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 September 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 October 25, 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 -
September 30, 1999 (Unaudited) and Dec. 31, 1998 (Audited)........3
Unaudited Consolidated Statements of Income -
Three Months and Nine Months Ended September 30, 1999 and 1998....4
Unaudited Consolidated Statements of Retained Earnings -
Nine Months Ended September 30, 1999 and 1998.....................5
Unaudited Consolidated Statements of Cash Flows -
Nine Months Ended September 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
PART II. OTHER INFORMATION
Items 1, 2, 3, 4, 5, and 6..........................................11
SIGNATURE....................................................................12
PART 1. FINANCIAL INFORMATION
NOLAND COMPANY AND SUBSIDIARY
Consolidated Balance Sheets
Item 1. Financial Statements
September 30, December 31,
1999 1998
(Unaudited) (Audited)
Assets
Current Assets:
Cash and cash equivalents $ 4,075 354 $ 3,318,526
Accounts receivable, net 56,027,575 55,451,379
Inventory, net 64,236,441 70,570,288
Deferred income taxes 1,947,578 1,947,578
Prepaid expenses 260,139 298,787
Total Current Assets 126,547,087 131,586,558
Property and Equipment, at cost:
Land 13,357,915 13,127,360
Buildings 82,451,480 81,347,439
Equipment and fixtures 64,636,302 63,814,686
Property excess to current needs 1,719,855 1,876,350
Total 162,165,552 160,165,835
Less accumulated depreciation 78,362,596 74,361,284
Property and Equipment, net 83,802,956 85,804,551
Assets Held for Resale 1,021,492 1,021,492
Prepaid Pension 17,171,968 14,846,968
Other Assets 985,928 1,068,492
$229,529,431 $234,328,061
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable, short-term borrowing $ 7,100,000 $ 7,500,000
Current maturity of long-term debt 4,396,742 14,871,742
Book overdrafts 13,678,069 10,525,395
Accounts payable 25,589,873 21,890,089
Other accruals and liabilities 10,671,444 10,996,864
Federal and state income taxes 905,883 535,416
Total Current Liabilities 62,342,011 66,319,506
Long-term Debt 28,277,590 32,412,648
Deferred Income Taxes 9,122,433 9,122,433
Accrued Postretirement Benefits 1,469,480 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 91,715,049 88,560,575
Total 128,723,809 125,569,335
Deferred directors compensation 12,000 -
Less unearned compensation-restricted stock 417,892 336,492
Stockholders' Equity 128,317,917 125,232,843
$229,529,431 $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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Merchandise sales $126,276,396 $124,850,874 $365,664,181 $348,654,534
Cost of goods sold:
Purchases and freight-in 98,289,265 108,271,427 289,700,724 291,845,171
Inventory, beginning 68,354,182 70,533,927 70,570,288 66,470,051
Inventory, ending 64,236,441 78,339,091 64,236,441 78,339,091
Cost of goods sold 102,407,006 100,466,263 296,034,571 279,976,131
Gross profit on sales 23,869,390 24,384,611 69,629,610 68,678,403
Operating expenses 22,619,585 22,580,807 66,238,090 64,893,812
Operating profit 1,249,805 1,803,804 3,391,520 3,784,591
Other income:
Cash discounts, net 1,106,984 1,148,553 3,611,195 3,521,786
Service charges 353,395 304,085 1,085,761 900,675
Miscellaneous 188,710 174,515 581,639 606,138
Total other income 1,649,089 1,627,153 5,278,595 5,028,599
Interest expense 681,318 886,663 2,188,230 2,587,970
Income before taxes 2,217,576 2,544,294 6,481,885 6,225,220
Income taxes:
State 121,900 140,000 356,500 342,400
Federal 712,600 817,400 2,082,700 2,000,100
Total income taxes 834,500 957,400 2,439,200 2,342,500
Net income $ 1,383,076 $ 1,586,894 $ 4,042,685 $ 3,882,720
Basic earnings per share$ .37 $ .43 $ 1.09 $ 1.05
Diluted earnings
per share $ .38 $ .43 $ 1.10 $ 1.05
Cash dividends per share$ .08 $ .08 $ .24 $ .24
The accompanying notes are an integral part of the financial statements.
NOLAND COMPANY AND SUBSIDIARY
Unaudited Consolidated Statements of Retained Earnings
Nine Months Ended
September 30,
1999 1998
Retained earnings, January 1 $88,560,575 $83,875,284
Add net income 4,042,685 3,882,720
Deduct cash dividends paid
($.24 per share) (888,210) (888,210)
Retained earnings, September 30 $91,715,049 $86,869,794
The accompanying notes are an integral part of the financial statements.
NOLAND COMPANY AND SUBSIDIARY
Unaudited Consolidated Statements of Cash Flows
Nine Months
Ended September 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,042,685 $ 3,882,720
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 6,418,924 5,942,036
Amortization of prepaid pension cost (2,325,000) (1,565,250)
Amortization of unearned compensation-restricted stock 93,731 61,351
Deferred directors compensation 12,000 -
Provision for doubtful accounts 973,377 1,159,097
Change in operating assets and liabilities:
(Increase) in accounts receivable (1,549,573) (6,453,318)
Decrease (increase) in inventory 6,333,847 (11,869,040)
Decrease (increase) in prepaid expenses 38,648 (108,129)
(Increase) in other assets (11,168) (181,827)
Increase in accounts payable 3,699,783 7,062,650
(Decrease) in other accruals and liabilities (325,420) (2,852,526)
Increase (decrease) in federal and state income taxes 370,467 (340,996)
Increase in accrued postretirement benefits 228,849 212,352
Total adjustments 13,958,465 (8,933,600)
Net cash provided (used) by operating activities 18,001,150 (5,050,880)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,946,719) (13,619,369)
Proceeds from sale of assets 623,122 362,628
Net cash used by investing activities (4,323,597) (13,256,741)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in book overdrafts 3,152,674 226,644
Short-term (payments) borrowing, net (400,000) 13,000,000
Long-term debt repayments (14,610,058) (2,634,334)
Long-term borrowing - 7,500,000
Dividends paid (888,210) (888,210)
Purchase of restricted stock (175,131) (306,850)
Net cash (used) provided by financing activities(12,920,725) 16,897,250
CASH AND CASH EQUIVALENTS:
Increase (decrease) during first nine months 756,828 (1,410,371)
Beginning of year 3,318,526 5,674,097
End of first nine months $ 4,075,354 $ 4,263,726
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 September 30, 1999, and its results of
operations and cash flows for the three and nine months ended
September 30, 1999 and 1998. The balance sheet as of December 31,
1998, was derived from audited financial statements as of that date.
The results of operations for the quarter ended September 30, 1999,
are not necessarily indicative of the results to be expected for the
full year.
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 in the fourth quarter 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. 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, interim results of operations of each period are not
necessarily indicative of earnings for the year.
4. Accounts Receivable as of September 30, 1999 and December 31, 1998
are net of an allowance for doubtful accounts of $1,008,132. Third-
quarter bad debt charges, net of recoveries, were $230,959 for 1999
and $315,924 for 1998. Year-to-date bad debt charges, net of
recoveries, were $776,116 for 1999 and $974,148 for 1998.
5. Diluted earnings per share is based on 3,700,876 shares outstanding.
Basic earnings per share for the periods ended September 30, 1999
and 1998 is based on 3,674,776 and 3,681,376 shares, respectively.
The difference in shares is due to non-vested shares of restricted
stock.
6. Subsequent to the end of the quarter the estimate for pension
income for the year was increased by $671,000. This amount will be
reflected in the fourth quarter operating income.
7. In June 1998 the Financial Accounting Standards Board issued 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 generates necessary cash through: (1) cash flow from
operations; (2) short-term borrowing from bank lines of credit
arrangements, when needed; and (3) additional long-term debt, when
needed.
For the first nine months of 1999, the Company generated $18.0 million
from operating activities compared to using $5.1 million in operations
for the same period last year. A decline in inventory of $6.3 million
since December 31, 1998 and $14.1 million since September 30, 1998 is the
primary cause of the year-to-year swing. The cash provided by operations
was used to pay off $11.6 in short- and long-term debt and purchase $4.9
million in capital assets. Working capital at September 30, 1999 was
$64.2 million and the current ratio was 2.03. Management believes the
Company's liquidity, capital resources and working capital are sufficient
to meet the needs of the foreseeable future.
Results of Operations
Third-quarter sales of $126.3 million were 1.1 percent more than the
$124.9 million for the year-earlier period. Air conditioning sales
increased 2.9 percent for the quarter followed by increases of 1.9
percent and one percent for the industrial and plumbing departments,
respectively. Electrical sales declined 3.1 percent. Sales for the
quarter were adversely affected by Hurricane Floyd, which temporarily
closed many of our eastern branches, and the August closing of three
branches in Texas.
The gross margin of profit declined 2.1 percent to 18.9 percent compared
to the year-earlier period at 19.5 percent. Operating expenses were flat,
due in part to pension income for the quarter of $775,000 compared to
$522,000 for the year-earlier period as a result of an over-funded
pension plan. The combination of flat sales and lower profit margins led
to a 31 percent drop in operating profit. Much of this decline was
offset by a 23 percent reduction in interest expense, the result of lower
borrowings stemming from a sharp reduction in inventory. As of September
30, 1999, we had lowered our inventory investment by $14 million compared
to September 30, 1998, documenting the favorable impact of the new
purchasing and inventory management system.
Net income for the quarter was $1,383,000 compared to $1,587,000 for the
third quarter of 1998. Year-to-date net income was $4.0 million compared
to $3.9 million for the year earlier period.
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) Reports on Form 8-K
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
October 27, 1999 Arthur P. Henderson, Jr.
Arthur P. Henderson, Jr.
Vice President-Finance