================================================================================ 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 JUNE 30, 1997 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: 15,096,212 shares of the Company's Common Stock ($.50 par value) and 2,172,647 shares of the Company's Class B Common Stock ($.50 par value) were outstanding as of August 5, 1997.
<TABLE> <CAPTION> PART I. FINANCIAL INFORMATION WATSCO, INC. CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 1997 AND DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA) JUNE 30, DECEMBER 31, 1997 1996 --------- ----------- ASSETS (Unaudited) <S> <C> <C> Current assets: Cash and cash equivalents $ 6,123 $ 5,020 Marketable securities 1,138 334 Accounts receivable, net 110,119 59,523 Inventories 150,115 87,637 Other current assets 8,144 6,502 ----------- ----------- Total current assets 275,639 159,016 Property, plant and equipment, net 25,245 16,174 Intangible assets, net 39,279 23,596 Other assets 9,050 4,795 ----------- ----------- $349,213 $203,581 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations $ 994 $ 794 Accounts payable 44,186 17,343 Accrued liabilities 16,129 10,884 ----------- ----------- Total current liabilities 61,309 29,021 ----------- ----------- Long-term obligations: Borrowings under revolving credit agreement 57,900 48,000 Bank and other debt 10,438 3,027 ----------- ----------- 68,338 51,027 ----------- ----------- Deferred income taxes and credits 1,671 1,604 Preferred stock of subsidiaries 4,413 2,000 Shareholders' equity: Common Stock, $.50 par value 7,548 5,927 Class B Common Stock, $.50 par value 1,086 1,089 Paid-in capital 156,578 72,129 Retained earnings 48,270 40,784 ----------- ----------- Total shareholders' equity 213,482 119,929 ----------- ----------- $349,213 $203,581 =========== =========== </TABLE> See accompanying notes to condensed consolidated financial statements. 2 of 12
<TABLE> <CAPTION> WATSCO, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS QUARTER AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ -------------------- 1997 1996 1997 1996 ---- ---- ------ ---- <S> <C> <C> <C> <C> Revenues: Net sales $171,153 $110,669 $272,898 $181,344 Royalty and service fees 11,220 7,828 20,787 14,942 --------- ---------- --------- --------- Total revenues 182,373 118,497 293,685 196,286 --------- ---------- --------- --------- Costs and expenses: Cost of sales 133,274 86,249 211,125 140,920 Direct service expenses 8,784 6,029 16,219 11,512 Selling, general and administrative 29,338 18,474 51,088 32,840 --------- ---------- --------- --------- Total costs and expenses 171,396 110,752 278,432 185,272 --------- ---------- --------- --------- Operating income 10,977 7,745 15,253 11,014 Other income, net 251 283 464 352 Interest expense (789) (1,089) (1,567) (2,134) --------- ---------- --------- --------- Income before income taxes and minority interests 10,439 6,939 14,150 9,232 Income taxes (4,076) (2,683) (5,505) (3,554) Minority interests - - - (116) --------- ---------- --------- --------- Net income 6,363 4,256 8,645 5,562 Retained earnings at beginning of period 42,543 30,524 40,784 29,565 Common stock cash dividends (604) (450) (1,095) (765) Dividends on preferred stock of subsidiary (32) (32) (64) (64) --------- ---------- --------- --------- Retained earnings at end of period $ 48,270 $ 34,298 $ 48,270 $ 34,298 ========= ========== ========= ========= Earnings per share: Primary $.35 $.29 $.50 $.43 ==== ==== ==== ==== Fully diluted $.35 $.29 $.50 $.42 ==== ==== ==== ==== Weighted average shares and equivalent shares used to calculate: Primary earnings per share 18,240 14,420 17,322 12,769 ====== ====== ====== ====== Fully diluted earnings per share 18,240 14,791 17,322 13,221 ====== ====== ====== ====== </TABLE> See accompanying notes to condensed consolidated financial statements. 3 of 12
<TABLE> <CAPTION> WATSCO, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (IN THOUSANDS) (UNAUDITED) 1997 1996 ---- ---- <S> <C> <C> Cash flows from operating activities: Net income $ 8,645 $ 5,562 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 2,724 1,870 Provision for doubtful accounts 798 509 Minority interests, net of dividends paid - 116 Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable (29,636) (14,692) Inventories (24,318) (19,612) Accounts payable and accrued liabilities 16,513 15,991 Other, net (5,423) 273 -------- -------- Net cash used in operating activities (30,697) (9,983) -------- -------- Cash flows from investing activities: Business acquisitions, net of cash acquired (57,061) (14,694) Capital expenditures, net (4,810) (2,291) Net sales (purchases) of marketable securities (693) 267 -------- -------- Net cash used in investing activities (62,564) (16,718) -------- -------- Cash flows from financing activities: Net borrowings under revolving credit agreements 9,900 15,776 Net borrowings under (repayments of) long-term obligations 17 (4,015) Net proceeds from issuances of common stock 85,749 34,207 Common stock cash dividends (1,095) (765) Other (207) (64) -------- -------- Net cash provided by financing activities 94,364 45,139 -------- -------- Net increase in cash and cash equivalents 1,103 18,438 Cash and cash equivalents at beginning of period 5,020 3,751 -------- -------- Cash and cash equivalents at end of period $ 6,123 $ 22,189 ======== ======== </TABLE> See accompanying notes to condensed consolidated financial statements. 4 of 12
WATSCO, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 1. The condensed consolidated balance sheet as of December 31, 1996, 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 six month period ended June 30, 1997 are not necessarily indicative of the results for the year ending December 31, 1997. The sale of the Company's products and services is seasonal with revenues generally increasing during the months of May through August. 3. At June 30, 1997 and December 31, 1996, inventories consist of (in thousands): JUNE 30, DECEMBER 31, 1997 1996 -------- ----------- Raw materials $ 4,138 $ 4,208 Work in process 2,714 1,502 Finished goods 143,263 81,927 -------- ------- $150,115 $87,637 ======== ======= 4. Effective May 31, 1997, the Company completed the acquisition of the common stock of Weathertrol Supply Company, a $30 million wholesale distributor of residential air conditioning and heating products, with fifteen branch locations serving markets in Texas, Louisiana, Arkansas and Oklahoma. Cash consideration paid and debt assumed by the Company totaled approximately $11.0 million and is subject to adjustment upon the completion of an audit of the assets purchased and the liabilities assumed. This acquisition was accounted for under the purchase method of accounting and, accordingly, the results of its operations have been included in the condensed consolidated statement of income beginning on the date of acquisition. The excess of the aggregate purchase price over the net assets acquired of approximately $3.0 million is being amortized on a straight-line basis over 40 years. In connection with this acquisition, the Company assumed other liabilities of approximately $4.4 million. 5. In July 1997, the Company completed the acquisition of the common stock of Air Systems Distributors, Inc., a $9 million wholesale distributor of residential and commercial air conditioning equipment and related products in Florida. 6. The Company has two pending acquisitions for which it has executed letters of intent. The Companies to be acquired are wholesale distributors of air conditioning, heating and refrigeration equipment and related parts and supplies and had aggregate annual revenues of approximately $170 million for their most recently completed fiscal years. Completion of these transactions are subject to the execution of definitive agreements and other conditions. 5 of 12
7. On August 8, 1997, the Company executed an amended and restated bank-syndicated credit agreement which provides for borrowings of up to $260 million, expiring on August 8, 2002. The unsecured agreement will be used to fund seasonal working capital needs and for other general corporate purposes, including acquisitions. 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 June 30, 1997). The revolving credit agreement contains financial covenants 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. 8. The Company has evaluated the pro forma effects of the recent accounting pronouncement, SFAS No. 128, "Earnings Per Share", which will be effective for fiscal years ending after December 15, 1997. Based on this evaluation, the pro forma effects are not material to the Company's consolidated financial position, liquidity or results of operations. 6 of 12
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 quarter and six months ended June 30, 1997 and 1996 expressed as a percentage of total revenues: <TABLE> <CAPTION> QUARTER SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 1997 1996 1997 1996 ---- ---- ---- ---- <S> <C> <C> <C> <C> Total revenues 100.0% 100.0% 100.0% 100.0% Cost of sales and direct service expenses (77.9) (77.9) (77.4) (77.7) ------ ------ ------ ------- Gross profit 22.1 22.1 22.6 22.3 Selling, general and administrative expenses (16.1) (15.6) (17.4) (16.7) ------ ------ ------ ------- Operating income 6.0 6.5 5.2 5.6 Other income, net 0.1 0.3 0.2 0.2 Interest expense (0.4) (0.9) (0.5) (1.1) Income taxes (2.2) (2.3) (1.9) (1.8) Minority interests - - - (.1) ------ ------ ------ ------- Net income 3.5% 3.6% 3.0 % 2.8% ====== ====== ====== ======= </TABLE> The above table and following narrative includes the results of operations of companies acquired during 1997 and 1996 as follows: Three States Supply Company, Inc., acquired in April 1996; Serviceman Supplies, Inc., acquired in October 1996; Coastal Supply Company, Inc., acquired in December 1996; Coastline Distribution, Inc. and four branch operations, acquired in January 1997; Comfort Products Distributing, Inc. and Central Plains Distributing, Inc., acquired in March 1997; and Weathertrol Supply Company, acquired in June 1997 (collectively, the "acquisitions"). These acquisitions were accounted for under the purchase method of accounting and, accordingly, their results of operations have been included in the consolidated results of the Company beginning on their respective dates of acquisition. QUARTER ENDED JUNE 30, 1997 VS. QUARTER ENDED JUNE 30, 1996 Revenues for the three months ended June 30, 1997 increased $63.9 million, or 53.9%, compared to the same period in 1996. In the distribution operations, revenues increased $60.8 million, or 58.6%. Excluding the effect of acquisitions, revenues for the distribution operations increased $4.0 million, or 3.9%. Such increase was primarily due to sales generated from expanded product lines of parts and supplies. Gross profit for the three months ended June 30, 1997 increased $14.1 million, or 53.8%, compared to the same period in 1996. Excluding the effect of acquisitions, gross profit increased $1.6 million, or 6.2%, primarily as a result of the aforementioned revenue increases. Gross profit margin in the second quarter of 1997 was unchanged at 22.1% as compared to the same period in 1996. Excluding the effect of acquisitions, gross profit margin increased to 22.3% in 1997 from 22.1% in 1996. This increase was primarily due to the effect of new vendor procurement programs benefiting the Company with lower purchase costs for certain parts and supplies in 1997. 7 of 12
Selling, general and administrative expenses for the three months ended June 30, 1997 increased $10.9 million, or 58.8%, compared to the same period in 1996. Excluding the effect of acquisitions, selling, general and administrative expenses increased $1.9 million, or 10.2%, primarily due to increased revenues and higher costs related to new branches and the expansion of existing branches. Selling, general and administrative costs as a percent of revenues increased to 16.1% in 1997 from 15.6% in 1996, primarily due to higher cost structures of acquired companies and startup costs related to the opening of new distribution branches. Excluding the effect of acquisitions, selling, general and administrative expenses increased to 16.3% in 1997 from 15.6% in 1996, primarily due to branch expansions and the relatively higher cost structures of new distribution branches. Interest expense for the second quarter of 1997 decreased $300,000, or 27.6%, compared to the same period in 1996, primarily due to lower average borrowings. The effective tax rate for the three months ended June 30, 1997 was 39.0% compared to 38.7% for the same period in 1996. The increase was due to a higher effective Federal income tax rate. SIX MONTHS ENDED JUNE 30, 1997 VS. SIX MONTHS ENDED JUNE 30, 1996 Revenues for the six months ended June 30, 1997 increased $97.4 million, or 49.6%, compared to the same period in 1996. In the distribution operations, revenues increased $91.9 million, or 54.4%. Excluding the effect of acquisitions, revenues for the distribution operations increased $5.8 million, or 3.4%. This increase was primarily due to sales generated from expanded product lines of parts and supplies. Gross profit for the six months ended June 30, 1997 increased $22.5 million, or 51.3%, compared to the same period in 1996. Excluding the effect of acquisitions, gross profit increased $2.9 million, or 6.6%, primarily as a result of the aforementioned revenue increases. Gross profit margin for the six month period increased to 22.6% in 1997 from 22.3% in 1996 and, excluding the effect of acquisitions, increased to 22.7% in 1997 from 22.3% in 1996. This increase was primarily due to the effect of new vendor procurement programs benefiting the Company with lower purchase costs for certain parts and supplies in 1997. Selling, general and administrative expenses for the six months ended June 30, 1997 increased $18.2 million, or 55.6%, compared to the same period in 1996. Excluding the effect of acquisitions, selling, general and administrative expenses increased $3.2 million, or 9.6%, primarily due to increased revenues and higher costs related to new branches and the expansion of existing branches. Selling, general and administrative expenses as a percent of revenues increased to 17.4% in 1997 from 16.7% in 1996, primarily due to higher cost structures of acquired companies and startup costs related to the opening of new distribution branches. Excluding the effect of acquisitions, selling, general and administrative expenses as a percent of revenues increased to 17.5% in 1997 from 16.7% in 1996, primarily due to branch expansions and the relatively higher cost structures of new distribution branches. Interest expense for the six months ended June 30, 1997 decreased $567,000, or 26.6%, compared to the same period in 1996, primarily due to lower average borrowings. Minority interest expense for the six months ended June 30, 1997 decreased $116,000 compared to the same period in 1996. This decrease was due to the Company's acquisition of the minority interests in three of its distribution subsidiaries in March 1996. Following the acquisition, all of the Company's subsidiaries were wholly owned. The effective tax rate for the six months ended June 30, 1997 was 39.0% compared to 38.5% for the same period in 1996. The increase was due to a greater percentage of income being taxed at a higher effective Federal income tax rate. 8 of 12
LIQUIDITY AND CAPITAL RESOURCES On August 8, 1997, the Company executed an amended and restated bank-syndicated credit agreement which provides for borrowings of up to $260 million, expiring on August 8, 2002. The unsecured agreement will be used to fund seasonal working capital needs and for other general corporate purposes, including acquisitions. Borrowings under the revolving credit agreement, which totaled $57.9 million at June 30, 1997, bear interest at primarily LIBOR-based rates plus a spread that is dependent upon the Company's financial performance (LIBOR plus .375% at June 30, 1997). The revolving credit agreement contains financial covenants 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 two pending acquisitions for which it has executed letters of intent. The companies to be acquired are wholesale distributors of air conditioning, heating and refrigeration equipment and related parts and supplies and had aggregate annual revenues of approximately $170 million for their most recently completed fiscal years. Completion of these transactions are subject to the execution of definitive agreements and other conditions. 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 $214.3 million at June 30, 1997 from $130.0 million at December 31, 1996. This increase is primarily due to the receipt of net proceeds of approximately $85.2 million from the sale of 3,000,000 shares of the Company's Common Stock in February 1997. In March 1997, the Company used the net proceeds to pay down its revolving credit agreement and to fund the acquisitions of Comfort Products and Central Plains. Cash and cash equivalents increased $1.1 million during the six month period ended June 30, 1997. Principal sources of cash were net proceeds from the issuance of common stock, borrowings under the revolving credit agreement and profitable operations. The principal uses of cash were to fund working capital needs and finance business acquisitions. Inventory purchases are substantially funded by borrowings under the revolving credit agreement. The increase in inventory in 1997 was higher than 1996 primarily due to higher levels of inventory carried by the distribution operations necessary to meet increased demand, stocking requirements of new branches, and expanded product lines. 9 of 12
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, 1996, filed on March 31, 1997. 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 (a) The Company's 1997 Annual Meeting of Shareholders was held on May 30, 1997. (b) Proxies were solicited by the Company's management pursuant to Regulation 14 under the Securities Exchange Act of 1934. There was no solicitation in opposition to the management's nominees as listed in the proxy statement. The following nominees were elected as indicated in the proxy statement pursuant to the vote of the shareholders as follows: Common Stock For Withheld ------------ --- -------- Mr. Alan H. Potamkin 12,707,604 86,046 Class B Common Stock -------------------- Mr. Roberto Motta 1,787,872 11,548 Mr. Cesar L. Alvarez 1,787,872 11,548 (c) Three additional proposals were voted upon at the Annual Meeting of Shareholders as follows: (1) To ratify the action of the Board of Directors amending and restating the Company's 1991 Stock Option Plan; (2) To ratify the action of the Board of Directors adopting the 1996 Qualified Employee Stock Purchase Plan; and (3) To ratify the reappointment of Arthur Andersen LLP as the Company's independent certified public accountants for the year ended December 31, 1997. The combined vote of the Company's Common Stock and Class B Common Stock was as follows: PROPOSAL 1 ---------- For 27,689,524 Against 924,159 Abstained 85,912 10 of 12
ITEM 4. RESULTS OF VOTES OF SECURITIES HOLDERS (CONTINUED) PROPOSAL 2 ---------- For 28,356,420 Against 261,240 Abstained 81,961 PROPOSAL 3 ---------- For 30,719,515 Against 10,584 Abstained 57,750 As of April 4, 1997, the record date for the Annual Meeting of Shareholders, the total number of shares of the Company's Common Stock, $.50 par value, and Class B Common Stock, $.50 par value, outstanding was 15,010,821 and 2,190,697, respectively, representing 36,917,791 combined votes. ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.18 Amended and Restated Revolving Credit and Reimbursement Agreement dated August 8, 1997 by and among Watsco, Inc., NationsBank, N.A. (Agent) and Barnett Bank, N.A., First Union National Bank, Suntrust Bank (Co-Agents), and the Lenders Party Hereto from Time to Time. 11. Computation of Earnings Per Share for the Quarter and Six Months Ended June 30, 1997 and 1996. 27. Financial Data Schedule (for SEC use only). (b) Reports on Form 8-K 11 of 12
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/ BARRY S. LOGAN Barry S. Logan Vice President and Secretary (Chief Financial Officer) August 13, 1997 12 of 12
EXHIBIT INDEX EXHIBIT - ------- 10.18 Amended and Restated Revolving Credit and Reimbursement Agreement dated August 8, 1997 by and among Watsco, Inc., NationsBank, N.A. (Agent), and Barnett Bank, N.A., First Union National Bank, Suntrust Bank (Co-Agents), and the Lenders Party Hereto from Time to Time. 11. Computation of Earnings Per Share for the Quarter and Six Months Ended June 30, 1997 and 1996. 27. Financial Data Schedule (for SEC use only).