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, 1995 or [ ] Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From ___ to ___ Commission file number 1-5581 I.R.S. Employer Identification Number 59-0778222 WATSCO, INC. (a Florida Corporation) 2665 South Bayshore Drive Coconut Grove, Florida 33133 Telephone: (305) 858-0828 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 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: 4,778,019 shares of the Company's Common Stock ($.50 par value) and 1,483,281 shares of the Company's Class B Common Stock ($.50 par value) were outstanding as of November 1, 1995. 1 of 10
<TABLE> <CAPTION> PART I. FINANCIAL INFORMATION WATSCO, INC. CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 1995 and December 31, 1994 (In $000s) SEPTEMBER 30, DECEMBER 31, 1995 1994 ------------- ------------ ASSETS (UNAUDITED) <S> <C> <C> Current assets: Cash and cash equivalents $ 3,190 $ 1,744 Marketable securities 1,281 3,227 Accounts receivable, net 47,413 34,811 Inventories 61,654 49,259 Other current assets 5,123 4,608 -------- -------- Total current assets 118,661 93,649 Property, plant and equipment, net 10,537 8,829 Intangible assets, net 14,353 13,164 Other assets 4,014 4,022 -------- -------- $147,565 $119,664 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations $ 744 $ 1,781 Borrowings under revolving credit agreements 49,433 32,034 Accounts payable 15,921 13,108 Accrued liabilities 7,578 6,631 -------- -------- Total current liabilities 73,676 53,554 Long-term obligations: Bank and other debt 4,026 2,719 Subordinated notes 2,500 2,500 Convertible subordinated debentures 1,341 1,505 -------- -------- 7,867 6,724 Deferred income taxes 638 713 Minority interests 12,780 11,857 Shareholders' equity: Common Stock, $.50 par value 2,392 2,334 Class B Common Stock, $.50 par value 742 743 Paid-in capital 19,578 18,936 Retained earnings 29,892 24,803 -------- -------- Total shareholders' equity 52,604 46,816 -------- -------- $147,565 $119,664 ======== ======== </TABLE> See accompanying notes to condensed consolidated financial statements. 2 of 10
<TABLE> <CAPTION> WATSCO, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS Quarter and Nine Months Ended September 30, 1995 and 1994 (In $000s except per share amounts) (Unaudited) QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- -------------------- 1995 1994 1995 1994 -------- -------- -------- ------ <S> <C> <C> <C> <C> Revenues: Net sales $90,472 $74,258 $226,689 $191,424 Royalty and service fees 8,335 8,547 23,501 22,460 ------- ------- -------- -------- Total revenues 98,807 82,805 250,190 213,884 ------- ------- -------- -------- Costs and expenses: Cost of sales 70,727 57,605 175,603 148,183 Direct service expenses 6,412 6,469 18,040 17,035 Selling, general and administrative 14,648 12,694 41,020 36,036 ------- ------- -------- -------- Total costs and expenses 91,787 76,768 234,663 201,254 ------- ------- -------- -------- Operating income 7,020 6,037 15,527 12,630 Other income (expense): Investment income, net 86 39 181 82 Interest expense (1,046) (813) (3,064) (2,278) ------- ------- -------- -------- (960) (774) (2,883) (2,196) ------- ------- -------- -------- Income before income taxes and minority interests 6,060 5,263 12,644 10,434 Income taxes (2,333) (2,123) (4,867) (4,065) Minority interests (896) (833) (1,744) (1,446) ------- ------- -------- -------- Net income 2,831 2,307 6,033 4,923 Retained earnings at beginning of period 27,401 22,254 24,803 20,208 Cash dividends (307) (264) (847) (770) Dividends on preferred stock of subsidiary (33) (33) (97) (97) ------- ------- -------- -------- Retained earnings at end of period $29,892 $24,264 $ 29,892 $ 24,264 ======= ======= ======== ======== Earnings per share: Primary $.42 $.36 $.91 $.77 ==== ==== ==== ==== Fully diluted $.41 $.35 $.87 $.74 ==== ==== ==== ==== Weighted average shares and equivalent shares used to calculate: Primary earnings per share 6,638 6,357 6,508 6,308 ===== ===== ===== ===== Fully diluted earnings per share 6,960 6,628 6,930 6,604 ===== ===== ===== ===== </TABLE> See accompanying notes to condensed consolidated financial statements. 3 of 10
<TABLE> <CAPTION> WATSCO, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 1995 and 1994 (In $000s) (Unaudited) 1995 1994 --------- ------- <S> <C> <C> Cash flows from operating activities: Net income $ 6,033 $ 4,923 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 2,057 1,633 Deferred income tax credit (75) (95) Minority interests, net of dividends paid 926 714 Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable (8,730) (7,181) Inventories (6,128) (11,839) Accounts payable and accrued liabilities 2,022 8,347 Other, net (150) 54 -------- -------- Net cash used in operating activities (4,045) (3,349) -------- -------- Cash flows from investing activities: Capital expenditures, net (3,165) (2,224) Marketable securities transactions, net 1,986 (816) Cash used in acquisitions, net of cash acquired (8,175) - -------- -------- Net cash used in investing activities (9,354) (3,040) -------- -------- Cash flows from financing activities: Net borrowings under revolving credit agreements 17,399 8,063 Repayments of long-term obligations (2,145) (421) Cash dividends (847) (770) Exercise of stock options and warrants 535 71 Other, net (97) (97) -------- -------- Net cash provided by financing activities 14,845 6,846 -------- -------- Net increase in cash and cash equivalents 1,446 457 Cash and cash equivalents at beginning of period 1,744 1,093 -------- -------- Cash and cash equivalents at end of period $ 3,190 $ 1,550 ======== ======== Supplemental cash flow information: Interest paid $ 1,022 $ 2,411 ======== ======== Income taxes paid $ 1,639 $ 2,808 ======== ======== </TABLE> See accompanying notes to condensed consolidated financial statements. 4 of 10
WATSCO, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 1. The condensed consolidated balance sheet as of December 31, 1994, which has been derived from 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, 1995 are not necessarily indicative of the results for the year ending December 31, 1995. The sale of the Company's products and services is seasonal with revenues generally increasing during the months of May through August. 3. At September 30, 1995 and December 31, 1994, inventories consisted of (in thousands): <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, 1995 1994 ------------- ------------ <S> <C> <C> Raw materials $ 4,633 $ 4,058 Work in process 1,380 1,152 Finished goods 55,641 44,049 ------- ------- $61,654 $49,259 ======= ======= </TABLE> 4. On October 26, 1995, the Company purchased certain accounts receivable, inventory and other operating assets and assumed certain liabilities of Central Air Conditioning Distributors, Inc., a Winston-Salem, North Carolina-based wholesale distributor of air conditioning, heating and refrigeration products operating five branch locations for $9.0 million. The purchase price is subject to adjustment upon the completion of an audit of the assets purchased and liabilities assumed. In connection with this acquisition, the Company assumed liabilities of $2.1 million. The above acquisition was accounted for under the purchase method of accounting. The excess of the aggregate purchase price over the fair value of the net assets acquired is being amortized on a straight-line basis over 40 years. 5. Certain amounts for 1994 have been reclassified to conform with the 1995 presentation. 5 of 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table presents certain items of the Company's consolidated financial statements for the quarter and nine months ended September 30, 1995 and 1994, respectively, expressed as a percentage of total revenues: <TABLE> <CAPTION> QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------- -------------------- 1995 1994 1995 1994 ------ ------ ------ ------ <S> <C> <C> <C> <C> Total revenues 100.0% 100.0% 100.0% 100.0% Cost of sales and direct service expenses (78.1) (77.4) (77.4) (77.2) ----- ----- ----- ----- Gross profit 21.9 22.6 22.6 22.8 Selling, general and administrative expenses (14.8) (15.3) (16.4) (16.8) ----- ----- ----- ----- Operating income 7.1 7.3 6.2 6.0 Interest expense (1.1) (1.0) (1.2) (1.1) Investment income, net .1 - .1 - Income taxes (2.3) (2.5) (2.0) (1.9) Minority interests (.9) (1.0) (.7) (.7) ----- ----- ----- ----- Net income 2.9% 2.8% 2.4% 2.3% ===== ===== ===== ===== </TABLE> The above table and following narrative include, from their respective dates of acquisition, the results of operations of Airite, Inc., a Louisiana-based wholesale distributor of residential central air conditioners acquired by the Company in February 1995; H.B. Adams, Inc., a wholesale distributor of residential air conditioners located in central Florida whose business and assets the Company purchased in March 1995; and Environmental Equipment & Supplies, Inc., a North Little Rock, Arkansas-based wholesale distributor of air conditioning and heating equipment whose business and assets the Company purchased in June 1995. QUARTER ENDED SEPTEMBER 30, 1995 VS. QUARTER SEPTEMBER 30, 1994 Revenues for the three months ended September 30, 1995 increased $16.0 million, or 19%, compared to the same period in 1994. In the distribution operations, revenues increased $16.5 million, or 24%. Excluding the effect of acquisitions, revenues for the distribution operations increased $8.0 million, or 12%. The increase in same store sales during the quarter was fueled by strong sales of replacement air conditioners, especially in the Company's Florida and Texas distribution markets. Revenues in the Company's manufacturing operations decreased $272,000, or 4%, primarily due to lower orders from original equipment manufacturers (OEMs) due to overstocked customers. Gross profit for the three months ended September 30, 1995 increased $2.9 million, or 16%, as compared to the same period in 1994. Excluding the effect of acquisitions, gross profit increased $1.0 million, or 5%, primarily as a result of the aforementioned revenue increases. Gross profit margin in the third quarter decreased to 21.9% in 1995 from 22.6% in 1994 and, excluding the effect of acquisitions, decreased to 21.8% in 1995 from 22.6% in 1994. These decreases are primarily due to the sale of higher cost inventory by the distribution operations and new product start-up costs in the manufacturing operations. 6 of 10
Selling, general and administrative expenses for the three months ended September 30, 1995 increased $2.0 million, or 15%, compared to the same period in 1994, primarily due to selling and delivery costs related to increased sales. Excluding the effect of acquisitions, selling, general and administrative expenses increased $580,000, or 5%, primarily due to revenue increases. Selling, general and administrative costs as a percent of revenues decreased to 14.8% in 1995 from 15.3% in 1994 and, excluding the effect of acquisitions, decreased to 14.7% in 1995 from 15.3% in 1994. These decreases were the result of a larger revenue base over which to spread fixed costs. Interest expense for the third quarter of 1995 increased $233,000, or 29%, compared to the same period in 1994, due to higher interest rates and additional borrowings used to finance acquisitions and increased inventory levels required by sales growth. Excluding the effect of acquisitions, interest expense increased $72,000, or 9%, primarily due to slightly higher average monthly borrowings. The effective tax rate for the three months ended September 30, 1995 was 38.5% compared to 40.3% for the same period in the 1994. The decrease is primarily a result of a proportionately larger share of taxable income generated in states with higher tax rates during 1994 as compared to 1995. NINE MONTHS ENDED SEPTEMBER 30, 1995 VS. NINE MONTHS ENDED SEPTEMBER 30, 1994 Revenues for the nine months ended September 30, 1995 increased $36.3 million, or 17%, compared to the same period in 1994. In the distribution operations, revenues increased $35.0 million, or 20%. Excluding the effect of acquisitions, revenues for the distribution operations increased $17.7 million, or 10%. This increase in same store sales was mainly due to increased sales of replacement air conditioners in each of the Company's primary distribution markets. Revenues in the Company's manufacturing operations increased $134,000, or 1%, primarily due to new product offerings to aftermarket customers which have more than offset lower sales to overstocked OEM customers. Revenues in the personnel services operations increased $1.1 million, or 5%, reflecting higher demand for temporary help services and greater customer acceptance of new product offerings such as professional staffing and technical temporaries. Gross profit for the nine months ended September 30, 1995 increased $7.9 million, or 16%, as compared to the same period in 1994. Excluding the effect of acquisitions, gross profit increased $3.9 million, or 8%, primarily as a result of the aforementioned revenue increases. Gross profit margin for the nine month period, including and excluding the effect of acquisitions, decreased to 22.6% in 1995 from 22.8% in 1994. These decreases are primarily due to the sale of higher cost inventory by the distribution operations and new product start-up costs in the manufacturing operations. Selling, general and administrative expenses for the nine months ended September 30, 1995 increased $5.0 million, or 14%, compared to the same period in 1994, primarily due to selling and delivery costs related to increased sales. Excluding the effect of acquisitions, selling, general and administrative expenses increased $2.1 million, or 6%, also due to revenue increases. Selling, general and administrative expenses as a percent of revenues, including and excluding the effect of acquisitions, decreased to 16.4% in 1995 from 16.8% in 1994. These decreases were the result of a larger revenue base over which to spread fixed costs. Interest expense for the nine months ended September 30, 1995 increased $786,000, or 35%, compared to the same period in 1994, due to higher interest rates and additional borrowings used to finance acquisitions and increased inventory levels required by sales growth and stocking requirements in new branch locations. Excluding the effect of acquisitions, interest expense increased $444,000, or 19%, primarily due to higher interest rates and higher average monthly borrowings. 7 of 10
The effective tax rate for the nine months ended September 30, 1995 was 38.5% compared to 39.0% for the same period in the 1994. The decrease is primarily a result of a proportionately larger share of taxable income generated in states with higher tax rates during 1994 as compared to 1995. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased to $3.2 million during the third quarter of 1995. Principal sources of cash were profitable operations, increased borrowings under revolving credit agreements, and proceeds from the sale of marketable securities, primarily consisting of tax exempt municipal bonds. The principal uses of cash were to fund acquisitions, finance capital expenditures, reduce long-term obligations and fund working capital needs. Inventory purchases are substantially funded by borrowings under the subsidiaries' revolving credit agreements. The working capital position of the Company increased $4.9 million to $45.0 million at September 30, 1995 from $40.1 million at December 31, 1994 due to higher levels of accounts receivable caused by higher sales volume and improved cash flow which lowers the amount of inventory financed by revolving credit facilities. The Company has adequate availability of capital from operations and revolving credit facilities to fund current operations and anticipated growth, including expansion in the Company's current and targeted market areas, through 1995. At September 30, 1995, the Company's distribution subsidiaries had aggregate borrowing commitments from lenders under existing revolving credit agreements of $62 million, of which $13 million was unused and $9 million available. Additionally, the Company has $3 million available under an unsecured revolving credit facility with a bank. Certain of the subsidiaries' revolving credit agreements contain provisions limiting the payment of dividends to their shareholders. The Company does not anticipate that these limitations on dividends will have a material effect on the Company's ability to meet its cash obligations. The Company continually evaluates additional acquisitions and other investment opportunities and its financing needs may change in the future. Should suitable investment opportunities or working capital needs arise that would require additional financing, the Company believes that its financial position and earnings history provide a solid base for obtaining additional financing resources at competitive rates and terms. 8 of 10
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, 1994, filed on March 28, 1995. 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 10.26. Line of Credit Agreement between Heating & Cooling Supply, Inc. and Bank of America National Trust and Savings Association dated September 28, 1995. 11. Computation of Earnings Per Share for the Quarter and Nine Months Ended September 30, 1995 and 1994. (b) Reports on Form 8-K None 9 of 10
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/ RONALD P. NEWMAN ------------------------------- Ronald P. Newman Vice President and Secretary/Treasurer (Chief Financial Officer) November 10, 1995 10 of 10