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, 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 July 22, 1999,
3,700,876 shares.
This report contains 13 pages.
NOLAND COMPANY AND SUBSIDIARY
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1999 (Unaudited) and Dec. 31, 1998 (Audited).... 3
Unaudited Consolidated Statements of Income -
Three Months and Six Months Ended June 30, 1999 and 1998. 4
Unaudited Consolidated Statements of Retained Earnings -
Six Months Ended June 30, 1999 and 1998.................. 5
Unaudited Consolidated Statements of Cash Flows -
Six Months Ended June 30, 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............................................ 10-11
PART II. OTHER INFORMATION
Items 1, 2, 3, 4, 5, and 6.................................. 12
SIGNATURE ........................................................... 13
PART 1. FINANCIAL INFORMATION
NOLAND COMPANY AND SUBSIDIARY
Consolidated Balance Sheets
Item 1. Financial Statements
June 30, December 31,
1999 1998
(Unaudited) (Audited)
Assets
Current Assets:
Cash and cash equivalents $ 4,274,380 $ 3,318,526
Accounts receivable, net 57,959,526 55,451,379
Inventory, net 68,354,182 70,570,288
Deferred income taxes 1,947,578 1,947,578
Prepaid expenses 304,921 298,787
Total Current Assets 132,840,587 131,586,558
Property and Equipment, at cost:
Land 13,809,541 13,127,360
Buildings 81,919,935 81,347,439
Equipment and fixtures 64,496,768 63,814,686
Property excess to current needs 1,735,135 1,876,350
Total 161,961,379 160,165,835
Less accumulated depreciation 77,265,716 74,361,284
Property and Equipment, net 84,695,663 85,804,551
Assets Held for Resale 1,021,492 1,021,492
Prepaid Pension 16,396,968 14,846,968
Other Assets 970,141 1,068,492
$235,924,851 $234,328,061
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable - short term borrowings $ 18,600,000 $ 7,500,000
Current maturity of long-term debt 3,586,742 14,871,742
Book overdrafts 8,799,052 10,525,395
Accounts payable 26,213,735 21,890,089
Other accruals and liabilities 9,881,402 10,996,864
Federal and state income taxes 1,103,988 535,416
Total Current Liabilities 68,184,919 66,319,506
Long-term Debt 30,039,276 32,412,648
Deferred Income Taxes 9,122,433 9,122,433
Accrued Postretirement Benefits 1,393,448 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 90,628,044 88,560,575
Total 127,636,804 125,569,335
Less restricted stock 452,029 336,492
Stockholders' Equity 127,184,775 125,232,843
$235,924,851 $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 Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Merchandise sales $125,137,345 $119,918,822 $239,387,785 $223,803,660
Cost of goods sold:
Purchases and freight-in 103,884,796 98,355,375 191,411,459 183,573,744
Inventory, beginning 65,507,284 68,354,153 70,570,288 66,470,051
Inventory, ending 68,354,182 70,533,927 68,354,182 70,533,927
Cost of goods sold 101,037,898 96,175,601 193,627,565 179,509,868
Gross profit on sales 24,099,447 23,743,221 45,760,220 44,293,792
Operating expenses 22,180,026 21,832,295 43,618,505 42,313,005
Operating profit 1,919,421 1,910,926 2,141,715 1,980,787
Other income:
Cash discounts, net 1,248,657 1,021,052 2,504,211 2,373,233
Service charges 304,167 269,242 732,367 596,590
Miscellaneous 213,881 321,024 392,928 431,623
Total other income 1,766,705 1,611,318 3,629,506 3,401,446
Interest expense 739,974 892,629 1,506,912 1,701,307
Income before income taxes 2,946,152 2,629,615 4,264,309 3,680,926
Income taxes 1,108,700 989,600 1,604,700 1,385,100
Net income $ 1,837,452 $ 1,640,015 $ 2,659,609 $2,295,826
Basic and diluted earnings
per share $ .50 $ .44 $ .72 $ .62
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 Retained Earnings
Six Months Ended
June 30,
1999 1998
Retained earnings, January 1 $88,560,575 $83,875,284
Add net income 2,659,609 2,295,826
Deduct cash dividends paid
($.16 per share) (592,140) (592,141)
Retained earnings, June 30 $90,628,044 $85,578,969
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
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,659,609$ 2,295,826
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,302,541 3,912,847
Amortization of prepaid pension cost (1,550,000) (1,043,500)
Provision for doubtful accounts 648,721 772,697
Amortization of unearned compensation-restricted stock 59,595 35,163
Change in operating assets and liabilities:
(Increase) in accounts receivable (3,156,868) (6,145,936)
Decrease (increase) in inventory 2,216,106 (4,063,876)
(Increase) in prepaid expenses (6,134) (279,865)
Decrease (increase) in other assets 38,756 (40,615)
Increase in accounts payable 4,323,646 5,707,153
(Decrease) in other accruals and liabilities (1,115,462) (4,043,493)
Increase (decrease) in federal and state income taxes 568,572 (143,957)
Increase in accrued postretirement benefits 152,817 131,269
Total adjustments 6,482,290 (5,202,113)
Net cash provided (used) by operating activities 9,141,899 (2,906,287)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,208,095)(10,581,039)
Proceeds from sale of assets 74,036 309,674
Net cash used by investing activities (3,134,059)(10,271,365)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in bank overdrafts (1,726,343) 1,632,466
Short-term borrowings 11,100,000 8,250,000
Long-term debt repayments (13,658,372) (2,372,889)
Long-term debt borrowings - 7,500,000
Dividends paid (592,140) (592,141)
Purchase of restricted stock (175,131) (306,850)
Net cash (used) provided by financing activities (5,051,986) 14,110,586
CASH AND CASH EQUIVALENTS:
Increase during first six months 955,854 932,934
Beginning of year 3,318,526 5,674,907
End of first six months $ 4,274,380 $ 6,607,031
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, 1999,
and its results of operations and cash flows for the three and
six months ended June 30, 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. The
estimated gross profit rates include an estimate of any
adjustment to the LIFO reserve. The rate of
inflation/deflation for an interim period is not necessarily
consistent with the full year rate of inflation/deflation.
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 and six months ended June 30, 1999 are not necessarily
indicative of earnings for the year.
4. Accounts Receivable as of June 30, 1999 and December 31, 1998
are net of an allowance for doubtful accounts of $1,008,132.
Second quarter bad debt charges, net of recoveries, were
$278,764 for 1999 and $309,474 for 1998. Year-to-date bad
debt charges, net of recoveries, were $545,157 for 1999 and
$658,223 for 1998.
5. Diluted earnings per share is based on 3,700,876 shares
outstanding. Basic earnings per share for the periods ended
June 30, 1999 and 1998 is based on 3,673,576 and 3,680,776
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 generally generates its cash needs 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 reduced its short- and long-term debt $2.6 million since
December 31, 1998 and $9.6 million since June 30, 1998. Cash flow
from operations provided the funds for the debt reduction and the
purchase of $3.2 million in capital assets. Plans to restructure the
Company's debt have been cancelled because of improved cash flow,
high cost of refinancing and an increase in interest rates. The
Company's financial condition remains strong with working capital
of $64.7 million and a current ratio of 1.95. Management believes
the Company has adequate financial resources to meet the needs of
the foreseeable future.
Results of Operations
Second-quarter sales of $125.1 million were a record high and 4.4
percent more than the $119.9 million total for 1998's second
quarter. Plumbing sales rose 9 percent indicating we captured our
share of available business in a strong construction market. Air
conditioning sales, hampered by weak demand for replacement
equipment during a relatively cool June, rose 2 percent.
Electrical/industrial sales declined 1 percent. Sales for the first
six months of 1999 were $229.4 million compared to $223.8 million
for the year-earlier period.
The gross margin of profit declined in the second quarter from 19.8
percent to 19.3 percent for the year-earlier period reflecting a
more aggressive sales effort in highly competitive markets.
Operating expenses were held to a modest 1.6 percent increase for
the quarter. For the first six months, gross margins declined from
19.8 percent to 19.1 percent and operating expenses increased 3.1
percent compared to a year ago. Operating expenses for the quarter
and first six months benefitted from pension income, generated by
the Company's overfunded pension plan, of $925,000 and $1,550,000
compared to $522,000 and $1,044,000 for the same periods a year ago.
Interest expense for the quarter and year-to-date decreased 17.1
percent and 11.4 percent, respectively. The decreases are due to
lower rates and lower average borrowings.
The second quarter's healthy sales increase for plumbing, the
largest product department, is cause for optimism and encouragement.
With key markets expected to remain relatively strong in the coming
months,we believe the trends of the first half should continue in
the third quarter.
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. None
SIGNATURE
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
July 27, 1999 Arthur P. Henderson, Jr.
Arthur P. Henderson, Jr.
Vice President-Finance