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: September 30, 1998
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 October 27, 1998 was
8,916,705.
1
<PAGE>
MESTEK, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
INDEX
Page No.
PART I - FINANCIAL INFORMATION --------
Condensed consolidated balance sheets at
September 30, 1998 and December 31, 1997 Pages 3-4
Condensed consolidated statements of income
for the three months ended September 30, 1998 and 1997
and the nine months ended September 30, 1998 and 1997 Page 5
Condensed consolidated statements of cash
flows for the nine months ended September 30, 1998 and 1997 Page 6
Condensed consolidated statement of changes in
shareholders' equity for the period from January 1, 1997
through September 30, 1998 Page 7
Notes to the condensed consolidated financial
statements Pages 8-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations Pages 10-11
PART II - OTHER INFORMATION Page 12
Item 6 - Exhibits and Reports on Form 8-K
Statement of Computation of Per share Earnings Page 12
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
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
MESTEK,INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
Sept. 30, Dec. 31,
1998 1997
---- ----
(Dollars in thousands)
ASSETS
Current Assets
Cash and Cash Equivalents $2,365 $2,494
Accounts Receivable - less allowances of
$3,179 and $2,529 respectively 57,348 52,696
Unbilled Accounts Receivable 299 248
Inventories 54,008 51,580
Other Current Assets 5,584 5,273
-------- --------
Total Current Assets 119,604 112,291
Property and Equipment (Net) 44,557 40,715
Equity Investments 8,778 8,778
Other Assets and Deferred Charges - Net 5,630 5,516
Excess of Cost over Net Assets of Acquired Companies 24,824 23,817
-------- --------
Total Assets $203,393 $191,117
======== ========
See the Notes to Condensed Consolidated Financial Statements.
Continued on next page
3
<PAGE>
MESTEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
Sept. 30, Dec. 31,
1998 1997
---- ----
(Dollars in thousands)
LIABILITIES, AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Portion of Long-Term Debt $17,978 $18,667
Accounts Payable 18,545 20,276
Accrued Compensation 5,252 6,100
Accrued Commissions 3,666 3,283
Progress Billings in Excess of Cost and
Estimated Earnings 3,014 3,205
Customer Deposits 4,800 3,570
Other Accrued Liabilities 18,812 15,134
--------- ----------
Total Current Liabilities 72,067 70,235
Long-Term Debt 549 662
Other Liabilities 291 238
--------- ----------
Total Liabilities 72,907 71,135
--------- ----------
Minority Interests 2,149 1,975
--------- ----------
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 119,725 109,199
Treasury Shares, at cost, (690,230 common shares) (6,230) (6,109)
Cumulative Translation Adjustment (1,071) (996)
---------- ----------
Total Shareholders' Equity 128,337 118,007
---------- ----------
Total Liabilities, and Shareholders' Equity $203,393 $191,117
========= ==========
See the Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
MESTEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1998 1997 1998 1997
(In thousands, except per share amounts)
Net Sales $87,792 $ 82,977 $233,206 $225,166
Net Service Revenues 4,221 4,350 12,144 12,245
-------- -------- --------- ---------
Total Revenues 92,013 87,327 245,350 237,411
Cost of Goods Sold 62,981 59,929 168,454 164,774
Cost of Service Revenues 2,600 2,418 7,527 7,214
-------- -------- --------- ---------
Gross Profit 26,432 24,980 69,369 65,423
Selling Expense 11,692 10,923 31,831 29,596
General and Administrative
Expense 5,000 5,055 12,784 13,284
Engineering Expense 2,199 2,039 6,542 5,808
-------- -------- --------- ---------
Operating Profit 7,541 6,963 18,212 16,735
Interest Expense (429) (469) (875) (1,066)
Other Income (Expense) - net (73) (24) (362) (349)
--------- --------- ---------- ---------
Income Before Income Taxes 7,039 6,470 16,975 15,320
Income Taxes 2,715 2,629 6,449 5,985
-------- -------- --------- ---------
Net Income $ 4,324 $ 3,841 $ 10,526 $ 9,335
======== ======== ========= =========
Basic and Diluted Earnings
per Common Share $ .48 $ .43 $1.18 $1.04
======== ======== ========= =========
Basic Weighted Average
Shares Outstanding 8,920 8,928 8,924 8,929
======== ======== ========= =========
Diluted Weighted Average
Shares Outstanding 8,947 8,950 8,951 8,949
======== ======== ========= =========
See the Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
MESTEK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
9 Months Ended
September 30,
1998 1997
---- ----
(Dollars in thousands)
Cash Flows from Operating Activities:
Net Income $10,526 $ 9,335
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating
Activities:
Depreciation and Amortization 5,903 5,526
Provision for Losses on Accounts Receivable 649 762
Change in Assets & Liabilities:
Cash Flows (Used) by Changes In:
Assets and Liabilities ( 4,715) ( 19,954)
---------- ---------
Net Cash Provided by (Used in) Operating
Activities 12,363 ( 4,331)
---------- ---------
Cash Flows from Investing Activities:
Capital Expenditures ( 8,571) ( 10,276)
Acquisition of Businesses (net of cash acquired) ( 3,096) ( 5,141)
---------- ---------
Net Cash (Used in) Investing Activities ( 11,667) (15,417)
---------- ---------
Cash Flows from Financing Activities:
Net Borrowings Under Line of Credit
Agreement 14,308 11,734
Principal Payments Under Long Term Debt
Obligations ( 15,111) ( 1,125)
Repurchase of Common Stock ( 121) ( 58)
Net Change in Minority Interests 174 ( 100)
Cumulative Translation Adjustments ( 75) ( 51)
---------- ----------
Net Cash Provided by (Used In) Financing
Activities ( 825) 10,400
---------- ----------
Net (Decrease) in Cash and Cash
Equivalents ( 129) ( 9,348)
Cash and Cash Equivalents - Beginning of
Period 2,494 11,649
--------- ----------
Cash and Cash Equivalents - End of Period $ 2,365 $ 2,301
========= ==========
See the Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
<TABLE>
<CAPTION>
MESTEK, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
For the period January 1, 1997 through September 30, 1998
<S> <C> <C> <C> <C> <C> <C>
Additional Cumulative
Common Paid In Retained Treasury Translation
Stock Capital Earnings Shares Adjustment Total
Balance - January 1, 1997 $ 479 $15,434 $94,794 ( $6,040) ( $949) $103,718
Net Income 14,405 14,405
Common Stock Repurchased ( 69) ( 69)
Cumulative Translation
Adjustment ( 47) ( 47)
--------- ---------- ---------- ----------- --------- ----------
Balance - December 31, 1997 $ 479 15,434 109,199 ( 6,109) ( 996) 118,007
Net Income 10,526 10,526
Common Stock Repurchased ( 121) ( 121)
Cumulative Translation
Adjustment ( 75) ( 75)
--------- ---------- ---------- ------------ --------- ----------
Balance - September 30, 1998 $ 479 $15,434 $119,725 ( 6,230) (1,071) $128,337
========= ========== ========== ============ ========= ==========
</TABLE>
See the Notes to the Condensed Consolidated Financial Statements.
7
<PAGE>
MESTEK, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Significant Accounting Policies
Basis of Presentation
The condensed 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 $2,715,000 and $2,629,000 were
recorded for the three months ended September 30, 1998 and 1997, respectively.
Goodwill
The Company amortizes Goodwill on the straight line basis over the
estimated period to be benefitted. The acquisitions made in 1995, 1996 and
1997 resulted, collectively, in goodwill of $21,739,000 which is being
amortized over 25 years. The acquisition of RBI, on April 29, 1998, as more
fully described in Note 2, resulted in goodwill of $1,781,000 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 April 29, 1998, the Company, through a Canadian subsidiary, acquired
100% of the outstanding common stock of Ruscio Brothers Refractory Ltd, (RBR)
and 988721 Ontario, Inc. (988721), both of Mississauga Ontario, Canada. RBR and
988721 manufacture and distribute commercial and residential copper-finned
boilers and water heaters under the name Ruscio Brothers Industries, (RBI)
primarily in Canada. Copper-finned boilers and water heaters are complimentary
to the Company's other hydronic products and the Company expects to
substantially increase the distribution of RBI's products in the United States.
The purchase price paid for the acquired stock was approximately $3,096,000
(U.S.) and included Goodwill of approximately $1,781,000 (U.S.).
8
<PAGE>
Note 3 - Property and Equipment
Sept. 30, Dec. 31,
1998 1997
---- ----
Land $2,045,000 $2,045,000
Buildings 19,091,000 18,319,000
Leasehold Improvements 4,366,000 4,352,000
Equipment 68,375,000 60,260,000
---------- -----------
93,877,000 84,976,000
Accumulated Depreciation (49,320,000) (44,261,000)
------------ ------------
$44,557,000 $40,715.000
============ ============
Note 4 - Long-Term Debt
Sept. 30, Dec. 31,
1998 1997
---- ----
Senior Notes $ - $15,000,000
Revolving Loan Agreement 17,808,000 3,500,000
Other Bonds and Notes Payable 719,000 829,000
----------- -------------
18,527,000 19,329,000
Less Current Maturities (17,978,000) (18,667,000)
------------ --------------
$ 549,000 $ 662,000
============ ==============
Revolving Loan Agreement - The Company has a Revolving Loan Agreement and Letter
of Credit Facility (the Agreement) with a commercial bank. The Agreement
provides $50 million of unsecured revolving credit in U.S. dollars, $5 million
of unsecured involving credit in Canadian dollars, and $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. The Agreement was recently
renewed on a one year basis extending through April 30, 1999. The Revolving Loan
Agreement contains financial covenants which require that the Company maintain
certain current ratios, working capital amounts, capital bases and leverage
ratios. This 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.
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 matured and were
paid off on March 1, 1998. The notes bore interest at 5.53% per annum.
Other - Other bonds and notes payable include $670,000 in secured obligations
assumed in connection with the purchase of Hill Engineering, Inc. on January 31,
1997.
Note 5 - Earnings Per Common Share
Basic earnings per share were computed using the weighted average number of
common shares outstanding. Common stock options were considered in the
computation of diluted earnings per share.
9
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operation
Total revenues in the Company's HVAC segment during the third quarter of
1998 were increased relative to the third quarter of 1997, by $3,430,000 or
5.5%, owing to strong sales of the Company's air distribution and air
conditioning products. Gross profit margins for the HVAC segment were relatively
unchanged at 28.1%. Operating income for this segment was accordingly increased
from $4,483,000 in the third quarter of 1997 to $5,072,000 in the third quarter
of 1998.
Total revenues in the Company's Metal Products segment during the third
quarter of 1998 were increased relative to the third quarter of 1997 by
$1,234,000 or 6.0%, principally as a result of growth in the segment's OmegaFlex
and Formtek units. OmegaFlex's Trac-Pipe(TM)flexible gas piping product has been
very successful, with demand for the product substantially exceeding
expectations. The Company believes that the substantial capital investments made
by OmegaFlex in 1996 and 1997 in Trac-Pipe(TM) product development and market
development have resulted in superior technology, as well as "low cost-producer"
status, in this emerging HVAC niche. Formtek's Rowe Machinery division (which
was relocated in 1997) and Hill Engineering division both enjoyed strong sales
growth in the quarter. As a result of these factors, gross profit margins
improved from 28.0% to 28.9% and operating income increased from $1,595,000 to
$1,894,000.
The Company's computer systems segment reported slightly reduced revenues,
and reduced gross profit margins and, as a result, reduced operating income.
The reduced margins resulted in part from the effect of under absorbed fixed
software support costs and in part from increases in product maintenance
spending.
For the Company as a whole, Selling, General and Administrative, and
Engineering costs, taken together as a percentage of Total Revenues, were
reduced from 20.6% to 20.5%.
Operating income for the third quarter of 1998 for the Company as a whole,
increased by $578,000 or 8.3% reflecting the net effect of the factors mentioned
above.
The Company's total debt (long-term debt plus current portion of long-term
debt) was reduced by $8,411,000 during the quarter ended September 30, 1998
reflecting strong seasonal cash flow. 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
<PAGE>
YEAR 2000 UPDATE
The Company's state of readiness:
Relative to its internal business application systems, the Company believes
that the disclosures which it outlined in its 1997 financial statements,
including specifically those included in Management's Discussion & Analysis,
relative to Year 2000 upgrades and conversions for its various locations remains
generally on schedule as of September 30, 1998 with the following exception.
Certain divisions in the Company's Metal Products segment have encountered
delays in the process of implementing their chosen software and hardware
solutions to the Year 2000 problem. While the company believes that it has
adequate contingency plans to cope with these delays, the possibility of
disruption at these divisions after December 31, 1999 cannot be
entirely discounted. Also, the possibility that one or more of the Company's
other divisions will fail to meet their respective deadlines relative to the
Year 2000 upgrade process cannot be discounted.
Risks related to the Company's Year 2000 exposures:
The Company's risks related to the Year 2000 problems fall into three
categories:
1. Information technology systems (business applications software/hardware).
The Company believes its plans relative to the upgrade of internal business
application systems are, with the exceptions described above, generally on
schedule at this time. The Company believes that the risks related to these
internal business applications, considering the caveats described above, are
under reasonable control at this time.
2. Suppliers and Customers Year 2000 problems.
Both the Company's customer base and its supplier base are large and diverse.
As a result, the Company does not believe it has a reliable method of
accurately assessing the magnitude of the risk it faces relating to either
its customers or its suppliers.
3. Embedded microprocessors.
The company does not believe that it has a reliable method at this time of
accurately assessing the magnitude of the risk it faces relating to
embedded microprocessor technology. Management continues to utilize the
technical resources available to it to manage this exposure.
Costs incurred relative to Year 2000 solutions:
Management continues to believe that its estimate of the total cost of
implementing Year 2000 solutions for its various locations, as contained in its
1997 disclosures, remains a reasonable estimate. Spending through
September 30, 1998 on Year 2000 solutions was approximately $300,000.
FORWARD LOOKING INFORMATION
This report contains forward looking statements which are subject to
inherent uncertainties. All of these are difficult to predict and many of these
are beyond the ability of the Company to control.
11
<PAGE>
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.
MESTEK, INC.
SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
(Amounts in thousands, except
earnings per common shares)
Net income for earnings
per share $4,324 $ 3,841 $10,526 $9,335
====== ======= ======= ======
Basic weighted average
number of common share 8,920 8,928 8,924 8,929
====== ======= ======= ======
Basic earnings per common
share $ .48 $ .43 $1.18 $1.04
====== ======= ======= ======
Diluted weighted average
number of common share
outstanding 8,947 8,950 8,951 8,949
====== ======= ======= ======
Diluted earnings per common
share $ .48 $ .43 $ 1.18 $ 1.04
====== ======= ======= ======
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: October 27, 1998
/S/ Stephen M. Shea
Stephen M. Shea
Senior Vice President - Finance
(Chief Financial Officer)
12
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<NAME> Mestek, Inc.
<MULTIPLIER> 1,000
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,365
<SECURITIES> 0
<RECEIVABLES> 60,527
<ALLOWANCES> 3,179
<INVENTORY> 54,008
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<PP&E> 93,877
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0
0
<COMMON> 479
<OTHER-SE> 127,858
<TOTAL-LIABILITY-AND-EQUITY> 203,393
<SALES> 87,792
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