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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 SEPTEMBER 30, 1999
or
[ ] Transition Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period From
___ to ___
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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) 714-4100
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: 25,946,377 shares of the
Company's Common Stock ($.50 par value) and 3,187,692 shares of the Company's
Class B Common Stock ($.50 par value) were outstanding as of November 9, 1999.
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<PAGE>
PART I. FINANCIAL INFORMATION
WATSCO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1999 and December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---------- --------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,264 $ 6,689
Accounts receivable, net 178,679 137,745
Inventories 222,239 202,592
Other current assets 10,050 11,984
Net assets of discontinued operation 12,378 11,966
---------- ---------
Total current assets 430,610 370,976
Property, plant and equipment, net 30,512 30,496
Other assets 11,445 24,237
Intangible assets, net 116,641 106,309
---------- ---------
$ 589,208 $ 532,018
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 869 $ 1,007
Accounts payable 78,528 60,742
Accrued liabilities 21,929 19,488
---------- ---------
Total current liabilities 101,326 81,237
---------- ---------
Long-term obligations:
Borrowings under revolving credit agreement 171,000 168,000
Bank and other debt 5,124 4,301
---------- ---------
Total long-term obligations 176,124 172,301
---------- ---------
Deferred income taxes and credits 2,760 3,912
---------- ---------
Shareholders' equity:
Common Stock, $.50 par value 12,779 12,420
Class B Common Stock, $.50 par value 1,596 1,596
Paid-in capital 197,727 189,225
Unrealized losses on investments, net of tax (364) (2,962)
Unearned compensation related to
outstanding restricted stock (5,758) (5,051)
Retained earnings 103,018 79,340
---------- ---------
Total shareholders' equity 308,998 274,568
---------- ---------
$ 589,208 $ 532,018
========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2 of 13
<PAGE>
WATSCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Quarter and Nine Months Ended September 30, 1999 and 1998
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenue $333,056 $317,028 $911,444 $760,597
Cost of sales 256,150 245,494 699,202 588,688
-------- -------- -------- --------
Gross profit 76,906 71,534 212,242 171,909
Selling, general and administrative expenses 55,192 51,071 162,456 130,191
-------- -------- -------- --------
Operating income 21,714 20,463 49,786 41,718
Interest expense, net 3,416 3,249 9,983 7,685
-------- -------- -------- --------
Income from continuing operations
before income taxes 18,298 17,214 39,803 34,033
Income taxes 6,824 6,369 14,813 12,592
-------- -------- -------- --------
Income from continuing operations 11,474 10,845 24,990 21,441
Loss on sale of discontinued operation,
net of income taxes - - - (398)
Income (loss) from discontinued operations,
net of income taxes 328 271 836 (20)
-------- -------- -------- --------
Net income $ 11,802 $ 11,116 $ 25,826 $ 21,023
======== ======== ======== ========
Basic earnings per share:
Income from continuing operations $0.40 $0.39 $0.87 $0.80
Loss on sale of discontinued operation - - - (0.02)
Income from discontinued operations 0.01 0.01 0.03 -
----- ----- ----- -----
Net income $0.41 $0.40 $0.90 $0.78
===== ===== ===== =====
Diluted earnings per share:
Income from continuing operations $0.39 $0.37 $0.84 $0.75
Loss on sale of discontinued operation - - - (0.01)
Income from discontinued operations 0.01 0.01 0.03 -
----- ------ ----- -----
Net income $0.40 $0.38 $0.87 $0.74
===== ===== ===== =====
Weighted average shares and equivalent shares
used to calculate earnings per share:
Basic 28,748 27,873 28,684 26,935
====== ====== ====== ======
Diluted 29,759 29,493 29,785 28,568
====== ====== ====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
WATSCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1999 and 1998
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Income from continuing operations $ 24,990 $ 21,441
Adjustments to reconcile income from
continuing operations to net cash provided by
(used in) operating activities:
Depreciation and amortization 7,854 6,108
Provision for doubtful accounts 2,078 2,193
Deferred income tax benefit (provision) 302 (204)
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (33,397) (37,259)
Inventories (12,834) (32,226)
Accounts payable and accrued liabilities 14,885 18,551
Other, net 64 (2,670)
-------- ---------
Net cash provided by (used in) operating activities
of continuing operations 3,942 (24,066)
-------- ---------
Cash flows from investing activities:
Business acquisitions, net of cash acquired (18,065) (22,881)
Capital expenditures, net (4,468) (8,397)
Proceeds from the sale of marketable securities 17,596 -
Purchases of marketable securities (1,042) (735)
-------- ---------
Net cash used in investing activities
of continuing operations (5,979) (32,013)
-------- ---------
Cash flows from financing activities:
Net borrowings under revolving credit agreement 3,000 66,000
Net borrowings (repayments) of bank and other debt 200 (6,323)
Net proceeds from issuances of common stock 1,135 2,619
Common stock dividends (2,147) (1,862)
-------- ---------
Net cash provided by financing activities
of continuing operations 2,188 60,434
-------- ---------
Net cash provided by (used in) discontinued operations 424 (3,785)
-------- ---------
Net increase in cash and cash equivalents 575 570
Cash and cash equivalents at beginning of period 6,689 7,880
-------- ---------
Cash and cash equivalents at end of period $ 7,264 $ 8,450
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4 of 13
<PAGE>
WATSCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(In thousands, except share data)
(Unaudited)
1. The condensed consolidated balance sheet as of December 31, 1998, 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 and nine-month period ended
September 30, 1999 are not necessarily indicative of the results for the
year ending December 31, 1999. The sale of the Company's products is
seasonal with revenue 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 by the total
weighted average number of shares outstanding. Diluted earnings per share
additionally assumes any added dilution from common stock equivalents.
Shares used to calculate earnings per share are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
------------------------ ------------------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 28,747,918 27,872,756 28,684,441 26,934,811
Dilutive stock options 1,011,554 1,620,458 1,100,830 1,633,080
---------- ---------- ---------- ----------
Shares for diluted earnings per share 29,759,472 29,493,214 29,785,271 28,567,891
========== ========== ========== ==========
Options outstanding which are not included in
the calculation of diluted earnings per share
because their impact is antidilutive 1,806,150 233,626 1,278,058 214,126
========== ========== ========== ==========
</TABLE>
5. The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for the reporting and display of comprehensive income
and its components in financial statements. The components of the Company's
comprehensive income are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
------------------------ ------------------------
<S> <C> <C> <C> <C>
Net income $11,802 $11,116 $25,826 $21,023
Unrealized gain (loss) on investments, net of tax (407) (3,692) 2,598 (2,813)
------- ------- ------- -------
Comprehensive income $11,395 $ 7,424 $28,424 $18,210
======= ======= ======= =======
</TABLE>
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<PAGE>
6. Discontinued operations include a personnel staffing business, Dunhill
Staffing Systems, Inc., and, until May 1998, a manufacturing operation,
Watsco Components, Inc. ("Components"). In May 1998, the Company sold
substantially all the operating assets of Components. Summarized results
for the discontinued operations are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
------------------------ ------------------------
<S> <C> <C> <C> <C>
Revenue $16,299 $13,982 $44,418 $46,504
======= ======= ======= =======
Income (loss) before income taxes 560 431 1,386 (31)
Income tax (expense) benefit (232) (160) (550) 11
------- ------- ------- -------
Income (loss) from discontinued operations $ 328 $ 271 $ 836 $ (20)
======= ======= ======= =======
</TABLE>
7. During January 1999, the Company completed the acquisitions of two
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 $18,065 including the repayment of debt
totaling $4,592 and the issuance of 507,224 shares of Common Stock having a
fair value of $6,433.
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 statement of income beginning on
their respective dates of acquisition. The excess of the aggregate purchase
prices over the net assets acquired of $11,167 is being amortized on a
straight-line basis over 40 years.
The Company's unaudited pro forma consolidated results of operations
assuming all significant acquisitions occurred on January 1, 1998 are as
follows:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
Revenue $334,286 $871,677
Income from continuing operations $ 11,716 $ 23,205
Diluted earnings per share from
continuing operations $ 0.39 $ 0.78
</TABLE>
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, 1998 for the
periods presented or of future results of operations.
8. On September 30, 1999, the Company's Board of Directors approved a stock
repurchase program authorizing the repurchase of up to 1,500,000 shares of
the Company's Common Stock. Shares repurchased under this program will be
reflected as treasury stock and will result in a reduction of stockholder's
equity. As of September 30, 1999, the Company had not made any purchases
under this program.
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<PAGE>
9. In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AcSEC") issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 establishes criteria for
determining which costs of developing or obtaining internal-use computer
software should be charged to expense and which should be capitalized. The
Company adopted SOP 98-1 on January 1, 1999. The adoption of SOP 98-1 was
not material to the Company's consolidated financial position or results of
operations.
In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 establishes standards for the reporting and
disclosure of start-up costs, including organization costs. The Company
adopted SOP 98-5 on January 1, 1999. Adoption of SOP 98-5 was not material
to the Company's consolidated financial position or results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which is effective for fiscal years beginning after June 15, 1999. SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 also requires that
changes in derivatives' fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. The impact of SFAS No.
133 on the Company's consolidated financial statements will depend on a
variety of factors, including future interpretive guidance from the FASB,
the extent of the Company's hedging activities, the type of hedging
instruments used and the effectiveness of such instruments. The Company has
not quantified the impact of adopting SFAS No. 133.
In June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No.133-an amendment of FASB Statement No. 133," which delayed the
implementation date for SFAS 133 for one year to fiscal years beginning
after June 15, 2000.
10. In June 1999, the Company executed an amended and restated bank-syndicated
credit agreement, which provides for borrowings up to $315 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 (LIBOR plus .6% at
September 30, 1999). The 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.
11. On November 8, 1999, the Company completed the acquisition of Atlantic Air,
Inc. ("Atlantic Air"), a distributor of air conditioning equipment based in
Fort Worth, Texas. Atlantic Air specializes in the manufactured housing
industry and operates from three locations serving over 1,500 customers
throughout Texas and five other western states. Atlantic Air's revenue was
approximately $40 million in 1998.
7 of 13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents the Company's consolidated financial statements
from continuing operations for the quarter and nine months ended September 30,
1999 and 1998, expressed as a percent of revenue:
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- -------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of sales 76.9 77.4 76.7 77.4
----- ----- ----- -----
Gross profit 23.1 22.6 23.3 22.6
Selling, general and administrative expenses 16.6 16.1 17.8 17.1
----- ----- ----- -----
Operating income 6.5 6.5 5.5 5.5
Interest expense, net 1.0 1.0 1.1 1.0
Income taxes 2.0 2.1 1.6 1.7
----- ----- ----- -----
Income from continuing operations 3.5% 3.4% 2.8% 2.8%
===== ===== ===== =====
</TABLE>
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 1999 and 1998. 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. Data presented
in the following narratives referring to "same store basis" excludes the effects
of operations acquired or locations opened and closed during the prior twelve
months.
QUARTER ENDED SEPTEMBER 30, 1999 VS. QUARTER ENDED SEPTEMBER 30, 1998
Revenue for the three months ended September 30, 1999 increased $16.0
million, or 5%, compared to the same period in 1998. On a same store basis,
revenue decreased $5.5 million, or 2%, primarily due to weather conditions
which resulted in lower demand for air conditioning.
Gross profit for the three months ended September 30, 1999 increased $5.4
million, or 8%, as compared to the same period in 1998, primarily as a result of
the aforementioned increases in revenue, improved pricing disciplines, enhanced
focus on margins, and cost reductions obtained from vendor programs. Gross
profit margins in the third quarter increased to 23.1% in 1999 from 22.6% in
1998. On a same store basis, gross profit decreased $1.0 million, or 1%
consistent with decreases in revenue. Gross profit margin on a same store basis
increased to 22.6% in 1999 from 22.5% in 1998.
Selling, general and administrative expenses for the three months ended
September 30, 1999 increased $4.1 million, or 8%, compared to the same period in
1998. As a percent of revenue, selling, general, and administrative expenses
increased to 16.6% in 1999 from 16.1% in 1998. Such increase was primarily due
to the inability to leverage the fixed cost structures against the volatile
sales demand experienced during the quarter and the higher cost structures of
acquired companies. On a same store basis, selling, general and administrative
expenses remained unchanged in both 1999 and 1998. Selling general and
administrative expenses as a percent of revenue increased to 16.4% in 1999 from
16.1% in 1998.
Interest expense, net for the third quarter in 1999 increased approximately
$0.2 million, or 5%, compared to the same period in 1998.
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<PAGE>
The effective tax rate for the three months ended September 30, 1999 was
37.3% compared to 37.0% for the same period in 1998. This increase was primarily
due to higher state income taxes resulting from acquisitions made in 1999 which
are located in states with higher tax rates.
NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenue for the nine months ended September 30, 1999 increased $150.8
million, or 20%, compared to the same period in 1998. On a same store basis,
revenue increased $14.3 million, or 2%.
Gross profit for the nine months ended September 30, 1999 increased $40.3
million, or 24%, as compared to the same period in 1998, primarily as a result
of the aforementioned revenue increases, improved pricing disciplines, enhanced
focus on margins, and cost reductions obtained from vendor programs. Gross
profit margin for the nine-month period increased to 23.3% in 1999 from 22.6% in
1998. Consistent with the aforementioned increases, gross profit on a same store
basis increased $6.1 million, or 4%, and gross profit margin on a same store
basis increased to 23.0% in 1999 from 22.6% in 1998.
Selling, general and administrative expenses for the nine months ended
September 30, 1999 increased $32.3 million, or 25%, compared to the same period
in 1998. As a percent of revenue, selling, general and administrative expenses
increased to 17.8% in 1999 from 17.1% in 1998, primarily due to higher selling
and delivery costs related to acquired companies and increased sales activity.
On a same store basis, selling, general and administrative expenses increased
$5.4 million, or 4%. As a percent of revenue, selling, general and
administrative expenses on a same store basis increased to 17.5% in 1999 from
17.1% in 1998.
Interest expense, net for the nine months ended September 30, 1999 increased
approximately $2.3 million, or 30%, compared to the same period in 1998,
primarily due to higher average borrowings primarily used to complete business
acquisitions.
The effective tax rate for the nine months ended September 30, 1999 was 37.2%
compared to 37.0% for the same period in 1998. This increase was primarily due
to higher state income taxes resulting from acquisitions made in 1999 which are
located in states with higher tax rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a bank-syndicated revolving credit agreement that
provides for borrowings of up to $315 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 $171.0 million at September 30,
1999, bear interest at primarily LIBOR-based rates plus a spread that is
dependent upon the Company's financial performance (LIBOR plus .6% at September
30, 1999). 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.
Working capital increased to $329.3 million at September 30, 1999 from $289.7
million at December 31, 1998, as a result of seasonal revenue yielding higher
accounts receivable during the months of May through August and additional
working capital contributed by current year acquisitions.
Cash and cash equivalents increased $0.6 million during the nine-month period
ended September 30, 1999. Principal sources of cash during the quarter were
cash flows from operations and proceeds from the sale of marketable securities.
The principal uses of cash were used to fund working capital needs and finance
acquisitions and capital expenditures.
The Company has adequate availability of capital 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. The Company currently has
no binding agreements 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
9 of 13
<PAGE>
position and earnings history provide a solid base for obtaining additional
financing resources at competitive rates and terms.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure consists of interest rate risk.
The Company's objective in managing the exposure to interest rate changes is to
limit the impact of interest rate changes on earnings and cash flows and to
lower its overall borrowing costs. To achieve its objectives, the Company uses
interest rate swaps to manage net exposure to interest rate changes to its
borrowings. The Company continuously monitors developments in the capital
markets and has only entered into swaps with a group of financial institutions
with investment grade credit ratings, thereby minimizing the risk of credit
loss. All items described below are non-trading.
At September 30, 1999, 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 with a weighted average rate of 6.3%.
YEAR 2000
Many computer systems in use in the world today may be unable to correctly
process data or may not operate at all after December 31, 1999 because those
systems recognize the year within a date only by the last two digits. Some
computer programs may interpret the year "00" as 1900, instead of as 2000,
causing errors in calculations, or the value "00" may be considered invalid by
the computer program causing the system to fail. The Year 2000 issue affects (1)
information technology utilized by the Company ("IT systems"); (2) other systems
utilized by the Company ("Non-IT systems") such as communications, facilities
management and service equipment containing embedded computer chips; and (3)
systems of key business partners (primarily the Company's customers and
suppliers).
Watsco, Inc. and its subsidiaries could be adversely affected if Year 2000
issues are not resolved by the Company or its significant business partners
before the Year 2000. Possible adverse consequences include, but are not limited
to: (1) the inability to obtain products or services used in the business
operations, (2) the inability to transact business with key customers or
suppliers, or (3) the inability to deliver goods or services sold to customers.
The Company's activities to manage the Year 2000 issue with respect to its
systems can be segregated into four phases. Phase I and II consisted of
identifying the systems that were non-compliant and formulating strategies to
remedy the problems identified. Phase III consisted of executing the changes
necessary through purchasing new or modifying existing systems. Phase IV
consisted of testing the changes made to ascertain compliance. As of November 1,
1999, the Company and its subsidiaries have successfully completed Phase I, II,
III, and IV. Costs expended aggregated approximately $1.1 million through the
date of completion; additional costs relating to the Year 2000 issue are not
expected to be material.
The Company has contacted a large number of its business partners to obtain
information regarding their progress on Year 2000 issues. While such entities
have not fully completed their own Year 2000 projects, the Company is not aware
of any significant business partners whose Year 2000 issues will not be resolved
in a timely manner. However, there can be no assurance that significant Year
2000 related problems will not ultimately arise with such business partners.
The Company believes that effective contingency plans have been developed
given that the Company is not reliant on a single enterprise-wide computer
system. The Company presently operates through a diverse group of 16 primary
operating subsidiaries that maintain independent computer systems,
substantially all of which have been purchased from and are supported by third
parties. The Company's contingency plans include manual "work arounds" for
software and hardware failures and substitution of hardware and software systems
in the event one or more operating systems fail to operate after December 31,
1999. The Company expects its contingency plans to mitigate business risks in
the event the remediation efforts conducted under Phases I to IV are
unsuccessful.
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<PAGE>
While management believes that it has undertaken reasonable steps to address
the Year 2000 issue, there can be no assurance that a failure to convert the
Company's systems or the inability of its key business partners to adequately
address the Year 2000 issue would not have a material adverse impact on the
Company.
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".
11 of 13
<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,
1998, filed on March 31, 1999.
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
None
27. Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
None
12 of 13
<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)
November 15, 1999
13 of 13
<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 SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,264
<SECURITIES> 0
<RECEIVABLES> 185,054
<ALLOWANCES> 6,375
<INVENTORY> 222,239
<CURRENT-ASSETS> 430,610
<PP&E> 60,518
<DEPRECIATION> 30,006
<TOTAL-ASSETS> 589,208
<CURRENT-LIABILITIES> 101,326
<BONDS> 176,124
0
0
<COMMON> 14,375
<OTHER-SE> 294,623
<TOTAL-LIABILITY-AND-EQUITY> 589,208
<SALES> 911,444
<TOTAL-REVENUES> 911,444
<CGS> 699,202
<TOTAL-COSTS> 699,202
<OTHER-EXPENSES> 160,378
<LOSS-PROVISION> 2,078
<INTEREST-EXPENSE> 9,983
<INCOME-PRETAX> 39,803
<INCOME-TAX> 14,813
<INCOME-CONTINUING> 24,990
<DISCONTINUED> 836
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,826
<EPS-BASIC> 0.90
<EPS-DILUTED> 0.87
</TABLE>
