FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2002 Commission file no. 2-27393
NOLAND COMPANY
A Virginia Corporation IRS Identification #54-0320170
80 29th Street
Newport News, Virginia 23607
Telephone: (757) 928-9000
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 and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Outstanding common stock, $10.00 par value at July 16, 2002: 3,557,871 shares.
This report contains 12 pages.
NOLAND COMPANYAND SUBSIDIARY
INDEX
Part 1: FINANCIAL INFORMATION | PAGE NO. |
Item 1. Financial Statements | |
Consolidated Balance Sheets - | |
June 30, 2002 and Dec. 31, 2001 | . . . . . . . .3 |
Consolidated Statements of Income - | |
Three Months and Six Months Ended June 30, 2002 and 2001 | . . . . . . . .4 |
Consolidated Statements of Cash Flows - | |
Six Months Ended June 30, 2002 and 2001 | . . . . . . . .5 |
Notes to Consolidated Financial Statements | . . . . . . . .6 |
Item 2. Management's Discussion and Analysis of Financial | |
Condition and Results of Operations | . . . . . . . .8 |
SIGNATURES | . . . . . . . 11 |
CERTIFICATIONS | . . . . . . . 12 |
PART 1. FINANCIAL INFORMATION
NOLAND COMPANY AND SUBSIDIARY
Consolidated Balance Sheets
Item 1. Financial Statements
June 30, December 31,
2002 * 2001 *
Assets
Current Assets:
Cash and cash equivalents $ 3,420,888 $ 3,606,187
Accounts receivable, net 61,798,300 56,699,501
Inventory, net 64,494,758 57,743,020
Other current assets 575,270 678,451
Total Current Assets130,289,216118,727,159
Property and Equipment, at cost:
Land 18,102,815 17,721,917
Buildings 89,602,855 88,210,396
Equipment and fixtures 67,451,346 66,746,192
Property in excess of current needs 1,530,850 1,539,431
Total 176,687,866 174,217,936
Less accumulated depreciation 91,734,756 89,549,572
Property and Equipment, net 84,953,110 84,668,364
Assets Held for Resale 447,136 447,136
Prepaid Pension 26,463,184 25,804,184
Other Assets 896,199 1,046,201
$243,048,845 $230,693,044
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable - short term borrowings $ 5,309,340 $ 4,000,000
Current maturity of long-term debt 943,220 1,464,993
Book overdrafts 5,299,517 6,485,518
Accounts payable 34,860,105 23,669,591
Other accruals and liabilities 12,276,176 13,499,515
Federal and state income taxes 1,241,517 367,886
Total Current Liabilities 59,929,875 49,487,503
Long-term Debt 20,163,000 20,187,000
Deferred Income Taxes 12,499,369 12,668,047
Accrued Postretirement Benefits 2,203,515 2,090,231
Stockholders' Equity:
Capital common stock, par value $10;
authorized, 6,000,000 shares; issued,
3,557,871 and 3,557,829 shares 35,578,710 35,578,290
Retained earnings 113,624,078 111,344,866
Additional paid in capital 158,400 -
Accumulated other comprehensive loss, net of tax (579,814) (303,360)
Unearned compensation, stock plans (528,288) (359,533)
Stockholders' Equity148,253,086146,260,263
$243,048,845 $230,693,044
* Restated. See note 2.
The accompanying notes are an integral part of the financial statements.
NOLAND COMPANY AND SUBSIDIARY
Consolidated Statements of Income
Three Months Ended Six Months Ended
June 30,June 30,
2002200120022001 *
Merchandise Sales $130,751,726 $127,469,787 $240,447,642242,400,488
Cost of goods sold:
Purchases and freight-in 111,543,218 101,543,715 198,997,000 192,805,793
Inventory, beginning 56,911,168 64,455,454 57,743,020 65,121,199
Inventory, ending (64,494,759) (63,582,479) (64,494,759)(63,582,479)
Cost of goods sold103,959,627102,416,690192,245,261194,344,513
Gross profits on sales 26,792,099 25,053,097 48,202,381 48,055,975
Operating expenses 24,201,978 23,327,646 46,018,045 45,451,071
(Gains) from sale of property - - (8,319) (404,568)
Operating profit 2,590,121 1,725,451 2,192,655 3,009,472
Other income:
Cash discounts, net 1,294,182 1,320,073 2,357,949 2,371,265
Service charges 269,809 271,187 542,334 583,612
Miscellaneous 166,901 190,246 357,358 415,794
Total other income 1,730,892 1,781,506 3,257,641 3,370,671
Interest expense 283,436 452,247 580,152 967,786
Income before income taxes 4,037,577 3,054,710 4,870,144 5,412,357
Income taxes 1,532,600 1,159,600 1,848,900 2,054,207
Net income $ 2,504,977 $ 1,895,110 $ 3,021,244 3,358,150
Earnings per share:
Basic $ .71 $ .54 $ .86 $ .95
Diluted $ .71 $ .53 $ .85 $ .94
Average shares outstanding:
Basic 3,517,116 3,540,811 3,519,352 3,545,272
Diluted 3,551,097 3,575,188 3,553,546 3,582,085
Cash dividends per share $ .08 $ .08 $ .16 $ .16
* Restated. See note 2.
The accompanying notes are an integral part of the financial statements.
NOLAND COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
Six Months
Ended June 30,
2002 | 2001 * | |
CASH FLOWS FROM OPERATING ACTIVITIES: | ||
Net income | $3,021,244 | $3,358,150 |
Adjustments to reconcile net income to net cash provided by operating activities: | ||
Depreciation and amortization | 3,982,234 | 4,054,123 |
Amortization of prepaid pension cost | (659,000) | (1,289,500) |
Amortization of unearned compensation-restricted stock | 73,842 | 70,971 |
Provision for doubtful accounts | 1,264,970 | 529,488 |
Deferred income taxes | - | 153,306 |
Increase in LIFO Reserve (Gain) on sale of property | 370,000 (8,319) | 150,000 (404,568) |
Change in operating assets and liabilities: | ||
(Increase) in accounts receivable | (6,363,769) | (3,945,993) |
(Increase) decrease in inventory | (7,121,738) | 1,388,720 |
Decrease (increase) in other current assets | 103,181 | 2,675,544 |
Decrease in other assets | 150,002 | 154,564 |
Increase in accounts payable | 11,190,514 | 2,133,957 |
(Decrease) in accruals and other liabilities | (1,668,471) | (3,030,733) |
Increase (decrease) in accrued income taxes | 873,631 | (6,926) |
Increase in postretirement benefits | 113,284 | 135,836 |
Total adjustments | 2,300,361 | 2,768,789 |
Net cash provided by operating activities | 5,321,605 | 6,126,939 |
CASH FLOWS FROM INVESTING ACTIVITIES: | ||
Capital expenditures | (4,518,919) | (6,233,285) |
Proceeds from sale of assets | 260,258 | 532,539 |
Net cash used in investing activities | (4,258,661) | (5,700,746) |
CASH FLOWS FROM FINANCING ACTIVITIES: | ||
Short-term borrowings - net | 1,309,340 | 5,325,000 |
(Decrease) increase in bank overdrafts | (1,186,001) | 1,141,911 |
Long-term debt (payments) - net | (545,773) | (5,532,440) |
Retirement of common stock | (280,800) | (131,589) |
Issuance of common stock | 108,420 | 12,420 |
Increase in unearned compensation -stock plans | (242,597) | (174,323) |
Additional paid in capital | 158,400 | - |
Dividends paid | (569,232) | (573,037) |
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | (1,248,243) | 67,942 |
CASH AND CASH EQUIVALENTS: | ||
(Decrease) increase during first six months | (185,299) | 494,135 |
Beginning of year | 3,606,187 | 3,349,283 |
End of first six months | $3,420,888 | $3,843,418 |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||
Non-cash change in fair value of derivatives | $ 276,454 | $ - |
* Restated. See note 2. |
The accompanying notes are an integral part of the financial statements.
NOLAND COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. In the opinion of the Company, the accompanying interim consolidated financial statements of Noland Company and Subsidiary contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company's consolidated financial position as of June 30, 2002, as restated, its consolidated results of operations for the three and six months ended June 30, 2002 and 2001, as restated, and its cash flows for the six months ended June 30, 2002 and 2001, as restated. The balance sheet as of December 31, 2001, as restated, was derived from audited financial statements as of that date.
2. In late October 2002, the Company determined that gains from certain sales of excess real estate in 2001 should be recognized as income. These transactions were previously treated as non-monetary exchanges and no gains were recognized. There were no gains in the second quarter of 2002 or 2001. The consolidated statement of income and consolidated statement of cash flows for the six months ended June 30, 2001 and the consolidated balance sheets as of June 30, 2002 and December 31, 2001 have been restated to include the effects of recognizing the gains, as follows:
Consolidated Results of Operations
For the six months ended June 30, 2001
2001
| As Reported | Restated |
Gains from sale of property | $ - | $ 404,568 |
Operating profit | 2,604,904 | 3,009,472 |
Income before income taxes | 5,007,789 | 5,412,357 |
Income taxes | 1,900,900 | 2,054,207 |
Net income | $ 3,106,889 | $ 3,358,150 |
Basic earnings per share | $ .88 | $ .95 |
Diluted earnings per share | $ .87 | $ .94 |
Net cash provided by operating activities | $ 3,186,500 | $ 6,126,939 |
Net cash used in investing activities | $(2,760,306) | $(5,700,746) |
Consolidated Balance Sheet
June 30, 2002December 31,2001
| As Reported | Restated | As Reported | Restated |
Total current assets | $130,283,607 | $130,289,216 | $118,721,550 | $118,727,159 |
Total property and equipment, net | 79,700,100 | 84,953,110 | 79,415,354 | 84,668,364 |
Total assets | 237,790,226 | 243,048,845 | 225,434,425 | 230,693,044 |
Deferred income taxes | 10,497,512 | 12,499,369 | $ 10,666,190 | $ 12,668,047 |
Stockholders' equity | 144,996,324 | 148,253,086 | 143,003,501 | 146,260,263 |
Total liabilities and stockholders' equity | $237,790,226 | $243,048,845 | $225,434,425 | $230,693,044 |
3. The Notes to Consolidated Financial Statements included in the Company's December 31, 2001 Annual Report on Form 10-K/A are an integral part of the interim financial statements. The Company takes a physical inventory in the fourth quarter of each year. The Company uses estimated gross profit rates to determine cost of goods sold during interim periods. In addition, the Company makes certain estimates to compute the LIFO reserve. The rate of inflation/deflation for an interim period is not necessarily consistent with the full year rate of inflation/deflation. Year-end inventory adjustments to reflect actual inventory levels are made in the fourth quarter.
4. Due to the seasonal nature of the construction industry supplied by the registrant, results of operations for the quarter ended June 30, 2002 are not necessarily indicative of the results for the full year.
5 Accounts Receivable as of June 30, 2002 and December 31, 2001 are net of allowance for doubtful accounts of $2,361,353 and $2,311,755, respectively. Quarterly bad debt charges, net of recoveries, were $979,521 for 2002 and $262,522 for 2001. Year-to-date bad debt charges, net of recoveries, were $1,264,970 for 2002 and $529,488 for 2001.
6. Revenue from product sales is generally recognized when goods are received by the customer and the risks and rewards of ownership have transferred to the customer.
7. The difference in diluted and basic average shares outstanding used to calculate earnings per share is due to non-vested shares of restricted stock.
8. Comprehensive income consists of net income and changes in the fair value of derivative instruments. The components of comprehensive income for the three and six months ended June 30, 2002 are as follows:
Three Months Six Months
Ended June 30, Ended June 30,
2002 | 2002 | |||
Net income | $2,504,977 | $3,021,244 | ||
Loss on derivative instruments, net of income tax benefit of ($230,497 and $353,774) |
(377,770) | |||
(276,454) | ||||
Comprehensive income | $2,127,207
| $2,744,790 |
There were no other items of comprehensive income for the three and six months ended June 30, 2002. There were no items of comprehensive income for the three and six months ended June 30, 2001.
9. Effective January 1, 2002 the Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets" and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets. Adoption of these statements did not have a material impact on the Company's financial statement. SFAS No. 143 "Accounting for Asset Retirement Obligations," is effective for years beginning after June 15, 2002. Adoption of this statement is not expected to have a material impact on the Company's financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Included in this discussion are forward-looking management comments and other statements which reflect management's current outlook for the future. Such forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated in the statements. Such risks and uncertainties include, but are not limited to, general business and economic conditions, climatic conditions, competitive pricing pressures, and product availability.
Restatement of Consolidated Financial Statements
In late October 2002, the Company determined that gains from certain sales of excess real estate in 2001 should have been recognized as income. These transactions were previously treated as non-monetary exchanges and no gain was recognized. The effect of recognizing the 2001 gain was to increase first six months net income by $252,000. The consolidated statement of income and consolidated cash flows for the six months ended June 30, 2001 and the consolidated balance sheets as of June 30, 2002 and December 31, 2001 have been restated to include the affect of recognizing these gains.
Liquidity and Capital Resources
The Company maintains its short- and long-term liquidity through: (1) cash flow from operations; (2) short-term borrowings from bank lines of credit arrangements, when needed; and (3) additional long-term debt, when needed.
The Company's financial condition remains strong with working capital of $70.4 million and a current ratio of 2.17. Cash provided from operations for the first six months of 2002 was $5.3 million compared to $6.1 million for same period of 2001. The cash was used for capital expenditures, to pay down debt and to pay dividends. As discussed in Item 3 below, the Company took steps in 2001 to protect itself against the possibility of a rising interest rate environment. This was done by utilizing a pay-fixed receive-variable interest rate swap. Management believes the Company has adequate financial resources to meet the needs of the foreseeable future.
Results of Operations
Second-quarter sales of $130.8 million were 2.6 percent more than the $127.5 million total for 2001's second quarter. Strong residential construction activity and favorable weather conditions in most of our territory gave us heightened opportunities and we took advantage of them. Plumbing sales increased 5.7 percent in part due to drought conditions that led to increased sales of well drilling rigs and water systems. Air conditioning sales rose 8.3 percent from higher demand for replacement air conditioning equipment brought on by unusually warm weather. Electrical/industrial sales declined 16.1 percent with the continual erosion of the Company's integrated supply business. Sales for the first six months of 2002 were $240.4 million, .8 percent less than the $242.4 million total for the year-earlier period. The Company has made the decision to cancel or not renew two of its larger integrated supply contracts due to continued losses. By December 31, 2002 the Company's Industrial Distribution Center outside of Richmond, Virginia which services these contracts, will cease operations. Other contracts will continue but will be managed from branch facilities located closer to the customers. The expected loss for the remainder of the year is not determinable at this time.
The gross margin of profit rose 4.1 percent in the second quarter from 19.7 percent in second quarter 2001 to 20.5 percent for second quarter 2002 despite a larger LIFO inventory adjustment for this year compared to 2001. Operating expenses were up 3.7 percent, largely due to higher bad debts stemming from two large accounts and a decline in non-cash pension credits. For the first six months, gross margins increased from 19.8 percent to 20.0 percent and operating expenses increased 1.2 percent. Operating expenses for the quarter and first six months were affected by pension credits generated by the Company's overfunded pension plan of $330,000 and $659,000 compared to $645,000 and $1,290,000 for the same periods a year ago.
Interest expense for the quarter and first six months is down 37.3 and 40.1 percent, respectively. Lower average borrowing and lower interest rates contributed to the declines. Also, the Company's overall inventory turns steadily improved during the first six months of 2002, and the average inventory investment was consistently lower than the prior-year period.
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.
NOLAND COMPANY
November 18, 2002Arthur P. Henderson, Jr.
Arthur P. Henderson, Jr.
Vice President ' Finance
CERTIFICATIONS
I, Lloyd U. Noland, III, certify that:
1. I have reviewed this amended quarterly report on Form 10-Q of the registrant for the three and six months ended June 30, 2002.
2. Based on my knowledge, this amended quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this amended quarterly report.
3. Based on my knowledge, the financial statements, and other financial information included in this amended quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this amended quarterly report.
Lloyd U. Noland, III
Name: Lloyd U. Noland, III
Title: Chief Executive Officer
I, Arthur P. Henderson, Jr., certify that:
1. I have reviewed this amended quarterly report on Form 10-Q of the registrant for the three and six months ended June 30, 2002.
2. Based on my knowledge, this amended quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this amended quarterly report.
3. Based on my knowledge, the financial statements, and other financial information included in this amended quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this amended quarterly report.
Arthur P. Henderson, Jr.
Name: Arthur P. Henderson, Jr. Title: Vice President - Finance
