The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes
are an integral part of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
Notes to Consolidated Financial Statements
|
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 industrial products to the U.S. market through twenty-one locations in fourteen states throughout the United States. In
2010, the Company purchased Southwest Wire Rope LP (“Southwest”), its general partner Southwest Wire Rope GP LLC and
its wholly owned subsidiary, Southern Wire (“Southern”) and subsequently merged them into the Company’s
operating subsidiary. On October 3, 2016, the Company purchased Vertex Corporate Holdings, Inc. and its subsidiaries (“Vertex”).
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
reserve for returns and allowances, 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.
Earnings (loss) per Share
Basic earnings (loss) per share are calculated
by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per share include
the dilutive effects of option and unvested restricted stock awards and units.
The following reconciles the denominator
used in the calculation of diluted earnings (loss) per share:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares for basic earnings per share
|
|
|
16,269,611
|
|
|
|
16,345,679
|
|
|
|
17,012,560
|
|
Effect of dilutive securities
|
|
|
—
|
|
|
|
—
|
|
|
|
55,033
|
|
Denominator for diluted earnings per share
|
|
|
16,269,611
|
|
|
|
16,345,679
|
|
|
|
17,067,593
|
|
The Company calculates earnings per share
using the “two-class” method, whereby unvested share-based payment awards that contain non-forfeitable rights to dividends
or dividend equivalents are “participating securities”, as discussed in Note 9, and therefore, these participating
securities are treated as a separate class in computing earnings per share. Stock awards to purchase 808,391, 685,054 and 643,738
shares of common stock were not included in the diluted net income (loss) per share calculation for 2017, 2016 and 2015, respectively,
as their inclusion would have been anti-dilutive.
Accounts Receivable
Accounts receivable consists primarily
of receivables from customers, less an allowance for doubtful accounts of $0.2 million at December 31, 2017 and 2016, and a reserve
for returns and allowances of $0.4 million and $0.2 million at December 31, 2017 and 2016, respectively. The Company has no
contractual repurchase arrangements with its customers. Credit losses have been within management’s expectations.
The following table summarizes the changes
in the allowance for doubtful accounts for the past three years:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Balance at beginning of year
|
|
$
|
151
|
|
|
$
|
132
|
|
|
$
|
139
|
|
Bad debt expense
|
|
|
68
|
|
|
|
285
|
|
|
|
97
|
|
Write-offs, net of recoveries
|
|
|
(47
|
)
|
|
|
(266
|
)
|
|
|
(104
|
)
|
Balance at end of year
|
|
$
|
172
|
|
|
$
|
151
|
|
|
$
|
132
|
|
Inventories
Inventories are carried at the lower of
cost, using the average cost method, and net realizable value 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
$3.9 million and $4.4 million at December 31, 2017 and 2016, respectively.
The following table summarizes the changes
in the inventory reserves for the past three years:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Balance at beginning of year
|
|
$
|
4,366
|
|
|
$
|
4,829
|
|
|
$
|
4,478
|
|
Provision for inventory write-downs
|
|
|
34
|
|
|
|
93
|
|
|
|
397
|
|
Deduction for inventory write-offs
|
|
|
(475
|
)
|
|
|
(556
|
)
|
|
|
(46
|
)
|
Balance at end of year
|
|
$
|
3,925
|
|
|
$
|
4,366
|
|
|
$
|
4,829
|
|
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 operations. 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 10 years
|
Leasehold improvements are depreciated
over their estimated life or the term of the lease, whichever is shorter.
Total depreciation expense was approximately
$1.4 million, $1.3 million and $1.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Goodwill
Goodwill represents the excess of the amount
paid to acquire businesses over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities
assumed. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often
involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates
and asset lives among other items. At December 31, 2017, the goodwill balance was $22.4 million, representing 11.5% of the Company’s
total assets.
The Company conducts impairment testing
for goodwill annually in the fourth quarter of its fiscal year and more frequently, on an interim basis, when an event occurs or
circumstances change that indicate that the fair value of a reporting unit may have declined below its carrying value. Events or
circumstances which could indicate a probable impairment include, but are not limited to, financial performance, industry and market
conditions, macroeconomic conditions, reporting unit-specific events, historical results of goodwill impairment testing and the
timing of the last performance of a quantitative assessment.
The Company tests goodwill at the reporting
unit level, which is defined as an operating segment or one level below an operating segment that constitutes a business for which
financial information is available and is regularly reviewed by management. The Company determined that it has four reporting units
for this purpose. Before testing goodwill, the Company considers whether or not to first assess qualitative factors to determine
whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of
a reporting unit is less than its carrying amount and whether an impairment test is required.
Intangibles
Intangible assets, from the acquisition
of Southwest and Southern in 2010 and the acquisition of Vertex in October 2016, consist of customer relationships and tradenames.
The customer relationships are amortized over 6 to 9 year useful lives. 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. If the undiscounted cash flows were less than
the carrying value, then the intangible assets would be written down to their fair value. Tradenames have an indefinite life and
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 reportable segment, sales of industrial products, including electrical and mechanical wire and cable,
industrial fasteners, hardware and related services to the U.S. market. The Company’s chief operating decision maker
(“CODM”) is its Chief Executive Officer. The CODM makes operational and resource decisions based on company-wide sales and margin performance compared to the established strategic goals of the Company.
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. Collectability
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. Customers are permitted to return product only on a case-by-case basis. Product exchanges are handled
as a credit, with any replacement item 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
No single customer accounted for 10% or
more of the Company’s sales in 2017, 2016 or 2015. The Company performs periodic credit evaluations of its customers and
generally does not require collateral.
Advertising Costs
Advertising costs are expensed when incurred.
Advertising expenses were $0.5 million for the year ended December 31, 2017 and $0.4 million for each of the years ended December
31, 2016 and 2015.
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.
Recent Accounting Pronouncements
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 those
ASUs that are relevant to the Company.
In May 2014, the FASB issued ASU No. 2014-09,
“Revenue from Contracts with Customers” (Topic 606), which supersedes the revenue recognition requirements in ASC Topic
605, “Revenue Recognition,” and most industry-specific guidance. This ASU is based on the principle that revenue is
recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount,
timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in
judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The amendments in the ASU must be applied
using one of two retrospective methods and are effective for annual and interim periods beginning after December 15, 2017. The
Company will adopt this ASU effective January 1, 2018 using the modified retrospective method. The Company has substantially completed
its evaluation and has concluded that the adoption of this ASU does not materially change the timing of our revenue recognition
and does not have a material impact on the consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09,
“Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments in this update provide
guidance about which changes to the terms and conditions of a share-based payment award, require the application of modification
accounting. This update is effective for public companies for annual periods beginning after December 15, 2017. The Company is
still reviewing the implications of this ASU, but based on current information, does not believe that the adoption will have a
material impact on its results of operations.
In March 2017, the FASB issued ASU No.
2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and
Net Periodic Postretirement Benefit Cost.” The new guidance requires that an employer disaggregate the service cost component
from the other components of net benefit cost. This update is effective for public companies for annual periods beginning after
December 15, 2017. The Company has concluded that the adoption of this ASU will not have a material impact on the consolidated
financial statements.
In January 2017, the FASB issued ASU No.
2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The amendment
in this ASU provides final guidance that simplifies the accounting for goodwill impairment for all entities by requiring impairment
charges to be based on the first step in today’s two-step impairment test under ASC 350. ASU No. 2017-04 is effective for
annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual
and interim goodwill impairment testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting,
as well as the timing of when it will adopt, this ASU.
In August 2016, the FASB issued ASU No.
2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The amendments
in this ASU address eight cash flow issues with the intention of reducing current diversity in practice among business entities.
ASU No. 2016-15 is effective for annual and interim periods beginning after December 15, 2017; early adoption is permitted and
should be applied retrospectively where practical. The Company adopted this guidance in the third quarter of 2016 and has applied
it retrospectively. It did not have a material impact on the consolidated financial statements.
In February 2016, the FASB issued ASU No.
2016-02, “Leases (Topic 842).” Under the new guidance, a lessee will be required to recognize a lease liability and
a right-to-use asset for leases greater than one year, both financing and operating leases. This update is effective for public
companies for fiscal years beginning after December 15, 2018 with early adoption permitted. This guidance will apply beginning
January 2019, which is when the Company plans to adopt this ASU. The Company expects the adoption of this ASU will lead to a material
increase in the assets and liabilities recorded on its Consolidated Balance Sheet.
Stock-Based Compensation
Stock options issued under the Company’s
2006 stock plan have an exercise price equal to the fair value of the Company’s stock on the grant date. Restricted stock
awards, units and cash awards are 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 stock-based compensation expense is included in salaries
and commissions expense in the accompanying consolidated statements of operations.
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. The Company establishes a valuation allowance to reduce the deferred tax assets when it is more likely than not that some
or all of the deferred tax assets will not be realized. In evaluating the ability to realize deferred tax assets, the Company
considers all available positive and negative evidence, in determining whether, based on the weight of that evidence, a valuation
allowance is needed for some or all of the deferred tax assets. In determining the need for a valuation allowance on the Company’s
deferred tax assets the Company places greater weight on recent and objectively verifiable current information, as compared
to more forward-looking information that is used in valuing other assets on the balance sheet. The Company has considered
taxable income in prior carryback years future reversals of existing taxable temporary differences, future taxable
income, and tax planning strategies in assessing the need for the valuation allowance.
On October 3, 2016, the Company completed
the acquisition of Vertex from DXP Enterprises. The acquisition has been accounted for in accordance with ASC Topic 805, Business
Combinations. Accordingly, the total purchase price has been allocated to the assets acquired and liabilities assumed based on
their fair values as of the acquisition date. Vertex is a master distributor of industrial fasteners, specializing in corrosion
resistant and specialty alloy inch and metric threaded fasteners, rivets, and hose clamps, to the industrial market. Under the
terms of the acquisition agreement, the purchase price was $32.3 million, subject to an adjustment based on the net working capital
of Vertex as of the date of closing. On May 2, 2017, the Company and DXP Enterprises finalized the working capital adjustment resulting
in a final purchase price of $32.2 million. The Company treated the acquisition as a stock purchase for tax purposes. The amount
of goodwill deductible for tax purposes is $1.0 million. The acquisition was funded by borrowing under the Company’s loan
agreement. This acquisition expanded the Company’s product offerings to the industrial marketplace that purchases its wire
and cable products.
During the third quarter 2017, the Company
finalized its analysis of assets acquired and liabilities assumed, including accounts receivable, inventories and leases. The following
table summarizes the final fair value of the acquired assets and assumed liabilities recorded as of the date of acquisition:
|
|
At October 3, 2016
|
|
|
|
(In thousands)
|
|
Cash
|
|
$
|
3
|
|
Accounts receivable
|
|
|
2,874
|
|
Inventories
|
|
|
15,006
|
|
Prepaids
|
|
|
46
|
|
Property and equipment
|
|
|
59
|
|
Intangibles
|
|
|
9,161
|
|
Goodwill
|
|
|
9,849
|
|
Other assets
|
|
|
116
|
|
Total assets acquired
|
|
|
37,114
|
|
|
|
|
|
|
Trade accounts payable
|
|
|
1,134
|
|
Accrued and other current liabilities
|
|
|
1,051
|
|
Long-term obligation
|
|
|
320
|
|
Deferred income taxes
|
|
|
2,432
|
|
Total liabilities assumed
|
|
|
4,937
|
|
|
|
|
|
|
Net assets purchased
|
|
$
|
32,177
|
|
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 were purchased under similar circumstances. The income approach indicated
value for the subject net assets based on the present value of cash flows projected to be generated by the net assets over their
useful life. Projected cash flows were discounted at a market rate of return that reflected the relative risk associated with the
asset and the time value of money. The cost approach estimated value by determining the current cost of replacing the asset with
another of equivalent economic utility. The cost to replace a given asset reflected the estimated reproduction or replacement cost
for the asset, less an allowance for loss in value due to depreciation.
Intangible assets acquired consist of customer
relationships - $7.0 million and trade names - $2.1 million. Trade names are not being amortized, while customer relationships
are being amortized over a 9 year useful life. As of December 31, 2017, accumulated amortization on the acquired intangible assets
was $1.0 million, and amortization expense for the year ended December 31, 2017 was $0.8 million. Amortization expense to be recognized
on the acquired intangible assets is expected to be $0.8 million per year in 2018 through 2024 and $0.6 million in 2025.
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 will be achieved by consolidating certain of Vertex’s
locations into existing Company locations and expanding Vertex’s product offerings throughout the balance of the Company’s
national platform.
The long-term obligation represents the
unfavorable lease terms relative to market, and is being amortized over the remaining term of the lease, which was 66 months at
December 31, 2017.
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 operating
expenses in the periods in which the costs are incurred. For the year ended December 31, 2016, the Company incurred $0.9 million
of acquisition-related costs, which were recorded in other operating expenses on the statement of operations. In the year ended
December 31, 2017 no acquisition-related costs were incurred.
|
3.
|
Detail of Selected Balance Sheet Accounts
|
Property and Equipment
Property and equipment are stated at cost and consist
of:
|
|
At December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Land
|
|
$
|
2,476
|
|
|
$
|
2,476
|
|
Buildings
|
|
|
8,207
|
|
|
|
8,105
|
|
Machinery and equipment
|
|
|
14,165
|
|
|
|
12,934
|
|
|
|
|
24,848
|
|
|
|
23,515
|
|
Less accumulated depreciation
|
|
|
13,493
|
|
|
|
12,254
|
|
Total
|
|
$
|
11,355
|
|
|
$
|
11,261
|
|
Intangible assets
Intangible assets consist of:
|
|
At December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Tradenames
|
|
$
|
5,996
|
|
|
$
|
5,996
|
|
Customer relationships
|
|
|
18,620
|
|
|
|
18,620
|
|
|
|
|
24,616
|
|
|
|
24,616
|
|
Less accumulated amortization:
|
|
|
|
|
|
|
|
|
Tradenames
|
|
|
—
|
|
|
|
—
|
|
Customer relationships
|
|
|
12,601
|
|
|
|
11,238
|
|
|
|
|
12,601
|
|
|
|
11,238
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,015
|
|
|
$
|
13,378
|
|
Intangible assets include
customer relationships which are being amortized over 7 to 9 year useful lives. The weighted average amortization period
for intangible assets is 8.0 years. Tradenames have an indefinite life and are not amortized; however, they are tested
annually for impairment. As of December 31, 2017, accumulated amortization on the acquired intangible assets was $12.6
million, and amortization expense was $1.4 million in the year ended December 31, 2017, $1.7 million in the year ended
December 31, 2016 and $1.8 million in the year ended December 31, 2015. Future amortization expense to be recognized on the
acquired intangible assets is expected to be as follows:
|
|
Annual
Amortization
Expense
|
|
|
|
(In thousands)
|
|
2018
|
|
$
|
777
|
|
2019
|
|
|
777
|
|
2020
|
|
|
777
|
|
2021
|
|
|
777
|
|
2022
|
|
|
777
|
|
2023
|
|
|
777
|
|
2024
|
|
|
777
|
|
2025
|
|
|
583
|
|
Goodwill
|
|
At December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Balance at beginning of year
|
|
$
|
22,770
|
|
|
$
|
25,082
|
|
Current year acquisitions
|
|
|
—
|
|
|
|
10,266
|
|
|
|
|
22,770
|
|
|
|
35,348
|
|
|
|
|
|
|
|
|
|
|
Less accumulated impairment losses
|
|
|
—
|
|
|
|
12,578
|
|
Less purchase price adjustment
|
|
|
417
|
|
|
|
—
|
|
Balance at end of year
|
|
$
|
22,353
|
|
|
$
|
22,770
|
|
Accrued and Other Current Liabilities
Accrued and other current liabilities consist of:
|
|
At December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Customer rebates
|
|
$
|
5,648
|
|
|
$
|
3,343
|
|
Payroll, commissions, and bonuses
|
|
|
3,056
|
|
|
|
1,783
|
|
Accrued inventory purchases
|
|
|
4,796
|
|
|
|
4,268
|
|
Property taxes
|
|
|
943
|
|
|
|
1,243
|
|
Freight
|
|
|
318
|
|
|
|
514
|
|
Other
|
|
|
2,062
|
|
|
|
2,097
|
|
Total
|
|
$
|
16,823
|
|
|
$
|
13,248
|
|
|
4.
|
Impairment
of Goodwill and Intangibles
|
The annual goodwill and intangibles impairment
qualitative test was performed as of October 1, 2017 for the Southern, Southwest and Vertex reporting units. This qualitative test,
which compared current year-to-date performance to plan, indicated that it was more likely than not that goodwill and the intangibles
were not impaired. If there are future reductions in our market capitalization and market multiples, or a unit’s projected
performance is not achieved, a reporting unit could be at risk of failing the second step in the future.
During the second quarter of 2016 and prior
to the annual impairment test of goodwill in October, the Company concluded that impairment indicators existed at the Houston Wire
& Cable (“HWC”) reporting unit, due to a decline in its overall financial performance, decrease in the market capitalization
and overall market demand. In the second quarter, the Company also concluded that there were impairment indicators for certain
of the Company’s tradenames related to the Southern reporting unit.
The Company performed step one of the impairment
test and concluded that the fair value of the HWC reporting unit was less than its carrying value. Therefore, the Company performed
step two of the impairment analysis. The step one test also indicated that one of the tradenames at Southern was impaired, and
the Company recorded a non-cash charge of less than $0.1 million against the tradenames during the quarter ended June 30, 2016.
Step two of the impairment analysis measured
the impairment charge by allocating the HWC reporting unit’s fair value to all of the assets and liabilities of the reporting
unit in a hypothetical analysis that calculated implied fair value of goodwill in the same manner as if the reporting unit was
being acquired in a business combination and recording the deferred tax impact. Any excess of the carrying value of the reporting
unit’s goodwill over the implied fair value of the reporting unit’s goodwill was recorded as an impairment loss.
The fair value of the HWC reporting unit
was estimated using a discounted cash flow model (income approach) and a guideline public company method, giving 50% weight to
each. The material assumptions used included a weighted average cost of capital of 11.0% and a long-term growth rate of 3-7% for
the income approach and an adjusted invested capital multiple of 0.2 times revenue and a control premium of 10.0% for the guideline
public company method. The carrying value of the HWC reporting unit’s goodwill was $2.4 million and its implied fair value
resulting from step two of the impairment test was zero. As a result, the Company recorded a non-cash goodwill impairment charge
of $2.4 million during the quarter ended June 30, 2016.
The fair values for goodwill and tradenames
(indefinite-lived intangible assets) were both determined using a Level 3 measurement approach. The Level 3 value of all of the
Company’s tradenames at June 30, 2016 was $4.5 million.
The Company is still anticipating significant
growth in the businesses acquired in 2010 and in 2016, but if this growth is not achieved, further goodwill impairments may result.
On October 3, 2016, in connection with
the Vertex acquisition, HWC Wire & Cable Company , the Company, Vertex, and Bank of America, N.A., as agent and lender, entered
into a First Amendment (the “Loan Agreement Amendment”) amending the Fourth Amended and Restated Loan and Security
Agreement (the “2015 Loan Agreement”). The Loan Agreement Amendment adds Vertex as borrower (and lien grantor) and
provides the terms for inclusion of Vertex’s eligible accounts receivable and eligible inventory in the borrowing base for
the 2015 Loan Agreement. The 2015 Loan Agreement was expanded to include incremental availability on eligible accounts receivable
and inventory up to $5 million, which, starting April 1, 2017, is being amortized quarterly over two and a half years. The 2015
Loan Agreement provides a $100 million revolving credit facility and expires on September 30, 2020. Under certain circumstances
the Company 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 2015 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 2015 Loan Agreement is secured by substantially all of the property of the Company, other than real estate.
The 2015 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 2015 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/or minimum level of availability. The
2015 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, 2020. At December 31, 2017, the Company was in compliance with the availability-based covenants governing its
indebtedness.
The Company’s borrowings at December
31, 2017 and 2016 were $73.6 million and $60.4 million, respectively. The weighted average interest rates on outstanding borrowings
were 3.2% and 2.4% at December 31, 2017 and 2016, respectively.
During 2017, the Company had an average
available borrowing capacity of approximately $24.0 million. This average was computed from the monthly borrowing base certificates
prepared for the lender. At December 31, 2017, the Company had available borrowing capacity of $23.0 million under the terms
of the 2015 Loan Agreement. During each of the three years ended December 31, 2017, the Company paid, $0.1 million, $0.2 million
and $0.2 million, respectively, for the unused facility.
Principal repayment
obligations for succeeding fiscal years are as follows:
|
|
(In thousands)
|
|
2017
|
|
$
|
—
|
|
2018
|
|
|
—
|
|
2019
|
|
|
—
|
|
2020
|
|
|
73,555
|
|
Total
|
|
$
|
73,555
|
|
On December 22, 2017 the Tax Cuts and Jobs
Act (“the Act”) was signed into law, making significant changes to the U.S. Internal Revenue Code. The major provisions
include a corporate tax rate decrease from 35% to 21%, effective for years beginning after December 31, 2017, and changes in business-related
exclusions and deductions.
As a result of the reduction in the
U.S. corporate tax rate, the Company re-measured its deferred income tax balances at December 31, 2017. The Company has
recorded a best estimate of the impact of the Act in the year-end income tax provision and as a result has recorded
provisional income tax expense of $0.3 million in the fourth quarter of 2017, the period in which the legislation was
enacted.
At December 31, 2017, the Company has not completed its accounting for the tax effects of the Act; however, for
certain items, the Company has made a reasonable estimate of the effects on its existing deferred tax balances. The Company
is still analyzing the Act and refining its calculations, which could potentially impact the measurement of the tax balances.
The Company is also assessing the impact of the provisions of the Act which do not apply until 2018. Any subsequent
adjustment to these estimates will be included in the current tax expense of future periods.
The provision (benefit) for income taxes
consists of:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,280
|
|
|
$
|
(1,285
|
)
|
|
$
|
3,166
|
|
State
|
|
|
159
|
|
|
|
(95
|
)
|
|
|
392
|
|
Total current
|
|
|
1,439
|
|
|
|
(1,380
|
)
|
|
|
3,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,259
|
|
|
|
13
|
|
|
|
(436
|
)
|
State
|
|
|
55
|
|
|
|
(7
|
)
|
|
|
(49
|
)
|
Total deferred
|
|
|
1,314
|
|
|
|
6
|
|
|
|
(485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,753
|
|
|
$
|
(1,374
|
)
|
|
$
|
3,073
|
|
A reconciliation of the U.S. Federal statutory
tax rate to the effective tax rate on income (loss) before taxes is as follows:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
|
|
4.2
|
|
|
|
1.7
|
|
|
|
4.1
|
|
Impairment, non-deductible portion
|
|
|
—
|
|
|
|
(6.6
|
)
|
|
|
20.0
|
|
Share-based compensation
|
|
|
15.2
|
|
|
|
(9.0
|
)
|
|
|
3.7
|
|
Non-deductible items
|
|
|
4.6
|
|
|
|
(3.9
|
)
|
|
|
3.0
|
|
Valuation allowance
|
|
|
41.0
|
|
|
|
—
|
|
|
|
—
|
|
Tax reform rate change
|
|
|
12.9
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
(4.1
|
)
|
|
|
1.4
|
|
|
|
(5.7
|
)
|
Total effective tax rate
|
|
|
108.8
|
%
|
|
|
18.6
|
%
|
|
|
60.1
|
%
|
The share-based compensation resulted in
incremental income tax expense, because the grant date fair value of share-based payments exceeded the actual tax deductions realized,
either upon exercise or vesting or due to forfeitures. Any future net deficits arising from stock-based compensation transactions
will result in incremental income tax expense, and will likely negatively impact the effective tax rate. In 2015, the other credit
includes the impact of over accruals of both federal and state taxes in earlier years. The current year tax charge included $1.0
million for the impact of the valuation allowance.
Significant components of the Company’s
deferred taxes were as follows:
|
|
Year Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Uniform capitalization adjustment
|
|
$
|
1,272
|
|
|
$
|
1,420
|
|
Inventory valuation
|
|
|
1,334
|
|
|
|
2,496
|
|
Accounts receivable valuation
|
|
|
51
|
|
|
|
159
|
|
Stock compensation expense
|
|
|
725
|
|
|
|
1,368
|
|
Property and equipment
|
|
|
62
|
|
|
|
145
|
|
Other
|
|
|
134
|
|
|
|
96
|
|
Total deferred tax assets
|
|
|
3,578
|
|
|
|
5,684
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
460
|
|
|
|
393
|
|
Intangibles
|
|
|
2,385
|
|
|
|
4,211
|
|
Other
|
|
|
109
|
|
|
|
188
|
|
Total deferred tax liabilities
|
|
|
2,954
|
|
|
|
4,792
|
|
|
|
|
|
|
|
|
|
|
Less: Valuation allowance
|
|
|
1,038
|
|
|
|
—
|
|
Net deferred tax (liabilities)/assets
|
|
$
|
(414
|
)
|
|
$
|
892
|
|
The Company establishes a
valuation allowance to reduce the deferred tax assets when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. In evaluating the ability to realize deferred tax assets, the Company considers all
available positive and negative evidence, in determining whether, based on the weight of that evidence, a valuation allowance
is needed for some or all of their deferred tax assets. In determining the need for a valuation allowance on the
Company’s deferred tax assets the Company places greater weight on recent and objectively verifiable current
information, as compared to more forward-looking information that is used in valuing other assets on the balance sheet. The
Company has considered taxable income in prior carryback years, future reversals of existing taxable temporary differences,
future taxable income, and tax planning strategies in assessing the need for the valuation allowance. If the Company was to
determine that it would be able to realize the deferred tax assets in the future in excess of their net recorded amount, the
Company would make an adjustment to the valuation allowance, which would reduce the provision for income
taxes. Due to the level of losses incurred in 2016, management believes that it is more-likely-than-not that the
Company would not be able to realize all of the benefits of its deferred tax assets and accordingly recognized a valuation
allowance of $1.0 million for the year ended December 31, 2017.
The Company does not have any unrecognized
tax benefits recorded at December 2017, 2016 and 2015. 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, 2017, 2016 and 2015, the Company recorded no
provision for interest or penalties related to uncertain tax positions. The tax years 2013 through 2017 remain open to examination
by the major taxing jurisdictions to which the Company is subject.
On March 7, 2014, the Board of Directors
adopted a stock repurchase program under which the Company is authorized to purchase up to $25 million of its outstanding shares
of common stock from time to time, depending on market conditions, trading activity, business conditions and other factors. Shares
of stock purchased under the program are held as treasury shares and may be used to satisfy the exercise of options, issuance of
restricted stock, to fund acquisitions or for other uses as authorized by the Board of Directors. In November 2016, the Board of
Directors suspended purchases under the stock repurchase program. During 2016, the Company made repurchases under the stock repurchase
program of 366,820 shares for a total cost of $2.2 million.
Under the terms of the 2006 Stock Plan,
the Company acquired 27,156 shares and 10,040 shares that were surrendered by the holders to pay withholding taxes in 2017 and
2016, respectively.
The Company paid a quarterly cash dividend
from August 2007 until August 2016, resulting in aggregate dividends in 2016 and 2015 of $2.5 million and $7.2 million, 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 now terminated stockholder
rights plan, the Board of Directors designated 100,000 shares as Series A Junior Participating Preferred Stock. No shares of preferred
stock have been issued.
|
8.
|
Retirement-related Benefits
|
Defined Contribution Plan
The Company maintains a combination profit-sharing
plan and salary deferral plan for the benefit of its employees who are not covered by a collective bargaining agreement. 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 U.S. of Internal Revenue 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
matches 100% of the first 1% of the employee’s contribution. The Company’s match for the years ended December 31, 2017,
2016 and 2015 was $0.2 million for each year.
Defined Benefit Plan
The Company has a non-contributory defined
benefit pension plan for those current and former employees at its Vertex location in Attleboro, Massachusetts who are subject
to a collective bargaining agreement under the PFI Union. Currently, there are fifteen active employees, fourteen retired and
eight terminated employees, covered by the plan.
The benefit provisions to participants of the defined benefit plan are calculated
based on the number of years of service and an annual negotiated plan benefit per year of service. Annual compensation (or future
compensation increases) is not used in calculating the benefit or future plan contributions.
It is the Company’s policy to
fund amounts for pensions sufficient to meet the minimum funding requirements set forth in applicable employee benefit laws,
which currently approximate the benefit payments made each year. A total contribution of less than $0.1 million was made
during the year.
The current projected benefit obligation
as of December 31, 2017 is $1.0 million. The discount rate used to determine the projected benefit obligation was 3.77%.
The Company’s investment policy is
to maximize the expected return for an acceptable level of risk. The expected long-term rate of return on plan assets, which was
5%, is based on a target allocation of assets, which is based on the goal of earning the highest rate of return while maintaining
risk at acceptable levels. As of December 31, 2017, the target asset allocations for the defined benefit plan were 69% equity securities
and 31% debt securities.
The fair value of the assets of the defined
benefit plan as of December 31, 2017 was $1.1 million, which consisted of $0.8 million of equity mutual funds and $0.3 million
of fixed income – corporate bonds. The plan assets are all classified as Level 1 and as such have readily observable prices
and therefore a reliable fair market value.
The Company expects to contribute approximately
$0.1 million to the defined benefit plan in 2018 and expects the annual benefit payments to be approximately $0.1 million per year.
On August 4, 2017,
the Board of Directors approved the Houston Wire & Cable Company 2017 Stock Plan (the “2017 Plan”). The
2017 Plan provides for discretionary grants of stock options, stock awards, stock units and stock appreciation rights (SARs) to
employees and directors up to a total of 1,000,000 shares. Shares issuable under the 2017 Plan may be authorized but unissued shares
or treasury shares. If any award granted under the 2017 Plan expires, terminates or is forfeited or cancelled for any reason, the
shares subject to the award will again be available for issuance. Any shares subject to an award that are delivered to the Company
or withheld by the Company on behalf of a participant as payment for the award (including the exercise price of a stock option
or SAR) or as payment for any withholding taxes due in connection with the award, or that are purchased by the Company with proceeds
received from a stock option exercise, will not again be available for issuance. The 2017 Plan’s purpose is to attract and
retain outstanding individuals as employees and directors of the Company and its subsidiaries and to provide them with additional
incentive to expand and improve the Company's profits by giving them the opportunity to acquire or increase their proprietary interest
in the Company. The Company will submit the 2017 Plan for approval by stockholders at the 2018 Annual Meeting.
The 2017 Plan succeeded the Company’s
2006 Stock Plan (the “2006 Plan”), which expired on May 1, 2017. The types of equity awards previously authorized under
the 2006 Plan did not significantly differ from those permitted under the 2017 Plan.
Stock Option Awards
The Company has granted options to purchase
its common stock to employees and directors of the Company under the 2006 Plan 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. The plan contains 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.
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 other factors. 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. There were no options granted in 2017 or 2016.
All granted stock options have vested,
with the last grant having an expiration date of December 20, 2021. The following summarizes stock option activity and related
information:
|
|
2017
|
|
|
|
Options
(in 000’s)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Weighted
Average
Remaining
Contractual Life
(in years)
|
|
Outstanding—Beginning of year
|
|
|
314
|
|
|
$
|
13.85
|
|
|
$
|
—
|
|
|
|
3.28
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(48
|
)
|
|
|
12.89
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(43
|
)
|
|
|
18.89
|
|
|
|
|
|
|
|
|
|
Outstanding—End of year
|
|
|
223
|
|
|
|
13.10
|
|
|
$
|
—
|
|
|
|
2.84
|
|
Exercisable—End of year
|
|
|
223
|
|
|
|
13.10
|
|
|
$
|
—
|
|
|
|
2.84
|
|
Weighted average fair value of options granted during 2017
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during 2016
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during 2015
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There was no excess tax benefit for the
years ended December 31, 2017, 2016 and 2015.
There were no options exercised in the
years ended December 31, 2017 and 2016. The total intrinsic value of options exercised during the year ended December 31,
2015 was less than $0.1 million. There is no intrinsic value of options outstanding and exercisable as of December 31, 2017 as
the closing stock price at the end of 2017 creates a negative intrinsic value.
The total grant-date fair value of options
vested during the years ended December 31, 2017, 2016 and 2015 was $0.2 million, $0.3 million and $0.1 million, respectively.
Restricted Stock Awards, Restricted Stock Units and Cash
Awards
Liability (cash) awards
Following the Annual Meeting of
Stockholders on May 5, 2017, the Company approved the award of restricted stock units with a value of $60,000 to each
non-employee director who was elected or re-elected, for an aggregate of 37,500 restricted stock units. Issuance of the
restricted stock unit awards was subject to adoption of the 2017 Plan, as the Company’s 2006 Stock Plan expired on May
1, 2017. Each award of restricted stock units will vest at the date of the 2018 Annual Meeting of Stockholders. In addition,
on August 4, 2017, the Company approved the award of 7,653 restricted stock units with a value of $45,000 to a newly elected
non-employee director. Until the 2017 Plan has been approved by the Company’s stockholders, each restricted stock unit
entitles the non-employee director to receive, at such time as the director’s service on the board terminates for any
reason, a cash payment equal to the market value of one share of the Company’s common stock, together with dividend
equivalents from the date of grant, at the time of payment. Following stockholder approval of the 2017 Plan, instead of such
cash payment each non-employee director will be 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. At the time the awards vest, they will represent the
right to receive shares of common stock.
On August 4, 2017, the Company approved
an award of restricted stock units with a value of $50,000 to a new member of senior management, based on the closing price on
the date of grant. These units vest in one third increments, on the third, fourth and fifth anniversaries of the date of grant,
as long as the recipient is still employed by the Company. Assuming the stockholders approve the Plan at the 2018 Annual Meeting,
upon vesting each restricted stock unit will entitle the recipient to receive one share of the Company’s common stock, together
with dividend equivalents from the date of grant.
On December 11, 2017, the Board of
Directors granted to the Company’s President and CEO 46,154 restricted stock units and an additional 46,154 performance
stock units. The restricted stock units vest in equal thirds on December 11, 2018, 2019 and 2020. The performance stock units
will vest on December 31, 2020 based on the Company’s achievement of cumulative EBITDA and stock price performance
goals over a three-year period, as long as the recipient is then employed by the Company. Any dividends declared will be accrued and paid if and when the related units vest and are settled.
In addition, on December 11, 2017,
the Board of Directors also granted $330,000 of restricted stock units to members of management. These units vest in one
third increments, on the third, fourth and fifth 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 if and when the
related units vest and are settled.
Until the 2017 Plan has been approved by
the Company’s stockholders, each restricted stock unit may be settled only in cash. Following stockholder approval of the
2017 Plan, instead of a cash payment, upon vesting of a restricted stock unit, the recipient will be entitled to receive shares
of the Company’s common stock.
As long as they can be settled only in
cash, the awards discussed above are liability awards and are required to be fair valued every quarter and any difference accounted
for in the statement of operation. The fair value of these awards is $0.2 million as of December 31, 2017.
Equity awards
On January 30, 2017, the Board of
Directors granted to the Company’s President and CEO 60,000 voting shares of restricted stock and performance stock
units with respect to an additional 40,000 shares of common stock under the 2006 Plan. The 60,000 shares of restricted stock
vest in one-third increments on January 30, 2018, December 19, 2018 and December 19, 2019, in each case as long as the
recipient is then employed by the Company. The performance stock units vest on December 31, 2019 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
recipient is then employed by the Company, and upon vesting will be settled in shares of the Company’s common stock. Any
dividends declared will be accrued and paid if and when the related shares or units vest.
Restricted common shares and restricted
stock units are measured at fair value on the date of grant based on 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, based on the number of awards
that vest.
The following summarizes restricted stock
activity for the year ended December 31, 2017:
|
|
2017
|
|
|
|
Shares
|
|
|
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
|
|
|
299
|
|
|
$
|
7.88
|
|
|
|
36
|
|
|
$
|
7.04
|
|
Granted
|
|
|
60
|
|
|
|
7.50
|
|
|
|
40
|
|
|
|
7.50
|
|
Vested
|
|
|
(94
|
)
|
|
|
9.02
|
|
|
|
(36
|
)
|
|
|
7.04
|
|
Cancelled/Forfeited
|
|
|
(27
|
)
|
|
|
7.94
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Non-vested —End of year
|
|
|
238
|
|
|
$
|
7.33
|
|
|
|
40
|
|
|
$
|
7.50
|
|
Total stock-based compensation cost was
$1.2 million for the year ended December 31, 2017, of which $1.0 million was for equity awards and $0.2 million was for liability
awards, and $0.9 million for each of the years ended December 31, 2016 and 2015. Total income tax benefit recognized for equity
awards stock-based compensation arrangements was $0.2 million for the year ended December 31, 2017 and $0.3 million for each of
the years ended December 31, 2016 and 2015.
As of December 31, 2017, there was
$2.2 million of total unrecognized compensation cost related to non-vested, share-based compensation arrangements, of which
$1.3 million was for equity awards and $0.9 million was for liability awards. The cost for equity and liability awards is
expected to be recognized over a weighted average period of approximately 28 months and 38 months, respectively.
|
10.
|
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 $3.5 million in 2017, $2.6 million in 2016 and $2.5 million in 2015.
Future minimum lease payments under non-cancelable
operating leases with initial terms of one year or more consisted of the following at December 31, 2017:
|
|
(In thousands)
|
|
2018
|
|
$
|
3,631
|
|
2019
|
|
|
3,058
|
|
2020
|
|
|
2,401
|
|
2021
|
|
|
2,133
|
|
2022
|
|
|
1,955
|
|
Thereafter
|
|
|
1,306
|
|
Total minimum lease payments
|
|
$
|
14,484
|
|
The Company had aggregate purchase commitments
for fixed inventory quantities of approximately $61.8 million at December 31, 2017.
As part of the acquisition of Southwest
and Southern in 2010, the Company assumed the liability for the post-remediation monitoring of the water quality at one of the
acquired facilities in Louisiana. The expected liability of $0.1 million at December 31, 2017 relates to the cost of the monitoring,
which the Company estimates will be incurred in the next year 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 Minnesota, North Dakota, and South Dakota alleging that certain wire
and cable which may have contained asbestos caused injury to the plaintiffs who were exposed to this wire and cable. These lawsuits
are individual personal injury suits that seek unspecified amounts of money damages as the sole remedy. It is not clear whether
the alleged injuries occurred as a result of the wire and cable in question or whether the Company, in fact, distributed the wire
and cable alleged to have caused any injuries. The Company maintains general liability insurance that, to date, has covered the
defense of and all costs associated with these claims. In addition, the Company did not manufacture any of the wire and cable at
issue, and the Company would rely on any warranties from the manufacturers of such cable if it were determined that any of the
wire or cable that the Company distributed contained asbestos which caused injury to any of these plaintiffs. In connection with
ALLTEL's sale of the Company in 1997, ALLTEL provided indemnities with respect to costs and damages associated with these claims
that the Company believes it could enforce if its insurance coverage proves inadequate.
There are no legal proceedings pending
against or involving the Company that, in management’s opinion, based on the current known facts and circumstances, are expected
to have a material adverse effect on the Company’s consolidated financial position, cash flows, or results from operations.
None.
|
12.
|
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, 2017. The unaudited
information has been prepared on the same basis as the audited consolidated financial statements.
|
|
Year Ended December 31, 2017
|
|
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
82,146
|
|
|
$
|
81,196
|
|
|
$
|
75,646
|
|
|
$
|
78,709
|
|
Gross profit
|
|
$
|
20,843
|
|
|
$
|
18,570
|
|
|
$
|
16,318
|
|
|
$
|
16,931
|
|
Operating income (loss)
|
|
$
|
2,969
|
|
|
$
|
2,047
|
|
|
$
|
(162
|
)
|
|
$
|
(250
|
)
|
Net income (loss)
|
|
$
|
1,996
|
|
|
$
|
(1,711
|
)
|
|
$
|
(54
|
)
|
|
$
|
(453
|
)
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
(1)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.03
|
)
|
Diluted
|
|
$
|
0.12
|
(1)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
69,257
|
|
|
$
|
65,222
|
|
|
$
|
62,454
|
|
|
$
|
64,711
|
|
Gross profit
|
|
$
|
15,076
|
|
|
$
|
12,045
|
|
|
$
|
12,430
|
|
|
$
|
13,399
|
|
Operating income (loss)
|
|
$
|
(1,630
|
)
(2)
|
|
$
|
(1,804
|
)
|
|
$
|
(3,062
|
)
(3)
|
|
$
|
(39
|
)
|
Net income (loss)
|
|
$
|
(1,826
|
)
(2)
|
|
$
|
(1,439
|
)
|
|
$
|
(2,557
|
)
(3)
|
|
$
|
(184
|
)
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.11
|
)
(2)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.16
|
)
(3)
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
(0.11
|
)
(2)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.16
|
)
(3)
|
|
$
|
(0.01
|
)
|
|
(1)
|
The “two-class” method was used to calculate
earnings per share which resulted in the same value.
|
|
(2)
|
During the fourth quarter of 2016, the Company recorded
a charge of $483 of additional cost of sales expense that related to the first three quarters of 2016 and was immaterial to each
quarter.
|
|
(3)
|
During the second quarter of 2016, the Company recorded
a non-cash impairment charge of $2,384. See Note 4 for additional information.
|