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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 SEPTEMBER 30, 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
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: 15,235,340 shares of the
Company's Common Stock ($.50 par value) and 2,167,453 shares of the Company's
Class B Common Stock ($.50 par value) were outstanding as of November 5, 1997.
PART I. FINANCIAL INFORMATION
WATSCO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996
(In thousands, except per share data)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 14,380 $ 5,020
Marketable securities 891 334
Accounts receivable, net 128,787 59,523
Inventories 178,101 87,637
Other current assets 9,481 6,502
----------- -----------
Total current assets 331,640 159,016
Property, plant and equipment, net 28,993 16,174
Intangible assets, net 72,503 23,596
Other assets 9,255 4,795
----------- -----------
$442,391 $203,581
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 988 $ 794
Accounts payable 52,513 17,343
Accrued liabilities 19,668 10,884
----------- ----------
Total current liabilities 73,169 29,021
----------- ----------
Long-term obligations:
Borrowings under revolving credit agreement 135,900 48,000
Bank and other debt 4,611 3,027
----------- ----------
140,511 51,027
----------- ----------
Deferred income taxes and credits 1,670 1,604
Preferred stock of subsidiaries 4,413 2,000
Shareholders' equity:
Common Stock, $.50 par value 7,608 5,927
Class B Common Stock, $.50 par value 1,084 1,089
Paid-in capital 159,304 72,129
Retained earnings 54,632 40,784
----------- -----------
Total shareholders' equity 222,628 119,929
----------- -----------
$442,391 $203,581
=========== ===========
See accompanying notes to condensed consolidated financial statements.
2 of 11
WATSCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
RETAINED EARNINGS
Quarters and Nine Months Ended September 30, 1997 and 1996
(In thousands, except per share data)
(Unaudited)
QUARTERS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Net sales $195,047 $115,681 $467,945 $297,025
Royalty and service fees 11,535 9,657 32,322 24,599
----------- ---------- ----------- -----------
Total revenues 206,582 125,338 500,267 321,624
----------- ---------- ----------- -----------
Costs and expenses:
Cost of sales 151,841 89,551 362,966 230,471
Direct service expenses 9,075 7,459 25,294 18,971
Selling, general and administrative 33,554 19,642 84,643 52,482
----------- ---------- ----------- -----------
Total costs and expenses 194,470 116,652 472,903 301,924
----------- ---------- ----------- -----------
Operating income 12,112 8,686 27,364 19,700
Other income, net 435 195 899 547
Interest expense (1,277) (832) (2,844) (2,966)
----------- ---------- ----------- -----------
Income before income taxes and minority interests 11,270 8,049 25,419 17,281
Income taxes (4,282) (3,047) (9,786) (6,601)
Minority interests - - - (116)
----------- ---------- ----------- -----------
Net income 6,988 5,002 15,633 10,564
Retained earnings at beginning of period 48,270 34,298 40,784 29,565
Common stock cash dividends (593) (474) (1,688) (1,239)
Dividends on preferred stock of subsidiary (33) (33) (97) (97)
----------- ---------- ----------- -----------
Retained earnings at end of period $ 54,632 $ 38,793 $ 54,632 $ 38,793
=========== ========== =========== ===========
Earnings per share:
Primary $.38 $.34 $.88 $.78
==== ==== ==== ====
Fully diluted $.38 $.34 $.88 $.77
==== ==== ==== ====
Weighted average shares and
equivalent shares used to calculate:
Primary earnings per share 18,379 14,538 17,664 13,363
====== ====== ====== ======
Fully diluted earnings per share 18,423 14,840 17,733 13,759
====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements.
3 of 11
WATSCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1997 and 1996
(In thousands)
(Unaudited)
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 15,633 $ 10,564
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 4,429 3,018
Provision for doubtful accounts 1,576 916
Minority interests, net of dividends paid - 116
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (29,849) (14,401)
Inventories (22,357) (22,693)
Accounts payable and accrued liabilities 8,082 8,930
Other, net (5,586) (393)
-------- ---------
Net cash used in operating activities (28,072) (13,943)
-------- ---------
Cash flows from investing activities:
Business acquisitions, net of cash acquired (116,785) (15,119)
Capital expenditures, net (6,836) (3,639)
Other (257) 265
-------- ---------
Net cash used in investing activities (123,878) (18,493)
-------- ---------
Cash flows from financing activities:
Net borrowings under revolving credit agreements 87,900 8,815
Repayments of bank and other debt (11,514) (8,514)
Net proceeds from issuance of common stock 86,709 34,329
Common stock cash dividends (1,688) (1,239)
Other (97) (97)
-------- ---------
Net cash provided by financing activities 161,310 33,294
-------- ---------
Net increase in cash and cash equivalents 9,360 858
Cash and cash equivalents at beginning of period 5,020 3,751
-------- ---------
Cash and cash equivalents at end of period $ 14,380 $ 4,609
======== =========
See accompanying notes to condensed consolidated financial statements.
4 of 11
WATSCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 and nine month period ended
September 30, 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 September 30, 1997 and December 31, 1996, inventories consisted of (in
thousands):
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
Raw materials $ 3,839 $ 4,208
Work in process 3,010 1,502
Finished goods 171,252 81,927
---------- ----------
$178,101 $87,637
========== ==========
4. In July 1997, the Company completed the acquisition of the common stock of
Air Systems Distributors, Inc., a $9 million wholesale distributor of
residential and commercial air conditioning equipment and related products
which has four branch locations in Florida.
In August 1997, the Company completed the acquisition of the common stock
of William Wurzbach Company, Inc. ("Wurzbach"), an $18 million wholesale
distributor of parts and supplies for commercial and industrial
refrigeration, air conditioning and refrigeration equipment and related
products. Wurzbach has twelve branch locations serving markets in northern
California and Reno, Nevada.
In September 1997, the Company completed the acquisition of the common
stock of Baker Distributing Company ("Baker"), a $148 million wholesale
distributor of air conditioning, heating and refrigeration equipment and
related parts and supplies. Baker has 83 branch locations serving markets
in Florida, Georgia, South Carolina, North Carolina, Virginia, Alabama and
Louisiana.
Consideration for these acquisitions totaled $68.1 million and consisted of
cash payments aggregating approximately $60.6 million and the issuance of
approximately 80,000 shares of Common Stock and is subject to adjustment
upon the completion of audits 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 $32.4 million is
being amortized on a straight-line basis over 40 years. In connection with
these acquisitions, the Company assumed liabilities of approximately $24.8
million.
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5. In August, 1997, the Company executed an amended and restated
bank-syndicated credit agreement which provides for borrowings of up to
$260 million, expiring on August 8, 2002. The unsecured agreement will be
used to fund seasonal working capital needs and for other general corporate
purposes, including acquisitions. Borrowings under the revolving credit
agreement bear interest at primarily LIBOR-based rates plus a spread that
is dependent upon the Company's financial performance (30-day LIBOR plus
.375% at September 30, 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.
6. The Company has evaluated the pro forma effects of the recent accounting
pronouncement, SFAS No. 128, "Earnings Per Share", which will be effective
for fiscal years ending after December 15, 1997. Based on this evaluation,
the pro forma effects are not material to the Company's consolidated
financial position, liquidity or results of operations.
6 of 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents certain items of the Company's condensed
consolidated financial statements for the quarters and nine months ended
September 30, 1997 and 1996 expressed as a percentage of revenues:
QUARTERS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales and direct service expenses (77.9) (77.4) (77.6) (77.6)
--------- --------- --------- ---------
Gross profit 22.1 22.6 22.4 22.4
Selling, general and administrative expenses (16.2) (15.7) (16.9) (16.3)
--------- --------- --------- ---------
Operating income 5.9 6.9 5.5 6.1
Other income, net .2 .2 .2 .2
Interest expense (.6) (.7) (.6) (.9)
Income taxes (2.1) (2.4) (2.0) (2.1)
--------- -------- -------- ---------
Net income 3.4% 4.0% 3.1% 3.3%
========= ======== ======== =========
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 A&C Distributors, Inc. branch operations, acquired
in January 1997; Comfort Products Distributing, Inc. and Central Plains
Distributing, Inc., acquired in March 1997; Weathertrol Supply Company, acquired
in June 1997; Air Systems Distributors, Inc., acquired in July 1997; and William
Wurzbach Company, Inc., acquired in August 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.
QUARTER ENDED SEPTEMBER 30, 1997 VS. QUARTER ENDED SEPTEMBER 30, 1996
Revenues for the three months ended September 30, 1997 increased $81.2
million, or 65%, compared to the same period in 1996. In the distribution
operations, revenues increased $81.0 million, or 75%. Excluding the effect of
acquisitions, revenues for the distribution operations increased $12.6 million,
or 12%. Such increase was primarily due to sales generated from expanded product
lines of parts and supplies.
Gross profit for the three months ended September 30, 1997 increased $17.3
million, or 61%, compared to the same period in 1996, primarily as a result of
the aforementioned revenue increases. In the distribution operations, gross
profit increased $17.9 million or 76%. Excluding the effect of acquisitions,
gross profit for the distribution operations increased $2.8 million, or 12%.
Gross profit margin decreased to 22.1% in 1997 from 22.6% in 1996 primarily due
to lower revenues and higher production costs in the Company's manufacturing
operations. Excluding the effect of acquisitions, gross profit margin for the
distribution operations was unchanged from 1996 at 21.8%.
7 of 11
Selling, general and administrative expenses for the three months ended
September 30, 1997 increased $13.9 million, or 71%, compared to the same period
in 1996. In the distribution operations, selling, general and administrative
expenses increased $13.6 million or 91%. Excluding the effect of acquisitions,
selling, general and administrative expenses for the distribution operations
increased $2.2 million, or 15%, primarily due to increased revenues and higher
costs related to new branches and expansion of existing branches. Selling,
general and administrative costs as a percent of revenues increased to 16.2% in
1997 from 15.7% in 1996, primarily due to the 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 costs
as a percent of revenues increased to 16.1% in 1997 from 15.7% in 1996,
primarily due to branch expansions, the relatively higher cost structures of new
distribution branches, and lower revenues in the Company's manufacturing
operations.
Interest expense for the third quarter of 1997 increased $445,000, or 54%,
compared to the same period in 1996 primarily due to higher average borrowings.
Excluding the effect of acquisitions, interest expense decreased $807,000, or
97% primarily due to a reduction in average borrowings funded by proceeds from
the sale of the Company's Common Stock in February 1997.
The effective tax rate for the three months ended September 30, 1997 was
38.0% compared to 37.9% for the same period in 1996. The increase is primarily a
result of a higher effective Federal income tax rate.
NINE MONTHS ENDED SEPTEMBER 30, 1997 VS. NINE MONTHS ENDED SEPTEMBER 30, 1996
Revenues for the nine months ended September 30, 1997 increased $178.6
million, or 56%, compared to the same period in 1996. In the distribution
operations, revenues increased $172.9 million, or 62%. Excluding the effect of
acquisitions, revenues for the distribution operations increased $18.4 million,
or 7%. This increase was primarily due to sales generated from expanded product
lines of parts and supplies.
Gross profit for the nine months ended September 30, 1997 increased $39.8
million, or 55%, compared to the same period in 1996, primarily as a result of
the aforementioned revenue increases. In the distribution operations, gross
profit increased $39.3 million or 65%. Excluding the effect of acquisitions,
gross profit for the distribution operations increased $5.0 million, or 8%.
Gross profit margin for the nine month period was unchanged from 1996 at 22.4%.
Excluding the effect of acquisitions, gross profit margin for the distribution
operations increased to 22.0% in 1997 from 21.7% in 1996.
Selling, general and administrative expenses for the nine months ended
September 30, 1997 increased $32.2 million, or 61%, compared to the same period
in 1996. In the distribution operations, selling, general and administrative
expenses increased $30.3 million or 76%. Excluding the effect of acquisitions,
selling, general and administrative expenses for the distribution operations
increased $4.1 million, or 10%, primarily due to increased revenues and the
higher costs related to new branches and expansion of existing branches.
Selling, general and administrative expenses as a percent of revenues increased
to 16.9% in 1997 from 16.3% in 1996, primarily due to the higher cost structures
of acquired companies, startup costs related to the opening of new distribution
branches, and lower revenues in the Company's manufacturing operations.
Excluding the effect of acquisitions, selling, general and administrative
expenses as a percent of revenues increased to 16.9% in 1997 from 16.3% in 1996,
primarily due to branch expansions, the relatively higher cost structures of new
distribution branches, and lower revenues in the Company's manufacturing
operations.
Interest expense for the nine months ended September 30, 1997 decreased
$122,000, or 4%, compared to the same period in 1996. Excluding the effect of
acquisitions, interest expense decreased $2.8 million, or 94% primarily due to a
reduction in average borrowings funded by proceeds from the sale of the
Company's Common Stock in February 1997.
Minority interest expense for the nine months ended September 30, 1997
decreased $116,000 compared to the same period in 1996. This decrease was due to
the Company's acquisition of the minority interests in three of its distribution
subsidiaries in March 1996. Following the acquisition, all of the Company's
subsidiaries were wholly owned.
8 of 11
The effective tax rate for the nine months ended September 30, 1997 was 38.5%
compared to 38.2% for the same period in 1996. The increase is primarily a
result of a higher effective Federal income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
In August 1997, the Company executed an amended and restated bank-syndicated
credit agreement which provides for borrowings of up to $260 million, expiring
on August 8, 2002. The unsecured agreement will be used to fund seasonal working
capital needs and for other general corporate purposes, including acquisitions.
Borrowings under the revolving credit agreement, which totaled $135.9 million at
September 30, 1997, bear interest at primarily LIBOR-based rates plus a spread
that is dependent upon the Company's financial performance (LIBOR plus .375% at
September 30, 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.
During the third quarter, the Company completed the acquisitions of three
wholesale distributors of air conditioning equipment and related parts and
supplies: Air Systems Distributors, Inc., based in Miami, Florida; William
Wurzbach Company, Inc., based in Oakland, California; and Baker Distributing
Company, based in Jacksonville, Florida. Consideration for these acquisitions
consisted of cash and common stock. Cash consideration paid, net of cash
acquired, was approximately $60.6 million and was funded from borrowings under
the Company's aforementioned revolving credit agreement.
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. 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 $258.5 million at September 30, 1997 from $130.0
million at December 31, 1996. This increase was funded by 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 and borrowings under the Company's
revolving credit agreement.
Cash and cash equivalents increased $9.4 million during the nine month period
ended September 30, 1997. Principal sources of cash were net proceeds from the
issuance of common stock, borrowings under the revolving credit agreement and
profitable operations. The principal uses of cash were to fund working capital
needs, finance business acquisitions and capital expenditures, and repay bank
and other debt.
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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,
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 and
Nine Months Ended September 30, 1997 and 1996.
27. Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K filed during the quarter
October 15, 1997 - The following event was reported:
Item 2. The purchase of all of the issued and outstanding
capital stock of Baker Distributing Company for
approximately $60 million.
Item 7. The following financial statements of Baker
Distributing Company and subsidiary were filed:
Independent Auditors' Report
Consolidated Balance Sheets as of June 30, 1997
(unaudited) and September 30, 1996
Consolidated Statements of Income and Retained
Earnings for the nine months ended June 30, 1997 and
1996 (unaudited) and the year ended September 30,
1996
Consolidated Statements of Cash Flows for the nine
months ended June 30, 1997 and 1996 (unaudited) and
the year ended September 30, 1996
Notes to Consolidated Financial Statements
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)
November 14, 1997
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
11 Computation of Earnings Per Share for the Quarters and
Nine Months Ended September 30, 1997 and 1996.
27 Financial Data Schedule
EXHIBIT 11
WATSCO, INC.
COMPUTATION OF EARNINGS PER SHARE
Quarters and Nine Months Ended September 30, 1997 and 1996
(In thousands, except per share data)
QUARTERS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
Net income $6,988 $5,002 $15,633 $10,564
Less subsidiary preferred stock dividend (33) (33) (97) (97)
-------- -------- -------- --------
Income applicable to common stock
for primary earnings per share 6,955 4,969 15,536 10,467
Add interest expense, net of income tax effects,
attributable to convertible debentures - 22 - 70
-------- -------- -------- --------
Income applicable to common stock for
fully diluted earnings per share $6,955 $4,991 $15,536 $10,537
======== ======== ======== ========
Weighted average common shares outstanding 17,286 13,631 16,596 12,507
Additional shares assuming
exercise of stock options and warrants 1,093 907 1,068 856
-------- -------- -------- --------
Shares used for primary earnings per share 18,379 14,538 17,664 13,363
Additional shares assuming:
Exercise of stock options and warrants 44 37 69 84
Conversion of 10% Convertible
Subordinated Debentures due 1996 - 265 - 312
-------- -------- -------- --------
Shares used for fully diluted earnings per share 18,423 14,840 17,733 13,759
======== ======== ======== ========
Earnings per share:
Primary $.38 $.34 $.88 $.78
==== ==== ==== ====
Fully diluted $.38 $.34 $.88 $.77
==== ==== ==== ====
5
1,000
9-MOS
DEC-31-1997
SEP-30-1997
14,380
891
135,037
6,250
178,101
331,640
53,634
24,641
442,391
73,169
140,511
8,692
0
0
213,936
442,391
467,945
500,267
362,966
388,260
83,067
1,576
2,844
25,419
9,786
15,633
0
0
0
15,633
0.88
0.88
