FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998 Commission file no. 2-27393
NOLAND COMPANY
A Virginia Corporation IRS Identification #54-0320170
80 29th Street
Newport News, Virginia 23607
Telephone: (757) 928-9000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Outstanding capital common stock, $10.00 par value at November 2, 1998
3,700,876 shares.
This report contains 12 pages.
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NOLAND COMPANY AND SUBSIDIARY
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1998 (Unaudited) and Dec. 31, 1997 (Audited)........3
Unaudited Consolidated Statements of Income -
Three Months and Nine Months Ended September 30, 1998 and 1997....4
Unaudited Consolidated Statements of Retained Earnings -
Nine Months Ended September 30, 1998 and 1997.....................5
Unaudited Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997.....................6
Notes to Unaudited Consolidated Financial Statements.................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................8-10
PART II. OTHER INFORMATION
Items 1, 2, 3, 4, 5, and 6..........................................11
SIGNATURE....................................................................12
<PAGE>
PART 1. FINANCIAL INFORMATION
NOLAND COMPANY AND SUBSIDIARY
Consolidated Balance Sheets
Item 1. Financial Statements
September 30, December 31,
1998 1997
(Unaudited) (Audited)
Assets
Current Assets:
Cash and cash equivalents $ 4,263,726 $ 5,674,097
Accounts receivable, net 55,278,241 49,984,020
Inventory, net 78,339,091 66,470,051
Deferred income taxes 1,706,295 1,706,295
Prepaid expenses 293,041 184,912
Total Current Assets 139,880,394 124,019,375
Property and Equipment, at cost:
Land 13,185,246 13,384,253
Buildings 80,883,240 76,944,986
Equipment and fixtures 63,688,472 55,713,614
Property excess to current needs 1,876,351 1,872,851
Total 159,633,309 147,915,704
Less accumulated depreciation 72,825,775 68,491,485
Property and Equipment, net 86,807,534 79,424,219
Assets Held for Resale 1,240,864 1,240,864
Prepaid Pension 14,439,444 12,874,194
Other Assets 1,002,488 889,271
$243,370,724 $218,447,923
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable, short-term borrowing $ 18,750,000 $ 5,750,000
Current maturity of long-term debt 4,870,778 2,895,778
Book overdrafts 5,574,920 5,348,276
Accounts payable 28,092,171 21,029,521
Other accruals and liabilities 9,424,733 12,277,259
Federal and state income taxes 532,302 873,298
Total Current Liabilities 67,244,904 48,174,132
Long-term Debt 42,675,055 39,784,389
Deferred Income Taxes 8,806,830 8,806,830
Accrued Postretirement Benefits 1,128,061 915,709
Stockholders' Equity:
Capital common stock, par value $10;
authorized, 6,000,000 shares; issued,
3,700,876 shares 37,008,760 37,008,760
Retained earnings 86,869,794 83,875,284
Total 123,878,554 120,884,044
Less unearned compensation-restricted stock 362,680 117,181
Stockholders' Equity 123,515,874 120,766,863
$243,370,724 $218,447,923
The accompanying notes are an integral part of the financial statements.
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NOLAND COMPANY AND SUBSIDIARY
Unaudited Consolidated Statements of Income
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Merchandise sales $124,850,784 $122,014,132 $348,654,534 $350,662,820
Cost of goods sold:
Purchases and freight-in 108,271,427 94,413,891 291,845,171 281,405,515
Inventory, beginning 70,533,927 71,200,735 66,470,051 67,782,230
Inventory, ending 78,339,091 67,437,708 78,339,091 67,437,708
Cost of goods sold 100,466,263 98,176,918 279,976,131 281,750,037
Gross profit on sales 24,384,611 23,837,214 68,678,403 68,912,783
Operating expenses 22,580,807 22,778,587 64,893,812 67,349,215
Operating profit 1,803,804 1,058,627 3,784,591 1,563,568
Other income:
Cash discounts, net 1,148,553 918,466 3,521,786 3,128,704
Service charges 304,085 301,762 900,675 881,972
Miscellaneous 174,515 80,067 606,138 428,231
Total other income 1,627,153 1,300,295 5,028,599 4,438,907
Interest expense 886,663 786,637 2,587,970 2,357,321
Income before income taxes 2,544,294 1,572,285 6,225,220 3,645,154
Income taxes:
State 140,000 86,500 342,400 200,500
Federal 817,400 505,200 2,000,100 1,171,200
Total income taxes 957,400 591,700 2,342,500 1,371,700
Net income $ 1,586,894 $ 980,585 $3,882,720 $2,273,454
Basic and diluted earnings per
share (based on 3,700,876
shares outstanding) $ .43 $ .26 $ 1.05 $ .61
Cash dividends per share $ .08 $ .08 $ .24 $ .24
The accompanying notes are an integral part of the financial statements.
<PAGE>
NOLAND COMPANY AND SUBSIDIARY
Unaudited Consolidated Statements of Retained Earnings
Nine Months Ended
September 30,
1998 1997
Retained earnings, January 1 $83,875,284 $79,516,091
Add net income 3,882,720 2,273,454
Deduct cash dividends paid
($.24 per share) (888,210) (888,210)
Retained earnings, September 30 $86,869,794 $80,901,335
The accompanying notes are an integral part of the financial statements.
<PAGE>
NOLAND COMPANY AND SUBSIDIARY
Unaudited Consolidated Statements of Cash Flows
Nine Months
Ended September 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,882,720 $ 2,273,454
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,942,036 5,139,143
Amortization of prepaid pension cost (1,565,250) (389,997)
Amortization of unearned compensation-restricted stock 61,351 50,585
Provision for doubtful accounts 1,159,097 1,110,284
Change in operating assets and liabilities:
(Increase) in accounts receivable (6,453,318) (120,247)
(Increase) decrease in inventory (11,869,040) 344,522
(Increase) decrease in prepaid expenses (108,129) 262,272
Decrease in assets held for resale - 49,912
(Increase) decrease in other assets (181,827) 125,052
Increase in accounts payable 7,062,650 6,048,553
(Decrease) in other accruals and liabilities (2,852,526) (4,027,426)
(Decrease) in federal and state income taxes (340,996) (53,963)
Increase in accrued postretirement benefits 212,352 172,543
Total adjustments (8,933,600) 8,711,233
Net cash (used) provided by operating activities (5,050,880) 10,984,687
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (13,619,369) (7,157,162)
Proceeds from sale of assets 362,628 1,892,238
Net cash used by investing activities (13,256,741) (5,264,924)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in book overdrafts 226,644 5,324,931
Short-term borrowing (payments), net 13,000,000 (5,000,000)
Long-term debt repayments (2,634,334)(10,735,327)
Long-term borrowing 7,500,000 7,660,000
Dividends paid (888,210) (888,210)
Purchase of restricted stock (306,850) -
Net cash provided (used) by financing activities 16,897,250 (3,638,606)
CASH AND CASH EQUIVALENTS:
(Decrease) increase during first nine months (1 410,371) 2,081,157
Beginning of year 5,674,097 3,507,588
End of first nine months $4,263,726 $5,588,745
The accompanying notes are an integral part of the financial statements.
<PAGE>
NOLAND COMPANY AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
1. In the opinion of the Company, the accompanying unaudited
consolidated financial statements of Noland Company and
Subsidiary contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly
the Company's consolidated financial position as of
September 30, 1998, and its results of operations and cash
flows for the three and nine months ended September 30, 1998
and 1997. The balance sheet as of December 31, 1997, was
derived from audited financial statements as of that date.
The results of operations for the quarter ended September
30, 1998, are not necessarily indicative of the results to
be expected for the full year.
2. The Notes to Consolidated Financial Statements included in
the Company's December 31, 1997 Annual Report on Form 10-K
are an integral part of the interim unaudited financial
statements. The Company takes a physical inventory annually
on December 31 of each year. The Company uses estimated
gross profit rates to determine cost of goods sold during
interim periods. In addition, the Company makes certain
estimates to compute the LIFO reserve and such estimates at
interim may not be consistent with year-end results. Year-
end inventory adjustments to reflect actual inventory levels
are made in the fourth quarter.
3. Due to the seasonal nature of the construction industry
supplied by the registrant, interim results of operations of
each period are not necessarily indicative of earnings for
the year.
4. Accounts Receivable as of September 30, 1998 and December
31, 1997 are net of an allowance for doubtful accounts of
$1,008,132. Third-quarter bad debt charges, net of
recoveries, were $315,924 for 1998 and $326,708 for 1997.
Year-to-date bad debt charges, net of recoveries, were
$974,148 for 1998 and $968,790 for 1997.
<PAGE>
5. Several new accounting pronouncements have been released
since the beginning of the year. Among these are Statement
of Financial Accounting Standards No. 132 "Employers'
Disclosures about Pensions and Other Postretirement
Benefits" and Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging
Activities". The Company has no derivative instruments or
hedging activities. Adoption of the new pronouncements is
not expected to materially effect the financial condition or
results of operations of the Company.
6. Certain prior period amounts have been reclassified to
conform to current period presentation.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
The Company generates necessary cash through: (1) cash flow from
operations; (2) short-term borrowing from bank lines of credit
arrangements, when needed; and (3) additional long-term debt,
when needed.
For the first nine months of 1998, the Company used $5.1 million
in operating activities compared to generating $11.0 million from
operations for the same period last year. A new inventory
management system, which has caused a planned temporary buildup
of inventory, is the primary cause for the year-to-year swing.
Short-term borrowing and additional long-term debt provided the
cash needed for the inventory buildup and the $13.6 million in
capital expenditures through September 30, 1998. Working capital
at September 30, 1998 was $72.6 million and the current ratio was
2.08. Management believes the Company's liquidity, capital
resources and working capital are sufficient to meet the needs of
the foreseeable future.
Results of Operations
Third-quarter sales of $124.9 million were 2.3 percent more than
the $122.0 million for the year-earlier period. Plumbing
department sales increased four percent for the quarter
<PAGE>
reflecting our participation in the construction and remodeling
markets. At the same time, several newer integrated supply
contracts gained momentum, fueling a three percent growth in
industrial sales. Air conditioning sales were even with the year-
earlier period, while electrical sales declined one percent.
For the quarter the gross margin of profit remained level with
the year-earlier period at 19.5 percent. Operating expenses
declined slightly, in part due to pension income for the quarter
of $522,000 compared to $130,000 for the year-earlier period as a
result of an over-funded pension plan. This led to an operating
profit of $1,804,000 for the quarter, 70 percent greater than the
$1,059,000 total of a year ago.
Net income for the quarter was $1,587,000 compared to $981,000
for the third quarter of 1997. Year-to-date net income was $3.9
million compared to $2.3 million for the year earlier period.
Year 2000
The Company is both internally and externally dependent on
computer software that uses a two digit dating technique.
In 1997, the Company developed and implemented a plan to address
significant Year 2000 deficiencies in its internal computer
hardware, software, related systems, non-information technology
systems and third party risks.
For information technology systems, this resulted in the purchase
of new computer equipment costing approximately $500,000 about
six months ahead of schedule. All new hardware and software
purchased as part of an ongoing replacement process has been
certified by the vendor as Year 2000 compliant. In addition, the
Company paid a contractor $20,000 to address specific Year 2000
issues. All other Year 2000 work has been accomplished by the
reallocation of existing staff. Remediation and testing has been
completed on all mission critical systems. Additional testing by
independent outside sources will also be completed. All funds for
Year 2000 costs will come from operations. Future expenditures
for Year 2000 issues are expected to be insignificant. No
information technology projects have been postponed or cancelled
as a result of the Company's efforts to become Year 2000
compliant. In the event of internal Year 2000 failure, the
Company intends to process transactions manually until its
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systems are restored.
Noland Company is a distributor of products that are manufactured
or provided by other organizations (vendors). Noland is dependent
on other organizations such as vendors, customers, support
services, and the infrastructure that have Year 2000 concerns.
Year 2000 issues are also present in some products sold by
Noland, but they represent less than one percent of the Company's
sales.
Noland has received and/or mailed hundreds of communications
regarding Year 2000 issues. Thus far, we have not been able to
identify any significant vendors, manufacturers, customers, or
support organizations that have advised us of Year 2000 issues
that will not be effectively addressed. It is possible that
Noland has not been advised of issues that will not be corrected
and will fail. The amount of loss imposed upon Noland, if any,
will depend upon the specific issue that fails.
The Company's external source of products purchased for resale is
redundant and competitive. Most of Noland's products purchased
for resale can be obtained from alternative sources. The Company
has been assured by its primary vendors that they are
successfully addressing the Year 2000 issue.
The failure of the United States postal system, federal banking
system, the country's electric power generating "grid", and
similar infrastructure losses could be catastrophic to the
Company. The amount of the loss could depend upon the severity
and length of the disruption. Noland Company has no reasonable
way to estimate those losses, if any.
Included in this discussion are forward-looking management
comments and other statements which reflect management's current
outlook for the future. Such forward-looking statements are not
guarantees of future performance and are subject to risks and
uncertainties that could cause actual results to differ
materially from those anticipated in the statements. Such risks
and uncertainties include, but are not limited to, general
business and economic conditions, climatic conditions,
competitive pricing pressures, and product availability.
<PAGE>
PART II. OTHER INFORMATION
Item 1. None
Item 2. None
Item 3. None
Item 4. None
Item 5. None
Item 6. None
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
NOLAND COMPANY
November 2 , 1998 Arthur P. Henderson, Jr.
Arthur P. Henderson, Jr.
Vice President-Finance
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<SECURITIES> 0
<RECEIVABLES> 56,286,373
<ALLOWANCES> 1,008,132
<INVENTORY> 78,339,091
<CURRENT-ASSETS> 139,880,394
<PP&E> 159,633,309
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<COMMON> 37,008,760
<OTHER-SE> 86,507,114
<TOTAL-LIABILITY-AND-EQUITY> 243,370,724
<SALES> 124,850,874
<TOTAL-REVENUES> 124,850,874
<CGS> 100,466,263
<TOTAL-COSTS> 22,264,883
<OTHER-EXPENSES> (1,627,153)
<LOSS-PROVISION> 315,924
<INTEREST-EXPENSE> 886,663
<INCOME-PRETAX> 2,544,294
<INCOME-TAX> 957,400
<INCOME-CONTINUING> 1,586,894
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