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 March 31, 1999 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 April 20, 1999,
3,700,876 shares.
This report contains 12 pages.
NOLAND COMPANY AND SUBSIDIARY
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1999 (Unaudited) and Dec. 31, 1998 (Audited).... 3
Unaudited Consolidated Statements of Income -
Three Months Ended March 31, 1999 and 1998................. 4
Unaudited Consolidated Statements of Retained Earnings -
Three Months Ended March 31, 1999 and 1998................ 5
Unaudited Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998................ 6
Notes to Unaudited Consolidated Financial Statements......... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 8-10
Item 3. Qualitative and Quantitative Disclosures About
Market Risk.............................................. 10
PART II. OTHER INFORMATION
Items 1, 2, 3, 4, 5, and 6................................... 11
SIGNATURES ............................................................. 12
PART 1. FINANCIAL INFORMATION
NOLAND COMPANY AND SUBSIDIARY
Consolidated Balance Sheets
Item 1. Financial Statements
March 31, December 31,
1999 1998
(Unaudited) (Audited)
Assets
Current Assets:
Cash and cash equivalents $ 4,132,373 $ 3,318,526
Accounts receivable, net 54,591,707 55,451,379
Inventory, net 65,507,284 70,570,288
Deferred income taxes 1,947,578 1,947,578
Prepaid expenses 396,583 298,787
Total Current Assets 126,575,525 131,586,558
Property and Equipment, at cost:
Land 13,782,609 13,127,360
Buildings 81,640,309 81,347,439
Equipment and fixtures 64,304,403 63,814,686
Property in excess of current needs 1,740,547 1,876,350
Total 161,467,868 160,165,835
Less accumulated depreciation 76,353,600 74,361,284
Property and Equipment, net 85,114,268 85,804,551
Assets Held for Resale 1,021,492 1,021,492
Prepaid Pension 15,471,968 14,846,968
Other Assets 1,068,965 1,068,492
$229,252,218 $234,328,061
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable - short term borrowings $ 20,000,000 $ 7,500,000
Current maturity of long-term debt 3,586,742 14,871,742
Book overdrafts 6,456,009 10,525,395
Accounts payable 21,788,465 21,890,089
Other accruals and liabilities 8,306,036 10,996,864
Federal and state income taxes 915,775 535,416
Total Current Liabilities 61,053,027 66,319,506
Long-term Debt 32,150,961 32,412,648
Deferred Income Taxes 9,122,433 9,122,433
Accrued Postretirement Benefits 1,316,600 1,240,631
Stockholders' Equity:
Capital common stock, par value $10;
authorized, 6,000,000 shares; issued,
3,700,876 shares 37,008,760 37,008,760
Retained earnings 89,086,662 88,560,575
Total 126,095,422 125,569,335
Less restricted stock 486,225 336,492
Stockholders' Equity 125,609,197 125,232,843
$229,252,218 $234,328,061
The accompanying notes are an integral part of the financial statements.
NOLAND COMPANY AND SUBSIDIARY
Unaudited Consolidated Statements of Income
Three Months Ended
March 31,
1999 1998
Merchandise sales $114,250,440 $103,884,838
Cost of goods sold:
Purchases and freight-in 87,526,662 85,218,369
Inventory, beginning 70,570,288 66,470,051
Inventory, ending (65,507,284) (68,354,153)
Cost of goods sold 92,589,666 83,334,267
Gross profit on sales 21,660,774 20,550,571
Operating expenses 21,438,480 20,480,710
Operating profit 222,294 69,861
Other income:
Cash discounts, net 1,255,553 1,352,181
Service charges 428,199 327,348
Miscellaneous 179,049 110,599
Total other income 1,862,801 1,790,128
Interest expense 766,938 808,678
Income before income taxes 1,318,157 1,051,311
Income taxes 496,000 395,500
Net income $ 822,157 $ 655,811
Basic and diluted earnings per share $ .22 $ .18
Cash dividends per share $ .08 $ .08
The accompanying notes are an integral part of the financial statements.
NOLAND COMPANY AND SUBSIDIARY
Unaudited Consolidated Statements of Retained Earnings
Three Months Ended
March 31,
1999 1998
Retained earnings, January 1 $88,560,575 $83,875,284
Add net income 822,157 655,811
Deduct cash dividends paid
($.08 per share) (296,070) (296,071)
Retained earnings, March 31 $89,086,662 $84,235,024
The accompanying notes are an integral part of the financial statements.
NOLAND COMPANY AND SUBSIDIARY
Unaudited Consolidated Statements of Cash Flows
Three Months
Ended March 31
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 822,157 $ 655,811
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,166,131 1,919,993
Amortization of prepaid pension cost (625,000) (521,750)
Provision for doubtful accounts 319,890 384,042
Amortization of unearned compensation-restricted stock 25,459 13,278
Change in operating assets and liabilities:
Decrease in accounts receivable 539,782 1,752,292
Decrease (increase) in inventory 5,063,004 (1,884,102)
(Increase) in prepaid expenses (97,796) (206,381)
(Increase) in other assets (25,996) (87,901)
(Decrease) in accounts payable (101,625) (386,321)
(Decrease) in other accruals and liabilities (2,690,828) (5,336,406)
Increase (decrease) in federal and state income taxes 380,359 (472,960)
Increase in accrued post retirement benefits 75,969 64,126
Total adjustments 5,029,349 (4,762,090)
Net cash provided by (used in) operating activities 5,851,506 (4,106,279)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,475,931) (7,440,455)
Proceeds from sale of assets 25,606 12,597
Net cash used in investing activities (1,450,325) (7,427,858)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in bank overdrafts (4,069,386) 4,811,208
Short-term borrowings - net 12,500,000 7,250,000
Long-term debt (payments)- net (11,546,687) (261,445)
Dividends paid (296,070) (296,071)
Purchase of restricted stock (175,191) (58,169)
Net cash (used in) provided by financing activities (3,587,334) 11,445,523
CASH AND CASH EQUIVALENTS:
Increase (decrease) during first quarter 813,847 (88,614)
Beginning of year 3,318,526 5,674,097
End of first quarter $ 4,132,373 $ 5,585,483
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 March 31,
1999, and its results of operations and cash flows for the
three months ended March 31, 1999 and 1998. The balance sheet
as of December 31, 1998 was derived from audited financial
statements as of that date.
2. The Notes to Consolidated Financial Statements included in the
Company's December 31, 1998 Annual Report on Form 10-K are an
integral part of the interim unaudited financial statements.
The Company takes a physical inventory annually on December 31
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 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 March 31, 1999 are not necessarily indicative of
the results for the full year.
4. Accounts Receivable as of March 31, 1999 and December 31, 1998
are net of allowance for doubtful accounts of $1,008,132.
Quarterly bad debt charges, net of recoveries, were $266,393
for 1999 and $348,746 for 1998.
5. Diluted earnings per share is based on 3,700,876 shares
outstanding. Basic earnings per share for the periods ended
March 31, 1999 and 1998 is based on 3,672,976 and 3,690,476
shares, respectively. The difference in shares is due to non-
vested shares of restricted stock.
6. In June 1998 the Financial Accounting Standards Board isssued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities". The Company has no derivative instruments or
hedging activities and believes adoption of the new
pronouncement will not be material to the consolidated
financial condition or results of operations of the Company.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
The Company maintains its short- and long-term liquidity through:
(1) cash flow from operations; (2) short-term borrowings; (3) bank
lines of credit arrangements, when needed; and (4) additional long-
term debt, when needed.
The Company's financial condition remains strong with working
capital of $65.5 million and a current ratio of 2.0. There has been
no material change in total debt since December 31, 1998. A
$10,000,000 maturity of long-term debt was repaid on March 30, 1999
with a short-term demand note. The Company feels that the
historically low interest rates present an opportunity to
restructure its debt. The Company is in the process of arranging a
new debt structure. Management believes the Company has adequate
financial resources to meet the needs of the foreseeable future.
Results of Operations
For the quarter the Company had net income of $822,000, or 22 cents
per share, compared to net income of $656,000 or 18 cents per share,
for the first quarter of 1998. Net income increased 25%, while first
quarter sales increased 10%. First quarter sales totaled $114.3
million, compared to $103.9 million for the year-earlier period.
The $114.3 million was a record-high first quarter, with air
conditioning/heating sales leading the way with a 16% improvement.
Plumbing sales rose 10% and electrical/industrial sales were up by
3.3%.
The Company's gross margins declined from 19.8% to 19.0%. The
decline reflects in part a more aggressive stance toward bidding and
securing orders on large commercial projects. Much of this business
was direct shipped from manufacturers and carried smaller margins.
Operating expenses increased $958,000, or 4.6%, compared to the
first quarter of 1998. Pension income, generated by the Company's
overfunded pension plan, reduced operating expenses $625,000
compared to $572,000 a year ago. As a percent of sales, operating
expenses declined. Other income was up 4.1% and interest expense
declined by 5.2%.
Year 2000
The Company is both internally and externally dependent on computer
software that uses a two-digit dating technique. In 1997, the
Company developed and implemented a plan to address significant Year
2000 deficiencies in its internal computer hardware, software,
related systems, non-information technology systems and third party
risks.
For information technology systems, all new hardware and software
purchased as part of an ongoing replacement process have been
certified by the vendor as Year 2000 compliant. The Company paid a
contractor $20,000 to address specific Year 2000 issues while all
other Year 2000 work has been accomplished by existing staff. All
programs and modules have been bench tested and migrated into
production. All funds for Year 2000 costs will come from operations.
Future expenditures for Year 2000 issues, which are expected to be
insignificant, will also come from operations. No information
technology projects have been postponed or cancelled as a result of
the Company's efforts to become Year 2000 compliant. In the event
of internal Year 2000 failure, the Company intends to process
transactions manually until its systems are restored.
Noland Company is dependent on other organizations such as vendors,
customers, support services, and the infrastructure that have Year
2000 concerns. Year 2000 issues are also present in some products
sold by Noland, but they represent less than one percent of the
Company's sales. Noland has received and/or mailed hundreds of
communications regarding Year 2000 issues. Thus far, we have not
identified any significant vendors, manufacturers, customers, or
support organizations that have advised us of Year 2000 issues that
will not be effectively addressed. It is possible that Noland has
not been advised of issues that will not be corrected and will fail.
The amount of loss imposed upon Noland, if any, will depend upon the
specific issue that fails. Most of Noland's products purchased for
resale can be obtained from alternative sources. The Company has
been assured by its primary vendors that they are successfully
addressing the Year 2000 issue.
The failure of the United States postal system, federal banking
system, the country's electric power generating "grid", and similar
infrastructure losses could cause material problems for the
Company's operations. The amount of any loss would depend upon the
severity and length of the disruption. Noland Company has no
reasonable way to estimate those losses, if any.
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.
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. The Company does not engage
in foreign currency hedging or the use of derivatives. 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 and discount rate 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
(a) Exhibits
27 - Financial Data Schedule (SEC use only)
(b) 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
April 27, 1999 Arthur P. Henderson, Jr.
Arthur P. Henderson, Jr.
Vice President-Finance