UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
_X_ Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the Fiscal Year Ended December 31, 2000
Commission File Number 1-5581
WATSCO, INC.
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(Exact name of registrant as specified in its charter)
FLORIDA 59-0778222
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2665 South Bayshore Drive, Suite 901, Coconut Grove, FL 33133
(Address of principal executive offices)
Registrant's telephone number, including area code: (305) 714-4100
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $.50 par value New York Stock Exchange
Class B Common Stock, $.50 par value American Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES _X_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form l0-K or any amendment to this
Form l0-K. _X_
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 23, 2001 was approximately $266 million.
The number of shares of common stock outstanding as of March 23, 2001 was
23,360,922 shares of Common Stock, excluding treasury shares of 3,118,150, and
3,296,606 shares of Class B Common Stock, excluding treasury shares of 48,263.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Parts I and II is incorporated by reference from
the Annual Report to Shareholders for the year ended December 31, 2000, attached
hereto as Exhibit 13. The information required by Part III (Items 10, 11, 12 and
13) will be incorporated by reference from the Registrant's definitive proxy
statement (to be filed pursuant to Regulation 14A).
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WATSCO, INC.
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Index to Annual Report
on Form 10-K
Year Ended December 31, 2000
PART I Page
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Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder 8
Matters
Item 6. Selected Consolidated Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition and 8
Results of Operations
Item 7A. Qualitative and Quantitative Disclosures about Market Risk 8
Item 8. Consolidated Financial Statements and Supplementary Data 8
Item 9. Changes in and Disagreements with Accountants on Accounting and 9
Financial Disclosure
PART III 9
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K 9
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PART I
This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including statements regarding, among other items, (i) the Company's
business and acquisition strategies, (ii) potential acquisitions by the Company,
(iii) the Company's financing plans and (iv) industry, demographic and other
trends affecting the Company's financial condition or results of operations.
These forward-looking statements are based largely on the Company's expectations
and are subject to a number of risks and uncertainties, certain of which are
beyond the Company's control. Actual results could differ materially from these
forward-looking statements as a result of several factors, including general
economic conditions, prevailing interest rates, competitive factors and the
ability of the Company to continue to implement its business and acquisition
strategies. In light of these uncertainties, there can be no assurance that the
forward-looking information contained herein will in fact transpire.
ITEM 1. BUSINESS
General
Watsco, Inc. (the "Registrant" or the "Company") was incorporated in 1956 and is
the largest distributor of air conditioning, heating, and refrigeration
equipment and related parts and supplies ("HVAC") in the United States. The
Company's revenue has increased from $80 million in 1989 to over $1.3 billion in
2000. The Company's distribution network operates from 300 locations in 30
states. The Company also owns Dunhill Staffing Systems, Inc. ("Dunhill"), a
national temporary staffing and permanent employment services business, which
represents 5% of the Company's total revenue.
The Company's principal executive offices are located at 2665 South Bayshore
Drive, Suite 901, Coconut Grove, Florida 33133, and its telephone number is
(305) 714-4100. The Company's corporate website is www.watsco.com, and e-mail
may be sent to the Company at mweber@watsco.com.
Residential Central Air Conditioning, Heating and Refrigeration Industry
According to the Air Conditioning and Refrigeration Institute ("ARI"), the
market for residential central air conditioning, heating and refrigeration
equipment and related parts and supplies in the U.S. is approximately $20
billion with unitary equipment shipments having grown at an annual rate of 6%
since 1990. Residential central air conditioners are manufactured primarily by
seven major companies that together account for approximately 90% of all units
shipped in the U.S. each year. These companies are: Carrier Corporation
("Carrier"), a subsidiary of United Technologies Corporation, Goodman
Manufacturing Corporation, Rheem Manufacturing Company ("Rheem"), American
Standard Companies Inc. ("American Standard"), York International Corporation
("York"), Lennox International, Inc. and Nordyne Corporation ("Nordyne"), a
subsidiary of Nortek Corporation. These manufacturers distribute their products
through a combination of factory-owned and independent distributors who, in
turn, supply the equipment and related parts and supplies to contractors and
dealers nationwide that sell to and install the products for the consumer.
Residential central air conditioning and heating equipment is sold to both the
replacement and the homebuilding (including manufactured housing) markets. The
replacement market has increased substantially in size and importance over the
past ten years as a result of the aging of the installed base of residential
central air conditioners, the introduction of new energy efficient models and
the upgrading of existing homes to central air conditioning. According to
industry data, over 120 million central air conditioning units and warm air gas
furnaces have been installed in the United States in the past 20 years. Many
units installed from the mid-1970s to the mid-1980s have reached the end of
their useful lives, thus providing a growing and substantial replacement market.
The mechanical life of this equipment varies by region due to usage and is
estimated to range from 8 to 20 years.
The Company also sells products to the refrigeration market. Such products
include condensing units, compressors, evaporators, valves, walk-in coolers and
ice machines for industrial and commercial applications. The Company distributes
products manufactured by Copeland Compressor Corporation, a subsidiary of
Emerson Electric Co., Tecumseh Products Company, and The Manitowoc Company, Inc.
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Business Strategy
The Company's business strategy includes five primary concepts: (i) implement
programs to build market share in existing markets, (ii) complete strategic
acquisitions to expand in existing markets or to extend the Company's geographic
reach into new markets, (iii) leverage the Company's existing infrastructure by
obtaining new or expanded territories from the grant of distribution rights by
manufacturers, (iv) over a long-term horizon, implement an e-commerce strategy
to improve the level and efficiency of service to existing customers and (v)
implement initiatives to streamline operations and reduce the cost structures of
acquired businesses.
STRATEGY IN EXISTING MARKETS The Company's strategy for growth in existing
markets focuses on satisfying the needs of the higher growth, higher margin
replacement market, where customers generally demand immediate, convenient and
reliable service. In response to this need, the Company's focus is to (i) offer
expansive product lines, including all equipment, parts and supplies necessary
to install or repair a central air conditioner, furnace or refrigeration system,
(ii) maintain multiple warehouse locations in a single metropolitan market for
increased customer convenience, (iii) maintain well-stocked inventories to
ensure that customer orders are filled in a timely manner, (iv) provide a high
degree of technical expertise at the point of sale and (v) develop e-commerce
initiatives to further enhance customer service capabilities. The Company
believes these concepts provide a competitive advantage over smaller,
lesser-capitalized competitors who are unable to commit resources to open
additional locations, develop e-commerce business solutions, provide the same
variety of products as the Company, maintain the same inventory levels or
attract the wide range of expertise that is required to support a diverse
product offering. The Company also believes it has a competitive advantage over
factory-owned distributors who typically do not maintain extensive inventories
of parts and supplies and whose limited number of warehouse locations make it
difficult to meet the time-sensitive demands of the replacement market.
The Company also sells to the homebuilding and manufactured housing markets. The
Company believes that its reputation for reliable, high quality service and its
relationships with contractors, who generally serve both the replacement and new
construction markets, allow it to compete effectively in these markets.
ACQUISITION STRATEGY The Company's acquisition strategy is focused on acquiring
businesses that complement the Company's presence in existing markets or
establish a presence in new markets. Since 1989, the Company has acquired 42
distributors of air conditioning, heating and refrigeration products, 13 of
which operate as primary operating subsidiaries of the Company. The other
smaller distributors acquired have been integrated into the Company's primary
operating subsidiaries.
DISTRIBUTION RIGHTS The Company actively seeks new or expanded territories of
distribution from the major equipment manufacturers. During 2000 and 1999, five
of the leading equipment manufacturers granted the Company rights to distribute
their residential and light commercial equipment in key U.S. markets.
OPERATING PHILOSOPHY The Company's operating subsidiaries operate in a manner
that recognizes the long-term relationships established between the distributors
and their customers. The Company preserves the identity of acquired businesses
by retaining their management and sales organizations, maintaining the product
brand name offerings previously distributed by them and
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selectively expanding complementary product offerings. The Company believes this
strategy builds on the value of the acquired operations by creating additional
sales opportunities.
The Company maintains a highly specialized functional support staff at its
corporate headquarters to support the individual operating subsidiaries'
strategies for growth in their representative markets. Such functional support
includes specialists in finance, information technology, accounting, human
resources, product procurement, treasury and working capital management, tax
planning and risk management. The Company targets certain general and
administrative expenses for cost savings initiatives that leverage the Company's
overall volume and improve operating efficiencies.
In line with this operating philosophy, the Company's subsidiaries initiated
restructuring initiatives during 2000 to streamline operations by eliminating
certain underperforming locations, reducing market overlap, disposing of
inventory related to discontinued product lines and eliminating other
nonproductive SKUs. As such, the Company closed 25 branches in 2000 and will
close 7 additional branches in 2001. For additional information see Form 8-K
filed with the Securities Exchange Commission on January 22, 2001.
SUMMARY The following table summarizes the number of distribution locations and
states represented at December 31 for each of the last ten years and the
Company's consolidated revenue for each year:
States
Locations Represented Revenue
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($'s in millions)
1991 31 5 $ 157
1992 32 5 172
1993 47 6 209
1994 50 7 260
1995 69 10 308
1996 101 15 400
1997 268 22 680
1998 308 23 1,062
1999 315 30 1,246
2000 300 30 1,307
INTERNET E-COMMERCE STRATEGY The Company began implementation of its e-commerce
strategy in late 1999 which includes the following initiatives: (i) enabling
connectivity by customers to the Company's operating subsidiaries operating
software and (ii) a web site, ACDoctor.com, which provides homeowners,
businesses and HVAC contractors useful information and a variety of services.
The first initiative, being implemented by the Company's subsidiaries, allows
customers to access the Company's systems on-line 24 hours a day, 7 days a week
to search for desired products, verify inventory availability, obtain pricing,
place orders, check order status, schedule pickup or delivery times and make
payments.
The second initiative, ACDoctor.com, provides homeowners, businesses and HVAC
contractors useful information in areas that broaden the consumer's product
knowledge. The site highlights new products and allows homeowners and businesses
to locate, select and hire a licensed contractor. ACDoctor.com provides a wide
variety of B2B value-added services to contractor customers in an exclusive
"members-only" area. The primary functionality of the site provides members with
leads from consumers seeking service for their air conditioning and heating
systems. As part of their membership subscription, contractors also get their
own customized website, which is linked to consumer inquiries for contractor
services.
DESCRIPTION OF BUSINESS
Distribution Operations
PRODUCTS The Company sells an expansive line of products and maintains
sufficient inventory levels to meet its customers' immediate needs. The Company
seeks to provide every product a contractor would generally require when
installing or repairing a central air conditioner, furnace or refrigeration
system. The products distributed by the Company in its markets consist of: (i)
equipment, including residential central air conditioners ranging from 1-1/2 to
5 tons*, light commercial air conditioners ranging up to 20 tons, gas, electric
and oil furnaces ranging from 50,000 to 150,000 BTUs, commercial air
conditioning and heating equipment and systems ranging from 20 to 400 tons, and
other specialized equipment; (ii) parts, including replacement compressors,
evaporator coils, thermostats, motors and other component parts; and (iii)
supplies, including insulation material, refrigerants, ductwork, grills,
registers, sheet metal, tools, copper tubing, concrete pads, tape, adhesives and
other ancillary supplies.
Sales of air conditioning and heating equipment accounted for approximately 49%
of revenue for 2000. Sales of parts and supplies (currently representing over
1,500 different vendors) comprised the remaining revenue.
DISTRIBUTION AND SALES The Company currently operates from 300 locations, most
of which are located in regions that the Company believes have favorable
demographic trends. The Company maintains well-stocked inventories at each
warehouse location to meet the immediate needs of its customers. This is
accomplished by transporting inventory between locations daily and either
directly delivering products to customers with the Company's fleet of 816 trucks
or making the products available for pick-up at the location nearest to the
customer. The Company has over 400 commissioned salespeople with an average of
more than 10 years of experience in the air conditioning, heating and
refrigeration distribution industry.
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* The cooling capacity of air conditioning units is measured in tons. One
ton of cooling capacity is equivalent to 12,000 BTUs and is generally adequate
to air condition approximately 500 square feet of residential space.
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MARKETS The Company's network serves 30 states and Puerto Rico from 300
locations. The Company's primary markets include (in order of the number of
locations in the state): Florida, Texas, Georgia, California, South Carolina,
North Carolina, Alabama, Tennessee, Arizona, Missouri and Massachusetts. The
Company also serves Nevada, Kansas, Arkansas, Nebraska, Mississippi, Virginia,
Oklahoma, Louisiana, Kentucky, North Dakota, South Dakota, Iowa, New Hampshire,
Connecticut, Maine, Maryland, Vermont, Rhode Island and New York. The Company
also distributes products on an export basis to portions of Latin America and
the Caribbean Basin.
CUSTOMERS AND CUSTOMER SERVICE The Company sells to contractors and dealers who
service the new construction and replacement markets for residential and light
commercial central air conditioning, heating and refrigeration systems. The
Company currently serves over 35,000 customers, with no single customer in 2000
accounting for more than 1% of consolidated revenue. The Company focuses on
providing products where and when the customer needs them, technical support by
phone or on site as required and quick and efficient service at the locations.
The Company also provides increased customer convenience through e-commerce,
which allows customers to access the Company's systems on-line 24 hours a day, 7
days a week to search for desired products, verify inventory availability,
obtain pricing, place orders, check order status, schedule pickup or delivery
times and make payments. Management believes that the Company successfully
competes with other distributors primarily on the basis of its experienced sales
organization, strong service support, high quality reputation and broad product
lines.
KEY EQUIPMENT SUPPLIERS The Company maintains significant relationships with
Carrier, Rheem, American Standard, York and Nordyne, each a leading manufacturer
of residential central air conditioning and heating equipment in the United
States. Each manufacturer has a well-established reputation of producing
high-quality, competitively priced products. The Company believes the
manufacturers' current product offerings, quality, serviceability and brand-name
recognition allow the Company to operate favorably against its competitors. To
maintain brand-name recognition, the manufacturers provide national advertising
and participate with the Company in cooperative advertising programs and
promotional incentives that are targeted to both contractors and homeowners. The
Company estimates the replacement market currently accounts for approximately
two-thirds of industry sales in the United States and expects this percentage to
increase as units installed in the 1970s and 1980s wear out and get replaced or
updated to more energy-efficient models.
The Company made approximately 46% of its total 2000 purchases from five key
equipment suppliers. A significant interruption in the delivery of these
products would impair the Company's ability to continue to maintain its current
inventory levels and could adversely affect the Company's business. The
Company's future results of operations are also materially dependent upon the
continued market acceptance of these manufacturers' products and their ability
to continue to manufacture products that comply with laws relating to
environmental and efficiency standards. However, the Company believes that its
sales of other complementary equipment products and continued emphasis to expand
the sale of parts and supplies are mitigating factors against such risks.
DISTRIBUTION AGREEMENTS The Company has distribution agreements with each of its
key equipment suppliers, either on an exclusive or non-exclusive basis, for
terms generally ranging from one to ten years. Certain of the distribution
agreements contain certain provisions that restrict or limit the sale of
competitive products in the markets served. Other than the markets where such
restrictions and limitations may apply, the Company may distribute other
manufacturers' lines of air conditioning or heating equipment.
Staffing Service Business
Dunhill, founded in 1952, is one of the nation's best-known staffing service
networks. Through franchised, licensed and company-owned offices in 27 states
and Canada, Dunhill provides permanent placement and temporary staffing services
to businesses (including the Company's operating subsidiaries), professional and
service organizations, government agencies, health care providers and other
employers. Dunhill's operations primarily consist of 25 company-owned and 13
licensed temporary staffing offices, as well as 80 franchised permanent
placement offices and 7 franchised temporary staffing offices. Dunhill's
franchisees operate their businesses autonomously within the framework of
Dunhill's policies and standards and recruit, employ and pay their own
employees, including temporary employees. Dunhill's permanent placement division
recruits primarily middle-management, sales, technical and administrative and
support personnel for permanent employment in a wide variety of industries and
positions.
6
Employees
The Company employed over 2,900 persons as of December 31, 2000. The Company
believes that its relations with these employees are good.
Order Backlog
Order backlog is not a material aspect of the Company's business and no material
portion of the Company's business is subject to government contracts.
Government Regulations and Environmental Matters
The Company's operations are subject to federal, state and local laws and
regulations relating to the generation, storage, handling, emission,
transportation and discharge of materials into the environment. These include
laws and regulations implementing the Clean Air Act, relating to minimum energy
efficiency standards of HVAC systems and the production, servicing and disposal
of certain ozone-depleting refrigerants used in such systems, including those
established at the Montreal Protocol in 1992 concerning the phase-out of
CFC-based refrigerants. Management believes that the Company is in substantial
compliance with all applicable federal, state and local provisions relating to
the protection of the environment. The Company is also subject to regulations
concerning the transport of hazardous materials, including regulations adopted
pursuant to the Motor Carrier Safety Act of 1990.
BUSINESS RISK FACTORS
SUPPLIER CONCENTRATION The Company has distribution agreements with five key
equipment suppliers, either on an exclusive or non-exclusive basis, for terms
generally ranging from one to ten years. Certain of the distribution agreements
contain certain provisions that restrict or limit the sale of competitive
products in the markets served. Other than the markets where such restrictions
and limitations may apply, the Company may distribute other manufacturers' lines
of air conditioning or heating equipment. Purchases from these five suppliers
comprised 46% of all purchases made in 2000. The Company's largest supplier
accounted for 16% of all purchases made in 2000. Any significant interruption by
the manufacturers or a termination of a distribution agreement could temporarily
disrupt the operations of certain subsidiaries. The Company's future results of
operations are also materially dependent upon the continued market acceptance of
these manufacturers' products and their ability to continue to manufacture
products that comply with laws relating to environmental and efficiency
standards. The Company believes that its sales of other complementary equipment
products and continued emphasis to expand sales of parts and supplies are
mitigating factors against such risks.
COMPETITION All of the Company's businesses operate in highly competitive
environments. The Company's distribution business competes with a number of
distributors and also with several air conditioning and heating equipment
manufacturers that distribute a significant portion of their products through
their own distribution organizations in certain markets. Competition within any
given geographic market is based upon product availability, customer service,
price and quality. Competitive pressures or other factors could cause the
Company's products or services to lose market acceptance or result in
significant price erosion, all of which would have a material adverse effect on
the Company's profitability.
SEASONALITY Sales of residential central air conditioners, heating equipment and
parts and supplies distributed by the Company have historically been seasonal.
Furthermore, the Company's results of operations can be impacted favorably or
unfavorably based on the severity or mildness of weather patterns during summer
or winter selling seasons. Demand related to the residential central air
conditioning replacement market is highest in the second and third quarters with
demand for heating equipment usually highest in the fourth quarter. Demand
related to the new construction sectors throughout most of the Sunbelt markets
is fairly even during the year except for dependence on housing completions and
related weather and economic conditions.
ITEM 2. PROPERTIES
The Company operates 300 locations in the U.S. having approximately 5.4 million
square feet of space, of which approximately 5.0 million square feet is leased.
The Company also leases approximately .5 million square feet of space for
additional storage and offices. The Company believes that its facilities are
well maintained and adequate to meet its needs.
7
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in litigation incidental to the
operation of the Company's business. The Company vigorously defends all matters
in which the Company or its subsidiaries are named defendants and, for insurable
losses, maintains significant levels of insurance to protect against adverse
judgments, claims or assessments that may affect the Company. In the opinion of
the Company, although the adequacy of existing insurance coverage or the outcome
of any legal proceedings cannot be predicted with certainty, the ultimate
liability associated with any claims or litigation in which the Company or its
subsidiaries are involved will not materially affect the Company's financial
condition or results of operations.
In September 1999, a lawsuit was filed in the Circuit Court for the First
Judicial District of Jasper County, Mississippi against the Company and a group
of companies now operating as a subsidiary of the Company, Kaufman Supply, Inc.
("Kaufman"), and an employee of Kaufman. The lawsuit pertained to a vehicle
accident involving a Kaufman vehicle and three individuals who sustained
injuries resulting from the accident. In the lawsuit, the plaintiffs alleged
that Kaufman and its employee were liable for damages resulting from their
injuries and further alleged that Kaufman and its employee were grossly
negligent in the operation of the vehicle. Although vigorously defended, the
suit was settled at a settlement conference held by the Circuit Court of Jasper
County, Mississippi in November 2000. The settlement was funded entirely by the
Company's insurance carriers with no financial consequence to the Company or
Kaufman.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of the year ended December 31, 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Page 34 of the Company's 2000 Annual Report contains "Information on Common
Stock", which identifies the market on which the Registrant's common stocks are
being traded and contains the high and low sales prices and dividend information
for the years ended December 31, 2000, 1999 and 1998 and is incorporated herein
by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Page 7 of the Company's 2000 Annual Report contains "Selected Consolidated
Financial Data" and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Pages 8 through 13 of the Company's 2000 Annual Report contain "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and is
incorporated herein by reference.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Page 11 of the Company's 2000 Annual Report contain "Qualitative and
Quantitative Disclosures about Market Risk" and is incorporated herein by
reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 14 through 32 of the Company's 2000 Annual Report contain the 2000 and
1999 Consolidated Balance Sheets and other consolidated financial statements for
the years ended December 31, 2000, 1999 and 1998, together with the report
thereon of Arthur Andersen LLP dated February 5, 2001, and are incorporated
herein by reference.
8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
This part of Form 10-K, which includes Items 10 through 13, is omitted because
the Registrant will file definitive proxy material pursuant to Regulation 14A
not more than 120 days after the close of the Registrant's year end, which proxy
material will include the information required by Items 10 through 13 and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page No. in
Annual Report
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(a) Consolidated Financial Statements, Consolidated Financial Statement
Schedules and Exhibits
(1) Consolidated Financial Statements (incorporated by reference from the
2000 Annual Report of Watsco, Inc.):
Consolidated Statements of Income for the years
ended December 31, 2000, 1999 and 1998 14
Consolidated Balance Sheets as of December 31, 2000 and 1999 15
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2000, 1999 and 1998 16
Consolidated Statements of Cash Flows for the
years ended December 31, 2000, 1999 and 1998 17
Notes to Consolidated Financial Statements 18-31
Report of Independent Certified Public Accountants 32
Selected Quarterly Financial Data (Unaudited) 33
Page No. in
Form 10-K
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(2) Consolidated Financial Statement Schedule:
For the three years ended December 31, 2000:
Report of Independent Certified Public Accountants on Schedule S-1
Schedule II. Valuation and Qualifying Accounts S-2
All other schedules have been omitted since the required information is
not present, or is not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the Consolidated Financial Statements or notes thereto.
(3) Exhibits: The following list of exhibits includes exhibits submitted with
this Form 10-K as filed with the SEC and those incorporated by reference
to other filings.
3.1 Company's Amended and Restated Articles of Incorporation (filed as
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1995 and incorporated herein by
reference).
3.2 Company's Amended Bylaws (filed as Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended January 31,
1985 and incorporated herein by reference).
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4.1 Specimen form of Class B Common Stock Certificate (filed as
Exhibit 4.6 to the Company's Registration Statement on Form S-1
(No. 33-56646) and incorporated herein by reference).
4.2 Specimen form of Common Stock Certificate (filed as Exhibit 4.4 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by reference).
10.1 Amended and Restated Revolving Credit and Reimbursement Agreement
dated August 8, 1997 by and among Watsco, Inc., NationsBank, N.A.
(Agent) and Barnett Bank, N.A., First Union National Bank,
SunTrust Bank (Co-Agents), and the Lenders Party Hereto from Time
to Time (filed as Exhibit 10.18 to the Company's Quarterly Report
on Form 10-Q for the period ended June 30, 1997 and incorporated
herein by reference).
10.2 1983 Executive Stock Option Plan of Watsco, Inc. (filed as Exhibit
10.3 to the Company's Registration Statement on Form S-8
(Registration No. 33-6229) and incorporated herein by reference).
10.3 Key Executive Deferred Compensation Agreement dated January 31,
1983, between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit
10.8 to the Company's Registration Statement on Form S-1 (No.
33-56646) and incorporated herein by reference).
10.4 Watsco, Inc. Amended and Restated 1991 Stock Option Plan (filed as
Exhibit 4.23 to the Company's Registration Statement on Form S-8
(333-82011) and incorporated herein by reference).
10.5 Watsco, Inc. Amended and Restated Profit Sharing Retirement Plan
and Trust Agreement dated October 21, 1994 (filed as Exhibit 10.25
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).
10.6 Employment Agreement and Incentive Plan dated January 31, 1996 by
and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit
10.20 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1996 and incorporated herein by
reference).
10.7 Watsco, Inc. 1996 Qualified Employee Stock Purchase Plan (filed as
Exhibit 4.3 to the Company's Registration Statement on Form S-8
(333-80341) and incorporated herein by reference).
10.8 Amendment Agreement No. 1 to Amended and Restated Revolving Credit
and Reimbursement Agreement dated February 20, 1998 by and among
Watsco, Inc., the Lenders hereto and NationsBank, N.A. (filed as
Exhibit 10.16 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by
reference).
10.9 Amendment Agreement No. 2 to Amended and Restated Revolving Credit
and Reimbursement Agreement dated June 30, 1999 by and among
Watsco, Inc., the Lenders and NationsBank, N.A., as Agent (filed
as Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1999 and incorporated
herein by reference).
10.10 Amendment Agreement No. 3 to Amended and Restated Revolving Credit
and Reimbursement Agreement dated December 30, 1999 by and among
Watsco, Inc., the Lenders and NationsBank, N.A., as Agent. (filed
as Exhibit 10.11 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 and incorporated herein by
reference).
10.11 Amendment Agreement No. 4 to Amended and Restated Revolving Credit
and Reimbursement Agreement dated March 14, 2000 by and among
Watsco, Inc., the Lenders and NationsBank, N.A., as Agent. (filed
as Exhibit 10.12 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 and incorporated herein by
reference).
10.12 Watsco, Inc. $125,000,000 Private Shelf Agreement as of January
31, 2000 by and among, Watsco, Inc. and the Prudential Insurance
Company of America. (filed as Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999
and incorporated herein by reference).
10
10.13 First Amendment dated January 1, 2001 to Employment Agreement and
Incentive Plan dated January 31, 1996 by and between Watsco, Inc.
and Albert H. Nahmad. #
10.14 Exhibit A-1 dated January 1, 2001 to Employment Agreement and
Incentive Plan dated January 31, 1996 by and between Watsco, Inc.
and Albert H. Nahmad. #
13. 2000 Annual Report to Shareholders (with the exception of the
information incorporated by reference into Items 1, 5, 6, 7 and 8
of this Form 10-K, the 2000 Annual Report to Shareholders is
provided solely for the information of the Securities and Exchange
Commission and is not deemed "filed" as part of this Form 10-K). #
21. Subsidiaries of the Registrant. #
23. Consent of Independent Certified Public Accountants. #
Note to exhibits:
# Submitted electronically herewith.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the
fourth quarter of 2000.
11
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WATSCO, INC.
April 2, 2001 By: /s/ Albert H. Nahmad
---------------------------------
Albert H. Nahmad, President
April 2, 2001 By: /s/ Barry S. Logan
---------------------------------
Barry S. Logan, Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Albert H. Nahmad Chairman of the Board and April 2, 2001
-------------------- President (principal
Albert H. Nahmad executive officer)
/s/ Barry S. Logan Vice President and April 2, 2001
-------------------- Secretary (principal
Barry S. Logan accounting officer)
/s/ Cesar L. Alvarez Director April 2, 2001
--------------------
Cesar L. Alvarez
/s/ David B. Fleeman Director April 2, 2001
--------------------
David B. Fleeman
/s/ J. Ira Harris Director April 2, 2001
--------------------
J. Ira Harris
/s/ Paul F. Manley Director April 2, 2001
--------------------
Paul F. Manley
/s/ Bob L. Moss Director April 2, 2001
--------------------
Bob L. Moss
/s/ Roberto Motta Director April 2, 2001
--------------------
Roberto Motta
/s/ Charles Walker Director April 2, 2001
--------------------
Charles Walker
12
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
To Watsco, Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements included in Watsco, Inc.'s
Annual Report to Shareholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated February 5, 2001 (except with respect to
the matter discussed in Note 14, as to which the date is February 7, 2001). Our
audits were made for the purpose of forming an opinion on those statements taken
as a whole. The accompanying Schedule II is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 5, 2001.
S-1
WATSCO, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2000, 1999 and 1998
(In thousands)
Allowance for doubtful accounts:
BALANCE, December 31, 1997 $ 5,786
Allowances from acquisitions 377
Additions charged to costs and expenses 3,567
Write-offs, net (3,014)
-------
BALANCE, December 31, 1998 6,716
Allowances from acquisitions 90
Additions charged to costs and expenses 3,389
Write-offs, net (4,631)
-------
BALANCE, December 31, 1999 5,564
Additions charged to costs and expenses 5,386
Write-offs, net (3,980)
-------
BALANCE, December 31, 2000 $ 6,970
=======
Restructuring liability or valuation reserves(1):
BALANCE, December 31, 1999 $ -
Additions charged to costs and expenses 8,481
Write-down of assets to net realizable value (1,826)
Cash payments (1,500)
-------
BALANCE, December 31, 2000 $ 5,155
=======
(1) At December 31, 2000, valuation reserves of $3,484 and $30, respectively,
are netted against related asset balances -inventory and accounts
receivable, net and the $1,641 restructuring liability is included in
accrued liabilities in the consolidated balance sheets.
S-2
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.13 First Amendment dated January 1, 2001 to Employment Agreement
and Incentive Plan dated January 31, 1996 by and between
Watsco, Inc. and Albert H. Nahmad.
10.14 Exhibit A-1 dated January 1, 2001 to Employment Agreement and
Incentive Plan dated January 31, 1996 by and between Watsco,
Inc. and Albert H. Nahmad.
13. 2000 Annual Report to Shareholders (with the exception of the
information incorporated by reference into Items 1, 5, 6, 7
and 8 of this Form 10-K, the 2000 Annual Report to
Shareholders is provided solely for the information of the
Securities and Exchange Commission and is not deemed "filed"
as part of this Form 10-K).
21. Subsidiaries of the Registrant.
23. Consent of Independent Certified Public Accountants.
EXHIBIT 10.13
FIRST AMENDMENT
TO
EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement is made and entered into
effective as of January 1, 2001, by and between WATSCO, INC., a Florida
corporation (hereinafter called the "Company"), and ALBERT H. NAHMAD
(hereinafter called the "Employee").
RECITALS
WHEREAS, the Company and the Employee entered into an Employment
Agreement effective as of January 31, 1996 (the "Employment Agreement") pursuant
to which the Employee renders certain services to the Company; and
WHEREAS, the Compensation Committee of the Company's Board of Directors
has increased the Base Salary payable by the Company to the Employee from
$480,000 to $750,000, and provided an additional fringe benefit, effective as of
January 1, 2001; and
WHEREAS, the Company and the Employee now desire to amend the
Employment Agreement to reflect that increase in the Employee's Base
Compensation and additional fringe benefit.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth in this First Amendment, and other good and valuable consideration,
the parties to this First Amendment agree as follows:
1. All capitalized terms in this First Amendment shall have the same
meaning as in the Employment Agreement, unless otherwise specified.
2. The first sentence of Section 4 of the Employment Agreement is
hereby amended to read as follows:
"Effective as of January 1, 2001, the Company agrees to pay to
Employee and Employee agrees to accept from the Company a
salary at the annual rate of not less than Seven Hundred Fifty
Thousand ($750,000) Dollars, payable in bi-weekly or monthly
installments."
3. Section 7 of the Employment Agreement is hereby amended by the
insertion a sentence at the end thereof to read as follows:
"The Company shall supply to the Employee the use of the
Company's airplane for up to forty (40) hours per calendar
year and shall pay all fuel and operational costs incident
thereto. The value of the Employee's usage of the Company's
airplane, as reasonably determined by the Compensation
Committee shall be treated as compensation for tax purposes,
subject to applicable withholding taxes."
4. The Employment Agreement is hereby amended by replacing "Exhibit A-1
- -- 2000 Performance Goals and Performance Based Compensation" with the attached
"Exhibit A-1 -- 2001 Performance Goals and Performance Based Compensation"
thereto.
5. All other terms and conditions of the Employment Agreement shall
remain the same.
IN WITNESS WHEREOF, the parties have caused this First Amendment to be
duly executed effective as of the day and year first above written.
COMPANY:
WATSCO, INC.
By: /s/ Barry S. Logan
-------------------------------
Barry S. Logan, CFO
EMPLOYEE:
/s/ Albert H. Nahmad
-----------------------------------
ALBERT H. NAHMAD
-2-
EXHIBIT 10.14
EXHIBIT A-1
2001 Performance Goals and Performance Based Compensation
I. Formula
Performance
Based
A. Earnings Per Share Compensation Formula
------------------ --------------------
For each $.01 increase................................................... $65,250
B. Increase in Common Stock Price
------------------------------
(i) If the price of a share of Common Stock on 12/31/01 does not
exceed $11.52............................................................ $0
(ii) If the price of a share of Common Stock on 12/31/01 exceeds
$11.52 but does not equal or exceed $15.00, for each $0.01 increase in
per share price of a share of Common Stock above $11.52.................. $1,200
(iii) If the price of a share of Common Stock on 12/31/01 equals or
exceeds $15.00, for each $0.01 increase in per share price of a share
of Common Stock above $11.52............................................. $1,600
II. Method of Payment
A. Cash. The Performance Based Compensation determined for 2001
under the formula set forth in Section I above shall be paid
in cash if and to the extent such Compensation does not exceed
$1,250,000.
B. Restricted Stock. If the Performance Based Compensation
determined for 2001 under the formula set forth in Section I
above exceeds $1,250,000 (such excess amount being referred to
as the "Additional Amount"), the Executive shall be granted a
number of shares of restricted Class B Common Stock of the
Company (the "Shares") equal to the amount determined by
dividing (i) two times the Additional Amount, by (ii) the
closing price for the Class B Common Stock of the Company on
the American Stock Exchange as of the close of trading on
December 31, 2001. The value of any fractional shares shall be
paid in cash. The restrictions on the Shares shall lapse on
the first to occur of (i) October 15, 2015, (ii) termination
of the Executive's employment with the Company by reason of
Executive's disability or death, (iii) the Executive's
termination of employment with the Company for Good Reason;
(iv) the Company's termination of Executive's employment
without Cause, or (v) the occurrence of a Change in Control of
the Company ("Good Reason", "Cause", and "Change in Control"
to be defined in a manner consistent with the most recent
grant of Restricted Stock by the Company to the Executive).
Dated: Effective as of January 1, 2001 /s/ Paul F. Manley
--------------------------
Paul Manley, Chairman
Compensation Committee
Acknowledged and Accepted:
/s/ Albert H. Nahmad
--------------------------
Albert H. Nahmad
EXHIBIT 13
WATSCO, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended December 31,
(In thousands, except per share data) 2000(2) 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
OPERATIONS
Revenue $1,306,642 $1,246,272 $1,062,265 $679,931 $399,970
Gross profit 303,256 291,838 241,924 152,788 87,317
Earnings before depreciation, amortization,
other expense and income taxes 58,075 70,679 63,047 40,090 25,382
Earnings before interest and income taxes 45,815 59,439 54,066 34,793 22,586
Income from continuing operations 19,114 29,481 26,972 19,368 12,045
===================================================================================================================
SHARE DATA (1)
Diluted earnings per share
from continuing operations $0.69 $0.99 $0.94 $0.72 $0.56
Cash dividends declared per share:
Common Stock $0.10 $0.10 $0.10 $0.09 $0.09
Class B Common Stock 0.10 0.10 0.10 0.09 0.09
Weighted average shares outstanding
for diluted earnings per share 27,793 29,741 28,690 26,780 21,288
Common stock outstanding 26,497 27,907 28,032 26,144 21,048
===================================================================================================================
BALANCE SHEET INFORMATION
Total assets $563,470 $588,180 $535,323 $429,070 $200,297
Long-term obligations 140,878 159,415 172,301 137,276 50,424
Shareholders' equity 304,164 301,716 274,568 225,598 119,929
===================================================================================================================
(1) Share data includes the effect of a three-for-two stock split
effected on August 14, 1998.
(2) During the 4th quarter of 2000, the Company recorded restructuring
and other non-cash charges of $13,169 ($8,270 or $0.30 per share
on an after-tax basis), as more fully described in Note 9 to
consolidated financial statements.
1
WATSCO, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Watsco, Inc. and its subsidiaries (collectively, the "Company" or "Watsco") is
the largest distributor of air conditioning, heating and refrigeration equipment
and related parts and supplies in the United States. The Company operates from
300 locations in 30 states.
The following table presents the Company's consolidated financial results from
continuing operations for the three years ended December 31, 2000, 1999 and
1998, expressed as a percentage of total revenue:
2000 1999 1998
- ----------------------------------------------------------------------------------------
Revenue 100.0% 100.0% 100.0%
Cost of sales 76.5 76.6 77.2
Cost of sales - restructuring .3 - -
- ----------------------------------------------------------------------------------------
Gross profit 23.2 23.4 22.8
Selling, general and
administrative expenses 19.4 18.6 17.7
Restructuring costs .3 - -
- ----------------------------------------------------------------------------------------
Operating income 3.5 4.8 5.1
Interest expense (1.0) (1.0) (1.1)
Investment write-down (.1) - -
Income taxes (.9) (1.4) (1.5)
- ----------------------------------------------------------------------------------------
Income from continuing operations 1.5% 2.4% 2.5%
========================================================================================
The following narratives include the results of operations acquired during 2000,
1999 and 1998. The acquisitions were accounted for under the purchase method of
accounting and, accordingly, their results of operations have been included in
the consolidated results of the Company beginning on their respective dates of
acquisition. Data presented in the following narratives referring to "same-store
basis" exclude the effects of operations acquired or locations opened and closed
during the prior twelve months.
Comparison of Year Ended December 31, 2000 with Year Ended December 31, 1999
Revenue in 2000 increased $60.4 million, or 5%, over 1999. On a same-store
basis, revenue increased $43.9 million, or 4% in 2000 and includes 6% same store
sales growth in the Company's core HVAC business which was offset by lower sales
volume to the manufactured housing market. The Company's revenue growth in its
core HVAC business on a same-store basis for 2000 reflects gains in market share
based on data published by the Air Conditioning and Refrigeration Institute,
which indicates 1% industry growth for the year. The Company's sales to the
manufactured housing market declined 22% primarily as a result of a tightened
financing market for home dealers and consumers.
Gross profit in 2000 increased $11.4 million, or 3.9%, over 1999, primarily as a
result of the aforementioned revenue increases. Gross profit margin decreased to
23.2% in 2000 from 23.4% in 1999, primarily as a result of restructuring charges
relating to discontinued product lines and to the elimination of other
unproductive SKUs. Excluding the aforementioned restructuring charges, gross
profit margin increased from 23.4% to 23.5%. Increases in gross profit margin
are primarily attributable to enhanced focus on margins in certain markets and
contribution from expanded vendor programs. On a same-store basis in the
Company's core HVAC segment and excluding restructuring charges incurred in
2000, gross profit increased $16.1 million, or 6.6%.
Selling, general and administrative expenses in 2000 increased $20.8 million, or
9%, over 1999, primarily due to the full-year impact of selling, general and
administrative expenses of companies acquired in late 1999 and increased sales
activity. Selling, general and administrative expenses, excluding restructuring
charges of $4.2 million, as a percent of revenue increased to 19.4% in 2000 from
18.6% in 1999. Such increase was primarily due to the inability to leverage the
fixed cost structures against lower than expected sales demand, operating
inefficiencies caused by lower business volume in the manufactured housing
operations and additional costs incurred to support expanded product lines. On a
same-store basis and excluding restructuring charges, the Company's core HVAC
segment selling, general and administrative expenses increased $13.1 million, or
7%, and selling, general and administrative expenses as a percent of revenue
increased to 18.1% from 18.0% in 1999.
2
An investment write-down of $2.2 million was recorded in 2000, representing an
impaired investment in one of the Company's primary competitors.
Interest expense, net in 2000 increased $.6 million, or 4%, from 1999 primarily
due to 8% lower average daily borrowings during the year, offset by an increase
in the effective interest rate from 6.6% to 7.2%.
The effective tax rate was 37.2% and 37.0% in 2000 and 1999, respectively.
Year 2000 Restructuring and Non-Cash Charges
During the fourth quarter of 2000, the Company's Board of Directors approved
plans adopted by certain business units of the Company to improve operating
efficiency and profitability. These initiatives eliminate certain
underperforming locations, reduce market overlap, dispose of inventory related
to discontinued product lines and eliminate other nonproductive SKUs. In
connection with these restructuring activities, 25 locations closed in 2000 and
7 locations will close in 2001. The Company expects to complete these
restructuring activities by December 31, 2001.
In accordance with Emerging Issues Task Force ("EITF") Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)," SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and SEC Staff Accounting Bulletin No. 100, "Restructuring &
Impairment Charges," the Company recorded restructuring charges of $8.5 million
($5.3 million after-tax) during the fourth quarter of 2000 ($0.19 per share on a
diluted basis). A portion of this restructuring charge ($4.3 million on a
pre-tax basis) relates to the valuation of inventory to be disposed of and has
been classified in cost of sales.
Also in the fourth quarter of 2000, the Company recorded non-cash charges of $.8
million related to additional inventory reserves, $1.7 million related to
accounts receivable valuation reserves in its manufactured housing subsidiaries
and $2.2 million related to the write-down of an impaired investment in one of
the Company's primary competitors.
On an after-tax basis, restructuring and other non-cash charges were $8.3
million or $0.30 per share. The Company expects that the 2000 and 2001
restructuring activities will result in a simplified operating structure that
should enhance future profitability. See Note 9 to Consolidated Financial
Statements for further information.
Comparison of Year Ended December 31, 1999 with Year Ended December 31, 1998
Revenue in 1999 increased $184.0 million, or 17%, over 1998. On a same-store
basis, revenue increased $23.3 million, or 2%. The Company's revenue growth rate
on a same-store basis for 1999 was less than historical growth rates, primarily
due to milder weather in certain of the Company's large markets, which resulted
in lower demand for replacement air conditioning. The Company's revenue was also
impacted by lower sales to the manufactured housing market.
Gross profit in 1999 increased $49.9 million, or 21%, over 1998, primarily as a
result of the aforementioned revenue increases. Gross profit margin increased to
23.4% in 1999 from 22.8% in 1998, primarily as a result of the gross margin
contribution of companies acquired that operate at higher margins than the
Company's historical gross margins. On a same-store basis, gross profit
increased $7.7 million, or 3%, slightly higher than the same-store revenue
increase. Same-store gross profit margin increased to 23.0% in 1999 from 22.8%
in 1998 due to improved pricing strategies and cost reductions obtained from
consolidated vendor programs.
Selling, general and administrative expenses in 1999 increased $44.5 million, or
24%, over 1998, due to added selling and delivery costs associated with the
aforementioned revenue increase. Selling, general and administrative expenses as
a percent of revenue increased to 18.6% in 1999 from 17.7% in 1998, primarily
due to the higher selling and delivery costs of acquired companies. On a
same-store basis, selling, general and administrative expenses increased $11.1
million, or 6%, and selling, general and administrative expenses as a percent of
revenue increased to 18.3% in 1999 from 17.7% in 1998. Such increase was
primarily due to the inability to leverage selling, general and administrative
expenses against lower than anticipated sales volumes.
Interest expense, net in 1999 increased $1.4 million, or 12%, from 1998
primarily due to higher average borrowings.
The effective tax rate was 37.0% in 1999 and 1998.
3
Discontinued Operation
In November 1997, the Company's Board of Directors approved a plan to divest of
its manufacturing operation, Watsco Components, Inc. ("Components"). In May
1998, the Company sold the operating assets of Components at a loss of $1.0
million, net of income taxes of $.6 million. See Note 3 to Consolidated
Financial Statements for further information.
Liquidity and Capital Resources
The Company maintains a bank-syndicated revolving credit agreement that provides
for borrowings of up to $315 million, expiring on August 8, 2002. Borrowings
under the unsecured agreement are used to fund seasonal working capital needs
and for other general corporate purposes, including acquisitions. Borrowings
under the agreement, which totaled $138.0 million at December 31, 2000, bear
interest at primarily London Interbank Offered Rate ("LIBOR") based rates plus a
spread that is dependent upon the Company's financial performance (LIBOR plus
.6% at December 31, 2000). The revolving credit agreement contains customary
affirmative and negative covenants including certain financial covenants with
respect to the Company's consolidated net worth, interest and debt coverage
ratios and limits capital expenditures and dividends in addition to other
restrictions. The Company was in compliance with all covenants at December 31,
2000.
At December 31, 2000, the Company had various interest rate swap agreements to
manage its net exposure to interest rate changes related to a portion of the
borrowings under the revolving credit agreement. The interest rate swap
agreements effectively convert a portion of the Company's LIBOR-based variable
rate borrowings into fixed rate borrowings. The Company continuously monitors
developments in the capital markets and only enters into swap transactions with
established counterparties having investment grade ratings. See Note 11 to
Consolidated Financial Statements for further information.
The Company's Board of Directors authorized the repurchase, at management's
discretion, of up to 4.5 million shares of the Company's stock in the open
market or via private transactions. Shares repurchased under the program are
accounted for using the cost method and result in a reduction of shareholders'
equity. During 2000, the Company purchased 1.8 million shares at a cost of $17.6
million and, in 1999, 1.3 million shares at a cost of $14.3 million, bringing
the total purchased to 3.1 million shares at a cost of $31.9 million.
Working capital decreased to $278.4 million at December 31, 2000 from $292.3
million at December 31, 1999. This decrease was primarily due to improvements in
working capital management. Inventory turns improved to 4.7 in 2000 from 4.5 in
1999 and accounts receivable days sales outstanding remained at 45.
Net cash provided by operating activities was $49.1 million in 2000 compared to
$41.9 million in 1999, an increase of $7.2 million, primarily due to the
aforementioned improvement in working capital. Net cash provided by operating
activities was $41.9 million in 1999 compared to net cash used in operating
activities of $8.6 million in 1998, an increase of $33.3 million primarily due
to decreased use of cash for operating assets and liabilities and an increase in
income from continuing operations in 1999.
Net cash used in investing activities decreased to $10.1 million in 2000 from
$11.9 million in 1999 primarily as a result of fewer acquisitions during 2000.
Net cash used in investing activities decreased to $11.9 million in 1999 from
$36.3 million in 1998, primarily due to proceeds of $17.6 million from the sale
of marketable securities.
Net cash used in financing activities of $41.7 million in 2000 resulted
primarily from net repayments under the revolving credit agreement and other
debt and purchases of the Company's common stock. Net cash used by financing
activities of $29.8 million in 1999 resulted primarily from net repayments under
the revolving credit agreement and purchases of the Company's common shares. Net
cash provided by financing activities of $27.7 million in 1998 resulted
primarily from net borrowings under the revolving credit agreement.
On January 31, 2000, the Company entered into a $125.0 million private placement
shelf facility. The uncommitted loan facility provides Watsco a source of long
term, fixed-rate financing as a complement to the variable rate borrowings
available under its existing revolving credit facility. The Company did not have
any outstanding debt under this shelf facility at December 31, 2000. On February
7, 2001, the Company issued $30 million Senior Series A Notes bearing 7.07%
interest under the private shelf facility. The Company's notes have an average
life to maturity of 6 years with equal installments of $10 million beginning on
April 9, 2005 until the final maturity on April 9, 2007. Interest is to be paid
on a quarterly basis beginning on April 9, 2001. The Company used
4
the net proceeds from the issuance of the notes for the repayment of a portion
of its outstanding indebtedness under its revolver credit facility.
The Company has adequate availability of capital from operations, its revolving
credit agreement and private placement shelf facility to fund present operations
and anticipated growth, including expansion in its current and targeted market
areas. The Company continually evaluates potential acquisitions and has held
discussions with a number of acquisition candidates; however, the Company
currently has no binding agreement with respect to any acquisition candidates.
Should suitable acquisition opportunities or working capital needs arise that
would require additional financing, the Company believes that its financial
position and earnings history provide a solid base for obtaining additional
financing resources at competitive rates and terms.
Qualitative and Quantitative Disclosures about Market Risk
The Company's primary market risk exposure consists of interest rate risk. The
Company's objective in managing the exposure to interest rate changes is to
limit the impact of interest rate changes on earnings and cash flows and to
lower its overall borrowing costs. To achieve its objectives, the Company uses
interest rate swaps to manage net exposure to interest rate changes to its
borrowings. These swaps are entered into with a group of financial institutions
with investment grade credit ratings, thereby minimizing the risk of credit
loss. All items described are non-trading. See Notes 1 and 11 to Consolidated
Financial Statements for further information.
The table below provides information about the Company's market sensitive
financial instruments and constitutes a "forward-looking statement." The average
interest rates on the variable rate debt and the average receive rate on the
interest rate swaps were derived from implied forward three-month LIBOR curves.
Expected Maturity Date
----------------------
2001 2002
---- ----
Variable rate debt - $315.0
Average interest rates 5.48% 5.48%
Interest rate swaps - $60.0(1)
Average pay rate 6.37% 6.37%
Average receive rate 4.88% 4.88%
(1) At December 31, 2000, the Company's interest rate swap portfolio
consisted of three swaps aggregating a notional value of $60.0 million
and maturity dates ranging from 2002 to 2007.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No. 137,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
Deferral of the Effective Date of FASB Statement SFAS No. 133." In June 2000,
the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an amendment of SFAS No. 133." SFAS No. 133, as
amended, establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 also requires that changes in
derivatives' fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative instrument's gains and losses to offset related results on
the hedged item in the income statement, to the extent effective, and requires
that the Company formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. The Company adopted SFAS No. 133, as
amended, on January 1, 2001. The adoption of this accounting standard did not
have a material impact on the Company's results of operations. Other
comprehensive income was reduced by approximately $0.6 million, net of tax
benefit of $0.4 million, as of January 1, 2001.
New Accounting Standards
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." In June 2000, the SEC issued SAB 101B to defer the effective date
of implementation of SAB 101 until the fourth quarter of 2000. SAB 101 provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. The Company's revenue recognition policies are consistent with SAB
101.
5
In March 2000, the FASB issued FASB Interpretation ("FIN") 44, "Accounting for
Certain Transactions involving Stock Compensation," which clarifies the
application of Accounting Principles Board Opinion No. 25 for certain issues.
The interpretation was effective July 1, 2000, except for the provisions that
relate to modifications that directly or indirectly reduce the exercise price of
an award and the definition of an employee, which were effective after December
15, 1998. The adoption of FIN 44 did not have a material effect on the Company's
consolidated financial statements.
In July 2000, the Emerging Issues Task Force ("EITF") issued 00-10, "Accounting
for Shipping and Handling Fees and Costs." EITF 00-10 became effective in the
fourth quarter of 2000. EITF 00-10 prohibits the netting of shipping and
handling costs against shipping and handling revenues. EITF 00-10 permits
companies to adopt a policy of including shipping and handling costs in cost of
sales or other income statement line items. The adoption of EITF 00-10 did not
have a material effect on the Company's consolidated financial statements.
Shipping and handling costs included in selling, general and administrative
expenses amounted to $2.9 million, $2.4 million and $1.0 million for the years
ended December 31, 2000, 1999 and 1998, respectively.
Safe Harbor Statement
This annual report contains statements which, to the extent they are not
historical fact, constitute "forward-looking statements" under the securities
laws. All forward-looking statements involve risks, uncertainties and other
factors that may cause the actual results, performance or achievements of the
Company to differ materially from those contemplated or projected, forecasted,
estimated, budgeted, expressed or implied by or in such forward-looking
statements. The forward-looking statements in this document are intended to be
subject to the safe harbor protection provided under the securities laws.
For additional information identifying some other important factors which may
affect the Company's operations and markets and could cause actual results to
vary materially from those anticipated in the forward looking statements, see
the Company's Securities and Exchange Commission filings, including but not
limited to, the discussion included in the Business section of the Company's
Form 10-K under the heading "Business Risk Factors."
6
WATSCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
(In thousands, except per share data) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Revenue $1,306,642 $1,246,272 $1,062,265
Cost of sales 999,117 954,434 820,341
Cost of sales - restructuring 4,269 - -
- ----------------------------------------------------------------------------------------------------------
Gross profit 303,256 291,838 241,924
Selling, general and administrative expenses 253,229 232,399 187,858
Restructuring costs 4,212 - -
- ----------------------------------------------------------------------------------------------------------
Operating income 45,815 59,439 54,066
- ----------------------------------------------------------------------------------------------------------
Other expense:
Interest expense (13,211) (12,643) (11,253)
Investment write-down (2,169) - -
- ----------------------------------------------------------------------------------------------------------
Total other expense (15,380) (12,643) (11,253)
- ----------------------------------------------------------------------------------------------------------
Income from continuing operations before
income taxes 30,435 46,796 42,813
Income taxes (11,321) (17,315) (15,841)
- ----------------------------------------------------------------------------------------------------------
Income from continuing operations 19,114 29,481 26,972
Discontinued operation, net of income taxes:
Operating loss - - (800)
Loss on sale - - (981)
- ----------------------------------------------------------------------------------------------------------
Net income $19,114 $29,481 $25,191
==========================================================================================================
Basic earnings per share:
Income from continuing operations $0.72 $1.03 $0.99
Discontinued operation, net of income taxes:
Operating loss - - (0.02)
Loss on sale - - (0.04)
- ----------------------------------------------------------------------------------------------------------
Net income $0.72 $1.03 $0.93
==========================================================================================================
Diluted earnings per share:
Income from continuing operations $0.69 $0.99 $0.94
Discontinued operation, net of income taxes:
Operating loss - - (0.02)
Loss on sale - - (0.03)
- ----------------------------------------------------------------------------------------------------------
Net income $0.69 $0.99 $0.89
==========================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
7
WATSCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(In thousands, except share data) 2000 1999
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,781 $ 7,484
Accounts receivable, net 163,770 167,335
Inventories 205,805 222,853
Other current assets 18,179 17,397
- -------------------------------------------------------------------------------------------------------------------
Total current assets 392,535 415,069
- -------------------------------------------------------------------------------------------------------------------
Property and equipment, net 30,258 31,427
Intangible assets, net 128,656 131,556
Other assets 12,021 10,128
- -------------------------------------------------------------------------------------------------------------------
$563,470 $588,180
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 1,887 $ 5,915
Accounts payable 86,108 89,997
Accrued liabilities 26,099 26,895
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 114,094 122,807
- -------------------------------------------------------------------------------------------------------------------
Long-term obligations:
Borrowings under revolving credit agreement 138,000 155,000
Bank and other debt 2,878 4,415
- -------------------------------------------------------------------------------------------------------------------
Total long-term obligations 140,878 159,415
- -------------------------------------------------------------------------------------------------------------------
Deferred income taxes and other liabilities 4,334 4,242
- -------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 11 and 12)
Shareholders' equity:
Common Stock, $0.50 par value, 40,000,000 shares authorized,
26,435,195 and 26,071,649 shares issued in 2000 and 1999, respectively 13,217 13,036
Class B Common Stock, $0.50 par value, 4,000,000 shares authorized,
3,157,407 and 3,181,628 shares issued in 2000 and 1999, respectively 1,579 1,591
Paid-in capital 204,871 202,106
Unearned compensation related to outstanding restricted stock (6,031) (5,998)
Accumulated other comprehensive income (loss), net of tax 105 (669)
Retained earnings 122,348 105,971
Treasury stock, at cost, 3,095,513 and 1,346,200 shares of common
stock in 2000 and 1999, respectively (31,925) (14,321)
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 304,164 301,716
- -------------------------------------------------------------------------------------------------------------------
$563,470 $588,180
===================================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
8
WATSCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Common Stock Accumulated
and Other
Class B Common Stock Paid-in Unearned Comprehensive Retained Treasury
(In thousands, except share data) Shares Amount Capital Compensation Income (Loss) Earnings Stock Total
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 26,143,922 $13,072 $159,638 $(3,836) - $56,724 - $225,598
Net income 25,191 25,191
Changes in value of available-for-sale
securities, net of income taxes (2,962) (2,962)
--------
Comprehensive income 22,229
--------
Contribution to 401(k) plan 42,805 21 749 770
Issuances from exercise of stock options
and employee stock purchase plan 369,796 185 3,179 3,364
Tax benefit from exercise of stock options 999 999
Issuances for acquisitions 1,397,041 699 23,232 23,931
Issuances of restricted shares of
common stock 127,500 63 2,188 (2,251) -
Forfeitures of restricted shares
of common stock (48,750) (24) (760) 784 -
Amortization of unearned compensation 252 252
Common stock dividends,
$0.10 per share (2,575) (2,575)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 28,032,314 14,016 189,225 (5,051) (2,962) 79,340 - 274,568
Net income 29,481 29,481
Changes in value of available-for-
sale securities, net of income taxes 2,293 2,293
--------
Comprehensive income 31,774
--------
Contribution to 401(k) plan 79,202 40 804 844
Issuances from exercise of stock options
and employee stock purchase plan 206,192 103 1,391 1,494
Tax benefit from exercise of stock options 508 508
Issuances for acquisitions 842,569 421 8,929 9,350
Issuances of restricted shares of
common stock 93,000 47 1,249 (1,296) -
Amortization of unearned compensation 349 349
Common stock dividends,
$0.10 per share (2,850) (2,850)
Acquisition of common stock (1,346,200) (14,321) (14,321)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 27,907,077 14,627 202,106 (5,998) (669) 105,971 (14,321) 301,716
Net income 19,114 19,114
Changes in value of available-for-
sale securities, net of income taxes 774 774
--------
Comprehensive income 19,888
--------
Contribution to 401(k) plan 85,906 43 947 990
Issuances from exercise of stock options
and employee stock purchase plan 171,419 85 1,161 1,246
Tax benefit from exercise of stock options 276 276
Issuances of restricted shares of
common stock 127,000 63 1,144 (1,207) -
Forfeitures of restricted shares of
common stock (45,000) (22) (763) 785 -
Amortization of unearned compensation 389 389
Common stock dividends,
$0.10 per share (2,737) (2,737)
Acquisition of common stock (1,749,313) (17,604) (17,604)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 26,497,089 $14,796 $204,871 $(6,031) $105 $122,348 $(31,925) $304,164
=================================================================================================================================
The accompanying notes to consolidated financial statements are an integral
part of these statements.
9
WATSCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(In thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Income from continuing operations $ 19,114 $ 29,481 $ 26,972
Adjustments to reconcile income from
continuing operations to net cash
provided by operating activities
of continuing operations:
Depreciation and amortization 12,260 11,240 8,981
Provision for doubtful accounts 5,386 3,389 3,567
Restructuring costs 6,981 - -
Investment write-down 2,169 - -
Net investment losses (gains) - (920) 330
Deferred income taxes 1,241 1,120 (320)
Non-cash stock contribution to 40l(k) plan 990 844 770
Tax benefit from exercise of stock options 276 508 999
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (2,362) (12,325) (22,417)
Inventories 12,970 (10,320) (12,285)
Accounts payable and accrued liabilities (5,751) 23,992 3,699
Other, net (4,214) (5,115) (1,708)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities
of continuing operations 49,060 41,894 8,588
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Business acquisitions, net of cash acquired (896) (26,440) (24,944)
Capital expenditures (7,032) (6,236) (9,987)
Purchases of marketable securities - (1,042) (1,007)
Proceeds from the sale of marketable securities - 17,597 -
Other, net (2,175) 4,250 (403)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities
of continuing operations (10,103) (11,871) (36,341)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under revolving
credit agreement (17,000) (13,000) 33,300
Net repayments of bank and other debt (5,565) (1,111) (6,360)
Net proceeds from issuances of common stock 1,246 1,494 3,364
Common stock dividends (2,737) (2,850) (2,575)
Acquisition of common stock (17,604) (14,321) -
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities
of continuing operations (41,660) (29,788) 27,729
- -------------------------------------------------------------------------------------------------------------------
Net cash used in discontinued operation - - (1,939)
Net increase (decrease) in cash and cash equivalents (2,703) 235 (1,963)
Cash and cash equivalents at beginning of year 7,484 7,249 9,212
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 4,781 $ 7,484 $ 7,249
====================================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
10
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
1. Significant Accounting Policies
Nature of Operations
Watsco, Inc. and its subsidiaries (collectively the "Company" or "Watsco") is
the largest distributor of air conditioning, heating and refrigeration equipment
and related parts and supplies in the United States. The Company operates from
300 locations in 30 states.
Basis of Consolidation
The consolidated financial statements include the accounts of Watsco and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Revenue Recognition
The Company recognizes revenue upon shipment of products or upon delivery of
services. Substantially all customer returns are under warranty by the Company's
manufacturers. Accordingly, the Company's risk of loss for customer returns is
not material.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents.
Inventories
Inventories consist of air conditioning, heating and refrigeration equipment and
related parts and supplies and are stated at the lower of cost (first-in,
first-out method) or market. Provision is made as necessary to reduce excess or
obsolete inventories to their net realizable value.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment is computed using the straight-line method. Buildings and
improvements are being depreciated or amortized over estimated useful lives
ranging from 2-40 years. Leasehold improvements are amortized over the shorter
of the respective lease terms or useful lives. Estimated useful lives for other
depreciable assets range from 3-12 years. Depreciation and amortization related
to property and equipment amounted to $8,259, $7,634 and $6,118 for the years
ended December 31, 2000, 1999 and 1998, respectively.
Intangible Assets
Intangible assets, net of accumulated amortization of $13,273 and $9,987 at
December 31, 2000 and 1999, respectively, consist of goodwill arising from the
excess of the cost of acquired businesses over the fair value of their net
assets. Goodwill is amortized on a straight-line basis over 40 years. The
Company assesses the recoverability of long-lived assets by determining whether
the amortization of the balance over its remaining life can be recovered through
undiscounted future operating cash flows of the operation. The amount of
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of long-lived assets will be impacted if
estimated future operating cash flows are not achieved. Amortization expense
related to intangible assets amounted to $3,612, $3,257 and $2,611 for the years
ended December 31, 2000, 1999 and 1998, respectively.
Investment Securities
Investments in marketable equity securities of $255 and $1,197 at December 31,
2000 and 1999, respectively, are included in other assets and are classified as
available-for-sale. The Company records the securities at fair value with
unrealized holding gains and losses, net of applicable income taxes, included as
a separate component of shareholders' equity. Dividend and interest income are
recognized when earned. The difference between cost and market was an unrealized
holding gain of $105 in 2000 and a loss of $669, net of income tax expense of
$62 in 2000 and income tax benefit of $392 in 1999. During the year ended
December 31, 2000, the Company recorded a $2,169 write-down related to the
permanent impairment of an investment in marketable securities held in one of
the Company's primary competitors.
11
Derivative Financial Instruments
The Company enters into interest rate swap agreements to reduce its exposure to
market risks from changing interest rates. Under the swap agreements, the
Company agrees to exchange, at specified intervals, the difference between fixed
and variable interest amounts calculated by reference to a notional principal
amount. Any differences paid or received on interest rate swap agreements are
recognized as adjustments to interest expense over the life of each swap,
thereby adjusting the effective interest rate on the underlying obligation. The
Company does not hold or issue such financial instruments for trading purposes.
Derivatives used for hedging purposes must be designated as, and effective as, a
hedge of the identified risk exposure at the inception of the contract.
Accordingly, changes in the fair value of the derivative contract must be highly
correlated with changes in the fair value of the underlying hedged item at
inception of the hedge and over the life of the hedge contract.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No. 137,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
Deferral of the Effective Date of FASB Statement SFAS No. 133." In June 2000,
the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an amendment of SFAS No. 133." SFAS No. 133, as
amended, establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 also requires that changes in
derivatives' fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative instrument's gains and losses to offset related results on
the hedged item in the income statement, to the extent effective, and requires
that the Company formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. The Company adopted SFAS No. 133, as
amended, on January 1, 2001. The adoption of this accounting standard did not
have a material impact on the Company's results of operations. Other
comprehensive income was reduced by approximately $600, net of tax benefit of
$400, on January 1, 2001.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense amounted to
$4,833, $5,179 and $3,538 for the years ended December 31, 2000, 1999 and 1998,
respectively.
Self-insurance
The Company is self-insured for certain group health benefits. The Company has
limited its exposure by maintaining excess and aggregate liability coverages.
Self-insurance reserves are established based on claims filed and estimates of
claims incurred but not reported. The estimates are based on data provided by
the respective claims administrators.
Income Taxes
The Company provides for federal and state income taxes currently payable, as
well as for those deferred because of temporary differences between reporting
income and expenses for financial statement purposes versus tax purposes.
Deferred tax assets and liabilities reflect the temporary differences between
the financial statement and income tax bases of assets and liabilities. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect of a change in tax rates is
recognized as income or expense in the period that includes the enactment date.
The Company and its eligible subsidiaries file a consolidated U.S. federal
income tax return.
Stock-Based Compensation
As described in Note 7, the Company applies the intrinsic value-based method of
accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, in
accounting for its fixed plan stock options. As such, compensation expense would
be recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. SFAS No. 123, "Accounting for
Stock-Based Compensation," established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic value-based method of accounting described
above, and has adopted the disclosure requirements of SFAS No. 123.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the total of the
weighted average number of shares outstanding. Diluted earnings per share
additionally assumes, if dilutive, any added dilution from common stock
equivalents.
12
Shares used to calculate earnings per share are as follows:
Years Ended December 31, 2000 1999 1998
- -------------------------------------------------------------------------------------------------
Weighted average shares outstanding 26,549,211 28,498,683 27,147,622
Dilutive stock options and restricted
shares of common stock 1,243,821 1,242,157 1,542,842
- -------------------------------------------------------------------------------------------------
Shares for diluted earnings per share 27,793,032 29,740,840 28,690,464
=================================================================================================
Stock options and restricted shares of
common stock outstanding which
are not included in the calculation of
diluted earning because their impact
is antidilutive 2,886,251 1,565,868 284,625
=================================================================================================
Comprehensive Income
Comprehensive income consists of net income and changes in the value of
available-for-sale securities at December 31, 2000, 1999 and 1998. The
accumulated balances related to changes in the value of available-for-sale
securities for comprehensive income are as follows:
Years Ended December 31, 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized holding losses arising during the period, net
of income tax benefit of $27, $382 and $1,740,
respectively $ (45) $ (651) $ (2,962)
Reclassification adjustment for losses realized
in income, net of income tax of $1,729 - 2,944 -
Reclassification adjustment for losses realized from the
write-down of marketable securities, net of income
tax of $480 819 - -
- ----------------------------------------------------------------------------------------------------------------------------
Changes in value of available-for-sale
securities, net of income taxes $774 $2,293 $(2,962)
============================================================================================================================
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior year consolidated financial
statements to conform to the current year presentation.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." In June 2000, the SEC issued SAB 101B to defer the effective date
of implementation of SAB 101 until the fourth quarter of 2000. SAB 101 provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. The Company's revenue recognition policies are consistent with SAB
101.
In March 2000, the FASB issued FASB Interpretation ("FIN") 44, "Accounting for
Certain Transactions involving Stock Compensation," which clarifies the
application of APB Opinion No. 25 for certain issues. The interpretation was
effective July 1, 2000, except for the provisions that relate to modifications
that directly or indirectly reduce the exercise price of an award and the
definition of an employee, which were effective after December 15, 1998. The
adoption of FIN 44 did not have a material effect on the Company's consolidated
financial statements.
In July 2000, the Emerging Issues Task Force ("EITF") issued 00-10, "Accounting
for Shipping and Handling Fees and Costs." EITF 00-10 became effective in the
fourth quarter of 2000. EITF 00-10 prohibits the netting of shipping and
handling costs against shipping and handling revenues. EITF 00-10 permits
companies to adopt a policy of including shipping and handling costs in cost of
sales or other income statement line items. The adoption of EITF 00-10 did not
have a material effect on the Company's consolidated financial statements.
Shipping and handling costs included in selling, general and administrative
expenses amounted to $2,914, $2,379 and $971 for the years ended December 31,
2000, 1999 and 1998, respectively.
13
2. Supplier Concentration
The Company has distribution agreements with five key equipment suppliers.
Purchases from these five suppliers comprised 46%, 43% and 39% of all purchases
made in 2000, 1999 and 1998, respectively. The Company's largest supplier
accounted for 16%, 18% and 17% of all purchases made in 2000, 1999 and 1998,
respectively. Any significant interruption by the manufacturers or a termination
of a distribution agreement could temporarily disrupt the operations of certain
subsidiaries. The Company believes that its sales of other complementary
equipment products and continued emphasis to expand sales of parts and supplies
are mitigating factors against this risk.
3. Discontinued Operations
In November 1997, the Company's Board of Directors approved a plan to dispose of
the Company's manufacturing operation, Watsco Components, Inc. ("Components").
In May 1998, the Company sold substantially all the operating assets of
Components to International Comfort Products Corporation ("ICP") in exchange for
approximately $16,649 of ICP's common stock. The results of Components have been
accounted for as a discontinued operation and the consolidated financial
statements presented herein report separately the net assets, net cash flows and
operating results of this discontinued operation.
Unaudited summarized results for the discontinued operation are as follows:
Year Ended December 31, 1998
- ---------------------------------------------------------------------------
Revenue $ 8,861
- ---------------------------------------------------------------------------
Loss before income taxes $ (1,270)
Income tax benefit 470
- ---------------------------------------------------------------------------
Net loss $ (800)
===========================================================================
Income before income taxes includes allocated interest expense of $177 in 1998.
Interest expense was allocated to Components based on a ratio of the net assets
of the discontinued operation to the total Company's consolidated net assets.
4. Property and Equipment, net
Property and equipment, net, consists of:
December 31, 2000 1999
- -----------------------------------------------------------------------------
Land, buildings and improvements $17,698 $17,008
Machinery, vehicles and equipment 34,643 34,838
Furniture and fixtures 19,127 14,977
- -----------------------------------------------------------------------------
71,468 66,823
Less: accumulated depreciation
and amortization (41,210) (35,396)
- -----------------------------------------------------------------------------
$30,258 $31,427
=============================================================================
5. Long-Term Obligations
Revolving Credit Agreement
The Company maintains a bank-syndicated revolving credit agreement that provides
for borrowings of up to $315,000, expiring on August 8, 2002. Borrowings under
the unsecured agreement are used to fund seasonal working capital needs and for
other general corporate purposes, including acquisitions. Borrowings under the
agreement aggregated $138,000 and $155,000 in 2000 and 1999, respectively, and
bear interest at primarily London Interbank Offered Rate ("LIBOR") based rates
plus a spread that is dependent upon the Company's financial performance (LIBOR
plus .6% and LIBOR plus .5% as of December 31, 2000 and 1999, respectively). The
Company must pay a variable commitment fee on the unused portion of the
commitment. The revolving credit agreement contains customary affirmative and
negative covenants including certain financial covenants with respect to the
Company's consolidated net worth, interest and debt coverage ratios and limits
capital expenditures and dividends in addition to other restrictions. The
Company was in compliance with all covenants at December 31, 2000. See Note 11
for details regarding related interest rate swap agreements designated as
hedges.
14
Bank and Other Debt
Bank and other debt (net of current portion) of $2,878 and $4,415 at December
31, 2000 and 1999, respectively, primarily consists of promissory notes issued
for business acquisitions and capital leases on equipment. Interest rates on
bank and other debt range from 5% to 13% and mature at varying dates through
2008. Annual maturities of long-term obligations for the years subsequent to
December 31, 2000 are as follows: $1,887 in 2001, $1,503 in 2002, $474 in 2003,
$419 in 2004, $180 in 2005 and $302 thereafter.
On January 31, 2000, the Company entered into a $125,000 private placement shelf
facility. The uncommitted loan facility provides Watsco a source of long term,
fixed-rate financing as a complement to the variable rate borrowings available
under its existing revolving credit facility. At December 31, 2000, the Company
did not have any outstanding debt under this shelf facility. See Note 14 for
drawings made subsequent to December 31, 2000.
Total cash payments for interest were $12,499, $13,183 and $11,424 for the years
ended December 31, 2000, 1999 and 1998, respectively.
6. Income Taxes
The income tax provision on income from continuing operations consists of:
Years Ended December 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------
Federal $11,087 $16,489 $15,211
State 234 826 630
- ----------------------------------------------------------------------------------------
$11,321 $17,315 $15,841
========================================================================================
Current $10,080 $16,195 $16,161
Deferred 1,241 1,120 (320)
- ----------------------------------------------------------------------------------------
$11,321 $17,315 $15,841
========================================================================================
A reconciliation of the provision for federal income taxes on income from
continuing operations from the federal statutory income tax rate to the
effective income tax rate as reported is as follows:
Years Ended December 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 2.2 2.0 2.0
- ----------------------------------------------------------------------------------------
37.2% 37.0% 37.0%
========================================================================================
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities:
December 31, 2000 1999
- ----------------------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable reserves $2,593 $1,234
Capitalized inventory costs and inventory reserves 2,453 6,163
Unrealized loss on investments 807 392
Net operating loss carryforwards of subsidiary 487 487
Other 1,099 -
- ----------------------------------------------------------------------------------------
7,439 8,276
- ----------------------------------------------------------------------------------------
Deferred tax liabilities:
Deductible goodwill (3,938) (3,415)
Depreciation and amortization (437) (528)
Other (901) (475)
- ----------------------------------------------------------------------------------------
(5,276) (4,418)
- ----------------------------------------------------------------------------------------
Net deferred tax assets (1) $2,163 $3,858
========================================================================================
(1) Net deferred tax assets of $5,718 and $7,159 have been included in the
consolidated balance sheet in "Other current assets" at December 31,
2000 and 1999, respectively.
A subsidiary of the Company has available net operating loss carryforwards
("NOLs") of $1,392, which are available to offset future taxable income in equal
annual amounts of $278 through 2005. SFAS No. 109, "Accounting for Income
Taxes," requires that the tax
15
benefit of such NOLs be recorded as an asset to the extent that management
assesses the utilization of such NOLs to be more likely than not. Management has
determined, based on the subsidiary's recent taxable income and expectations for
the future, that taxable income of the subsidiary will be sufficient to fully
utilize the available NOLs.
Total cash payments for income taxes were $11,247, $15,745 and $17,396 for the
years ended December 31, 2000, 1999 and 1998, respectively.
7. Stock Option and Benefit Plans
Stock Option Plans
At December 31, 2000, the Company had two stock option plans. Under the 1991
Stock Option Plan (the "1991 Plan"), options for an aggregate of 6,750,000
shares of Common Stock and Class B Common Stock may be granted. Options as to
4,417,170 of Common Stock and 2,223,872 of Class B Common Stock have been
granted through December 31, 2000. The terms of the 1991 Plan require the option
price per share be equivalent to the fair market value of the underlying common
stock on the date of grant. Options under the 1991 Plan are for a term of ten
years and are exercisable as determined by the Option Committee of the Board of
Directors. The 1983 Executive Stock Option Plan (the "1983 Plan") expired in
February 1993; therefore, no additional options may be granted. Options as to
36,158 shares of Common Stock are outstanding under the 1983 Plan at December
31, 2000. Options under the 1983 Plan are for a term of ten years and,
generally, may be exercised in annual 20% installments beginning one year after
grant. Under either plan, the Option Committee may waive the vesting period and
permit options to be exercised immediately. There were 108,958 shares of common
stock reserved for future grants as of December 31, 2000 under the 1991 Plan.
A summary of option activity is shown below:
2000 1999 1998
--------------------- ---------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- ----------------------------------------------------------------------------------------------------------
Outstanding on January 1, 4,157,833 $11.23 3,747,830 $10.75 2,954,255 $8.47
Granted 1,121,289 9.39 703,000 13.46 1,075,999 16.70
Exercised (91,275) 5.84 (140,210) 5.56 (205,874) 5.73
Forfeited (264,751) 13.75 (152,787) 14.98 (76,550) 19.82
- -----------------------------------------------------------------------------------------------------------
Outstanding on December 31, 4,923,096 $10.78 4,157,833 $11.23 3,747,830 $10.75
===========================================================================================================
Options exercisable at end of year 3,158,851 $10.01 2,650,365 $8.87 2,200,986 $6.97
===========================================================================================================
The following sets forth certain information with respect to those stock options
outstanding on December 31, 2000:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------- ----------------------------------
Weighted- Weighted- Weighted-
Number Average Average Number Average
Outstanding at Exercise Remaining Outstanding at Exercise
December 31, 2000 Price Contractual Life December 31, 2000 Price
- -----------------------------------------------------------------------------------------------------------
$2.32 - $5.00 1,287,194 $3.84 2.2 1,287,194 $3.84
$5.01 - $10.00 1,067,151 8.28 8.2 319,068 7.56
$10.01-$15.00 990,750 13.26 8.0 381,266 13.46
$15.01-$20.00 1,523,288 16.41 6.7 1,139,936 16.19
$20.01-$23.17 54,713 21.55 6.1 31,387 21.47
- -----------------------------------------------------------------------------------------------------------
4,923,096 $10.78 6.1 3,158,851 $10.01
===========================================================================================================
Employee Stock Purchase Plan
Effective July 1, 1996, the Company adopted the Watsco, Inc. Qualified Employee
Stock Purchase Plan under which full-time employees with at least 90 days of
service may purchase up to an aggregate of 800,000 shares of the Company's
Common Stock. The plan allows participating employees to purchase, through
payroll deductions or lump-sum contribution, shares of the Company's Common
Stock at 85% of the fair market value at specified times subject to certain
restrictions. During 2000, 1999, and 1998 employees purchased 77,822, 70,909 and
163,123 shares of Common Stock at an average price of $8.54, $11.52 and $14.13
per share, respectively. At December 31, 2000, 274,209 shares remained available
for purchase under the plan.
16
The Company accounts for its stock option plans and employee stock purchase plan
in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Accordingly, no compensation cost has
been recognized in the consolidated statements of income. Had compensation cost
for the Company's stock-based compensation plans been determined based on the
fair value at the grant dates for awards under the stock option plans and
purchases under the employee stock purchase plan consistent with the method of
SFAS No. 123, the Company's pro forma net earnings and earnings per share would
be as follows:
Years Ended December 31, 2000 1999 1998
- -------------------------------------------------------------------------------------------------
Net income As reported $19,114 $29,481 $25,191
Pro forma $14,853 $25,823 $22,088
Basic earnings per share As reported $0.72 $1.03 $0.93
Pro forma $0.56 $0.91 $0.81
Diluted earnings per share As reported $0.69 $0.99 $0.89
Pro forma $0.53 $0.87 $0.78
The Company's pro forma information above is not representative of the pro forma
effect of the fair value provisions of SFAS No. 123 on the Company's net income
in future years because pro forma compensation expense related to grants made
prior to 1995 may not be taken into consideration.
The weighted-average fair value at date of grant for stock options granted
during 2000, 1999 and 1998 was $6.56, $7.64 and $8.19, respectively, and was
estimated using the Black-Scholes option valuation model with the following
weighted-average assumptions:
Years Ended December 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------
Expected life in years 7.7 8.2 6.0
Risk-free interest rate 5.1% 6.1% 4.8%
Expected volatility 71.5% 43.3% 43.3%
Dividend yield 0.8% 0.5% 0.5%
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including expected stock price volatility. The Company's
stock-based compensation arrangements have characteristics significantly
different from those of traded options, and changes in the subjective input
assumptions used in valuation models can materially affect the fair value
estimate. As a result, the existing models may not necessarily provide a
reliable single measure of the fair value of its stock-based compensation.
Restricted Stock
During 2000, 1999 and 1998, certain employees were granted an aggregate of
127,000, 93,000 and 127,500 shares, respectively, of the Company's common
stock, subject to certain significant restrictions. The restrictions lapse upon
attainment of retirement age or under other circumstances. During 2000 and 1998,
45,000 and 48,750 shares, respectively, were forfeited upon certain employee
terminations. The unearned compensation resulting from the grant of restricted
shares is reported as a reduction to shareholders' equity in the consolidated
balance sheets and is being amortized to earnings over the period from date of
issuance to the respective retirement age of each employee. Total amortization
expense related to the restricted shares amounted to $389, $349 and $252 for the
years ended December 31, 2000, 1999 and 1998, respectively.
401(k) Plan
The Company has a profit sharing retirement plan for its employees that is
qualified under Section 401(k) of the Internal Revenue Code. The Company makes
an annual matching contribution based on a percentage of eligible employee
compensation deferrals. The contribution is made in cash or by the issuance of
the Company's Common Stock to the plan on behalf of its employees. For the years
ended December 31, 2000, 1999 and 1998, the aggregate contribution to the plan
was $998, $893 and $790, respectively.
8. Acquisitions
The Company has completed various acquisitions, all of which have been accounted
for under the purchase method of accounting. Accordingly, their results of
operations have been included in the consolidated statements of income beginning
on their respective dates of acquisition.
17
During 2000, the Company completed the acquisition of a refrigeration equipment
distributor in Florida for cash consideration of $896.
During 1999, the Company completed the acquisition of six wholesale distributors
of air conditioning and heating products and one staffing service franchise for
cash consideration of $26,440 (net of cash acquired), including repayment of
debt totaling $4,592, the issuance of a $6,098 promissory note and 842,569
shares of Common Stock having a fair value of $9,350.
During 1998, the Company completed the acquisition of 11 wholesale distributors
of air conditioning and heating products and six staffing service franchises for
cash consideration of $24,944 (net of cash acquired) and the issuance of
1,397,041 shares of Common Stock having a fair value of $23,931.
The unaudited pro forma information of the Company as if the above acquisitions
had occurred on January 1, 1998 is as follows:
Years Ended December 31, 1999 1998
- ----------------------------------------------------------------------------------------
Revenue $1,282,621 $1,225,881
Income from continuing operations $32,175 $32,061
Diluted earnings per share from continuing operations $1.07 $1.06
The unaudited pro forma information is not necessarily indicative of either the
results of operations that would have occurred had the above companies been
acquired on January 1, 1998 for the years presented or of future results of
operations. The 2000 acquisition was not material to the Company's operations.
The purchase price allocations for business combinations are as follows:
Years Ended December 31, 2000 1999 1998
- ---------------------------------------------------------------------------------------------
Accounts receivable, net $383 $13,453 $18,644
Inventories 476 9,941 16,988
Property and equipment, net 20 1,625 4,697
Intangible assets 256 24,413 33,337
Other assets - 1,629 915
Accounts payable and accrued expenses (239) (9,173) (17,570)
Long-term debt - (6,098) (8,136)
Fair value of common stock issued - (9,350) (23,931)
- ----------------------------------------------------------------------------------------------
Cash used in acquisitions, net of
cash acquired $896 $26,440 $24,944
=============================================================================================
9. Restructuring and Non-Cash Charges
During the fourth quarter of 2000, the Company's Board of Directors approved
plans adopted by certain business units of the Company to improve operating
efficiency and profitability. These initiatives eliminate certain
underperforming locations, reduce market overlap, dispose of inventory related
to discontinued product lines and eliminate other nonproductive SKUs. In
connection with these restructuring activities, 25 locations closed in 2000 and
7 locations will close in 2001. The Company expects to complete these
restructuring activities by December 31, 2001.
In accordance with Emerging Issues Task Force ("EITF") Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)," SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and SEC Staff Accounting Bulletin No. 100, "Restructuring &
Impairment Charges," the Company recorded restructuring charges of $8,481
($5,326 after-tax) during the fourth quarter of 2000. A portion of this
restructuring charge ($4,269 on a pre-tax basis) relates to the valuation of
inventory to be disposed of and has been classified in cost of sales.
18
Selected information relating to the restructuring charge follows:
Restructuring Restructuring
charge for the Write-down of liability or
year ended assets to net Cash valuation reserves at
December 31, 2000 realizable value payments December 31, 2000
- -------------------------------------------- -----------------------------------------------------------------------------------
Discontinued product lines $4,269 (785) - $3,484
Noncancelable lease obligations 1,541 - (347) 1,194
Write-down of accounts receivable 924 (894) - 30
Employee severance and benefits 326 - (272) 54
Write-down of property and equipment 185 (147) - 38
Other 1,236 - (881) 355
- -----------------------------------------------------------------------------------------------------------------------
Total $8,481 (1,826) (1,500) $5,155
=======================================================================================================================
At December 31, 2000, valuation reserves of $3,484 and $30, respectively, are
netted against related asset balances - inventory and accounts receivable, net
and the $1,641 restructuring liability is included in accrued liabilities in the
consolidated balance sheets.
Also in the fourth quarter of 2000, the Company recorded non-cash charges of
$788 related to additional inventory reserves, $1,731 related to accounts
receivable valuation reserves in its manufactured housing subsidiaries and
$2,169 related to the write-down of an impaired investment in one of the
Company's primary competitors.
On an after-tax basis, restructuring and other non-cash charges were $8,270.
10. Shareholders' Equity
Common Stock and Class B Common Stock share equally in the earnings of the
Company and are identical in most other respects except (i) Common Stock has
limited voting rights, each share of Common Stock being entitled to one vote on
most matters and each share of Class B Common Stock being entitled to ten votes;
(ii) shareholders of Common Stock are entitled to elect 25% of the Board of
Directors (rounded up to the nearest whole number) and Class B shareholders are
entitled to elect the balance of the Board of Directors; (iii) cash dividends
may be paid on Common Stock without paying a cash dividend on Class B Common
Stock and no cash dividend may be paid on Class B Common Stock unless at least
an equal cash dividend is paid on Common Stock and (iv) Class B Common Stock is
convertible at any time into Common Stock on a one-for-one basis at the option
of the shareholder.
The Company's Board of Directors authorized the repurchase, at management's
discretion, of up to 4,500,000 shares of the Company's stock in the open market
or via private transactions. Shares repurchased under the program are accounted
for using the cost method and result in a reduction of shareholders' equity. The
Company purchased 1,749,313 shares at a cost of $17,604 in 2000 and 1,346,200
shares at a cost of $14,321, bringing the total purchased to 3,095,513 shares at
a cost of $31,925.
11. Financial Instruments
Recorded Financial Instruments
The Company's recorded financial instruments consist of cash and cash
equivalents, accounts receivable, accounts payable, the current portion of
long-term obligations, borrowings under revolving credit agreement and debt
instruments included in other long-term obligations.
At December 31, 2000 and 1999, the fair values of cash and cash equivalents,
accounts receivable, accounts payable and the current portion of long-term
obligations approximated their carrying values due to the short term nature of
these instruments.
The fair values of borrowings under the revolving credit agreement and debt
instruments included in long-term obligations also approximate their carrying
value based upon interest rates available to the Company for similar instruments
with consistent terms and remaining maturities.
Off-Balance Sheet Financial Instruments
The Company uses interest rate swaps to alter the interest rate risk profile
related to outstanding borrowings under its revolving credit agreement, thereby
altering the Company's exposure to changes in interest rates. The swap
agreements exchange the variable rate of LIBOR plus the spread on its revolving
credit agreement to fixed interest rate payments ranging from 6.25% to 6.49% in
2000 and 1999. At December 31, 2000, the Company's interest rate swap portfolio
consisted of several swaps aggregating a notional value of $60,000 and maturity
dates ranging from 2002 to 2007. At December 31, 1999, the Company's interest
rate swap portfolio consisted
19
of several swaps totaling a notional value of $60,000 and maturity dates ranging
from 2002 to 2007 and a single swap with a notional value of $70,000 that
matured on January 26, 2000 and was used to hedge a short-term interest rate
increase related to Year 2000 systems issues.
At December 31, 2000 and 1999, respectively, the Company is contingently liable
under standby letters of credit aggregating approximately $2,300 and $7,300 that
were primarily used as collateral for promissory notes issued in connection with
certain acquisitions. The Company does not expect any material losses to result
from the issuance of the standby letters of credit because performance is not
expected to be required. Accordingly, the estimated fair value of these
instruments is zero.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash investments and accounts receivable.
The Company places its temporary cash investments with high credit quality
financial institutions and limits the amount of credit exposure to any one
financial institution or investment. Concentrations of credit risk with respect
to accounts receivable are limited due to the large number of customers
comprising the Company's customer base and their dispersion across many
different geographical regions. The Company establishes and monitors an
allowance for doubtful accounts based on the credit risk of specific customers,
historical trends and other information. At December 31, 2000 and 1999, the
allowance for doubtful accounts was $6,970 and $5,564, respectively. Although
the Company believes its allowance is sufficient, the amount the Company
ultimately realizes could differ materially in the near-term from the amount
reported above.
12. Commitments and Contingencies
At December 31, 2000, the Company is obligated under non-cancelable operating
leases of real property and equipment used in its continuing operations for
minimum annual rentals as follows: $25,852 in 2001, $22,914 in 2002, $17,858 in
2003, $13,750 in 2004, $9,560 in 2005 and $15,865 thereafter. Rental expense for
continuing operations for the years ended December 31, 2000, 1999 and 1998 was
$26,462, $25,831 and $21,911, respectively.
The Company and its subsidiaries are involved in litigation incidental to the
operation of the Company's business. The Company vigorously defends all matters
in which the Company or its subsidiaries are named defendants and, for insurable
losses, maintains significant levels of insurance to protect against adverse
judgments, claims or assessments that may affect the Company. In the opinion of
the Company, although the adequacy of existing insurance coverage or the outcome
of any legal proceedings cannot be predicted with certainty, the ultimate
liability associated with any claims or litigation in which the Company or its
subsidiaries are involved will not materially affect the Company's financial
condition or results of operations.
13. Segment Information
The Company's primary business is the operation of a distribution network
selling air conditioning, heating and refrigeration equipment and related parts
and supplies. The Company also operates Dunhill, a national temporary staffing
and permanent employment services business, which is immaterial (as defined in
SFAS 131) to the Company's financial results, net assets and net cash flows.
Accordingly, there is no segment information reportable in these notes to the
consolidated financial statements.
14. Subsequent Events
On February 7, 2001, the Company issued $30,000 Senior Series A Notes bearing
7.07% interest under its private placement shelf facility (see Note 5). The
Company's notes have an average life to maturity of 6 years with equal
installments of $10,000 beginning on April 9, 2005 until the final maturity on
April 9, 2007. Interest is to be paid on a quarterly basis beginning on April 9,
2001. The Company used the net proceeds from the issuance of the notes for the
repayment of a portion of its outstanding indebtedness under its revolver credit
facility.
20
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Watsco, Inc.:
We have audited the accompanying consolidated balance sheets of Watsco, Inc.
(a Florida corporation) and subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of income, shareholders' equity and
comprehensive income and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Watsco, Inc. and subsidiaries
as of December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 5, 2001 (except with respect to the
matter discussed in Note 14, as to which the
date is February 7, 2001).
21
WATSCO, INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA (UNAUDITED)
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter Total
- ---------------------------------------------------------------------------------------------------------
Year ended December 31, 2000:
Revenue (3) $286,344 $370,832 $360,633 $288,833 $1,306,642
Gross profit 67,467 87,780 85,345 62,664 303,256
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $3,054 $12,620 $11,913 $(8,473) $19,114
==========================================================================================================
Diluted earnings (loss) per share (1), (2) $0.11 $0.45 $0.43 $(0.32) $0.69
==========================================================================================================
Year ended December 31, 1999:
Revenue (3) $260,383 $346,124 $349,355 $290,410 $1,246,272
Gross profit 61,274 80,779 80,703 69,082 291,838
- ----------------------------------------------------------------------------------------------------------
Net income $2,447 $11,577 $11,802 $3,655 $29,481
==========================================================================================================
Diluted earnings per share (1) $0.08 $0.39 $0.40 $0.13 $0.99
==========================================================================================================
(1) Quarterly earnings per share are calculated on an individual basis and,
because of rounding and changes in the weighted average shares
outstanding during the year, the summation of each quarter may not
equal the amount calculated for the year as a whole.
(2) During the 4th Quarter of 2000, the Company recorded restructuring and
other non-cash charges of $8,270 or $0.30 per share on an after-tax
basis, as more fully described in Note 9 of the consolidated financial
statements.
(3) Sales of residential central air conditioners, heat equipment and parts
and supplies distributed by the Company have historically been
seasonal. Demand related to the residential central air conditioning
replacement market is highest in the second and third quarters with
demand for heating equipment usually highest in the fourth quarter.
Demand related to the new construction sectors throughout most of the
Sunbelt markets is fairly even during the year except for dependence on
housing completions and related weather and economic conditions.
22
WATSCO, INC. AND SUBSIDIARIES
INFORMATION ON COMMON STOCK
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol WSO and its Class B Common Stock is traded on the American Stock Exchange
under the symbol WSOB. The following table indicates the high and low prices of
the Company's Common Stock and Class B Common Stock, as reported by the New York
Stock Exchange and American Stock Exchange, respectively, and dividends paid per
share for each quarter during the years ended December 31, 2000, 1999 and 1998.
At March 28, 2001, excluding shareholders with stock in street name, the Company
had 560 Common Stock shareholders of record and 275 Class B Common Stock
shareholders of record.
Common Class B Cash Dividends
High Low High Low Common Class B
==================================================================================================
Year Ended December 31, 2000:
Fourth quarter $12.040 $ 8.890 $11.812 $ 9.000 $.025 $.025
Third quarter 13.938 10.050 13.625 10.250 .025 .025
Second quarter 15.750 10.438 15.937 10.500 .025 .025
First quarter 12.500 8.375 12.812 8.875 .025 .025
==================================================================================================
Year Ended December 31, 1999:
Fourth quarter $13.125 $ 9.750 $12.875 $ 9.750 $.025 $.025
Third quarter 17.438 10.375 17.063 10.375 .025 .025
Second quarter 19.875 14.625 19.750 14.500 .025 .025
First quarter 18.625 11.250 18.188 13.500 .025 .025
==================================================================================================
Year Ended December 31, 1998:
Fourth quarter $19.125 $14.375 $19.500 $14.000 $.025 $.025
Third quarter 23.531 12.062 23.328 12.250 .023 .023
Second quarter 23.796 16.671 23.421 18.000 .023 .023
First quarter 20.000 15.828 19.921 16.015 .023 .023
==================================================================================================
23
Exhibit 21
REGISTRANT'S SUBSIDIARIES
The following table sets forth, at April 2, 2001, the Registrant's significant
operating subsidiaries and other associated companies and their respective
incorporation jurisdictions. The Registrant owns 100% of the voting securities
of each of the subsidiaries listed below. There are no subsidiaries not listed
in the table, which would, in the aggregate, be considered significant.
State of
Active Subsidiaries: Incorporation
-------------------- -------------
Distribution:
A&C Distributors, Inc. (d/b/a Comfortmaker Distribution) Florida
ACDoctor.com Inc. Texas
AC Wholesalers, Inc. Florida
Air Supply, Inc. California
Air Systems Distributors, Inc. Florida
Ambient, Inc. (d/b/a Superior Supply) Texas
Atlantic Air, Inc. Texas
CAD Watsco, Inc. Florida
Baker Distributing Co. Florida
Central Air Conditioning Distributors, Inc. North Carolina
Coastline Distribution, Inc. Delaware
Comfort Cooling Supply, Inc. California
Comfort Supply, Inc. Delaware
CP Distributors, Inc. (d/b/a Central Plains Distributing
and Comfort Products Distributing) Florida
Gemaire Distributors, Inc. Florida
GMC Distributors, Inc. (d/b/a Kingaire) Tennessee
H.B. Adams Distributors, Inc. Florida
Heat, Inc. New Hampshire
Heating & Cooling Supply, Inc. California
Homans Associates, Inc. Massachusetts
Kaufman Supply, Inc. Delaware
NSI Supply, Inc. Nevada
Three States Supply Company, Inc. Tennessee
Watsco Direct, Inc. Delaware
Watsco Investments I, Inc. Florida
Watsco Investment II, Inc. Florida
Weathertrol Supply Company North Carolina
William Wurzbach Co. Inc. California
WSO Distributors, LLC Nevada
Personnel Services:
Dunhill Personnel System of New Jersey, Inc. New Jersey
Dunhill Staffing Systems, Inc. Delaware
Dunhill Staffing Systems of Milwaukee, Inc. Wisconsin
Dunhill Temporary Systems, Inc. New York
Dunhill Temporary Systems of Indianapolis, Inc. Indiana
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our reports included in this Form l0-K, into the Company's
previously filed Registration Statements on Form S-3 (Nos. 33-7758, 33-37982,
333-00371, 333-01441 and 333-19803) and in Registration Statements on Form S-8
(Nos. 33-6229, 33-72798, 333-10363, 333-80341 and 333-82011).
ARTHUR ANDERSEN LLP
Miami, Florida,
April 2, 2001.