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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
- --------------------------------------------------------------------------------
[X] Quarterly Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
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: 15,028,600 shares of the
Company's Common Stock ($.50 par value) and 2,179,847 shares of the
Company's Class B Common Stock ($.50 par value) were outstanding as of May
13, 1997.
PART I. FINANCIAL INFORMATION
WATSCO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
1997 1996
-------- -----------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 3,936 $ 5,020
Marketable securities 1,124 334
Accounts receivable, net 81,227 59,523
Inventories 133,808 87,637
Other current assets 7,588 6,502
-------- --------
Total current assets 227,683 159,016
Property, plant and equipment, net 19,081 16,174
Intangible assets, net 35,512 23,596
Other assets 5,974 4,795
-------- --------
$288,250 $203,581
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 942 $ 794
Accounts payable 33,650 17,343
Accrued liabilities 9,969 10,884
-------- --------
Total current liabilities 44,561 29,021
Long-term obligations:
Borrowings under revolving credit agreement 26,100 48,000
Bank and other debt 5,417 3,027
-------- --------
31,517 51,027
-------- --------
Deferred income taxes 911 911
Deferred credits 2,439 693
Preferred stock of subsidiary 2,000 2,000
Shareholders' equity:
Common Stock, $.50 par value 7,491 5,927
Class B Common Stock, $.50 par value 1,107 1,089
Paid-in capital 155,681 72,129
Retained earnings 42,543 40,784
-------- --------
Total shareholders' equity 206,822 119,929
-------- --------
$288,250 $203,581
======== ========
See accompanying notes to condensed consolidated financial statements.
2
WATSCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
THREE MONTHS ENDED MARCH 31, 1997 and 1996
(In thousands, except per share data)
(Unaudited)
1997 1996
--------- ---------
Revenues:
Net sales $ 101,745 $ 70,675
Royalty and service fees 9,567 7,114
--------- ---------
Total revenues 111,312 77,789
--------- ---------
Costs and expenses:
Cost of sales 77,851 54,671
Direct service expenses 7,435 5,483
Selling, general and administrative 21,750 14,366
--------- ---------
Total costs and expenses 107,036 74,520
--------- ---------
Operating income 4,276 3,269
Other income, net 213 69
Interest expense (778) (1,045)
--------- ---------
Income before income taxes and minority interests 3,711 2,293
Income taxes (1,429) (871)
Minority interests -- (116)
--------- ---------
Net income 2,282 1,306
Retained earnings at beginning of period 40,784 31,136
Common stock cash dividends (491) (315)
Dividends on preferred stock of subsidiary (32) (32)
--------- ---------
Retained earnings at end of period $ 42,543 $ 32,095
========= =========
Earnings per share:
Primary $ .14 $ .11
========= =========
Fully diluted $ .14 $ .11
========= =========
Weighted average shares and
equivalent shares used to calculate (1):
Primary earnings per share 16,400 11,101
========= =========
Fully diluted earnings per share 16,400 11,553
========= =========
(1) Weighted average common shares used in the calculation of earnings per share
for the quarter ended March 31, 1996 have been restated to reflect a 3-for-2
stock split paid on June 14, 1996.
See accompanying notes to condensed consolidated financial statements.
3
WATSCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(In thousands)
(Unaudited)
1997 1996
-------- --------
Cash flows from operating activities:
Net income $ 2,282 $ 1,306
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 1,264 799
Provision for doubtful accounts 149 220
Minority interests, net of dividends paid -- 116
Change in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (3,504) (2,309)
Inventories (13,678) (10,895)
Accounts payable and accrued liabilities 3,885 (359)
Other, net (2,127) (435)
-------- --------
Net cash used in operating activities (11,729) (11,557)
-------- --------
Cash flows from investing activities:
Capital expenditures, net (2,167) (1,142)
Business acquisitions, net of cash acquired (48,891) --
Net sales (purchases) of marketable securities (712) 267
-------- --------
Net cash used in investing activities (51,770) (875)
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit agreements (21,900) 13,904
Net repayments of short-term promissory notes -- (1,500)
Net repayments of long-term obligations (335) (33)
Net proceeds from issuances of common stock 85,173 33,938
Cash dividends (491) (315)
Other (32) (32)
-------- --------
Net cash provided by financing activities 62,415 45,962
-------- --------
Net increase (decrease) in cash and cash equivalents (1,084) 33,530
Cash and cash equivalents at beginning of period 5,020 3,751
-------- --------
Cash and cash equivalents at end of period $ 3,936 $ 37,281
======== ========
Supplemental cash flow information:
Interest paid $ 772 $ 980
======== ========
Income taxes paid $ 610 $ 58
======== ========
See accompanying notes to condensed consolidated financial statements.
4
WATSCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
1. The condensed consolidated balance sheet as of December 31, 1996, which has
been derived from 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 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 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, 1997 are not
necessarily indicative of the results for the year ending December 31,
1997. 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, 1997 and December 31, 1996, inventories consist of (in
thousands):
MARCH 31, DECEMBER 31,
1997 1996
-------- ------------
Raw materials $ 5,158 $ 4,208
Work in process 1,512 1,502
Finished goods 127,138 81,927
-------- --------
$133,808 $ 87,637
======== ========
4. In January 1997, the Company completed the acquisition of the common stock
of Coastline Distribution, Inc. ("Coastline") and the purchase of
substantially all of the operating assets of four branch operations from
Inter-City Products Corporation (USA). Coastline and the branches operate
as wholesale distributors of residential air conditioning and heating
products in Florida, Georgia, southern Alabama, North Carolina, South
Carolina, southern California, northern Virginia and Maryland.
In March 1997, the Company completed the purchase of substantially all of
the operating assets and assumption of certain liabilities of Carrier
Corporation's Comfort Products Distributing ("Comfort Products") and
Central Plains Distributing ("Central Plains") distribution operations.
Comfort Products and Central Plains sell heating and air conditioning
products from eight branches serving markets in Missouri, Kansas, Nebraska,
Iowa, North Dakota and South Dakota.
Cash consideration paid by the Company for these acquisitions totaled
approximately $48.9 million and is subject to adjustment upon the
completion of an audit of the assets purchased and the liabilities assumed.
These acquisitions were accounted for under the purchase method of
accounting and, accordingly, their results of operations have been included
in the condensed consolidated statement of income beginning on their
respective dates of acquisition. The excess of the aggregate purchase
prices over the net assets acquired of approximately $11.9 million is being
amortized on a straight-line basis over 40 years. In connection with these
acquisitions, the Company assumed liabilities of approximately $15.1
million.
5. In February 1997, the Company completed the sale of 3,000,000 shares of
Common Stock in a public offering resulting in net proceeds of
approximately $85.2 million, a significant portion of which was used to
repay borrowings under its revolving credit agreement. In March 1997, the
Company used a portion of the proceeds to fund the acquisition of Carrier
Corporation's Comfort Products and Central Plains distribution operations
discussed above. The Company intends to use the remaining net proceeds for
general corporate purposes including potential acquisitions.
5
6. In April 1997, the Company announced that it (or its subsidiaries) had
signed letters of intent to acquire the net assets and businesses of four
wholesale distributors of air conditioning, heating and refrigeration
equipment and related parts and supplies. The businesses to be acquired
have aggregate annual revenues of approximately $57 million, collectively
operate 30 branches and serve markets in Texas, California, North Carolina,
Tennessee, Louisiana, Nevada, and Oklahoma. The transactions are subject to
the execution of definitive agreements and other conditions.
7. Certain amounts for 1996 have been reclassified to conform with the 1997
presentation.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1997 VS. QUARTER ENDED MARCH 31, 1996
RESULTS OF OPERATIONS
The following table presents certain items of the Company's consolidated
financial statements for the three months ended March 31, 1997 and 1996,
expressed as a percentage of revenues:
1997 1996
------ -------
Revenues 100.0% 100.0%
Cost of sales and direct service expenses (76.6) (77.3)
------ -------
Gross profit 23.4 22.7
Selling, general and administrative expenses (19.5) (18.5)
------ -------
Operating income 3.9 4.2
Other income, net .2 -
Interest expense (.7) (1.3)
Income taxes (1.3) (1.1)
Minority interests - (.1)
------ -------
Net income 2.1% 1.7%
====== =======
The above table and following narrative includes the results of operations of
companies acquired during 1997 and 1996 as follows: Three States Supply
Company, Inc., acquired in April 1996; Serviceman Supplies, Inc., acquired in
October 1996; Coastal Supply Company, Inc., acquired in December 1996; Coastline
Distribution, Inc. and four branch operations, acquired in January 1997; and
Comfort Products Distributing, Inc. and Central Plains Distributing, Inc.,
acquired in March 1997 (collectively, the "acquisitions"). 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.
Revenues for the three months ended March 31, 1997 increased $33.5 million,
or 43%, compared to the same period in 1996. In the climate control segment,
revenues increased $31.1 million, or 44%. Excluding the effect of acquisitions,
revenues for the climate control segment increased $1.8 million, or 3%. Such
increase was primarily due to greater sales of parts and supplies resulting from
expanded product lines.
Gross profit for the three months ended March 31, 1997 increased $8.4
million, or 48%, as compared to the same period in 1996. Excluding the effect of
acquisitions, gross profit increased $1.2 million, or 7%, primarily as a result
of the aforementioned revenue increase and improvement in gross profit margins.
Gross profit margin in the first quarter increased to 23.4% in 1997 from 22.7%
in 1996. Excluding the effect of acquisitions, gross profit margin increased to
23.3% in 1997 from 22.7% in 1996. These increases were primarily due to certain
vendor price increases during 1995 which the Company did not begin passing on to
customers until the second quarter of 1996 and the effect of new vendor
procurement programs benefiting the Company with lower purchase costs for
certain parts and supplies in 1997.
Selling, general and administrative expenses for the three months ended March
31, 1997 increased $7.3 million, or 51%, compared to the same period in 1996,
primarily due to selling and delivery costs related to increased sales.
Excluding the effect of acquisitions, selling, general and administrative
expenses increased $1.3 million, or 9%, primarily due to revenue increases.
Selling, general and administrative expenses as a percent of revenues increased
to 19.5% in 1997 from 18.5% in 1996, primarily due to higher cost structures of
acquired companies and startup costs related to the opening of new distribution
branches. Excluding the effect of acquisitions, selling, general and
administrative expenses as a percent of revenues increased to 19.3% in 1997 from
18.5% in 1996, primarily due to relatively higher cost structures of new
distribution branches.
7
Interest expense for the first quarter in 1997 decreased approximately
$267,000, or 26%, compared to the same period in 1996 and, excluding the effect
of acquisitions, interest expense decreased $737,000, or 71%, primarily due to
lower average borrowings.
In March 1996, the Company acquired the minority interests in certain of its
distribution subsidiaries. Therefore, there was no minority interest expense in
the first quarter of 1997.
The effective tax rate for the three months ended March 31, 1997 was 38.5%
compared to 38.0% for the same period in 1996. This increase was due to a
greater percentage of income earned in states having higher tax rates in 1997 as
compared to 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has adequate availability of capital from operations and its
revolving credit agreement to fund present operations and anticipated growth,
including expansion in the Company's current and targeted market areas. At March
31, 1997, borrowings under the revolving credit agreement totaled $26.1 million
and bear interest at primarily LIBOR-based rates plus a spread that is dependent
upon the Company's financial performance (LIBOR plus 3/8% at March 31, 1997).
The revolving credit agreement contains 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 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.
Working capital increased to $183.1 million at March 31, 1997 from $130.0
million at December 31, 1996. This increase is primarily due to the receipt of
net proceeds of approximately $85.2 million from the sale of 3,000,000 shares of
the Company's Common Stock in February 1997. In March 1997, the Company used the
net proceeds to pay down its revolving credit agreement and to fund the
acquisitions of Comfort Products and Central Plains.
Cash and cash equivalents decreased $1.1 million during the first quarter of
1997. Principal sources of cash during the quarter were net proceeds from the
issuance of common stock, borrowings under the revolving credit agreements and
profitable operations. The principal uses of cash were to fund working capital
needs, finance business acquisitions and repay long-term obligations. Inventory
purchases are substantially funded by borrowings under a revolving credit
agreement.
8
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,
1996, filed on March 31, 1997.
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, 1997 and 1996.
27. Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None
9
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
(Chief Financial Officer)
May 14, 1997
10
EXHIBIT PAGE
- ------- ----
11 Computation of Earnings Per Share 12
27 Financial Data Schedule 13
11
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
QUARTERS ENDED MARCH 31, 1997 AND 1996
(In thousands, except per share data)
1997 1996(1)
-------- --------
Net income $ 2,282 $ 1,306
Less subsidiary preferred stock dividend (32) (32)
-------- --------
Income applicable to common stock
for primary earnings per share 2,250 1,274
Add interest expense, net of income tax effects,
attributable to convertible debentures -- 25
-------- --------
Income applicable to common stock for
fully diluted earnings per share $ 2,250 $ 1,299
======== ========
Weighted average common shares outstanding 15,298 10,368
Additional shares assuming
exercise of stock options and warrants 1,102 733
-------- --------
Shares used for primary earnings per share 16,400 11,101
Additional shares assuming
exercise of stock options and warrants -- 117
Conversion of 10% Convertible
Subordinated Debentures due 1996 -- 335
-------- --------
Shares used for fully diluted earnings per share 16,400 11,553
======== ========
Earnings per share:
Primary $ .14 $ .11
======== ========
Fully diluted $ .14 $ .11
======== ========
- ---------------
(1) Weighted average common shares outstanding have been restated to include the
effect of a 3-for-2 stock split paid on June 14, 1996.
12
5
1,000
3-MOS
DEC-31-1997
MAR-31-1997
3,936
1,124
86,147
4,920
133,808
227,683
36,107
17,026
288,250
44,561
31,517
0
0
8,598
198,224
288,250
101,745
111,312
77,851
85,286
21,601
149
778
3,711
1,429
2,282
0
0
0
2,282
0.14
0.14
