SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: June 30, 1997
Commission file number: 1- 448
MESTEK,INC.
Pennsylvania Corporation
I.R.S. Employer Identification No.
25 - 0661650
260 North Elm Street
Westfield, Massachusetts 01085
Telephone: (413) 568-9571
The Registrant 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 has
been subject to such filing requirements for the past 90 days.
The number of shares of Common Stock outstanding as of July 28, 1997 was
8,929,082.
1
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MESTEK, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 1997
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Condensed consolidated balance sheets at June 30, 1997
and December 31, 1996 Pages 3-4
Condensed consolidated statements of income for the three months
ended June 30, 1997 and 1996 and the six months ended
June 30, 1997 and 1996 Page 5
Condensed consolidated statements of cash flows for the six
months ended June 30, 1997 and 1996 Page 6
Condensed consolidated statement of changes in shareholders'
equity for the period from January 1, 1996 through June 30, 1997 Page 7
Notes to the condensed consolidated financial statements Pages 8-10
Management's Discussion and Analysis of Financial Condition
and Results of Operations Page 10
PART II - OTHER INFORMATION Page 11
Item 6 - Exhibits and Reports on Form 8-K
Item 7 - Submission of Matters to a Vote of Security Holders
Statement of Computation of Per share Earnings Page 11
SIGNATURE Page 12
In the opinion of management, the information contained herein reflects
all adjustments necessary to make the results of operations for the interim
periods a fair statement of such operations. All such adjustments are of a
normal recurring nature.
2
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
MESTEK,INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, Dec. 31,
1997 1996
(Dollars in thousands)
ASSETS
Current Assets
Cash and Cash Equivalents $ 3,948 $ 11,649
Accounts Receivable - less allowances of
$2,103 and $1,701 respectively 49,643 49,577
Unbilled Accounts Receivable 258 174
Inventories 51,579 43,265
Other Current Assets 4,431 4,087
Total Current Assets $ 109,859 $ 108,752
Property and Equipment (Net) 38,363 31,439
Equity Investments 8,778 8,778
Other Assets and Deferred Charges - Net 6,961 7,066
Excess of Cost over Net Assets of Acquired 20,581 13,975
Companies
Total Assets $ 184,542 $170,010
See the Notes to Condensed Consolidated Financial Statements.
Continued on next page
3
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MESTEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
June 30, Dec. 31,
1997 1996
(Dollars in thousands)
LIABILITIES, AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Portion of Long-Term Debt $ 28,207 $ 115
Accounts Payable 20,064 19,559
Accrued Compensation 2,578 4,886
Accrued Commissions 2,138 3,404
Progress Billings in Excess of Cost and
Estimated Earnings 3,305 2,899
Customer Deposits 3,518 4,829
Other Accrued Liabilities 12,889 13,786
Total Current Liabilities 72,699 49,478
Long-Term Debt 790 15,247
Deferred Compensation 16 18
Total Liabilities 73,505 64,743
Minority Interests 1,879 1,549
Shareholders' Equity
Common Stock - no par, stated value $0.05
per share, 9,610,135 shares 479 479
Paid in Capital 15,434 15,434
Retained Earnings 100,288 94,794
Treasury Shares, at cost,(680,364 common shares) ( 6,040) ( 6,040)
Cumulative Translation Adjustment ( 1,003) ( 949)
Total Shareholders' Equity 109,158 103,718
Total Liabilities, and Shareholders'Equity $184,542 $170,010
See the Notes to Condensed Consolidated Financial Statements.
4
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MESTEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
(In thousands, except per share amounts)
Net Sales $ 70,954 $ 63,946 $142,189 $ 126,093
Net Service Revenues 3,914 4,245 7,895 8,415
Total Revenues 74,868 68,191 150,084 134,508
Cost of Goods Sold 52,509 48,095 104,845 93,149
Cost of Service Revenues 2,343 1,614 4,796 4,096
Gross Profit 20,016 18,482 40,443 37,263
Selling Expense 9,749 8,267 18,673 16,666
General and Administrative
Expense 4,211 3,634 8,229 7,402
Engineering Expense 1,885 1,826 3,769 3,437
Operating Profit 4,171 4,755 9,772 9,758
Interest Expense ( 387) ( 391) ( 597) ( 677)
Gain on Sale of Other Assets - 590 - 1,444
Other Income (Expense) - net( 166) ( 397) ( 325) ( 688)
Income Before Income Taxes 3,618 4,557 8,850 9,837
Income Taxes 1,377 1,816 3,356 3,954
Net Income $ 2,241 $ 2,741 $ 5,494 $ 5,883
Earnings per Common Share $ .25 $ .31 $ .61 $ .66
Weighted Average Shares
Outstanding 8,930 8,930 8,930 8,946
See the Notes to Condensed Consolidated Financial Statements.
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MESTEK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
6 Months Ended
June 30,
1997 1996
(Dollars in thousands)
Cash Flows from Operating Activities:
Net Income $ 5,494 $ 5,883
Adjustments to Reconcile Net Income to Net
Cash Provided by (Used In) Operating
Activities:
Depreciation and Amortization 3,569 2,890
Provision for Losses on Accounts Receivable 402 434
Change in Assets & Liabilities:
Cash Flows Provided (Used) by Changes In:
Accounts Receivable 538 517
Unbilled Accounts Receivable ( 84) 3
Inventories ( 6,814) 1,379
Other Assets ( 4,312) 1,592
Accounts Payable 249 ( 3,335)
Progress Billings 406 1,557
Other Accruals ( 6,777) ( 109)
Deferred Compensation ( 2) ( 1)
Purchase Price Payable - National Northeast - ( 9,960)
Net Cash Provided by (Used in) Operating Activities ( 7,331) 850
Cash Flows from Investing Activities:
Capital Expenditures ( 6,944) ( 2,489)
Disposition of Property - 3,193
Acquisition of Businesses (net of cash acquired) ( 5,141) ( 12,538)
Net Cash (Used in) Investing Activities ( 12,085) ( 11,834)
Cash Flows from Financing Activities:
Net Borrowings Under Line of Credit
Agreement 13,040 ( 1,725)
Proceeds from issuance of Long Term Debt 15,000
Principal Payments Under Long Term Debt
Obligations ( 1,106) ( 862)
Repurchase of Common Stock - ( 591)
Net Change in
Minority Interests ( 165) ( 531)
Cumulative Translation Adjustments ( 54) ( 49)
Net Cash Provided by Financing
Activities 11,715 11,242
Net Increase (Decrease) in Cash and Cash
Equivalents ( 7,701) 258
Cash and Cash Equivalents - Beginning of
Period 11,649 1,405
Cash and Cash Equivalents - End of Period $ 3,948 $1,663
See the Notes to Condensed Consolidated Financial Statements.
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MESTEK, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
For the period January 1, 1996 through June 30, 1997
Addt'nl Cumul.
Common Pd In Retain. Treasury Trans.
Stock Capital Earn. Shares Adjust. Total
Bal.-Jan. 1, 1996 $ 479 $ 15,434 $ 81,465 ( 5,449) ( 883) $ 91,046
Net Income 13,329 13,329
Common Stock Repurch. ( 591) ( 591)
Cumul.Trans. Adj. ( 66) ( 66)
Bal.-Dec.31, 1996 $ 479 $ 15,434 $ 94,794 ( 6,040) ( 949) 103,718
Net Income 5,494 5,494
Cumul.Trans. Adj. ( 54) ( 54)
Bal.-June 30, 1997 $ 479 $ 15,434 $100,288 ( 6,040) ( 1,003) $109,158
See the Notes to the Condensed Consolidated Financial Statements.
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MESTEK, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the company
and its wholly-owned subsidiaries. In the opinion of management, the financial
statements include all material adjustments necessary for a fair presentation of
the Company's financial position, results of operations and cash flows. The
results of this interim period are not necessarily indicative of results for the
entire year.
Inventories
Inventories are valued at the lower of cost or market. Cost of inventories
is determined principally by the last-in, first-out (LIFO) method.
Income Taxes
Provisions for income tax in the amounts of $1,377,000 and $1,816,000 were
recorded for the three months ended June 30, 1997 and 1996, respectively.
Goodwill
The Company amortizes Goodwill on the straight line basis over the
estimated period to be benefitted. The acquisitions of National Northeast
Corporation, National Southeast Aluminum Corporation, and Heat Exchangers, Inc.
in 1995 resulted in goodwill,(adjusted for additional consideration paid as
explained more fully in Note 2) of $11,118,000 which will be amortized over 25
years. The acquisitions of Rowe Machinery and Automation, Inc., and Omega Flex,
Inc. in 1996, as more fully described in Note 2, resulted in goodwill of
$7,729,000 which will be amortized over 25 years. The acquisition of Hill
Engineering, Inc. on January 31, 1997, as more fully described in Note 2,
resulted in goodwill of $2,892,000 which will be amortized over 25 years. The
Company continually evaluates the carrying value of goodwill. Any impairments
would be recognized when the expected future operating cash flows derived from
such goodwill is less than their carrying value.
Reclassification
Reclassifications are made periodically to previously issued financial
statements to conform with the current year presentation.
Note 2 - Business Acquisitions
On January 31, 1997, the Company acquired 91.01% of the issued and
outstanding common stock of Hill Engineering, Inc. of Villa Park, Illinois and
Danville, Kentucky (Hill). Hill is a leading producer of precision tools and
dies for the gasket manufacturing and roll-forming industries and other
speciality equipment. The purchase price paid for the acquired stock was $5.1
million.
On January 2, 1997, the Company's National Northeast subsidiary paid
$4,028,000 in additional consideration related to the purchase on October 30,
1995 of approximately 83% of the issued and outstanding voting common stock of
National Northeast Corporation and National Southeast Corporation (National).
This payment completes the Company's acquisition of National.
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Note 3 - Property and Equipment
June 30, Dec. 31,
1997 1996
Land $ 1,748,000 $ 1,092,000
Buildings 17,112,000 13,657,000
Leasehold Improvements 4,388,000 4,186,000
Equipment 56,823,000 51,183,000
80,071,000 70,118,000
Accumulated Depreciation (41,708,000) (38,679,000)
$38,363,000 $31,439.000
Note 4 - Long-Term Debt
June 30, Dec. 31,
1997 1996
Senior Notes $15,000,000 $15,000,000
Revolving Loan Agreement 11,540,000 -
Note Payable - Bank 1,500,000 -
Other Bonds and Notes Payable 957,000 362,000
28,997,000 15,362,000
Less Current Maturities (28,207,000) (115,000)
$ 790,000 $15,247,000
Senior Notes - On April 5, 1996 the Company borrowed $15,000,000 from a
commercial insurance company on an unsecured basis, executing a Note Purchase
Agreement and the related Senior Notes, (The Notes). The Notes mature March 1,
1998 and bear interest at 5.53%. The Note Purchase Agreement contains a number
of financial covenants which limit the Company's overall debt, its dividends,
and in certain circumstances, its ability to effect acquisitions and/or
divestitures. The Company's management does not believe that these limitations
will materially affect the Company's future operations or strategic plans.
Revolving Loan Agreement - The Company's Revolving Loan Agreement and Letter of
Credit Facility with a commercial bank was revised and extended recently through
April 30, 1998. The revised agreement (The Agreement), provides for $50 million
of unsecured revolving credit, including $10 million of standby letter of credit
capacity. Borrowings under the Agreement bear interest at a floating rate based
on the bank's prime rate less 1.75% or, at the discretion of the borrower, LIBOR
plus a quoted market factor. In addition, the Agreement provides a $5,000,000
(Canadian) unsecured line of credit facility. The Agreement contains financial
covenants which require that the Company maintain certain current ratios,
working capital amounts, capital bases and leverage ratios. The Agreement also
contains restrictions regarding the creation of indebtedness, the occurrence of
mergers or consolidations, the sale of subsidiary stock, and the payment of
dividends in excess of 50% of net income.
Note Payable Bank - The Company has a $10,000,000 unsecured line of credit with
a second commercial bank which expires on June 30, 1998. Borrowings under the
line, which totaled $1,500,000 at June 30, 1997, accrue interest on the basis of
LIBOR plus a quoted market factor.
Other bonds and notes payable include $670,000 in secured obligations
assumed in connection with the purchase of Hill on January 31, 1997, as more
fully described in Note 2.
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Note 5 - Earnings Per Common Share
Earnings per share were computed using the weighted average number of
common shares outstanding.
Note 6 - Shareholder's Equity
Due to redemptions of the stock interests of certain employees of the
Company's National Northeast Subsidiary the Company now owns approximately 88%
of the issued and outstanding voting common stock of National Northeast
Corporation, a Delaware corporation, successor by merger to National Northeast
Corporation and National Southeast Corporation.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operation
Total revenues in the Company's HVAC segment during the second quarter of
1996 were essentially flat relative to the second quarter of 1997. Significantly
improved sales in certain residential and commercial hydronic products were
offset somewhat by reduced sales of certain industrial and air conditioning
products. The relocation of the Company's Koldwave product line from Skokie,
Illinois to Dundalk, Maryland, which was completed in 1997, contributed to this
situation. Gross profit margins for the HVAC segment increased slightly from
26.1% to 26.9%. Operating income for this segment was down from $2,447,000 in
the second quarter of 1996 to $2,312,000 in the second quarter of 1997
reflecting the effect of overall flat sales mentioned above. (Gross Profit and
Operating Income for 1996 for this segment have been adjusted to reflect certain
reclassifications for purposes of comparability).
Total Revenues in the Company's Metal Products segment were up
significantly during the second quarter of 1997 ($20,268,000 versus $13,234,000)
reflecting the added effect of Dahlstrom Industries, Inc., acquired on August
30, 1996, and Hill Engineering, Inc., acquired on January 31, 1997. Gross profit
margins were reduced from 25.3% to 23.6%, and operating income decreased from
$1,453,000 to $1,224,000 due to significant product development costs incurred
by Omega Flex, Inc., (Omega) and relocation and other transitional costs
incurred by Rowe. Omega, acquired in February 1996, is a manufacturer of
flexible metal hose. In January of 1997 Omega introduced Trac-Pipe(TM), a
corrugated stainless steel tubing product developed especially for use in the
piping and installation of gas appliances. The unexpectedly rapid acceptance of
this product led to greater market development, product development and
manufacturing overhead costs than were originally envisioned. The closing of the
Rowe Machinery manufacturing plant in Dallas, Texas and the move of its products
to the Company's Clinton, Maine facility was completed in the quarter ended June
30, 1997.
The Company's computer systems segment reported slightly reduced Revenues,
Gross Profit margins and Operating income figures in the quarter ended June 30,
1997 relative to the quarter ended June 30, 1996.
For the Company as a whole, Selling, General and Administrative, and
Engineering costs, taken together as a percentage of Total Revenues, increased
from 20.1% to 21.1% owing principally to the relatively flat HVAC sales
mentioned above. (Sales Expense and General and Administrative Expense for 1996,
as reported in the accompanying financial statements, have been adjusted to
reflect certain reclassifications for purposes of comparability).
Operating income for the second quarter of 1997 for the Company as a whole,
decreased by $584,000 or 12.2% relative to the second quarter of 1996 reflecting
the various effects mentioned above.
Pretax income for the quarter ended June 30, 1996 included a $590,000
nonrecurring gain on the sale of the Company's idle Hagerstown, Maryland plant.
Earnings per share was increased by $.04 in that quarter as a result of this
transaction.
The Company's total debt (long-term debt plus current portion of long-term
debt) increased during the quarter ended June 30, 1997 by $9,916,000,
principally due to seasonal growth in receivables and inventories as well as
additional investments in capital equipment. Management regards the Company's
current capital structure and banking relationships as fully adequate to meet
foreseeable future needs. The Company has not paid dividends on its common stock
since 1979.
10
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PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Statement of Computation of Per Share Earnings...Page 11.
(b) Registrant did not file a Form 8-K during the quarter for which this
report is filed.
Item 7 - Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 23, 1997. The
following Directors were re-elected to serve until the next Annual Meeting.
A. Warne Boyce
E. Herbert Burk
William J. Coad
Winston R. Hindle, Jr.
David W. Hunter
David M. Kelly
David R. Macdonald
John E. Reed
Stewart B. Reed
The shareholders voted to affirm the appointment of Grant Thornton LLP as
independent auditors for the Company for the fiscal year ending December 31,
1997.
MESTEK, INC.
SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
(Amounts in thousands, except
earnings per common shares)
Net income for earnings
per share $ 2,241 $ 2,741 $ 5,494 $ 5,883
Total Common shares and
common share
equivalents 8,930 8,930 8,930 8,946
Earnings per common
share $ .25 $ .31 $ .61 $ .66
11
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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.
MESTEK,INC.
(Registrant)
Date: July 28, 1997
/s/Stephen M. Shea
Stephen M. Shea
Senior Vice President - Finance
(Chief Financial Officer
12
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