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 JUNE 30, 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 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: 4,693,937 shares of the Company's Common Stock ($.50 par value) and 1,463,030 shares of the Company's Class B Common Stock ($.50 par value) were outstanding as of August 8, 1995. 1 of 19 PART I. FINANCIAL INFORMATION WATSCO, INC. CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 1995 and December 31, 1994 (In $000s) JUNE 30, DECEMBER 31, 1995 1994 ------------ ------------ ASSETS (UNAUDITED) Current assets: Cash and cash equivalents $ 2,218 $ 1,744 Marketable securities 1,281 3,227 Accounts receivable, net 48,012 34,811 Inventories 68,471 49,259 Other current assets 5,555 4,608 -------- -------- Total current assets 125,537 93,649 Property, plant and equipment, net 9,902 8,829 Intangible assets, net 14,433 13,164 Other assets 4,538 4,022 -------- -------- $154,410 $119,664 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations $ 1,809 $ 1,781 Borrowings under revolving credit agreements 55,571 32,034 Accounts payable 20,910 13,108 Accrued liabilities 7,027 6,631 -------- -------- Total current liabilities 85,317 53,554 Long-term obligations: Bank and other debt 3,133 2,719 Subordinated notes 2,500 2,500 Convertible subordinated debentures 1,505 1,505 -------- -------- 7,138 6,724 Deferred income taxes 638 713 Minority interests 11,884 11,857 Shareholders' equity: Common Stock, $.50 par value 2,345 2,334 Class B Common Stock, $.50 par value 733 743 Paid-in capital 18,954 18,936 Retained earnings 27,401 24,803 -------- -------- Total shareholders' equity 49,433 46,816 -------- -------- $154,410 $119,664 ======== ======== See accompanying notes to condensed consolidated financial statements. 2 of 19 WATSCO, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS Quarter and Six Months Ended June 30, 1995 and 1994 (In $000s except per share amounts) (Unaudited) QUARTER ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 --------------------- -------------------- 1995 1994 1995 1994 ------- ------- -------- -------- Revenues: Net sales $83,023 $68,448 $136,217 $117,173 Royalty and service fees 8,039 7,379 15,166 13,906 ------- ------- -------- -------- Total revenues 91,062 75,827 151,383 131,079 ------- ------- -------- -------- Costs and expenses: Cost of sales 64,773 53,497 104,876 90,578 Direct service expenses 6,145 5,613 11,628 10,566 Selling, general and administrative 14,275 12,170 26,372 23,342 ------- ------- -------- -------- Total costs and expenses 85,193 71,280 142,876 124,486 ------- ------- -------- -------- Operating income 5,869 4,547 8,507 6,593 Interest expense, net (1,075) (782) (1,923) (1,422) ------- ------- -------- -------- Income before income taxes and minority interests 4,794 3,765 6,584 5,171 Income taxes (1,842) (1,409) (2,534) (1,942) Minority interests (651) (430) (848) (613) ------- ------- -------- -------- Net income 2,301 1,926 3,202 2,616 Retained earnings at beginning of period 25,405 20,622 24,803 20,208 Cash dividends (273) (262) (540) (506) Dividends on preferred stock of subsidiary (32) (32) (64) (64) ------- ------- -------- -------- Retained earnings at end of period $27,401 $22,254 $ 27,401 $ 22,254 ======= ======= ======== ======== Earnings per share: Primary $.35 $.30 $.48 $.41 ==== ==== ==== ==== Fully diluted $.34 $.29 $.47 $.39 ==== ==== ==== ==== Weighted average shares and equivalent shares used to calculate: Primary earnings per share 6,537 6,339 6,478 6,289 ===== ===== ===== ===== Fully diluted earnings per share 6,817 6,624 6,815 6,623 ===== ===== ===== ===== See accompanying notes to condensed consolidated financial statements. 3 of 19 WATSCO, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 1995 and 1994 (In $000s) (Unaudited) 1995 1994 -------- -------- Cash flows from operating activities: Net income $ 3,202 $ 2,616 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 1,316 1,074 Deferred income tax credit (75) (95) Minority interests, net of dividends paid 30 (119) Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable (9,329) (8,582) Inventories (12,945) (8,496) Accounts payable and accrued liabilities 6,460 4,380 Other, net (1,029) 162 -------- -------- Net cash used in operating activities (12,370) (9,060) -------- -------- Cash flows from investing activities: Capital expenditures, net (1,898) (1,051) Marketable securities transactions, net 1,938 (913) Cash used in acquisitions, net of cash acquired (8,175) - -------- -------- Net cash used in investing activities (8,135) (1,964) -------- -------- Cash flows from financing activities: Net borrowings under revolving credit agreements 23,537 12,080 Repayments of long-term obligations (1,973) (555) Cash dividends (540) (506) Other (45) (39) -------- -------- Net cash provided by financing activities 20,979 10,980 -------- -------- Net increase (decrease) in cash and cash equivalents 474 (44) Cash and cash equivalents at beginning of period 1,744 1,093 -------- -------- Cash and cash equivalents at end of period $ 2,218 $ 1,049 ======== ======== Supplemental cash flow information: Interest paid $ 1,857 $ 1,701 ======== ======== Income taxes paid $ 2,291 $ 1,394 ======== ======== See accompanying notes to condensed consolidated financial statements. 4 of 19 WATSCO, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1995 1. The condensed consolidated balance sheet as of December 31, 1994, 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 six month period ended June 30, 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 June 30, 1995 and December 31, 1994, inventories consisted of (in thousands): JUNE 30, DECEMBER 31, 1995 1994 ------- ------------ Raw materials $ 4,874 $ 4,058 Work in process 1,274 1,152 Finished goods 62,323 44,049 ------- ------- $68,471 $49,259 ======= ======= 4. On May 15, 1995, the Company effected a three-for-two stock split in the form of a 50% stock dividend for both classes of the Company's common stock for shareholders of record as of April 28, 1995. Shareholders' equity has been restated to give retroactive recognition to the stock split for all periods presented by reclassifying from retained earnings to common stock the par value of the additional shares arising from the split. All share and per share amounts have been restated to reflect the stock split. 5. On June 2, 1995, Comfort Supply, Inc., the Company's Houston-based distribution subsidiary, purchased certain accounts receivable, inventory and other operating assets and assumed certain liabilities of Environmental Equipment & Supplies, Inc. ("Environmental"), a wholesale distributor of residential air conditioners and related parts and supplies based in North Little Rock, Arkansas. The acquisition was accounted for under the purchase method of accounting. The excess of the purchase price over the fair value of the net assets acquired of $30,000 is being amortized on a straight-line basis over 40 years. In connection with the acquisition, the Company assumed liabilities of $2,163,000. 6. In July 1995, the Company's Amended and Restated Articles of Incorporation were amended to increase the number of authorized shares of Common Stock, par value $.50 per share, from 10,000,000 to 40,000,000. 7. Certain amounts for 1994 have been reclassified to conform with the 1995 presentation. 5 of 19 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 consolidated financial statements for the quarter and six months ended June 30, 1995 and 1994 expressed as a percentage of total revenues: QUARTER SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------- ------------------ 1995 1994 1995 1994 ----- ----- ----- ----- Total revenues 100.0% 100.0% 100.0% 100.0% Cost of sales and direct service expenses (77.9) (78.0) (77.0) (77.2) ----- ----- ----- ----- Gross profit 22.1 22.0 23.0 22.8 Selling, general and administrative expenses (15.7) (16.0) (17.4) (17.8) ----- ----- ----- ----- Operating income 6.4 6.0 5.6 5.0 Interest expense, net (1.2) (1.0) (1.2) (1.1) Income taxes (2.0) (1.9) (1.7) (1.4) Minority interests (.7) (.6) (.6) (.5) ----- ----- ----- ----- Net income 2.5% 2.5% 2.1% 2.0% ===== ===== ===== ===== The above table and following narrative include, from their respective dates of acquisition, the results of operations of Airite, Inc. ("Airite"), a Louisiana-based wholesale distributor of residential central air conditioners acquired in February 1995; 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; and Environmental Equipment & Supplies, Inc. ("Environmental"), a North Little Rock, Arkansas-based wholesale distributor of air conditioning and heating equipment whose business and assets the Company purchased in June 1995. QUARTER ENDED JUNE 30, 1995 VS. QUARTER ENDED JUNE 30, 1994 Growth in revenue and operating results of the Company's distribution operations continued at a strong pace during the second quarter with same store sales achieving 12% growth and recent acquisitions contributing additional sales growth. This growth in revenues and greater leveraging of operating expenses resulted in a 41% increase in distribution operating profits for the quarter. In the Company's manufacturing operations, revenues and operating results were unfavorably impacted in the second quarter as moderate weather early in the summer and other factors slowed the pace of customer orders in both the original equipment manufacturer (OEM) market and aftermarket. In addition, high start-up costs for new product offerings reduced overall gross profit margins. The Company has taken appropriate measures in response to the softer market conditions and is making efforts to further improve the profitability of its new products. The Company is continuing to aggressively expand into other new product opportunities, both domestically and internationally, as market acceptance of the Company's products remains strong. Revenues and operating results of the Company's personnel services segment continued to grow during the quarter, although at slower rates than achieved in recent quarters. Revenues for the three months ended June 30, 1995 increased $15.2 million, or 20%, compared to the same period in 1994. In the climate control segment, revenues increased $14.6 million, or 21%. Excluding the effect of acquisitions, revenues for the climate control segment increased $7.1 million, 6 of 19 or 10%. Revenues in the Company's Florida distribution market increased $9.9 million, or 37%, primarily from a 15% increase in same store sales and the acquisition of H.B. Adams. Revenues in the Company's Houston-based distribution subsidiary, which serves the Texas, Louisiana and Arkansas markets, increased $2.9 million, or 20%, helped by the acquisitions of Airite and Environmental. On a same store basis, revenues in the market served by the Houston-based distribution subsidiary increased 9% due to greater market penetration. Revenues in the Company's western distribution market rose $2.0 million, or 10%, on increased sales of replacement air conditioners in California. Revenues in the Company's manufacturing operations decreased $235,000, or 4%, primarily due to soft market conditions and other factors. Revenues in the personnel services segment increased $660,000, or 9%, reflecting continued demand for temporary help services. Gross profit for the three months ended June 30, 1995 increased $3.4 million, or 21%, as compared to the same period in 1994. Excluding the effect of acquisitions, gross profit increased $1.7 million, or 10%, primarily as a result of the aforementioned revenue increases. Gross profit margin in the second quarter, including and excluding the effect of acquisitions, increased to 22.1% in 1995 from 22.0% in 1994 as increased gross profit margins in the distribution operations caused by greater sales of higher margin replacement air conditioners and parts more than offset lower margins in the manufacturing operations caused by soft market conditions and new product start-up costs. Selling, general and administrative expenses for the three months ended June 30, 1995 increased $2.1 million, or 17%, 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 $901,000, or 7%, primarily due to revenue increases. Selling, general and administrative costs as a percent of revenues decreased from 16.0% in 1994 to 15.7% in 1995 and, excluding the effect of acquisitions, decreased from 16.0% in 1994 to 15.6% in 1995. These decreases were the result of a larger revenue base over which to spread fixed costs . Interest expense, net for the second quarter in 1995 increased $293,000, or 37%, compared to the same period in 1994, due to higher interest rates and additional borrowings used to finance acquisitions and increased inventory levels required by sales growth. Excluding the effect of acquisitions, interest expense, net increased $151,000, or 19%, primarily due to higher interest rates and additional borrowings. The effective tax rate for the three months ended June 30, 1995 was 38.4% compared to 37.4% for the same period in the 1994. The increase is primarily a result of a proportionately larger share of taxable income generated in states with higher tax rates during 1995 as compared to 1994. SIX MONTHS ENDED JUNE 30, 1995 VS. SIX MONTHS ENDED JUNE 30, 1994 Revenues for the six months ended June 30, 1995 increased $20.3 million, or 16%, compared to the same period in 1994. In the climate control segment, revenues increased $19.0 million, or 16%. Excluding the effect of acquisitions, revenues for the climate control segment increased $10.1 million, or 9%. Revenues in the Company's Florida distribution market increased $12.0 million, or 27%, primarily due to the acquisition of H.B. Adams, but also due to an 11% increase in same store sales from increased sales of replacement air conditioners. Revenues in the market served by the Company's Houston-based distribution subsidiary increased $4.3 million, or 17%, primarily on a 9% increase in same store sales due to greater market penetration and further aided by the acquisitions of Airite and Environmental. Revenues in the Company's western distribution market rose 7% on increased sales of replacement air conditioners. Revenues in the Company's manufacturing operations increased $406,000, or 4%, primarily due to new product offerings to aftermarket customers. Revenues in the personnel services segment increased $1.3 million, or 9%, reflecting continued demand for temporary help services and greater customer acceptance of new product offerings such as professional staffing and technical temporaries. 7 of 19 Gross profit for the six months ended June 30, 1995 increased $4.9 million, or 17%, as compared to the same period in 1994. Excluding the effect of acquisitions, gross profit increased $2.9 million, or 10%, primarily as a result of the aforementioned revenue increases but also due to increased gross profit margins. Gross profit margin for the six month period increased to 23.0% in 1995 from 22.8% in 1994 and, excluding the effect of acquisitions, increased to 23.1% in 1995 from 22.8% in 1994. These increases are primarily due to a shift in product mix during the period to replacement sales and increased sales of parts, which achieve higher margins than equipment sales. Selling, general and administrative expenses for the six months ended June 30, 1995 increased $3.0 million, or 13%, 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 $1.6 million, or 7%, primarily due to revenue increases. Selling, general and administrative expenses as a percent of revenues decreased from 17.8% in 1994 to 17.4% in 1995 and, excluding the effect of acquisitions, decreased from 17.8% in 1994 to 17.5% in 1995. These decreases were the result of a larger revenue base over which to spread fixed costs. Interest expense, net for the six months ended June 30, 1995 increased $501,000, or 35%, compared to the same period in 1994, due to higher interest rates and additional borrowings used to finance acquisitions and increased inventory levels required by sales growth and stocking requirements in new branch locations. Excluding the effect of acquisitions, interest expense, net increased $320,000, or 22%, primarily due to higher interest rates and additional borrowings. The effective tax rate for the six months ended June 30, 1995 was 38.5% compared to 37.6% for the same period in the 1994. The increase is primarily a result of a proportionately larger share of taxable income generated in states with higher tax rates during 1995 as compared to 1994. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased to $2.2 million during the second 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, reduce long-term obligations and fund working capital needs. Inventory purchases are substantially funded by borrowings under the subsidiaries' revolving credit agreements. The increase in inventory in 1995 was higher than 1994 primarily due to higher levels of inventory carried by the distribution operations necessary to meet increased demand. 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 June 30, 1995, the Company's distribution subsidiaries had aggregate borrowing commitments from lenders under existing revolving credit agreements of $62 million, of which $6 million was unused and 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 19 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 In July 1995, the Company's Amended and Restated Articles of Incorporation were amended to increase the number of authorized shares of Common Stock, par value $.50 per share, to 40,000,000. Item 3. Defaults by the Company on its Senior Securities None Item 4. Results of Votes of Securities Holders (a) The Company's 1995 Annual Meeting of Shareholders was held on June 5, 1995. (b) Proxies were solicited by the Company's management pursuant to Regulation 14 under the Securities Exchange Act of 1934. There was no solicitation in opposition to the management's nominees as listed in the proxy statement. The following nominees were elected as indicated in the proxy statement pursuant to the vote of the shareholders: Mr. James S. Grien; Mr. David B. Fleeman and Mr. Bob L. Moss. Other directors whose term of office continued after the meeting are as follows: Mr. Albert H. Nahmad (chairman), Mr. O.M. Butler, Mr. D.A. Coape-Arnold, Mr. Paul F. Manley, Mr. Roberto Motta and Mr. Alan H. Potamkin. (c) Two additional proposals were voted upon at the Annual Meeting of Shareholders as follows: (1) To ratify the action of the Board of Directors amending the Company's Amended and Restated Articles of Incorporation to increase the number of authorized shares of Common Stock, par value $.50 per share, to 40,000,000. (2) To ratify the reappointment of Arthur Andersen LLP, the Company's Independent Certified Public Accountants. The combined vote of the Company's Common Stock and Class B Common Stock was as follows: PROPOSAL 1 ---------- For 9,764,578 Against 257,907 Abstained 10,625 PROPOSAL 2 ---------- For 10,013,533 Against 10,865 Abstained 8,712 9 of 19 Item 4. Results of Votes of Securities Holders (continued) As of April 17, 1995, the record date for the Annual Meeting of Shareholders, the total number of shares of the Company's Common Stock, $.50 par value, and Class B Common Stock, $.50 par value, outstanding was 3,106,712 and 996,185, respectively, representing 13,068,562 combined votes. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Amended and Restated Articles of Incorporation of Watsco, Inc. 11. Computation of Earnings Per Share for the Quarter and Six Months Ended June 30, 1995 and 1994. (b) Reports on Form 8-K None 10 of 19 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) August 10, 1995 11 of 19