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
[X] Quarterly Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1995
or
[ ] Transition Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period From
___ to ___
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) 858-0828
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 (includes
the effects of a 3-for-2 stock split declared for both classes of
common stock payable on May 15, 1995 to shareholders of record as
of April 28, 1995): 4,682,468 shares (3,121,762 shares prior to
the stock split) of the Company's Common Stock ($.50 par value)
and 1,471,573 shares (981,135 shares prior to the stock split) of
the Company's Class B Common Stock ($.50 par value) were
outstanding as of April 30, 1995.
1 of 11
PART I. FINANCIAL INFORMATION
WATSCO, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 1995 and December 31, 1994
(In $000s)
March 31, December 31,
1995 1994
----------- ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 1,829 $ 1,744
Marketable securities 981 3,227
Accounts receivable, net 37,783 34,811
Inventories 64,851 49,259
Other current assets 4,861 4,608
-------- --------
Total current assets 110,305 93,649
Property, plant and equipment, net 9,595 8,829
Intangible assets, net 14,698 13,164
Other assets 3,885 4,022
-------- --------
$138,483 $119,664
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 1,729 $ 1,781
Borrowings under revolving credit agreements 46,250 32,034
Accounts payable 16,962 13,108
Accrued liabilities 6,193 6,631
-------- --------
Total current liabilities 71,134 53,554
Long-term obligations:
Bank and other debt 3,228 2,719
Subordinated notes 2,500 2,500
Convertible subordinated debentures 1,505 1,505
-------- --------
7,233 6,724
Deferred income taxes 638 713
Minority interests 12,051 11,857
Shareholders' equity:
Common Stock, $.50 par value 1,553 1,553
Class B Common Stock, $.50 par value 498 498
Paid-in capital 18,945 18,936
Retained earnings 26,431 25,829
-------- --------
Total shareholders' equity 47,427 46,816
-------- --------
$138,483 $119,664
======== ========
See accompanying notes to consolidated financial statements.
2 of 11
WATSCO, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Three Months Ended March 31, 1995 and 1994
(In $000s except per share amounts)
(Unaudited)
1995 1994
------- -------
Revenues:
Net sales $53,194 $48,536
Royalty and service fees 7,127 6,716
------- -------
Total revenues 60,321 55,252
------- -------
Costs and expenses:
Cost of sales 40,103 37,081
Direct service expenses 5,483 4,953
Selling, general and administrative 12,097 11,172
------- -------
Total costs and expenses 57,683 53,206
------- -------
Operating income 2,638 2,046
Other income (expense):
Investment income, net 63 37
Interest expense (911) (677)
------- -------
(848) (640)
------- -------
Income before income taxes and minority interests 1,790 1,406
Income taxes (692) (533)
Minority interests (197) (183)
------- -------
Net income 901 690
Retained earnings at beginning of period 25,829 21,234
Common stock cash dividends (267) (244)
Dividends on preferred stock of subsidiary (32) (32)
------- -------
Retained earnings at end of period $26,431 $21,648
======= =======
Earnings per share:
Primary $.14 $.11
==== ====
Fully diluted $.13 $.11
==== ====
Weighted average shares and
equivalent shares used to calculate:
Primary earnings per share 6,412 6,229
===== =====
Fully diluted earnings per share 6,720 6,530
===== =====
See accompanying notes to consolidated financial statements.
3 of 11
WATSCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1995 and 1994
(In $000s)
(Unaudited)
1995 1994
------- -------
Cash flows from operating activities:
Net income $ 901 $ 690
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 623 522
Deferred income tax credit (75) (95)
Minority interests, net of dividends paid 197 (550)
Change in operating assets and liabilities,
net of effects from acquisitions
Accounts receivable (23) (1,419)
Inventories (10,734) (6,666)
Accounts payable and accrued liabilities 2,492 (1,579)
Other, net 79 104
-------- --------
Net cash used in operating activities (6,540) (8,993)
-------- --------
Cash flows from investing activities:
Cash used in acquisitions, net of cash acquired (7,914) -
Capital expenditures, net (1,009) (341)
Net proceeds from marketable securities transactions 2,260 746
-------- --------
Net cash provided by (used in) investing activities (6,663) 405
-------- --------
Cash flows from financing activities:
Net borrowings under revolving credit agreements 14,216 11,830
Repayments of long-term obligations (638) (325)
Cash dividends (267) (244)
Other, net (23) (18)
-------- --------
Net cash provided by financing activities 13,288 11,243
-------- --------
Net increase in cash and cash equivalents 85 2,655
Cash and cash equivalents at beginning of period 1,744 1,093
-------- --------
Cash and cash equivalents at end of period $ 1,829 $ 3,748
======== ========
Supplemental cash flow information:
Interest paid $ 791 $ 608
======== ========
Income taxes paid $ 120 $ 500
======== ========
See accompanying notes to consolidated financial statements
4 of 11
WATSCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1995
1. The consolidated balance sheet as of December 31, 1994, which has
been derived from audited financial statements, and the unaudited interim
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 generally accepted accounting
principles 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 to a fair presentation have been
included in the consolidated financial statements for the periods presented
herein.
2. The results of operations for the quarter ended March 31, 1995 are not
necessarily indicative of the results for the year ending December 31,
1995. The sale of the Company's products and services is seasonal with
revenues generally increasing during the months of May through August.
3. At March 31, 1995 and December 31, 1994, inventories consist of
(in thousands):
March 31, December 31,
1995 1994
-------- ------------
Raw materials $ 4,430 $ 4,058
Work in process 1,321 1,152
Finished goods 59,100 44,049
------- -------
$64,851 $49,259
======= =======
4. On February 6, 1995, Comfort Supply, Inc. ("Comfort Supply"), the
Company's Houston-based distribution subsidiary, acquired the common
stock of Airite, Inc., a Louisiana-based wholesale distributor of
residential central air conditioners and related parts and supplies.
Consideration for the purchase consisted of a cash payment to the
seller in the amount of $100,000, with the remainder represented by a
subordinated promissory note payable to the seller in the amount of
$615,000.
On March 13, 1995, Gemaire Distributors, Inc. ("Gemaire"), the
Company's Florida-based distribution subsidiary, purchased certain
accounts receivable, inventory and other operating assets and assumed
certain liabilities of H.B. Adams, Inc. ("H.B. Adams"), a wholesale
distributor of air conditioning, heating and refrigeration products
operating seven branch locations in central Florida. The cash
consideration paid by Gemaire totaled approximately $7.8 million and
is subject to adjustment upon the completion of an audit of the assets
purchased and liabilities assumed. In connection with this
transaction, Gemaire increased its revolving credit agreement to allow
maximum borrowings of $27 million in order to fund the purchase and to
provide additional financing for future working capital requirements.
The above acquisitions were accounted for under the purchase method of
accounting. The excess of the aggregate purchase prices over the fair
value of the net assets acquired of $1.6 million is being amortized on
a straight-line basis over 40 years. In connection with these
acquisitions, the Company assumed liabilities of $1,132,000.
5. In March 1995, Comfort Supply entered into a letter of intent to
purchase the business and operating assets and assume certain
liabilities of Environmental Equipment & Supplies, Inc., a wholesale
distributor of residential central air conditioners and related parts
and supplies based in North Little Rock, Arkansas. The purchase is
subject to execution of a definitive agreement and other conditions.
5 of 11
6. On April 18, 1995, the Company's Board of Directors authorized, for
both classes of the Company's common stock, a three-for-two stock
split effected in the form of a 50% stock dividend payable on May 15,
1995 to shareholders of record as of April 28, 1995. All weighted
average share and per share amounts included in this quarterly report
have been restated to reflect this stock split.
7. Certain amounts for 1994 have been reclassified to conform with the
1995 presentation.
6 of 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1995 VS. QUARTER ENDED MARCH 31, 1994
RESULTS OF OPERATIONS
The following table presents certain items of the Company's consolidated
financial statements for the three months ended March 31, 1995 and 1994,
expressed as a percentage of total revenues:
1995 1994
---- ----
Total revenues 100.0% 100.0%
Cost of sales and direct service expenses (75.6) (76.1)
----- -----
Gross profit 24.4 23.9
Selling, general and administrative expenses (20.1) (20.2)
----- -----
Operating income 4.3 3.7
Interest income, net .1 -
Interest expense (1.5) (1.2)
Income taxes (1.1) (1.0)
Minority interests (.3) (.3)
----- -----
Net income 1.5% 1.2%
===== =====
The above table and following narrative includes, from the date of
their respective acquisition, the results of operations of Airite, Inc.
("Airite"), a Louisiana-based wholesale distributor of residential central
air conditioners acquired in February 1995, and H.B. Adams, Inc. ("H.B.
Adams"), a wholesale distributor of residential air conditioners located in
central Florida whose business and assets the Company purchased in March
1995 (collectively, the "acquisitions").
Revenues for the three months ended March 31, 1995 increased $5.1
million, or 9%, compared to the same period in 1994. In the climate control
segment, revenues increased $4.4 million, or 9%. Excluding the effect of
acquisitions, revenues for the climate control segment increased $3.0
million, or 6%. Revenues in the Company's Florida distribution market
increased $2.1 million, or 12%, partially due to the acquisition of H.B.
Adams, but primarily due to a 6% increase in same store sales from
increased sales of replacement air conditioners in south Florida, higher
sales of parts and supplies as a result of improved marketing efforts and
growth in international sales to Latin America. Revenues in the Company's
Texas distribution market increased $1.3 million, or 14%, helped by the
acquisition of Airite. On a same store basis, revenues in the Texas
distribution market increased 6% due to greater market penetration.
Revenues in the Company's western distribution market rose 2% as increased
sales of replacement air conditioners offset sales delays caused by heavy
rains in California. Revenues in the Company's manufacturing operations
increased $641,000, or 13%, due to increased penetration of the original
equipment manufacturer (OEM) market and new product offerings to both OEM
and aftermarket customers. Revenues in the personnel services segment
increased $638,000, or 10%, reflecting greater demand for temporary help
services and greater customer acceptance of new product offerings such as
professional staffing and technical temporaries.
Gross profit for the three months ended March 31, 1995 increased $1.5
million, or 12%, as compared to the same period in 1994. Excluding the
effect of acquisitions, gross profit increased $1.2 million, or 9%,
primarily as a result of the aforementioned revenue increases but also due
to increased gross profit margins. Gross profit margin in the first quarter
increased to 24.4% in 1995 from 23.9% in 1994. Excluding the effect of
acquisitions, gross profit margin increased to 24.5% in 1995 from 23.9% in
1994, primarily due to a shift in product mix during the quarter to higher
margin replacement sales and increased sales of parts and supplies, which
achieve higher margins than equipment sales.
7 of 11
Selling, general and administrative expenses for the three months ended
March 31, 1995 increased $835,000, or 8%, compared to the same period in
1994, primarily due to selling and delivery costs related to increased
sales. Excluding the effect of acquisitions, selling, general and
administrative expenses increased $565,000, or 5%, primarily due to revenue
increases. Including and excluding the effect of acquisitions, selling,
general and administrative costs as a percent of revenues decreased from
19.4% in 1994 to 19.1% in 1995. These decreases were the result of a larger
revenue base, due to acquisitions and sales growth, over which to spread
fixed costs.
Interest expense for the first quarter in 1995 increased $234,000, or
35%, compared to the same period in 1994, due to interest rate increases
and higher borrowings used to finance the purchase of H. B. Adams and to
finance increased inventory levels required by sales growth and stocking
requirements in new branch locations. Excluding the effect of acquisitions,
interest expense increased $195,000, or 29%, primarily due to interest rate
increases and higher borrowings.
The effective tax rate for the three months ended March 31, 1995 was
38.6% compared to 37.9% for the same period in the 1994. The increase is
primarily a result of a proportionately larger share of taxable income
expected to be generated in states with higher tax rates during 1995 as
compared to 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased to $1.8 million during the first
quarter of 1995. Principal sources of cash were profitable operations,
proceeds from the sale of marketable securities, primarily consisting of
tax exempt municipal bonds, and increased borrowings under revolving credit
agreements. The principal uses of cash were to fund acquisitions, finance
capital expenditures and purchase inventories. Inventory purchases are
substantially funded by borrowings under the subsidiaries' revolving credit
agreements. The increase in inventory in 1995 was higher than 1994 due to
earlier receipt of inventory shipments from suppliers than in the prior
year in order to take advantage of lower vendor prices and discounts and
the purchase of new inventory products to expand product offerings.
The working capital position of the Company did not change materially
from December 31, 1994. The Company has adequate availability of capital
from operations and revolving credit facilities to fund current operations
and anticipated growth, including expansion in the Company's current and
targeted market areas, through 1995. At March 31, 1995, the Company's
distribution operations had aggregate borrowing commitments from lenders
under existing revolving credit agreements of $62 million, of which $16
million was unused and $6 million available. Additionally, the Company has
$3 million available under an unsecured revolving credit facility with a
bank. Certain of the subsidiaries' revolving credit agreements contain
provisions limiting the payment of dividends to their shareholders. The
Company does not anticipate that these limitations on dividends will have a
material effect on the Company's ability to meet its cash obligations.
The Company continually evaluates additional acquisitions and other
investment opportunities and its financing needs may change in the future.
Should suitable investment 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.
8 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, 1994, filed on
March 28, 1995.
Item 2. Changes in the Rights of the Company's Security Holders
None
Item 3. Defaults by the Company on its Senior Securities
None
Item 4. Results of Votes of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11. Computation of Earnings Per Share for the Quarters Ended
March 31, 1995 and 1994.
(b) Reports on Form 8-K
None
9 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/ RONALD P. NEWMAN
------------------------------------
Ronald P. Newman
Vice President and
Secretary/Treasurer
(Chief Financial Officer)
May 12, 1995
10 of 11
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
Quarters Ended March 31, 1995 and 1994
(In $000s except per share amounts)
1995 (1) 1994 (1)
--------- ----------
Net income $ 901 $ 690
Less subsidiary preferred stock dividend (32) (32)
------ ------
Income applicable to common stock
for primary earnings per share 869 658
Add interest expense, net of income tax effects,
attributable to convertible debentures 28 31
------ ------
Income applicable to common stock for
fully diluted earnings per share $ 897 $ 689
====== ======
Weighted average common shares outstanding 6,152 6,087
Additional shares assuming
exercise of stock options and warrants 260 142
------ ------
Shares used for primary earnings per share 6,412 6,229
Additional shares assuming
exercise of stock options and warrants 60 25
Conversion of 10% Convertible
Subordinated Debentures due 1996 248 276
------ ------
Shares used for fully diluted earnings per share 6,720 6,530
====== ======
Earnings per share:
Primary $.14 $.11
==== ====
Fully diluted $.13 $.11
==== ====
(1) Weighted average common shares used in the calculation of earnings
per share for the quarters ended March 31, 1995 and 1994 have been
restated to reflect a 3-for-2 stock split payable on May 15, 1995
to shareholders of record as of April 28, 1995.
11 of 11
5
0000105016
WATSCO, INC.
1,000
3-MOS
DEC-31-1995
MAR-31-1995
1,829
981
40,716
2,933
64,851
110,305
20,797
11,202
138,483
71,134
7,233
2,051
0
0
45,376
138,483
53,194
60,321
40,103
45,586
11,992
105
911
1,790
692
901
0
0
0
901
0.14
0.13
