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, 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 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: 11,618,836 shares of the Company's Common Stock ($.50 par value) and 2,293,020 shares of the Company's Class B Common Stock ($.50 par value) were outstanding as of November 8, 1996. Page 1 of 10
PART I. FINANCIAL INFORMATION WATSCO, INC. CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 1996 and December 31, 1995 (In thousands of dollars) SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 4,609 $ 3,751 Accounts receivable, net 63,217 43,564 Inventories 90,407 59,724 Other current assets 5,532 5,340 -------- -------- Total current assets 163,765 112,379 Property, plant and equipment, net 15,201 11,286 Intangible assets, net 22,813 16,995 Other assets 4,111 4,224 -------- -------- $205,890 $144,884 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations $ 535 $ 2,455 Short-term promissory notes -- 4,250 Accounts payable 25,637 17,229 Accrued liabilities 9,842 7,091 -------- -------- Total current liabilities 36,014 31,025 Long-term obligations: Borrowings under revolving credit agreements 49,000 40,185 Bank and other debt 1,888 3,143 Subordinated note -- 2,500 -------- -------- 50,888 45,828 Deferred income taxes 628 978 Deferred credits 688 675 Minority interests -- 10,622 Preferred stock of subsidiary 2,000 2,000 Shareholders' equity: Common Stock, $.50 par value 5,773 3,601 Class B Common Stock, $.50 par value 1,176 1,111 Paid-in capital 69,930 19,479 Retained earnings 38,793 29,565 -------- -------- Total shareholders' equity 115,672 53,756 -------- -------- $205,890 $144,884 ======== ======== See accompanying notes to condensed consolidated financial statements. 2 of 10
<TABLE> <CAPTION> WATSCO, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS Quarters and Nine Months Ended September 30, 1996 and 1995 (In thousands of dollars, except per share amounts) (Unaudited) QUARTERS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 1996 1995 1996 1995 ---- ---- ---- ---- <S> <C> <C> <C> <C> Revenues: Net sales $ 115,681 $90,472 $297,025 $226,689 Royalty and service fees 9,657 8,335 24,599 23,501 --------- --------- --------- --------- Total revenues 125,338 98,807 321,624 250,190 --------- --------- --------- --------- Costs and expenses: Cost of sales 89,551 70,727 230,471 175,603 Direct service expenses 7,459 6,412 18,971 18,040 Selling, general and administrative 19,642 14,648 52,482 41,020 --------- --------- --------- --------- Total costs and expenses 116,652 91,787 301,924 234,663 --------- --------- --------- --------- Operating income 8,686 7,020 19,700 15,527 Other income, net 195 86 547 181 Interest expense (832) (1,046) (2,966) (3,064) --------- --------- --------- --------- Income before income taxes and minority interests 8,049 6,060 17,281 12,644 Income taxes (3,047) (2,333) (6,601) (4,867) Minority interests -- (896) (116) (1,744) --------- --------- --------- --------- Net income 5,002 2,831 10,564 6,033 Retained earnings at beginning of period 34,298 25,830 29,565 23,232 Cash dividends (474) (307) (1,239) (847) Dividends on preferred stock of subsidiary (33) (33) (97) (97) --------- --------- --------- --------- Retained earnings at end of period $ 38,793 $ 28,321 $ 38,793 $ 28,321 ========= ========= ========= ========= Earnings per share: Primary $ .34 $ .28 $ .78 $ .61 ========= ========= ========= ========= Fully diluted $ .34 $ .27 $ .77 $ .58 ========= ========= ========= ========= Weighted average shares and equivalent shares used to calculate: Primary earnings per share 14,538 9,958 13,363 9,762 ========= ========= ========= ========= Fully diluted earnings per share 14,840 10,441 13,759 10,395 ========= ========= ========= ========= </TABLE> See accompanying notes to condensed consolidated financial statements. 3 of 10
WATSCO, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 1996 and 1995 (In thousands of dollars) (Unaudited) 1996 1995 ---- ---- Cash flows from operating activities: Net income $ 10,564 $ 6,033 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 3,018 2,057 Provision for losses on accounts receivable 916 575 Deferred income tax credit -- (75) Minority interests, net of dividends paid 116 926 Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable (14,401) (9,305) Inventories (22,693) (6,128) Accounts payable and accrued liabilities 8,930 2,022 Other, net (393) (150) -------- -------- Net cash used in operating activities (13,943) (4,045) -------- -------- Cash flows from investing activities: Capital expenditures, net (3,639) (3,165) Net proceeds from sales of marketable securities 265 1,986 Business acquisitions, net of cash acquired (15,119) (8,175) -------- -------- Net cash used in investing activities (18,493) (9,354) -------- -------- Cash flows from financing activities: Net borrowings under revolving credit agreements 8,815 17,399 Repayments of short-term promissory notes (4,250) -- Repayments of long-term obligations (4,264) (2,145) Net proceeds from issuance of common stock 34,329 535 Cash dividends (1,239) (847) Other, net (97) (97) -------- -------- Net cash provided by financing activities 33,294 14,845 -------- -------- Net increase in cash and cash equivalents 858 1,446 Cash and cash equivalents at beginning of period 3,751 1,744 -------- -------- Cash and cash equivalents at end of period $ 4,609 $ 3,190 ======== ======== Supplemental cash flow information: Interest paid $ 3,463 $ 1,022 ======== ======== Income taxes paid $ 4,587 $ 1,639 ======== ======== See accompanying notes to condensed consolidated financial statements. 4 of 10
WATSCO, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 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 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, 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 September 30, 1996 and December 31, 1995, inventories consisted of (in thousands): SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ Raw materials $ 4,584 $ 3,637 Work in process 1,500 1,359 Finished goods 84,323 54,728 -------- -------- $ 90,407 $ 59,724 ======== ======== 4. On September 12, 1996, the Company's 10% Convertible Subordinated Debentures (the "Class B Debentures") matured and substantially all outstanding Class B Debentures, totaling approximately $1.5 million, were converted into 333,970 shares of common stock. 5. On September 25, 1996, the Company executed a bank-syndicated revolving credit agreement which provides for borrowings of up to $130 million, expiring on September 30, 2001. The unsecured agreement replaced the Company's previous revolving credit agreements and will be used to fund acquisitions and seasonal working capital needs and for other general corporate purposes. Borrowings under the revolving credit agreement bear interest at primarily LIBOR-based rates plus a spread that is dependent upon the Company's financial performance (30-day LIBOR plus .375% at September 30, 1996). The revolving credit agreement contains financial convenants with respect to the Company's consolidated net worth, interest and debt coverage ratios, and limits capital expenditures and dividends in addition to other restrictions. 6. On October 17, 1996, Comfort Supply, Inc., the Company's Houston-based distribution subsidiary, completed the acquisition of Serviceman Supplies, Inc., a $10 million wholesale distributor of residential central air conditioners and related parts and supplies headquartered in Arlington, Texas. 7. Certain amounts for 1995 have been reclassified to conform with the 1996 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 condensed consolidated financial statements for the quarters and nine months ended September 30, 1996 and 1995 expressed as a percentage of revenues: QUARTERS NINE MONTHS ENDED SEPTEMBER 30, ENDED JUNE 30, ------------------- -------------- 1996 1995 1996 1995 ---- ---- ---- ---- Revenues 100.0% 100.0% 100.0% 100.0% Cost of sales and direct service expenses (77.4) (78.1) (77.6) (77.4) ----- ----- ----- ----- Gross profit 22.6 21.9 22.4 22.6 Selling, general and administrative expenses (15.7) (14.8) (16.3) (16.4) ----- ----- ----- ----- Operating income 6.9 7.1 6.1 6.2 Other income, net .2 .1 .2 .1 Interest expense (.7) (1.1) (.9) (1.2) Income taxes (2.4) (2.3) (2.1) (2.0) Minority interests -- (.9) -- (.7) ----- ----- ----- ----- Net income 4.0% 2.9% 3.3% 2.4% ===== ===== ===== ===== The above table and following narrative includes the results of operations of companies acquired during 1996 and 1995 as follows: 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; Central Air Conditioning Distributors, Inc., a Winston-Salem, North Carolina-based distributor purchased in October 1995; and Three States Supply Company, Inc., a Memphis, Tennessee-based distributor purchased in April 1996 (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. QUARTER ENDED SEPTEMBER 30, 1996 VS. QUARTER ENDED SEPTEMBER 30, 1995 Revenues for the three months ended September 30, 1996 increased $26.5 million, or 27%, compared to the same period in 1995. In the climate control segment, revenues increased $25.2 million, or 28%. Excluding the effect of acquisitions, revenues for the climate control segment increased $4.7 million, or 5%. Such increase was primarily due to strong replacement sales activity in Florida and Texas, which together achieved a 9% increase in sales. However, this increase was offset by lower sales in California, which experienced cooler weather and had fewer selling days than in the comparable period last year. Gross profit for the three months ended September 30, 1996 increased $6.7 million, or 31%, compared to the same period in 1995. Excluding the effect of acquisitions, gross profit increased $1.3 million, or 6%, primarily as a result of the aforementioned revenue increases. Gross profit margin increased to 22.6% in 1996 from 21.9% in 1995 due to higher margins achieved by newly acquired companies, which exceeded historical margins, and gross margin improvements in the manufacturing operations caused by higher sales. Excluding the effect of acquisitions, gross profit margin for the third quarter of 1996 was unchanged from 1995 at 21.9%. 6 of 10
Selling, general and administrative expenses for the three months ended September 30, 1996 increased $5.0 million, or 34%, 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 $1.5 million, or 10%, primarily due to sales volume increases and higher compensation costs. Selling, general and administrative costs as a percent of revenues increased to 15.7% in 1996 from 14.8% in 1995, primarily due to acquisitions, whose percentages exceeded the Company's historical percentages. Excluding the effect of acquisitions, selling, general and administrative costs as a percent of revenues increased to 15.4% in 1996 from 14.8% in 1995, primarily due to costs to develop the international business of the manufacturing operations and increased compensation costs. Interest expense for the third quarter of 1996 decreased $214,000, or 20%, compared to the same period in 1995 and, excluding the effect of acquisitions, interest expense decreased $337,000, or 32%. These decreases were primarily due to lower average interest rates on borrowings. In March 1996, the Company acquired the minority interests in its distribution subsidiaries. Therefore, there was no minority interest expense in the third quarter of 1996. The effective tax rate for the three months ended September 30, 1996 was 37.9% compared to 38.5% for the same period in 1995. The decrease is primarily a result of tax planning strategies which were implemented during 1996. NINE MONTHS ENDED SEPTEMBER 30, 1996 VS. NINE MONTHS ENDED SEPTEMBER 30, 1995 Revenues for the nine months ended September 30, 1996 increased $71.4 million, or 29%, compared to the same period in 1995. In the climate control segment, revenues increased $70.4 million, or 31%. Excluding the effect of acquisitions, revenues for the climate control segment increased $20.6 million, or 9%. Such increase was primarily due to strong replacement sales and increased homebuilding activity. Gross profit for the nine months ended September 30, 1996 increased $15.6 million, or 28%, compared to the same period in 1995. Excluding the effect of acquisitions, gross profit increased $2.9 million, or 5%, primarily as a result of the aforementioned revenue increases. Gross profit margin for the nine month period decreased to 22.4% in 1996 from 22.6% in 1995 and, excluding the effect of acquisitions, decreased to 21.9% in 1996 from 22.6% in 1995. These margin decreases were primarily due to certain vendor price increases in late 1995 which the Company did not begin passing on to customers until late in the first quarter of 1996, and additional price increases in mid-1996 which were not fully passed on to customers in the second and third quarters. Selling, general and administrative expenses for the nine months ended September 30, 1996 increased $11.5 million, or 28%, 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 $2.9 million, or 7%, primarily due to sales volume increases. Selling, general and administrative expenses as a percent of revenues decreased to 16.3% in 1996 from 16.4% in 1995 and, excluding the effect of acquisitions, decreased to 16.2% in 1996 from 16.4% in 1995. These decreases were primarily the result of a larger revenue base over which to spread fixed costs. Interest expense for the nine months ended September 30, 1996 decreased $98,000, or 3%, compared to the same period in 1995 and, excluding the effect of acquisitions, decreased $616,000, or 20%. These decreases were primarily due to lower average interest rates on borrowings. Minority interest expense for the nine months ended September 30, 1996 decreased $1.6 million compared to the same period in 1995. This decrease was due to the Company's acquisition of the minority interests in its distribution subsidiaries in March 1996. Following the acquisition, all of the Company's subsidiaries became wholly owned. 7 of 10
The effective tax rate for the nine months ended September 30, 1996 was 38.2% compared to 38.5% for the same period in 1995. The decrease is primarily a result of tax planning strategies which were implemented during 1996. LIQUIDITY AND CAPITAL RESOURCES On September 25, 1996, the Company executed a bank-syndicated revolving credit agreement which provides for borrowings of up to $130 million, expiring on September 30, 2001. The unsecured agreement replaced the Company's previous revolving credit facilities and will be used to fund acquisitions and seasonal working capital needs and for other general corporate purposes. Borrowings under the revolving credit agreement, which totaled $49 million at September 30, 1996, bear interest at primarily LIBOR-based rates plus a spread that is dependent upon the Company's financial performance (30-day LIBOR plus .375% at September 30, 1996). The revolving credit agreement contains financial convenants with respect to the Company's consolidated net worth, interest and debt coverage ratios, and limits capital expenditures and dividends in addition to other restrictions. The Company has adequate availability of capital from operations and its revolving credit agreement to fund present operations and anticipated growth, including expansion in the Company's current and targeted market areas. The Company continually evaluates potential acquisitions and has held discussions with a number of acquisition candidates; however, the Company currently has no binding 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. Working capital increased to $127.8 million at September 30, 1996 from $81.4 million at December 31, 1995. In March 1996, the Company completed a public offering of 2,355,000 shares of Common Stock that yielded net proceeds of $32.6 million. 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. In September 1996, the Company used approximately $15.7 million of the remaining proceeds from the offering to reduce borrowings under the Company's previous revolving credit agreements. Cash and cash equivalents increased $858,000 for the nine month period ended September 30, 1996. Principal sources of cash were net proceeds from the issuance of common stock, borrowings under the revolving credit agreements and profitable operations. The principal uses of cash were to fund working capital needs, acquire Three States Supply, repay long-term obligations and fund capital expenditures. Inventory purchases are substantially funded by borrowings under revolving credit agreements. The increase in inventory in 1996 was higher than 1995 primarily due to higher levels of inventory carried by the distribution operations necessary to meet increased demand caused by growth. On October 17, 1996, Comfort Supply, Inc., the Company's Houston-based distribution subsidiary, completed the acquisition of Serviceman Supplies, Inc., a $10 million wholesale distributor of residential central air conditioners and related parts and supplies headquartered in Arlington, Texas. 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 10.21 Revolving Credit and Reimbursement Agreement dated September 25, 1996 by and among Watsco, Inc., NationsBank, National Association (South) and the Lenders Party Hereto from Time to Time. 11. Computation of Earnings Per Share for the Quarters and Nine Months Ended September 30, 1996 and 1995. 27. Financial Data Schedule (for SEC use only). (b) Reports on Form 8-K filed during the quarter 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) November 13, 1996 10 of 10