Houston Wire & Cable Company
Houston Wire & Cable CO (Form: 10-K, Received: 03/15/2012 17:04:18)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

For the Fiscal Year ended December 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

 

 

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)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Class   Name of Each Exchange on Which Registered
Common stock, par value $0.001 per share   The NASDAQ Stock Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES   ¨                 NO   x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

YES   ¨                 NO   x

 

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   x                 NO   ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     x

 

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 definitions 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

 

The aggregate market value of the voting stock (common stock) held by non-affiliates of the registrant as of June 30, 2011 was $252,162,221.

 

At March 1, 2012, there were 17,820,440 outstanding shares of the registrant’s common stock, $.001 par value per share.

 

  DOCUMENTS INCORPORATED BY REFERENCE

 

Part III of this report incorporates by reference specific portions of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 8, 2012.

 

 
 

 

HOUSTON WIRE & CABLE COMPANY

Form 10-K

For the Fiscal Year Ended December 31, 2011

 

INDEX

PART I.      
Item 1. Business   3
Item 1A. Risk Factors   6
Item 1B. Unresolved Staff Comments   9
Item 2. Properties   9
Item 3. Legal Proceedings   9
Item 4. Mine Safety Disclosures   9
  Supplemental Item. Executive Officers of the Registrant    10
       
PART II.      
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   11
Item 6. Selected Financial Data   13
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations   15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk   25
Item 8. Consolidated Financial Statements and Supplementary Data   26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   45
Item 9A. Controls and Procedures   45
Item 9B. Other Information   48
       
PART III.      
Item 10. Directors, Executive Officers and Corporate Governance   48
Item 11. Executive Compensation   48
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   48
Item 13. Certain Relationships and Related Transactions, and Director Independence   48
Item 14. Principal Accounting Fees and Services   48
       
Part IV.      
Item 15. Exhibits and Financial Statement Schedules   49

 

2
 

 

PART I

 

ITEM 1.  BUSINESS

 

Overview

 

We are one of the largest providers of wire and cable and related services to the U.S. market. The June 25, 2010 purchase of Southwest Wire Rope LP (“SWWR”), its general partner Southwest Wire Rope GP LLC (“GP”) and SWWR’s wholly owned subsidiary, Southern Wire LLC (“SW”) (collectively “the acquired businesses” or “the acquisition”), 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.

 

Our wide product selection and specialized services support our position in the supply chain between wire and cable manufacturers and the customer. The breadth and depth of wire and cable and related hardware that we offer, require significant warehousing resources and a large number of SKU’s (stock-keeping units). While manufacturers may have the space and capabilities to maintain a large supply of inventory, we do not believe that any single manufacturer has the breadth and depth of product that we offer. More importantly, manufacturers historically have not offered the services that our customers need, such as complimentary custom cutting and same day shipment, and do not have multiple distribution centers across the nation.

 

Our Cable Management Program addresses our customers’ growing requirement for sophisticated and efficient just-in-time product management for large capital projects. This program entails purchasing and storing dedicated inventory, so our customers have immediate product availability for the duration of their project. Some advantages of this program include extra pre-allocated safety stock, firm pricing, zero cable surplus and just-in-time delivery. Used on large construction and capital expansion projects, our Cable Management Program combines the expertise of our cable specialists with dedicated project inventory and superior logistics to allow complex projects to be completed on time, within budget and with minimal residual waste.

 

History

 

We were founded in 1975 and have a long history of exceptional customer service, broad product selection and high levels of product expertise. In 1987, we completed our first initial public offering and were subsequently purchased in 1989 by ALLTEL Corporation. In 1997, we were purchased by investment funds affiliated with Code, Hennessy & Simmons LLC. In June 2006, we completed our second initial public offering.

 

Products

 

We offer products in most categories of wire and cable, including: continuous and interlocked armor cable; control and power cable; electronic wire and cable; flexible and portable cords; instrumentation and thermocouple cable; lead and high temperature cable; medium voltage cable; premise and category wire and cable, wire rope and wire rope slings, as well as nylon slings, chain, shackles and other related hardware. We also offer private branded products, including our proprietary brand LifeGuard™, a low-smoke, zero-halogen cable. Our products are used in Repair and Replacement, also referred to as Maintenance, Repair and Operations ("MRO"), and related projects, larger-scale projects in the utility, industrial and infrastructure markets and a diverse range of industrial applications including  communications, energy, engineering and construction, general manufacturing, mining, construction, oilfield services, infrastructure, petrochemical, transportation, utility, wastewater treatment, marine construction and marine transportation.

 

Targeted Markets

 

Our business is driven, in part, by the strength, growth prospects and activity in the end-markets in which our products are used. We have targeted three of these markets—the utility, industrial and infrastructure markets—in our sales and marketing initiatives.

 

3
 

 

Utility Market.     The utility market includes large investor-owned utilities, rural cooperatives and municipal power authorities. According to Industrial Information Resources’ (“IIR’s”) 2012 Global Industrial Outlook, the spending on the power market in 2012 within the United States is expected to be $63 billion. While we do not distribute the power lines used for the transmission of electricity, we sell many products used in the construction of a power plant and the related pollution control equipment. As such we are positioned to benefit from expenditures for new power generation needed to satisfy a growing population with increasing energy demands and to comply with federal mandates to reduce toxic outputs from power generating facilities. We expect to benefit from this trend as our customers utilize our cable management services to supply the wire and cable required in the construction of new power plants and upgrading of existing power plants. These upgrades often require the addition of highly-engineered and capital-intensive environmental compliance devices such as selective catalytic reduction (SCR) and flue gas desulfurization (FGD) systems to remove harmful emissions from existing power generation units. These projects require the specialty instrumentation, power and control wire and cable that we distribute.

 

Industrial Market.     The industrial market is one of the largest segments of the U.S. economy and is comprised of a diverse base of manufacturing and production companies. According to IIR’s 2012 Global Industrial Outlook, the 2012 projected total industrial spending within the United States is expected to be $195 billion. We provide a wide variety of products specifically designed for the petroleum refining, chemical processing, metal/mineral, and manufacturing industries where there may be significant exposure to caustic materials or extreme temperatures. As with the utilities market, we are positioned to benefit from several environmental compliance projects.

 

Infrastructure Market.      We believe that significant infrastructure improvements will be needed over the next several years and include market opportunities within the transportation, water management, waste management, education and health care industries. The government’s stimulus packages are designed to help these industries over a number of years, and we remain focused on following the funded opportunities. At the same time, federal production tax credits (PTCs) continue to be available for the renewable energy markets, such as wind power, through the end of 2012. We have the right products for these markets and are positioned to benefit from the capital project investments. In turn, we are assisting our customers by working closely with engineering and construction engineers to drive the wire and cable specifications in these large construction projects.

 

LifeGuard™ Opportunity

 

We believe that demand for low-smoke, zero-halogen products is in its infancy in the U.S. and represents a significant opportunity within our targeted markets. Low-smoke, zero-halogen cables have been used extensively in Europe and Asia for many years. We are leading the development of the market for low-smoke, zero-halogen cable in the U.S. When traditional cable burns, the acid gases produced are particularly destructive to electrical and electronic equipment, which represents a significant investment for many businesses. In contrast, low-smoke, zero-halogen compounds provide significant flame resistance, minimal smoke production and substantially reduced toxicity and corrosiveness when burned, as compared to traditional wire and cable. We sell our LifeGuard™ products across most of our end-user markets.

 

Distribution Logistics

 

We believe that our national distribution presence and value-added services make us an essential partner in the supply chain for our suppliers. We have successfully expanded our business from one original location in Houston, Texas to eighteen locations nationwide, which includes two third-party logistics providers. Our standard practice is to process customers' orders the same day they are received. Our strategically located distribution centers generally allow for ground delivery nationwide within 24 hours of shipment. Orders are delivered through a variety of distribution methods, including less-than-truck-load, truck-load, air or parcel service providers, direct from supplier and cross-dock shipments. Freight costs are typically borne by our customers. Due to our shipment volume, we have preferred pricing relationships with our contract carriers.

 

Customers

 

During 2011, we served approximately 6,000 customers, shipping approximately 36,000 SKU’s to over 10,000 customer locations nationwide. No customer represented 10% or more of our 2011 sales.

 

Suppliers

 

We obtain products from most of the leading wire and cable suppliers. We believe we have strong relationships with our top suppliers. Although we believe that alternative sources are available for the majority of our wire and cable products, we have strategically concentrated our purchases of wire and cable with four leading suppliers in order to maximize product quality, delivery dependability, purchasing efficiencies, and vendor rebates. As a result, in 2011 approximately 52% of our annual purchases came from four suppliers. We do not believe we are dependent on any one supplier for any of our wire and cable products and related hardware.

 

4
 

 

Our top four suppliers in 2011 were Belden, General Cable Corp, Nexans Energy USA, Inc and Southwire Company.

 

Sales

 

We market our wire and cable and related services through an inside sales force situated in our regional offices and a field sales force focused on key geographic markets throughout the U.S. By operating under a decentralized process, region managers are able to adapt quickly to market-specific occurrences, allowing us to compete effectively with local competitors. We believe the breadth and depth of our sales force is critical to serving our fragmented and diverse customer and end-user base.

 

Competition

 

The wire and cable market is highly competitive and fragmented, with several hundred wire and cable competitors serving this market. The product offerings and levels of service from the other wire and cable providers with whom we compete vary widely. We compete with many wire and cable providers on a regional and local basis. Most of our direct competitors are smaller companies that focus on a specific geographical area or feature a select product offering, such as surplus wire. In addition to the direct competition with other wire and cable providers, we also face, on a much more limited basis, competition with distributors and manufacturers that sell products directly or through multiple distribution channels to end-users or other resellers. In the markets that we serve, competition is primarily based on product line breadth, quality, product availability, service capabilities and price.

 

Employees

 

At December 31, 2011, we had 410 employees. Our sales and marketing staff accounted for 172 employees, including 50 field sales personnel and 94 inside sales and technical support personnel.

 

Our employees are not represented by a labor union or covered by a collective bargaining agreement. We believe that our employee relations are good.

 

Website Access

 

We maintain an internet website at www.houwire.com. We make available, free of charge under the “Investor Relations” heading on our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and if applicable, amendments to those reports, as well as proxy and information statements, as soon as reasonably practicable after such documents are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). Information contained on our website is not part of, and should not be construed as being incorporated by reference into, this Annual Report on Form 10-K.

 

Government Regulation

 

We are subject to regulation by various federal, state and local agencies. We believe we are in compliance in all material respects with existing applicable statutes and regulations affecting environmental issues and our employment, workplace health and workplace safety practices.

 

5
 

 

ITEM 1A.  RISK FACTORS

 

In addition to other information in this Annual Report on Form 10-K, the following risk factors should be carefully considered in evaluating our business, because such factors may have a significant impact on our business, operating results, cash flows and financial condition. As a result of the risks set forth below and elsewhere in this Annual Report, actual results could differ materially from those projected in any forward-looking statements.

 

Downturns in capital spending and cyclicality in certain of the markets we serve could have a material adverse effect on our financial condition and results of operations.

 

The majority of our products are used in the construction, maintenance, repair and operation of facilities, plants and projects in the communications, energy, engineering and construction, general manufacturing, infrastructure, petrochemical, mining, oilfield services, transportation, utility, wastewater treatment, marine construction and marine transportation industries. The demand for our products and services depends to a large degree on the capital spending levels of end-users in these markets. Many of these end-users defer capital expenditures or cancel projects during economic downturns. In addition, certain of the markets we serve are cyclical, which affects capital spending by end-users in these industries.

 

We have risks associated with our customers’ access to credit.

 

The current turmoil in global financial markets has not impaired access to our credit facility for financing our operations. However, poor credit market conditions may adversely impact the availability of construction and other project financing, upon which many of our customers depend, resulting in project cancellations or delays. Our utility and industrial customers may also face limitations when trying to access the credit markets to fund ongoing operations or capital projects. Credit constraints experienced by our customers may result in lost revenues and reduced gross margins for us and, in some cases, higher than expected bad debt losses. Our suppliers’ ability to deliver products may also be affected by financing constraints caused by credit market conditions, which could negatively impact our revenue and cost of products sold, at least until alternate sources of supply are arranged.

 

  We have risks associated with inventory.

 

Our business requires us to maintain substantial levels of inventory. We must identify the right mix and quantity of products to keep in our inventory to fulfill customer orders. Failure to do so could adversely affect our sales and earnings. However, if our inventory levels are too high, we are at risk that unexpected changes in circumstances, such as a shift in market demand, drop in prices or default or loss of a customer, could have a material adverse impact on the net realizable value of our inventory.

 

Our operating results are affected by fluctuations in commodity prices.

 

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 higher commodity prices result in increases in the costs we pay for our products, we attempt to reflect the increase in the prices we charge our customers. While we historically have been able to pass most of these cost increases on to our customers, to the extent we are unable to do so in the future, it could have a material adverse effect on our operating results. In addition, as commodity costs increase, our customers may delay or decrease their purchases of our wire and cable, which could adversely affect the demand for our products. To the extent commodity prices decline, the net realizable value of our existing inventory could be reduced, and our gross profit could be adversely affected.

 

Our sales of wire rope and related hardware are impacted by the level of oil and gas offshore drilling activity.

 

The 2010 oil spill in the Gulf of Mexico resulted in tighter drilling and permitting qualifications by the U.S. Government. Until drilling companies meet these qualifications or they are eased, oil and gas drilling activity will remain at low levels, limiting the demand for the products we sell to this market.

 

6
 

 

If we are unable to maintain our relationships with our customers, it could have a material adverse effect on our financial results.

 

We rely on customers to purchase our wire and cable and related hardware. The number, size, business strategy and operations of these customers vary widely from market to market. Our success depends heavily on our ability to identify and respond to our customers’ needs.

 

In 2011, our ten largest customers accounted for approximately 33% of our sales. If we were to lose one or more of our large customers, or if one or more of our large customers were to significantly reduce the amount of wire and cable and related hardware they purchase from us, and we were unable to replace the lost sales on similar terms, we could experience a significant loss of revenue and profits. In addition, if one or more of our key customers failed or were unable to pay, we could experience a write-off or write-down of the related receivables, which could adversely affect our earnings. We participate in a number of national marketing groups and engage in joint promotional sales activities with the members of those groups. Any permanent exclusion of us from, or refusal to allow us to participate in, such national marketing groups could have a material adverse effect on our sales and our results of operations.

 

An inability to obtain the products that we distribute could result in lost revenues and reduced profits and damage our relationships with customers.

 

In 2011, we sourced products from approximately 256 suppliers. However, we have adopted a strategy to concentrate our purchases of wire and cable with a small number of suppliers in order to maximize product quality, delivery dependability, purchasing efficiencies and vendor rebates. As a result, in 2011 approximately 52% of our purchases came from four suppliers. If any of these suppliers changes its sales strategy or decides to terminate its business relationship with us, our sales and earnings would be adversely affected unless and until we were able to establish relationships with suppliers of comparable products. In addition, if we are not able to obtain the products we distribute from either our current suppliers or other competitive sources, we could experience a loss of revenue, reduction in profits and damage to our relationships with our customers. Supply shortages may occur as a result of unanticipated demand or production cutbacks, shortages of raw materials, labor disputes or weather conditions affecting products or shipments, transportation disruptions or other reasons beyond our control. When shortages occur, wire and cable suppliers often allocate products among their customers, and our allocations might not be adequate to meet our customers' needs.

 

Loss of key personnel or our inability to attract and retain new qualified personnel could hurt our ability to operate and grow successfully.

 

Our success is highly dependent upon the services of James Pokluda III, our President and Chief Executive Officer, Nicol Graham, our Chief Financial Officer, and Chris McLeod, our Senior Vice President - Operations. Our success will continue to depend to a significant extent on our executive officers and key management and sales personnel. We do not have key man life insurance covering any of our executive officers. We may not be able to retain our executive officers and key personnel or attract additional qualified management and sales personnel. The loss of any of our executive officers or our other key management and sales personnel or our inability to recruit and retain qualified personnel could hurt our ability to operate and make it difficult to maintain our market share and to execute our growth strategies.

 

A change in vendor rebate programs could adversely affect our gross margins and results of operations.

 

The terms on which we purchase products from many of our suppliers entitle us to receive a rebate based on the volume of our purchases. These rebates effectively reduce our costs for products. If suppliers adversely change the terms of some or all of these programs, the changes may lower our gross margins on products we sell and may have an adverse effect on our operating results.

  

Our private branded products might not gain market acceptance.

 

An important element of our growth strategy is the continued development and market acceptance of our LifeGuard™ line of low-smoke, zero-halogen cable and other products sold under our private brands. Our success with our private branded products, however, depends on our ability to market these products in the appropriate channels and, ultimately, on the acceptance of these products in the markets we serve. We have been selling LifeGuard™ cable since 2003, and our efforts to develop and market new private branded products might not be successful. Further, demand for our products could diminish as a result of a competitor's introduction of higher quality, better performing or lower cost products in the marketplace. In addition, the low-smoke, zero-halogen properties of our LifeGuard™ line of cable products depend on a highly-engineered petrochemical material. If there is not an adequate supply of this material, we may be unable to have our LifeGuard™ products manufactured, or our LifeGuard™ products may be available only at a higher cost or after a long manufacturing delay. If we cannot sustain the growth in demand for our LifeGuard™ products, or if we cannot have those products manufactured on acceptable terms or if we do not develop additional private branded products, we will be unable to realize fully our growth strategy. 

 

7
 

 

If we encounter difficulties with our management information systems, we would experience problems managing our business.

 

We believe our management information systems are a competitive advantage in maintaining our leadership position in the wire and cable industry. We rely upon our management information systems to manage and replenish inventory, fill and ship orders on a timely basis and coordinate our sales and marketing activities. If we experience problems with our management information systems, we could experience product shortages, diminished inventory control or an increase in accounts receivable. Any failure by us to maintain our management information systems could adversely impact our ability to attract and serve customers and would cause us to incur higher operating costs and experience reduced profitability.

 

  An increase in competition could decrease sales or earnings.

 

We operate in a highly competitive industry. We compete directly with national, regional and local providers of wire and cable and related hardware. Competition is primarily focused in the local service area and is generally based on product line breadth, product availability, service capabilities and price. Some of our existing competitors have, and new market entrants may have, greater financial and marketing resources than we do. To the extent existing or future competitors seek to gain or retain market share by reducing prices, we may be required to lower our prices, thereby adversely affecting our financial results. Existing or future competitors also may seek to compete with us for acquisitions, which could have the effect of increasing the price and reducing the number of suitable acquisitions. Other companies, including our current customers, could seek to compete directly with our private branded products, which could adversely affect our sales of those products and ultimately our financial results. Our existing customers, as well as suppliers, could seek to compete with us by offering services similar to ours, which could adversely affect our market share and our financial results. In addition, competitive pressures resulting from the economic downturn and the industry trend toward consolidation could adversely affect our growth and profit margins.

 

We may not be able to successfully identify acquisition candidates, effectively integrate newly acquired businesses into our operations or achieve expected profitability from our acquisitions.

 

To supplement our growth, we intend to selectively pursue acquisition opportunities. If we are not successful in finding attractive acquisition candidates that we can acquire on satisfactory terms, or if we cannot complete those acquisitions that we identify, we will not be able to realize the benefit of this growth strategy.

 

Acquisitions involve numerous possible risks, including unforeseen difficulties in integrating operations, technologies, services, accounting and personnel; the diversion of financial and management resources from existing operations; unforeseen difficulties related to entering geographic regions or target markets where we do not have prior experience; the potential loss of key employees; and the inability to generate sufficient profits to offset acquisition or investment-related expenses. If we finance acquisitions by issuing equity securities or securities convertible into equity securities, our existing stockholders could be diluted, which, in turn, could adversely affect the market price of our stock. If we finance an acquisition with debt, it could result in higher leverage and interest costs. As a result, if we fail to evaluate and execute acquisitions properly, we might not achieve the anticipated benefits of these acquisitions, and we may incur costs in excess of what we anticipate.

 

The Company is anticipating significant growth in the recently acquired businesses and if this growth is not achieved, a goodwill impairment may result.

 

We may be subject to product liability claims that could be costly and time consuming.

 

We sell wire and cable and related hardware. As a result, from time to time we have been named as defendants in lawsuits alleging that these products caused physical injury or injury to property. We rely on product warranties and indemnities from the product manufacturers, as well as insurance that we maintain, to protect us from these claims. However, manufacturers' warranties and indemnities are typically limited in duration and scope and may not cover all claims that might be asserted. Moreover, our insurance coverage may not be available or may not be adequate to cover every claim asserted or the entire amount of every claim.

 

8
 

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.  PROPERTIES

 

Facilities

 

We operate out of eighteen distribution centers strategically located throughout the continental United States with approximately 760,000 sq ft of distribution space. Two facilities in Houston, TX, are owned (one of which houses all centralized and back office functions such as finance, marketing, purchasing, human resources and information technology) as are two facilities in Louisiana. All of the other facilities are leased. Fourteen of the facilities, in addition to containing inventory for re-sale, house knowledgeable sales staff. We believe that our properties are in good operating condition and adequately serve our current business operations.

 

ITEM 3.  LEGAL PROCEEDINGS

 

From time to time, we are involved in lawsuits that are brought against us in the normal course of business. We are not currently a party to any legal proceedings that we expect, either individually or in the aggregate, to have a material adverse effect on our business or financial condition. We, along with many other defendants, have 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 we, in fact, distributed the wire and cable alleged to have caused any injuries. We maintain general liability insurance that, to date, has covered the defense of and all costs associated with these claims. In addition, we did not manufacture any of the wire and cable at issue, and we would rely on any warranties from the manufacturers of such cable if it were determined that any of the wire or cable that we distributed contained asbestos which caused injury to any of these plaintiffs. In connection with ALLTEL's sale of our company in 1997, ALLTEL provided indemnities with respect to costs and damages associated with these claims that we believe we could enforce if our insurance coverage proves inadequate.

 

  ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

 

9
 

 

SUPPLEMENTAL ITEM.  EXECUTIVE OFFICERS OF THE REGISTRANT

 

Name/Office   Age  

Served

as an

Officer

Since

 

Business Experience

During Last 5 Years

             

James L. Pokluda III

President and Chief Executive Officer

  47   2011   Chief Executive Officer since January 2012 and President since May 2011. Prior thereto, Vice President Sales & Marketing from April 2007 until May 2011.
             

Nicol G. Graham

Chief Financial Officer, Treasurer and Secretary

  59   1997   Chief Financial Officer, Treasurer and Secretary since 1997.
             

Christopher R. McLeod

Senior Vice President - Operations

  50   2011   Senior Vice President, Operations since May 2011. Prior thereto, Vice President, Logistics from 2001 until May 2011.

 

10
 

 

PART II

 

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is listed on The NASDAQ Global Market under the symbol “HWCC”.  The following table lists quarterly information on the price range of our common stock based on the high and low reported sale prices for our common stock as reported by The NASDAQ Global Market for the periods indicated below.

 

    High     Low  
Year ended December 31, 2011:                
First quarter   $ 15.00     $ 11.56  
Second quarter   $ 18.00     $ 13.30  
Third quarter   $ 17.15     $ 11.21  
Fourth quarter   $ 14.54     $ 10.01  
                 
Year ended December 31, 2010:                
First quarter   $ 14.68     $ 11.31  
Second quarter   $ 14.53     $ 9.66  
Third quarter   $ 13.17     $ 8.64  
Fourth quarter   $ 13.64     $ 9.61  

 

There were 16 holders of record of our common stock as of December 31, 2011.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

The following table provides information about our purchases of common stock for the quarter ended December 31, 2011. For further information regarding our stock repurchase activity, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

 

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
 
October 1 – 31, 2011         $           $ 19,385,303  
November 1 – 30, 2011         $           $ 19,385,303  
December 1 – 31, 2011 (2)     28,833     $ 14.32           $ 19,385,303  
Total     28,833     $                

 

 

(1) The board authorized a stock buyback in the amount 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 4th quarter of 2011.
(2) These shares were surrendered in connection with the exercise of a stock option to pay the exercise price and withholding taxes in accordance with the terms of our 2006 Stock Plan and accordingly were not shares acquired under the publicly announced plan.

  

Stock Performance Graph

 

The following graph compares the total stockholder return on our common stock with the total return on the NASDAQ US Index and the Russell 2000 Index.  We believe the Russell 2000 Index includes companies with capitalization comparable to ours.  Houston Wire & Cable Company has a unique niche in the marketplace, due to the size and scope of our business platform, and we are unable to identify peer issuers, as the public companies within our industry are substantially more diversified than we are.

 

11
 

 

Total return is based on an initial investment of $100 on January 1, 2007, and reinvestment of dividends.

 

 

Dividend Policy

 

Holders of our common stock are entitled to receive dividends when, as and if declared by our Board of Directors. We have paid a quarterly cash dividend since August 2007. From February 2008 through February 2011, our quarterly cash dividend was $0.085 per share, as approved by our Board of Directors. Beginning in May 2011, the Board of Directors has approved a quarterly cash dividend of $0.09 per share. During 2011 and 2010, the cash dividend was $0.355 and $0.34 per share, resulting in total dividends paid of $6.3 million and $6.0 million, respectively.

 

As a holding company, our only source of funds to pay dividends is distributions from our operating subsidiary. Our 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 availability.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The information called for by this item and by Item 12 regarding securities available for issuance is presented under Item 12.

 

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ITEM 6.  SELECTED FINANCIAL DATA

 

You should read the following selected financial information together with our consolidated financial statements and the related notes and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Form 10-K. We have derived the consolidated statement of income data for each of the years ended December 31, 2011, 2010 and 2009, and the consolidated balance sheet data at December 31, 2011 and 2010, from our audited financial statements, which are included in this Form 10-K. We have derived the consolidated statement of income data for each of the years ended December 31, 2008 and 2007, and the consolidated balance sheet data at December 31, 2009, 2008 and 2007 from our audited financial statements, which are not included in this Form 10-K.

 

    Year Ended December 31,  
    2011     2010     2009     2008     2007  
    (Dollars in thousands, except share data)  
                               
CONSOLIDATED STATEMENT OF INCOME DATA:                                        
Sales   $ 396,410     $ 308,522     $ 254,819     $ 360,939     $ 359,115  
Cost of sales     307,515       245,932       201,865       275,224       266,276  
                                         
Gross profit     88,895       62,590       52,954       85,715       92,839  
Operating expenses:                                        
Salaries and commissions     28,053       25,281       20,596       24,080       23,861  
Other operating expenses     24,513       20,565       18,023       20,728       18,811  
Depreciation and amortization     2,952       1,738       563       523       459  
Total operating expenses     55,518       47,584       39,182       45,331       43,131  
                                         
Operating income     33,377       15,006       13,772       40,384       49,708  
Interest expense     1,424       844       520       1,825       1,188  
                                         
Income before income taxes     31,953       14,162       13,252       38,559       48,520  
Income tax provision     12,276       5,543       5,220       14,822       18,295  
                                         
Net income   $ 19,677     $ 8,619     $ 8,032     $ 23,737     $ 30,225  
                                         
Earnings per share:                                        
Basic   $ 1.11     $ 0.49     $ 0.46     $ 1.33     $ 1.49  
                                         
Diluted   $ 1.11     $ 0.49     $ 0.45     $ 1.33     $ 1.48  
                                         
Weighted average common shares outstanding :                                        
Basic     17,679,524       17,657,682       17,648,696       17,789,739       20,328,182  
Diluted     17,801,134       17,710,123       17,665,924       17,838,072       20,406,000  

 

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    As of December 31,  
    2011     2010     2009     2008     2007  
    (Dollars in thousands)  
CONSOLIDATED BALANCE SHEET DATA:                                        
Cash and cash equivalents   $     $     $     $     $  
Accounts receivable, net   $ 59,731     $ 67,838     $ 46,859     $ 50,798     $ 58,202  
Inventories, net   $ 69,517     $ 67,503     $ 61,325     $ 73,459     $ 69,299  
Total assets   $ 179,153     $ 185,490     $ 122,014     $ 134,753     $ 139,091  
Book overdraft   (1)   $ 2,270     $ 3,055     $ 907     $ 4,933     $ 3,854  
Total debt   (2) (3)   $ 47,967     $ 54,825     $ 17,479     $ 29,808     $ 34,507  
Stockholders’ equity   (3)   $ 97,338     $ 85,720     $ 80,813     $ 76,595     $ 71,170  

 

 

(1) Our book overdraft is funded by our revolving credit facility as soon as the related checks clear our disbursement account.
(2) On June 25, 2010, we completed the purchase of the acquired businesses for a total purchase price of $51.5 million of which $51.2 million was paid in 2010 and was funded from our loan agreement.
(3) A stock repurchase program was approved in 2007 and has been extended through 2012. During the years ended December 31, 2008 and 2007, purchases of stock totaling $14,725 and $40,890, respectively, were made, part of which was funded by debt. No repurchases under the stock repurchase program were made during the years ended December 31, 2011, 2010 and 2009. In 2011, we repurchased common stock totaling $413 in connection with the exercise of stock options.

 

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ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Form 10-K. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Factors that could cause such differences include those described in “Risk Factors” and elsewhere in this Form 10-K. Certain tabular information may not foot due to rounding.

 

Overview

 

Since our founding over 36 years ago, we have grown to be one of the largest providers of wire and cable and related services to the U.S. market. Today, we serve approximately 6,000 customers. Our products are used in MRO activities and related projects, as well as for larger-scale projects in the utility, industrial and infrastructure markets and a diverse range of industrial applications including communications, energy, engineering and construction, general manufacturing, mining, construction, oilfield services, infrastructure, petrochemical, transportation, utility, wastewater treatment, marine construction and marine transportation.

 

Our revenue is driven in part by the level of capital spending within the end-markets we serve. Because many of these end-markets defer capital expenditures during periods of economic downturns, our business has experienced cyclicality from time to time. We believe that our revenue will continue to be impacted by fluctuations in capital spending and by our ability to drive demand through our sales and marketing initiatives and the continued development and marketing of our private branded products, such as LifeGuard™. The recent economic uncertainty and volatility in commodity prices have impacted sales and the level of demand. This has had and will continue to have an impact on our performance, until economic conditions stabilize.

 

Our direct costs will continue to be influenced significantly by the prices we pay our suppliers to procure the products we distribute to our customers. Changes in these costs may result, for example, from increases or decreases in raw material costs, changes in our relationships with suppliers or changes in vendor rebates. Our operating expenses will continue to be affected by our investment in sales, marketing and customer support personnel and commissions paid to our sales force for revenue and profit generated. Some of our operating expenses are related to our fixed infrastructure, including rent, utilities, administrative salaries, maintenance, insurance and supplies. To meet our customers’ needs for an extensive product offering and short delivery times, we will need to continue to maintain adequate inventory levels. Our ability to obtain this inventory will depend, in part, on our relationships with suppliers.

 

Critical Accounting Policies and Estimates

 

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 accounting principles generally accepted in the United States, commonly referred to as 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 the invoice date. We have an estimation procedure, based on historical data, current economic conditions and recent changes in the aging of the 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 December 31, 2011 would have resulted in a change in income before income taxes of less than $0.1 million.

 

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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 December 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 December 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 2011 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 are amortized over 6 or 7 year useful lives and non-compete agreements are amortized over a 1 year useful life. 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 such 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 such rebates reduce cost of sales. Throughout the year, we estimate the amount of the rebates earned based on purchases to date relative to the total purchase levels expected to be achieved during the rebate period. We continually revise these estimates to reflect rebates expected to be earned based on actual purchase levels and forecasted purchase volumes for the remainder of the rebate period. A 20% change in our estimate of total rebates earned during 2011 would have resulted in a change in income before income taxes of $1.5 million for the year ended December 31, 2011.

 

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 December 31, 2011, our goodwill balance was $25.1 million, representing 14.0% 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. Our goodwill impairment test is performed annually in October. Based on our 2011 goodwill impairment 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.

 

The Company is anticipating significant growth in the recently acquired businesses and if this growth is not achieved, a goodwill impairment may result. 

  

Sales

 

We generate most of our sales by providing wire and cable and related hardware to our customers, as well as billing for freight charges. We recognize revenue upon shipment of our products to customers from our distribution centers or directly from our suppliers. Sales incentives earned by customers are accrued in the same month as the shipment is invoiced and are accounted for as a reduction in sales.

 

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Cost of Sales

 

Cost of sales consists primarily of the average cost of the wire and cable and related hardware that we sell. We also incur shipping and handling costs in the normal course of business. Cost of sales also reflects cash discounts for prompt payment to vendors and vendor rebates generally related to annual purchase targets, as well as inventory obsolescence charges.

 

Operating Expenses

 

Operating expenses include all expenses, excluding freight, incurred to receive, sell and ship product and administer the operations of the Company.

 

Salaries and Commissions.  Salary expense includes the base compensation, and any overtime earned by hourly personnel, for all sales, administrative and warehouse employees and stock compensation expense for options and restricted stock granted to employees. Commission expense is earned by inside sales personnel based on gross profit dollars generated, by field sales personnel from generating sales and meeting various objectives, by sales, national and marketing managers for driving the sales process, by region managers based on the profitability of their branches and by corporate managers based primarily on our profitability and also on other operating metrics.

 

Other Operating Expenses.  Other operating expenses include all other expenses, except for salaries and commissions and depreciation and amortization. This includes all payroll taxes, health insurance, traveling expenses, public company expenses, advertising, management information system expenses, facility rent and all distribution expenses such as packaging, reels, and repair and maintenance of equipment and facilities.

 

Depreciation and Amortization.  We incur depreciation expense for costs related to the capitalization of property and equipment on a straight-line basis over the estimated useful lives of the assets, which range from three to thirty years. We incur amortization expense on leasehold improvements over the shorter of the lease term or the life of the related asset and on intangible assets over the estimated life of the asset.

 

Interest Expense

 

Interest expense consists primarily of interest we incur on our debt.

 

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Results of Operations

 

The following discussion compares our results of operations for the years ended December 31, 2011, 2010 and 2009.

 

The following table shows, for the periods indicated, information derived from our consolidated statements of income, expressed as a percentage of sales for the period presented.

 

    Year Ended December 31,  
    2011     2010     2009  
Sales     100.0 %     100.0 %     100.0 %
Cost of sales     77.6 %     79.7 %     79.2 %
Gross profit     22.4 %     20.3 %     20.8 %
                         
Operating expenses:                        
Salaries and commissions     7.1 %     8.2 %     8.1 %
Other operating expenses     6.2 %     6.7 %     7.1 %
Depreciation and amortization     0.7 %     0.6 %     0.2 %
Total operating expenses     14.0 %     15.4 %     15.4 %
                         
Operating income     8.4 %     4.9 %     5.4 %
Interest expense     0.4 %     0.3 %     0.2 %
Income before income taxes     8.1 %     4.6 %     5.2 %
Income tax provision     3.1 %     1.8 %     2.0 %
                         
Net income     5.0 %     2.8 %     3.2 %

 

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

 

Comparison of Years Ended December 31, 2011 and 2010

 

Sales

    Year Ended  
    December 31,  
(Dollars in millions)   2011     2010     Change  
Sales   $ 396.4     $ 308.5     $ 87.9       28.5 %

  

Our sales for 2011 increased 28.5% to $396.4 million from $308.5 million in the fiscal year 2010.  The primary reasons for this increase were the contribution from the acquired businesses, improved demand for our products due to recovering economic conditions and the increase in the price of copper, a component in our products, which rose approximately 17% during 2011.   We estimate sales in our core Repair and Replacement sector, also referred to as Maintenance, Repair and Operations (“MRO”), increased approximately 8%-10% as a result of improved economic conditions.  Sales within our five internal growth initiatives encompassing Emission Controls, Engineering & Construction, Industrials, LifeGuard™ (and other private branded products) and Utility Power Generation increased approximately 30% as project activity in these areas remained strong due to ongoing market penetration and previously booked backlog.

 

Gross Profit

    Year Ended  
    December 31,  
(Dollars in millions)   2011     2010     Change  
Gross profit   $ 88.9     $ 62.6     $ 26.3       42.0 %
Gross profit as a percent of sales     22.4 %     20.3 %     2.1 %        

  

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Gross profit increased 42.0% to $88.9 million in 2011 from $62.6 million in 2010. The increase in gross profit was attributed to an increase in our legacy business and the contribution from the acquired businesses. Gross profit as a percentage of sales (gross margin) increased to 22.4% in 2011 from 20.3% in 2010 due to a better macroeconomic business environment which allowed a higher gross margin on our products and higher margins from the acquired businesses.

 

Operating Expenses

 

    Year Ended  
    December 31,  
(Dollars in millions)   2011     2010     Change  
Operating expenses:                                
Salaries and commissions   $ 28.1     $ 25.3     $ 2.8       11.0 %
Other operating expenses     24.5       20.6       3.9       19.2 %
Depreciation and amortization     3.0       1.7       1.2       69.9 %
Total operating expenses   $ 55.5     $ 47.6     $ 7.9       16.7 %
                                 
Operating expenses as a percent of sales     14.0 %     15.4 %     (1.4 )%        

 

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

 

Salaries and Commissions. Salaries and commissions increased primarily due to the additional personnel from the acquisition and increases in commissions from our legacy business associated with higher organic sales volumes and related profitability. This increase was partially offset by a $1.7 million onetime reversal in 2011 of salary expense recorded prior to January 1, 2011 attributed to the change in the estimated forfeiture rate from 0% to 100% for non-vested options previously awarded to the Chief Executive Officer, who left the Company effective December 31, 2011.

 

Other Operating Expenses. Other operating expenses increased primarily due to the additional operations of the acquired businesses and increased expenses associated with higher sales.

 

Depreciation and Amortization . The depreciation and amortization increase is primarily attributable to the assets from the acquisition.

 

Operating expenses as a percentage of sales decreased to 14.0% in 2011 from 15.4% in 2010. This decrease is attributed to the reversal of salary expense, ongoing cost control initiatives and operating leverage from our legacy business, partially offset by the acquired businesses.

 

Interest Expense

 

Interest expense increased 68.7% to $1.4 million in 2011 from $0.8 million in 2010 due to higher debt levels resulting from borrowings to fund the entire purchase price of the acquisition and an increase in working capital. Average debt was $58.5 million in 2011 compared to $33.5 million in 2010. The average effective interest rate increased slightly to 2.3% in 2011 from 2.2% in 2010.

 

Income Tax Expense

 

Income tax expense increased 121.5% to $12.3 million in 2011 from $5.5 million in 2010 as our income before income taxes increased 125.6%. The effective income tax rate decreased to 38.4% in 2011 from 39.1% in 2010 primarily due to the impact of non-deductible acquisition and other expenses incurred in 2010.

 

Net Income

 

We achieved net income of $19.7 million in 2011 compared to $8.6 million in 2010, an increase of 128.3%.

 

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Comparison of Years Ended December 31, 2010 and 2009

 

Sales

 

    Year Ended  
    December 31,  
(Dollars in millions)   2010     2009     Change  
Sales   $ 308.5     $ 254.8     $ 53.7       21.1 %

 

Our sales for 2010 increased 21.1% to $308.5 million from $254.8 million in the fiscal year 2009. The primary reasons for this increase were the acquisitions, which generated sales of $37.6 million, improved demand for our products due to recovering economic conditions and the increase in the average price of copper, a component in certain of our products, which rose 45.5% over 2009 levels during 2010. We estimate sales in our core MRO sector were up slightly as a result of improved economic conditions in the fourth quarter of 2010.  Sales within the areas that we have identified as our legacy growth initiatives - Environmental Compliance, Engineering & Construction, Industrials, LifeGuard™ (and other private branded products) and Utility Power Generation - increased at a greater rate than MRO sales, as sales within our growth initiatives remained more resilient to difficult early year economic conditions as projects in these areas were already in progress and had been previously funded. Project bookings and backlog for our growth initiatives in 2010 remained strong as a result of our continued penetration into these markets.

 

Gross Profit

 

    Year Ended  
    December 31,  
(Dollars in millions)   2010     2009     Change  
Gross profit   $ 62.6     $ 53.0     $ 9.6       18.2 %
Gross profit as a percent of sales     20.3 %     20.8 %     (0.5 )%        

 

Gross profit increased 18.2% to $62.6 million in 2010 from $53.0 million in 2009. The increase in gross profit was attributed to the acquisition as the contribution from the HWC legacy business remained flat due to more customers earning rebates and increased freight expenses. Gross profit as a percentage of sales (gross margin) decreased due to the competitive market place, sales mix and increased customer rebates and freight expenses.

 

Operating Expenses

 

    Year Ended  
    December 31,  
(Dollars in millions)   2010     2009     Change  
Operating expenses:                                
Salaries and commissions   $ 25.3     $ 20.6     $ 4.7       22.7 %
Other operating expenses     20.6       18.0       2.5       14.1 %
Depreciation and amortization     1.7       0.6       1.2       208.7 %
Total operating expenses   $ 47.6     $ 39.2     $ 8.4       21.4 %
                                 
Operating expenses as a percent of sales     15.4 %     15.4 %              

 

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

 

Salaries and Commissions. Salaries and commissions increased primarily due to the additional personnel from the acquisition.

 

Other Operating Expenses.  Other operating expenses increased due to the additional operations of the acquired businesses and acquisition costs of $0.9 million, which the Company did not incur in 2009. These additional expenses were partially offset by ongoing cost control initiatives from HWC’s legacy business.

  

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

 

20
 

 

Operating expenses as a percentage of sales remained flat at 15.4% in 2010 and 2009.

 

Interest Expense

 

Interest expense increased 62.3%, or $0.3 million, to $0.8 million in 2010 from $0.5 million in 2009 due to higher debt levels as the acquisition was funded entirely from the Company’s loan agreement. Average debt was $33.5 million in 2010 compared to $20.8 million in 2009. The average effective interest rate increased to 2.2% in 2010 from 1.8% in 2009. This increase was primarily due to the higher base spreads over LIBOR under a September 2009 amendment to our loan agreement and an increase in the applicable LIBOR spread as a result of the higher debt-to-EBITDA ratio caused by the acquisition.

 

Income Tax Expense

 

Income tax expense increased $0.3 million, or 6.2%, to $5.5 million in 2010 as our income before income taxes increased 6.9%. The effective income tax rate decreased to 39.1% in 2010 from 39.4% in 2009. The effective income tax rate was lower in 2010 due to 2009 reflecting a deferred tax adjustment relating to prior periods which increased the effective income tax rate in 2009. This decrease was partially offset by the effect of nondeductible expenses incurred in 2010 associated with the acquisition.

 

Net Income

 

We achieved net income of $8.6 million in 2010 compared to $8.0 million in 2009, an increase of 7.3%.

 

Impact of Inflation and Commodity Prices

 

Our results of operations are affected by changes in the inflation rate and commodity prices. Moreover, because copper, petrochemical and steel products are components of the wire and cable and related hardware we sell, fluctuations in the costs of these and other commodities have historically affected our operating results. Copper prices have decreased from an average price per pound of $4.39 in the first quarter of 2011 to a low of $3.40 per pound in the fourth quarter of 2011. The impact of decreasing copper prices on our sales and net income during 2011 cannot be isolated, as product mix changes and volatile economic demand also impacted performance. To the extent commodity prices decline, the net realizable value of our existing inventory could also decline, and our gross profit could be adversely affected because of either reduced selling prices or lower of cost or market adjustments in the carrying value of our inventory. If we turn our inventory approximately four times a year, the impact of changes in copper and steel prices in any particular quarter would primarily affect the results of the succeeding calendar quarter. If we are unable to pass on to our customers future cost increases due to inflation or rising commodity prices, our operating results could be adversely affected.

 

Liquidity and Capital Resources

 

Our primary capital needs are for working capital obligations, capital expenditures, dividend payments and other general corporate purposes, including acquisitions and the stock repurchase program. 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;
· cash flows generated from operating activities;
· capital expenditures;
· payment of dividends;
· acquisitions; and
· additional stock repurchases

 

21
 

 

Comparison of Years Ended December 31, 2011 and 2010

 

Our net cash provided by operating activities was $14.3 million in 2011 compared to $19.3 million in 2010. Our net income increased by $11.1 million or 128.3% to $19.7 in 2011 million from $8.6 million in 2010.

 

Changes in our operating assets and liabilities resulted in cash used in operating activities of $8.8 million in 2011. Trade accounts payable decreased $9.9 million primarily due to payment in early 2011 of $4.9 million of vendor invoices under dispute at December 31, 2010 and a planned slow down of inventory purchases for our legacy business in December 2011. Inventory increased $2.8 million as a result of the acquired businesses. This additional inventory included products needed to support projected sales, consignment inventory that was converted to regular stock and the addition of new stocking sites. Income taxes decreased $2.8 million due to federal and state tax payments. Offsetting these uses of cash was a decrease in accounts receivable of $8.1 million due to lower sales in December 2011 compared to December 2010 and the receipt in 2011 of an amount outstanding since 2009 due to a product dispute.

 

Net cash used in investing activities was $1.2 million in 2011 compared to $50.7 million in 2010. Cash paid for the acquisition decreased from $51.2 million in 2010 to the $0.3 million final payment made in 2011. Expenditures for property and equipment increased from $0.5 million in 2010 to $1.3 million in 2011 primarily due to expenditures made for the acquired businesses.

 

Net cash used in financing activities was $13.1 million in 2011 compared to cash provided by financing activities of $31.4 million in 2010. Net payments on the revolver of $6.9 million and dividends of $6.3 million were the main components of financing activities in 2011.

 

Comparison of Years Ended December 31, 2010 and 2009

 

Our net cash provided by operating activities was $19.3 million in 2010, an increase of $0.5 million or 2.9% compared to cash provided by operating activities of $18.7 million in 2009. Our net income increased by $0.6 million or 7.3% to $8.6 million in 2010 from $8.0 million in 2009.

 

Changes in our operating assets and liabilities resulted in cash provided by operating activities of $7.5 million in 2010. Accrued and other liabilities increased $5.5 million primarily due to higher accruals for volume rebates to our customers, additional payroll related accruals and increased accrued wire purchases. Accounts payable increased $5.0 million due to additional inventory received in December 2010 compared to December 2009 in response to increased sales. Prepaids decreased $3.0 million primarily related to a prepayment for inventory at December 31, 2009, which was subsequently received in January 2010. The book overdraft, which is funded by our revolving credit facility as soon as the related vendor checks clear our disbursement account, increased $1.7 million. Offsetting these sources of cash was an increase in accounts receivable of $9.8 million due to higher sales.

 

Net cash used in investing activities was $50.7 million in 2010 compared to $0.4 million in 2009. The increase was attributable to the Company paying $51.2 million for the acquisition in 2010.

 

Net cash provided by financing activities was $31.4 million in 2010 compared to cash used in financing activities of $18.3 million in 2009. Net borrowings on the revolver of $37.3 million and dividend payments of $6.0 million were the main components of financing activities in 2010.

 

  Indebtedness

 

Our principal source of liquidity at December 31, 2011 was working capital of $102.6 million compared to $94.6 million at December 31, 2010. We also had available borrowing capacity in the amount of $35.0 million at December 31, 2011 and $20.2 million at December 31, 2010 under our loan agreement.

 

We believe that we will have adequate availability of capital to fund our present operations, meet our commitments on our existing debt, continue 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 additional financing, we believe that our financial position and earnings history provide a solid base for obtaining additional financing resources at competitive rates and terms. Additionally, based on market conditions, we may decide to issue additional shares of common or preferred stock to raise funds.

 

22
 

 

Loan and Security Agreement

 

On September 30, 2011, we entered into a Third Amended and Restated Loan and Security Agreement (the “2011 Loan Agreement”) with certain lenders and Bank of America, N.A., as agent. The 2011 Loan Agreement provides for a $100 million revolving credit facility and expires on September 30, 2016. Availability under the 2011 Loan Agreement is limited to a borrowing base equal to 85% of the value of eligible accounts receivable, plus 65% of the value of eligible inventory, less certain reserves. The 2011 Loan Agreement is secured by a lien on substantially all our property, other than real estate.

 

Portions of the loan under the 2011 Loan Agreement may be converted to LIBOR loans in minimum amounts of $1.0 million and integral multiples of $0.1 million. LIBOR loans bear interest at the British Bankers Association LIBOR Rate plus 125 to 200 basis points based on availability, and loans not converted to LIBOR loans bear interest at a fluctuating rate equal to the greatest of the agent’s prime rate, the federal funds rate plus 50 basis points, or 30-day LIBOR plus 150 basis points. Additionally, we are obligated to pay an unused facility fee on the unused portion of the loan commitment. Unused commitment fees are 25 or 30 basis points, depending on the amount of the unused commitment.

 

Covenants in the 2011 Loan Agreement require us to maintain certain minimum financial ratios and availability levels. Repaid amounts can be re-borrowed subject to the borrowing base. As of December 31, 2011, we were in compliance with all financial covenants.

 

Contractual Obligations

 

The following table describes our cash commitments to settle contractual obligations as of December 31, 2011.

 

    Total     Less than
1 year
    1-3 years     3-5 years     More than
5 years
 
    (In thousands)  
Loans payable   $ 47,967     $     $     $ 47,967     $  
Operating lease obligations     8,113       2,831       3,589       1,226       467  
Non-cancellable purchase obligations (1)     38,949       38,949                    
Total   $ 95,029     $ 41,780     $ 3,589     $ 49,193     $ 467  

 

 

(1) These obligations reflect purchase orders outstanding with manufacturers as of December 31, 2011. We believe that some of these obligations may be cancellable upon negotiation with our vendors, but we are treating these as non-cancellable for this disclosure due to the absence of an express cancellation right.

 

Capital Expenditures

 

We made capital expenditures of $1.3 million in the year ended December 31, 2011 and $0.5 million in each of the years ended December 31, 2010 and 2009.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements, other than operating leases.

 

Share Repurchase Program

 

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 scheduled to expire on December 31, 2009 but was initially extended through December 31, 2011 and on November 4, 2011 was further extended through December 31, 2012. 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. There were no shares repurchased during 2011 and 2010 under the stock repurchase program.

 

23
 

 

Financial Derivatives

 

We have no financial derivatives.

 

Market Risk Management

 

We are exposed to market risks arising from changes in market prices, including movements in interest rates and commodity prices.

 

Interest Rate Risk

 

Borrowings under our 2011 Loan Agreement bear interest at variable interest rates and therefore are sensitive to changes in the general level of interest rates. At December 31, 2011, the weighted average interest rate on our $48.0 million of variable interest debt was approximately 2.29%.

 

While our variable rate debt obligations expose us to the risk of rising interest rates, management does not believe that the potential exposure is material to our overall financial performance or results of operations. Based on December 31, 2011 borrowing levels, a 1.0% increase or decrease in the applicable interest rates would have a $0.5 million effect on our annual interest expense.

 

Commodity Risk

 

We are subject to periodic fluctuations in copper prices, as our products have varying levels of copper content in their construction. In addition, varying steel prices also impact certain products we purchase. Profitability is influenced by these fluctuations as prices change between the time we buy and sell our products.

 

Foreign Currency Exchange Rate Risk

 

Our products are purchased and invoiced in U.S. dollars. Accordingly, we do not believe we are exposed to foreign exchange rate risk.

 

Climate Risk

 

Our operations are subject to inclement weather conditions including hurricanes, earthquakes and abnormal weather events. Our previous experience from these events has had a minimal effect on our operations and results.

 

Factors Affecting Future Results

 

This Annual Report on Form 10-K contains statements that may be considered forward-looking.  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. You should read statements that contain these words carefully, because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other "forward-looking" information.  Actual results could differ materially from the results indicated by these statements, because the realization of those results is subject to many risks and uncertainties.  Some of these risks and uncertainties are discussed in greater detail under Item 1A, "Risk Factors."

 

All forward-looking statements are based on current management expectations and speak only as of the date of this filing. Except as required under federal securities laws and the rules and regulations of the SEC, we do not have any intention, and do not undertake, to update any forward-looking statements to reflect events or circumstances arising after the date of this Form 10-K.

 

24
 

 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Quantitative and Qualitative Disclosures about Market Risk are reported in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the captions “Market Risk Management”, “Interest Rate Risk”, “Commodity Risk”, and “Foreign Currency Exchange Rate Risk”.

 

25
 

 

ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Houston Wire & Cable Company

 

Index to consolidated financial statements

 

    Page
Report of Independent Registered Public Accounting Firm   27
Consolidated Balance Sheets as of December 31, 2011 and 2010   28
Consolidated Statements of Income for the years ended December 31, 2011, 2010 and 2009   29
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2011, 2010 and 2009   30
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009   31
Notes to Consolidated Financial Statements   32

  

26
 

 

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Stockholders of Houston Wire & Cable Company

 

We have audited the accompanying consolidated balance sheets of Houston Wire & Cable Company (the Company) as of December 31, 2011 and 2010, and the related consolidated statements of income, cash flows, and stockholders’ equity for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Houston Wire & Cable Company at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Houston Wire & Cable Company’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2012 expressed an unqualified opinion thereon.

 

/s/ ERNST & YOUNG LLP

 

Houston, Texas 

March 15, 2012

 

27
 

   

Houston Wire & Cable Company

Consolidated Balance Sheets

 

    December 31,  
    2011     2010  
    (In thousands, except
share data)
 
             
Assets                
Current assets:                
Accounts receivable, net   $ 59,731     $ 67,838  
Inventories, net     69,517       67,503  
Deferred income taxes     2,268       2,399  
Income taxes     1,693       0  
Prepaids     828       763  
Total current assets     134,037       138,503  
                 
Property and equipment, net     6,029       6,255  
Intangible assets, net     13,700       15,557  
Goodwill     25,082       25,082  
Other assets     305       93  
Total assets   $ 179,153     $ 185,490  
                 
Liabilities and stockholders’ equity                
Current liabilities:                
Book overdraft   $ 2,270     $ 3,055  
Trade accounts payable     10,099       19,987  
Accrued and other current liabilities     19,101       19,781  
Income taxes     0       1,036  
Total current liabilities     31,470       43,859  
                 
Debt     47,967       54,825  
Other long-term obligations     128       141  
Deferred income taxes     2,250       945  
Total liabilities     81,815       99,770  
                 
Stockholders’ equity:                
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued and outstanding     0       0  
Common stock, $0.001 par value; 100,000,000 shares authorized: 20,988,952 shares issued: 17,811,806 and 17,748,487 shares outstanding at December 31, 2011 and 2010, respectively     21       21  
Additional paid-in capital     55,760       58,642  
Retained earnings     93,588       80,187  
Treasury stock     (52,031 )     (53,130 )
Total stockholders’ equity     97,338       85,720  
                 
Total liabilities and stockholders’ equity   $ 179,153     $ 185,490  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

28
 

 

Houston Wire & Cable Company

 Consolidated Statements of Income

 

    Year Ended December 31,  
    2011     2010     2009  
    (In thousands, except share and per share data)  
                   
Sales   $ 396,410     $ 308,522     $ 254,819  
Cost of sales     307,515       245,932       201,865  
Gross profit     88,895       62,590       52,954  
                         
Operating expenses:                        
Salaries and commissions     28,053       25,281       20,596  
Other operating expenses     24,513       20,565       18,023  
Depreciation and amortization     2,952       1,738       563  
Total operating expenses     55,518       47,584       39,182  
                         
Operating income     33,377       15,006       13,772  
Interest expense     1,424       844       520  
Income before income taxes     31,953       14,162       13,252  
Income tax provision     12,276       5,543       5,220  
Net income   $ 19,677     $ 8,619     $ 8,032  
                         
Earnings per share:                        
Basic   $ 1.11     $ 0.49     $ 0.46  
Diluted   $ 1.11     $ 0.49     $ 0.45  
                         
Weighted average common shares outstanding:                        
Basic     17,679,524       17,657,682       17,648,696  
Diluted     17,801,134       17,710,123       17,665,924  
                         
Dividends declared per share   $ 0.355     $ 0.34     $ 0.34  

 

The accompanying notes are an integral part of these consolidated financial statements.

  

29
 

 

Houston Wire & Cable Company

 Consolidated Statements of Stockholders' Equity

 

                Additional                 Total  
    Common Stock     Paid-In     Retained     Treasury Stock     Stockholders'  
    Shares     Amount     Capital     Earnings     Shares     Amount     Equity  
    (In thousands, except share data)  
       
Balance at December 31, 2008     20,988,952       21       55,901       75,540       (3,346,400 )     (54,867 )     76,595  
Net income                       8,032                   8,032  
Exercise of stock options                 (145 )           10,185       167       22  
Excess tax benefit for stock options                 13                         13  
Deferred tax adjustment related to stock compensation                 (53 )                       (53 )
Amortization of unearned stock compensation                 2,205                         2,205  
Issuance of restricted stock awards                 (1,312 )           80,000       1,312        
Dividends paid                       (6,001 )                 (6,001 )
                                                         
Balance at December 31, 2009     20,988,952       21       56,609       77,571       (3,256,215 )     (53,388 )     80,813  
Net income                       8,619                   8,619  
Exercise of stock options                 (134 )           10,750       176       42  
Excess tax benefit for stock options                 7                         7  
Amortization of unearned stock compensation                 2,260                         2,260  
Impact of forfeited vested options                 (18 )                       (18 )
Impact of forfeited restricted stock awards                 238             (14,500 )     (238 )        
Issuance of restricted stock awards                 (320 )           19,500       320        
Dividends paid                       (6,003 )                 (6,003 )
                                                         
Balance at December 31, 2010     20,988,952       21       58,642       80,187       (3,240,465 )     (53,130 )     85,720  
Net income                       19,677                   19,677  
Exercise of stock options, net                 (383 )           26,899       497       114  
Excess tax benefit for stock options                 37                         37  
Excess tax deficiency for stock options                 (48 )                       (48 )
Amortization of unearned stock compensation                 (707 )                       (707 )
Impact of forfeited vested options                 (1,153 )                       (1,153 )
Impact of forfeited restricted stock awards                 82             (5,000 )     (82 )      
Issuance of restricted stock awards                 (710 )           43,251       710        
Impact of surrendered equity awards to satisfy taxes                             (1,831 )     (26 )     (26 )
Dividends paid                       (6,276 )                 (6,276 )
Balance at December 31, 2011     20,988,952     $ 21     $ 55,760     $ 93,588       (3,177,146 )   $ (52,031 )   $ 97,338  

  

The accompanying notes are an integral part of these consolidated financial statements.

  

30
 

 

Houston Wire & Cable Company

Consolidated Statements of Cash Flows

 

    Year Ended December 31,  
    2011     2010     2009  
    (In thousands)  
Operating activities                        
Net income   $ 19,677     $ 8,619     $ 8,032  
                         
Adjustments to reconcile net income to net cash provided by operating activities:                        
Depreciation and amortization     2,952       1,738       563  
Amortization of capitalized loan costs     14       46       99  
Amortization of unearned stock compensation     (707 )     2,260       2,205  
Provision for doubtful accounts     (9 )     93       0  
Provision for returns and allowances     66       (118 )     (109 )
Provision for inventory obsolescence     826       734       529  
(Gain) loss on disposals of property and equipment     (2 )     26       (15 )
Deferred income taxes     283       (1,603 )     (741 )
Changes in operating assets and liabilities:                        
Accounts receivable     8,050       (9,785 )     4,048  
Inventories     (2,840 )     1,059       11,606  
Prepaids     (65 )     2,954       (2,820 )
Other assets     (126 )     354       (31 )
Book overdraft     (785 )     1,668       (4,026 )
Trade accounts payable     (9,888 )     5,010       1,519  
Accrued and other current liabilities     (337 )     5,466       (758 )
Long term liabilities     (13 )     (3 )     0  
Income taxes     (2,777 )     755       (1,363 )
Net cash provided by operating activities     14,319       19,273       18,738  
                         
Investing activities                        
Expenditures for property and equipment     (1,319 )     (459 )     (462 )
Proceeds from disposals of property and equipment     452       956       19  
Cash paid for acquisition     (343 )     (51,162 )     0  
Net cash used in investing activities     (1,210 )     (50,665 )     (443 )
                         
Financing activities                        
Borrowings on revolver     405,741       352,276       255,829  
Payments on revolver     (412,599 )     (314,930 )     (268,158 )
Deferred loan cost     (100 )     0       0  
Proceeds from exercise of stock options     114       42       22  
Payment of dividends     (6,276 )     (6,003 )     (6,001 )
Excess tax benefit for options     37       7       13  
Purchase of treasury stock     (26 )            
Net cash provided by (used in) financing activities     (13,109 )     31,392       (18,295 )
                         
Net change in cash     0       0       0  
Cash at beginning of year     0       0       0  
                         
Cash at end of year   $ 0     $ 0     $ 0  
                         
Supplemental disclosures                        
Cash paid during the year for interest   $ 1,445     $ 743     $ 514  
                         
Cash paid during the year for income taxes   $ 14,732     $ 6,191     $ 7,352  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

31
 

 

Houston Wire & Cable Company

Notes to Consolidated Financial Statements

  (dollars in thousands, except share and per share data)

 

1.   Organization and Summary of Significant Accounting Policies

 

Description of Business

 

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 eighteen 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 businesses”, or “the acquisition”). On January 1, 2011, the acquired businesses were merged into HWC Wire & Cable Company. The Company has no other business activity.

 

Basis of Presentation and Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared following accounting principles generally accepted in the United States (“GAAP”) and the requirements of the Securities and Exchange Commission (“SEC”). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of the Company’s financial position and operating results. All significant inter-company balances and transactions have been eliminated.

 

Use of Estimates

 

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significant estimates are those relating to the allowance for doubtful accounts, the inventory obsolescence reserve, the reserve for returns and allowances, vendor rebates, and asset impairments. Actual results could differ materially from the estimates and assumptions used for the preparation of the financial statements.

 

Earnings per Share

 

Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share include the dilutive effects of stock option and restricted stock awards.

 

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

 

    Year Ended December 31,  
    2011     2010     2009  
Denominator:                        
Weighted average common shares for basic earnings per share     17,679,524       17,657,682       17,648,696  
Effect of dilutive securities     121,610       52,441       17,228  
Denominator for diluted earnings per share     17,801,134       17,710,123       17,665,924  

 

 Options to purchase 811,939, 882,455 and 1,042,795 shares of common stock were not included in the diluted net income per share calculation for 2011, 2010 and 2009, respectively, as their inclusion would have been anti-dilutive. The 2011 amount includes 490,385 options held by the former CEO who retired effective December 31, 2011.

 

Accounts Receivable

 

Accounts receivable consists primarily of receivables from customers, less an allowance for doubtful accounts of $211 and $358, and a reserve for returns and allowances of $552 and $486 at December 31, 2011 and 2010, respectively. Consistent with industry practices, the Company normally requires payment from its customers within 30 days. The Company has no contractual repurchase arrangements with its customers. Credit losses have been within management’s expectations.

 

32
 

 

The following table summarizes the changes in the allowance for doubtful accounts for the past three years:

 

    2011     2010     2009  
Balance at beginning of year   $ 358     $ 282     $ 262  
Acquisition           173        
Bad debt expense     (9 )     93        
Write-offs, net of recoveries     (138 )     (190 )     20  
Balance at end of year   $ 211     $ 358     $ 282  

 

Inventories

 

Inventories are carried at the lower of cost, using the average cost method, or market and consist primarily of goods purchased for resale, less a reserve for obsolescence and unusable items and unamortized vendor rebates. The reserve for inventory is based upon a number of factors, including the experience of the purchasing and sales departments, age of the inventory, new product offerings, and other factors. The reserve for inventory may periodically require adjustment as the factors identified above change. The inventory reserve was $2,975 and $3,036 at December 31, 2011 and 2010, respectively.

 

Vendor Rebates

 

Under many of the Company’s arrangements with its vendors, the Company receives a rebate of a specified amount of consideration, payable when the Company achieves any of a number of measures, generally related to the volume level of purchases from the vendors. The Company accounts for such rebates as a reduction of the prices of the vendors’ products and therefore as a reduction of inventory until it sells the products, at which time such rebates reduce cost of sales in the accompanying consolidated statements of income. Throughout the year, the Company estimates the amount of the rebates earned based on purchases to date relative to the total purchase levels expected to be achieved during the rebate period. The Company continually revises these estimates to reflect rebates expected to be earned based on actual purchase levels and forecasted purchase volumes for the remainder of the rebate period.

 

Property and Equipment

 

The Company provides for depreciation on a straight-line method over the following estimated useful lives:

 

Buildings 25 to 30 years
Machinery and equipment 3 to 5 years

 

Leasehold improvements are depreciated over their estimated life or the term of the lease, whichever is shorter. Total depreciation expense was approximately $1,095, $805, and $563 for the years ended December 31, 2011, 2010 and 2009, respectively.

 

Goodwill

 

Goodwill represents excess cost over the net tangible and intangible assets of acquired businesses. Goodwill is not amortized but is reviewed annually for impairment, or more frequently if indications of possible impairment exist, by applying a fair-value based test. The Company completes the required annual assessment as of October 1 of each year. The Company has performed the requisite impairment tests for goodwill and has determined that goodwill was not impaired as of October 1, 2011. The Company is anticipating significant growth in the recently acquired businesses and if this growth is not achieved, a goodwill impairment may result.

 

Other Assets

 

Other assets include deferred financing costs on the current loan agreement of $100. The deferred financing costs are amortized on a straight-line basis over the contractual life of the related loan agreement, which approximates the effective interest method, and such amortization expense is included in interest expense in the accompanying consolidated statements of income. Accumulated amortization at December 31, 2011 and 2010 was approximately $14 and $4, respectively.

 

Estimated future amortization expense for capitalized loan costs through the maturity of the loan agreement are $18 for each of the years 2012 through 2015 and $14 in 2016.

 

33
 

 

Intangibles

 

Intangible assets, from the acquisition, consist of customer relationships, trade names, and non-compete agreements. The customer relationships are amortized over 6 or 7 year useful lives and non-compete agreements were amortized over a 1 year useful life. 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. Trade names are not being amortized and are tested for impairment on an annual basis. 

 

Self Insurance

 

The Company retains certain self-insurance risks for both health benefits and property and casualty insurance programs. The Company limits its exposure to these self insurance risks by maintaining excess and aggregate liability coverage. Self insurance reserves are established based on claims filed and estimates of claims incurred but not reported. The estimates are based on information provided to the Company by its claims administrators.

 

Segment Reporting

 

The Company operates in a single operating and reporting segment, sales of wire and cable and related services to the U.S. market.

 

Revenue Recognition, Returns & Allowances

 

The Company recognizes revenue when the following four basic criteria have been met:

 

1.       Persuasive evidence of an arrangement exists;

 

2.       Delivery has occurred or services have been rendered;

 

3.       The seller’s price to the buyer is fixed or determinable; and

 

4.       Collectibility is reasonably assured.

 

The Company records revenue when customers take delivery of products. Customers may pick up products at any distribution center location, or products may be delivered via third party carriers. Products shipped via third party carriers are considered delivered based on the shipping terms, which are generally FOB shipping point. Normal payment terms are net 30 days. Customers are permitted to return product only on a case-by-case basis. Product exchanges are handled as a credit, with any replacement items being re-invoiced to the customer. Customer returns are recorded as an adjustment to sales. In the past, customer returns have not been material. The Company has no installation obligations.

 

The Company may offer sales incentives, which are accrued monthly as an adjustment to sales.

 

Shipping and Handling

 

The Company incurs shipping and handling costs in the normal course of business. Freight amounts invoiced to customers are included as sales and freight charges are included as a component of cost of sales.

 

Credit Risk

 

The Company’s customers are located primarily throughout the United States. No single customer accounted for 10% or more of the Company’s sales in 2011, 2010 or 2009. The Company performs periodic credit evaluations of its customers and generally does not require collateral.

 

34
 

 

Advertising Costs

 

Advertising costs are expensed when incurred. Advertising expenses were $212, $163, and $94 for the years ended December 31, 2011, 2010, and 2009, respectively.

 

Financial Instruments

 

The carrying values of accounts receivable, trade accounts payable and accrued and other current liabilities approximate fair value, due to the short maturity of these instruments. The carrying amount of long term debt approximates fair value as it bears interest at variable rates.

 

  Stock-Based Compensation

 

Stock options issued under the Company’s stock plan have an exercise price equal to the fair value of the Company’s stock on the grant date. Restricted stock is valued at the closing price of the Company’s stock on the grant date. The Company recognizes compensation expense ratably over the vesting period. The Company’s compensation expense is included in salaries and commissions expense in the accompanying consolidated statements of income.

 

The Company receives a tax deduction for certain stock option exercises in the period in which the options are exercised, generally for the excess of the market price on the date of exercise over the exercise price of the options. The Company reports excess tax benefits from the award of equity instruments as financing cash flows. Excess tax benefits result when a deduction reported for tax return purposes for an award of equity instruments exceeds the cumulative compensation cost for the instruments recognized for financial reporting purposes.

 

Income Taxes

 

Deferred tax assets and liabilities are determined based on differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

 

2.   Business Combination

 

On June 25, 2010, the Company completed the acquisition of SWWR, its general partner Southwest Wire Rope GP LLC and SWWR’s subsidiary, SW, from Teleflex Incorporated. The acquisition was accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. Accordingly, the total purchase price was 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 and the balance in 2011. 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 expanded the Company’s product offerings to the industrial marketplace that purchases its electrical wire and cable products.

 

The following table summarizes the fair value of the acquired assets and assumed liabilities recorded as of the date of acquisition.

 

    At June 25, 2010  
Accounts  receivable   $ 11,169  
Inventories     7,971  
Deferred income taxes     117  
Prepaids     68  
Property and equipment     4,413  
Intangibles     16,490  
Goodwill     22,720  
Other assets     475  
Total assets acquired     63,423  
         
Book overdraft     480  
Trade accounts payable     3,367  
Accrued and other current liabilities     3,053  
Deferred income taxes     4,879  
Long term obligations     144  
Total liabilities assumed     11,923  
         
Net assets purchased   $ 51,500  

 

35
 

 

The fair values of the assets acquired and liabilities assumed were determined using the market, income and cost approaches. The market approach used by the Company included prices at which comparable assets are purchased under similar circumstances. The income approach indicates value for a subject asset based on the present value of cash flows projected to be generated by the asset over its useful life. Projected cash flows are discounted at a market rate of return that reflects the relative risk associated with the asset and the time value of money. The cost approach estimates value by determining the current cost of replacing an asset with another of equivalent economic utility. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the asset, less an allowance for loss in value due to depreciation.

 

Intangible assets, from the acquisition, consist of customer relationships - $11,630, trade names - $4,610, and non-compete agreements - $250. Customer relationships are being amortized over 6 or 7 year useful lives and non-compete agreements were amortized over a 1 year useful life. The weighted average amortization period for intangible assets is 6.6 years. Trade names are not amortized. As of December 31, 2011, accumulated amortization on the acquired intangible assets was $2,790, and amortization expense was $1,857 and $933 for the year ended December 31, 2011 and from the date of acquisition through December 31, 2010, respectively. Future amortization expense to be recognized on the acquired intangible assets is expected to be as follows:

 

      Annual
Amortization
Expense
  2012    $ 1,733
  2013     1,733
  2014     1,733
  2015     1,733
  2016     1,512
  2017     646

 

Goodwill represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the acquisition consists primarily of sales and operational synergies that the Company expects to achieve by expanding the regionally based operations of the acquired companies to the Company’s national platform.

 

Under ASC Topic 805-10, acquisition-related costs (e.g. legal, valuation and advisory) are not included as a component of consideration paid, but are accounted for as expenses in the periods in which the costs are incurred. For the year ended December 31, 2010, the Company incurred $860 of acquisition-related costs. In the year ended December 31, 2011, no acquisition-related costs were incurred.

 

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3.   Detail of Selected Balance Sheet Accounts

 

Property and Equipment

 

Property and equipment are stated at cost and consist of:

 

    At December 31,  
    2011     2010  
Land   $ 1,187     $ 1,436  
Buildings     3,411       3,599  
Machinery and equipment     8,810       7,628  
      13,408       12,663  
Less accumulated depreciation     7,379       6,408  
Total   $ 6,029     $ 6,255  

  

Intangibles assets

 

Intangibles assets consist of: 

 

    At December 31,  
    2011     2010  
Trade names   $ 4,610     $ 4,610  
Customer relationships     11,630       11,630  
Non-compete agreements     250       250  
      16,490       16,490  
Less accumulated amortization                
Trade names            
Customer relationships     2,540       808  
Non-compete agreements     250       125  
      2,790       933  
Total   $ 13,700     $ 15,557  

 

Goodwill

 

Changes in goodwill were as follows:

 

    At December 31,  
    2011     2010  
Balance at beginning of year   $ 25,082     $ 2,362  
Current year acquisitions           22,720  
Balance at end of year   $ 25,082     $ 25,082  

 

Accrued and Other Current Liabilities

 

Accrued and other current liabilities consist of:

 

    At December 31,  
    2011     2010  
Customer advances   $ 2,539     $ 3,844  
Customer rebates     5,112       4,402  
Payroll, commissions, and bonuses     3,760       3,326  
Accrued inventory purchases     4,324       4,303  
Other     3,366       3,906  
Total   $ 19,101     $ 19,781  

 

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4.   Debt

 

On September 30, 2011, HWC Wire & Cable Company, as borrower, entered into the Third Amended and Restated Loan and Security Agreement (“2011 Loan Agreement”), with certain lenders and Bank of America, N.A., as agent, and the Company, as guarantor, executed a Second Amended and Restated Guaranty of the borrower’s obligations thereunder. The 2011 Loan Agreement provides for a $100 million revolving credit facility, bears interest at the agent’s base rate, with a LIBOR rate option and expires on September 30, 2016. The 2011 Loan Agreement is secured by a lien on substantially all the property of the Company, other than real estate. Availability under the 2011 Loan Agreement is limited to a borrowing base equal to 85% of the value of eligible accounts receivable, plus 65% of the value of eligible inventory, less certain reserves.

 

Portions of the loan may be converted to LIBOR loans in minimum amounts of $1,000 and integral multiples of $100. LIBOR loans bear interest at the British Bankers Association LIBOR Rate plus 125 to 200 basis points based on availability, and loans not converted to LIBOR loans bear interest at a fluctuating rate equal to the greatest of the agent’s prime rate, the federal funds rate plus 50 basis points, or 30-day LIBOR plus 150 basis points. Unused commitment fees are 25 or 30 basis points, depending on the amount of the unused commitment.

 

The 2011 Loan Agreement includes, among other things, covenants that require the Company to maintain a specified minimum fixed charge coverage ratio and availability levels. Additionally, the 2011 Loan Agreement allows for the unlimited payment of dividends and repurchases of stock, subject to the absence of events of default and maintenance of a fixed charge coverage ratio and minimum level of availability. The 2011 Loan Agreement contains certain provisions that may cause the debt to be classified as a current liability, in accordance with GAAP, if availability falls below certain thresholds, even though the ultimate maturity date under the loan agreement remains as September 30, 2016. Availability has remained above these thresholds. At December 31, 2011, the Company was in compliance with the financial covenants governing its indebtedness.

 

The Company’s borrowings at December 31, 2011 and 2010 were $47,967 and $54,825, respectively. The weighted average interest rates on outstanding borrowings were 2.3% and 2.2% at December 31, 2011 and 2010, respectively.

 

During 2011, the Company had an average available borrowing capacity of approximately $25,965. This average was computed from the monthly borrowing base certificates prepared for the lender. At December 31, 2011, the Company had available borrowing capacity of $34,956 under the terms of the 2011 Loan Agreement. During the years ended December 31, 2011, 2010 and 2009, the Company paid $71, $108, and $107, respectively, for the unused facility.

 

Principal repayment obligations for succeeding fiscal years are as follows:

 

2012   $  
2013      
2014      
2015      
2016     47,967  
Total   $ 47,967  

 

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5.   Income Taxes

 

The provision (benefit) for income taxes consists of:

 

    Year Ended December 31,  
    2011     2010     2009  
Current:                        
Federal   $ 10,612     $ 6,392     $ 5,307  
State     1,381       754       654  
Total current     11,993       7,146       5,961  
                         
Deferred:                        
Federal     258       (1,457 )     (674 )
State     25       (146 )     (67 )
Total deferred     283       (1,603 )     (741 )
                         
Total   $ 12,276     $ 5,543     $ 5,220  

 

A reconciliation of the U.S. Federal statutory tax rate to the effective tax rate on income before taxes is as follows:

 

    Year Ended December 31,  
    2011     2010     2009  
                   
Federal statutory rate     35.0 %     35.0 %     35.0 %
State taxes, net of federal benefit     2.8       2.8       2.8  
Non-deductible items     0.6       0.6       0.9  
Other           0.7       0.7  
Total effective tax rate     38.4 %     39.1 %     39.4 %

 

Significant components of the Company’s deferred taxes were as follows: 

 

    Year Ended
December 31,
 
    2011     2010  
Deferred tax assets:                
Uniform capitalization adjustment   $ 875     $ 933  
Inventory reserve     1,146       1,169  
Allowance for doubtful accounts     81       138  
Stock compensation expense     1,685       3,227  
Other     31       137  
Total deferred tax assets     3,818       5,604  
                 
Deferred tax liabilities                
Property and equipment     14       173  
Goodwill     613       393  
Intangibles     3,173       3,584  
Total deferred tax liabilities     3,800       4,150  
Net deferred tax assets   $ 18     $ 1,454  

 

The Company recognizes interest on any tax issue as a component of interest expense and any related penalties in other operating expenses. As of December 31, 2011, 2010 and 2009, the Company made no provisions for interest or penalties related to uncertain tax positions. The tax years 2007 through 2011 remain open to examination by the major taxing jurisdictions to which the Company is subject.

 

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6.     Stockholders’ Equity

 

In 2007, the Board of Directors approved a stock repurchase program, where the Company is authorized to purchase up to $75,000 of its outstanding shares of common stock, depending on market conditions, trading activity, business conditions and other factors. The program was scheduled to expire on December 31, 2009 but was initially extended through December 31, 2011 and on November 4, 2011 was further extended through December 31, 2012. Shares of stock purchased under the program are currently being held as treasury stock and may be used to satisfy the exercise of options, as restricted stock, to fund acquisitions, or for other uses as authorized by the Board of Directors. During the years ended December 31, 2011 and 2010, the Company did not repurchase any of its stock under the stock repurchase program. As of December 31, 2011, the Company had total repurchases under the stock repurchase program of 3,391,854 shares for a total cost of $55,615. Under the terms of the 2006 Stock Plan, the Company did repurchase 29,043 shares that were surrendered by the holders to fund the exercise of the related awards and to pay withholding taxes.

 

The Company has paid a quarterly cash dividend since August 2007, resulting in aggregate dividends in 2011, 2010 and 2009 of $6,276, $6,003 and $6,001, respectively.

 

The Company is authorized to issue 5,000,000 shares of preferred stock, par value $.001 per share. The Board of Directors is authorized to fix the particular preferences, rights, qualifications and restrictions of each series of preferred stock. In connection with the adoption of a stockholder rights plan, which was subsequently terminated, the Board of Directors designated 100,000 shares as Series A Junior Participating Preferred Stock. No shares of preferred stock have been issued.

 

7.   Employee Benefit Plans

 

The Company maintains a combination profit-sharing plan and salary deferral plan (the “Plan”) for the benefit of its employees. Employees who are eligible to participate in the Plan can contribute a percentage of their base compensation, up to the maximum percentage allowable not to exceed the limits of Internal Revenue Code (“Code”) Sections 401(k), 404, and 415, subject to the IRS-imposed dollar limit. Employee contributions are invested in certain equity and fixed-income securities, based on employee elections. The Company has adopted the Safe Harbor provisions of the Code, whereby contributions up to the first 3% of an employee’s compensation are matched 100% by the Company and the next 2% are matched 50% by the Company.  The Company’s match for the years ended December 31, 2011, 2010 and 2009 was $727, $599, and $537, respectively.

 

8.   Incentive Plans

 

On March 23, 2006, the Company adopted and on May 1, 2006, the stockholders approved the 2006 Stock Plan (the “2006 Plan”) to provide incentives for certain key employees and directors through awards of restricted stock and options. The 2006 Plan provides for options to be granted at the fair market value of the Company’s common stock at the date of grant and may be either nonqualified stock options or incentive stock options as defined by Section 422 of the Code. Under the 2006 Plan a maximum of 1,800,000 shares may be issued to designated participants. The maximum number of shares available to any one participant in any one calendar year is 500,000.

 

The Company also has options outstanding under a stock option plan adopted in 2000 (the “2000 Plan”). The 2000 Plan provided for options to be granted at the fair market value of the Company’s common stock at the date of the grant, which options could be either nonqualified stock options or incentive stock options as defined by Section 422 of the Code. In connection with the adoption of the 2006 Plan, the Board of Directors resolved that no further options would be granted under the 2000 Plan.

 

Stock Option Awards

 

The Company has granted options to purchase its common stock to employees and directors of the Company under the two stock plans at no less than the fair market value of the underlying stock on the date of grant. These options are granted for a term not exceeding ten years and may be forfeited in the event the employee or director terminates his or her employment or relationship with the Company. Options granted to employees generally vest over three to five years, and options granted to directors generally vest one year after the date of grant. Shares issued to satisfy the exercise of options may be newly issued shares or treasury shares. Both option plans contain anti-dilutive provisions that permit an adjustment of the number of shares of the Company’s common stock represented by each option for any change in capitalization. Compensation cost for options granted is charged to expense on a straight line basis over the term of the option.

 

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On December 20, 2011, the Company granted options to purchase 64,330 shares and 8,580 shares of its common stock to the Company’s President (as part of his overall compensation plan commensurate upon assuming the Chief Executive Officer role effective January 1, 2012) with the exercise price equal to the fair market value of the Company’s stock at the close of trading on December 20, 2011. The first option grant has a contractual life of ten years and vests 50% on December 31, 2016 and the remaining 50% on December 31, 2017. The second grant also has a contractual life of ten years and vests at the rate of 20% per year commencing December 20, 2012 through December 20, 2016. Both grants provide that in the event of the chief executive officer’s death or permanent disability, such options would vest ratably based on the days served from the date of grant.

 

On December 20, 2011, the Company granted options to purchase 97,500 shares of its common stock to its managers with the exercise price equal to the fair market value of the Company’s stock at the close of business on December 20, 2011. This grant has a contractual life of ten years and vest at the rate of 20% per year commencing December 20, 2012 through December 20, 2016.

 

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. For options issued, the following weighted average assumptions were used:

 

    Year Ended
December 31,
 
    2011     2010     2009  
Risk-free interest rate     1.01 %     1.86 %     1.00 %
Expected dividend yield     2.55 %     2.80 %     3.29 %
Weighted average expected life     5.5 years       4.5 years       2 years  
Expected volatility     65 %     64 %     81 %

 

  Vesting dates range from December 17, 2012 to December 31, 2017, and expiration dates range from January 1, 2012 to December 20, 2021. The following summarizes stock option activity and related information:

 

    2011              
   

Options

(in   000’s)

    Weighted
Average
Exercise Price
    Aggregate
Intrinsic
Value
    Weighted
Average
Remaining
Contractual Life
(in years)
 
Outstanding—Beginning of year     1,291     $ 18.49     $ 1,705          
Granted     170       14.11                  
Exercised     (54 )     9.30                  
Forfeited     (570 )     24.29                  
Expired                            
Outstanding—End of year     837     $ 14.25     $ 1,430       6.79  
Exercisable—End of year     529     $ 15.09     $ 1,048       5.98  
Weighted average fair value of options granted during 2011   $ 6.55                          
Weighted average fair value of options granted during 2010   $ 5.04                          
Weighted average fair value of options granted during 2009   $ 4.04                          

 

During the years ended December 31, 2011, 2010 and 2009, tax benefits of $37, $7 and $13, respectively, were reflected in financing cash flows.

 

The total intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009 was $277, $77 and $77, respectively.

 

The total fair value of options vested during the years ended December 31, 2011, 2010 and 2009 was $3,890, $703 and $1,013, respectively. The December 31, 2011 amount includes vested options of the retired former chief executive officer in the amount of $2,993. These options expired upon his departure.

 

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Restricted Stock Awards and Restricted Stock Units

 

On December 20, 2011, the Company granted two restricted stock awards to the Company’s President (as part of his overall compensation plan commensurate upon assuming the Chief Executive Officer role effective January 1, 2012) in the amounts of 26,576 shares and 14,175 shares. The first grant vests in two equal amounts on December 31, 2016 and December 31, 2017. The second grant is performance based on achieving at least 85% of a cumulative operating income target for the three year period commencing January 1, 2012 and ending December 31, 2014. The award will vest at the 100% level by achieving 100% or more of the cumulative operating income target and on a sliding scale down to 0% vesting if less than 85% of the target cumulative operating income is attained. Vesting is dependent upon the recipient being employed and any dividends declared will be accrued and paid to the recipient when the related shares vest.

 

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 of Directors terminates for any reason.

 

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 equally over five years on the anniversary of the date of 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.

 

On June 28, 2010, the Company granted 19,500 voting shares of restricted stock under the 2006 Plan to new members of the management team, who joined the Company as part of the acquisition. These shares vest in one-third increments, on the first, second and third anniversaries of the date of 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.

 

The following summarizes restricted stock activity for the year ended December 31, 2011:

 

    2011  
    Awards     Units  
    Shares
(in 000’s)
    Weighted
Average
Market
Value at
Grant Date
   

 

 

Shares

(in 000’s)

    Weighted
Average
Market
Value at
Grant Date
 
Non-vested —Beginning of year     85     $ 12.14           $  
Granted     43       13.98       18       16.48  
Vested     (1 )     11.62              
Cancelled/Forfeited     (5 )     11.62              
Non-vested —End of year     122     $ 12.82       18     $ 16.48  

 

Total stock-based compensation (benefit)/cost was $(707), $2,260 and $2,205 for the years ended December 31, 2011, 2010 and 2009, respectively. Total income tax (expense)/benefit recognized for stock-based compensation arrangements was $(274), $885 and $869 for the years ended December 31, 2011, 2010 and 2009, respectively. The credit for share-based compensation for the year ended December 31, 2011 is due to the reversal of $1.7 million of compensation expense which was recorded prior to January 1, 2011. This reversal resulted from a change in the estimated forfeiture rate from 0% to 100% of non-vested options previously awarded to the Chief Executive Officer, who retired from the Company effective December 31, 2011.

  

As of December 31, 2011, there was $2,811 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 50 months. There were 553,010 shares available for future grants under the 2006 Plan at December 31, 2011.

 

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9.   Commitments and Contingencies

 

The Company has entered into operating leases, primarily for distribution centers and office facilities. These operating leases frequently include renewal options at the fair rental value at the time of renewal. For leases with step rent provisions, whereby the rental payments increase incrementally over the life of the lease, the Company recognizes the total minimum lease payments on a straight line basis over the minimum lease term. Facility rent expense was approximately $2,809 in 2011, $2,602 in 2010 and $2,161 in 2009.

 

Future minimum lease payments under non-cancelable operating leases with initial terms of one year or more consisted of the following at December 31, 2011:

 

2012   $ 2,831  
2013     2,067  
2014     1,522  
2015     712  
2016     514  
Thereafter     467  
Total minimum lease payments   $ 8,113  

 

The Company had aggregate purchase commitments for fixed inventory quantities of approximately $38,949 at December 31, 2011.

 

As part of the acquisition, the Company assumed the liability for the post-remediation monitoring of the water quality at one of the acquired facilities in Louisiana. The expected liability of $128 at December 31, 2011 relates to the cost of the monitoring, which the Company estimates will be incurred over approximately the next 5 years and also the cost to plug the wells. Remediation work was completed prior to the acquisition in accordance with the requirements of the Louisiana Department of Environmental Quality.

 

The Company, along with many other defendants, has been named in a number of lawsuits in the state courts of Illinois, Minnesota, North Dakota, and South Dakota alleging that certain wire and cable which may have contained asbestos caused injury to the plaintiffs who were exposed to this wire and cable. These lawsuits are individual personal injury suits that seek unspecified amounts of money damages as the sole remedy. It is not clear whether the alleged injuries occurred as a result of the wire and cable in question or whether the Company, in fact, distributed the wire and cable alleged to have caused any injuries.  The Company maintains general liability insurance that, to date, has covered the defense of and all costs associated with these claims. In addition, the Company did not manufacture any of the wire and cable at issue, and the Company would rely on any warranties from the manufacturers of such cable if it were determined that any of the wire or cable that the Company distributed contained asbestos which caused injury to any of these plaintiffs. In connection with ALLTEL’s sale of the Company in 1997, ALLTEL provided indemnities with respect to costs and damages associated with these claims that the Company believes it could enforce if its insurance coverage proves inadequate.

 

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.

 

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.

 

10.  Subsequent Events

 

On February 10, 2012, the Board of Directors approved a quarterly dividend of $0.09 per share payable to shareholders of record on February 20, 2012. This dividend totaling $1,593 was paid on February 29, 2012.

 

43
 

 

11.  Select Quarterly Financial Data (unaudited)

 

The following table presents the Company’s unaudited quarterly results of operations for each of the last eight quarters in the period ended December 31, 2011. The unaudited information has been prepared on the same basis as the audited consolidated financial statements.

 

    Year Ended December 31, 2011  
    Fourth
Quarter
    Third
Quarter
    Second
Quarter
    First
Quarter
 
    (in thousands, except per share data)  
                         
Sales   $ 87,481     $ 105,782     $ 103,420     $ 99,727  
Gross profit   $ 19,917     $ 23,006     $ 23,720     $ 22,252  
Operating income   $ 5,306     $ 8,386     $ 11,527     $ 8,158  
Net income   $ 3,052     $ 4,965     $ 6,842     $ 4,818  
Earnings per share:                                
Basic   $ 0.17     $ 0.28     $ 0.39     $ 0.27  
Diluted   $ 0.17     $ 0.28     $ 0.38     $ 0.27  

 

    Year Ended December 31, 2010  
    Fourth
Quarter
    Third
Quarter
    Second
Quarter
    First
Quarter
 
    (in thousands, except per share data)  
                         
Sales   $ 93,549     $ 90,536     $ 63,269     $ 61,168  
Gross profit   $ 19,756     $ 17,574     $ 12,753     $ 12,507  
Operating income   $ 5,088     $ 4,063     $ 3,004     $ 2,851  
Net income   $ 2,904     $ 2,233     $ 1,777     $ 1,705  
Earnings per share:                                
Basic   $ 0.16     $ 0.13     $ 0.10     $ 0.10  
Diluted   $ 0.16     $ 0.13     $ 0.10     $ 0.10  
                               

 

44
 

  

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A.  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

In accordance with Exchange Act Rules 13a-15 and 15a-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2011.

 

Design and Evaluation of Internal Control over Financial Reporting

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we included a report of management’s assessment of the design and effectiveness of our internal controls as part of this Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Ernst & Young, LLP, our independent registered public accounting firm, also attested to our internal control over financial reporting. Management’s report and the independent registered accounting firm’s attestation report are included on pages 46 and 47 under the captions entitled “Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting,” and are incorporated herein by reference.

 

There has been no change in our internal controls over financial reporting that occurred during the year ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

  

45
 

 

  MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

The Company has assessed the effectiveness of its internal control over financial reporting as of December 31, 2011 based on criteria established by   Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO Framework”). The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting. The Company’s independent registered public accountants that audited the Company’s financial statements as of December 31, 2011 have issued an attestation report on management’s assessment of the effectiveness of the Company’s internal control over financial reporting, which appears on page 47.

 

Internal control over financial reporting is a process designed 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. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

 

The Company’s assessment of the effectiveness of its internal control over financial reporting included testing and evaluating the design and operating effectiveness of its internal controls. In management’s opinion, the Company has maintained effective internal control over financial reporting as of December 31, 2011, based on criteria established in the COSO Framework .

 

/s/ James L. Pokluda III   /s/ Nicol G. Graham
James L. Pokluda III   Nicol G. Graham
President and Chief Executive Officer   Chief Financial Officer, Treasurer
    and Secretary (Chief Accounting Officer)

 

 

46
 

 

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

 

Board of Directors and Stockholders of Houston Wire & Cable Company

 

We have audited Houston Wire & Cable Company’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Houston Wire & Cable Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Houston Wire & Cable Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Houston Wire & Cable Company as of December 31, 2011 and 2010, and the related consolidated statements of income, cash flows, and stockholders’ equity for each of the three years in the period ended December 31, 2011 of Houston Wire & Cable Company and our report dated March 15, 2012 expressed an unqualified opinion thereon.

 

  /s/ ERNST & YOUNG LLP
   
Houston, Texas  
March 15, 2012  

 

47
 

 

ITEM 9B.  OTHER INFORMATION

 

We have no information to report pursuant to Item 9B.

 

PART III

 

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information called for by Item 10 relating to directors and nominees for election to the Board of Directors is incorporated herein by reference to the “Election of Directors” section of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 8, 2012.  The information called for by Item 10 relating to executive officers and certain significant employees is set forth in Part I of this Annual Report on Form 10-K.

 

The information called for by Item 10 relating to disclosure of delinquent Form 3, 4 or 5 filers is incorporated herein by reference to the “Stock Ownership of Certain Beneficial Owners and Management” section of the registrant’s definitive  Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 8, 2012.

 

The information called for by Item 10 relating to the code of ethics is incorporated herein by reference to the “Corporate Governance and Board Committees – Code of Business Practices” section of the registrant’s definitive  Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 8, 2012.

 

The information called for by Item 10 relating to the procedures by which security holders may recommend nominees to the Board of Directors is incorporated herein by reference to the “Corporate Governance and Board Committees – Stockholder Recommendations for Director Nominations” section of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 8, 2012.

 

The information called for by Item 10 relating to the audit committee and the audit committee financial expert is incorporated herein by reference to the “Corporate Governance and Board Committees – Committees Established by the Board – Audit Committee” section of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 8, 2012.

 

ITEM 11.  EXECUTIVE COMPENSATION

 

The information called for by Item 11 is incorporated herein by reference to the “Report of the Compensation Committee,” “Compensation Committee Interlocks and Insider Participation,” “Executive Compensation” and “Director Compensation” sections of the registrant’s definitive  Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 8, 2012.

 

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information called for by Item 12 is incorporated herein by reference to the “Stock Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” sections of the registrant’s definitive  Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 8, 2012.

 

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information called for by Item 13 is incorporated herein by reference to the “Corporate Governance and Board Committees – Are a Majority of the Directors Independent?” and “Certain Relationships and Related Transactions” sections of the registrant’s definitive  Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 8, 2012.

 

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The information called for by Item 14 is incorporated herein by reference to the “Principal Independent Accountant Fees and Services” section of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 8, 2012.

 

48
 

 

  PART IV

 

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a) The following financial statements of our Company and Report of the Independent Registered Public Accounting Firm are included in Part II:

 

· Report of Independent Registered Public Accounting Firm
· Consolidated Balance Sheets as of December 31, 2011 and 2010
· Consolidated Statements of Income for the years ended December 31, 2011, 2010 and 2009
· Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2011, 2010 and 2009
· Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009
· Notes to Consolidated Financial Statements

 

(b) Financial Statement Schedules:

 

Financial statement schedules have been omitted because they are either not applicable or the required information has been disclosed in the financial statements or notes thereto.

 

(c) Exhibits

 

Exhibits are set forth on the attached exhibit index

 

49
 

 

  SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

 

HOUSTON WIRE & CABLE COMPANY

(Registrant)

     
Date: March 15, 2012 By: /s/ NICOL G. GRAHAM
   

Nicol G. Graham

Chief Financial Officer, Treasurer and Secretary

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

SIGNATURE   TITLE   DATE
         
/s/ JAMES L. POKLUDA III   President, Chief Executive Officer and Director   March 15, 2012
James L. Pokluda III        
         
/s/ NICOL G. GRAHAM  

Chief Financial Officer, Treasurer and

Secretary (Principal Accounting Officer)

  March 15, 2012
Nicol G. Graham        
         
/s/ MICHAEL T. CAMPBELL   Director   March 15, 2012
Michael T. Campbell        
         
/s/ IAN STEWART FARWELL   Director   March 15, 2012
Ian Stewart Farwell        
         
/s/ PETER M. GOTSCH   Director   March 15, 2012
Peter M. Gotsch        
         
/s/ WILSON B. SEXTON   Director   March 15, 2012
Wilson B. Sexton        
         
/s/ WILLIAM H. SHEFFIELD   Director   March 15, 2012
William H. Sheffield        
         
/s/ SCOTT L. THOMPSON   Director   March 15, 2012
Scott L. Thompson        
         

 

50
 

 

INDEX TO EXHIBITS

 

EXHIBIT

NUMBER

  EXHIBIT
     
3.1  

Amended and Restated Certificate of Incorporation of Houston Wire & Cable Company (incorporated herein by reference to Exhibit 3.1 to Houston Wire & Cable Company’s Registration Statement on Form S-1 (Registration No. 333-132703)) 

     
3.2  

By-Laws of Houston Wire & Cable Company (incorporated herein by reference to Exhibit 3.2 to Houston Wire & Cable Company’s Registration Current Report on Form 8-K filed August 6, 2007) 

     
10.1  

Houston Wire & Cable Company 2000 Stock Plan (incorporated herein by reference to Exhibit 10.2 to Houston Wire & Cable Company’s Registration Statement on Form S-1 (Registration No. 333-132703)) 

     
10.2  

Houston Wire & Cable Company 2006 Stock Plan, as amended (incorporated herein by reference to (i) Exhibit 10.3 to Houston Wire & Cable Company’s Registration Statement on Form S-1 (Registration No. 333-132703) and (ii) Exhibit 10.1 to Houston Wire & Cable Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, as amended) 

     
10.3*   Executive Employment Agreement dated as of January 1, 2012 between James L. Pokluda, III and Houston Wire & Cable Company
     
10.4  

Form of Employee Stock Option Agreement under Houston Wire & Cable Company’s 2006 Stock Plan (incorporated herein by reference to Exhibit 10.23 to Houston Wire & Cable Company’s Annual Report on Form 10-K for the year ended December 31, 2007) 

     
10.5  

Form of Director Stock Option Agreement under Houston Wire & Cable Company’s 2006 Stock Plan (incorporated herein by reference to Exhibit 10.24 to Houston Wire & Cable Company’s Annual Report on Form 10-K for the year ended December 31, 2007) 

     
10.6*   Form of Employee Stock Award Agreement under Houston Wire & Cable Company’s 2006 Stock Plan
     
10.7   Form of Restricted Stock Unit Award Agreement for Non-Employee Directors under Houston Wire & Cable Company’s 2006 Stock Plan (incorporated herein by reference to Exhibit 10.2 to Houston Wire & Cable Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, as amended)
     
10.8*  

Description of Senior Management Bonus Program 

     
10.9  

Form of Director/Officer Indemnification Agreement by and between Houston Wire & Cable Company and a director, member of a committee of the Board of Directors or officer of Houston Wire & Cable Company (incorporated herein by reference to Exhibit 10.24 to Houston Wire & Cable Company’s Annual Report on Form 10-K for the year ended December 31, 2006) 

     
10.10  

Third Amended and Restated Loan and Security Agreement, dated as of September 30, 2011, among HWC Wire & Cable Company, as borrower, Houston Wire & Cable Company, as Guarantor, certain financial institutions, as lenders, and Bank of America, N.A., as agent (incorporated herein by reference to Exhibit 10.1 to Houston Wire & Cable Company’s Current Report on Form 8-K filed October 5, 2011) 

     
10.11   Second Amended and Restated Guaranty dated as of September 30, 2011, by Houston Wire & Cable Company, as guarantor, in favor of Bank of America, N.A., as agent (incorporated herein by reference to Exhibit 10.2 to Houston Wire & Cable Company’s Current Report on Form 8-K filed October 5, 2011)

 

51
 

 

10.13   Equity Interest Purchase Agreement between Houston Wire & Cable Company and Teleflex Incorporated dated May 26, 2010 (incorporated herein by reference to Exhibit 10.1 to Houston Wire & Cable Company’s Current Report on Form 8-K filed May 28, 2010)
     
21.1  

Subsidiaries of Houston Wire & Cable Company (incorporated herein by reference to Exhibit 21.1 to Houston Wire & Cable Company’s Registration Statement on Form S-1 (Registration No. 333-132703)) 

     
23.1*  

Consent of Ernst & Young, LLP 

     
31.1*  

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

     
31.2*  

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

     
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 

 

* Filed herewith

 

52

 

Exhibit 10.3

 

 

EXECUTIVE EMPLOYMENT AGREEMENT

 

THIS EXECUTIVE EMPLOYMENT AGREEMENT (the “Agreement”) is entered into as of January 1, 2012, by and between James L. Pokluda, III (the “Executive”) and Houston Wire & Cable Company, a Delaware corporation (the “Company”).

 

WHEREAS, the Company desires to employ the Executive as President and Chief Executive Officer of the Company and of its wholly owned subsidiary HWC Wire & Cable Company, and the Company and the Executive desire to enter into this Agreement to set forth the terms and conditions of the Executive’s employment.

 

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

 

1. Capacities and Duties .

 

1.1 Title . The Executive is hereby employed in the capacity of President and Chief Executive Officer of the Company and of HWC Wire & Cable Company, effective as of January 1, 2012. The Executive shall report directly to the Board of Directors of the Company (the “Board”) and shall be subject to its supervision, control and direction. The Executive will at all times abide by the Company’s personnel policies in effect from time to time and will faithfully, industriously and to the best of the Executive’s ability, experience and talents perform all of the duties that may be required of and from the Executive by the Board pursuant to the express and implied terms hereof, consistent with the Executive’s status as the President and Chief Executive Officer of the Company and HWC Wire & Cable Company.

 

1.2 Exclusive Services . During the Term, the Executive agrees to devote his best efforts and full business time to rendering services to the Company. The Executive is specifically restricted from being employed by any other company, other than a Subsidiary or an Affiliate (each as defined below) of the Company, while employed by the Company pursuant to this Agreement; provided that the Executive’s service on boards of directors of other companies in accordance with the Company’s Corporate Governance Principles, or on boards of any civic, charitable, education or professional organizations, shall not be considered employment in violation of this Section 1.2.

 

1.3 Election as Director . The Company has elected the Executive as a member of the Company’s Board of Directors, effective as of January 1, 2012 and shall use its best efforts to cause the Executive to remain elected as such a member during the term of this Agreement. The Company and the Executive shall enter into an indemnification agreement substantially similar to the form of agreement the Company has with the other members of the Board of Directors.

 

2. Term . Subject to earlier termination as set forth herein, the term of this Agreement shall be four years, commencing on the date of this Agreement (the “Term”).

 

 
 

3. Compensation and Benefits . For the Executive’s services performed during the Term of this Agreement, the Company agrees to pay or provide the Executive with the following:

 

3.1 Salary . An annual base salary (“Base Salary”) of $400,000, to be paid according to the Company’s general payroll practices as in effect from time to time. The Executive’s Base Salary will be subject to annual reviews and increases (but not decreases) as approved by the Board and the Compensation Committee of the Board.

 

3.2 Incentive Compensation Program . The Company shall pay the Executive an annual bonus (“Incentive Bonus”) of up to 75% of his Base Salary for each full fiscal year of the Company in which the Executive is employed by the Company, based upon achievement of the performance target for such fiscal year as described in this Section 3.2. If the Company achieves less than 85% of the target for a fiscal year, no Incentive Bonus shall be paid for such fiscal year. If the Company achieves 100% of the target for a fiscal year, the Incentive Bonus for that fiscal year shall be equal to 50% of the Executive’s Base Salary for that fiscal year. If the Company achieves 115% or more of the target for a fiscal year, the Incentive Bonus for that year shall be equal to 75% of the Executive’s Base Salary for that fiscal year. If the Company achieves a percentage of the target for a fiscal year that is between any two of the 85%, 100% or 115% thresholds referred to above, the Incentive Bonus shall be a percentage of the Executive’s Base Salary for that fiscal year calculated on a straight line basis between the percentage that would apply at those two thresholds. As used in this Section 3.2, “Base Salary” means the rate of Base Salary in effect for a majority of that fiscal year (or, if no Base Salary rate was in effect for a majority of such fiscal year, then a rate equal to the actual Base Salary paid for that fiscal year). No later than 60 days after the beginning of each fiscal year, the Board (or the Compensation Committee) and the Executive shall mutually agree upon the performance target for such fiscal year, which performance target will be consistent with the Company’s business plan approved by the Board for such fiscal year. Except as provided for in this Agreement, the Company shall not be obligated to pay any Incentive Bonus for any fiscal year unless the Executive is employed by the Company at the end of that fiscal year. The Executive shall be paid the Incentive Bonus by March 15 of the year following the fiscal year to which the Bonus relates, provided that if the audit of the Company and its Subsidiaries is not completed by such date, payment shall be made within 60 days following the completion of the audit, but no later than December 31 of such year.

 

3.3 Stock Plan . The Executive will participate in the Company’s 2006 Stock Plan (including any amended or successor plan, the “Stock Plan”). On December 20, 2011, the Company granted awards to the Executive under the Stock Plan as follows:

 

(a) stock options with respect to 64,330 shares of the Company’s common stock, which will vest 50% on December 31, 2016 and 50% on December 31, 2017;

 

(b) 26,576 shares of restricted stock, which will vest 50% on December 31, 2016 and 50% on December 31, 2017;

 

- 2 -
 

(c) 14,175 shares of performance-based restricted stock, which will vest at the end of the three-year performance period ending December 31, 2014 based on the level of attainment of a cumulative operating income target; and

 

(d) stock options with respect to 8,580 shares of the Company’s common stock, in accordance with the Company’s regular grant procedures for 2011,

 

each as more specifically set forth in the applicable award agreement. The Executive will be eligible to receive awards of stock options, restricted stock and/or restricted stock units during the Term in accordance with the Company’s regular annual grant procedures.

 

3.4 Benefits . The Executive shall be entitled to receive all benefits of employment generally available to the Company’s other executive employees when and as such benefits, if any, become available and the Executive becomes eligible for them, including any medical, dental, life and disability insurance benefits, paid time off benefits, long-term incentive plan, stock option plan, pension plan and/or profit-sharing plan; provided that the Executive shall not participate in the Senior Management Bonus Program. The Company has the right to amend or terminate any such benefit plans or programs. The Executive shall be insured under the Company’s director and officer indemnification policy.

 

3.5 Vacation . The Executive shall be entitled to four weeks of paid vacation each year during the Term, which shall accrue each January 1 during the Term. The Executive will use his reasonable efforts to schedule vacation periods to minimize disruption of the Company’s business.

 

3.6 Vehicle Allowance . The Executive shall be entitled to participate in the Company’s automobile policy as it applies to executive employees.

 

3.7 Reimbursement of Expenses . The Company shall reimburse the Executive for up to $5,000 in legal expenses incurred in connection with the review and negotiation of this Agreement. The Company shall also reimburse the Executive for any reasonable business expenses incurred by the Executive in the ordinary course of the Company’s business in accordance with the Company’s reimbursement policies then in effect. These expenses shall be substantiated by invoices and receipts, to be submitted by the Executive within 30 days after incurrence, and reimbursement shall be made by the Company within 60 days following its receipt of all necessary documentation with respect to such expenses.

 

4. Termination of Employment .

 

4.1 For Cause or Other than for Good Reason or Disability . If, prior to the expiration of the Term and prior to a Change in Control, the Company terminates the Executive’s employment for Cause or the Executive terminates his employment for any reason other than Good Reason or Disability, the Company shall pay the Executive the unpaid Base Salary earned by the Executive through the date of termination and any vacation pay, expense reimbursements and other cash entitlements accrued by the Executive that are payable pursuant to the Company’s policies as of such date. Such payment shall be made within 30 days of termination or earlier if required by law. All unexercised stock options and all unpaid restricted stock or restricted stock units and other equity incentive compensation awards previously granted to the Executive shall be exercisable or forfeited, as the case may be, in accordance with the applicable agreement or award between the Company and the Executive.

 

- 3 -
 

4.2 Without Cause or for Good Reason or Disability . If, prior to the expiration of the Term and prior to a Change in Control, the Company terminates the Executive’s employment without Cause, the Executive terminates his employment for Good Reason or the Executive’s employment terminates due to Disability, the Executive shall be entitled to receive:

 

(a) The cash amounts described in Section 4.1 above.

 

(b) Continuation of the Executive’s Base Salary as then in effect for the 12-month period beginning on the date of such termination of employment, payable in accordance with the Company’s payroll policy then in effect.

 

(c) A prorata payment of the Incentive Bonus that would have been earned by the Executive had he remained employed through the end of the fiscal year in which the termination occurs (determined on the basis of the number of days of employment during such fiscal year), paid at the same time bonuses for such fiscal year are paid by the Company to other executive employees.

 

(d) Continuation of medical benefits under the Company’s group health plan as in effect from time to time for the Executive and his spouse and covered dependents for 36 months. Coverage during the first 18 months is subject to the Executive’s timely payment of premiums at active employee rates for such coverage and shall be concurrent with coverage under Title I, Part 6 of the Employee Retirement Income Security Act of 1974 (“COBRA”), provided that the Executive timely elects COBRA continuation coverage. Coverage for the remainder of the 36-month continuation period is subject to the Executive’s payment of the entire premium for such coverage. The medical benefits provided under this Section shall terminate at such time that the Executive and his spouse and covered dependents become eligible for medical benefits under any other benefit plan or policy to the extent not prohibited by COBRA.

 

(e) On the effective date of termination of the Executive’s employment, the stock option and restricted stock awards described in Sections 3.3(a) and 3.3(b), respectively, shall each vest as to a number of shares equal to the sum of (i) and (ii), where (i) is the product of (A) 50% of the total number of shares subject to such award and (B) a fraction, the numerator of which is the number of days in the period beginning January 1, 2012 through the effective date of termination of employment, and the denominator of which is the number of days in the period beginning January 1, 2012 through December 31, 2016 and (ii) is the product of (A) 50% of the total number of shares subject to such award and (B) a fraction, the numerator of which is the number of days in the period beginning January 1, 2012 through the effective date of termination of employment, and the denominator of which is the number of days in the period beginning January 1, 2012 through December 31, 2017. All other unexercised stock options and all unpaid restricted stock or restricted stock units and other equity incentive compensation awards granted to the Executive shall be exercisable or forfeited, as the case may be, in accordance with the applicable agreement or award between the Company and the Executive.

 

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4.3 Death . If prior to the expiration of the Term the Executive’s employment terminates due to his death, the Executive’s estate shall be entitled to receive:

 

(a) The cash amounts described in Section 4.1 above.

 

(b) A prorata payment of the Incentive Bonus that would have been earned by the Executive had he remained employed through the end of the fiscal year in which the termination occurs (determined on the basis of the number of days of employment during such fiscal year), paid at the same time bonuses for such fiscal year are paid by the Company to other executive employees.

 

(c) Continuation of medical benefits under the Company’s group health plan as in effect from time to time for the Executive’s surviving spouse and covered dependents for 36 months pursuant to COBRA. Coverage during the first 18 months is subject to the beneficiaries’ timely payment of premiums at active employee rates for such coverage, provided that the beneficiary timely elects COBRA continuation coverage. Coverage for the remainder of the 36-month continuation period is subject to the beneficiaries’ payment of the entire premium for such coverage. The medical benefits provided under this Section shall terminate at such time that the Executive’s surviving spouse and covered dependents become eligible for medical benefits under any other benefit plan or policy to the extent not prohibited by COBRA.

 

(d) All unexercised stock options and all unpaid restricted stock or restricted stock units and other equity incentive compensation awards previously granted to the Executive shall be exercisable or forfeited, as the case may be, in accordance with the applicable agreement or award between the Company and the Executive.

 

4.4 Without Cause or for Good Reason following a Change in Control . If, prior to the expiration of the Term and following a Change in Control, the Company terminates the Executive’s employment without Cause (other than for Disability) or the Executive terminates his employment for Good Reason, the Executive shall be entitled to receive:

 

(a) The cash amounts described in Section 4.1 above.

 

(b) Continuation of the Executive’s Base Salary as then in effect for the 24-month period beginning on the date of such termination of employment, payable in accordance with the Company’s payroll policy then in effect.

 

(c) A prorata payment of the Incentive Bonus that would have been earned by the Executive had he remained employed through the end of the fiscal year in which the termination occurs (determined on the basis of the number of days of employment during such fiscal year), paid at the same time bonuses for such fiscal year are paid by the Company to other executive employees.

 

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(d) Continuation of medical benefits under the Company’s group health plan as in effect from time to time for the Executive and his spouse and covered dependents for 36 months. Coverage during the first 18 months is subject to the Executive’s timely payment of premiums at active employee rates for such coverage and shall be concurrent with coverage under COBRA, provided that the Executive timely elects COBRA continuation coverage. Coverage for the remainder of the 36-month continuation period is subject to the Executive’s payment of the entire premium for such coverage. The medical benefits provided under this Section shall terminate at such time that the Executive and his spouse and covered dependents become eligible for medical benefits under any other benefit plan or policy to the extent not prohibited by COBRA.

 

(e) All unexercised stock options and all unpaid restricted stock or restricted stock units and other equity incentive compensation awards previously granted to the Executive shall be exercisable or paid, as the case may be, in accordance with the applicable agreement or award between the Company and the Executive.

 

4.5 Entitlement To Benefits . Notwithstanding any other Section of this Agreement, upon termination of the Executive’s employment, the Executive shall be entitled to all vested benefits, vested stock-based awards, accrued and unused vacation, return of personal effects, COBRA rights and other rights that may not be waived or released as a matter of law, in addition to any other sums, benefits, or rights which are provided for in this Agreement.

 

4.6 Release of Claims . The Executive agrees that, as a condition to receiving benefits under this Section 4, the Executive will execute a general release of claims in a form provided by the Company. Payments of any continued Base Salary shall begin on the first payroll period occurring after the 45th day following the Executive’s termination of employment, and the first payment shall include amounts that would have been paid to the Executive in the interim had employment continued. Any release executed by the Executive shall contain exceptions to the release for (a) any existing right to indemnification, contribution and a defense, (b) any directors and officers and general liability insurance coverage of the Executive, (c) the Executive’s rights as a shareholder, (d) all vested rights of the Executive, (e) the Executive’s right to enforce this Agreement and (f) any rights which cannot be waived or released as a matter of law.

 

4.7 No Offset . Subject to Section 6, there shall be no offset of any kind to the payment of the severance benefits described in this Section 4.

 

4.8 Action Required to Terminate the Executive . Action by the affirmative vote of a majority of the members of the Board, other than the Executive, taken at a meeting of the Board or by written consent of the Board shall be required for the Company to terminate the Executive’s employment.

 

4.9 Internal Revenue Code Section 280G . If (a) in connection with a Change in Control, the Executive would be or is subject to an excise tax under Section 4999 of the Internal Revenue Code (an “Excise Tax”) with respect to any cash, benefits or other property received, or any acceleration of vesting of any benefit or award (the “Change in Control Benefits”), and (b) (i) the total net after-tax value of the Change in Control Benefits to the Executive (taking into account federal, state and local income and employment taxes and the Excise Tax) is less than (ii) the total net after-tax value of the Change in Control Benefits (taking into account federal, state and local income and employment taxes and the Excise Tax) reduced to the largest amount payable without triggering the imposition of any Excise Tax, then the Change in Control Benefits payable under this Agreement shall be reduced to the amount described in (b)(ii). No later than 30 days after the date of the Change in Control, a nationally recognized accounting firm selected by the Company shall make a determination as to whether any Excise Tax would be reported with respect to the Change in Control Benefits and, if so, the amounts described in each of (b)(i) and (b)(ii) above. If a reduction to the Change in Control Benefits is necessary, the Executive shall determine the Change in Control Benefits to be reduced, and the Company shall provide the Executive with such information as is necessary to make such determination. The Company and the Executive shall furnish to the accounting firm such information and documents as the accounting firm may reasonably request in order to make a determination under this Section 4.9. The Company shall be responsible for all fees and expenses connected with the determinations by the accounting firm pursuant to this Section 4.9. The Executive agrees to notify the Company in the event of any audit or other proceeding by the Internal Revenue Service or any taxing authority in which the Internal Revenue Service or other taxing authority asserts that any Excise Tax should be assessed against the Executive and to cooperate with the Company in contesting any such proposed assessment with respect to such Excise Tax.

 

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4.10 Definitions of Terms Used in Section 4 .

 

(a) Cause . “Cause” shall exist if there is (i) a material neglect by the Executive of his assigned duties, which includes any failure to follow the written direction of the Board or to comply with the Company’s code of ethics or written policies, or repeated refusal by the Executive to perform his assigned duties, in each case other than by reason of Disability, which continues for 30 days following receipt of written notice from the Board; (ii) the commission by the Executive of any act of fraud or embezzlement against Company or any of its Affiliates or the commission of any felony or act involving dishonesty; (iii) the commission by the Executive of any act of moral turpitude which actually causes financial harm to the Company or any of its Affiliates; (iv) a material breach by the Executive of the terms of Section 5.1 of this Agreement or any other confidentiality or non-disclosure agreement of the Executive with the Company; or (v) the Executive’s commencement of employment with another company while he is an employee of the Company without the prior consent of the Board.

 

(b) Change in Control . “Change in Control” shall have the meaning set forth in the Stock Plan, as in effect on the date of this Agreement.

 

(c) Disability . “Disability” means, in the sole judgment of the Board, the Executive’s inability to engage in any substantial gainful activity by reason of any medically-determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.

 

(d) Good Reason . “For Good Reason” shall mean voluntary termination of this Agreement by the Executive if, without the prior consent of the Executive: (a) the Company shall relocate its principal executive offices to a location outside the Houston, Texas metropolitan area, (b) there is a material reduction by the Company in the Executive’s responsibilities, duties, authority, title or reporting relationship; or (c) the Company acts in any way that would materially reduce the Executive’s Base Salary (as defined or subsequently increased pursuant to Section 3.1) or if the Company adversely affects the Executive’s participation in or materially reduces the Executive’s benefit under any benefit plan of the Company in which the Executive is participating; provided, however, that termination for Good Reason by the Executive shall not be permitted unless (x) the Executive has given the Company at least 30 day’s prior written notice that he has a basis for a termination for Good Reason, which notice shall specify the facts and circumstances constituting Good Reason, and (y) the Company has not remedied such facts and circumstances constituting Good Reason within such 30-day period.

 

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5. Restrictive Covenants .

 

5.1 Confidential and Proprietary Information . During the Term and for a period of two years following the date of termination of the Executive’s employment with the Company (except as to trade secrets, which shall not be disclosed at any time), the Executive acknowledges that he has as of the date of this Agreement, and will continue to have, access to and use of Confidential and Proprietary Information and agrees that he will not, either directly or indirectly, and he will not permit any Covered Entity which is Controlled by the Executive to, either directly or indirectly, divulge to any Person or use any of the Confidential and Proprietary Information, except as required in connection with the performance of the Executive’s duties to the Company. The Executive and each Covered Entity (and if deceased, his personal representative) shall promptly, following a request therefor from the Company, return to the Company, without retaining copies, all tangible items (including electronic data storage devices) which are or which contain Confidential and Proprietary Information.

 

5.2 Non-Competition; Non-Solicitation; No Disparagement . The Executive acknowledges and agrees that: (i) through his continuing services to the Company, he will learn valuable trade secrets and other Confidential and Proprietary Information relating to the Company’s businesses; (ii) the Executive’s services to the Company are unique in nature, and (iii) the Company would be irreparably damaged if the Executive were to provide services to any Person in violation of the restrictions contained in this Agreement. Accordingly, as an inducement to the Company to enter into this Agreement, the Executive agrees that except in the Executive’s capacity as an employee of the Company, neither the Executive nor any Covered Entity shall directly or indirectly, without the prior written consent of the Company (which may be withheld in its sole discretion), during the Restriction Period:

 

(a) engage or participate in, anywhere in the Territory (as defined below), as an employee, owner, partner, shareholder, officer, director, member, manager, advisor, consultant, lender, lessor, agent or (without limitation by the specific enumeration of the foregoing) otherwise, or permit his name to be used by or render services of any type for, any Competing Business (as defined below) or any Person developing a Competing Business; provided, however, that nothing in this Agreement shall prevent the Executive from acquiring or owning, but solely as a passive investment, up to five percent of any class of voting securities registered under the Securities Exchange Act of 1934, as amended, of any issuer engaged in a Competing Business;

 

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(b) take any action which could reasonably be expected to divert from the Company any opportunity which would be within the scope of the Company’s business;

 

(c) solicit or attempt to solicit any Person who is or has been (A) a customer of the Company at any time within one year prior to the date of termination of the Executive’s employment to purchase any product or service which may be provided by the Company, or (B) a customer, supplier, licensor, licensee or other business relation conducting business with the Company at any time within one year prior to the date of termination of the Executive’s employment, to cease doing business with, or to alter or limit its business relationship with, the Company;

 

(d) solicit, attempt to solicit, or assist anyone else to solicit any Business Associate (as defined below) to terminate his, her or its association with the Company;

 

(e) recruit, solicit, hire or otherwise retain the services of any Business Associate, whether on a full-time basis, part-time basis or otherwise and whether as an employee, independent contractor, consultant, advisor or in another capacity; or

 

(f) make (or cause to be made) to any Person any knowingly disparaging, derogatory or other negative statement about the Company or any of its officers, directors, employees or agents.

 

5.3 Protection of and Rights to Intellectual Property . All Intellectual Property developed by the Executive during the Term shall be the sole and exclusive property of the Company, without further compensation. Any Intellectual Property based upon Confidential and Proprietary Information and developed at any time either during or following the Term shall be the property of the Company. The Executive shall assign to the Company or its designees, the entire right, title and interest in said Intellectual Property. The Executive shall, at the Company’s request and expense, make applications for domestic or foreign patents, execute all documents necessary thereto, assist in securing, defending or enforcing any such title and right thereto, and assist the Company in any other claims or litigation involving said Intellectual Property. Consistent with applicable law, the Company acknowledges that no provision in this Agreement is intended to require assignment of any of the Executive’s rights in an invention if no equipment, supplies, facilities, or trade secret information of the Company was used, and the invention was developed entirely on the Executive’s own time, unless the invention relates to the Business or to the Company’s current or demonstrably anticipated business, research or development, or the invention results from any work performed by the Executive for the Company.

 

5.4 Specific Performance . The Executive agrees that any violation by him of Sections 5.1, 5.2 or 5.3 of this Agreement would be highly injurious to the Company and would cause irreparable harm to the Company. By reason of the foregoing, the Executive consents and agrees that if he violates any provision of Sections 5.1, 5.2 or 5.3 of this Agreement, the Company shall be entitled, in addition to any other rights and remedies that it may have, to apply to any court of competent jurisdiction in Houston, Texas for specific performance and/or injunctive or other equitable relief in order to enforce, or prevent any continuing violation of, the provisions of such Sections 5.1, 5.2 and 5.3. The Executive also recognizes that the territorial, time and scope limitations set forth in Sections 5.1 and 5.2, as applicable, are reasonable and are properly required for the protection of the Company, and, in the event that any such territorial, time or scope limitation is deemed to be unreasonable by a court of competent jurisdiction, the Company and the Executive agree, and the Executive submits, to the reduction of any or all of said territorial, time or scope limitations to such an area, period or scope as said court shall deem reasonable under the circumstances. If such partial enforcement is not possible, then to the extent permitted by law, the provision shall be deemed severed, and the remaining provisions of this Agreement shall remain in full force and effect. If any covenant in Section 5.1 or 5.2 is breached, then (to the extent permitted by law) the Restricted Period with respect to such covenant shall be extended by the number of days during which such breach exists.

 

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5.5 Impact of Breach of Section 5 on Certain Payments . The Executive agrees that the payment of any compensation or benefits pursuant to Section 4.2 or 4.4 is conditioned on the Executive’s compliance with the provisions of Sections 5.1, 5.2 and 5.3.

 

5.6 Definitions of Terms Used in Section 5 .

 

(a) Affiliate . An “Affiliate” of a Person is another Person that Controls, is Controlled by or is under common Control with such first Person.

 

(b) Business Associate . “Business Associate” means any employee, representative, consultant or agent of the Company who is acting in such capacity as of the date hereof or has acted in such capacity at any time within the 12 month period immediately preceding the date of hire, recruitment, solicitation or retention by the Executive or a Covered Entity.

 

(c) Competing Business . A “Competing Business” means a business which is, in whole or in part, directly or indirectly, competitive with the business of the Company as conducted at the time of enforcement of Section 5.2 (if such enforcement occurs prior to the termination of the Executive’s employment) or at the time of the termination of the Executive’s employment (if enforcement of Section 5.2 occurs at or following such time) or under development at either such time, as the case may be, and expected to be introduced or undertaken within one year following such date of enforcement. Without limiting the generality of the foregoing sentence, the term Competing Business shall include the business of the Company.

 

(d) Confidential and Proprietary Information . “Confidential and Proprietary Information” means all information and any idea in any form whatsoever, tangible or intangible, pertaining in any manner to the business of the Company or any Affiliate of the Company, or to the Company’s clients, consultants or business associates, unless the information is or becomes publicly known through lawful means (other than disclosure by the Executive, unless such disclosure by the Executive is made in good faith in the course of performing the Executive’s duties under this Agreement, or with the express written consent of the Board of Directors).

 

(e) Control . “Control” means (i) in the case of corporate entities, direct or indirect ownership of more than 50% of the stock or participating assets entitled to vote for the election of directors; and (ii) in the case of non-corporate entities (such as individuals, limited liability companies, partnerships or limited partnerships), either (A) direct or indirect ownership of more than fifty percent 50% of the equity interest or (B) the power to direct the management and policies of the noncorporate entity.

 

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(f) Covered Entity . “Covered Entity” means every Affiliate of the Executive, and every Person in which the Executive has invested (whether through debt or equity securities), or to which the Executive has contributed any capital or made any advances, or in which any Affiliate of the Executive has an ownership interest or profit sharing percentage, or a firm from which the Executive or any Affiliate of the Executive receives or is entitled to receive income, compensation or consulting fees, or in which the Executive or any Affiliate of the Executive has an interest as a lender (other than solely as a trade creditor for the sale of goods or provision of services that do not otherwise violate the provisions of this Agreement). The agreements of the Executive contained herein specifically apply to each Person which is presently a Covered Entity or which becomes a Covered Entity subsequent to the date of this Agreement. Notwithstanding the foregoing, nothing contained in this Agreement prohibits the Executive or any Affiliate of the Executive from owning less than five percent of any class of voting securities registered under the Securities Exchange Act of 1934, as amended, of any issuer, and no such issuer shall be considered a Covered Entity solely by virtue of such ownership or the incidents thereof. Further notwithstanding anything contained in the foregoing provisions to the contrary, the term “Covered Entity” shall not include the Company, any Subsidiary of the Company, or any Affiliate of the Company or any such Subsidiary.

 

(g) Engage . To “engage” in a business means (i) to render services in (or with respect to) the Territory for that business, or (ii to own, manage, operate or control (or participate in the ownership, management, operation or control of) an enterprise engaged in that business in (or with respect to) the Territory.

 

(h) Intellectual Property . “Intellectual Property” means all discoveries, inventions, improvements, computer programs, formulas, ideas, devices, writings or other intellectual property (including any notes, records, reports, sketches, plans, memoranda and other tangible information relating to such Intellectual Property), whether or not subject to protection under the patent or copyright laws, which the Executive shall conceive solely or jointly with others, in the course of, or within the scope of employment, or which relates directly to the business of the Company or its actual or anticipated research and development, or which was conceived or created using the Company’s materials or facilities, whether during or after working hours.

 

(i) Person . “Person” means any individual, partnership, limited partnership, corporation, limited liability company, association, joint stock company, trust, joint venture, unincorporated organization or any other entity.

 

(j) Restriction Period . “Restriction Period” shall mean the period commencing on the date hereof and continuing during the Executive’s employment with the Company and for a period of one year (two years in the event the Executive is entitled to continuation of Base Salary under Section 4.2(b) or 4.4(b)) following the date of termination of the Executive’s employment with the Company.

 

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(k) Solicit . To “solicit” means to encourage or induce, or to take any action that is intended or calculated to encourage or induce, or which is reasonably likely to result in encouragement or inducement.

 

(l) Subsidiary . “Subsidiary” shall mean any Person which is Controlled, directly or indirectly, by the Company, including through the ownership of stock or other interests in one or more other business enterprises which are connected with the Company.

 

(m) Territory . “Territory” means the United States of America.

 

6. Recoupment . In the event the Company restates its financial statements due to material noncompliance with any reporting requirement, the Executive shall, within 60 days of written notice from the Company that such repayment is required by applicable law or Company policy, repay any incentive compensation (including stock options) he has received from the Company that is in excess of the amount to which he would have been entitled under the restated financial statements.

 

7. Withholding . The Executive authorizes the Company to make any and all applicable withholdings of federal and state taxes and other items the Company may be required to deduct, as such items may exist under this Agreement or otherwise from time to time.

 

8. Successors and Assigns . This Agreement is intended to bind and inure to the benefit of and be enforceable by the Executive, the Company and their respective heirs, successors and assigns, except that the Executive shall not have any right to assign or otherwise transfer this Agreement, or any of the Executive’s rights, duties or any other interest herein, to any party without the prior written consent of the Company, and any such purported assignment shall be null and void.

 

9. Survival of Rights and Obligations . The rights and obligations of the parties as stated herein shall survive the termination of this Agreement.

 

10. Entire Agreement . This Agreement sets forth the parties’ sole and entire agreement regarding the subject matter hereof and supersedes any and all other agreements, statements and representations of the parties, including but not limited to any employment agreement or other agreement regarding the Executive’s compensation or terms of employment entered into prior to the date hereof. Notwithstanding the foregoing, benefits provided under the Company’s employee benefit plans, including any awards granted under the Stock Plan, will be subject to the terms and conditions of the relevant plans and, where applicable, award agreements.

 

11. Modifications or Waivers . The terms and provisions of this Agreement may be modified or amended only by a written instrument executed by each of the parties hereto, and compliance with the terms and provisions hereof may be waived only by a written instrument executed by each party entitled to the benefits thereof. No failure or delay on the part of any party in exercising any right, power, or privilege granted hereunder shall constitute a waiver thereof, nor shall any single or partial exercise of any such right, power, or privilege preclude any other or further exercise thereof or the exercise of any other right, power, or privilege granted hereunder.

 

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12. Governing Law . This Agreement shall be governed pursuant to federal law, as applicable or the laws of the State of Texas, without giving effect to any choice of law or conflict of law provision or rule that would cause the application of the laws of any jurisdiction other than the State of Texas.

 

13. Internal Revenue Code Section 409A . If at the time of the Executive’s termination of employment for reasons other than death he is a “specified employee” (as such term is defined and determined in accordance with the procedures set forth in Treas. Reg. §1.409A-1(i)), any amounts payable to the Executive pursuant to this Agreement that are subject to Section 409A of the Internal Revenue Code (“Code Section 409A”) shall not be paid or commence to be paid until six months following the Employee’s termination of employment or, if earlier, the Employee’s subsequent death. Each cash payment made pursuant to Section 4 shall be considered a separate payment for purposes of Code Section 409A. This Agreement is to be construed and interpreted in a manner consistent with Code Section 409A, and the parties hereto agree to amend this Agreement as necessary to avoid the imposition of penalty taxes under Code Section 409A against the Executive. No payment required to be made hereunder shall be accelerated or deferred by the Company or the Executive in a manner that would subject such payment to any excise tax under Code Section 409A.

 

14. Severability . If any part, clause or condition of this Agreement is held to be partially or wholly invalid, unenforceable or inoperative for any reason whatsoever, such shall not affect any other provision or portion hereof, which shall continue to be effective as though such invalid, unenforceable or inoperative part, clause or condition had not been made. If any provision, or its application to any Person or circumstance, is held by a court of competent jurisdiction or an arbitrator pursuant to Section 18 hereof to be invalid or unenforceable, the court or the arbitrator is empowered to and shall modify any such provision so as to be enforceable. All remaining provisions shall remain valid and enforceable.

 

15. Interpretation .

 

15.1 Section Headings . The section and subsection heading of this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions.

 

15.2 Gender and Number . Whenever required by the context, the singular shall include the plural, the plural shall include the singular, and the masculine gender shall include the neuter and feminine genders and vice versa.

 

16. Notices . All notices and other communications under or in connection with this Agreement shall be in writing and shall be deemed given (a) if delivered personally, upon delivery, (b) if delivered by registered or certified mail (return receipt requested), upon the earlier of actual delivery or three days after being mailed, (c) if given by overnight courier with receipt acknowledgment requested, the next business day following the date sent, or (d) if given by telecopy, upon confirmation of transmission by telecopy, in each case to the parties at the following addresses:

 

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  To the Company: Houston Wire & Cable Company
    10201 North Loop East
    Houston, TX  77029
    Facsimile:  (713) 609-2168
    Attention:  Chairman of the Board
     
  with a copy to: Schiff Hardin LLP
    6600 Sears Tower
    Chicago, Illinois  60606
    Facsimile:  (312) 258-5600
    Attention:  Robert Minkus
     
  To the Executive: James L. Pokluda III
    At the most recent address on file with the Company
     

17. Joint Preparation . Each of the parties to this Agreement has negotiated it at length, and has had the opportunity to consult with and be represented by its or his own competent counsel. This Agreement is therefore deemed to have been jointly prepared by the parties and any uncertainty or ambiguity existing in it shall not be interpreted against any party, but rather shall be interpreted according to the rules generally governing the interpretation of contracts.

 

18. Mediation and Arbitration . If requested by the Company or the Executive, any unresolved controversy or claim arising from or related to this Agreement or breach hereof shall be resolved by use of mediation initially, and if that fails to resolve the matter, by arbitration. Mediation shall be in Houston, Texas, before one mediator qualified in mediation of employment matters agreed upon by the parties, or if no agreement on a mediator is reached, before a mediator chosen according to the American Arbitration Association (“AAA”) National Rules for the Resolution of Employment Disputes, specifically the Employment Mediation Rules. There shall be only one mediator. The parties will use best efforts to obtain a mediator and complete the mediation within 30 days from the date of request for mediation. If the mediation has not been completed within 45 days from the date of request for mediation, any party may, by notice to all other parties and the AAA, forego mediation and move directly to arbitration under the AAA National Rules for the Resolution of Employment Disputes; provided, however, that such arbitration shall be before three arbitrators, not one, and shall be in Houston, Texas. Also, by written agreement signed by the Company and the Executive, the parties hereto may agree to forego mediation, may make any agreement regarding scheduling of the mediation or the arbitration process, discovery or hearing, which agreement shall be binding on the mediator or arbitrator, despite any AAA rule to the contrary. In any arbitration, if the Executive is the prevailing party, the Company shall pay all reasonable attorney’s fees of the Executive, as well as the expenses and administrative fees related to the arbitration. If the Company is the prevailing party at the arbitration, each party shall pay its own attorney’s fees and expenses and its share of the administrative fees and expenses related to the arbitration. Notwithstanding the foregoing provisions of this Section 18, (a) the parties are not required to arbitrate any issue for which injunctive relief is sought by any party hereto, (b) all parties may seek injunctive relief in any federal or state court having jurisdiction located in Harris County, Texas, and (c) claims of worker’s compensation and unemployment compensation shall not be subject to arbitration under this Agreement.

 

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19. Cooperation and Further Actions . The parties agree to perform any and all acts and to execute and deliver any and all documents necessary or convenient to carry out the terms of this Agreement.

 

20. Counterparts . This Agreement may be executed in two or more counterparts, including electronically transmitted counterparts, each of which shall be deemed an original and all of which shall be considered one and the same instrument.

 

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the parties hereto have executed, or caused their duly authorized representatives to execute, this Agreement as of the Effective Date.

 

  EXECUTIVE
   
  By:  /s/ James L. Pokluda III
    James L. Pokluda III

 

 

  HOUSTON WIRE & CABLE COMPANY
   
  By:  /s/ Scott L. Thompson
    Scott L. Thompson
Chairman of the Board

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Exhibit 10.6

 

HOUSTON WIRE & CABLE COMPANY

2006 STOCK PLAN

 

FORM OF EMPLOYEE
STOCK AWARD AGREEMENT

 

THIS STOCK AWARD AGREEMENT (this “Agreement”) by and between [NAME] (“Recipient”) and Houston Wire & Cable Company (the “Company”) is made and entered into as of this [DAY] day of [MONTH & YEAR] (the “Grant Date”).

 

R E C I T A L S:

 

A. The Company maintains the Houston Wire & Cable Company 2006 Stock Plan (as amended from time to time, the “Plan”). The Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”).

 

B. Pursuant to the Plan, the terms of which are hereby incorporated by reference, the Committee has granted to Recipient a stock award without consideration from Recipient (the “Stock Award”), and in connection therewith Recipient and the Company desire to enter into this Agreement setting forth the restrictions, terms and conditions of such Stock Award.

 

NOW, THEREFORE, in consideration of the foregoing and the mutual promises contained herein, Recipient and the Company agree as follows:

 

Article I
GRANT OF RESTRICTED STOCK

 

1.1 Grant of Common Stock . Subject to the terms and conditions set forth in the Plan and the restrictions, terms and conditions set forth in this Agreement, the Company hereby grants and conveys to Recipient, and Recipient hereby accepts, a Stock Award of [NUMBER OF SHARES] shares of its common stock, par value $0.001 (the “Restricted Stock”).

 

1.2 Delivery of Certificates; Dividends .

 

(a) The certificates representing the shares of Restricted Stock granted hereunder shall be issued in Recipient’s name and shall be held by the Secretary of the Company and delivered to Recipient if and when the shares vest pursuant to Article II. At such time, the Secretary of the Company shall deliver promptly to Recipient the certificate or certificates evidencing the shares that then become vested.

 

(b) All dividends and other distributions payable with respect to the unvested shares of Restricted Stock shall be accrued by the Company and paid to Recipient on the vesting date (if any) of the particular shares with respect to which the dividends have accrued. Recipient shall have full rights to vote all shares of Restricted Stock held by the Company and, except as provided in the preceding sentence, all other rights and obligations of a Company stockholder with respect to such shares.

 

1.3 Section 83(b) Election . Recipient may make an election pursuant to Section 83(b) of the Internal Revenue Code (“Section 83(b)”) to recognize income with respect to the Restricted Stock before the Restricted Stock vests by filing an election with the Internal Revenue Service. Recipient acknowledges that such election, if Recipient chooses to make it, must be filed within 30 days after the Grant Date. RECIPIENT SHOULD CONSULT WITH HIS OR HER TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES OF ACQUIRING THE SHARES AND THE ADVANTAGES AND DISADVANTAGES OF FILING THE SECTION 83(b) ELECTION. RECIPIENT ACKNOWLEDGES THAT IT IS THE SOLE RESPONSIBILITY OF RECIPIENT, AND NOT THE COMPANY, TO FILE A TIMELY SECTION 83(b) ELECTION SHOULD RECIPIENT, AFTER CONSULTING WITH HIS OR HER TAX ADVISOR, DECIDE TO MAKE ONE.

 
 

 

1.4 Nontransferability . Except as set forth in Section 10 of the Plan, none of the shares of Restricted Stock shall be sold, pledged, encumbered or otherwise transferred until such shares vest in accordance with Section 2.1.

 

Article II
VESTING AND FORFEITURE

 

2.1 Vesting . The shares of Restricted Stock shall be subject to forfeiture until such time (if any) as they vest.

 

[FOR TIME-BASED VESTING]

 

(a) The shares of Restricted Stock shall vest as follows:

 

(i) [PERCENTAGE OF SHARES] (__%) of the shares of Restricted Stock shall vest on [DATE].

 

(ii) [PERCENTAGE OF SHARES] (__%) of the shares of Restricted Stock shall vest on [DATE].

 

(iii) [PERCENTAGE OF SHARES] (__%) of the shares of Restricted Stock shall vest on [DATE].

 

(iv) [PERCENTAGE OF SHARES] (__%) of the shares of Restricted Stock shall vest on [DATE].

 

(v) [PERCENTAGE OF SHARES] (__%) of the shares of Restricted Stock shall vest on [DATE].

 

[FOR PERFORMANCE-BASED VESTING]

 

(a) After the end of the [DURATION]-year performance period that begins [DATE] and ends [DATE], the Company’s [MEASURE] for the [DURATION]-year period will be compared to the target of $[TARGET]. The shares of Restricted Stock shall vest as follows:

 

 
 

 

 

Level of Attainment of
[TARGET]
% of Stock Award
that Vests
less than __% 0%
__% __%
___% or more ___%

Attainment of the operating income target at between __% and ___% shall result in vesting of a portion of the Stock Award calculated on a straight line basis between ___% and ____.

 

(b) Notwithstanding the foregoing, 100% of the shares of Restricted Stock shall immediately and fully vest upon the occurrence of a Change in Control.

 

2.2 Forfeiture of Restricted Stock . Any unvested shares of Restricted Stock shall be forfeited to the Company upon termination of Recipient’s employment with the Company and all subsidiaries for any reason. [The foregoing provision of this Section 2.2 shall be subject to the provisions of any written employment or severance agreement that has been or may be executed by Recipient and the Company, and the provisions in such employment or severance agreement concerning the vesting of Restricted Stock shall supersede any inconsistent or contrary provision of this Section 2.2.]

 

2.3 Effect of Forfeiture . In the event that Recipient forfeits any or all of the unvested shares of Restricted Stock pursuant to Section 2.2, all of Recipient’s rights, title and interest with respect to such forfeited shares, including the right to receive any cash dividends accrued with respect thereto, shall automatically lapse and be of no further force or effect. Recipient hereby irrevocably designates and appoints the Secretary of the Company as Recipient’s agent and attorney in fact, to act for or on behalf of Recipient and in his or her name and stead, for the limited purpose of executing any documents and instruments to further evidence the forfeiture of the unvested shares and the transfer of such shares back to the Company.

 

2.4 Withholding Taxes . Recipient shall pay to the Company an amount sufficient to satisfy all minimum Federal, state and local withholding tax requirements prior to the delivery of any vested shares of Common Stock covered by the Stock Award. Payment of such taxes may be made by one or more of the following methods: (a) in cash, (b) in cash, received from a broker-dealer to whom Recipient has submitted a notice and irrevocable instructions to deliver to the Company proceeds from the sale of a portion of the shares subject to the Stock Award, (c) by delivery to the Company of other Common Stock owned by Recipient that is acceptable to the Company, valued at its then fair market value, and/or (d) by directing the Company to withhold such number of shares of Common Stock otherwise issuable in connection with the Stock Award with a fair market value equal to the amount of tax to be withheld.

 

 
 

Article III
MISCELLANEOUS

 

3.1 Entire Agreement . This Agreement and the Plan constitute the entire understanding of the parties with respect to the subject matter hereof and may be modified only by an agreement in writing signed by the parties.

 

3.2 Waiver of Breach . No waiver of a breach of any provision of this Agreement by either party shall be effective unless made expressly in writing, and no such waiver shall constitute or be construed as a waiver by such party of any future breach of the same or any other provisions of this Agreement.

 

3.3 Counterparts; Facsimile Signatures . This Agreement may be executed in several counterparts, each of which shall be deemed an original, and said counterparts shall together constitute but one and the same agreement, binding upon all of the parties hereto, notwithstanding that all of the parties are not signatory to the original or the same counterpart. Counterparts may be delivered via facsimile transmission and shall be treated as original counterparts for all purposes.

 

3.4 Insider Trading Policy . The sale or transfer of any vested shares of Common Stock subject to the Stock Award is subject to the provisions of the Company’s Insider Trading Policy, as in effect from time to time.

 

3.5 Plan Governs . The terms of this Agreement shall be subject to the terms of the Plan. If there is any inconsistency between the terms of this Agreement and the terms of the Plan, the Plan’s terms shall govern. All capitalized terms shall have the meanings ascribed to them in the Plan, unless otherwise set forth herein. A copy of the Plan is attached hereto and the terms of the Plan are hereby incorporated by reference.

 

3.6 Employment Status . This Agreement does not give Recipient the right to be retained as an employee of the Company.

 

3.7 Acceptance . The grant of the Stock Award is conditioned upon Recipient’s acceptance of this Agreement and Recipient’s return of an executed copy to the Treasurer of the Company within 30 days after receipt hereof.

 

IN WITNESS WHEREOF, this Agreement is executed as of the date first above written.

 

    HOUSTON WIRE & CABLE COMPANY
     
     
    By:  
    Its:  

 

 
 

I acknowledge receipt of the Houston Wire & Cable Company 2006 Stock Plan, as amended (the “Plan”), and hereby accept the Stock Award set forth in this Agreement subject to all the restrictions, terms and conditions thereof. I agree to accept as binding, conclusive and final all decisions and interpretations of the Board or the Committee, each as defined in the Plan, regarding any questions arising under the Plan or this Agreement.

 

Dated:     RECIPIENT:
       
   
  [NAME]

 

 

 

 
 

Exhibit 10.8

 

 

Description of Senior Management Bonus Program
(as amended on December 20, 2011)

 

The following is a description of the senior management bonus program, as adopted by the compensation committee (the “Committee”) of the board of directors of Houston Wire & Cable Company (the “Company”) on December 20, 2011. The bonus program provides for the payment of discretionary annual cash bonuses to employees who are considered management level. The bonus program is administered by the Committee, which has full authority to select participants, set bonus amounts and fix performance targets. The Company’s board of directors receives a report from the Committee of all awards granted and targets established.

 

For each participant, the potential bonus award is based on the employee’s salary for the year with respect to which the bonus is payable (the “Bonus Year”). In order for any bonus to be paid, the Company must achieve the operating income threshold (the “Threshold”) set by the Committee for the Bonus Year. If the Threshold is met, then the participant may receive a “basic” bonus equal to a percentage (ranging from 0% to 50%) of his or her salary, depending on the Company’s performance with respect to targets established for three incentive factors: operating income, revenue and inventory turns. 70% of the bonus is based on meeting the established targets for operating income, 20% of the bonus is based on meeting the established targets for revenues, and 10% of the bonus is based on meeting the established targets for inventory turns. The full basic bonus of 50% of salary will be available if the Company achieves the maximum target for each of the three incentive factors. The bonus available for each incentive factor will be calculated on a standalone basis (provided the Threshold is met) and will be calculated on a pro rata, straight line basis between the 0 and 50% level, provided the specific target for such incentive factor has been met.

 

The program also provides that a bonus of an additional 5% of salary may be awarded if the Company achieves certain sales thresholds with respect to certain proprietary products, provided established gross margins are maintained, and that a bonus of an additional 10% of salary may be awarded in the event the Company makes one or more acquisitions during the Bonus Year and the acquired businesses meet established financial goals. The maximum bonus paid (the basic bonus plus the additional bonuses) may not exceed 65% of the participant’s base salary. All bonuses are payable the year following the Bonus Year, after receipt of (and subject to) the audit of the financial statements for the Bonus Year.

 

No award will be paid for any full or partial year to a participant whose employment with the Company terminates prior to the time the bonus is paid. In all cases the payment is in the discretion of the Committee, and the Committee retains the right to terminate a participant’s participation in the bonus program at any time, in which case no bonus may be paid.

 

The Chief Executive Officer’s bonus, as described in his employment contract, is based on performance targets established by the Committee and board of directors each year.

 

 

 

 
 

  Exhibit 23.1

 

Consent of Independent Registered Public Accounting Firm

 

We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-135777) pertaining to the Houston Wire & Cable Company 2000 Stock Plan and the Houston Wire & Cable Company 2006 Stock Plan of our reports dated March 15, 2012, with respect to the consolidated financial statements of Houston Wire & Cable Company, and the effectiveness of internal control over financial reporting of Houston Wire & Cable Company, included in this Annual Report (Form 10-K) for the year ended December 31, 2011.

 

  /s/ ERNST & YOUNG LLP
   
Houston, Texas  
March 15, 2012  

 

 

 

Exhibit 31.1

 

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

 

I, James L. Pokluda III, certify that:

 

1. I have reviewed this annual report on Form 10-K for the year ended December 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 control over financial reporting, or caused such internal control 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:     March 15, 2012 /s/ James L. Pokluda III
  James L. Pokluda III  
  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 annual report on Form 10-K for the year ended December 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 control over financial reporting, or caused such internal control 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:      March 15, 2012 /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 Annual Report of Houston Wire & Cable Company (the “Corporation”) on Form 10-K for the fiscal year ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), James L. Pokluda III, 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 their 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: March 15, 2012 /s/ James L. Pokluda III
    James L. Pokluda III  
    Chief Executive Officer  

 

Date: March 15, 2012 /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.