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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, 2001
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: 23,371,432
shares of the Company's Common Stock ($.50 par value), excluding
treasury shares of 3,152,450, and 3,296,043 shares of the Company's
Class B Common Stock ($.50 par value) excluding treasury shares of
48,263 were outstanding as of May 3, 2001.
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PART I. FINANCIAL INFORMATION
WATSCO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2001 and December 31, 2000
(In thousands, except per share data)
March 31, December 31,
2001 2000
----------- ---------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 3,869 $ 4,781
Accounts receivable, net 160,529 163,770
Inventories 225,346 205,805
Other current assets 18,785 18,179
--------- ---------
Total current assets 408,529 392,535
Property and equipment, net 29,328 30,258
Intangible assets, net 127,755 128,656
Other assets 12,227 12,021
--------- ---------
$ 577,839 $ 563,470
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 1,419 $ 1,887
Accounts payable 92,255 86,108
Accrued liabilities 15,790 26,099
--------- ---------
Total current liabilities 109,464 114,094
--------- ---------
Long-term obligations:
Borrowings under revolving credit agreement 126,500 138,000
Long-term notes 30,000 --
Bank and other debt 2,776 2,878
--------- ---------
Total long-term obligations 159,276 140,878
--------- ---------
Deferred income taxes and other liabilities 5,464 4,334
--------- ---------
Shareholders' equity:
Common Stock, $.50 par value 13,240 13,217
Class B Common Stock, $.50 par value 1,648 1,579
Paid-in capital 206,978 204,871
Unearned compensation related to
outstanding restricted stock (7,910) (6,031)
Accumulated other comprehensive income (loss), net of tax (1,435) 105
Retained earnings 124,052 122,348
Treasury stock, at cost (32,938) (31,925)
--------- ---------
Total shareholders' equity 303,635 304,164
--------- ---------
$ 577,839 $ 563,470
========= =========
See accompanying notes to condensed consolidated financial statements.
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WATSCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2001 and 2000
(In thousands, except per share data)
(Unaudited)
2001 2000
-------- --------
Revenue $277,552 $286,344
Cost of sales 209,351 218,877
-------- --------
Gross profit 68,201 67,467
Selling, general and administrative expenses 61,542 59,428
-------- --------
Operating income 6,659 8,039
Interest expense, net 2,892 3,176
-------- --------
Income before income taxes 3,767 4,863
Income taxes 1,401 1,809
-------- --------
Net income $ 2,366 $ 3,054
======== ========
Basic earnings per share $ 0.09 $ 0.11
-------- --------
Diluted earnings per share $ 0.09 $ 0.11
-------- --------
Weighted average shares and
equivalent shares used to calculate
earnings per share:
Basic 25,965 27,690
======== ========
Diluted 27,203 28,686
======== ========
See accompanying notes to condensed consolidated financial statements.
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WATSCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2001 and 2000
(In thousands)
(Unaudited)
2001 2000
-------- --------
Cash flows from operating activities:
Net income $ 2,366 $ 3,054
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 3,070 2,965
Provision for doubtful accounts 1,169 1,128
Other, net (172) 79
Changes in operating assets and liabilities:
Accounts receivable 2,072 (5,181)
Inventories (19,541) (18,041)
Accounts payable and accrued liabilities (4,557) 5,048
Other, net (909) (7,634)
-------- --------
Net cash used in operating activities (16,502) (18,582)
-------- --------
Cash flows from investing activities:
Capital expenditures (1,456) (2,326)
Proceeds from sale of fixed assets 692 --
-------- --------
Net cash used in investing activities (764) (2,326)
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit agreement (11,500) 34,560
Proceeds from issuance of long-term notes 30,000 --
Net repayments of bank and other debt (570) (4,231)
Net proceeds from issuances of common stock 91 49
Common stock dividends (654) (696)
Acquisition of common stock (1,013) (9,376)
-------- --------
Net cash provided by financing activities 16,354 20,306
-------- --------
Net decrease in cash and cash equivalents (912) (602)
Cash and cash equivalents at beginning of period 4,781 7,484
-------- --------
Cash and cash equivalents at end of period $ 3,869 $ 6,882
======== ========
See accompanying notes to condensed consolidated financial statements.
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WATSCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(Amounts in thousands, except share data)
(Unaudited)
1. The condensed consolidated balance sheet as of December 31, 2000, 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.
2. The results of operations for the quarter ended March 31, 2001, are not
necessarily indicative of the results for the year ending December 31,
2001. 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 of
the 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 are as follows for
the three months ended March 31, 2001 and 2000:
2001 2000
---------- ----------
Weighted average shares outstanding 25,965,195 27,690,468
Dilutive stock options and restricted shares of
common stock 1,237,854 995,832
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Shares for diluted earnings per share 27,203,049 28,686,300
========== ==========
Stock options and restricted shares of common
stock outstanding which are not included in the
calculation of diluted earnings per share because
their impact is antidilutive 3,020,001 2,397,799
========== ==========
5. 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.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, which established accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities. All derivatives, whether designated in hedging relationships or
not, are required to
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be recorded on the balance sheet at fair value. If the derivative is
designated as a fair value hedge, the changes in the fair value of the
derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow
hedge, the effective portions of changes in the fair value of the
derivative are recorded in other comprehensive income ("OCI") and are
recognized in the income statement when the hedged items affect earnings.
Ineffective portions of changes in the fair value of cash flow hedges are
recognized in earnings.
The adoption of SFAS No. 133 on January 1, 2001 resulted in a cumulative
pre-tax reduction to OCI of $1,001 ($629 after-tax). The Company also
recorded a loss of $1,427 ($896 after-tax) in OCI relating to the change in
value of the cash flow hedges at March 31, 2001.
6. Comprehensive income consists of net income and changes in the value of
available-for-sale securities and derivative instruments and the cumulative
change in accounting principles as further discussed in Note 5 to the
Condensed Consolidated Financial Statements at March 31, 2001 and 2000. The
components of the Company's comprehensive income are as follows for the
three months ended March 31, 2001 and 2000:
2001 2000
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Net income $ 2,366 $ 3,054
Unrealized holding losses on investments
arising during the period net of income
tax benefit of $9 and $47, respectively (15) (80)
Cumulative effect of accounting change,
net of income tax benefit of $372 (629) --
Loss on derivative instruments, net of income
tax benefit of $531 (896) --
------- -------
Comprehensive income $ 826 $ 2,974
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7. 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. Those 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 during 2000 and 7 locations closed during the first quarter of 2001.
The following table summarizes the activity in restructuring liabilities or
valuation reserves during the quarter ended March 31, 2001.
Restructuring Restructuring
Liability or Write-down of Liability or
Valuation Reserves at Assets to Net Cash Valuation Reserve at
December 31, 2000 Realizable Value Payments March 31, 2001
----------------------------------------------------------------------------------------------------------
Discontinued product lines $3,484 $(671) $ -- $2,813
Noncancelable lease obligations 1,194 - (228) 966
Other 477 (29) (195) 253
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Total $5,155 $(700) $(423) $4,032
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2001 VS. QUARTER ENDED MARCH 31, 2000
Results of Operations
The following table presents the Company's consolidated financial results for
the three months ended March 31, 2001 and 2000, expressed as a percent of
revenue:
2001 2000
---- ----
Revenue 100.0 % 100.0 %
Cost of sales (75.4) (76.4)
----- -----
Gross profit 24.6 23.6
Selling, general and administrative expenses (22.2) (20.8)
----- -----
Operating income 2.4 2.8
Interest expense, net (1.0) (1.1)
Income taxes (.5) (.6)
----- -----
Net income .9 % 1.1 %
===== =======
Data presented in the following narratives referring to "same-store basis"
excludes the effects of locations opened and closed during the prior twelve
months.
Revenue for the three months ended March 31, 2001 decreased by $8.8 million,
or 3%, compared to the same period in 2000. Results for the quarter ended March
31, 2001 include a $6.2 million, or 3%, same-store sales increase in the
Company's core residential and commercial air conditioning, heating and
refrigeration ("HVAC") business. Revenue growth in the Company's core HVAC
business was offset by the impact of closing 32 underperforming locations in
connection with the Company's restructuring efforts described below and a 27%
same-store sales decline in the manufactured housing operations. The 32
locations closed accounted for 3% of total revenue during the three months ended
March 31, 2000. During the quarter ended March 31, 2001, the Company's core HVAC
business and manufactured housing operations represented 89% and 7% of revenue,
respectively. The Company believes that market share gains were achieved during
the quarter in its core HVAC business as the Company's 3% same-store sales
growth compares favorably to an 8% decrease in industry-wide distributor
shipments during the same period, according to industry data published by the
Air Conditioning & Refrigeration Institute.
Gross profit for the three months ended March 31, 2001 increased $.7 million,
or 1%, as compared to the same period in 2000. The increase is primarily the
result of improved gross selling margins to 24.6% in 2001 from 23.6% in 2000 due
to the Company's greater focus on improved pricing disciplines, higher margin
products, and improved vendor programs. On a same-store basis in the Company's
core HVAC business, gross profit increased $3.4 million, or 6%, and gross profit
margin increased to 24.4% in 2001 from 23.6% in 2000.
Selling, general and administrative expenses for the three months ended March
31, 2001 increased $2.1 million, or 4%, compared to the same period in 2000.
Selling, general and administrative expenses as a percent of revenue increased
to 22.2% in 2001 from 20.8% in 2000, primarily due to the inability to leverage
the fixed cost structures against the lower than expected sales demand during
the quarter and operating inefficiencies caused by lower business volume in the
manufactured housing operations. On a same-store basis, in the Company's core
HVAC business, selling, general and administrative expenses increased $4.1
million, or 9%, and selling, general and administrative expenses as a percent of
revenue increased to 20.7% in 2001 from 19.5% in 2000.
Interest expense, net for the first quarter in 2001 decreased approximately
$0.3 million, or 9%, compared to the same period in 2000, primarily due to
improved cash flow and lower average borrowings during the quarter.
The effective tax rate was 37.2% for the three months ended March 31, 2001
and 2000.
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Restructuring Activities
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. Those 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 during 2000
and 7 locations closed during the first quarter of 2001. All planned location
closures under the restructuring plan have been completed. The Company believes
that the remaining restructuring liability and valuation reserves are adequate
to complete all other restructuring activities by December 31, 2001.
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 $126.5 million at March 31,
2001, bear interest at primarily LIBOR-based rates plus a spread that is
dependent upon the Company's financial performance (LIBOR plus .6% at March 31,
2001). 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. On February
7, 2001, the Company issued $30.0 million Senior Series A Notes ("Notes")
bearing 7.07% interest under its private placement shelf facility. The Notes
have an average life of 5 years with repayment in equal installments of $10.0
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 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's Board of Directors has 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 the quarter ended March 31, 2001, the Company
purchased approximately .1 million shares at a cost of approximately $1.0
million. Cumulative under the program, the Company has purchased approximately
3.2 million shares at a cost of approximately $32.9 million.
Working capital increased to $299.1 million at March 31, 2001 from $278.4
million at December 31, 2000, 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 long-term debt borrowings.
Cash and cash equivalents decreased $0.9 million during the first quarter of
2001. Principal sources of cash during the quarter were from borrowings made
under the private placement shelf facility and from profitable operations. The
principal uses of cash were to fund working capital needs, the repayment of
borrowings under the revolver credit agreement, capital expenditures and the
Company's repurchase of its common stock. Due to the seasonal nature of the
Company's business, outstanding borrowings under the credit facility typically
peak during the first and second quarters as the Company finances inventory
purchases in advance of the Company's highest sales periods, May through August.
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, 2001, the Company had various interest rate swap agreements with
an aggregate notional amount
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of $60.0 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%.
Effective January 1, 2001 the Company adopted Statement of Accounting
Financial Standards ("SFAS") No. 133, which established accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. All derivatives, whether
designated in hedging relationships or not, are required to be recorded on the
balance sheet at fair value. If the derivative is designated as a fair value
hedge, the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in earnings. If the derivative is
designated as a cash flow hedge, the effective portions of changes in the fair
value of the derivative are recorded in other comprehensive income ("OCI") and
are recognized in the income statement when the hedged items affect earnings.
Ineffective portions of changes in the fair value of cash flow hedges are
recognized in earnings.
The adoption of SFAS No. 133 on January 1, 2001 resulted in a cumulative
pre-tax reduction to OCI of $1.0 million ($.6 million after-tax). The Company
also recorded a loss of $1.4 million ($.9 million after-tax) in OCI relating to
the change in value of the cash flow hedges at March 31, 2001.
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.
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".
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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,
2000, filed on March 31, 2001.
Item 2. Changes in Securities and Use of Proceeds
During the quarter ended March 31, 2001, the Company issued an
aggregate of 150,000 shares of restricted Class B Common Stock to
two executive officers. These issuances were exempt from registration
pursuant to the exemption provided by Section 4(2) of the Securities
Act of 1933.
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
(b) Reports on Form 8-K
A report on Form 8-K dated January 25, 2001 disclosed in Item 9,
regulation FD Disclosure, that the Company issued a press release
regarding certain actions of the Company to improve efficiency and
enhance profitability.
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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 15, 2001
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