================================================================================
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, 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: 15,096,212 shares of the
Company's Common Stock ($.50 par value) and 2,172,647 shares of the Company's
Class B Common Stock ($.50 par value) were outstanding as of August 5, 1997.
PART I. FINANCIAL INFORMATION
WATSCO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
1997 1996
--------- -----------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 6,123 $ 5,020
Marketable securities 1,138 334
Accounts receivable, net 110,119 59,523
Inventories 150,115 87,637
Other current assets 8,144 6,502
----------- -----------
Total current assets 275,639 159,016
Property, plant and equipment, net 25,245 16,174
Intangible assets, net 39,279 23,596
Other assets 9,050 4,795
----------- -----------
$349,213 $203,581
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 994 $ 794
Accounts payable 44,186 17,343
Accrued liabilities 16,129 10,884
----------- -----------
Total current liabilities 61,309 29,021
----------- -----------
Long-term obligations:
Borrowings under revolving credit agreement 57,900 48,000
Bank and other debt 10,438 3,027
----------- -----------
68,338 51,027
----------- -----------
Deferred income taxes and credits 1,671 1,604
Preferred stock of subsidiaries 4,413 2,000
Shareholders' equity:
Common Stock, $.50 par value 7,548 5,927
Class B Common Stock, $.50 par value 1,086 1,089
Paid-in capital 156,578 72,129
Retained earnings 48,270 40,784
----------- -----------
Total shareholders' equity 213,482 119,929
----------- -----------
$349,213 $203,581
=========== ===========
See accompanying notes to condensed consolidated financial statements.
2 of 12
WATSCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
QUARTER AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ --------------------
1997 1996 1997 1996
---- ---- ------ ----
Revenues:
Net sales $171,153 $110,669 $272,898 $181,344
Royalty and service fees 11,220 7,828 20,787 14,942
--------- ---------- --------- ---------
Total revenues 182,373 118,497 293,685 196,286
--------- ---------- --------- ---------
Costs and expenses:
Cost of sales 133,274 86,249 211,125 140,920
Direct service expenses 8,784 6,029 16,219 11,512
Selling, general and administrative 29,338 18,474 51,088 32,840
--------- ---------- --------- ---------
Total costs and expenses 171,396 110,752 278,432 185,272
--------- ---------- --------- ---------
Operating income 10,977 7,745 15,253 11,014
Other income, net 251 283 464 352
Interest expense (789) (1,089) (1,567) (2,134)
--------- ---------- --------- ---------
Income before income taxes and minority interests 10,439 6,939 14,150 9,232
Income taxes (4,076) (2,683) (5,505) (3,554)
Minority interests - - - (116)
--------- ---------- --------- ---------
Net income 6,363 4,256 8,645 5,562
Retained earnings at beginning of period 42,543 30,524 40,784 29,565
Common stock cash dividends (604) (450) (1,095) (765)
Dividends on preferred stock of subsidiary (32) (32) (64) (64)
--------- ---------- --------- ---------
Retained earnings at end of period $ 48,270 $ 34,298 $ 48,270 $ 34,298
========= ========== ========= =========
Earnings per share:
Primary $.35 $.29 $.50 $.43
==== ==== ==== ====
Fully diluted $.35 $.29 $.50 $.42
==== ==== ==== ====
Weighted average shares and
equivalent shares used to calculate:
Primary earnings per share 18,240 14,420 17,322 12,769
====== ====== ====== ======
Fully diluted earnings per share 18,240 14,791 17,322 13,221
====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements.
3 of 12
WATSCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(IN THOUSANDS)
(UNAUDITED)
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 8,645 $ 5,562
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 2,724 1,870
Provision for doubtful accounts 798 509
Minority interests, net of dividends paid - 116
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (29,636) (14,692)
Inventories (24,318) (19,612)
Accounts payable and accrued liabilities 16,513 15,991
Other, net (5,423) 273
-------- --------
Net cash used in operating activities (30,697) (9,983)
-------- --------
Cash flows from investing activities:
Business acquisitions, net of cash acquired (57,061) (14,694)
Capital expenditures, net (4,810) (2,291)
Net sales (purchases) of marketable securities (693) 267
-------- --------
Net cash used in investing activities (62,564) (16,718)
-------- --------
Cash flows from financing activities:
Net borrowings under revolving credit agreements 9,900 15,776
Net borrowings under (repayments of) long-term obligations 17 (4,015)
Net proceeds from issuances of common stock 85,749 34,207
Common stock cash dividends (1,095) (765)
Other (207) (64)
-------- --------
Net cash provided by financing activities 94,364 45,139
-------- --------
Net increase in cash and cash equivalents 1,103 18,438
Cash and cash equivalents at beginning of period 5,020 3,751
-------- --------
Cash and cash equivalents at end of period $ 6,123 $ 22,189
======== ========
See accompanying notes to condensed consolidated financial statements.
4 of 12
WATSCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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 six month period ended June
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 June 30, 1997 and December 31, 1996, inventories consist of
(in thousands):
JUNE 30, DECEMBER 31,
1997 1996
-------- -----------
Raw materials $ 4,138 $ 4,208
Work in process 2,714 1,502
Finished goods 143,263 81,927
-------- -------
$150,115 $87,637
======== =======
4. Effective May 31, 1997, the Company completed the acquisition of the common
stock of Weathertrol Supply Company, a $30 million wholesale distributor of
residential air conditioning and heating products, with fifteen branch
locations serving markets in Texas, Louisiana, Arkansas and Oklahoma.
Cash consideration paid and debt assumed by the Company totaled
approximately $11.0 million and is subject to adjustment upon the
completion of an audit of the assets purchased and the liabilities
assumed. This acquisition was accounted for under the purchase method
of accounting and, accordingly, the results of its operations have been
included in the condensed consolidated statement of income beginning
on the date of acquisition. The excess of the aggregate purchase price
over the net assets acquired of approximately $3.0 million is being
amortized on a straight-line basis over 40 years. In connection with
this acquisition, the Company assumed other liabilities of approximately
$4.4 million.
5. 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
in Florida.
6. The Company has two pending acquisitions for which it has executed
letters of intent. The Companies to be acquired are wholesale distributors
of air conditioning, heating and refrigeration equipment and related parts
and supplies and had aggregate annual revenues of approximately $170
million for their most recently completed fiscal years. Completion of
these transactions are subject to the execution of definitive agreements
and other conditions.
5 of 12
7. On August 8, 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 June 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.
8. 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 12
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 quarter and six months ended June 30,
1997 and 1996 expressed as a percentage of total revenues:
QUARTER SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1997 1996 1997 1996
---- ---- ---- ----
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales and direct service expenses (77.9) (77.9) (77.4) (77.7)
------ ------ ------ -------
Gross profit 22.1 22.1 22.6 22.3
Selling, general and administrative expenses (16.1) (15.6) (17.4) (16.7)
------ ------ ------ -------
Operating income 6.0 6.5 5.2 5.6
Other income, net 0.1 0.3 0.2 0.2
Interest expense (0.4) (0.9) (0.5) (1.1)
Income taxes (2.2) (2.3) (1.9) (1.8)
Minority interests - - - (.1)
------ ------ ------ -------
Net income 3.5% 3.6% 3.0 % 2.8%
====== ====== ====== =======
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 branch operations, acquired in January 1997; Comfort
Products Distributing, Inc. and Central Plains Distributing, Inc., acquired in
March 1997; and Weathertrol Supply Company, acquired in June 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 JUNE 30, 1997 VS. QUARTER ENDED JUNE 30, 1996
Revenues for the three months ended June 30, 1997 increased $63.9 million, or
53.9%, compared to the same period in 1996. In the distribution operations,
revenues increased $60.8 million, or 58.6%. Excluding the effect of
acquisitions, revenues for the distribution operations increased $4.0 million,
or 3.9%. Such increase was primarily due to sales generated from expanded
product lines of parts and supplies.
Gross profit for the three months ended June 30, 1997 increased $14.1
million, or 53.8%, compared to the same period in 1996. Excluding the effect of
acquisitions, gross profit increased $1.6 million, or 6.2%, primarily as a
result of the aforementioned revenue increases. Gross profit margin in the
second quarter of 1997 was unchanged at 22.1% as compared to the same period in
1996. Excluding the effect of acquisitions, gross profit margin increased to
22.3% in 1997 from 22.1% in 1996. This increase was primarily due to the effect
of new vendor procurement programs benefiting the Company with lower purchase
costs for certain parts and supplies in 1997.
7 of 12
Selling, general and administrative expenses for the three months ended June
30, 1997 increased $10.9 million, or 58.8%, compared to the same period in 1996.
Excluding the effect of acquisitions, selling, general and administrative
expenses increased $1.9 million, or 10.2%, primarily due to increased revenues
and higher costs related to new branches and the expansion of existing branches.
Selling, general and administrative costs as a percent of revenues increased to
16.1% in 1997 from 15.6% in 1996, primarily due to 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 expenses increased to 16.3% in 1997 from 15.6% in 1996, primarily
due to branch expansions and the relatively higher cost structures of new
distribution branches.
Interest expense for the second quarter of 1997 decreased $300,000, or 27.6%,
compared to the same period in 1996, primarily due to lower average borrowings.
The effective tax rate for the three months ended June 30, 1997 was 39.0%
compared to 38.7% for the same period in 1996. The increase was due to a higher
effective Federal income tax rate.
SIX MONTHS ENDED JUNE 30, 1997 VS. SIX MONTHS ENDED JUNE 30, 1996
Revenues for the six months ended June 30, 1997 increased $97.4 million, or
49.6%, compared to the same period in 1996. In the distribution operations,
revenues increased $91.9 million, or 54.4%. Excluding the effect of
acquisitions, revenues for the distribution operations increased $5.8 million,
or 3.4%. This increase was primarily due to sales generated from expanded
product lines of parts and supplies.
Gross profit for the six months ended June 30, 1997 increased $22.5 million,
or 51.3%, compared to the same period in 1996. Excluding the effect of
acquisitions, gross profit increased $2.9 million, or 6.6%, primarily as a
result of the aforementioned revenue increases. Gross profit margin for the six
month period increased to 22.6% in 1997 from 22.3% in 1996 and, excluding the
effect of acquisitions, increased to 22.7% in 1997 from 22.3% in 1996. This
increase was primarily due to the effect of new vendor procurement programs
benefiting the Company with lower purchase costs for certain parts and supplies
in 1997.
Selling, general and administrative expenses for the six months ended June
30, 1997 increased $18.2 million, or 55.6%, compared to the same period in
1996. Excluding the effect of acquisitions, selling, general and administrative
expenses increased $3.2 million, or 9.6%, primarily due to increased revenues
and higher costs related to new branches and the expansion of existing branches.
Selling, general and administrative expenses as a percent of revenues increased
to 17.4% in 1997 from 16.7% in 1996, primarily due to 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 expenses as a percent of revenues increased to 17.5% in 1997 from
16.7% in 1996, primarily due to branch expansions and the relatively higher cost
structures of new distribution branches.
Interest expense for the six months ended June 30, 1997 decreased $567,000,
or 26.6%, compared to the same period in 1996, primarily due to lower average
borrowings.
Minority interest expense for the six months ended June 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.
The effective tax rate for the six months ended June 30, 1997 was 39.0%
compared to 38.5% for the same period in 1996. The increase was due to a greater
percentage of income being taxed at a higher effective Federal income tax rate.
8 of 12
LIQUIDITY AND CAPITAL RESOURCES
On August 8, 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 $57.9 million at June 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 June 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.
The Company has two pending acquisitions for which it has executed letters
of intent. The companies to be acquired are wholesale distributors of air
conditioning, heating and refrigeration equipment and related parts and supplies
and had aggregate annual revenues of approximately $170 million for their most
recently completed fiscal years. Completion of these transactions are subject to
the execution of definitive agreements and other conditions.
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 $214.3 million at June 30, 1997 from $130.0
million at December 31, 1996. This increase is primarily due to 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. In March 1997, the Company used the
net proceeds to pay down its revolving credit agreement and to fund the
acquisitions of Comfort Products and Central Plains.
Cash and cash equivalents increased $1.1 million during the six month period
ended June 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 and finance business acquisitions. Inventory purchases are substantially
funded by borrowings under the revolving credit agreement. The increase in
inventory in 1997 was higher than 1996 primarily due to higher levels of
inventory carried by the distribution operations necessary to meet increased
demand, stocking requirements of new branches, and expanded product lines.
9 of 12
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
(a) The Company's 1997 Annual Meeting of Shareholders was held on May
30, 1997.
(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 as follows:
Common Stock For Withheld
------------ --- --------
Mr. Alan H. Potamkin 12,707,604 86,046
Class B Common Stock
--------------------
Mr. Roberto Motta 1,787,872 11,548
Mr. Cesar L. Alvarez 1,787,872 11,548
(c) Three additional proposals were voted upon at the Annual
Meeting of Shareholders as follows:
(1) To ratify the action of the Board of Directors amending
and restating the Company's 1991 Stock Option Plan;
(2) To ratify the action of the Board of Directors adopting
the 1996 Qualified Employee Stock Purchase Plan; and
(3) To ratify the reappointment of Arthur Andersen LLP as the
Company's independent certified public accountants for the
year ended December 31, 1997.
The combined vote of the Company's Common Stock and Class B
Common Stock was as follows:
PROPOSAL 1
----------
For 27,689,524
Against 924,159
Abstained 85,912
10 of 12
ITEM 4. RESULTS OF VOTES OF SECURITIES HOLDERS (CONTINUED)
PROPOSAL 2
----------
For 28,356,420
Against 261,240
Abstained 81,961
PROPOSAL 3
----------
For 30,719,515
Against 10,584
Abstained 57,750
As of April 4, 1997, 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 15,010,821 and 2,190,697, respectively, representing
36,917,791 combined votes.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.18 Amended and Restated Revolving Credit and Reimbursement
Agreement dated August 8, 1997 by and among Watsco, Inc.,
NationsBank, N.A. (Agent) and Barnett Bank, N.A., First Union
National Bank, Suntrust Bank (Co-Agents), and the Lenders
Party Hereto from Time to Time.
11. Computation of Earnings Per Share for the Quarter and Six
Months Ended June 30, 1997 and 1996.
27. Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
11 of 12
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)
August 13, 1997
12 of 12
EXHIBIT INDEX
EXHIBIT
- -------
10.18 Amended and Restated Revolving Credit and Reimbursement
Agreement dated August 8, 1997 by and among Watsco, Inc.,
NationsBank, N.A. (Agent), and Barnett Bank, N.A., First Union National
Bank, Suntrust Bank (Co-Agents), and the Lenders Party Hereto from
Time to Time.
11. Computation of Earnings Per Share for the Quarter and Six
Months Ended June 30, 1997 and 1996.
27. Financial Data Schedule (for SEC use only).