- --------------------------------------------------------------------------------
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[X] Quarterly Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
or
[ ] Transition Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period From
___ to ___
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Commission file number 1-5581
I.R.S. Employer Identification Number 59-0778222
WATSCO, INC.
(a Florida Corporation)
2665 South Bayshore Drive, Suite 901
Coconut Grove, Florida 33133
Telephone: (305) 714-4100
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 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date: 23,792,345 shares of the
Company's Common Stock ($.50 par value), excluding treasury shares of 2,343,000,
and 3,228,806 shares of the Company's Class B Common Stock ($.50 par value) were
outstanding as of May 4, 2000.
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PART I. FINANCIAL INFORMATION
WATSCO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2000 and December 31, 1999
(In thousands, except per share data)
March 31, December 31,
2000 1999
----------- ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 6,882 $ 7,484
Accounts receivable, net 169,052 164,999
Inventories 241,928 223,887
Other current assets 25,806 18,699
--------- ---------
Total current assets 443,668 415,069
--------- ---------
Property, plant and equipment, net 31,975 31,427
Intangible assets, net 130,852 131,556
Other assets 10,899 10,854
--------- ---------
$ 617,394 $ 588,906
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 1,976 $ 5,915
Accounts payable 94,120 89,997
Accrued liabilities 27,840 26,895
--------- ---------
Total current liabilities 123,936 122,807
--------- ---------
Long-term obligations:
Borrowings under revolving credit agreement 189,560 155,000
Bank and other debt 4,123 4,415
--------- ---------
Total long-term obligations 193,683 159,415
--------- ---------
Deferred income taxes and other liabilities 4,949 4,968
--------- ---------
Shareholders' equity:
Common Stock, $.50 par value 13,050 13,036
Class B Common Stock, $.50 par value 1,613 1,591
Paid-in capital 202,479 202,106
Unearned compensation related to
outstanding restricted stock (6,199) (5,998)
Unrealized loss on investments, net of tax (749) (669)
Retained earnings 108,329 105,971
Treasury stock, at cost (23,697) (14,321)
--------- ---------
Total shareholders' equity 294,826 301,716
--------- ---------
$ 617,394 $ 588,906
========= =========
See accompanying notes to condensed consolidated financial statements.
2 of 11
WATSCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Three Months Ended March 31, 2000 and 1999
(In thousands, except per share data)
(Unaudited)
2000 1999
--------- ---------
Revenue $ 286,344 $ 260,383
Cost of sales 218,877 199,109
--------- ---------
Gross profit 67,467 61,274
Selling, general and administrative expenses 59,428 54,115
--------- ---------
Operating income 8,039 7,159
Interest expense, net 3,176 3,262
--------- ---------
Income before income taxes 4,863 3,897
Income taxes 1,809 1,450
--------- ---------
Net income 3,054 2,447
Retained earnings at beginning of period 105,971 79,340
Common stock cash dividends (696) (714)
--------- ---------
Retained earnings at end of period $ 108,329 $ 81,073
========= =========
Basic earnings per share $ 0.11 $ 0.09
--------- ---------
Diluted earnings per share $ 0.11 $ 0.08
--------- ---------
Weighted average shares and
equivalent shares used to calculate
earnings per share:
Basic 27,690 28,600
========= =========
Diluted 28,686 29,820
========= =========
See accompanying notes to condensed consolidated financial statements.
3 of 11
WATSCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2000 and 1999
(In thousands)
(Unaudited)
2000 1999
-------- --------
Cash flows from operating activities:
Net income $ 3,054 $ 2,447
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 2,965 2,635
Provision for doubtful accounts 1,128 1,113
Deferred income taxes (23) (259)
Non-cash stock contribution to 401(k) plan 75 --
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (5,181) (1,832)
Inventories (18,041) (26,656)
Accounts payable and accrued liabilities 5,075 583
Other, net (7,634) (6,927)
-------- --------
Net cash used in operating activities (18,582) (28,896)
-------- --------
Cash flows from investing activities:
Business acquisitions, net of cash acquired -- (17,544)
Capital expenditures (2,326) (1,302)
Purchases of marketable securities -- (823)
-------- --------
Net cash used in investing activities (2,326) (19,669)
-------- --------
Cash flows from financing activities:
Net borrowings under revolving credit agreement 34,560 47,900
Net borrowings (repayments) of bank and other debt (4,231) 230
Net proceeds from issuances of common stock 49 218
Common stock dividends (696) (714)
Acquisition of common stock (9,376) --
-------- --------
Net cash provided by financing activities 20,306 47,634
-------- --------
Net decrease in cash and cash equivalents (602) (931)
Cash and cash equivalents at beginning of period 7,484 7,249
-------- --------
Cash and cash equivalents at end of period $ 6,882 $ 6,318
======== ========
See accompanying notes to condensed consolidated financial statements.
4 of 11
WATSCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Amounts in thousands, except share data)
(Unaudited)
1. The condensed consolidated balance sheet as of December 31, 1999, which has
been derived from the Company's audited financial statements, and the
unaudited interim condensed consolidated financial statements, have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and note disclosures normally
included in the annual financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted pursuant to those rules and regulations, although the
Company believes the disclosures made are adequate to make the information
presented not misleading. In the opinion of management, all adjustments
necessary for a fair presentation have been included in the condensed
consolidated financial statements herein. As discussed in Note 6, amounts
in the condensed consolidated statements of income and retained earnings
and statements of cash flows have been restated in 1999 to include Dunhill
Staffing Systems Inc. ("Dunhill") as continuing operations.
2. The results of operations for the quarter ended March 31, 2000, are not
necessarily indicative of the results for the year ending December 31,
2000. The sale of the Company's products and services is seasonal with
revenue generally increasing during the months of May through August.
3. 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 revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
4. Basic earnings per share is computed by dividing net income by the total
weighted average shares outstanding. Diluted earnings per share
additionally assumes, if dilutive, any added dilution from common stock
equivalents. Shares used to calculate earnings per share for the three
months ended March 31, 2000 and 1999 are as follows:
2000 1999
---- -----
Weighted average shares outstanding 27,690,468 28,600,139
Dilutive stock options 995,832 1,220,183
---------- ----------
Shares for diluted earnings per share 28,686,300 29,820,322
========== ==========
Options outstanding which are not
included in the calculation of diluted
earnings per share because their
impact is antidilutive 2,397,799 1,737,000
========= =========
5. The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for the reporting and display of comprehensive income
and its components in the financial statements. Comprehensive income
consists of net income and changes in the value of available-for-sale
securities at March 31, 2000 and 1999. The components of the Company's
comprehensive income are as follows for the three months ended March 31,
2000 and 1999:
2000 1999
---- -----
Net income $3,054 $2,447
Unrealized holding losses on investments
arising during the period net of
income taxes (80) (607)
------ -------
Comprehensive income $2,974 $1,840
====== ======
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6. In November 1997, the Company's Board of Directors approved a plan to
dispose of its staffing service subsidiary, Dunhill. During the period in
which it was reported as a discontinued operation, the Company did not
receive any acceptable offers for Dunhill. Therefore, in 1999, the Company
decided to retain Dunhill as part of its continuing operations and has
accordingly restated operating results and net cash flows in 1999 to
include Dunhill in continuing operations.
Unaudited summarized financial information for the quarter that Dunhill was
reported as a discontinued operation is as follows:
Revenue $13,006
Operating profit $ 248
7. During 1999, the Company completed the acquisition of six wholesale
distributors of air conditioning and heating products and one staffing
service franchise.
Acquisitions have been accounted for under the purchase method of
accounting and, accordingly, their results of operations have been included
in the unaudited condensed consolidated statement of income and retained
earnings beginning on their respective dates of acquisition.
The Company's unaudited pro forma consolidated results of operations
assuming all significant acquisitions occurred on January 1, 1999 is as
follows for the three months ended March 31, 1999:
Revenue $269,460
Net income $ 3,275
Diluted earnings per share $ 0.11
The unaudited pro forma consolidated results of operations is not
necessarily indicative of either the results of operations that would have
occurred had the above companies been acquired on January 1, 1999 for the
period presented or of future results of operations.
8. In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 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. The impact of SFAS No.
133 on the Company's consolidated financial statements will depend on a
variety of factors, including future interpretive guidance from the FASB,
the extent of the Company's hedging activities, the type of hedging
instruments used and the effectiveness of such instruments. The Company has
not quantified the impact of adopting SFAS No. 133. In June 1999, the FASB
issued SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the effective date of FASB Statement 133 - an
amendment to FASB Statement No. 133," which delayed the implementation date
for SFAS 133 for one year to fiscal years beginning after June 15, 2000.
6 of 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2000 VS. QUARTER ENDED MARCH 31, 1999
RESULTS OF OPERATIONS
The following table presents the Company's consolidated financial results for
the three months ended March 31, 2000 and 1999, expressed as a percent of
revenue:
2000 1999
---- ----
Revenue 100.0 % 100.0 %
Cost of sales (76.4) (76.5)
----- -----
Gross profit 23.6 23.5
Selling, general and administrative expenses (20.8) (20.8)
----- -----
Operating income 2.8 2.7
Interest expense, net (1.1) (1.2)
Income taxes (0.6) (0.6)
----- -----
Net income 1.1 % 0.9 %
===== =====
The above table and following narrative includes the results of operations
acquired during 1999. These 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" excludes the effects of operations acquired or
locations opened and closed during the prior twelve months. Amounts in 1999 have
been restated to include Dunhill in continuing operations.
Revenue for the three months ended March 31, 2000 increased $26.0 million, or
10%, compared to the same period in 1999. On a same-store basis, revenue
increased $16.8 million, or 7%. Such increase was primarily due to additional
sales generated by expanded product lines of equipment in certain large markets
and favorable industry conditions.
Gross profit for the three months ended March 31, 2000 increased $6.2
million, or 10%, as compared to the same period in 1999, as a result of the
aforementioned revenue increases. Gross profit margin in the first quarter
increased to 23.6% in 2000 from 23.5% in 1999. On a same-store basis, gross
profit increased $3.7 million, or 6% and gross profit margin decreased to 23.4%
in 2000 from 23.5% in 1999.
Selling, general and administrative expenses for the three months ended March
31, 2000 increased $5.3 million, or 10%, compared to the same period in 1999,
primarily due to increased selling and delivery costs related to increased
sales. Selling, general and administrative expenses as a percent of revenue
remained unchanged at 20.8% in both 2000 and 1999. On a same-store basis,
selling, general and administrative expenses increased $3.6 million, or 7%,
primarily due to revenue increases. Selling, general and administrative expenses
on a same-store basis as a percent of revenue increased to 20.7% in 2000 from
20.6% in 1999.
Interest expense, net for the first quarter in 2000 decreased approximately
$0.9 million, or 3%, compared to the same period in 1999, primarily due to lower
average borrowings during the quarter, offset by a rise in interest rates.
The effective tax rate was 37.2% for the three months ended March 31, 2000
and 1999.
7 of 11
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a bank-syndicated revolving credit agreement that
provides for borrowings of up to $315.0 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 aggregated $189.6 million at March 31,
2000, bear interest at primarily LIBOR-based rates plus a spread that is
dependent upon the Company's financial performance (LIBOR plus .5% at March 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.
On January 31, 2000, the Company entered into a $125.0 million private
placement shelf facility. The uncommitted loan facility provides the Company a
source of long-term, fixed-rate financing as a complement to the variable rate
borrowings available under its existing revolving credit facility. There were no
outstanding borrowings under the agreement as of March 31, 2000.
The Company's Board of Directors has authorized the repurchase, at
management's discretion, of up to three million shares of the Company's stock in
the open market or via private transactions. As of March 31, 2000, the Company
had purchased approximately 2.3 million shares at a cost of approximately $24.0
million.
Working capital increased to $319.7 million at March 31, 2000 from $292.3
million at December 31, 1999, primarily due to the Company's seasonal build-up
of inventory in preparation for the spring and summer selling seasons. This
increase was funded primarily by borrowings under the Company's revolving credit
agreement.
Cash and cash equivalents decreased $0.6 million during the first quarter of
2000. Principal sources of cash during the quarter were borrowings under the
revolving credit agreement and profitable operations. The principal uses of cash
were to fund working capital needs, the Company's repurchase of its common
stock, and repayments of bank and other debt.
The Company has adequate availability of capital from operations and its
revolving credit agreement 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.
QUANTITATIVE AND QUALITATIVE 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 below are non-trading.
At March 31, 2000, the Company had various interest rate swap agreements with
an aggregate notional amount of $60 million 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 with a weighted average pay rate of 6.4%.
8 of 11
SAFE HARBOR STATEMENT
This quarterly report contains statements which, to the extent they are not
historical fact, constitute "forward looking statements" under the securities
laws, including statements regarding acquisitions, financing agreements and
industry, demographic and other trends affecting the Company. 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.
The Company's shareholders should also be aware that while the Company does,
at various times, communicate with securities analysts, it is against the
Company's policies to disclose to such analysts any material non-public
information or other confidential information. Accordingly, our shareholders
should not assume that the Company agrees with all statements or reports issued
by such analysts. To the extent such statements or reports contain projections,
forecasts or opinion by such analysts about our Company, such reports are not
the responsibility of the Company.
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 "Other Information".
9 of 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no significant changes from the information reported
in the Annual Report on Form 10-K for the period ended December 31,
1999, filed on March 31, 2000.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.14 Exhibit A-1 dated January 1, 2000 to Employment Agreement and
Incentive Plan dated January 31, 1996 by and between Watsco,
Inc. and Albert H. Nahmad #
27. Financial Data Schedule (for SEC use only) #
(b) Reports on Form 8-K
None
10 of 11
SIGNATURES
Pursuant to the requirements 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.
----------------------------
(Registrant)
By: /S/ BARRY S. LOGAN
----------------------------
Barry S. Logan
Vice President and Secretary
(Chief Financial Officer)
May 9, 2000
11 of 11
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.14 Exhibit A-1 dated January 1, 2000 to Employment Agreement
and Incentive Plan dated January 31, 1996 by and between
Watsco, Inc. and Albert H. Nahmad.
27 Financial Data Schedule
EXHIBIT 10.14
EXHIBIT A-1
2000 PERFORMANCE GOALS AND PERFORMANCE BASED COMPENSATION
I. FORMULA
PERFORMANCE
BASED
COMPENSATION FORMULA
A. EARNINGS PER SHARE
For each $.01 increase................................................ $65,250
B. INCREASE IN COMMON STOCK PRICE
(i) If the price of a share of Common Stock on 12/31/00 does not
exceed $11.56................................................ $ 0
(ii) If the price of a share of Common Stock on 12/31/00 exceeds
$11.56 but does not equal or exceed $15.00, for each $0.0625
increase in per share price of a share of Common Stock above
$11.56....................................................... $ 7,500
(iii) If the price of a share of Common Stock on 12/31/00 equals or
exceeds $15.00, for each $0.0625 increase in per share price
of a share of Common Stock above $11.56...................... $10,000
II. METHOD OF PAYMENT
A. CASH. The Performance Based Compensation determined for 2000
under the formula set forth in Section I above shall be paid
in cash if and to the extent such Compensation does not exceed
$500,000.
B. RESTRICTED STOCK. If the Performance Based Compensation
determined for 2000 under the formula set forth in Section I
above exceeds $500,000 (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, 2000. 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, 2000
/s/ PAUL MANLEY
-------------------------------
Paul Manley, Chairman
Compensation Committee
Acknowledged and Accepted:
/s/ ALBERT H. NAHMAD
-------------------------------
Albert H. Nahmad
5
1,000
3-MOS
DEC-31-2000
MAR-31-2000
6,882
0
175,155
6,103
241,928
443,668
68,566
36,591
617,394
123,936
4,123
0
0
14,663
280,163
617,394
286,344
286,344
218,877
218,877
58,300
1,128
3,176
4,863
1,809
3,054
0
0
0
3,054
0.11
0.11
