HOUSTON WIRE & CABLE COMPANY 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 Annual Report on Form 10-K for the year ended
Overview
We are a provider of industrial products including electrical wire and cable and industrial fasteners to the U.S. market. We sell electrical products through wholesale electrical distributors and fastener products through industrial distributors. 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 and Estimates
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 judgments are discussed in our Annual Report on Form 10-K for the
year ended
Impact of the COVID-19 Pandemic
The COVID-19 pandemic has spread throughout
The rapid development and uncertainty of the COVID-19 pandemic precludes any prediction as to the ultimate effect 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, especially from the oil and gas market. In response, in 2020, we applied for and received funds under the Paycheck Protection Program and have implemented several cost savings measures which included furloughing employees, reducing headcount, temporary payroll reductions, and other actions to decrease corporate and noncritical expenses. These cost savings measures, which began to have an impact in the latter part of the second quarter, resulted in additional savings for the balance of the year. We have seen an uptick in activity during the latter part of the first quarter of 2021 and hope this level of activity continues and increases.
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Cautionary Statement for Purposes of the "Safe Harbor"
Forward-looking statements in this report are made in reliance upon the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may relate to, but are not limited to, information or
assumptions about our sales and marketing strategy, sales (including pricing),
income, operating income or gross margin improvements, working capital, cash
flow, interest rates, impact of changes in accounting standards, future economic
performance, management's plans, goals and objectives for future operations,
performance and growth or the assumptions relating to any of the forward-looking
statements. These statements can be identified by the fact that they do not
relate strictly to historical or current facts. They use words such as "aim",
"anticipate", "believe", "could", "estimate", "expect", "intend", "may", "plan",
"project", "should", "will be", "will continue", "will likely result", "would"
and other words and terms of similar meaning in conjunction with a discussion of
future operating or financial performance. The Company cautions that
forward-looking statements are not guarantees because there are inherent
difficulties in predicting future results. Actual results could differ
materially from those expressed or implied in the forward-looking
statements. The quarterly results are also non-comparable, as the first quarter
2020 contain Southern Wire results. There were also substantial expenses of
approximately
Website Disclosure
The Company uses its website, www.houwire.com, in the "Investors" section, as a
channel of distribution of Company information. Financial and other important
information about the Company is routinely accessible through and posted on its
website. Accordingly, investors should monitor the Company's website, in
addition to following its press releases,
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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
March 31,
2021 2020
Sales 100.0 % 100.0 %
Cost of sales 75.5 % 76.5 %
Gross profit 24.5 % 23.5 %
Operating expenses:
Salaries and commissions 11.1 % 11.3 %
Other operating expenses 10.0 % 9.1 %
Depreciation and amortization 1.3 % 0.9 %
Impairment charge 0.0 % 0.3 %
Loss on divestiture 1.5 % - %
Total operating expenses: 23.9 % 21.6 %
Operating income 0.6 % 1.9 %
Interest expense 0.2 % 1.0 %
Income before income taxes 0.4 % 0.9 %
Income tax expense 0.2 % 0.3 %
Net income 0.3 % 0.7 %
Note: Due to rounding, percentages may not add up to total operating expenses, operating income, income before income taxes or net income.
Comparison of the Three Months Ended
Sales
Three Months Ended
March 31,
(Dollars in millions) 2021 2021 Change
Sales $ 67.0 $ 83.5 $ (16.5 ) (19.8 )%
Our sales for the first quarter were down 19.8% to
Gross Profit
Three Months Ended
March 31,
(Dollars in millions) 2021 2020 Change
Gross profit $ 16.5 $ 19.6 $ (3.1 ) (16.0) %
Gross margin 24.5 % 23.5 %
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Gross profit decreased 16.0% to
Operating Expenses
Three Months Ended
March 31,
(Dollars in millions) 2021 2020 Change
Operating expenses:
Salaries and commissions $ 7.4 $ 9.5 $ (2.1 ) (21.7 )%
Other operating expenses 6.7 7.6 (0.8 ) (11.0 )%
Depreciation and amortization 0.9 0.8 0.1 13.2 %
Impairment charge 0.0 0.2 0.2 (100.0 )%
Loss on divestiture 1.0 0.0 1.0 100.0 %
Total operating expenses $ 16.0 $ 18.0 $ (2.0 ) (11.0 %
Operating expenses as a percent of sales 23.9% 21.6 %
Note: Due to rounding, numbers may not add up to total operating expenses.
Salaries and commissions decreased
Other operating expenses decreased in 2021 compared to 2020 due to continued
expense management in response to the COVID-19 pandemic, along with the sale of
the Southern Wire reporting unit in
Depreciation and amortization increased slightly primarily due to depreciation on the internal-use software intangible assets added in the third and fourth quarters of 2020.
We recorded an impairment charge in the first quarter of 2020 with respect to tradenames at our Southwest Wire Rope reporting unit. (See Note 4 of our Consolidated Financial Statements)
In
Interest Expense
Interest expense decreased to
Income Taxes
The income tax expense of
Impact of Inflation and Commodity Prices
Our results of operations are affected by changes in the inflation rate and commodity prices. Moreover, because copper, 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. We turn our inventory approximately three times a year, therefore, 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.
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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 Three Months Ended
Our net cash provided by operating activities was
Changes in our operating assets and liabilities resulted in cash provided by
operating activities of
Net cash provided by investing activities was
Net cash used in financing activities was
Indebtedness
Our principal source of liquidity at
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.
Contractual Obligations
The following table summarizes our loan commitment at
More
Less than than
In thousands Total 1 year 1-3 years (1) 3-5 years 5 years
Total debt $ 23,185 $ - $ 6,185 $ 17,000 $ -
(1) The Company has applied for loan forgiveness and believes that it will
achieve 90-95% forgiveness, or approximately
There were no material changes in non-cancellable purchase obligations since
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