<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
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, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-4821
PITTWAY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-5616408
(State of Incorporation) (I.R.S. Employer Identification No.)
200 South Wacker Drive, Chicago, Illinois 60606-5802
(Address of Principal Executive Offices) (Zip Code)
312/831-1070
(Registrant's Telephone Number, Including Area Code)
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 latest practicable date (October 1,
1995).
Common Stock 2,626,024
Class A Stock 11,314,700
<PAGE>
PITTWAY CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1995
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Financial Statements
Consolidated Statement of Income -
Three Months and Nine Months Ended
September 30, 1995 and 1994 3
Consolidated Balance Sheet -
September 30, 1995 and December 31, 1994 4 - 5
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1995 and 1994 6
Notes to Consolidated Financial Statements 7 - 8
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9 - 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 11 - 12
ITEM 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 13
2
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PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(Dollars in Thousands, Except Per Share Data)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
Net Sales............................ $239,131 $202,026 $694,855 $567,789
Operating Expenses:
Cost of sales....................... 149,867 124,486 428,995 345,427
Selling, general and administrative. 69,400 58,946 205,228 170,666
Depreciation and amortization....... 5,417 5,226 15,844 15,077
224,684 188,658 650,067 531,170
Operating Income..................... 14,447 13,368 44,788 36,619
Other Income (Expense):
Gain on sale of investment.......... 19,506
Income from marketable securities
and other interest................. 674 913 2,058 2,872
Interest expense.................... (1,631) (1,053) (4,095) (2,513)
Income from investments............. 332 (168) 747 1,114
Miscellaneous, net.................. 606 439 1,844 1,280
(19) 131 554 22,259
Income Before Income Taxes........... 14,428 13,499 45,342 58,878
Provision For Income Taxes........... 5,248 5,203 16,712 23,217
Net Income........................... $ 9,180 $ 8,296 $ 28,630 $ 35,661
Net Income Per Share of Common and
Class A Stock....................... $ .66 $ .60 $ 2.06 $ 2.56
Cash Dividends Declared Per Share:
Common.............................. $ .10 $ .10 $ .30 $ .30
Class A............................. $ .125 $ .125 $ .375 $ .375
Average Number of Shares Outstanding
(in thousands)...................... 13,941 13,941 13,941 13,941
See accompanying notes.
3
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PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
(Dollars in Thousands)
(UNAUDITED)
September 30, December 31,
1995 1994
ASSETS
CURRENT ASSETS:
Cash and equivalents................... $ 3,470 $ 10,359
Marketable securities.................. 26,364 34,313
Accounts and notes receivable, less
allowance for doubtful accounts of
$8,455 and $6,348.................... 167,455 137,747
Inventories............................ 165,331 124,801
Future income tax benefits............. 18,204 17,879
Prepayments, deposits and other........ 13,958 11,805
394,782 336,904
PROPERTY, PLANT AND EQUIPMENT, at cost:
Buildings.............................. 24,913 24,769
Machinery and equipment................ 182,119 157,061
207,032 181,830
Less: Accumulated depreciation......... (106,052) (94,426)
100,980 87,404
Land................................... 2,369 2,369
103,349 89,773
INVESTMENTS:
Real estate and other ventures......... 55,428 56,261
Leveraged leases....................... 22,525 22,752
77,953 79,013
OTHER ASSETS:
Goodwill, less accumulated
amortization of $8,211 and $7,193.... 48,285 40,935
Other intangibles, less accumulated
amortization of $10,126 and $9,597... 5,654 6,256
Notes receivable....................... 7,595 4,370
Miscellaneous.......................... 6,219 6,036
67,753 57,597
$643,837 $563,287
See accompanying notes.
4
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PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
(Dollars in Thousands)
(UNAUDITED)
September 30, December 31,
1995 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable........................... $ 92,542 $ 46,232
Long-term debt due within one year...... 3,078 5,184
Dividends payable....................... 1,764 1,758
Accounts payable........................ 71,489 58,246
Accrued expenses........................ 42,245 41,391
Income taxes payable.................... 5,015 10,093
Retirement and deferred
compensation plans.................... 1,665 1,148
Unearned income......................... 3,450 5,797
221,248 169,849
LONG-TERM DEBT, less current maturities... 8,764 5,088
DEFERRED LIABILITIES:
Income taxes............................ 48,955 54,158
Other................................... 11,476 6,062
60,431 60,220
STOCKHOLDERS' EQUITY:
Preferred stock, none issued............
Common capital stock, $1 par value-
Common stock.......................... 2,626 2,626
Class A stock......................... 11,315 11,315
Capital in excess of par value.......... 28,348 28,348
Retained earnings....................... 315,355 291,756
Cumulative marketable securities
valuation adjustment.................. (1,552) (3,050)
Cumulative foreign currency translation
adjustment............................ (2,698) (2,865)
353,394 328,130
$643,837 $563,287
See accompanying notes.
5
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PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(Dollars in Thousands)
(UNAUDITED)
1995 1994
Cash Flows From Operating Activities:
Net Income....................................... $ 28,630 $ 35,661
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................. 15,844 15,077
Gain on sale of investment, net of taxes....... (11,776)
Deferred income taxes.......................... (6,526) 1,426
Retirement and deferred compensation plans..... 5,270 1,635
Income/loss from investments adjusted for
cash distributions received................... 1,027 (888)
Provision for losses on accounts receivable.... 3,135 2,222
Change in assets and liabilities, excluding
effects from acquisitions, disposition and
foreign currency adjustments:
Increase in accounts receivable............. (25,556) (23,129)
Increase in inventories..................... (33,142) (18,536)
Increase in accounts payable
and accrued expenses....................... 7,837 11,632
(Decrease) increase in income
taxes payable.............................. (4,846) 5,724
Other changes, net.......................... (10,361) (3,430)
Net cash (used in) provided by operations........ (18,688) 15,618
Cash Flows From Investing Activities:
Capital expenditures............................. (29,865) (22,916)
Proceeds from the sale of investment, net of
taxes of $9,730................................. 14,776
Proceeds from the sale of marketable securities.. 16,034 27,949
Purchases of marketable securities............... (5,846) (35,933)
Disposition of property and equipment............ 1,899 1,144
Additions to investments......................... (52) (7,546)
Net assets of businesses acquired, net of cash... (7,565) (1,444)
Disposition of business.......................... 177
Net increase in notes receivable................. (2,793) (46)
Net cash used in investing activities............ (28,011) (24,016)
Cash Flows From Financing Activities:
Net increase in notes payable.................... 46,305 15,021
Proceeds of long-term debt....................... 3,197 3,614
Repayments of long-term debt..................... (4,743) (5,372)
Dividends paid................................... (5,025) (5,032)
Net cash provided by financing activities........ 39,734 8,231
Effect of Exchange Rate Changes on Cash ........... 76 199
(Decrease) Increase in Cash and Equivalents........ (6,889) 32
Cash and Equivalents at Beginning of Period........ 10,359 1,908
Cash and Equivalents at End of Period.............. $ 3,470 $ 1,940
See accompanying notes.
=============================================================================
Supplemental cash flow disclosure:
1995 1994
Interest paid.................................... $ 4,081 $ 2,597
Income taxes paid................................ 28,150 18,138
6
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PITTWAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Unaudited)
Note 1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Pittway Corporation and its majority-owned subsidiaries (the "Company" or
"Registrant"). Summarized financial information for the limited real
estate partnership ventures and other affiliates is omitted because, when
considered in the aggregate, they do not constitute a significant
subsidiary. Certain prior year amounts in the consolidated statement of
cash flows have been reclassified to conform to the current year
classification.
The accompanying consolidated financial statements are unaudited but
reflect all adjustments of a normal recurring nature which are, in the
opinion of management, necessary for a fair presentation of the financial
statements contained herein. However, the financial statements and related
notes do not include all disclosures normally provided in the Company's
Annual Report on Form 10-K. Accordingly, these financial statements and
related notes should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
Note 2. Acquisitions and Disposition
During the first nine months of 1995, the Company acquired a 100% interest
in a foreign manufacturer of commercial intrusion alarms and control panels
and the assets and business of a domestic manufacturer of residential
burglar/fire alarm controls for $7,565 cash and $3,089 in notes. The
acquisitions were accounted for as purchase transactions in the
consolidated financial statements from their respective dates of
acquisition. Their impact on consolidated results of operations was not
significant. During the 1995 second quarter, the Company sold its 51%
interest in a business offering seminars and other business training
programs to its minority stockholders for $177 cash and a $177 note due in
one year. No significant gain or loss resulted from the sale. Operating
results were included in the consolidated financial statements to the date
of disposition.
Note 3. Marketable Securities
At September 30, 1995 and December 31, 1994, marketable securities
consisted of adjustable rate preferred stocks, which had gross unrealized
holding losses of $2,587 and $5,083, respectively. Realized gains and
losses are based upon the specific identification method. During the first
nine months of 1995 and 1994, such gains amounted to $198 and $330,
respectively, and losses amounted to $453 and $76, respectively.
7
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In connection with an initial public offering of First Alert, Inc. common
stock in 1994, the Company sold its 16.67% ownership in First Alert, Inc.
The sale of the shares resulted in a pretax gain of $19,506. The $24,506
pre-tax proceeds from the sale were received in April 1994. Prior to the
initial public offering, the Company's equity investment in First Alert,
Inc. was recorded at a cost of $5 million.
Note 4. Inventories
Inventories consist of the following:
September 30, December 31,
1995 1994
Raw materials $ 39,886 $ 32,520
Work in process 17,460 11,653
Finished goods -
Manufactured by the Company 56,472 43,096
Manufactured by others 52,440 37,794
Total 166,258 125,063
Less LIFO reserve (927) (262)
$165,331 $124,801
Note 5. Earnings per Share
Net income per share of common capital stock is based on the combined
weighted average number of Common and Class A shares outstanding during
each period and does not include Class A shares issuable upon exercise of
stock options because the dilutive effect is not significant.
Note 6. Legal Proceedings
In 1989 a judgment was entered against Saddlebrook Resorts, Inc.
("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which
arose out of the development of Saddlebrook's resort and a portion of the
adjoining residential properties owned and currently under development by
the Company. The lawsuit alleged damage to plaintiffs' adjoining property
caused by surface water effects from improvements to the properties.
Damages of approximately $8 million were awarded to the plaintiffs and an
injunction was entered requiring, among other things, that Saddlebrook work
with local regulatory authorities to take corrective actions. In 1990 the
trial court entered an order vacating the judgment and awarding a new
trial. In December 1994, Saddlebrook's motion for summary judgment based
on collateral estoppel was granted on the ground that Plaintiffs' claims
were fully retried and rejected in a related administrative proceeding.
Plaintiffs have appealed the trial court's decision granting summary
judgment. The Company believes that the ultimate outcome of the
aforementioned lawsuit will not have a material adverse effect on its
financial statements.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the third quarter of 1995, sales increased 18% due to higher alarm
segment sales. For the first nine months of 1995, sales increased 22% due
to higher sales in both the alarm and publishing segments. On a year-to-
date basis, domestic sales increased 20% and international sales,
representing approximately 11% of total consolidated sales, increased 38%.
Cost of sales grew at a higher rate than sales due to factors noted below.
Selling, general and administrative expenses increased 18% over the third
quarter and 20% over the first nine months of 1994 primarily due to
increased costs associated with the expanded sales volume and to higher
deferred compensation expense resulting from the significant increase in
the price of the Company's stock during the third quarter.
Alarm product sales increased 24% to $196.4 million for the quarter and 26%
to $550.5 million year-to-date due to a combination of overall market
growth and, more significantly, increased market share. The latter has
resulted from growing customer preference for the service and convenience
offered by the Company's distribution business and for numerous new
products introduced by the Company's manufacturing units in recent years.
The success of the distribution business has been partly aided by the
bankruptcy of a major competitor. Operating income for the segment
increased 3% to $13.8 million for the quarter and 19% to $40.2 million
year-to-date primarily because of the expanded sales volume partially
offset by costs associated with the development and introduction of new
products.
For the quarter, publishing sales declined 1% to $42.3 million and
operating income declined 6% to $1.6 million as a result of the sale of a
seminar and other training programs business in the second quarter of 1995.
Excluding the results of this ancillary business, publishing sales
increased 10% and operating income increased 6%. On a year-to-date basis,
publishing sales increased 10% to $144.0 million and operating income
increased 12% to $9.0 million. Excluding the year-to-date results of
seminar business, publishing sales increased 13% and operating income
increased 16%. The increase in sales of the segment's present operations
was due primarily to higher magazine revenues. The increase in profits
generated from the increase in advertising pages and page rates was
partially offset by significantly higher paper and postage costs.
Included in other income in 1994 is a $19.5 million pretax gain on the sale
of First Alert, Inc. common stock recorded in the first half of the year.
Excluding the gain on sale of investment, other income was less favorable
in 1995 primarily due to increased interest expense on a higher level of
debt and reduced income from marketable securities. Earnings from
affiliates and from other long-term investments was higher in the 1995
third quarter than the comparable period in 1994 due to cash distributions
received from real estate limited partnerships. Earnings from affiliates
and other long-term investments was lower in the first nine months of 1995
9
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because of reduced income from leveraged leases and the unfavorable results
of a 45%-owned affiliate which recorded a loss in 1995 due to large product
development expenses. Partially offsetting this affiliate loss in 1995 were
cash distributions from real estate limited partnerships totaling $1.5
million.
The effective tax rates for the 1995 periods presented decreased
approximately two percentage points from 1994 periods primarily due to the
benefit of certain foreign tax credits along with an overall lower
effective tax rate on increased earnings at the foreign locations.
FINANCIAL CONDITION
The Company's financial condition remained strong through the third quarter
of 1995. Management anticipates that operations, borrowings and marketable
securities will continue to be the primary source of funds needed to meet
ongoing programs for capital expenditures, to finance acquisitions and
investments and to pay dividends.
Through the first nine months of 1995, the primary source of cash provided
by operations was profits before depreciation and amortization. Such cash
generated from operations, along with a $45 million net increase in debt
and $10 million net proceeds from marketable securities, was used to
finance the $63 million net increase in working capital items and to pay
approximately $30 million for capital expenditures, $8 million to acquire
new businesses and $5 million in dividends.
The Company is continually investigating investment opportunities for
growth in related areas and is presently committed to invest approximately
$7.5 million in certain affordable housing ventures through 1997.
The Company has real estate investments in various limited partnerships
with interests in commercial rental properties which either have been or
may be sold or turned over to lenders due to the present weak commercial
real estate market. Such events have no effect on net income although they
do have a negative impact on the Company's cash position because
significant tax payments become due when the properties are sold or
returned to the lenders. After paying $9 million through the first nine
months of 1995, the Company has approximately $6 million accrued at
September 30, 1995 to fully cover the remaining tax payments that would be
due if all the properties are sold or returned to the lenders. It is now
expected that substantially all of the remaining $6 million will be paid
during the remainder of 1995 and during 1996.
10
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 10, 1989, the Circuit Court of the Sixth Judicial Circuit in and for
Pasco County, Florida, entered a judgment against Saddlebrook Resorts, Inc.
("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which
arose out of the development of Saddlebrook's resort and a portion of the
adjoining residential properties owned and currently under development by
the Company. The lawsuit (James H. Porter and Martha Porter, Trustees, et
al. vs. Saddlebrook Resorts, Inc. and The County of Pasco, Florida; Case
No. CA83-1860), alleges damage to plaintiffs' adjoining property caused by
surface water effects from improvements to the properties. Damages of
approximately $8 million were awarded to the plaintiffs and an injunction
was entered requiring, among other things, that Saddlebrook work with local
regulatory authorities to take corrective actions. Saddlebrook made two
motions for a new trial, based on separate grounds. One such motion was
granted on December 18, 1990. Such grant was appealed by the plaintiffs.
The other such motion was denied on February 28, 1991. Saddlebrook
appealed such denial. The appeals were consolidated, fully briefed and
heard in February 1992. Saddlebrook received a favorable ruling on March
18, 1992, dismissing the judgment and remanding the case to the Circuit
Court for a new trial. An agreed order has been entered by the Court
preserving the substance of the injunction pending final disposition of
this matter. As part of its plan to comply with the agreed order,
Saddlebrook filed applications with the regulatory agency to undertake
various remediation efforts. Plaintiffs, however, filed petitions for
administrative review of the applications, which administrative hearing was
concluded in February 1992. On March 31, 1992, the hearing officer issued
a recommended order accepting Saddlebrook's expert's testimony. The
agency's governing board was scheduled to consider this recommended order
on April 28, 1992, however, shortly before the hearing, the plaintiffs
voluntarily dismissed their petitions and withdrew their challenges to the
staff's proposal to issue a permit.
At the April 28, 1992 hearing the governing board closed its file on the
matter and issued the permits. Saddlebrook appealed the board's refusal to
issue a final order. On July 9, 1993 a decision was rendered for
Saddlebrook remanding jurisdiction to the governing board for further
proceedings, including entry of a final order which was issued on October
25, 1993. The plaintiffs appealed the Appellate Court decision to the
Florida Supreme Court and appealed the issuance of the final order to the
Second District Court of Appeals. The Florida Supreme Court heard the
appeal on May 3, 1994 and denied plaintiffs' appeal. The other appeal was
voluntarily dismissed by the plaintiffs on June 17, 1994. On remand to the
trial court, Saddlebrook's motion for summary judgment, based on collateral
estoppel on the ground that plaintiffs' claims were fully retried and
rejected in a related administrative proceeding, was granted on December 7,
1994. Plaintiffs filed for a rehearing which was denied. Plaintiffs have
appealed the trial court's granting of summary judgment.
11
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Until October 14, 1989, Saddlebrook disputed responsibility for ultimate
liability and costs (including costs of corrective action). On that date,
the Company and Saddlebrook entered into an agreement with regard to such
matters. The agreement, as amended and restated on July 16, 1993, provides
for the Company and Saddlebrook to split equally the costs of the defense
of the litigation and the costs of certain related litigation and
proceedings, the costs of the ultimate judgment, if any, and the costs of
any mandated remedial work. Subject to certain conditions, the agreement
permits Saddlebrook to obtain subordinated loans from the Company to enable
Saddlebrook to pay its one-half of the costs of the latter two items. No
loans have been made to date.
The Company believes that the ultimate outcome of the aforementioned
lawsuit will not have a material adverse effect on its financial
statements.
12
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Number Description
27 Financial Data Schedule
(submitted only in electronic format)
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
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.
PITTWAY CORPORATION
(Registrant)
By /s/ Paul R. Gauvreau
Paul R. Gauvreau
Financial Vice President
and Treasurer
(Duly Authorized Officer and
Principal Financial Officer)
Date: October 31, 1995
13
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 3,470
<SECURITIES> 26,364
<RECEIVABLES> 175,910
<ALLOWANCES> 8,455
<INVENTORY> 165,331
<CURRENT-ASSETS> 394,782
<PP&E> 209,401
<DEPRECIATION> 106,052
<TOTAL-ASSETS> 643,837
<CURRENT-LIABILITIES> 221,248
<BONDS> 8,764
<COMMON> 13,941
0
0
<OTHER-SE> 339,453
<TOTAL-LIABILITY-AND-EQUITY> 643,837
<SALES> 694,855
<TOTAL-REVENUES> 694,855
<CGS> 428,995
<TOTAL-COSTS> 428,995
<OTHER-EXPENSES> 15,844
<LOSS-PROVISION> 3,135
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<INCOME-PRETAX> 45,342
<INCOME-TAX> 16,712
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<DISCONTINUED> 0
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