**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

**Forthe quarterly period ended March 31, 2007**

**Or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe transition period from                            to                             .**

**CommissionFile Number:  000-52046**

****

(Exact name of registrantas specified in its charter)

| **Delaware**                     |   | **36-4151663**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

| **10201 North Loop East**                 |   |       |
|-------------------------------------------|--------|------------|
| **Houston,  Texas**                       |   | **77029**  |
| (Address of  principal executive offices) |   | (Zip Code) |

 

**(713) 609-2100**

(Registrant’s telephonenumber, including area code)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days   YES  x   NO  o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct

| Large Accelerated Filer o |   | Accelerated  Filer o |   | Non-Accelerated Filer x |
|---------------------------|--------|----------------------|--------|-------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act)   YES  o   NO  x

At May 1, 2007 there were 20,930,107 outstandingshares of the registrant’s common stock, $0.001 par value per share.

 

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**HOUSTON WIRE & CABLE COMPANY****Form 10-Q For the Quarter Ended March 31, 2007****INDEX**
| **PART I. FINANCIAL INFORMATION**                                                                   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                          | ** ** |
| Item 1. Financial Statements (Unaudited)                                                            |       |
|                                                                                                |       |
| Consolidated  Balance Sheets                                                                        |       |
| Consolidated Statements of Income                                                                   |       |
| Consolidated Statements of Cash Flows                                                               |       |
| Notes to Consolidated Financial Statements                                                          |       |
|                                                                                                |       |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations |       |
| Overview                                                                                            |       |
| Results of Operations                                                                               |       |
| Impact of Inflation and Commodity Prices                                                            |       |
| Liquidity and Capital Resources                                                                     |       |
| Contractual  Obligations                                                                            |       |
| Cautionary Statement                                                                                |       |
|                                                                                                |       |
| Item 3. Quantitative and Qualitative Disclosures about  Market Risk                                 |       |
|                                                                                                |       |
| Item 4. Controls and Procedures                                                                     |       |
|                                                                                                |       |
| **PART  II. OTHER INFORMATION**                                                                     | ** ** |
| ** **                                                                                          | ** ** |
| Item 1A. Risk Factors                                                                               |       |
|                                                                                                |       |
| Item 6. Exhibits                                                                                    |       |
|                                                                                                |       |
| **Signature Page**                                                                                  | ** ** |

 

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**HOUSTONWIRE & CABLE COMPANYConsolidated Balance Sheets**(Inthousands, except share data)
| ** **                                                                                                                                                      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                      | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                      | ** ** | **(unaudited)**    | ** ** |
| **Assets**                                                                                                                                                      |       |               |       |                  |       |
| Current assets:                                                                                                                                                 |       |               |       |                  |       |
| Accounts  receivable, net                                                                                                                                       |       | $                  | 51,081     |                  | $          | 52,128 |   |
| Inventories, net                                                                                                                                                |       | 63,781             |       | 56,329                |       |
| Deferred income  taxes                                                                                                                                          |       | 1,409              |       | 1,165                 |       |
| Prepaid expenses                                                                                                                                                |       | 1,039              |       | 450                   |       |
| Total current assets                                                                                                                                            |       | 117,310            |       | 110,072               |       |
|                                                                                                                                                            |       |               |       |                  |       |
| Property and equipment,  net                                                                                                                                    |       | 2,959              |       | 2,973                 |       |
| Goodwill                                                                                                                                                        |       | 2,996              |       | 2,996                 |       |
| Deferred income taxes                                                                                                                                           |       | 655                |       | 688                   |       |
| Other assets, net                                                                                                                                               |       | 116                |       | 135                   |       |
| Total assets                                                                                                                                                    |       | $                  | 124,036    |                  | $          | 116,864 |   |
|                                                                                                                                                            |       |               |       |                  |       |
| **Liabilities and stockholders’  equity**                                                                                                                  |       |               |       |                  |       |
| Current liabilities:                                                                                                                                            |       |               |       |                  |       |
| Book overdraft                                                                                                                                                  |       | $                  | 3,455      |                  | $          | 1,265 |   |
| Trade accounts  payable                                                                                                                                         |       | 13,781             |       | 10,988                |       |
| Accrued and  other current liabilities                                                                                                                          |       | 8,968              |       | 10,358                |       |
| Income taxes  payable                                                                                                                                           |       | 4,205              |       | 520                   |       |
| Total current  liabilities                                                                                                                                      |       | 30,409             |       | 23,131                |       |
|                                                                                                                                                            |       |               |       |                  |       |
| Long-term obligations                                                                                                                                           |       | 3,787              |       | 12,059                |       |
|                                                                                                                                                            |       |               |       |                  |       |
| Stockholders’ equity:                                                                                                                                      |       |               |       |                  |       |
| Common stock,  $0.001 par value; 100,000,000 shares authorized: 20,921,827 shares issued and  outstanding at March 31, 2007 and 20,867,172 at December 31, 2006 |       | 21                 |       | 21                    |       |
| Additional  paid-in-capital                                                                                                                                     |       | 51,848             |       | 50,979                |       |
| Retained  earnings                                                                                                                                              |       | 37,971             |       | 30,674                |       |
| Total stockholders’  equity                                                                                                                                |       | 89,840             |       | 81,674                |       |
| Total liabilities and stockholders’ equity                                                                                                                 |       | $                  | 124,036    |                  | $          | 116,864 |   |

 

The accompanying Notes are an integral part of theseConsolidated Financial Statements

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**HOUSTONWIRE & CABLE COMPANYConsolidated Statements of Income**(Unaudited)

(In thousands,except share and per share data)
| ** **                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                  | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                                        |       |                                             |       |   |   |
| Sales                                       |       | $                                                | 81,788     |   | $ | 66,428 |   |
| Cost of sales                               |       | 59,179                                           |       | 48,437 |   |
| Gross profit                                |       | 22,609                                           |       | 17,991 |   |
| ** **                                  |       |                                             |       |   |   |
| Operating Expenses:                         |       |                                             |       |   |   |
| Salaries and  commissions                   |       | 5,678                                            |       | 5,072 |   |
| Other operating  expenses                   |       | 4,766                                            |       | 3,748 |   |
| Management fee                              |       | —                                           |       | 125 |   |
| Depreciation and  amortization              |       | 110                                              |       | 93 |   |
| Total operating  expenses                   |       | 10,554                                           |       | 9,038 |   |
| Operating income                            |       | 12,055                                           |       | 8,953 |   |
| Interest expense                            |       | 185                                              |       | 1,054 |   |
| Income before income  taxes                 |       | 11,870                                           |       | 7,899 |   |
| Income taxes                                |       | 4,573                                            |       | 3,097 |   |
| Net income                                  |       | $                                                | 7,297      |   | $ | 4,802 |   |
|                                        |       |                                             |       |   |   |
| Earnings per share:                         |       |                                             |       |   |   |
| Basic                                       |       | $                                                | 0.35       |   | $ | 0.29 |   |
| Diluted                                     |       | $                                                | 0.35       |   | $ | 0.29 |   |
| Weighted average common  shares outstanding |       |                                             |       |   |   |
| Basic                                       |       | 20,868,027                                       |       | 16,613,702 |   |
| Diluted                                     |       | 20,996,579                                       |       | 16,710,098 |   |

 

The accompanying Notes are an integral part of theseConsolidated Financial Statements

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**HOUSTONWIRE & CABLE COMPANYConsolidated Statements of Cash Flows**(Unaudited)

(In thousands)
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**               | ** ** |
| ** **                                                                         | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| **Operating activities**                                                           |       |                             |       |   |   |
| Net income                                                                         |       | $                                | 7,297      |   | $ | 4,802 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                             |       |   |   |
| Depreciation                                                                       |       | 110                              |       | 93 |   |
| Amortization of  capitalized loan costs                                            |       | 16                               |       | 76 |   |
| Amortization of  unearned stock compensation                                       |       | 290                              |       | 27 |   |
| Provision for  returns & allowances                                            |       | (116                             | )          | — |   |
| Provision for  inventory obsolescence                                              |       | 16                               |       | 75 |   |
| Deferred income  taxes                                                             |       | (211                             | )          | 51 |   |
| Changes in  operating assets and liabilities:                                      |       |                             |       |   |   |
| Accounts  receivable                                                               |       | 1,163                            |       | 1,864 |   |
| Inventories                                                                        |       | (7,468                           | )          | (8,834 | ) |
| Prepaid expenses                                                                   |       | (589                             | )          | 42 |   |
| Other assets                                                                       |       | 3                                |       | 3 |   |
| Book overdraft                                                                     |       | 2,190                            |       | (26 | ) |
| Trade accounts  payable                                                            |       | 2,793                            |       | 3,009 |   |
| Accrued and  other current liabilities                                             |       | (1,390                           | )          | 369 |   |
| Income taxes  payable                                                              |       | 3,685                            |       | 2,420 |   |
| Net cash provided by  operating activities                                         |       | 7,789                            |       | 3,971 |   |
| **Investing activities**                                                           |       |                             |       |   |   |
| Expenditures for  property, plant, and equipment                                   |       | (96                              | )          | (104 | ) |
| Net cash used in  investing activities                                             |       | (96                              | )          | (104 | ) |
| **Financing activities**                                                           |       |                             |       |   |   |
| Borrowings on  revolver                                                            |       | 75,494                           |       | 65,850 |   |
| Payments on  revolver                                                              |       | (83,766                          | )          | (68,899 | ) |
| Payments on  long-term obligations                                                 |       | —                           |       | (631 | ) |
| Proceeds from  exercise of common stock options                                    |       | 31                               |       | 6 |   |
| Payment of  common stock offering costs                                            |       | —                           |       | (213 | ) |
| Excess income  tax benefit for common stock options                                |       | 548                              |       | 20 |   |
| Net cash used in  financing activities                                             |       | (7,693                           | )          | (3,867 | ) |
| Net change in cash                                                                 |       | —                           |       | — |   |
| Cash at beginning of  period                                                       |       | —                           |       | — |   |
| Cash at end of period                                                              |       | $                                | —     |   | $ | — |   |

 

The accompanying Notes are an integral part of theseConsolidated Financial Statements.

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**HOUSTONWIRE & CABLE COMPANYNotes to Consolidated Financial Statements (Unaudited)(in thousands, except per share amounts)**

**1. Basis ofPresentation**

Houston Wire & CableCompany (“HWC” or the “Company”) through its wholly owned subsidiaries, HWCWire & Cable Company, Advantage Wire & Cable and Cable ManagementServices Inc., distributes specialty electrical wire and cable to the U.S.electrical distribution market through eleven locations in ten statesthroughout the United States.  TheCompany has no other business activity.

The consolidatedfinancial statements as of March 31, 2007 and for the three months ended March31, 2007 and 2006 have been prepared in accordance with U.S. generally acceptedaccounting principles (“GAAP”) for interim financial information and Article 10of Regulation S-X.  Accordingly they donot include all of the information and footnotes required by GAAP for completefinancial statements.  In the opinion ofmanagement, all adjustments, consisting only of normal recurring accruals, considerednecessary for a fair presentation of the results of these interim periods havebeen included.  The results of operationsfor the interim periods are not necessarily indicative of the results that maybe expected for the full year.

The preparation of thefinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes.  Themost significant estimates are those relating to the allowance for doubtfulaccounts, returns and allowances, the inventory obsolescence reserve and theaccrual for vendor rebates.  Theseestimates are continually reviewed and adjusted as necessary, but actualresults could differ from those estimates.

On May 16, 2006, theCompany effected a 1.875-for-1 stock split for its outstanding common stock inthe form of a stock dividend.  Allstockholder equity balances and disclosures in the accompanying consolidatedfinancial statements have been retroactively restated for such stock split.

For further information,refer to the consolidated financial statements and footnotes thereto includedin our Annual Report on Form 10-K for the fiscal year ended December 31, 2006filed with the Securities and Exchange Commission (the “SEC”).

*Reclassification*

Certain prior periodamounts have been reclassified to conform to the current year presentation.

*Adoption of New Accounting Policy*

In June 2006, the FASBissued Interpretation No. 48, *Accounting forUncertainty in Income Taxes — an interpretation of FASB Statement 109*(“FIN 48”).  FIN 48 clarifies the accounting for uncertainty in incometaxes by prescribing a recognition threshold for tax positions taken orexpected to be taken in a tax return.  FIN 48 requires that entities recognizein their financial statements the impact of a tax position if that position ismore likely than not of being sustained on audit, based on the technical meritsof the position.  FIN 48 is effective for fiscal years beginning afterDecember 15, 2006.  Interest and penalties, if incurred, would berecognized as  components of interestexpense and other operating expenses. The Company’s  adoption of FIN 48 on January 1, 2007 had noimpact on the Company’s consolidated financial statements. Except for a completedInternal Revenue Service 2004 Issue Focused Examination, the tax years2002-2006 remain open to examination by the major taxing jurisdictions to whichwe are subject.

*Recent Accounting Pronouncements*

In March 2006, theEmerging Issues Task Force reached a consensus on EITF Issue No. 06-3(“EITF 06-3”), How Taxes Collected from Customers and Remitted to GovernmentalAuthorities Should be Presented in the Income Statement (that is, Gross versusNet Presentation), which allows companies to adopt a policy of presenting taxesin the income statement on either a gross or net basis. Taxes within the scopeof this EITF 06-3 would include taxes that are imposed on a revenue transactionbetween a seller and a customer, for example, sales taxes, use taxes, value-addedtaxes, and some types of excise taxes. EITF 06-3 is effective for interimand annual reporting periods beginning after December 15, 2006. TheCompany presents sales net of sales taxes in its consolidated statement ofincome. No change in presentation was required as a result of adoption ofEITF 06-3.

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**2. Earnings perShare**

In accordance withStatement of Financial Accounting Standards (“SFAS”) 128, *Earnings perShare*, basic earnings per share is calculated by dividing the netincome by the weighted-average number of common shares outstanding. Dilutedearnings per share includes the dilutive effects of stock option awards.  The numerator used in the calculation of bothbasic and diluted net income per share for all periods presented was netincome.  The denominator for each periodpresented was determined as follows:
| ** **                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Weighted average  common shares for basic earning per share |       | 20,868                                           |       | 16,614 |   |
| Effect of  dilutive securities                              |       | 129                                              |       | 96 |   |
| Denominator of diluted  earnings per share                  |       | 20,997                                           |       | 16,710 |   |

 

The weighted averagenumber of stock-based awards not included in the calculation of the dilutiveeffect of stock based awards was 309 for the three months ended March 31,2007.  There were no stock-based awardsexcluded from the calculation for the three months ended March 31, 2006.

**3. PublicOfferings**

On June 14, 2006, aRegistration Statement relating to the Company’s initial public offering ofcommon stock was declared effective by the SEC. As a result, the Company issued 4,250 shares of common stock which weresubsequently sold to the public for $13 per share.  Certain selling stockholders sold anadditional 5,525 shares which also were resold to the public for $13 per share.The Company received net proceeds of $49,900 after deducting the underwritingdiscounts and offering expenses.  The netproceeds were used to repay a portion of the outstanding debt.

In March 2007, theCompany completed an offering for its largest stockholder, Code, Hennessy &Simmons II, L.P. and other selling stockholders, who sold approximately 7,500common shares at $25 per share. All the shares came from selling stockholders,including approximately 6,900 common shares from Code, Hennessy & SimmonsII, L.P., thus there was no dilution to earnings per share or proceeds to theCompany. After the offering, Code, Hennessy & Simmons II, L.P.’s ownershiphas been reduced from 38% to 8%.

**4. Long TermObligations**

The Company’s current loan andsecurity agreement, which provides for a $45,000 revolving loan, bears interestat Bank of America’s base interest rate and matures on May 21, 2010. TheCompany is in compliance with the financial covenants governing itsindebtedness.

**5. Stock BasedCompensation**

On March 9, 2007,the Company granted to the Company’s chief executive officer, 500 optionsto purchase shares of its common stock with an exercise price equal to the fairmarket value of the Company’s stock at the close of trading on March 9,2007. These options have a contractual life of ten years and vest 50% fouryears after the date of grant and 50% five years after the date of grant,provided that in the event of death or permanent disability, such options wouldvest ratably based on the days served from the date of grant.

The fair value of each option awarded is estimated onthe date of grant using a Black-Scholes option-pricing model. Expectedvolatilities are based on historical volatility of the Company’s stock and thehistorical volatility of the stock of similar companies, and other factors. TheCompany uses historical data to estimate option exercises and employeeterminations within the valuation model. The expected life of options grantedrepresents the period of time that options granted are expected to beoutstanding. The risk-free rate for periods within the life of the option isbased on the U.S. Treasury yield curve in effect at the time of grant.

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The following assumptions were used to calculate thefair value of the Company’s options on the date of grant during the threemonths ended March 31, 2007:

|                          | ** ** | **2007**  | ** ** |
|--------------------------|------------|-----------|------------|
| Expected  volatility     |       | 42        | %          |
| Expected life in  years  |       | 5.5 years |       |
| Risk-free  interest rate |       | 4.59      | %          |
| Dividend yield           |       | 0         | %          |

 

Total stock-basedcompensation cost was $290 and $28 for the three months ended March 31, 2007and 2006 respectively. Total income tax benefit recognized for stock-basedcompensation arrangements were $112 and $11 for the three-month period endedMarch 31, 2007 and 2006 respectively.

As of March 31, 2007,there was $7,800 of total unrecognized compensation cost related to nonvestedshare-based compensation arrangements. The cost is expected to be recognizedover a weighted average period of approximately fifty-seven months.

**6. Contingencies**

HWC, along with manyother defendants, has been named in a number of lawsuits in the state courts ofNorth Dakota and South Dakota alleging that certain wire and cable which mayhave contained asbestos caused injury to the plaintiffs who were exposed tothis wire and cable. These lawsuits are individual personal injury suits thatseek unspecified amounts of money damages as the sole remedy. It is not clearwhether the alleged injuries occurred as a result of the wire and cable inquestion or whether HWC, in fact, distributed the wire and cable alleged to havecaused any injuries. In addition, HWC did not manufacture any of the wire andcable at issue, and HWC would rely on any warranties from the manufacturers ofsuch cable if it were determined that any of the wire or cable that HWCdistributed contained asbestos which caused injury to any of these plaintiffs.In connection with ALLTEL’s sale of the company in 1997, ALLTEL providedindemnities with respect to costs and damages associated with these claims thatHWC believes it could enforce if its insurance coverage proves inadequate. Inaddition, HWC maintains general liability insurance that has applied to theseclaims. To date, all costs associated with these claims have been covered bythe applicable insurance policies and all defense of these claims has beenhandled by the applicable insurance companies.

In addition to the foregoing cases, there are no legalproceedings pending against or involving the Company that, in management’sopinion, based on the current known facts and circumstances, are expected to have a material adverse effect on the Company’sconsolidated financial position, cash flows, or results from operations.

**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

The following Management’sDiscussion and Analysis (“MD&A”) is intended to help the reader understandthe Company’s financial position and results of operations.  MD&A is provided as a supplement to theCompany’s Consolidated Financial Statements (unaudited) and the accompanyingNotes to Consolidated Financial Statements (unaudited) and should be read inconjunction with the MD&A included in the Company’s Form 10-K for the yearended December 31, 2006.

**Overview**

We are one of the largestdistributors of specialty wire and cable and related services to the U.S.electrical distribution market. We serve over 2,700 customers in over 8,000individual locations, including virtually all of the top 200 electricaldistributors in the U.S. We have strong relationships with leading wire andcable manufacturers and provide them with efficient access to the fragmentedelectrical distribution market. We distribute approximately 22,000 SKUs(stock-keeping units) from eleven strategically located distribution centers inten states. We are focused on providing our electrical distributor customerswith a single-source solution for specialty wire and cable and related servicesby offering a large selection of in-stock items, exceptional customer serviceand high levels of product expertise.

We offer products in mostcategories of specialty wire and cable, including:

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·                  continuousand interlocked armor cable (cable encapsulated in either a seamless orinterlocked aluminum protective sheath);

·                  controland power cable (single or multiple conductor industrial cable);

·                  electronicwire and cable (computer, audio and signal cable);

·                  flexibleand portable cords (flexible, heavy duty industrial cable);

·                  instrumentationand thermocouple cable (cables used for transmitting signals for instrumentsand heat sensing devices);

·                  leadand high temperature cable (single conductor cable used for low or hightemperature applications);

·                  mediumvoltage cable (cables used for applications between 2,001 volts and 35,000volts); and

·                  premiseand category wire and cable (cable used for home and high speed dataapplications).

We alsooffer private branded products, including our LifeGuardTM low-smoke,zero-halogen cable. Low-smoke, zero halogen products are made with compoundsthat produce no halogen gases and very little smoke while under combustion.

Inaddition to our product offerings, we provide comprehensive value-addedservices including: standard same day shipment from our extensive inventory anddistribution network; application engineering support through our knowledgeablesales and technical support staff; custom cutting of wire and cable to exactspecifications; inventory management programs that provide job-specific assetmanagement and just-in-time delivery; job-site delivery and logistics support;24/7/365 customer service provided by our own employees; and customizedinternet-based ordering capabilities.

**CriticalAccounting Policies**

Criticalaccounting policies are those that both are important to the accurate portrayalof a company’s financial condition and results, and require subjective orcomplex judgments, often as a result of the need to make estimates about theeffect of matters that are inherently uncertain.

Inorder to prepare financial statements that conform to GAAP, we make estimatesand assumptions that affect the amounts reported in our financial statementsand accompanying notes. Certain estimates are particularly sensitive due totheir significance to the financial statements and the possibility that futureevents may be significantly different from our expectations.

We haveidentified the following accounting policies as those that require us to makethe most subjective or complex judgments in order to fairly present ourconsolidated financial position and results of operations. Actual results inthese areas could differ materially from management’s estimates under differentassumptions and conditions.

**Allowance forDoubtful Accounts**

Wemaintain an allowance for doubtful accounts receivable for estimated lossesresulting from the inability of our customers to make required payments. Weperform periodic credit evaluations of our customers and typically do notrequire collateral. Consistent with industry practices, we require payment frommost customers within 30 days of invoice date. We have an estimation procedure,based on historical data and recent changes in the aging of these receivables,which we use to record reserves throughout the year. In the last five years,write-offs against our allowance for doubtful accounts have averagedapproximately $164,000 per year. A 20% change in our estimate at March 31, 2007would have resulted in a change in income before income taxes of approximately$91,000 for the three months ended March 31, 2007.

**Reserve forReturns and Allowances**

We estimate the grossprofit impact of returns and allowances for previously recorded sales. Thisreserve is calculated on historical and statistical returns and allowances dataand adjusted as trends in the variables change. A 20% change in our estimate atMarch 31, 2007 would have resulted in a change in income before income taxes of$113,000 for the three months ended March 31, 2007.

**InventoryObsolescence**

Wecontinually monitor our inventory levels at each of our distribution locations.Our reserve for inventory obsolescence is based on the age of the inventory,movements of our inventory over the prior twelve months and the experience ofour purchasing and sales departments in estimating demand for the product inthe succeeding year. Our inventories are generally not susceptible totechnological obsolescence. A 20% change in our estimate at March 31, 2007would have resulted in a change in income before income taxes of approximately$396,000 for the three months ended March 31, 2007.

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**Vendor Rebates**

Many ofour arrangements with our vendors entitle us to receive a rebate of a specifiedamount when we achieve any of a number of measures, generally related to thevolume of purchases from the vendor. We account for these rebates as areduction of the prices of the vendor’s products, which reduces inventory untilwe sell the product, at which time these rebates reduce cost of sales.Throughout the year, we estimate the amount of rebates earned based on ourpurchases to date and our estimate of purchases to be made for the remainder ofthe year relative to the purchase levels that mark our progress toward earningthe rebates. We continually revise these estimates to reflect actual purchaselevels. A 20% change in our estimate of total rebates earned during the threemonths ended March 31, 2007 would have resulted in a change in income beforeincome taxes of approximately $345,000 for this period.

**Goodwill**

Goodwill represents theexcess of the amount we paid to acquire businesses over the estimated fairvalue of tangible assets and identifiable intangible assets acquired, lessliabilities assumed. At March 31, 2007, our net goodwill balance was $3.0million, representing 2.4% of our total assets.

 In 2002, we adopted the provisions ofStatement of Financial Accounting Standards No. 142, Goodwill and Other IntangibleAssets (“SFAS 142”). Under SFAS 142, we test goodwill for impairment annually,or more frequently if indications of possible impairment exist, by applying afair value-based test. In October 2006, we performed our annual goodwillimpairment tests for goodwill and other indefinite-lived intangible assets,and, as a result of this test, we believe the goodwill on our balance sheet isnot impaired.

If circumstances changeor events occur to indicate that our fair market value has fallen below bookvalue, we will compare the estimated fair value of the goodwill to its carryingvalue. If the carrying value of goodwill exceeds the estimated fair value ofgoodwill, we will recognize the difference as an impairment loss in operatingincome.

**Results of Operations**

The following table shows, for the periods indicated, informationderived from our consolidated statements of income, expressed as a percentageof net sales for the periods presented.

|                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------------|------------|
| ** **                    | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Sales                         |       | 100.0                                            | %          | 100.0 | % |
| Cost of sales                 |       | 72.4                                             | %          | 72.9 | % |
| Gross profit                  |       | 27.6                                             | %          | 27.1 | % |
|                          |       |                                             |       |   |   |
| Operating  expenses:          |       |                                             |       |   |   |
| Salaries and commissions      |       | 6.9                                              | %          | 7.6 | % |
| Other operating expenses      |       | 5.8                                              | %          | 5.6 | % |
| Management fee                |       | 0.0                                              | %          | 0.2 | % |
| Recovery from litigation      |       | 0.0                                              | %          | 0.0 | % |
| Depreciation and amortization |       | 0.1                                              | %          | 0.1 | % |
|                          |       |                                             |       |   |   |
| Total operating expenses      |       | 12.9                                             | %          | 13.6 | % |
|                          |       |                                             |       |   |   |
| Operating income              |       | 14.7                                             | %          | 13.5 | % |
| Interest expense              |       | 0.2                                              | %          | 1.6 | % |
|                          |       |                                             |       |   |   |
| Income before  income taxes   |       | 14.5                                             | %          | 11.9 | % |
| Income tax  provision         |       | 5.6                                              | %          | 4.7 | % |
|                          |       |                                             |       |   |   |
| Net income                    |       | 8.9                                              | %          | 7.2 | % |

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Note:                       Due torounding, percentages may not add up to operating expenses, operating income,income before taxes or net income.

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**Comparison of theThree Months Ended March 31, 2007 and 2006**

**Sales**
| ** **             | ** ** | **Three Months Ended** | ** ** |
|------------------------|------------|----------------------------------|------------|
| ** **             | ** ** | **March 31,**               | ** ** |
| **(in millions)** | ** ** | **2007**                         | ** ** | **2006** | ** ** | **Change** | ** ** |
| Sales                  |       | $                                | 81.8       |   | $ | 66.4 |   | $ | 15.4 |   | 23.1 | % |
|                        |            |                                  |            |  |  |  |  |  |  |  |  |  |

 

Sales in the firstquarter of 2007 increased 23.1% to $81.8 million from $66.4 million in thefirst quarter of 2006. Internal growth accounted for the entire increase insales. The Company estimates that nearly all of the sales growth in the firstquarter of 2007 resulted from the five major new initiatives, encompassingEmission Controls, Engineering & Construction, Industrials, LifeGuardTM (andother private branded products) and Utility Power Generation, as theseinitiatives benefited from continued penetration of our target markets.Distributor growth was flat to slightly positive.

**Gross Profit**
| ** **                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **March 31,**               | ** ** |
| **(in millions)**             | ** ** | **2007**                         | ** ** | **2006** | ** ** | **Change** | ** ** |
| Gross profit                       |       | $                                | 22.6       |   | $ | 18.0 |   | $ | 4.6 |   | 25.7 | % |
| Gross profit as a percent of sales |       | 27.6                             | %          | 27.1 | % | 0.5 | % |   |   |
|                                    |            |                                  |            |  |  |  |  |  |  |  |  |  |

 

Gross margin at 27.6%improved over prior year by 50 basis points but reflected a tougher competitiveenvironment when compared to the last half of 2006. Our core distributorbusiness was flat to slightly positive as a result of reduced discretionarymaintenance, repair and operations (“MRO”) spending by some of our industrialend use customers during the quarter. Improvements in freight management andpurchasing leverage mitigated some price degradation. Gross profit increased25.7% as it benefited from the increased sales volume and improved marginpercent.

**Operating Expenses**
| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **March 31,**               | ** ** |
| **(in millions)**                        | ** ** | **2007**                         | ** ** | **2006** | ** ** | **Change** | ** ** |
| Operating Expenses:                           |       |                             |       |   |   |   |   |   |   |
| Salaries and  commissions                     |       | $                                | 5.7        |   | $ | 5.1 |   | $ | 0.6 |   | 11.9 | % |
| Other operating  expenses                     |       | 4.8                              |       | 3.7 |   | 1.0 |   | 27.2 | % |
| Management fee  Depreciation and amortization |       | 0.0                              |       | 0.1 |   | (0.1 | ) | (100 | )% |
|                                          |       | 0.1                              |       | 0.1 |   | 0.0 |   | 18.3 | % |
| Total operating  expenses                     |       | $                                | 10.6       |   | $ | 9.0 |   | $ | 1.5 |   | 16.8 | % |
|                                          |       |                             |       |   |   |   |   |   |   |
| Operating expenses as a % of sales            |       | 12.9                             | %          | 13.6 | % | (0.7 | )% |   |   |

----

Note:                        Due to rounding, numbers maynot add up to total operating expenses.

The increase in salaries and commissions primarily reflects a highernumber of employees, annual pay increases, option expenses and increasedcommission expense due to higher sales levels, gross profit dollars andprofitability.  Salaries and commissionsas a percentage of sales decreased to 6.9% for the three months ended March 31,2007 from 7.6% from the comparable period in 2006 due to changes in, or maximumpayouts under, commission programs.

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Other operating expenses increased in 2007 primarily due to publiccompany expenses, including costs related to the secondary offering in March2007, which were not incurred in the comparable period in 2006. Additionalexpenses were also incurred due to the higher number of employees.

There were no managementfees in 2007 due to the cancellation of the management services agreement inconnection with the IPO in June 2006.

Depreciation andamortization expense was consistent at $0.1 million for both periods.

Operating expenses as apercent of sales decreased to 12.9% in 2007 from 13.6% in 2006, reflecting theCompany’s ability to leverage costs over the higher sales volume and realizeproductivity improvements from its ongoing Operational Excellence Program.

**Interest Expense**

Interest expensedecreased $0.1 million or 82.4%, primarily due to the use of the IPO proceedsreceived in June 2006 to reduce the outstanding debt balance. The Companycontinued to pay down the outstanding debt in the first quarter of 2007 withcash from operations.

**Income Taxes**

The increase in incometaxes is primarily due to the additional $4.0 million in income before incometaxes. This was partially offset by the decrease in our effective income taxrate to 38.5% for the first quarter of 2007 from 39.2% for the comparativeperiod in 2006. The reduction in our overall effective tax rate was due to alower state tax rate.

**Net Income**

The Company achievedfirst quarter net income of $7.3 million in 2007 compared to net income of $4.8million in 2006, an increase of 52.0%.

**Quarterly Results(unaudited)**

The followingtable presents our unaudited quarterly results of operations for each of ourlast eight quarters ended March 31, 2007. We have prepared the unauditedinformation on the same basis as our audited consolidated financial statements.Results of operations for any quarter are not necessarily indicative of resultsfor any future quarters or for a full year.
|                                        | **Quarter Ended** | ** ** |
|----------------------------------------|------------------------|------------|
| ** **                             | **March 31,**     | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **June 30,** | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
| ** **                             | **2007**               | ** ** | **2006** | ** ** | **2006** | ** ** | **2006** | ** ** | **2006** | ** ** | **2005** | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                             | **(In thousands)**     | ** ** |
| **CONSOLIDATED STATEMENT OF  INCOME:** |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales                                  | $                      | 81,788     |   | $ | 82,892 |   | $ | 89,963 |   | $ | 84,184 |   | $ | 66,428 |   | $ | 65,878 |   | $ | 58,321 |   | $ | 46,652 |   |
| Gross profit                           | 22,609                 |       | 23,618 |   | 26,203 |   | 24,527 |   | 17,991 |   | 17,371 |   | 15,136 |   | 12,053 |   |
| Operating income                       | 12,055                 |       | 13,701 |   | 15,857 |   | 14,563 |   | 8,953 |   | 7,711 |   | 6,889 |   | 4,271 |   |
| Net income                             | $                      | 7,297      |   | $ | 8,150 |   | $ | 9,468 |   | $ | 8,254 |   | $ | 4,802 |   | $ | 4,359 |   | $ | 3,904 |   | $ | 2,240 |   |

 

**Impact ofInflation and Commodity Prices**

Our results of operationsare affected by changes in the inflation rate and commodity prices. Moreover,because copper and petrochemical products are components of the wire and cablewe sell, fluctuations in the costs of these and other commodities havehistorically affected our operating results. To the extent we are unable topass on to our customers cost increases due to inflation or rising commodityprices, it could adversely affect our operating results.  To the extent commodity prices decline, thenet realizable value of our existing inventory could be reduced, and our grossprofits could be adversely affected. As the Company turns its inventory inexcess of four times a year, the impact of decreasing copper prices wouldprimarily affect the results of the succeeding calendar quarter.

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**Liquidity andCapital Resources**

Our primary capital needsare for working capital obligations and other general corporate purposes andcapital expenditures. Our primary sources of working capital are cash fromoperations supplemented by bank borrowings. During 2007, we have funded ourcapital expenditures through cash from operations. Our working capital remainedconstant at $86.9 million at March 31, 2007 and December 31, 2006.

While working capitalremained constant at $86.9 million between March 31, 2007 and December 31,2006, there were movements between the components worth noting. Inventoryincreased $7.5 million due to typical lower year end levels in December and tomaximize inventory availability for the upcoming quarter. Book overdraftincreased $2.2 million due to a higher dollar amount of outstanding checks,higher accounts payable of $2.8 million was due to increased inventory andhigher income taxes payable of $3.7 million was due to the timing of the firstquarter federal tax payment.

Liquidity is defined asthe ability to generate adequate amounts of cash to meet the current need forcash. We assess our liquidity in terms of our ability to generate cash to fundour operating activities. Significant factors which could affect liquidityinclude the following:

· the adequacy of available bank lines of credit;

· the ability to attract long-term capital withsatisfactory terms;

· cash flows generated from operating activities;

· capital expenditures and

· acquisitions.

**Inventories**

Inventorylevels have risen from the prior year quarter by $23.7 million or 59.2%. Thisincrease has been necessary to support the increase in sales in 2006 and 2007as a result of the Company’s five new growth initiatives.

**Comparison of theThree Months Ended March 31, 2007 and 2006**

Our net cash provided byoperations for the three months ended March 31, 2007 was $7.8 million comparedto $4.0 million in the prior year period. Our net income increased to $7.3million in 2007 from $4.8 million in 2006. Inventory levels increased $7.5million due to typical lower year end levels in December and to maximizeinventory availability for the upcoming quarter.  Income taxes payable increased $3.7 milliondue to the higher profitability levels and the timing of the first quarterfederal tax payment. Accounts payable increased $2.8 million due to the higherinventory levels. There is not a direct correlation between increased accountspayable and inventory due to the Company taking advantage of discounted paymentterms. The book overdraft increased $2.2 million due to the higher dollaramount of outstanding checks that had not cleared the bank at quarter end.

Net cash used ininvesting activities was $0.1 million for the 2007 and 2006 periods, as demandsfor additional capital resources were low.

Net cash used infinancing activities was $7.7 million in 2007 compared to $3.9 million in theprior year period. The net cash used in financing activities reflects thereduction of outstanding debt paid with cash generated from operations.

**Indebtedness**

Our principal source ofliquidity at March 31, 2007 was working capital of $86.9 million whichremained constant from December 31, 2006. We also had available borrowingcapacity in the approximate amount of $41.2 million at March 31, 2007 and$32.9 million at December 31, 2006 under our loan and securityagreement with Bank of America and another syndication leader.

We believe that we willhave adequate availability of capital to fund our present operations, meet ourcommitments on our existing debt, and fund anticipated growth over the nexttwelve months, including expansion in existing and targeted market areas. Wecontinually seek potential acquisitions and from time to time hold discussionswith acquisition candidates. If suitable acquisition opportunities or workingcapital needs arise that would require additional financing, we believe thatour financial position and earnings history provide a solid base for obtainingadditional financing resources at competitive rates and terms. Additionally, wemay issue additional shares of common or preferred stock to raise funds.

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**Loan and SecurityAgreement**

We have a loan andsecurity agreement with Bank of America and another lender, which provides fora $45.0 million revolving loan. The loan bears interest at Bank of America’sbase interest rate and matures on May 21, 2010. The lenders have a securityinterest in all of our assets, including accounts receivable and inventory.Portions of the outstanding loan may be converted to LIBOR loans in minimumamounts ranging between $100,000 to $1 million and integral multiples of$100,000. Upon such conversion, interest is payable at LIBOR plus 0.75%.  We have entered into a series of one-monthLIBOR loans, which, upon maturity, are either rolled back into the revolvingloan or renewed under a new LIBOR contract.

**ContractualObligations**

The followingtable describes our loan commitment at March 31, 2007:
| ** **                    | ** ** | **Total**               | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
|-------------------------------|------------|-------------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **(In thousands)** | ** ** |
| Term loans and  loans payable |       | $                       | 3,787      |                            | $          | —             |       | $                  | —     |                             | $          | 3,787 |   | $ | — |   |
|                               |            |                         |            |                                 |            |                    |            |                    |            |                                  |            |  |  |  |  |  |

 

There were no newmaterial changes in operating lease obligations or non-cancellable purchaseobligations since December 31, 2006.

**CautionaryStatement for Purposes of the “Safe Harbor”**

Forward-lookingstatements in this report are made in reliance upon the safe harbor provisionsof the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements may relateto, but are not limited to, information or assumptions about our sales andmarketing strategy, sales (including pricing), income, operating income orgross margin improvements, working capital, cash flow, interest rates, impactof changes in accounting standards, future economic performance, management’splans, goals and objectives for future operations, performance and growth orthe assumptions relating to any of the forward-looking statements.  These statements can be identified by thefact 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”, “willbe”, “will continue”, “will likely result”, “would” and other words and termsof similar meaning in conjunction with a discussion of future operating orfinancial performance.  The Companycautions that forward-looking statements are not guarantees because there areinherent difficulties in predicting future results.  Actual results could differ materially fromthose expressed or implied in the forward-looking statements.  The factors listed under “Risk Factors” inthe Company’s Annual Report on Form 10-K for the year ended December 31, 2006,as well as any cautionary language in this report, provide examples of risks,uncertainties and events that may cause our actual results to differ materiallyfrom the expectations we describe in our forward-looking statements.

**Item 3.Quantitative and Qualitative Disclosures about Market Risk**

**Interest Rate Risk**

There have been nomaterial changes from what we reported in the Form 10-K for the year endedDecember 31, 2006.

**Foreign ExchangeRisk**

There have been nomaterial changes from what we reported in the Form 10-K for the year ended December31, 2006.

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**Item 4. Controlsand Procedures**

As of March 31, 2007, anevaluation was performed by the Company’s management, under the supervision andwith the participation of the Company’s chief executive officer and chieffinancial officer, of the effectiveness of the Company’s disclosure controlsand procedures.  Based on thatevaluation, the chief executive officer and the chief financial officerconcluded that the Company’s disclosure controls and procedures wereeffective.  There were no changes in theCompany’s internal control over financial reporting that occurred during thequarter ended March 31, 2007 that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

**Part II. OtherInformation**

**Item 1 — Notapplicable and has been omitted.**

**Item 1A - RiskFactors**

There have been nomaterial changes in our risk factors from those disclosed in the Form 10-K forthe year ended December 31, 2006.

**Items 2 - 5 arenot applicable and have been omitted.**

**Item 6. Exhibits**

**(a) Exhibitsrequired by Item 601 of Regulation S-K.**
| Exhibit  Number | ** ** | **Document  Description**                                                                                                                                                        |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                             |
| 31.1            |       | Certification by Charles A. Sorrentino pursuant to  Rule 13a-14(a) and 15d-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.          |
|            |       |                                                                                                                                                                             |
| 31.2            |       | Certification by Nicol G. Graham pursuant to  Rule 13a-14(a) and 15d-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                |
|            |       |                                                                                                                                                                             |
| 32.1            |       | Certification by Charles A. Sorrentino and Nicol G.  Graham pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**Signatures**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
| Date: May 2, 2007 | **HOUSTON WIRE & CABLE COMPANY** |
|-------------------|--------------------------------------|
|              | ** **                           |
|              | ** **                           |
|              | BY:                                  | /s/ Nicol G. Graham |
|              |                                 | Nicol G. Graham, Chief Financial Officer, |

 

**EXHIBIT INDEX**
| Exhibit Number | ** ** | **Document Description**                                                                                                                                                         |
|----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |       |                                                                                                                                                                             |
| 31.1           |       | Certification by Charles A. Sorrentino pursuant to  Rule 13a-14(a) and 15d-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.          |
|           |       |                                                                                                                                                                             |
| 31.2           |       | Certification by Nicol G. Graham pursuant to  Rule 13a-14(a) and 15d-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                |
|           |       |                                                                                                                                                                             |
| 32.1           |       | Certification by Charles A. Sorrentino and Nicol G.  Graham pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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