================================================================================ 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 MARCH 31, 1996 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, Suite 901 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 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 last practicable date: 7,579,375 shares of the Company's Common Stock ($.50 par value) and 1,418,652 shares of the Company's Class B Common Stock ($.50 par value) were outstanding as of May 10, 1996. ================================================================================ 1 of 10
PART I. FINANCIAL INFORMATION WATSCO, INC. CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 1996 and December 31, 1995 (In thousands of dollars) MARCH 31, DECEMBER 31, 1996 1995 ----------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 37,281 $ 3,751 Marketable securities -- 267 Accounts receivable, net 45,653 43,564 Inventories 70,619 59,724 Other current assets 5,501 5,073 -------- -------- Total current assets 159,054 112,379 Property, plant and equipment, net 11,762 11,286 Intangible assets, net 22,208 16,995 Other assets 4,247 4,224 -------- -------- $197,271 $144,884 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations $ 2,529 $ 2,455 Short-term promissory notes 2,750 4,250 Borrowings under revolving credit agreements 54,089 40,185 Accounts payable 18,821 17,229 Accrued liabilities 5,530 7,091 -------- -------- Total current liabilities 83,719 71,210 Long-term obligations: Bank and other debt 3,711 3,818 Subordinated note 2,500 2,500 -------- -------- 6,211 6,318 Deferred income taxes 978 978 Minority interests -- 10,622 Preferred stock of subsidiary 2,000 2,000 Shareholders' equity: Common Stock, $.50 par value 3,775 2,401 Class B Common Stock, $.50 par value 720 740 Paid-in capital 67,773 19,479 Retained earnings 32,095 31,136 -------- -------- Total shareholders' equity 104,363 53,756 -------- -------- $197,271 $144,884 ======== ======== See accompanying notes to condensed consolidated financial statements. 2 of 10
WATSCO, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS Three Months Ended March 31, 1996 and 1995 (In thousands of dollars, except per share amounts) (Unaudited) 1996 1995 -------- -------- Revenues: Net sales $70,675 $53,194 Royalty and service fees 7,114 7,127 ------- ------- Total revenues 77,789 60,321 ------- ------- Costs and expenses: Cost of sales 54,671 40,103 Direct service expenses 5,483 5,483 Selling, general and administrative 14,366 12,097 ------- ------- Total costs and expenses 74,520 57,683 ------- ------- Operating income 3,269 2,638 Other income (expense): Investment income, net 69 63 Interest expense (1,045) (911) ------- ------- (976) (848) ------- ------- Income before income taxes and minority interests 2,293 1,790 Income taxes (871) (692) Minority interests (116) (197) ------- ------- Net income 1,306 901 Retained earnings at beginning of period 31,136 25,829 Common stock cash dividends (315) (267) Dividends on preferred stock of subsidiary (32) (32) ------- ------- Retained earnings at end of period $32,095 $26,431 ======= ======= Earnings per share: Primary $ .17 $ .14 ======= ======= Fully diluted $ .17 $ .13 ======= ======= Weighted average shares and equivalent shares used to calculate: Primary earnings per share 7,401 6,412 ======= ======= Fully diluted earnings per share 7,702 6,720 ======= ======= See accompanying notes to condensed consolidated financial statements. 3 of 10
WATSCO, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 1996 and 1995 (In thousands of dollars) (Unaudited) 1996 1995 -------- -------- Cash flows from operating activities: Net income $ 1,306 $ 901 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 799 623 Minority interests, net of dividends paid 116 197 Change in operating assets and liabilities, net of effects from acquisitions in 1995 Accounts receivable (2,089) (23) Inventories (10,895) (10,734) Accounts payable and accrued liabilities (359) 2,492 Other, net (435) 4 -------- -------- Net cash used in operating activities (11,557) (6,540) -------- -------- Cash flows from investing activities: Cash used in acquisitions, net of cash acquired -- (7,914) Capital expenditures, net (1,142) (1,009) Net proceeds from marketable securities transactions 267 2,260 -------- -------- Net cash used in investing activities (875) (6,663) -------- -------- Cash flows from financing activities: Net borrowings under revolving credit agreements 13,904 14,216 Repayments of long-term obligations (1,533) (638) Net proceeds from issuance of Common Stock 32,609 -- Exercise of stock options 1,329 9 Cash dividends (315) (267) Other, net (32) (32) -------- -------- Net cash provided by financing activities 45,962 13,288 -------- -------- Net increase in cash and cash equivalents 33,530 85 Cash and cash equivalents at beginning of period 3,751 1,744 -------- -------- Cash and cash equivalents at end of period $ 37,281 $ 1,829 ======== ======== Supplemental cash flow information: Interest paid $ 980 $ 791 ======== ======== Income taxes paid $ 58 $ 120 ======== ======== See accompanying notes to condensed consolidated financial statements 4 of 10
WATSCO, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 1996 1. The condensed consolidated balance sheet as of December 31, 1995, 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 to a fair presentation have been included in the condensed consolidated financial statements for the periods presented herein. 2. The results of operations for the quarter ended March 31, 1996 are not necessarily indicative of the results for the year ending December 31, 1996. The sale of the Company's products and services is seasonal with revenues generally increasing during the months of May through August. 3. At March 31, 1996 and December 31, 1995, inventories consist of (in thousands): MARCH 31, DECEMBER 31, 1996 1995 --------- ------------ Raw materials $ 4,294 $ 3,637 Work in process 1,418 1,359 Finished goods 64,907 54,728 ------- ------- $70,619 $59,724 ======= ======= 4. On March 6, 1996, the Company completed a public offering in which it sold 1,570,000 shares of Common Stock resulting in net proceeds of approximately $32.6 million. In April 1996, the Company used approximately $14.0 million of the proceeds to fund the acquisition of Three States Supply Co., Inc. ("Three States Supply") discussed below. In April 1996, the Company also used $2.5 million of the net proceeds to repay a 12% subordinated note payable to Rheem Manufacturing Company ("Rheem"). The Company intends to use the remaining net proceeds for other potential acquisitions, to reduce debt and for general corporate purposes. 5. Effective March 19, 1996, the Company and Rheem completed a transaction pursuant to a Stock Exchange Agreement and Plan of Reorganization (the "Exchange Agreement") whereby the Company acquired Rheem's minority ownership interests in Gemaire Distributors, Inc. ("Gemaire"), Comfort Supply, Inc. ("Comfort Supply") and Heating & Cooling Supply, Inc. ("Heating & Cooling") in exchange for 964,361 unregistered shares of the Company's Common Stock having an estimated fair value of $16.1 million. The acquisition of Rheem's minority ownership interests was accounted for under the purchase method of accounting and, accordingly, the effects of the transaction are included in the Company's results of operations as of the transaction date. Goodwill related to the transaction, totaling approximately $5.4 million, represents the excess of the fair value of the Common Stock exchanged over the minority interests acquired and is being amortized on a straight-line basis over 40 years. Following this transaction, Gemaire, Comfort Supply and Heating & Cooling became wholly-owned subsidiaries of the Company. Previous agreements between the Company and Rheem provided Rheem with the right to "call" from the Company and the Company with the right to "put" to Rheem the Company's ownership interests in Gemaire, Comfort Supply and Heating & Cooling. Under the terms of the Exchange Agreement, the put/call provisions included in the previous agreements are effectively eliminated because the rights to "put" or "call" become exercisable primarily upon the occurrence of certain events of insolvency. 5 of 10
6. On April 12, 1996, the Company purchased certain accounts receivable, inventory and other operating assets and assumed certain liabilities of Three States Supply, a Memphis, Tennessee-based distributor of supplies used primarily in air conditioning and heating systems. The cash consideration paid by the Company totaled approximately $14.0 million, which approximated net book value, and is subject to adjustment upon the completion of an audit of the assets purchased and liabilities assumed. The acquisition was accounted for under the purchase method of accounting. 7. Certain amounts for 1995 have been reclassified to conform with the 1996 presentation. 6 of 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS QUARTER ENDED MARCH 31, 1996 VS. QUARTER ENDED MARCH 31, 1995 RESULTS OF OPERATIONS The following table presents certain items of the Company's consolidated financial statements for the three months ended March 31, 1996 and 1995, expressed as a percentage of total revenues: 1996 1995 ---- ---- Total revenues 100.0% 100.0% Cost of sales and direct service expenses (77.3) (75.6) ------- ------- Gross profit 22.7 24.4 Selling, general and administrative expenses (18.5) (20.1) ------- ------- Operating income 4.2 4.3 Investment income, net - .1 Interest expense (1.3) (1.5) Income taxes (1.1) (1.1) Minority interests (.1) (.3) ------- ------- Net income 1.7% 1.5% ======= ======= The above table and following narrative includes the results of operations of the following wholesale distributors of air conditioners and related parts and supplies: Airite, Inc., a Louisiana-based distributor acquired in February 1995; H.B. Adams, Inc., a central Florida distributor purchased in March 1995; Environmental Equipment & Supplies, Inc. a North Little Rock, Arkansas-based distributor purchased in June 1995; and Central Air Conditioning Distributors, Inc., a Winston-Salem, North Carolina-based distributor purchased in October 1995 (collectively, the "acquisitions"). These acquisitions were accounted for under the purchase method of accounting and, accordingly, the results of their operations have been included in the consolidated results of the Company beginning on their respective dates of acquisition. Revenues for the three months ended March 31, 1996 increased $17.5 million, or 29%, compared to the same period in 1995. In the climate control segment, revenues increased $17.5 million, or 33%. Excluding the effect of acquisitions, revenues for the climate control segment increased $7.8 million, or 15%. Such increase was driven by strong replacement sales, increased homebuilding activity and favorable weather patterns. Gross profit for the three months ended March 31, 1996 increased $2.9 million, or 20%, as compared to the same period in 1995. Excluding the effect of acquisitions, gross profit increased $459,000, or 3%, primarily as a result of the aforementioned revenue increases. Gross profit margin in the first quarter decreased to 22.7% in 1996 from 24.4% in 1995. Excluding the effect of acquisitions, gross profit margin decreased to 22.3% in 1996 from 24.4% in 1995. These decreases were primarily due to certain vendor price increases which the Company did not begin passing on to customers until late in the quarter. Selling, general and administrative expenses for the three months ended March 31, 1996 increased $2.3 million, or 19%, compared to the same period in 1995, primarily due to selling and delivery costs related to increased sales. Excluding the effect of acquisitions, selling, general and administrative expenses increased $405,000, or 3%, primarily due to revenue increases. Selling, general and administrative costs as a percent of revenues decreased from 20.1% in 1995 to 18.5% in 1996 and excluding the effect of acquisitions decreased from 20.1% in 1995 to 18.4% in 1996. These decreases were the result of a larger revenue base over which to spread fixed costs. 7 of 10
Interest expense for the first quarter in 1996 increased $134,000, or 15%, compared to the same period in 1995, due to higher borrowings used to finance acquisitions and increased inventory levels required by sales growth. The effective tax rate for the three months ended March 31, 1996 was 38.0% compared to 38.6% for the same period in 1995. The decrease is primarily a result of a proportionately larger share of taxable income expected to be generated in states with lower tax rates during 1996 as compared to 1995. ACQUISITION OF MINORITY INTERESTS In March 1996, pursuant to a Stock Exchange Agreement and Plan of Reorganization (the "Exchange Agreement") with Rheem Manufacturing Company ("Rheem"), the Company acquired Rheem's minority ownership interests in three of the Company's distribution subsidiaries in exchange for 964,361 shares of unregistered Common Stock of the Company having an estimated fair value of $16.1 million. Following this transaction, all of the Company's distribution companies are wholly-owned subsidiaries of the Company. LIQUIDITY AND CAPITAL RESOURCES 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 1996. At March 31, 1996, the Company had aggregate borrowing commitments from lenders under existing revolving credit agreements of $75 million, of which $18 million was unused and $11 million available. In February 1996, the Company received and is considering a proposal from one of its lenders to syndicate a master $125 million unsecured revolving credit facility. This facility, if completed, would replace all of the Company's existing revolving credit facilities and provide the Company with up to $50 million of additional availability to fund future growth. 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. Working capital increased to $75.3 million at March 31, 1996 from $41.2 million at December 31, 1995. This increase is primarily due to the receipt of net proceeds of $32.6 million from the sale of 1,570,000 shares of the Company's Common Stock in March 1996. In April 1996, the Company used approximately $14.0 million of the net proceeds to fund the acquisition of Three States Supply Co., Inc., a Memphis, Tennessee-based distributor of supplies used primarily in air conditioning and heating systems, and $2.5 million to repay a 12% subordinated note payable to Rheem. The Company anticipates using the remainder of the net proceeds to fund other potential acquisitions, to reduce debt and for general corporate purposes. Cash and cash equivalents increased $33.5 million during the first quarter of 1996. Principal sources of cash were net proceeds from the issuance of Common Stock, increased borrowings under revolving credit agreements and profitable operations. The principal uses of cash were to purchase inventories, repay long-term obligations and finance capital expenditures. Inventory purchases are substantially funded by borrowings under revolving credit agreements. The Company continually evaluates potential acquisitions and has held discussions with a number of acquisition candidates; however, the Company has no agreement with respect to any acquisition candidates. Should suitable acquisition 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. NEW ACCOUNTING STANDARDS On January 1, 1996, the Company adopted the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for Long-Lived Assets and Long-Lived Assets to be Disposed of" ("SFAS No. 121"). The adoption of SFAS No. 121 did not have a material effect on the Company's results of operations. 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, 1995, filed on March 29, 1996. 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 10.20 Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad. 11. Computation of Earnings Per Share for the Quarters Ended March 31, 1996 and 1995. 27. Financial Data Schedule (for SEC use only) (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 (Chief Financial Officer) May 14, 1996 10 of 10