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, 1996
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: 11,618,836 shares of the
Company's Common Stock ($.50 par value) and 2,293,020 shares of the Company's
Class B Common Stock ($.50 par value) were outstanding as of November 8, 1996.
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PART I. FINANCIAL INFORMATION
WATSCO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1996 and December 31, 1995
(In thousands of dollars)
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 4,609 $ 3,751
Accounts receivable, net 63,217 43,564
Inventories 90,407 59,724
Other current assets 5,532 5,340
-------- --------
Total current assets 163,765 112,379
Property, plant and equipment, net 15,201 11,286
Intangible assets, net 22,813 16,995
Other assets 4,111 4,224
-------- --------
$205,890 $144,884
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 535 $ 2,455
Short-term promissory notes -- 4,250
Accounts payable 25,637 17,229
Accrued liabilities 9,842 7,091
-------- --------
Total current liabilities 36,014 31,025
Long-term obligations:
Borrowings under revolving credit
agreements 49,000 40,185
Bank and other debt 1,888 3,143
Subordinated note -- 2,500
-------- --------
50,888 45,828
Deferred income taxes 628 978
Deferred credits 688 675
Minority interests -- 10,622
Preferred stock of subsidiary 2,000 2,000
Shareholders' equity:
Common Stock, $.50 par value 5,773 3,601
Class B Common Stock, $.50 par value 1,176 1,111
Paid-in capital 69,930 19,479
Retained earnings 38,793 29,565
-------- --------
Total shareholders' equity 115,672 53,756
-------- --------
$205,890 $144,884
======== ========
See accompanying notes to condensed consolidated financial statements.
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WATSCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Quarters and Nine Months Ended September 30, 1996 and 1995
(In thousands of dollars, except per share amounts)
(Unaudited)
QUARTERS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Net sales $ 115,681 $90,472 $297,025 $226,689
Royalty and service fees 9,657 8,335 24,599 23,501
--------- --------- --------- ---------
Total revenues 125,338 98,807 321,624 250,190
--------- --------- --------- ---------
Costs and expenses:
Cost of sales 89,551 70,727 230,471 175,603
Direct service expenses 7,459 6,412 18,971 18,040
Selling, general and
administrative 19,642 14,648 52,482 41,020
--------- --------- --------- ---------
Total costs and expenses 116,652 91,787 301,924 234,663
--------- --------- --------- ---------
Operating income 8,686 7,020 19,700 15,527
Other income, net 195 86 547 181
Interest expense (832) (1,046) (2,966) (3,064)
--------- --------- --------- ---------
Income before income taxes
and minority interests 8,049 6,060 17,281 12,644
Income taxes (3,047) (2,333) (6,601) (4,867)
Minority interests -- (896) (116) (1,744)
--------- --------- --------- ---------
Net income 5,002 2,831 10,564 6,033
Retained earnings at beginning
of period 34,298 25,830 29,565 23,232
Cash dividends (474) (307) (1,239) (847)
Dividends on preferred stock
of subsidiary (33) (33) (97) (97)
--------- --------- --------- ---------
Retained earnings at end of period $ 38,793 $ 28,321 $ 38,793 $ 28,321
========= ========= ========= =========
Earnings per share:
Primary $ .34 $ .28 $ .78 $ .61
========= ========= ========= =========
Fully diluted $ .34 $ .27 $ .77 $ .58
========= ========= ========= =========
Weighted average shares and
equivalent shares used
to calculate:
Primary earnings per share 14,538 9,958 13,363 9,762
========= ========= ========= =========
Fully diluted earnings per share 14,840 10,441 13,759 10,395
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
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WATSCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1996 and 1995
(In thousands of dollars)
(Unaudited)
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 10,564 $ 6,033
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 3,018 2,057
Provision for losses on accounts receivable 916 575
Deferred income tax credit -- (75)
Minority interests, net of dividends paid 116 926
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (14,401) (9,305)
Inventories (22,693) (6,128)
Accounts payable and accrued liabilities 8,930 2,022
Other, net (393) (150)
-------- --------
Net cash used in operating activities (13,943) (4,045)
-------- --------
Cash flows from investing activities:
Capital expenditures, net (3,639) (3,165)
Net proceeds from sales of marketable
securities 265 1,986
Business acquisitions, net of cash acquired (15,119) (8,175)
-------- --------
Net cash used in investing activities (18,493) (9,354)
-------- --------
Cash flows from financing activities:
Net borrowings under revolving credit
agreements 8,815 17,399
Repayments of short-term promissory notes (4,250) --
Repayments of long-term obligations (4,264) (2,145)
Net proceeds from issuance of common stock 34,329 535
Cash dividends (1,239) (847)
Other, net (97) (97)
-------- --------
Net cash provided by financing activities 33,294 14,845
-------- --------
Net increase in cash and cash equivalents 858 1,446
Cash and cash equivalents at beginning
of period 3,751 1,744
-------- --------
Cash and cash equivalents at end of period $ 4,609 $ 3,190
======== ========
Supplemental cash flow information:
Interest paid $ 3,463 $ 1,022
======== ========
Income taxes paid $ 4,587 $ 1,639
======== ========
See accompanying notes to condensed consolidated financial statements.
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WATSCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
1. The condensed consolidated balance sheet as of December 31, 1995, 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, 1996 are not necessarily indicative of the results for the year
ending December 31, 1996. 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, 1996 and December 31, 1995, inventories consisted
of (in thousands):
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
Raw materials $ 4,584 $ 3,637
Work in process 1,500 1,359
Finished goods 84,323 54,728
-------- --------
$ 90,407 $ 59,724
======== ========
4. On September 12, 1996, the Company's 10% Convertible Subordinated Debentures
(the "Class B Debentures") matured and substantially all outstanding Class B
Debentures, totaling approximately $1.5 million, were converted into 333,970
shares of common stock.
5. On September 25, 1996, the Company executed a bank-syndicated revolving
credit agreement which provides for borrowings of up to $130 million,
expiring on September 30, 2001. The unsecured agreement replaced the
Company's previous revolving credit agreements and will be used to fund
acquisitions and seasonal working capital needs and for other general
corporate purposes. 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,
1996). The revolving credit agreement contains financial convenants 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. On October 17, 1996, Comfort Supply, Inc., the Company's Houston-based
distribution subsidiary, completed the acquisition of Serviceman Supplies,
Inc., a $10 million wholesale distributor of residential central air
conditioners and related parts and supplies headquartered in Arlington,
Texas.
7. Certain amounts for 1995 have been reclassified to conform with the
1996 presentation.
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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, 1996 and 1995 expressed as a percentage of revenues:
QUARTERS NINE MONTHS
ENDED SEPTEMBER 30, ENDED JUNE 30,
------------------- --------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales and direct service
expenses (77.4) (78.1) (77.6) (77.4)
----- ----- ----- -----
Gross profit 22.6 21.9 22.4 22.6
Selling, general and administrative
expenses (15.7) (14.8) (16.3) (16.4)
----- ----- ----- -----
Operating income 6.9 7.1 6.1 6.2
Other income, net .2 .1 .2 .1
Interest expense (.7) (1.1) (.9) (1.2)
Income taxes (2.4) (2.3) (2.1) (2.0)
Minority interests -- (.9) -- (.7)
----- ----- ----- -----
Net income 4.0% 2.9% 3.3% 2.4%
===== ===== ===== =====
The above table and following narrative includes the results of operations of
companies acquired during 1996 and 1995 as follows: Airite, Inc., a
Louisiana-based distributor acquired in February 1995; H.B. Adams, Inc., a
central Florida distributor purchased in March 1995; Environmental Equipment &
Supplies, Inc., a North Little Rock, Arkansas-based distributor purchased in
June 1995; Central Air Conditioning Distributors, Inc., a Winston-Salem, North
Carolina-based distributor purchased in October 1995; and Three States Supply
Company, Inc., a Memphis, Tennessee-based distributor purchased in April 1996
(collectively, the "acquisitions"). These acquisitions were accounted for under
the purchase method of accounting and, accordingly, the results of their
operations have been included in the consolidated results of the Company
beginning on their respective dates of acquisition.
QUARTER ENDED SEPTEMBER 30, 1996 VS. QUARTER ENDED SEPTEMBER 30, 1995
Revenues for the three months ended September 30, 1996 increased $26.5
million, or 27%, compared to the same period in 1995. In the climate control
segment, revenues increased $25.2 million, or 28%. Excluding the effect of
acquisitions, revenues for the climate control segment increased $4.7 million,
or 5%. Such increase was primarily due to strong replacement sales activity in
Florida and Texas, which together achieved a 9% increase in sales. However, this
increase was offset by lower sales in California, which experienced cooler
weather and had fewer selling days than in the comparable period last year.
Gross profit for the three months ended September 30, 1996 increased $6.7
million, or 31%, compared to the same period in 1995. Excluding the effect of
acquisitions, gross profit increased $1.3 million, or 6%, primarily as a result
of the aforementioned revenue increases. Gross profit margin increased to 22.6%
in 1996 from 21.9% in 1995 due to higher margins achieved by newly acquired
companies, which exceeded historical margins, and gross margin improvements in
the manufacturing operations caused by higher sales. Excluding the effect of
acquisitions, gross profit margin for the third quarter of 1996 was unchanged
from 1995 at 21.9%.
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Selling, general and administrative expenses for the three months ended
September 30, 1996 increased $5.0 million, or 34%, compared to the same period
in 1995, primarily due to selling and delivery costs related to increased sales.
Excluding the effect of acquisitions, selling, general and administrative
expenses increased $1.5 million, or 10%, primarily due to sales volume increases
and higher compensation costs. Selling, general and administrative costs as a
percent of revenues increased to 15.7% in 1996 from 14.8% in 1995, primarily due
to acquisitions, whose percentages exceeded the Company's historical
percentages. Excluding the effect of acquisitions, selling, general and
administrative costs as a percent of revenues increased to 15.4% in 1996 from
14.8% in 1995, primarily due to costs to develop the international business of
the manufacturing operations and increased compensation costs.
Interest expense for the third quarter of 1996 decreased $214,000, or 20%,
compared to the same period in 1995 and, excluding the effect of acquisitions,
interest expense decreased $337,000, or 32%. These decreases were primarily due
to lower average interest rates on borrowings.
In March 1996, the Company acquired the minority interests in its distribution
subsidiaries. Therefore, there was no minority interest expense in the third
quarter of 1996.
The effective tax rate for the three months ended September 30, 1996 was 37.9%
compared to 38.5% for the same period in 1995. The decrease is primarily a
result of tax planning strategies which were implemented during 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1996 VS. NINE MONTHS ENDED SEPTEMBER 30, 1995
Revenues for the nine months ended September 30, 1996 increased $71.4 million,
or 29%, compared to the same period in 1995. In the climate control segment,
revenues increased $70.4 million, or 31%. Excluding the effect of acquisitions,
revenues for the climate control segment increased $20.6 million, or 9%. Such
increase was primarily due to strong replacement sales and increased
homebuilding activity.
Gross profit for the nine months ended September 30, 1996 increased $15.6
million, or 28%, compared to the same period in 1995. Excluding the effect of
acquisitions, gross profit increased $2.9 million, or 5%, primarily as a result
of the aforementioned revenue increases. Gross profit margin for the nine month
period decreased to 22.4% in 1996 from 22.6% in 1995 and, excluding the effect
of acquisitions, decreased to 21.9% in 1996 from 22.6% in 1995. These margin
decreases were primarily due to certain vendor price increases in late 1995
which the Company did not begin passing on to customers until late in the first
quarter of 1996, and additional price increases in mid-1996 which were not fully
passed on to customers in the second and third quarters.
Selling, general and administrative expenses for the nine months ended
September 30, 1996 increased $11.5 million, or 28%, compared to the same period
in 1995, primarily due to selling and delivery costs related to increased sales.
Excluding the effect of acquisitions, selling, general and administrative
expenses increased $2.9 million, or 7%, primarily due to sales volume increases.
Selling, general and administrative expenses as a percent of revenues decreased
to 16.3% in 1996 from 16.4% in 1995 and, excluding the effect of acquisitions,
decreased to 16.2% in 1996 from 16.4% in 1995. These decreases were primarily
the result of a larger revenue base over which to spread fixed costs.
Interest expense for the nine months ended September 30, 1996 decreased
$98,000, or 3%, compared to the same period in 1995 and, excluding the effect of
acquisitions, decreased $616,000, or 20%. These decreases were primarily due to
lower average interest rates on borrowings.
Minority interest expense for the nine months ended September 30, 1996
decreased $1.6 million compared to the same period in 1995. This decrease was
due to the Company's acquisition of the minority interests in its distribution
subsidiaries in March 1996. Following the acquisition, all of the Company's
subsidiaries became wholly owned.
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The effective tax rate for the nine months ended September 30, 1996 was 38.2%
compared to 38.5% for the same period in 1995. The decrease is primarily a
result of tax planning strategies which were implemented during 1996.
LIQUIDITY AND CAPITAL RESOURCES
On September 25, 1996, the Company executed a bank-syndicated revolving
credit agreement which provides for borrowings of up to $130 million, expiring
on September 30, 2001. The unsecured agreement replaced the Company's previous
revolving credit facilities and will be used to fund acquisitions and seasonal
working capital needs and for other general corporate purposes. Borrowings under
the revolving credit agreement, which totaled $49 million at September 30, 1996,
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, 1996). The revolving credit agreement contains financial convenants 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 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 $127.8 million at September 30, 1996 from $81.4
million at December 31, 1995. In March 1996, the Company completed a public
offering of 2,355,000 shares of Common Stock that yielded net proceeds of $32.6
million. In April 1996, the Company used approximately $14.0 million of the net
proceeds to fund the acquisition of Three States Supply Co., Inc., a Memphis,
Tennessee-based distributor of supplies used primarily in air conditioning and
heating systems, and $2.5 million to repay a 12% subordinated note. In September
1996, the Company used approximately $15.7 million of the remaining proceeds
from the offering to reduce borrowings under the Company's previous revolving
credit agreements.
Cash and cash equivalents increased $858,000 for the nine month period ended
September 30, 1996. Principal sources of cash 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, acquire Three States Supply, repay long-term obligations and fund capital
expenditures. Inventory purchases are substantially funded by borrowings under
revolving credit agreements. The increase in inventory in 1996 was higher than
1995 primarily due to higher levels of inventory carried by the distribution
operations necessary to meet increased demand caused by growth.
On October 17, 1996, Comfort Supply, Inc., the Company's Houston-based
distribution subsidiary, completed the acquisition of Serviceman Supplies, Inc.,
a $10 million wholesale distributor of residential central air conditioners and
related parts and supplies headquartered in Arlington, Texas.
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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, 1995,
filed on March 29, 1996.
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
10.21 Revolving Credit and Reimbursement Agreement dated September 25,
1996 by and among Watsco, Inc., NationsBank, National Association
(South) and the Lenders Party Hereto from Time to Time.
11. Computation of Earnings Per Share for the Quarters and
Nine Months Ended September 30, 1996 and 1995.
27. Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K filed during the quarter
None
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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)
November 13, 1996
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