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UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

FORM 10-Q

 

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

 

 For the quarterly period ended June 30, 2020

 

or

 

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

 

For the transition period from                              to                              

 

Commission File Number: 000-52046

 

(LOGO)

  (Exact name of registrant as specified in its charter)

 

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

 

(713) 609-2100 

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of each class Trading symbol Name of each exchange on which registered
Common stock, par value $0.001 per share HWCC The Nasdaq Stock Market

 

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 ☒        No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒       No ☐

 

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

 

Large Accelerated Filer    ☐ Accelerated Filer    ☒ Non-Accelerated Filer    ☐ Smaller Reporting Company    
Emerging Growth Company          

 

 If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes ☐ No

 

At August 1, 2020 there were 16,555,248 outstanding shares of the registrant’s common stock, $0.001 par value per share.

 

 

 

 

HOUSTON WIRE & CABLE COMPANY 

Form 10-Q 

For the Quarter Ended June 30, 2020

 

INDEX

 

PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements (Unaudited)  
  Consolidated Balance Sheets 2
  Consolidated Statements of Operations  3
  Consolidated Statements of Stockholders’ Equity 4
  Consolidated Statements of Cash Flows  5
  Notes to Consolidated Financial Statements  6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 10
  Overview 10
  Cautionary Statement for Purposes of the “Safe Harbor” 11
  Results of Operations  12
  Impact of Inflation and Commodity Prices  14
  Liquidity and Capital Resources  15
  Contractual Obligations 16
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk  16
     
Item 4. Controls and Procedures  16
     
PART II. OTHER INFORMATION  16
     
Item 1. Legal Proceedings  16
Item 1A. Risk Factors  16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  17
Item 3. Defaults Upon Senior Securities  17
Item 4. Mine Safety Disclosures  17
Item 5. Other Information  17
Item 6. Exhibits  18
   
Signature Page  19

 

 1

 

 

HOUSTON WIRE & CABLE COMPANY 

Consolidated Balance Sheets 

(In thousands, except share data)

 

   June 30,   December 31, 
   2020   2019 
    (unaudited)      
Assets          
Current assets:          
Cash  $5,696   $4,096 
Accounts receivable, net:          
Trade   43,593    50,325 
Other   2,921    6,640 
Inventories, net   106,018    114,069 
Income taxes   1,314    1,353 
Prepaids and other current assets   2,885    1,833 
Total current assets   162,427    178,316 
           
Property and equipment, net   15,774    14,589 
Intangible assets, net   9,521    10,282 
Goodwill   22,353    22,353 
Deferred income taxes   900    600 
Operating lease right-of-use assets, net   12,244    13,481 
Other assets   380    527 
Total assets  $223,599   $240,148 
           
Liabilities and stockholders’ equity          
Current liabilities:          
Trade accounts payable  $10,212   $13,858 
Accrued and other current liabilities   14,932    23,261 
Operating lease liabilities   2,803    2,742 
Total current liabilities   27,947    39,861 
           
Revolver Debt   74,540    83,500 
Paycheck Protection Program Loan   6,185     
Operating lease long term liabilities   9,946    11,182 
Other long term liabilities   2,227    1,977 
Total liabilities   120,845    136,520 
           
Stockholders’ equity:          
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued and outstanding        
Common stock, $0.001 par value; 100,000,000 shares authorized: 20,988,952 shares issued: 16,591,818 and 16,556,950 outstanding at June 30, 2020 and December 31, 2019, respectively   21    21 
Additional paid-in-capital   52,484    52,304 
Retained earnings   107,008    108,626 
Treasury stock, at cost   (56,759)   (57,323)
Total stockholders’ equity   102,754    103,628 
Total liabilities and stockholders’ equity  $223,599   $240,148 

 

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

 

 2

 

 

HOUSTON WIRE & CABLE COMPANY 

Consolidated Statements of Operations 

(Unaudited) 

(In thousands, except share and per share data)

 

                             
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2020   2019   2020   2019 
                 
Sales  $66,777   $85,326   $150,310   $170,596 
Cost of sales   52,541    64,789    116,482    128,800 
Gross profit   14,236    20,537    33,828    41,796 
                     
Operating expenses:                    
Salaries and commissions   8,407    9,244    17,881    18,424 
Other operating expenses   7,029    7,729    14,594    15,392 
Depreciation and amortization   815    534    1,582    1,087 
Impairment charge   173        373     
Total operating expenses   16,424    17,507    34,430    34,903 
                     
Operating income (loss)   (2,188)   3,030    (602)   6,893 
Interest expense   474    738    1,287    1,479 
Income (loss) before income taxes   (2,662)   2,292    (1,889)   5,414 
Income tax (benefit) expense   (499)   649    (271)   1,487 
Net income (loss)  $(2,163)  $1,643   $(1,618)  $3,927 
                     
Earnings (loss) per share:                    
Basic  $(0.13)  $0.10   $(0.10)  $0.24 
Diluted  $(0.13)  $0.10   $(0.10)  $0.24 
Weighted average common shares outstanding:                    
Basic   16,442,493    16,504,471    16,414,976    16,491,236 
Diluted   16,442,493    16,597,496    16,414,976    16,571,113 

 

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

 

 3

 

 

HOUSTON WIRE & CABLE COMPANY 

Consolidated Statements of Stockholders’ Equity 

(Unaudited)

 

                                       
       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, 2019   20,988,952   $21   $52,304   $108,626    (4,432,002)  $(57,323)  $103,628 
                                    
Net income               545            545 
Amortization of unearned stock compensation           328                328 
Impact of released vested restricted stock units           (356)       27,510    356     
Balance at March 31, 2020   20,988,952   $21   $52,276   $109,171    (4,404,492)  $(56,967)  $104,501 
                                    
Net loss               (2,163)           (2,163)
Repurchase of treasury shares                   (10,668)   (24)   (24)
Amortization of unearned stock compensation           440                440 
Impact of released vested restricted stock units           (232)       18,026    232     
Balance at June 30, 2020   20,988,952   $21   $52,484   $107,008    (4,397,134)  $(56,759)  $102,754 

 

                                         
       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, 2018   20,988,952   $21   $53,514   $105,975    (4,377,301)  $(58,832)  $100,678 
                                    
Net income               2,284            2,284 
Repurchase of treasury shares                   (1,506)   (8)   (8)
Amortization of unearned stock compensation           342                342 
Settlement of director’s deferred compensation                   2,251    16    16 
Cumulative effect of accounting change               101            101 
Balance at March 31, 2019   20,988,952   $21   $53,856   $108,360    (4,376,556)  $(58,824)  $103,413 
                                    
Net income               1,643            1,643 
Repurchase of treasury shares                   (11,951)   (73)   (73)
Amortization of unearned stock compensation           365                365 
Impact of released vested restricted stock units           (601)       44,737    601     
Balance at June 30, 2019   20,988,952   $21   $53,620   $110,003    (4,343,770)  $(58,296)  $105,348 

 

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

 4

 

 

HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands) 

 

               
  

Six Months

 Ended June 30, 

 
   2020   2019 
         
Operating activities          
Net income (loss)  $(1,618)  $3,927 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:          
Impairment charge   373     
Depreciation and amortization   1,582    1,087 
Amortization of unearned stock compensation   768    707 
Non-cash lease expense   1,793    1,968 
Provision for refund liability   77    471 
Provision for inventory obsolescence   1,273    459 
Deferred income taxes   (300)   460 
Other non-cash items   68    83 
Changes in operating assets and liabilities:          
Accounts receivable   10,374    75 
Inventories   6,778    (12,407)
Prepaids   (952)   (1,371)
Other assets   18    (550)
Lease payments   (1,800)   (1,963)
Book overdraft       330 
Trade accounts payable   (3,646)   2,106 
Accrued and other current liabilities   (8,702)   2,235 
Income taxes   39    (142)
Other operating activities   250    359 
Net cash provided by (used in) operating activities   6,375    (2,166)
           
Investing activities          
Expenditures for property and equipment   (1,626)   (875)
Net cash used in investing activities   (1,626)   (875)
           
Financing activities          
Borrowings on revolver   162,681    175,417 
Payments on revolver   (171,641)   (173,626)
Proceeds from Paycheck Protection Program loan   6,185     
Payment of dividends   (1)   (30)
Purchase of treasury stock/stock surrendered on vested awards   (24)   (65)
Lease payments   (349)   (48)
Net cash (used in) provided by financing activities   (3,149)   1,648 
           
Net change in cash   1,600    (1,393)
Cash at beginning of period   4,096    1,393 
           
Cash at end of period  $5,696   $ 
Supplemental disclosures of non-cash activities           
    Purchase of assets under finance leases  $752   $407 

 

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

 5

 

 

  HOUSTON WIRE & CABLE COMPANY

Notes to Consolidated Financial Statements

(Unaudited)

 

1.     Basis of Presentation and Principles of Consolidation

 

Houston Wire & Cable Company (the “Company”), through its wholly owned subsidiaries, provides industrial products including electrical wire and cable, steel wire rope and hardware, and fasteners to the U.S. market through twenty-one locations in fourteen states throughout the United States. The Company has no other business activity.

 

The consolidated financial statements as of June 30, 2020 and for the three and six months ended June 30, 2020 and 2019 have been prepared following accounting principles generally accepted in the United States (“GAAP”) for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of the results of these interim periods have been included. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. All significant intercompany balances and transactions have been eliminated. The Company has evaluated subsequent events through the time these financial statements in this Form 10-Q were filed with the Securities and Exchange Commission (the “SEC”).

 

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significant estimates are those relating to the allowance for doubtful accounts, the refund liability, the inventory obsolescence reserve, vendor rebates, the realization of deferred tax assets and the valuation of goodwill and indefinite-lived assets. Actual results could differ materially from the estimates and assumptions used for the preparation of the financial statements.

 

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC.

 

Risks and Uncertainties

 

The Company is currently subject to additional risks and uncertainties due to the COVID-19 pandemic. The pandemic, and governmental and other actions taken in response to it, have had an adverse effect on the demand for the Company’s products and on its results of operations, and the virus continues to spread. Capital markets and economies worldwide have been negatively impacted by the COVID-19 pandemic, and it is possible that the impact could cause an extended local and/or global economic recession. Such economic disruption could have a material adverse effect on our business as companies in many industries curtail and reduce capital and overall spending. Policymakers around the globe have responded with fiscal policy actions to support specific industries and their economies as a whole. However, the overall effectiveness of these actions remains uncertain.

 

The severity of the impact of the COVID-19 pandemic on the Company’s business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company’s customers, all of which are uncertain and cannot be predicted. The Company’s future results of operations and liquidity could be materially adversely affected by delays in payments of outstanding receivables, supply chain disruptions, uncertain or reduced demand, and the impact of any initiatives or programs that the Company may undertake to address financial and operational challenges faced by its customers. As of the date of issuance of these financial statements, the extent to which the COVID-19 pandemic may materially adversely affect the Company’s financial condition, liquidity, or results of operations is uncertain.

 

Recently Adopted Accounting Standards

 

The Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) is the sole source of authoritative GAAP other than SEC issued rules and regulations that apply only to SEC registrants. The FASB issues an Accounting Standard Update (“ASU”) to communicate changes to the codification. The Company considers the applicability and impact of all ASUs. The following are ASUs that were recently adopted by the Company.

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in this update eliminate, add and modify certain disclosure requirements for fair value measurements as part of the FASB’s disclosure framework project. The Company adopted this ASU in the first quarter of 2020, and the adoption did not have a material impact on the Company’s consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40); Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The amendments in this update require implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the non-cancellable term of the cloud computing arrangement plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. The Company adopted this ASU in the first quarter of 2020, and the adoption did not have a material impact on the Company’s consolidated financial statements.

 

 6

 

 

Recent Accounting Pronouncements

 

In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses.” This ASU, among other narrow-scope improvements, clarifies guidance around how to report expected recoveries. This ASU permits organizations to record expected recoveries on assets purchased with credit deterioration. In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. The effective date and transition methodology are the same as in ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB deferred the effective dates of these ASUs for smaller reporting companies (“SRC”) to fiscal years beginning after December 15, 2022. As of June 30, 2020, the Company qualifies as a SRC and expects to adopt these ASUs in the first quarter of 2023.

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU removes specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether certain exceptions apply in a given period. This ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: a) Franchise taxes that are partially based on income; b) Transactions with a government that result in a step up in the tax basis of goodwill; c) Separate financial statements of legal entities that are not subject to tax; and d) Enacted changes in tax laws in interim periods. For public business entities, ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

 

2.     Earnings per Share

 

Basic earnings per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings per share include the dilutive effects of options and unvested restricted stock awards and units.

 

The following reconciles the denominator used in the calculation of diluted earnings (loss) per share

                             
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2020   2019   2020   2019 
Denominator:                
Weighted average common shares outstanding for basic earnings per share   16,442,493    16,504,471    16,414,976    16,491,236 
Effect of dilutive securities       93,025        79,877 
Weighted average common shares outstanding for diluted earnings per share   16,442,493    16,597,496    16,414,976    16,571,113 

 

Stock awards to purchase 940,682 and 275,494 shares of common stock for the three months ended June 30, 2020 and 2019, respectively, and 961,526 and 286,141shares for the six months ended June 30, 2020 and 2019, respectively, were not included in the diluted net income (loss) per share calculation as their inclusion would have been anti-dilutive.

 

3.     Debt

 

On March 12, 2019 and December 10, 2019, the Company, as guarantor, HWC Wire & Cable Company and Vertex, as borrowers, and Bank of America, N.A., as agent and lender, entered into a Second and Third Amendments, respectively, to the Fourth Amended and Restated Loan and Security Agreement (such agreement, as so amended, the “Loan Agreement”). The Second Amendment extends the expiration date until March 12, 2024 and the Third Amendment increased the revolving credit facility to $115 million. Under certain circumstances theCompany may request an increase in the commitment by an additional $50 million.

 

Portions of the loan may be converted to LIBOR loans in minimum amounts of $1.0 million and integral multiples of $0.1 million. LIBOR loans bear interest at the British Bankers Association LIBOR Rate plus 100 to 150 basis points based on availability, and loans not converted to LIBOR loans bear interest at a fluctuating rate equal to the greatest of the agent’s prime rate, the federal funds rate plus 50 basis points, or 30-day LIBOR plus 150 basis points. The unused commitment fee is 25 basis points.

 

Availability under the Loan Agreement is limited to a borrowing base equal to 85% of the value of eligible accounts receivable, plus the lesser of 70% of the value of eligible inventory or 90% of the net orderly liquidation value percentage of the value of eligible inventory,in each case less certain reserves. The Loan Agreement is secured by substantially all of the property of the Company, other than real estate.

 

 7

 

 

The Loan Agreement includes, among other things, covenants that require the Company to maintain a specified minimum fixed charge coverage ratio, unless certain availability levels exist. Additionally, the Loan Agreement allows for the unlimited payment of dividends and repurchases of stock, subject to the absence of events of default and maintenance of a fixed charge coverage ratio and minimum level of availability. The Loan Agreement contains certain provisions that may cause the debt to be classified as a current liability, in accordance with GAAP, if availability falls below certain thresholds, even though the ultimate maturity date under the Loan Agreement remains March 12, 2024. At June 30, 2020, the Company was in compliance with the availability-based covenants governing its indebtedness.

 

 The carrying amount of long-term debt approximates fair value as it bears interest at variable rates. The fair value is a Level 2 measurement as defined in ASC Topic 820, “Fair Value Measurement.”

 

On May 4, 2020, the Company received a $6.2 million Paycheck Protection Program (“PPP”) loan from Bank of America (“Lender”), funded under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), pursuant to a Promissory Note issued by the Company to Lender. The Company will use the funds to pay its payroll related expenses as well as rent expenses, as allowed by the terms of the loan. The Company intends to apply for loan forgiveness in the third quarter 2020. Under current rules, which could still be clarified further, the Company believes it will achieve around 80-90% forgiveness. The forgivenessamount will be equal to the amount that the Company uses for the approved expenses, a minimum of 60% on payroll related expenses and up to 40% on non-payroll expenses. If the total of the loan is not forgiven, the Company will have two years from the funded date of May 4, 2020 to repay the balance of the PPP loan to Bank of America. No principal or interest payments will be due prior to the end of the six-month deferment period and the interest rate on the balance of the loan will not exceed 1.0% per annum.

 

4.    Impairment of Goodwill and Intangible Assets

 

The Company tests goodwill and indefinite lived intangibles for impairment at least annually or more frequently whenever events or circumstances occur indicating that it might be impaired. During the first and second quarter of 2020, the Company’s market capitalization declined significantly, driven by current macroeconomic and geopolitical conditions due in large part to the COVID-19 outbreak, which has contributed to a decline in demand for the Company’s products, a decline in overall financial performance, partially due to the decline in oil prices, and decline in industry and market conditions. Based on these events, the Company concluded that it was more-likely-than-not that the fair values of certain of its reporting units were less than their carrying values. Therefore, the Company performed an interim goodwill impairment test for both the first and second quarter.

 

Goodwill impairment is evaluated at each of the four reporting units. The Company determined the fair values of two reporting units with goodwill and certain of its indefinite lived intangibles exceeded their respective carrying values. The amount of goodwill at June 30, 2020 for the two reporting units, Southern Wire and Vertex, were $12.5 million and $9.8 million, respectively, and the Vertex reporting unit has a negative carrying value. Additionally, the Company determined the fair value of its Vertex reporting unit’s tradenames was below its carrying value, and as a result recorded an impairment charge of $0.1 million in June 2020. The Company also determined the fair value of its Southwest reporting unit’s tradenames was below its carrying value, and as a result, recorded an impairment charge of $0.1 million in June 2020 and $0.2 million in March2020.

 

5.    Income Taxes

 

The effective tax rate for the six months ended June 30, 2020 was 14.3%, compared to 27.5% for the same period in 2019. Compared to the U.S. statutory rate, the effective tax rate was impacted by state income taxes and nondeductible expenses. Due to the continuing uncertainty in the Company’s industry, the Company has utilized the method of recording income taxes on a year-to-date effective tax rate for the six months ended June 30, 2020. The Company will evaluate its use of this method each quarter until such time as a return to the annualized estimated effective tax rate method is deemed appropriate.

 

The CARES Act was signed into law on March 27, 2020. The CARES Act contains several tax law changes for corporations, including modifications for net operating loss carrybacks, the refundability of prior-year minimum tax liability, limitations on business interest and limitations on charitable contribution deductions. These benefits did not impact the Company’s tax provision for the three months ended June 30, 2020.

     

6.    Incentive Plans  

 

Stock Option Awards

 

There were no stock option awards granted during the first six months of 2020 or 2019.

 

 8

 

 

Restricted Stock Awards and Restricted Stock Units

 

On June 26, 2020, the Board of Directors granted 10,000 restricted stock units to the newly named executive chairman of the board. The award shall vests in two equal installments on June 26, 2021 and June 26, 2022. The award entitles the executive chairman of the board to receivea number of shares of the Company’s common stock equal to the number of vested restricted stock units, together with dividend equivalents from the date of grant, at such time as his service on the board terminates for any reason.

 

Following the Annual Meeting of Stockholders on May 7, 2019, the Company granted restricted stock units with a grant date value of $60,000 to each non-employee director who was elected and re-elected, for an aggregate of 58,920 restricted stock units. Each award of restricted stock units vested at the date of the 2020 Annual Meeting of Stockholders. Each non-employee director is entitled to receive a number of shares of the Company’s common stock equal to the number of vested restricted stock units, together with dividend equivalents from the date of grant, at such time as the director’s service on the board terminates for any reason. The Company did not grant equity awards to the non-employee directors following the 2020 Annual Meeting.

 

On March 12, 2019, the Board of Directors granted 52,910 performance stock units to the Company’s President and CEO and 13,228 performance stock units to the CFO. Each grant of performance stock units vests on December 31, 2021, based on and subject to the Company’s achievement of cumulative EBITDA and stock price performance goals over a three year period, as long as the grantee is then employed by the Company, and upon vesting will be settled in shares of our common stock. Any dividends declared will be accrued and paid to the grantee if and when the related shares vest.

 

Total stock-based compensation cost was $0.4 million for each of the three months ended June 30, 2020 and 2019, and $0.8 million for the six monthsended June 30, 2020 and $0.7 million for the six months ended June 30, 2019, and is included in salaries and commissions for employees, and in other operating expenses for non-employee directors. 

 

7.    Commitments and Contingencies

 

The Company had outstanding under the Loan Agreement letters of credit totaling $0.7 million to certain vendors as of June 30, 2020.

 

From time to time, the Company is involved in lawsuits that are brought against it in the normal course of business. The Company is not currently a party to any legal proceedings that it expects, either individually or in the aggregate, to have a material adverse effect on the Company’s consolidated financial position, cash flows, or results from operations. 

 

 9

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

        The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the Company’s financial position and results of operations. MD&A is provided as a supplement to the Company’s Consolidated Financial Statements (unaudited) and the accompanying Notes to Consolidated Financial Statements (unaudited) and should be read in conjunction with the MD&A included in the Company’s Form 10-K for the year ended December 31, 2019.

 

Overview

 

We are a provider of industrial products including electrical wire and cable, steel wire rope and hardware, and fasteners to the U.S. market. We provide our customers with a single-source solution by offering a large selection of in-stock items, exceptional customer service and high levels of product expertise.

 

Critical Accounting Policies

 

The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses. On an on-going basis, we make and evaluate estimates and assumptions, including those related to the allowance for doubtful accounts, the refund liability, the inventory obsolescence reserve, vendor rebates, the realization of deferred tax assets and the valuation of goodwill and indefinite-lived assets. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about amounts and timing of revenue and expenses, the carrying values of assets and the recorded amounts of liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. We have discussed the development and selection of critical accounting policies and estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed our related disclosures. The critical accounting policies related to the estimates and assumptions are discussed in our Annual Report on Form 10-K for the year ended December 31, 2019 under Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no changes to our critical accounting policies and estimates during the three and six months ended June 30, 2020.  

 

Impact of the COVID-19 Pandemic

 

The COVID-19 pandemic has spread throughout the United States and the countries in which our offshore suppliers are located. Governments in affected regions have implemented, and may continue to implement, safety precautions which include quarantines, travel restrictions, business closures, cancellations of public gatherings and other measures as they deem necessary. Many organizations and individuals, including the Company and our employees are taking additional steps to avoid or reduce infection, including limiting travel and working remotely. We continue to monitor our operations and government recommendations and have made modifications to our normal operations because of the pandemic, including requiring most of its non-essential employees to work remotely. We have maintained a substantial portion of our operational capacity at our warehouses across the continental United States and have instituted several health and safety protocols and procedures to safeguard our employees.

 

The rapid development and uncertainty of the COVID-19 pandemic precludes any prediction as to the ultimate adverse impact of the COVID-19 outbreak on our business. However, the outbreak has had an adverse impact on our business, including reductions in the demand for our products. In response, we applied for and received funds under the Paycheck Protection Program and have implemented several cost savings measures which include furloughing employees, payroll reductions, and other actions to decrease corporate and non-critical expenses. These cost savings measures are not fully reflected in the second quarter but we anticipate additional savings in the third and fourth quarters due to the continued execution of multiple expense reduction initiatives. While we cannot reasonably estimate the length or severity of this pandemic, we currently anticipate an adverse impact on our consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2020.

 

 10

 

 

Cautionary Statement for Purposes of the “Safe Harbor”

 

Forward-looking statements in this report are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements may relate to, but are not limited to, information or assumptions about the duration, extent and impact of the COVID-19 pandemic, our sales and marketing strategy, sales (including pricing), income, operating income or gross margin improvements, working capital, cash flow, interest rates, impact of changes in accounting standards, future economic performance, management’s plans, goals and objectives for future operations, performance and growth or the assumptions relating to any of the forward-looking statements.  These statements can be identified by the fact that they do not relate strictly to historical or current facts.  They use words such as “aim”, “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “project”, “should”, “will be”, “will continue”, “will likely result”, “would” and other words and terms of similar meaning in conjunction with a discussion of future operating or financial performance.  The Company cautions that forward-looking statements are not guarantees because there are inherent difficulties in predicting future results.  Actual results could differ materially from those expressed or implied in the forward-looking statements.  The factors listed under “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and in Part II, Item 1A of this report, as well as any cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements.

 

 11

 

 

Results of Operations

 

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

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2020   2019   2020   2019 
                 
Sales   100.0%   100.0%   100.0%   100.0%
Cost of sales   78.7%   75.9%   77.5%   75.5%
Gross profit   21.3%   24.1%   22.5%   24.5%
                     
Operating expenses:                    
Salaries and commissions   12.6%   10.8%   11.9%   10.8%
Other operating expenses   10.5%   9.1%   9.7%   9.0%
Depreciation and amortization   1.2%   0.6%   1.1%   0.6%
Impairment charge   0.3%       0.2%    
Total operating expenses   24.6%   20.5%   22.9%   20.5%
                     
Operating income (loss)   (3.3)%   3.6%   (0.4)%   4.0%
Interest expense   0.7%   0.9%   0.9%   0.9%
                     
Income (loss) before income taxes   (4.0)%   2.7%   (1.3)%   3.2%
Income tax expense (benefit)   (0.7)%   0.8%   (0.2)%   0.9%
                     
Net income (loss)   (3.2)%   1.9%   (1.1)%   2.3%

  

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

 

Comparison of the Three Months Ended June 30, 2020 and 2019

 

Sales

 

    Three Months Ended  
    June 30,  
(Dollars in millions)   2020     2019     Change  
Sales   $ 66.8     $ 85.3     $ (18.5     (21.7 )%

 

Our sales for the second quarter decreased from $85.3 million in 2019 to $66.8 million in 2020, primarily due to reduced market demand, as a result of current economic conditions caused by the COVID-19 pandemic, as well as the decline in the oil and gas market. We estimate sales for our project business, which targets end markets for Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and Mechanical Wire Rope, decreased 7.1%, while Maintenance, Repair, and Operations (MRO) sales decreased 24.6%, as compared to 2019.

  

Gross Profit

 

   Three Months Ended 
   June 30, 
(Dollars in millions)  2020   2019   Change 
Gross profit  $14.2   $20.5   $(6.3)   (30.7)%
Gross margin   21.3%   24.1%          

  

Gross profit decreased 30.7% to $14.2 million in 2020 from $20.5 million in 2019. The decrease in gross profit was attributable to reduced sales from the COVID-19 pandemic and the decline in the oil and gas market. Gross margin (gross profit as a percentage of sales) decreased to 21.3% in 2020 from 24.1% in 2019 primarily due to the decline in demand for our product as a result of the pandemic and the decline in the oil and gas market, combined with the relatively low price of copper through much of the quarter The Company also recorded an impairment charge of $0.6 million for inventory that will be returned under a one-time agreement with the supplier.

 

 12

 

 

Operating Expenses

 

    Three Months Ended  
    June 30,  
(Dollars in millions)   2020     2019     Change  
Operating expenses:                                
Salaries and commissions   $ 8.4     $ 9.2     $ (0.8     (9.1 )%
Other operating expenses     7.0       7.7       (0.7     (9.1 )%
Depreciation and amortization     0.8       0.5       0.3       52.6 %
Impairment charge     0.2             0.2       100.0 %
Total operating expenses   $ 16.4     $ 17.5     $ (1.1     (6.2 )%
                                 
Operating expenses as a percent of sales     24.6 %     20.5 %                

 

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

 

Salaries and commissions decreased $0.8 million from the second quarter 2019 compared to 2020 due to reduced full-time employee headcount, salary reductions, fewer temporary warehouse labor hours due to decreased activity as of result of COVID-19 and lower commissions resulting from the reduction in sales and gross profit.

 

Other operating expenses decreased due to our efforts to reduce expenses in response to COVID-19, mainly travel and entertainment expense and reduced office and other administrative expenses.

 

Depreciation and amortization increased primarily due to depreciation on additional right-of-use assets acquired in the second quarter of 2020.

 

We recorded an impairment charge in the second quarter of 2020 with respect to tradenames at our Southwest and Vertex reporting units. (See Note 4 of our Consolidated Financial Statements)

 

Interest Expense

 

Interest expense decreased from $0.7 million in 2019 to $0.5 million in 2020 as a result of lower average interest rates. Average debt was $78.0 million in 2020 compared to $74.3 million in 2019. The average effective interest rate was 2.2% in 2020 compared to 3.9% in 2019.

 

Income Taxes

 

The income tax benefit of $0.5 million in the second quarter 2020 decreased from the income tax expense of $0.6 million decreased in the prior year period due to lower pretax income. The effective income tax rate for the quarter was 18.7% in 2020 compared to 28.3% in 2019.

 

Comparison of the Six Months Ended June 30, 2020 and 2019

 

    Six Months Ended  
    June 30,  
(Dollars in millions)   2020     2019     Change  
Sales   $ 150.3     $ 170.6     $ (20.3     (11.9 )%

 

Our sales for the second quarter decreased from $170.6 million in 2019 to $150.3 million in 2020, primarily due to reduced market demand, as a result of current economic conditions caused by the COVID-19 pandemic, as well as the decline in the oil and gas market. We estimate sales for our project business, which targets end markets for Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and Mechanical Wire Rope, decreased 6.3%, while MRO decreased 12.8% from 2019.

 

 13

 

 

Gross Profit  

    Six Months Ended  
    June 30,  
(Dollars in millions)   2020     2019     Change  
Gross profit   $ 33.8     $ 41.8     $ (8.0     (19.1 )%
Gross margin     22.5 %     24.5 %                

 

Gross profit decreased 17.6% from $41.8 million in 2019 to $34.4 million in 2020. The decrease in gross profit was primarily attributable to the reduction in sales. Gross margin decreased to 22.9% in 2020 from 24.5% in 2019, primarily due to the decline in demand for our product as a result of the pandemic and the decline in the oil and gas market, combined with the relatively low price of copper through the first half of 2020.

 

Operating Expenses 

    Six Months Ended  
    June 30,  
(Dollars in millions)   2020     2019     Change  
Operating expenses:                                
Salaries and commissions   $ 17.9     $ 18.4     $ (0.5     (2.9 )%
Other operating expenses     14.6       15.4       (0.8     (5.2 )%
Depreciation and amortization     1.6       1.1       0.5       45.5 %
Impairment charge     0.4             0.4       100.0 %
Total operating expenses   $ 34.4     $ 34.9     $ (0.5     (1.4 )%
                                 
Operating expenses as a percent of sales     22.9 %     20.5 %                

 

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

 

Salaries and commissions decreased $0.5 million between the periods due to lower commissions resulting from the reduction in sales and gross profit, reduced full-time employee headcount, salary reductions and fewer temporary warehouse labor hours due to decreased activity as a result of COVID-19.

 

Other operating expenses decreased due to our efforts to reduce expenses in response to COVID-19, mainly travel and entertainment expense and reduced office and other administrative expenses.

 

Depreciation and amortization increased primarily due to depreciation on additional right-of-use assets acquired in the first half of 2020.

 

We recorded an impairment charge in the first and second quarters of 2020 with respect to tradenames at our Southwest and Vertex reporting units. (See Note 4 of our Consolidated Financial Statements)

 

Interest Expense

 

Interest expense decreased 13.0% from $1.5 million in 2019 to $1.3 million in 2020 due to lower interest rates. Average debt was $83.6 million in 2020 compared to $73.9 million in 2019 and the average effective interest rate fell to 2.8% in 2020 from 3.9% in the prior year period.

 

Income Taxes

 

The income tax benefit of $0.3 million in 2020 decreased $1.8 million compared to the income tax expense of $1.5 million in 2019 due to lower pretax income. The effective income tax rate was 14.3% in 2020 compared to 27.5% in 2019.

 

Impact of Inflation and Commodity Prices

 

Our results of operations are affected by changes in the inflation rate and commodity prices. Moreover, because copper, steel, aluminum, nickel and petrochemical products are components of the industrial products we sell, fluctuations in the costs of these and other commodities have historically affected our operating results. To the extent commodity prices decline, the net realizable value of our existing inventory could also decline, and our gross profit can be adversely affected because of either reduced selling prices or lower of cost or net realizable value adjustments in the carrying value of our inventory. If we turn our inventory approximately three times a year, the impact of changes in commodity prices in any particular quarter would primarily affect the results of the succeeding two calendar quarters. 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. 

 

 14

 

 

Liquidity and Capital Resources

 

Our primary capital needs are for working capital obligations, capital expenditures and other general corporate purposes, including acquisitions. Our primary sources of working capital are cash from operations supplemented by bank borrowings.

 

 Liquidity is defined as the ability to generate adequate amounts of cash to meet the current need for cash. We assess our liquidity in terms of our ability to generate cash to fund our operating activities. Significant factors which could affect liquidity include the following:

 

  the adequacy of available bank lines of credit;
  cash flows generated from operating activities;
  capital expenditures;
  acquisitions; and
  the ability to attract long-term capital with satisfactory terms

 

Comparison of the Six Months Ended June 30, 2020 and 2019

 

Our net cash provided by operating activities was $6.4 million for the six months ended June 30, 2020 compared to cash used in operating activities of $2.2 million for the same period in 2019. We had a net loss of $1.6 million in 2020 compared to net income of $3.9 million in 2019.

 

Changes in our operating assets and liabilities resulted in cash provided by operating activities of $2.3 million in 2020. A decrease in accounts receivables of $10.4 million due to decreased sales and a decrease in inventories of $6.8 million primarily due to efforts to align inventory levels with sales activities were the main sources of cash. The main uses of cash provided by operating activities were a decrease in accrued and other current liabilities of $8.7 million, a decrease in trade accounts payable of $3.6 million as a result of the decrease in inventory, lease payments of $1.8 million and prepaid expenses of $1.0 million.

 

Net cash used in investing activities was $1.6 million in 2020 compared to $0.9 million in 2019.

 

Net cash used in financing activities was $3.1 million in 2020 compared to net cash provided by financing activities of $1.6 million in 2019. Net payments on the revolver of $9.0 million were the primary uses of cash for financing activities in 2020, offset by the Paycheck Protection Plan (“PPP”) loan of $6.2 million received in the second quarter of 2020. We will be applying for loan forgiveness for the PPP loan in the third quarter and the outcome of the loan forgiveness application will determine how the loan funds are accounted for.

 

Indebtedness

 

Our principal source of liquidity at June 30, 2020 was working capital of $134.5 million compared to $138.5 million at December 31, 2019. We also had available borrowing capacity of $22.6 million at June 30, 2020 and $22.8 million at December 31, 2019 under our loan agreement. The availability at June 30, 2020 was net of outstanding letters of credit of $0.7 million.

 

We believe that we will have adequate availability of capital to fund our present operations, meet our commitments on our existing debt, and fund anticipated growth over the next twelve months, including expansion in existing and targeted market areas. We continually seek potential acquisitions and from time to time hold discussions with acquisition candidates. If suitable acquisition opportunities or working capital needs arise that would require additional financing, we believe that our financial position and earnings history provide a solid base for obtaining additional financing resources at competitive rates and terms. Additionally, based on market conditions, we may decide to issue additional shares of common or preferred stock to raise funds.

 

 15

 

 

Contractual Obligations

 

The following table summarizes our loan commitment at June 30, 2020.  

In thousands   Total    

Less than

1 year

    1-3 years     3-5 years    

More

than

5 years

 
                               
Total debt    $   80,725     $     $ 6,185     $ 74,540     $  

  

There were no material changes in non-cancellable purchase obligations since December 31, 2019.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

There were no material changes to our market risk as set forth in Items 7A and 7 of our Annual Report on Form 10-K for the year ended December 31, 2019.

 

Item 4. Controls and Procedures

 

As of June 30, 2020, an evaluation was performed by the Company’s management, under the supervision and with the participation of the Company’s chief executive officer and chief financial officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the chief executive officer and the chief financial officer concluded that the Company’s disclosure controls and procedures were effective. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II. Other Information

 

Item 1 - Not applicable and has been omitted.

 

Item 1A.  Risk Factors

 

The COVID-19 pandemic, efforts to mitigate or disrupt the pandemic and the related weak, or weakening of, economic or other negative conditions, have had a negative impact on our business, and the duration and extent of the pandemic could prolong or increase the adverse impact.

 

A novel strain of coronavirus (COVID-19) was first identified in Wuhan, China in December 2019 and subsequently declared a pandemic by the World Health Organization. As of the date of this report, the virus continues to spread and there is no effective vaccine available. The preventative measures taken to contain or mitigate the outbreak have caused, and are continuing to cause, business slowdown or shutdown in affected areas and significant disruption in the financial markets both globally and in the United States, which could lead to a decline in capital spending, and in turn further impact, possibly materially, our business, sales, financial condition and results of operations. It is currently not practicable to predict the precise potential impact, as well as the extent of any impact, of the COVID-19 pandemic on our business, and on the global economy as a whole. It is also currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. A prolonged situation could have a significant adverse effect on economies and financial markets globally, potentially leading to a significant worldwide economic downturn, which could have a significant adverse effect on our business, operating results and financial condition.

 

The extent to which the COVID-19 pandemic adversely affects our business, results of operations, and financial condition will likely depend on numerous evolving factors which are highly uncertain and cannot be predicted, including but not limited to:

 

Reductions in the demand for our products as a result of downturns in capital spending and our customers’ cost containment actions,
Disruption to our distribution centers and our suppliers and other vendors, including through the effects of facility closures,
Impacts to our distribution and logistics providers’ ability to operate or increases in their operating costs,
Labor shortages,
Real time changes in operating procedures and costs, including for additional cleaning and disinfection
Significant disruption of global financial markets, which could have a negative impact on our ability to access capital in the future.

 

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We intend to continue to monitor the situation and adjust our current policies and practices as more information and guidance become available.

 

Other than this item, there were no material changes in the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019. 

 

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

 

Our board authorized a stock repurchase program of $25 million in March 2014. The program has no expiration date. Purchases under the stock repurchase program were suspended in November 2016 and reactivated in August 2019.

 

No shares of common stock were purchased during the three months ended June 30, 2020. As of June 30, 2020, $8.1 million remained available under the repurchase authorization.

 

Item 3 - Not applicable and has been omitted.

 

Item 4 - Not applicable and has been omitted.

 

Item 5 - Not applicable and has been omitted.

 

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Item 6.  Exhibits

 

(a) Exhibits required by Item 601 of Regulation S-K.

 

Exhibit

Number

  Document Description
     
31.1   Certification by James L. Pokluda III pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification by Eric W. Davis pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification by James L. Pokluda III and Eric W. Davis pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS   XBRL Instance Document (1)
     
101.SCH   XBRL Taxonomy Extension Schema
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase
     
101.LAB   XBRL Taxonomy Extension Label Linkbase
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase

 

(1) Attached as exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at June 30, 2020 and December 31, 2019; (ii) the Consolidated Statements of Operations for the three and six month periods ended June 30, 2020 and 2019; (iii) the Consolidated Statements of Cash Flows for the six month periods ended June 30, 2020 and 2019; and (vi) Notes to the Consolidated Financial Statements.

 

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Signature

 

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

 

Date:  August 7, 2020 HOUSTON WIRE & CABLE COMPANY
     
  BY:   /s/ Eric W. Davis
  Eric W. Davis, Chief Financial Officer

 

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