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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 MARCH 31, 1998
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
the 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: 15,649,873 shares of the
Company's Common Stock ($.50 par value) and 2,199,460 shares of the Company's
Class B Common Stock ($.50 par value) were outstanding as of May 11, 1998.
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<PAGE>
PART I. FINANCIAL INFORMATION
WATSCO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1998 and December 31, 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,745 $ 7,880
Accounts receivable, net 106,812 101,727
Inventories 190,488 173,319
Other current assets 9,898 9,263
Net assets of discontinued operations 26,625 25,892
-------- --------
Total current assets 337,568 318,081
Property, plant and equipment, net 23,215 21,870
Intangible assets, net 80,826 77,388
Other assets 9,366 8,701
-------- --------
$450,975 $426,040
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 748 $ 958
Accounts payable 49,279 43,802
Accrued liabilities 12,350 15,562
-------- --------
Total current liabilities 62,377 60,322
-------- --------
Long-term obligations:
Borrowings under revolving credit agreement 152,300 134,700
Bank and other debt 2,365 2,541
-------- --------
154,665 137,241
-------- --------
Deferred income taxes and credits 2,904 2,879
-------- --------
Shareholders' equity:
Common Stock, $.50 par value 7,729 7,631
Class B Common Stock, $.50 par value 1,081 1,083
Paid-in capital 167,965 163,996
Unearned compensation related to
outstanding restricted stock (3,786) (3,836)
Retained earnings 58,040 56,724
-------- --------
Total shareholders' equity 231,029 225,598
-------- --------
$450,975 $426,040
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2 of 10
<PAGE>
WATSCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Three Months Ended March 31, 1998 and 1997
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Revenue $172,716 $96,271
Cost of sales 132,315 74,214
-------- -------
Gross profit 40,401 22,057
Selling, general and administrative expenses 35,860 18,212
-------- -------
Operating income 4,541 3,845
Interest expense, net 1,722 493
-------- -------
Income from continuing operations
before income taxes 2,819 3,352
Income taxes 1,043 1,291
-------- -------
Income from continuing operations 1,776 2,061
Income from discontinued operations,
net of income taxes 149 221
-------- -------
Net income 1,925 2,282
Retained earnings at beginning of period 56,724 40,784
Common stock cash dividends 609 491
Dividends on preferred stock of subsidiary - 32
-------- -------
Retained earnings at end of period $ 58,040 $42,543
======== =======
Basic earnings per share:
Income from continuing operations $0.10 $0.13
Income from discontinued operations - 0.01
----- -----
Net income $0.10 $0.14
===== =====
Diluted earnings per share:
Income from continuing operations $0.10 $0.12
Income from discontinued operations - 0.01
----- -----
Net income $0.10 $0.13
===== =====
Weighted average shares and
equivalent shares used to calculate:
Basic earnings per share 17,479 15,298
====== ======
Diluted earnings per share 18,531 16,400
====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3 of 10
<PAGE>
WATSCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1998 and 1997
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Cash flows from operating activities:
Income from continuing operations $ 1,776 $ 2,061
Adjustments to reconcile income from
continuing operations to net cash used
in operating activities:
Depreciation and amortization 1,693 807
Provision for doubtful accounts 395 149
Change in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (2,364) (1,209)
Inventories (13,550) (12,417)
Accounts payable and accrued liabilities (2,033) 3,400
Other, net (1,550) (28)
------- -------
Net cash used in operating activities (15,633) (7,237)
of continuing operations ------- -------
Cash flows from investing activities:
Business acquisitions, net of cash acquired (3,179) (48,891)
Capital expenditures, net (1,827) (1,712)
Net proceeds from sales of marketable securities - (712)
------- -------
Net cash used in investing activities
of continuing operations (5,006) (51,315)
------- -------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit agreement 17,600 (21,900)
Repayments of bank and other debt (494) (2,730)
Net proceeds from issuances of common stock 591 85,173
Common stock dividends (609) (491)
Other - (32)
------- -------
Net cash provided by financing activities
of continuing operations 17,088 60,020
------- -------
Net cash provided by (used in) discontinued operations (584) 74
------- -------
Net increase (decrease) in cash and cash equivalents (4,135) 1,542
Cash and cash equivalents at beginning of period 7,880 2,882
------- -------
Cash and cash equivalents at end of period $ 3,745 $ 4,424
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4 of 10
<PAGE>
WATSCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Amounts in thousands, except share data)
(Unaudited)
1. The condensed consolidated balance sheet as of December 31, 1997, which has
been derived from the Company's 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 ended March 31, 1998 are not
necessarily indicative of the results for the year ending December 31,
1998. The sale of the Company's products and services is seasonal with
revenues generally increasing during the months of May through August.
3. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
4. Basic earnings per share is computed by dividing net income, less
subsidiary preferred stock dividends, by the total of the weighted average
number of shares outstanding. Subsidiary preferred stock dividends were
$32 for the three months ended March 31, 1997. Diluted earnings per
share additionally assumes, if dilutive, any added dilution from common
stock equivalents.
Shares used to calculate earnings per share for the three months ended
March 31, 1998 and 1997 are as follows:
1998 1997
---------- ----------
Weighted average shares outstanding 17,478,988 15,298,177
Dilutive stock options and warrants 1,052,258 1,101,448
---------- ----------
Shares for diluted earnings per share 18,531,246 16,399,625
========== ==========
5. The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," effective January 1, 1998. SFAS
No. 130 establishes standards for reporting and display of comprehensive
income and its components in financial statements. The Company's net income
equals comprehensive income.
6. In November 1997, the Company's Board of Directors approved a plan to
divest of its manufacturing operation, Watsco Components, Inc.
("Components") and its personnel staffing business, Dunhill Staffing
Systems, Inc. ("Dunhill"). Accordingly, the results of Components and
Dunhill have been accounted for as discontinued operations and the
accompanying condensed consolidated financial statements presented herein
have been restated to report separately the net assets, net cash flows and
operating results of these discontinued operations. Summarized results for
the discontinued operations for the three months ended March 31, 1998 and
1997 are as follows:
1998 1997
---- ----
Revenue $16,418 $15,041
======= =======
Income before income taxes $ 236 $ 359
Income taxes 87 138
------- -------
Net income from discontinued operations $ 149 $ 221
======= =======
5 of 10
<PAGE>
Income before income taxes includes allocated interest expense of $125
and $79 in 1998 and 1997, respectively. Interest expense was allocated
to discontinued operations based on a ratio of net assets of discontinued
operations to the total Company's consolidated net assets.
7. In February and March 1998, the Company completed the acquisitions of five
wholesale distributors of air conditioning and heating products. The
acquisitions were made either in the form of the purchase of the
outstanding common stock or the purchase of the net assets and business of
the respective sellers. Aggregate consideration for these acquisitions
consisted of cash payments of approximately $3.2 million and the issuance
of 156,173 shares of Common Stock having a fair value of $3.4 million and
is subject to adjustment upon the completion of audits of the assets
purchased and the liabilities assumed.
Acquisitions have been accounted for under the purchase method of
accounting and, accordingly, their results of operations have been included
in the unaudited condensed consolidated statements of income beginning on
their respective dates of acquisition. The excess of the aggregate purchase
prices over the net assets acquired is being amortized on a straight-line
basis over 40 years.
The preliminary purchase price allocations for business combinations for
the three months ended March 31, 1998 and 1997 were as follows:
1998 1997
---- ----
Accounts receivable, net $ 3,116 $ 18,349
Inventories 3,619 32,493
Property, plant and equipment, net 636 1,789
Intangible assets 3,682 11,947
Other assets 32 400
Accounts payable and accrued expenses (4,411) (11,468)
Long-term debt assumed (108) (4,619)
Fair value of common stock issued (3,387) -
------- --------
Cash used in acquisitions, net of
cash acquired $ 3,179 $ 48,891
======= ========
The Company's unaudited pro forma consolidated results of operations
assuming all significant acquisitions occurred on January 1, 1997 is as
follows for the three months ended March 31, 1998 and 1997:
1998 1997
---- ----
Revenue $174,911 $166,105
Income from continuing operations $ 1,709 $ 1,144
Diluted earnings per share from continuing operations $ 0.09 $ 0.06
The unaudited pro forma consolidated results of operations is not
necessarily indicative of either the results of operations that would have
occurred had the above companies been acquired on January 1, 1997 for the
years presented or of future results of operations.
8. In April and May 1998, the Company completed the acquisitions of two
wholesale distributors of air conditioning, heating and refrigeration
products. Combined revenue of these companies for their most recently
completed fiscal year was approximately $27 million.
9. Certain amounts for 1997 have been reclassified to conform to the 1998
presentation.
6 of 10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1998 VS. QUARTER ENDED MARCH 31, 1997
RESULTS OF OPERATIONS
The following table presents the Company's consolidated financial results
from continuing operations for the three months ended March 31, 1998 and 1997,
expressed as a percent of revenue:
1998 1997
---- ----
Revenue 100.0% 100.0%
Cost of sales (76.6) (77.1)
----- -----
Gross profit 23.4 22.9
Selling, general and administrative expenses (20.8) (18.9)
----- -----
Operating income 2.6 4.0
Interest expense, net (1.0) (.5)
Income taxes (.6) (1.4)
----- -----
Income from continuing operations 1.0% 2.1%
===== =====
The above table and following narrative includes the results of operations of
wholesale distributors of air conditioning, heating and refrigeration equipment
and related parts and supplies acquired during 1998 and 1997. 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.
Revenue for the three months ended March 31, 1998 increased $76.4 million, or
79%, compared to the same period in 1997. Excluding the effect of acquisitions,
revenue increased $8.7 million, or 9%. Such increase was primarily due to
additional sales generated from market share gains and increased sales generated
by expanded product lines of parts and supplies.
Gross profit for the three months ended March 31, 1998 increased $18.3
million, or 83%, as compared to the same period in 1997, primarily as a result
of the aforementioned revenue increases. Excluding the effect of acquisitions,
gross profit increased $2.1 million, or 10%. Gross profit margin in the first
quarter increased to 23.3% in 1998 from 22.9% in 1997. Excluding the effect of
acquisitions, gross profit margin increased to 23.0% in 1998 from 22.9% in 1997.
Such increase was primarily due to improved pricing disciplines and the
contribution from new national vendor programs.
Selling, general and administrative expenses for the three months ended
March 31, 1998 increased $17.6 million, or 97%, compared to the same period in
1997, primarily due to selling and delivery costs related to increased sales.
Excluding the effect of acquisitions, selling, general and administrative
expenses increased $2.0 million, or 11%, primarily due to revenue increases and
the higher costs related to new branches and the expansion of existing branches.
Selling, general and administrative expenses as a percent of revenue increased
to 20.7% in 1998 from 18.9% in 1997, primarily due to the 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 revenue increased to 19.2% in 1998
from 18.9% in 1997, primarily due to the expansion of existing branches and the
comparatively higher cost structure of new distribution branches.
7 of 10
<PAGE>
Interest expense, net for the first quarter in 1998 increased approximately
$1.3 million, or 349%, compared to the same period in 1997, primarily due to
higher average borrowings that were used to complete business acquisitions.
Excluding the effect of acquisitions, interest expense, net in 1998 remained
unchanged from 1997.
The effective tax rate for the three months ended March 31, 1998 was 37.0%
compared to 38.5% for the same period in 1997. This decrease was primarily due
to the implementation of certain tax planning strategies.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a bank-syndicated revolving credit agreement that
provides for borrowings of up to $260 million, expiring on August 8, 2002.
Borrowings under the unsecured agreement are used to fund seasonal working
capital needs and for other general corporate purposes, including acquisitions.
Borrowings under the agreement, which totaled $152.3 million at March 31, 1998,
bear interest at primarily LIBOR-based rates plus a spread that is dependent
upon the Company's financial performance (LIBOR plus .375% at March 31, 1998).
The 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.
At March 31, 1998, the Company had various interest rate swap agreements with
an aggregate notional amount of $100 million to manage its net exposure to
interest rate changes related to a portion of the borrowings under the revolving
credit agreement. The interest rate swap agreements effectively convert a
portion of the Company's LIBOR-based variable rate borrowings into fixed rate
borrowings. The Company continuously monitors developments in the capital
markets and only enters into swap transactions with established counterparties
having investment-grade ratings.
Working capital increased to $275.2 million at March 31, 1998 from $257.8
million at December 31, 1997. This increase was funded primarily by borrowings
under the Company's revolving credit agreement.
Cash and cash equivalents decreased $4.1 million during the first quarter of
1998. Principal sources of cash during the quarter were borrowings under the
revolving credit agreement and profitable operations. The principal uses of cash
were to fund working capital needs, including the addition of inventory to
expand the product offerings of both existing and newly acquired locations, and
finance acquisitions and capital expenditures.
The Company has adequate availability of capital from operations and its
revolving credit agreement to fund present operations and anticipated growth,
including expansion in its 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.
SAFE HARBOR STATEMENT
This quarterly report contains statements which, to the extent they are not
historical fact, constitute "forward looking statements" under the securities
laws. All forward looking statements involve risks, uncertainties and other
factors that may cause the actual results, performance or achievements of the
Company to differ materially from those contemplated or projected, forecasted,
estimated, budgeted, expressed or implied by or in such forward looking
statements. The forward looking statements in this document are intended to be
subject to the safe harbor protection provided under the securities laws.
For additional information identifying some other important factors which may
affect the Company's operations and markets and could cause actual results to
vary materially from those anticipated in the forward looking statements, see
the Company's Securities and Exchange Commission filings, including but not
limited to, the discussion included in the Business section of the Company's
Form 10-K under the heading "Other Information".
8 of 10
<PAGE>
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,
1997, filed on March 31, 1998.
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
27. Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None
9 of 10
<PAGE>
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)
May 15, 1998
10 of 10
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
WATSCO, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,745
<SECURITIES> 0
<RECEIVABLES> 111,916
<ALLOWANCES> 5,104
<INVENTORY> 190,488
<CURRENT-ASSETS> 337,568
<PP&E> 38,450
<DEPRECIATION> 15,235
<TOTAL-ASSETS> 450,975
<CURRENT-LIABILITIES> 62,377
<BONDS> 2,365
8,810
0
<COMMON> 0
<OTHER-SE> 222,219
<TOTAL-LIABILITY-AND-EQUITY> 450,975
<SALES> 172,716
<TOTAL-REVENUES> 172,716
<CGS> 132,315
<TOTAL-COSTS> 132,315
<OTHER-EXPENSES> 35,465
<LOSS-PROVISION> 395
<INTEREST-EXPENSE> 1,722
<INCOME-PRETAX> 2,819
<INCOME-TAX> 1,043
<INCOME-CONTINUING> 1,776
<DISCONTINUED> 149
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,925
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
