FORM 10-Q
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, 2001 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 capital common stock, $10.00 par value at July 16, 2001, 3,578,400 shares.
This report contains 11 pages.
NOLAND COMPANYAND SUBSIDIARY
INDEX
Part 1: FINANCIAL INFORMATION | PAGE NO. |
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Item 1. Financial Statements | |
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Consolidated Balance Sheets - | |
| | |
June 30, 2001 (Unaudited) and Dec. 31, 2000 (Audited) | . . . . . . . . .3 |
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Unaudited Consolidated Statements of Income - | |
| | |
Three Months and Six Months Ended June 30, 2001 and 2000 | . . . . . . . . .4 |
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Unaudited Consolidated Statements of Cash Flows - | |
| | |
Six Months Ended June 30, 2001 and 2000 | . . . . . . . . .5 |
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Notes to Unaudited Consolidated Financial Statements | . . . . . . . . .6 |
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Item 2. Management's Discussion and Analysis of Financial | |
Condition and Results of Operations | . . . . . . . . .7 |
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Item 3. Qualitative and Quantitative Disclosures About | |
Market Risk | . . . . . . . . .9 |
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Part II: OTHER INFORMATION | |
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Items 1, 2, 3, 4, 5, and 6 | . . . . . . . . 10 |
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SIGNATURES | . . . . . . . . 11 |
PART 1. FINANCIAL INFORMATION
NOLAND COMPANY AND SUBSIDIARY
Consolidated Balance Sheets
Item 1. Financial Statements
June 30, December 31,
2001 2000
(Unaudited) (Audited)
Assets
Current Assets:
Cash and cash equivalents $ 3,843,418 $ 3,349,283
Accounts receivable, net 60,083,438 56,045,064
Inventory, net 63,582,479 65,121,199
Deferred income taxes 1,022,875 1,022,875
Prepaid expenses 618,155 342,012
Total Current Assets129,150,365125,880,433
Property and Equipment, at cost:
Land 13,531,922 13,397,010
Buildings 86,548,790 85,829,159
Equipment and fixtures 66,134,616 64,897,674
Property in excess of current needs 1,393,521 1,452,738
Total 167,608,849 165,576,581
Less accumulated depreciation 87,803,626 84,477,542
Property and Equipment, net 79,805,223 81,099,039
Assets Held for Resale 1,021,492 1,021,492
Prepaid Pension 24,272,468 22,982,968
Other Assets 821,968 976,532
$235,071,516 $231,960,464
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable - short term borrowings $ 13,800,000 $ 8,475,000
Current maturity of long-term debt 3,439,414 3,021,775
Book overdrafts 7,821,834 6,679,923
Accounts payable 24,592,756 22,879,945
Other accruals and liabilities 10,357,203 12,333,674
Federal and state income taxes 940,267 947,193
Total Current Liabilities 60,951,474 54,337,510
Long-term Debt 20,687,018 26,637,097
Deferred Income Taxes 10,937,070 10,937,070
Accrued Postretirement Benefits 1,960,310 1,824,474
Stockholders' Equity:
Capital common stock, par value $10;
authorized, 6,000,000 shares; issued,
3,578,400 and 3,584,758 shares 35,784,000 35,847,580
Retained earnings105,219,548102,741,284
Total 141,015,004 138,588,864
Less restricted stock 467,904 364,551
Stockholders' Equity140,535,644138,224,313
$235,071,516 $231,960,464
The accompanying notes are an integral part of the financial statements.
NOLAND COMPANY AND SUBSIDIARY
Unaudited Consolidated Statements of Income
Three Months Ended Six Months Ended
June 30,June 30,
2001 2000 2001 2000
Merchandise Sales $127,469,787 $129,130,785 $242,400,488 $250,124,936
Cost of goods sold:
Purchases and freight-in 101,543,715 96,152,852 192,805,793 196,543,924
Inventory, beginning 64,455,454 73,111,888 65,121,199 69,839,568
Inventory, ending 63,582,479 64,834,045 63,582,479 64,834,045
Cost of goods sold102,416,690104,430,695194,344,513201,549,447
Gross profits on sales 25,053,097 24,700,090 48,055,975 48,575,489
Operating expenses 23,327,646 21,959,374 45,451,07143,238,983
Operating profit 1,725,451 2,740,716 2,604,904 5,336,506
Other income:
Cash discounts, net 1,320,073 1,137,144 2,371,265 2,466,438
Service charges 271,187 307,179 583,612 665,550
Miscellaneous 190,246 674,741 415,794 870,668
Total other income 1,781,506 2,119,064 3,370,671 4,002,656
Interest expense 452,247 749,111 967,786 1,436,285
Income before income taxes 3,054,710 4,110,669 5,007,789 7,902,877
Income taxes 1,159,600 1,546,900 1,900,900 2,973,900
Net income $ 1,895,110 $ 2,563,769 $ 3,106,889 4,928,977
Earnings per share:
Basic $ .54 $ .70 $ .88 $ 1.35
Diluted $ .53 $ .69 $ .87 $ 1.34
Average shares outstanding:
Basic 3,540,811 3,652,127 3,545,272 3,658,475
Diluted 3,577,846 3,685,397 3,579,704 3,689,580
Cash dividends per share $ .08 $ .08 $ .16 $ .16
The accompanying notes are an integral part of the financial statements.
NOLAND COMPANY AND SUBSIDIARY
Unaudited Consolidated Statements of Cash Flows
Six Months
Ended June 30,
| | 2001 | 2000 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | |
Net income | $3,106,889 | $4,928,977 |
Adjustments to reconcile net income to net cash provided by operating activities: | | |
Depreciation and amortization | 4,054,123 | 4,179,487 |
Amortization of prepaid pension cost | (1,289,500) | (2,211,500) |
Provision for doubtful accounts | 675,330 | 667,054 |
Amortization of unearned compensation-restricted stock | 70,971 | 69,434 |
Gain on sale of property | - | (442,879) |
Change in operating assets and liabilities: | | |
(Increase) in accounts receivable | (4,713,704) | (6,775,531) |
Decrease in inventory | 1,538,720 | 5,005,523 |
(Increase) in prepaid expenses | (276,143) | (1,032) |
Decrease (increase) in other assets | 154,564 | (10,291) |
Increase (decrease) in accounts payable | 1,712,811 | (255,936) |
(Decrease) in other accruals and liabilities | (1,976,471) | (3,183,703) |
(Decrease) increase in federal and state income taxes | (6,926) | (61,252) |
Increase in accrued post retirement benefits | 135,836 | 121,626 |
Total adjustments | 79,611 | (2,899,000) |
Net cash provided by operating activities | 3,186,500 | 2,029,977 |
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CASH FLOWS FROM INVESTING ACTIVITIES: | | |
Capital expenditures | (2,888,277) | (3,004,657) |
Proceeds from sale of assets | 127,971 | 721,687 |
Net cash (used in) investing activities | (2,760,306) | (2,282,970) |
| | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | |
Increase in bank overdrafts | 1,141,911 | 2,272,866 |
Short-term borrowings | 5,325,000 | 3,700,000 |
Long-term debt (payments) | (5,532,440) | (2,373,888) |
Issue (purchase) deferred directors stock | 26,197 | 16,310 |
Retirement of common stock | (131,589) | (576,320) |
Dividends paid | (573,038) | (592,140) |
Purchase of restricted stock | (188,100) | (148,627) |
Net cash provided by financing activities | 67,941 | 2,298,201 |
| | | |
CASH AND CASH EQUIVALENTS: | | |
Increase during first six months | 494,135 | 2,045,208 |
Beginning of year | 3,349,283 | 2,528,131 |
End of first six months | $3,843,418 | $4,573,339 |
The accompanying notes are an integral part of the financial statements.
NOLAND COMPANY AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
1. In the opinion of the Company, the accompanying unaudited 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, 2001, and its results of operations and cash flows for the three months ended June 30, 2001 and 2000. The balance sheet as of December 31, 2000 was derived from audited financial statements as of that date.
2. The Notes to Consolidated Financial Statements included in the Company's December 31, 2000 Annual Report on Form 10-K are an integral part of the interim unaudited 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 and other inventory year-end adjustments and such estimates at interim may not be consistent with year-end results. Year-end inventory adjustments to reflect actual inventory levels are made in the fourth quarter.
3. Due to the seasonal nature of the construction industry supplied by the registrant, results of operations for the quarter ended June 30, 2001 are not necessarily indicative of the results for the full year.
4. Accounts Receivable as of June 30, 2001 and December 31, 2000 are net of allowance for doubtful accounts of $1,008,132. Quarterly bad debt charges, net of recoveries, were $262,522 for 2001 and $260,751 for 2000. Year-to-date bad debt charges, net of recoveries, were $529,488 for 2001 and $553,005 for 2000.
5. 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.
6. The difference in diluted and basic average shares outstanding used to calculate earnings per share is due to non-vested shares of restricted stock.
7. The Company entered into two separate interest rate swap arrangements with two banks late in the second quarter of 2001. The purpose of the swaps is to hedge the Company's interest rate risk. The arrangements are pay-fixed receive-variable swap on $20 million of the Company's long-term debt. Changes in the fair market value of the derivative are not significant for the quarter. Future quarters will reflect changes in fair value and will be recorded in other comprehensive income.
8. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards Statement No. 141, Business Combinations and Statement of Financial Standards No. 142, Goodwill and Other Intangible Assets. Statement No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001; the use of the pooling-of-interests method of accounting is prohibited after this time. Statement 141 also establishes specific criteria for the recognition of intangible assets separately from goodwill, and it requires unallocated negative goodwill to be written off immediately as an extraordinary gain (instead of being deferred and amortized). Statement 142 eliminates the amortization of goodwill and instead requires a periodic review of any goodwill balance for possible impairment. The Statement also requires that goodwill be allocated at the reporting unit level. This Statement is effective for years beginning after Decembe r 15, 2001. The Company will be required to discontinue amortization of goodwill as of January 1, 2002, and intends to complete an analysis of goodwill and an initial impairment test by the end of 2001. Statement 142 also contains provisions related to intangible assets other than goodwill. However, the Company currently has no intangible assets other than goodwill in its continuing operations. These Statements are 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, climactic conditions, competitive pricing pressures, and product availability.
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 $68.2 million and a current ratio of 2.12. Total cash was $494,000 for the first six months compared to $2 million for the same period last year. The decline is due in part to lower earnings for the first six months as compared to last year. As discussed in Footnote 7 above, the Company has taken steps 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. Additionally, the final payment of a 9.6% note will be made in the third quarter. This will further reduce the Company's interest expense. Management believes the Company has adequate financial resources to meet the needs of the foreseeable future.
Results of Operations
Second-quarter sales of $127.5 million were 1.3 percent less than the $129.1 million total for 2000's second quarter. Plumbing sales declined 3.1 percent and electrical/industrial sales were off 8.4 percent. Air conditioning sales, which benefited from a new three-branch operation in Florida, increased 8 percent. Sales for the first six months of 2001 were $242.4 million, 3.1 percent less than the $250.1 million total for the year-earlier period.
The gross margin of profit rose slightly in the second quarter from 19.1 percent in second quarter 2000 to 19.7 percent for this year. Gross margins were helped due to a smaller LIFO inventory adjustment for this year compared to 2000. Operating expenses were up 6.2 percent, largely due to higher utility costs, personnel costs and a decline in non-cash pension credits. For the first six months, gross margins increased from 19.4 percent to 19.8 percent and operating expenses increased 5.1 percent. Operating expenses for the quarter and first six months were affected by pension credits generated by the Company's overfunded pension plan of $645,000 and $1,290,000 compared to $1,106,000 and $2,212,000 for the same periods a year ago.
Other income for the quarter and first six months declined compared to last year because of the sale of a corporate aircraft in the second quarter of 2000.
Interest expense for the quarter and first six months is down 39.6 and 32.6 percent, respectively. Lower average borrowing and lower interest rates contributed to the declines.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Noland Company's market risk exposure from changes in interest rates and foreign currency are not material. As previously mentioned, the Company has taken steps through the use of hedging and derivatives to minimize exposure to rising interest rates. The Company's pension plan is overfunded, resulting in prepaid pension asset. The prepaid pension asset is subject to change based on the performance of the plan investments and the discount rate. Changes in the investment performance, discount rate, and other factors may cause the amount of pension income to increase or decrease from year-to-year.
PART II. OTHER INFORMATION
Item 1. None
Item 2. None
Item 3. None
Item 4. None
Item 5. None
Item 6. Exhibits and Reports on Form 8-K - None
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
August 9, 2001Arthur P. Henderson, Jr.
Arthur P. Henderson, Jr.
Vice President - Finance
