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HOUSTON WIRE AND CABLE COMPANY
Houston Wire & Cable Company: Financial Statement Analysis
University of Houston – Downtown
Houston Wire & Cable Company: Financial Statement Analysis
Company and Industry
Founded in 1975, Houston Wire & Cable Company (HWCC) is one of the largest providers of industrial products including electrical and mechanical wire and cable, industrial fasteners, hardware, and related services to the U.S. market. HWCC offers products in most categories of wire and cable including, power cable, electronic wire and cable, instrumentation and thermocouple cable, and high temperature cable.
HWCC has three target markets: utility market, industrial market, and infrastructure market. The utility market includes large investor-owned utilities, rural cooperatives, and municipal power authorities. While not a significant distributor of power lines used for the transmission of electricity today, HWCC has products that are used in this sector.
The industrial market is one of the largest segments of the U.S. economy and is comprised of a diverse base of manufacturing and production companies. HWCC provides a wide variety of products specifically designed for use in manufacturing, metal/mineral, and oil and gas upstream, midstream and downstream markets. Investments in the development, construction and maintenance of infrastructure markets including education and health care; air, ground and rail transportation; telecommunications, and wastewater are opportunities for product and service offerings.
In October 2016 HWCC acquired Vertex for $32.3M. This was a consolidation of companies with complimentary activities working together to increase efficiencies. This purchase affected the 2016 and 2017 financial performance of the company significantly. This impact is seen holistically in 2017 when there was a full year of Vertex financial performance combined with HWCC. As the following sections discuss, the acquisition drastically affected the financial statements between 2015 through 2017.
Common Size Analysis
Accounts receivable saw an increase of 28.5% primarily due to the Vertex acquisition, however this was also bolstered by an increase in sales. Similarly, inventory increased to $88.1M due to the increase in sales volume which was partially caused by the Vertex acquisition. Accounts receivable and inventory were the primary drivers in the increase of total assets. Debt increased significantly from 2015 to 2016 as HWCC borrowed to fund the acquisition. Debt continued to increase in 2017 as a function of borrowings due to increased operating activities. Additionally, borrowings were used to facilitate the rehabilitation of several buildings where the companies operate.
Income statement.
Sales increased significantly from $261.6M in 2016 to $317.7M in 2017 as this was the first full year that Vertex was incorporated into the company. There was also an increase to the sales due to sales volume increasing because of the improving economy. The increased efficiencies and higher profit margin products that Vertex offers helped decrease the percentage of Cost of Goods sold to sales revenue. Additionally, HWCC was able to utilize its existing distribution channels for these higher margin products. Salaries and commissions increased by 24.5% between 2016 and 2017 due to additional sales staff from the Vertex acquisition. Total operating expenses decreased by a percentage of sales but saw an overall increase by 14%. The decrease by percentage of sales was partially due to the impairment charge incurred in 2016 but not in 2017. This noncash impairment was to affect goodwill and has historically been an option for the company. Bank of America is the senior lender and as of 2017 the interest rate of the debt was 2.4% resulting in increased interest expense paid in 2017. Net income improved in 2017 but was still a loss. The improvement was due to the increase in sales and the decrease in costs of goods sold, as mentioned above.
Cash flow statement.
The first section of the cash flow statement is cash flow from operations. Operating activities include the core business activities. Cash flow from operating activities for HWCC showed a decline in value from $17.2M in 2016 to $11.3M in 2017. This was due to the significant use of cash for the increase in accounts receivable and inventory. The improvement in sales in 2017 is attributable to the higher profit margin Vertex products.
The second section is cash flow from investing activities. Any purchase or sale of fixed assets, such as, property or equipment qualify under the investment section. For the year 2017, cash flow from investing activities for HWCC was $1.6M. This was a significant increase from 2016, as in 2016 HWCC invested in the acquisition of Vertex. There were some small improvements in fixed assets, such as the building improvements, that drove the use of cash.
The third section of the cash flow statement lists the information for the company’s financing activities. Financing activities include purchases of bonds and stock as well as dividend payments. Cash flow from financing activities shows the flow of cash between HWCC and its owners and creditors were $12.91M for 2017. The company had a use of cash in the borrowings on the revolver that exceeded the repayments. This was primarily due to the increase in sales, accounts receivable, and inventory which drove the borrowings on the revolver.
Financial Ratio Analysis
The liquidity ratios are high, and big when compared to industry averages. The company does not account for the borrowings on the revolver as a current liability. Therefore, the current liabilities are under reported. Meanwhile, HWCC’s total assets are concentrated in current assets such as accounts receivable. The fixed asset turnover ratio improved due to the increase in sales, however it was low compared to industry average. Industry averages were obtained from IBISWorld and represent averages for companies with total sales greater than $50M. The sample only included 132 statements, so this may account for the instances where HWCC was not in line with the industry.
Strengths and Weaknesses
Houston Wire and Cable has improved its gross profit margin for the fourth quarter of its fiscal year 2017 compared to the same period a year ago. Sales and net income have continued to improve and grow. Due to its extreme liquidity levels, Houston Wire and Cable shows the ability to cover any short-term cash needs. The liquidity measurements indicate the company is unlikely to face financial difficulties in the near future. The price to book ratio and sales ratio are below the S&P 500 and industry average, indicating a discount to investment alternatives within the industry. Even though growth in revenues have outpaced the average competitor within the industry, the net income growth has not. Employees of Houston Wire and Cable have to deal with the stressful environment, due to the high volatility within the industry. In addition, employees have little job security, due to layoffs. Investors have historically been disappointed with the return on equity and lack of dividend payments.
Appendix A
HWCC Income Statement 2015 – 2017
Appendix B
HWCC Balance Sheet 2015 – 2017
Appendix C
HWCC Statement of Cash Flows 2015 - 2017
Appendix D
HWCC Ratio Analysis
%CHG. %CHG. Sales $317,697 100.00% 21.42% $261,644 100.00% -15% $308,133 100.00%
Cost of sales $245,035 77.13% 17.41% $208,694 79.76% -14% $242,223 78.61% Gross profit $72,662 22.87% 37.23% $52,950 20.24% -20% $65,910 21.39%
Operating expenses: Salaries and commissions $36,570 11.51% 24.52% $29,369 11.22% 3% $28,537 9.26% Other operating expenses $28,716 9.04% 16.19% $24,714 9.45% -1% $25,023 8.12% Depreciation and amortization $2,772 0.87% -8.15% $3,018 1.15% 4% $2,915 0.95% Impairment charge $0 0.00% -100.00% $2,384 0.91% -30% $3,417 1.11%
Total operating expenses $68,058 21.42% 14.41% $59,485 22.74% -1% $59,892 19.44% Operating income (loss) $4,604 1.45% -170.45% ($6,535) -2.50% -209% $6,018 1.95%
Interest expense $2,073 0.65% 145.33% $845 0.32% -6% $901 0.29% Income (loss) before income taxes $2,531 0.80% -134.30% ($7,380) -2.82% -244% $5,117 1.66%
Income tax expense (benefit) $2,753 0.87% -300.36% ($1,374) -0.53% -145% $3,073 1.00% Net income (loss) ($222) -0.07% -96.30% ($6,006) -2.30% -394% $2,044 0.66%
Basic ($0.01) ($0.37) $0.12 Diluted ($0.01) ($0.37) $0.12 Weighted average common shares outstanding : Basic 16,269,611 16,345,679 17,012,560 Diluted 16,269,611 16,345,679 17,067,893
Houston Wire & Cable Company CONSOLIDATED STATEMENT OF OPERATIONS DATA: ($000's)
2017 2016 2015
%CHG. %CHG.
Sales $317,697100.00%21.42%$261,644100.00%-15%$308,133100.00%
Cost of sales $245,03577.13%17.41%$208,69479.76%-14%$242,22378.61%
Gross profit $72,66222.87%37.23%$52,95020.24%-20%$65,91021.39%
Operating expenses:
Salaries and commissions $36,57011.51%24.52%$29,36911.22%3%$28,5379.26%
Other operating expenses $28,7169.04%16.19%$24,7149.45%-1%$25,0238.12%
Depreciation and amortization $2,7720.87%-8.15%$3,0181.15%4%$2,9150.95%
Impairment charge $00.00%-100.00%$2,3840.91%-30%$3,4171.11%
Total operating expenses $68,05821.42%14.41%$59,48522.74%-1%$59,89219.44%
Operating income (loss) $4,6041.45%-170.45%($6,535)-2.50%-209%$6,0181.95%
Interest expense $2,0730.65%145.33%$8450.32%-6%$9010.29%
Income (loss) before income taxes $2,5310.80%-134.30%($7,380)-2.82%-244%$5,1171.66%
Income tax expense (benefit) $2,7530.87%-300.36%($1,374)-0.53%-145%$3,0731.00%
Net income (loss) ($222)-0.07%-96.30%($6,006)-2.30%-394%$2,0440.66%
Basic ($0.01) ($0.37) $0.12
Diluted ($0.01) ($0.37) $0.12
Weighted average common shares
outstanding :
Basic 16,269,611 16,345,679 17,012,560
Diluted 16,269,611 16,345,679 17,067,893
Houston Wire & Cable Company
CONSOLIDATED STATEMENT OF OPERATIONS DATA: ($000's)
2017 2016 2015
Consolidated Balance Sheets ($000's) %CHG %CHG Assets
Current assets: Accounts receivable, net $57,396 29.58% 28.5% $44,677 25.40% -3.4% $46,250 29.07% Inventories, net $88,115 45.41% 10.4% $79,783 45.36% 953.0% $7,577 4.76% Income taxes $449 0.23% -77.0% $1,948 1.11% 109.0% $932 0.59% Prepaids $1,938 1.00% 240.0% $570 0.32% -12.0% $648 0.41%
Total current assets $147,898 76.22% 16.5% $126,978 72.20% 2.7% $123,607 77.69% Property and equipment, net $11,355 5.85% 0.8% $11,261 6.40% 3.3% $10,899 6.85% Intangible assets, net $12,015 6.19% -10.2% $13,378 7.61% 123.6% $5,984 3.76% Goodwill $22,353 11.52% -1.8% $22,770 12.95% 53.2% $14,866 9.34% Deferred income taxes $0 0.00% -100.0% $892 0.51% -73.3% $3,338 2.10% Other assets $418 0.22% -29.3% $591 0.34% 41.1% $419 0.26%
Total assets $194,039 100.00% 10.3% $175,870 100.00% 10.5% $159,113 100.00% Liabilities and stockholders’ equity
Current liabilities: Book overdraft $3,028 1.56% -4.8% $3,181 1.81% -14.1% $3,701 2.33% Trade accounts payable $8,449 4.35% 0.5% $8,406 4.78% 31.8% $6,380 4.01% Accrued and other current liabilities $16,823 8.67% 27.0% $13,248 7.53% 38.5% $9,568 6.01%
Total current liabilities $28,300 14.58% 14.0% $24,835 14.12% 26.4% $19,649 12.35% Debt $73,555 37.91% 21.8% $60,388 34.34% 54.1% $39,188 24.63% Deferred income taxes $414 0.21% $0 0.00% -100.0% $275 0.17% Other long-term obligations $1,026 0.53% 98.8% $516 0.29% -99.1% $59,112 37.15%
Total liabilities $103,295 53.23% 20.5% $85,739 48.75% 0.0% $85,739 53.89% Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued and outstanding — —0 0 0 Common stock, $0.001 par value; 100,000,000 shares authorized: 20,988,952 shares issued:16,491,181 16,457,525 16,712,626 Additional paid-in capital $54,006 27.83% 0.3% $53,824 30.60% -1.5% $54,621 34.33% Retained earnings $97,336 50.16% -0.2% $97,550 55.47% -8.0% $106,048 66.65% Treasury stock ($60,619) -31.24% -1.1% ($61,264) -34.83% 0.9% ($60,689) -38.14%
Total stockholders’ equity $90,744 46.77% 0.7% $90,131 51.25% -9.9% $100,001 62.85% Total liabilities and stockholders’ equity $194,039 100.00% 10.3% $175,870 100.00% 10.5% $159,113 100.00%
2017 2016 2015
Houston Wire & Cable Company
Consolidated Balance Sheets ($000's) %CHG %CHG
Assets
Current assets:
Accounts receivable, net $57,39629.58%28.5%$44,67725.40%-3.4%$46,25029.07%
Inventories, net $88,11545.41%10.4%$79,78345.36%953.0%$7,5774.76%
Income taxes $4490.23%-77.0%$1,9481.11%109.0%$9320.59%
Prepaids $1,9381.00%240.0%$5700.32%-12.0%$6480.41%
Total current assets $147,89876.22%16.5%$126,97872.20%2.7%$123,60777.69%
Property and equipment, net $11,3555.85%0.8%$11,2616.40%3.3%$10,8996.85%
Intangible assets, net $12,0156.19%-10.2%$13,3787.61%123.6%$5,9843.76%
Goodwill $22,35311.52%-1.8%$22,77012.95%53.2%$14,8669.34%
Deferred income taxes $00.00%-100.0%$8920.51%-73.3%$3,3382.10%
Other assets $4180.22%-29.3%$5910.34%41.1%$4190.26%
Total assets $194,039100.00%10.3%$175,870100.00%10.5%$159,113100.00%
Liabilities and stockholders’ equity
Current liabilities:
Book overdraft $3,0281.56%-4.8%$3,1811.81%-14.1%$3,7012.33%
Trade accounts payable $8,4494.35%0.5%$8,4064.78%31.8%$6,3804.01%
Accrued and other current liabilities $16,8238.67%27.0%$13,2487.53%38.5%$9,5686.01%
Total current liabilities $28,30014.58%14.0%$24,83514.12%26.4%$19,64912.35%
Debt $73,55537.91%21.8%$60,38834.34%54.1%$39,18824.63%
Deferred income taxes $4140.21% $00.00%-100.0%$2750.17%
Other long-term obligations $1,0260.53%98.8%$5160.29%-99.1%$59,11237.15%
Total liabilities $103,29553.23%20.5%$85,73948.75%0.0%$85,73953.89%
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued and outstanding — —0 0 0
Common stock, $0.001 par value; 100,000,000 shares authorized: 20,988,952 shares issued:16,491,181 16,457,525 16,712,626
Additional paid-in capital $54,00627.83%0.3%$53,82430.60%-1.5%$54,62134.33%
Retained earnings $97,33650.16%-0.2%$97,55055.47%-8.0%$106,04866.65%
Treasury stock ($60,619)-31.24%-1.1%($61,264)-34.83%0.9%($60,689)-38.14%
Total stockholders’ equity $90,74446.77%0.7%$90,13151.25%-9.9%$100,00162.85%
Total liabilities and stockholders’ equity $194,039100.00%10.3%$175,870100.00%10.5%$159,113100.00%
2017 2016 2015
Houston Wire & Cable Company
Consolidated Statements of Cash Flows ($000's) 2017 %CHG 2016 %CHG 2015 Operating activities
Net income (loss) (222) (0.96) (6,006) (3.94) 2,044 Adjustments to reconcile net income to net cash provided by operating activities: Impairment charge 0 (1.00) 2,384 (0.30) 3,417 Depreciation and amortization 2,772 (0.08) 3,018 0.04 2,915 Amortization of unearned stock compensation 1,176 0.37 856 (0.03) 886 Provision for doubtful accounts 68 (0.76) 285 1.94 97 Provision for inventory obsolescence 34 (0.63) 93 (0.77) 397 Deferred income taxes 1,314 218.00 6 (1.01) (485) Other non-cash items 222 (2.91) (116) 0.97 (59) Changes in operating assets and liabilities: Accounts receivable (12,719) (4.16) 4,019 (0.74) 15,352 Inventories (7,942) (1.76) 10,483 (0.18) 12,784 Book overdraft (153) (0.70) (517) (1.88) 588 Trade accounts payable 38 (0.96) 896 (1.56) (1,613) Accrued and other current liabilities 3,571 0.38 2,587 (1.73) (3,557) Income taxes 1,499 (2.48) (1,016) 0.42 (713) Prepaid expenses (1,368) (12.03) 124 (2.49) (83) Other operating activities 368 1.50 147 (2.04) (141)
Net cash (used in) provided by operating activities (11,342) (1.66) 17,243 (0.46) 31,829 Investing activities
Expenditures for property and equipment (1,769) 0.34 (1,319) (0.58) (3,123) Proceeds from disposals of property and equipment 8 0.00 8 0.60 5 Cash refunded (paid) for acquisition 193 (1.01) (32,370) 0
Net cash used in investing activities (1,568) (0.95) (33,684) 9.81 (3,115) Financing activities
Borrowings on revolver 333,301 0.10 302,898 (0.02) 310,366 Payments on revolver (320,133) 0.14 (281,698) (0.13) (325,025) Proceeds from exercise of stock options 0 0 (1.00) 11 Payment of dividends (81) (0.97) (2,495) (0.65) (7,172) Purchase of treasury stock (177) (0.92) (2,264) (0.67) (6,894) Net cash provided by (used in) financing activities 12,910 (0.21) 16,441 (1.57) (28,714)
Net change in cash 0 0 0 Cash at beginning of year 0 0 0 Cash at end of year 0 0 0 Supplemental disclosures Cash paid during the year for interest 1,961 1.69 728 900 Cash paid during the year for income taxes 64 (0.73) 233 4,278 The accompanying notes are an integral part of these consolidated financial statements.
Houston Wire & Cable Company
Consolidated Statements of Cash Flows ($000's) 2017%CHG2016%CHG2015
Operating activities
Net income (loss) (222)(0.96)(6,006)(3.94)2,044
Adjustments to reconcile net income to net cash provided by operating activities:
Impairment charge 0(1.00)2,384(0.30)3,417
Depreciation and amortization 2,772(0.08)3,0180.042,915
Amortization of unearned stock compensation 1,1760.37856(0.03)886
Provision for doubtful accounts 68(0.76)2851.9497
Provision for inventory obsolescence 34(0.63)93(0.77)397
Deferred income taxes 1,314218.006(1.01)(485)
Other non-cash items 222(2.91)(116)0.97(59)
Changes in operating assets and liabilities:
Accounts receivable (12,719)(4.16)4,019(0.74)15,352
Inventories (7,942)(1.76)10,483(0.18)12,784
Book overdraft (153)(0.70)(517)(1.88)588
Trade accounts payable 38(0.96)896(1.56)(1,613)
Accrued and other current liabilities 3,5710.382,587(1.73)(3,557)
Income taxes 1,499(2.48)(1,016)0.42(713)
Prepaid expenses (1,368)(12.03)124(2.49)(83)
Other operating activities 3681.50147(2.04)(141)
Net cash (used in) provided by operating activities (11,342)(1.66)17,243(0.46)31,829
Investing activities
Expenditures for property and equipment (1,769)0.34(1,319)(0.58)(3,123)
Proceeds from disposals of property and equipment 80.0080.605
Cash refunded (paid) for acquisition 193(1.01)(32,370) 0
Net cash used in investing activities (1,568)(0.95)(33,684)9.81(3,115)
Financing activities
Borrowings on revolver 333,3010.10302,898(0.02)310,366
Payments on revolver (320,133)0.14(281,698)(0.13)(325,025)
Proceeds from exercise of stock options 0 0(1.00)11
Payment of dividends (81)(0.97)(2,495)(0.65)(7,172)
Purchase of treasury stock (177)(0.92)(2,264)(0.67)(6,894)
Net cash provided by (used in) financing activities 12,910(0.21)16,441(1.57)(28,714)
Net change in cash 0 0 0
Cash at beginning of year 0 0 0
Cash at end of year 0 0 0
Supplemental disclosures
Cash paid during the year for interest 1,9611.69728 900
Cash paid during the year for income taxes 64(0.73)233 4,278
The accompanying notes are an integral part of these consolidated financial statements.
Houston Wire & Cable Company
2017 2016 2015 Industry
Current ratio 5.2 5.1 6.3 1.8 Quick ratio 2.0 1.8 2.4 1.0
TATO 1.6 1.5 1.9 2.9 FATO 28.0 23.2 28.3 46.8 DSO 65.9 62.3 54.8 49.3 Inventory Turnover 2.8 2.6 32.0 7.4
Debt ratio 0.7 0.7 0.5 Debt to equity 1.1 0.9 0.6 TIE 2.2 -7.7 6.7
NPM 0.0 0.0 0.0 ROA 0.0 0.0 ROE 0.0 -0.1
EPS -0.01 0.4 0.1 P/E (611.94)$ 17.69$ 43.95$
Houston Wire & Cable Company
Liquidity Ratios
Asset Management Ratios
Leverage Ratios
Profitability Ratios
Market Value Ratios
201720162015Industry
Current ratio 5.25.16.31.8
Quick ratio 2.01.82.41.0
TATO 1.61.51.92.9
FATO 28.023.228.346.8
DSO 65.962.354.849.3
Inventory Turnover2.82.632.07.4
Debt ratio 0.70.70.5
Debt to equity1.10.90.6
TIE 2.2-7.76.7
NPM 0.00.00.0
ROA 0.00.0
ROE 0.0-0.1
EPS -0.010.40.1
P/E (611.94)$ 17.69$ 43.95$
Houston Wire & Cable Company
Liquidity Ratios
Asset Management Ratios
Leverage Ratios
Profitability Ratios
Market Value Ratios
