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 May 31, 2001
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-12490
ACR GROUP, INC.
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(Exact name of registrant as specified in its charter)
Texas 74-2008473
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3200 Wilcrest Drive, Suite 440, Houston, Texas 77042-6039
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(Address of principal executive offices) (Zip Code)
(713) 780-8532
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(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, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No____
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Shares of Common Stock outstanding at June 30, 2001 - 10,681,294.
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PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
May 31, February 28,
2001 2001
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(Unaudited)
Current assets:
Cash $ 175,425 $ 171,249
Accounts receivable, net 20,694,337 15,975,668
Inventory 23,982,183 23,833,400
Prepaid expenses and other 301,674 642,912
Deferred income taxes 487,000 487,000
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Total current assets 45,640,619 41,110,229
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Property and equipment, net of accumulated
depreciation 5,757,476 5,768,093
Deferred income taxes 973,000 973,000
Goodwill, net of accumulated amortization 6,166,044 6,222,895
Other assets 472,470 507,350
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$59,009,609 $54,581,567
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 993,608 $ 956,201
Accounts payable 20,688,306 17,146,529
Accrued expenses and other liabilities 1,981,952 1,837,638
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Total current liabilities 23,663,866 19,940,368
Long-term debt and capital lease obligations,
less current maturities 24,802,948 24,494,007
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Total liabilities 48,466,814 44,434,375
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Shareholders' equity:
Common stock 106,813 106,813
Additional paid-in capital 41,691,379 41,691,379
Accumulated deficit (31,255,397) (31,651,000)
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Total shareholders' equity 10,542,795 10,147,192
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$59,009,609 $54,581,567
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The accompanying notes are an integral part
of these condensed financial statements.
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ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
May 31,
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2001 2000
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Sales $39,709,019 $33,178,455
Cost of sales 31,107,527 26,063,104
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Gross profit 8,601,492 7,115,351
Selling, general and administrative expenses (7,625,857) (6,453,451)
Other operating income (expense) (1,048) 34,507
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Operating income 974,587 696,407
Interest expense (633,487) (543,523)
Other non-operating income 90,103 80,801
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Income before income taxes 431,203 233,685
Provision for income taxes 35,600 33,350
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Net income $ 395,603 $ 200,335
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Weighted average shares outstanding:
Basic 10,681,294 10,670,634
Diluted 10,681,294 11,326,275
Earnings per common share:
Basic $ .04 $ .02
Diluted .04 .02
The accompanying notes are an integral part
of these condensed financial statements.
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ACR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
May 31,
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2001 2000
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Operating activities:
Net income $ 395,603 $ 200,335
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 353,722 286,624
Other 200 5,721
Changes in operating assets and liabilities:
Accounts receivables (4,689,867) (2,639,852)
Inventory (148,783) (938,086)
Prepaid expenses and other assets 266,697 (223,656)
Accounts payable 3,606,710 2,414,345
Accrued expenses and other liabilities 144,314 28,624
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Net cash used in operating activities (71,404) (865,945)
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Investing activities:
Acquisition of property and equipment (270,768) (689,195)
Acquisition of business, net of cash acquired - (200,643)
Proceeds from disposition of assets - 1,200
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Net cash used in investing activities (270,768) (888,638)
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Financing activities:
Net borrowings on revolving credit facility 639,081 2,193,021
Payments on long-term debt (292,733) (292,677)
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Net cash provided by financing activities 346,348 1,900,344
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Net increase in cash 4,176 145,761
Cash at beginning of year 171,249 107,035
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Cash at end of period $ 175,425 $ 252,796
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Schedule of non-cash investing and
financing activities:
Acquisition of subsidiaries:
Fair value of assets acquired - 793,712
Fair value of liabilities assumed - 817,915
Goodwill - 404,203
Notes payable to sellers - 152,000
Purchase of property and equipment under capital
leases (net of cash) - 63,550
The accompanying notes are an integral part
of these condensed financial statements.
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ACR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1 - Basis of Presentation
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The interim financial information included herein is unaudited; however,
such information reflects all adjustments (consisting solely of normally
recurring adjustments) which are, in the opinion of management, necessary for a
fair statement of results for the interim periods. The results of operations for
the three-month period ended May 31, 2001 is not necessarily indicative of the
results to be expected for the full year.
Substantially all inventories represent finished goods held for sale.
2 - Contingent Liabilities
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The Company has an arrangement with an HVACR equipment manufacturer and a
field warehouse agent whereby HVACR equipment is held for sale in bonded
warehouses located at the premises of the Company's operations in Georgia,
Colorado and Tennessee, with payment due only when products are sold. Such
inventory is accounted for as consigned merchandise and is not recorded on the
Company's balance sheet. As of May 31, 2001, the cost of such inventory held in
the bonded warehouses was $13,666,154.
The terms of the consignment agreement with the supplier further provide
that merchandise not sold within a specified period of time must be purchased by
the Company. The Company believes that substantially all consigned merchandise
will be sold in the ordinary course of business before any purchase obligation
is incurred.
3 - Income Taxes
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The provision for income taxes consists principally of federal alternative
minimum taxes and state income taxes. The Company has net operating loss and tax
credit carryforwards which offset substantially all of its federal taxable
income.
4 - Debt
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The Company has a revolving line of credit arrangement with a
commercial bank ("Bank"). The maximum amount that may be borrowed under the
revolving line of credit is $25 million, including up to $1 million for letters
of credit. At May 31, 2001, the Company had $23.5 million outstanding under this
credit facility and a maturity date set for May 2003, with an automatic
extension for one-year periods unless either party gives notice of termination
to the other.
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5 - Earnings Per Share
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The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended May 31,
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2001 2000
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Numerator:
Net income $ 395,603 $ 200,335
Numerator for basic and diluted
earnings per share - income
available to common stockholders $ 395,603 $ 200,335
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Denominator:
Denominator for basic earnings per
share - weighted average shares 10,681,294 10,670,634
Effect of dilutive securities:
Employee stock options - 28,822
Warrants - 626,819
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Dilutive potential common shares 0 655,641
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Denominator for diluted earnings
per share - adj. weighted average
shares and assumed conversions 10,681,294 11,326,275
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Basic earnings per share $ .04 $ .02
Dilutive earnings per share $ .04 $ .02
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ACR GROUP, INC. AND SUBSIDIARIES
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Comparison of Results of Operations for the Three-Month Periods Ended May 31,
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2001 and May 31, 2000
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Net income increased to $395,603 in the quarter ended May 31, 2001
(fiscal 2002) from $200,335 in the quarter ended May 31, 2000 (fiscal 2001), an
increase of 97%. The improvement in results of operations in fiscal 2002 was
generally attributable to an increase in same-store sales and to cost savings
attributable to the closing of a branch operation in Memphis, TN in the fourth
quarter of fiscal 2001.
Consolidated sales increased 20% during the quarter ended May 31, 2001
compared to the quarter ended May 31, 2000. Sales at the ten branch operations
opened during fiscal 2001 aggregated $3.9 million in the quarter ended May 31,
2001. Same-store sales for the 37 branches open for more than one year at the
beginning of the quarter increased 9% in the quarter ended May 31, 2001,
compared to a decrease of 4% in the quarter ended May 31, 2000. Same-store sales
growth was strongest in Florida and the western region of the United States.
Sales of new lines of HVACR equipment, which were first introduced in fiscal
2001, contributed significantly to the sales increase at these operations. Sales
increased only moderately at the Company's operations in Texas and Georgia
compared to fiscal 2001, as a combination of mild temperatures and wet spring
weather moderated demand for air conditioning products.
The Company's gross margin percentage on sales was 21.7% for the
quarter ended May 31, 2001, compared to 21.4% for the quarter ended May 31,
2000. Lower than average gross margin percentages at the Company's new branch
operations were more than offset by continued reductions in the net purchase
cost of inventory through national buying arrangements. In addition, the gross
margin percentage at the Company's sheet metal fabrication operation benefited
by reductions in commodity steel prices while maintaining its sale prices of
finished goods during the quarter ended May 31, 2001. The gross margin
percentage in fiscal 2001 was adversely impacted by efforts at the Company's
operations in Florida to sell the remaining inventory of a discontinued
equipment product line.
Selling, general and administrative ("SG&A") expenses increased 18% in
the quarter ended May 31, 2001 compared to the same quarter of 2000, because of
the costs associated with the new branch operations. Expressed as a percentage
of sales, SG&A expenses decreased in the first quarter from 19.5% in 2000 to
19.2% in 2001, as the Company gained operating leverage from same-store sales
growth. Increases in both workers compensation costs and transportation costs
attributable to fuel prices contributed to the overall increase in SG&A
expenses.
Interest expense increased 17% from 2000 to 2001 as a result of a 21%
increase in borrowings from the previous year. The increase was partially
mitigated by lower interest rates on the Company's variable rate debt. As a
percentage of sales, interest expense decreased from 1.64% in 2000 to 1.60% in
2001.
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The current provision for income taxes consists principally of federal
alternative minimum taxes and state income taxes. As a result of the Company's
substantial tax loss carryforwards, the Company has minimal liability for
Federal income taxes. See Liquidity and Capital Resources, below.
Liquidity and Capital Resources
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Current assets increased 11% from February 28, 2001 to May 31, 2001,
substantially comprised of an increase in accounts receivable that resulted from
the seasonal increase in sales. Gross accounts receivable represented 46 days of
gross sales as of both May 31, 2001 and 2000, as the Company maintained its
credit management standards and active collection efforts while seeking to
develop sales at the branches opened in fiscal 2001. Management placed a
heightened emphasis on controlling inventory levels after satisfying the
stocking requirements of the new branches, and from the end of February to the
end of May, inventory increased less than 1% in 2001, compared to 7% in 2000.
The Company has credit facilities with a commercial bank ("Bank") which
include an $25 million revolving line of credit, including up to $1 million for
letters of credit, and a $1 million term loan facility for capital expenditures.
During the quarter ended May 31, 2001, the Company borrowed $429,353 against the
capital expenditure facility and also borrowed $487,500, secured by a mortgage
on its Katy, TX real estate and improvements. At May 31, 2001, the Company had
available credit of $1.5 and $0.6 million under the revolving credit line and
the capital expenditure term loan facility, respectively. At May 31, 2001, the
outstanding balance on the revolving credit line and the term loan facility
bears interest at LIBOR plus 2.75% (currently 6.81%). Management believes that
availability under the revolving credit facility will be adequate to finance the
Company's working capital requirements of its existing operations for the
foreseeable future.
The Company has approximately $8 million in tax loss carryforwards
which expire by fiscal 2003. Such operating loss carryforwards will
substantially limit the Company's federal income tax liabilities in the near
future.
Seasonality
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The Company's sales volume and, accordingly, its operating income vary
significantly during its fiscal year. The highest levels of sales occur during
the times of the year when climatic conditions require the greatest use of air
conditioning, since the Company's operations are concentrated in the warmer
sections of the United States. Accordingly, sales will be highest in the
Company's second quarter ending August 31, and will be lowest in its fourth
quarter.
Inflation
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The Company does not believe that inflation has had a material effect
on its results of operations in recent years. Generally, manufacturer price
increases attributable to inflation uniformly affect both the Company and its
competitors, and such increases are passed through to customers as an increase
in sales prices.
Safe Harbor Statement
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This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements, which are other than
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statements of historical facts. Forward-looking statements involve risks and
uncertainties that could cause actual results or outcomes to differ materially.
The Company's expectations and beliefs are expressed in good faith and are
believed by the Company to have a reasonable basis, but there can be no
assurance that management's expectations, beliefs or projections will be
achieved or accomplished. The forward-looking statements in this document are
intended to be subject to the safe harbor protection provided under the
securities laws. In addition to other factors and matters discussed elsewhere
herein, the following are important matters that, in the view of the Company,
could cause actual results to differ materially from those discussed in the
forward-looking statements: the ability of the Company to continue to expand
through acquisitions, the availability of debt or equity capital to fund the
Company's expansion program, unusual weather conditions, the effects of
competitive pricing and general economic factors.
Item 3. - Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risk exposure related to changes in
interest rates on its senior credit facility, which includes revolving credit
and term notes. These instruments carry interest at a pre-agreed upon percentage
point spread from either the prime interest rate or LIBOR. Under its senior
credit facility the Company may, as its option, fix the interest rate for
certain borrowings based on a spread over LIBOR for 30 days to 6 months. At May
31, 2001 the Company had $23.5 million outstanding under its senior credit
facility. Based on this balance, an immediate change of one percent in the
interest rate would cause a change in interest expense of approximately
$235,000, or $.02 per basic share, on an annual basis.
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PART II - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K. None
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.
ACR GROUP, INC.
July 16, 2001 /s/ Anthony R. Maresca
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Date Anthony R. Maresca
Senior Vice-President and
Chief Financial Officer
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