Houston Wire Q3 Net Income Decreases 14.8%

Net income decreased by 14.8% or $0.7 million from 2011 and sequentially by 4.3% or $0.2 million. Although daily sales for the period remained inconsistent, and primarily a function of post-recession geographic strength, positive momentum involving increased MRO order count continued during the period. We estimate sales declines from the prior year period were equally dispersed between project and MRO markets.

  • Sales of $96.1 million
  • Gross margin reached 22.5%
  • Operating margins reached 7.4%
  • Net income of $4.2 million
  • Diluted EPS of $0.24
  • Declared dividends totaling $0.09 cents per share

Third Quarter Summary

Jim Pokluda, President and Chief Executive Officer commented, "The markets for our products in the third quarter remained inconsistent, as different parts of the country and industries experience economic recovery at different rates. While I am encouraged by the performance of our largest regions, which saw robust sales and delivered positive growth during the quarter, demand in smaller markets remained uneven, and we continue to experience regional sales performance differentials. Comparisons with the prior year period remain difficult, as the third quarter of 2011 had the highest sales in the history of the Company and included significant mega project sales. When adjusted for an estimated 6% negative impact from metals price fluctuations, we estimate that revenues were down just over 3% year-over-year and essentially flat sequentially.

Similar to our experience in the second quarter, notwithstanding inconsistent market conditions and related customer activity, key performance metrics including opportunity pipeline and sequential transactional activity continued to grow. We added 76 new customers during the quarter, which we believe will drive further share gains and continued to invest in more sales and marketing resources, new products and broader geographic coverage. We believe this is the prudent approach to strengthen the company, and to generate long term results for our investors. We are encouraged by these positive trends; however, we remain mindful that our performance, to varying degrees, will remain a function of post-recession recovery and market strength."

Gross margin was 22.5%, or 80 basis points higher than prior year period. While it fell 20 basis points sequentially, gross margin continued the recent overall trend of exceeding the prior year's margin.

Operating expenses decreased by 1.1% or $0.2 million, primarily due to lower commissions, offset by an increase in salaries. On a sequential basis operating expenses decreased by 1.8% or $0.3 million. The quarterly decrease in sales impacted operating margins which fell from 7.9% in 2011 to 7.4% in 2012 and sequentially from 7.7%.

Interest expense of $0.3 million was lower than the $0.4 million in prior year period. While the average debt levels increased from $61.9 million in 2011 to $62.6 million in the third quarter of 2012, the effective interest rate declined from 2.3% in 2011 to 2.0% in 2012. The effective tax rate for the quarter of 38.0% remained in line with the 2011 annual rate and with the 38.1% level in the comparable 2011 quarter. On a sequential basis the decline from the 38.6% in the second quarter, was due to the impact of lower state taxes.

Net income decreased by 14.8% or $0.7 million from 2011 and sequentially by 4.3% or $0.2 million. Diluted earnings per share were $0.24, compared to the $0.25 on a sequential basis.

Nine month summary

Sales activity within the five long-term growth initiatives of Utility Power Generation, Environmental Compliance, Engineering & Construction, Industrials and LifeGuard(TM), our proprietary private-label product, remained active and were largely driven by multiple small to medium sized project orders. Large projects, while still present, were fewer than the prior year period and sales volume to a large extent was replaced by an increase in smaller projects centered around industrial manufacturing, alternative fuel and natural gas power generation and up-stream, mid-stream and down-stream hydrocarbon extraction, transfer and refining.

Although daily sales for the period remained inconsistent, and primarily a function of post-recession geographic strength, positive momentum involving increased MRO order count continued during the period. We estimate sales declines from the prior year period were equally dispersed between project and MRO markets. For the nine month period, management estimates that metals market price fluctuations negatively impacted revenues by approximately 3%.

Gross margins, at 22.5%, improved 20 basis points over the prior year period. "Market conditions continue to place pressure on our margins, but I am pleased that we have been able to maintain the overall higher margin trend compared with the prior year," said Mr. Pokluda. Gross profit dollars decreased by $4.0 million or 5.8% primarily due to lower sales.

Operating expenses increased by 6.4% or $2.6 million in the current year. Excluding the impact of a $1.7 million expense reversal in 2011 resulting from a stock compensation adjustment, operating expenses increased, 2.2% or $0.9 million, primarily due to the impact of the higher headcount and higher consulting and professional fees.

Interest expense of $0.9 million was lower than the prior year's $1.1 million as average debt levels fell by 5.5% from $60.4 million in 2011 to $57.0 million in 2012 and interest rates decreased from 2.3% to 2.1%. The effective tax rate for the period of 38.4% was in line with both the prior year period and the 2011 annual rate.

Net income for the period of $12.7 million fell 18.7% from the $15.6 million level (excluding the impact of the stock compensation reversal) in the prior year period.

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