Item 1 Business
(1) (a) A Virginia corporation founded in 1915, Noland Company is a distributor of Plumbing/Heating, Electrical, Industrial and Air Conditioning/Refrigeration supplies, with branch facilities in fifteen states.
While most of its sales are wholesale, the Company plays a modest retail role through product showrooms and other marketing efforts of certain items. It handles products of over 6,000 vendors and sells to thousands of customers, largely in the industrial and construction sectors of the Southern United States. There have been no significant changes in the Company's methods of operation during the last five years. However, the growing demand for computer-based, fully automated procurement systems for MRO (Maintenance, repair and operating) products is attracting new business and widening the scope and possibilities for potential sales growth in this market.
Noland Properties, Inc., a wholly owned subsidiary, holds and manages the real estate holdings of the Company and acquires sites and provides facilities to house the Company's various branches as required.
(b) The Company operates in only one industry segment, the distribution of mechanical equipment and supplies. Markets for these products are all areas of construction - - residential, nonresidential (commercial, institutional, and industrial), and non-building (highways, sewers, water, and utilities); manufacturing; domestic water systems; and maintenance/repair/modernization.
(c) During the last five years, the Company has continued to serve essentially the same markets described in Item 1 (1) (b). Current plans call for the continuation of this policy. The Company does not manufacture any products.
(i) Total sales of each class of similar products for the last five years are as follows:
1994 1993 1992 1991 1990 (In thousands)
Plumbing/Heating $241,273 $220,879 $225,239 $220,179 $247,805 Electrical 46,076 43,363 49,090 47,498 57,539 Industrial 62,279 54,099 54,851 52,644 59,442 Air Conditioning/Refrigeration 90,574 84,600 82,906 64,214 63,687 $440,202 $402,941 $412,086 $384,535 $428,473
Not all branches have all four departments. If a product department does not exist in a particular branch, any sales of that department's products are attributed to the department that makes the sale.
(ii) The Company continues to market new products introduced by its suppliers/manufacturers. None will require the investment of a material amount of the assets of the Company.
(iii) The Company does not use or market raw materials.
(iv) The Company holds several sales franchises and has produced a variety of copyrighted materials and systems used in the normal conduct of its business. It is virtually impossible to dollar-quantify their significance. None are reflected as assets in the Company's Balance Sheet. The Company has no patents.
(v) The business in general is seasonal to the extent of the construction industry it supplies.
(vi) It is the practice of the Company to carry a full line of inventory items for rapid delivery to customers. At times, advance buying is necessary to ensure the availability of products for sale. The Company also extends credit, and this and the necessity for an adequate supply of merchandise ordinarily absorbs most of the Company's working capital.
(vii) The Company sells products to many thousands of customers. Although there is no customer which accounts for 10% or more of the Company's sales, there are several customers of which the loss of any one could have a material adverse effect on the Company's business.
(viii) The dollar amount of the Company's backlog of orders believed to be firm was approximately $36,979,000 at December 31, 1994, and $29,715,000 at December 31, 1993.
(ix) The portion of the Company's business with the Government and subject to renegotiation is not considered material.
(x) The wholesale distribution of all products in which the Company is engaged is highly competitive. Competition results primarily from price, service and the availability of goods. Industry statistics indicate that Noland Company is one of the larger companies in its field.
(xi) Company-sponsored research and development activities expenditures in 1994, 1993 and 1992 were immaterial.
(xii) The Company believes it is in compliance with Federal, State and local provisions which have been enacted or adopted regulating the discharge of materials into the environment. The effects of compliance are not material with respect to capital expenditures, earnings and competitive position of the Company. No material capital expenditures are anticipated for environmental control facilities during the remainder of the current year and the succeeding year.
(xiii) As of December 31, 1994, the Company employed 1,741 persons.
(d) From its founding in 1915 and continuing into 1994, the Company confined its operations to the Southern area of the United States. In late 1994 the Company opened its' first location in Pennsylvania. A second Pennsylvania location was opened in February 1995.
Item 2
Item 2 Properties
The main properties of the Company consist of 99 facilities, including warehouses, offices, showrooms, paved outside storage areas and covered pipe storage sheds. These are located in the following states: Alabama, Arkansas, Delaware, Florida, Georgia, Kentucky, Maryland, Mississippi, North Carolina, Pennsylvania, South Carolina, Tennessee, Texas, Virginia and West Virginia. Fourteen are held under leases and the remaining eighty-five are owned by the Company. All but one of the owned properties is free of any related debt. The executive office of the Company is located at 2700 Warwick Boulevard, Newport News, Virginia 23607.
In the opinion of management, the aforementioned facilities are suitable for the purposes for which they are used, are adequate for the needs of the business and are in continuous use in the day-to-day course of operations. The Company's policy is to maintain, repair and renovate its properties on a continuing basis, replacing older structures with new buildings and yard facilities as the need for such replacement arises. In addition, reference is made to Note 2 (c), page 16 of the Annual Report to Stockholders filed as an exhibit hereto, with respect to property excess to current needs.
Item 3
Item 3 Legal Proceeding
None of material consequence.
Item 4
Item 4 Submission of Matters to a Vote of Security Holders
None
Additional Item
Executive Officers of the Registrant
Positions and Offices Business Experience Name Age Held with Registrant During the Past Five Years
Lloyd U. Noland, III 51 Chairman of the Board, Chief Executive Officer of President and Director and Registrant. Officer since 1981
Frank A. Wimbush 49 Senior Vice President- Vice President-Sales and Marketing and Branch Marketing for All-Phase Operations. Officer Electric Supply Company from since March 1995 1988 to 1994.
A. P. Henderson, Jr. 51 Vice President-Finance Chief Financial Officer of Officer since 1983 the Registrant.
Charles A. Harvey 55 Vice President-Corporate Responsible for the Data. Officer since 1980 Registrant's Corporate Data Division.
John E. Gullett 53 Vice President-Corporate Responsible for the Communications Registrant's Corporate Officer since 1982 Communications Department.
James E. Sykes, Jr. 51 Treasurer/Secretary Responsible for Registrant's Officer since 1982 treasury functions and secretarial duties.
William G. Overman 54 Vice President-Purchases Responsible for Corporate Officer since 1988 Purchases Division.
Ronald K. Binger 48 Vice President-General Responsible for administering Credit Manager the Registrant's credit Officer since 1993 related activities. Previously, General Credit Manager (1991-1992), and Manager of Internal Audit Department.
David E. Gregg 48 Vice President-Manager Responsible for electrical, of Merchandising,and industrial marketing Electrical/Industrial activities. Previously Officer since 1993 Manager of Merchandising, Plumbing and Heating (1990- 1991) and Complex Manager.
All executive officers, except Mr. Frank A. Wimbush, were elected for a term of one year beginning May 1, 1994 and/or until their successors are elected and qualified. Mr. Wimbush joined the Company on March 14, 1995. None of the executive officers are related by blood, marriage or adoption. Service has been continuous since the date elected to their present positions. There are no arrangements or understandings between any officer and any other person pursuant to which he was elected an officer.
PART II
Item 5
Item 5 Market for the Registrant's Common Stock and Related Security Holder Matters
The information set forth on the inside back cover of the Annual Report to Stockholders contains information concerning the market price of Noland Company's common stock for the past two years, the number of holders thereof and the dividend record with respect thereto for the past two years. This information is incorporated herein by reference.
Item 6
Item 6 Selected Financial Data
The information set forth under the caption "Ten-Year Review of Selected Financial Data" relating to sales, net income, total assets, long-term debt, net income per share and dividends per share for the years 1990 through 1994 is incorporated herein by reference from pages 20 and 21 of the enclosed Noland Company Annual Report to Stockholders for the year ended December 31, 1994.
Item 7
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations
The information set forth under the above caption is incorporated herein by reference from pages 10 and 11 of the enclosed Noland Company Annual Report to Stockholders for the year ended December 31, 1994.
Item 8
Item 8 Financial Statements and Supplementary Data
The following consolidated financial statements of Noland Company, included in the Annual Report to Stockholders for the year ended December 31, 1994, are incorporated herein by reference:
Annual Report to Stockholders (page)
Report of Independent Accountants 12
Consolidated Statement of Income and Retained Earnings-- Years ended December 31, 1994, 1993 and 1992 13
Consolidated Balance Sheet--December 31, 1994, 1993 and 1992 14
Consolidated Statement of Cash Flows -- Years ended December 31, 1994, 1993 and 1992 15
Notes to Consolidated Financial Statements 16-19
Item 9
Item 9 Disagreements on Accounting and Financial Disclosure
None
PART III
Item 10
Item 10 Directors and Executive Officers of the Registrant
Data relating to Directors is incorporated herein by reference from pages 2 and 3 of the 1995 Noland Company Proxy Statement for the April 26, 1995 Annual Meeting of Stockholders.
Data relating to Executive Officers is included in Part I of this report.
Item 11
Item 11 Executive Compensation
The information set forth under the caption "Compensation of Executive Officers" on page 4 of the 1995 Noland Company Proxy Statement for the April 26, 1995, Annual Meeting of Stockholders is incorporated herein by reference.
Item 12
Item 12 Security Ownership of Certain Beneficial Owners and Management
The information set forth under the captions "Voting Securities and Principal Holders Thereof" and "Nominees for Director" on pages 1, 2 and 3 of the 1995 Noland Company Proxy Statement for the April 26, 1995, Annual Meeting of Stockholders is incorporated herein by reference.
Item 13
Item 13 Certain Relationships and Related Transactions
(a) There were no material direct or indirect transactions with management and others.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
PART IV
Item 14
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Consolidated Financial Statements
Included in PART II, Item 8 of this report:
Report of Independent Accountants
Consolidated Statement of Income and Retained Earnings--Years Ended December 31, 1994, 1993 and 1992
Consolidated Balance Sheet--December 31, 1994, 1993 and 1992
Consolidated Statement of Cash Flows --Years ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
With the exception of the aforementioned information incorporated by reference and the information in the 1994 Annual Report to Stockholders on the inside back cover and pages 11, 12, 20 and 21 incorporated in response to Items 5, 6 and 7 in this Form 10-K Annual Report, the 1994 Annual Report to Stockholders is not to be deemed "filed" as part of this report.
The individual financial statements of the registrant have not been filed because consolidated financial statements are filed. The registrant is an operating company and the subsidiary is wholly owned.
2. Financial Statement Schedules
Included in PART IV of this report:
For the three years ended December 31, 1994
Form 10-K Page(s)
Schedule II Valuation and Qualifying Accounts 9
Other financial statement schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto.
Report of Independent Accountants on Consolidated Financial Statement schedules 11
3. The exhibits are listed in the Index of Exhibits required by Item 601 of Regulation S-K at item (c) below.
(b) Reports on Form 8-K
No reports on Form 8-K for the three months ended December 31, 1994, were required to be filed.
(c) The Index of Exhibits and any required Exhibits are included beginning at page 12 of this report.
(d) Not applicable.
Item 14(a) (2)
Financial Statement Schedules
[FN] (1) Net of recoveries on bad debts of $685,511 for 1994, $524,859 for 1993, and $398,345 for 1992.
(2) Represents charges for which reserve was previously provided.
(3) Includes $200,000 reserve for final disposition of assets accepted as settlement of debt.
Signatures
Pursuant to the requirements of Section 13 or 15 (d) 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.
NOLAND COMPANY
March 24, 1995 By Lloyd U. Noland, III Chairman of the Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Chairman of the Board, Lloyd U. Noland, III President and Director March 24, 1995 Lloyd U. Noland, III
Vice President-Finance, Chief Financial Officer Arthur P. Henderson, Jr. and Director March 24, 1995 Arthur P. Henderson, Jr.
James E. Sykes, Jr. Treasurer/Secretary March 24, 1995 James E. Sykes, Jr.
Allen C. Goolsby, III Director March 24, 1995 Allen C. Goolsby, III
COOPERS & LYBRAND L.L.P.
REPORT OF INDEPENDENT ACCOUNTANTS
ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Our report on the consolidated financial statements of Noland Company and Subsidiary has been incorporated by reference in this Form 10-K from page 12 of the 1994 Annual Report to Stockholders of Noland Company. In connection with our audits of such consolidated financial statements, we have also audited the related consolidated financial statement schedules listed in Item 14 (a) 2 on page 7 of this Form 10-K.
In our opinion, the consolidated financial statement schedules referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Newport News, Virginia February 28, 1995
EXHIBIT INDEX
Exhibit Number Exhibit Page
(2) Plan of acquisition, reorganization, liquidation or succession Not Applicable
(3) Articles of Incorporation and Bylaws Previously Filed
(4) Instruments defining the rights of Security holders, including indentures Not Applicable
(9) Voting trust agreement Not Applicable
(10) Material contracts Not Applicable
(11) Statement regarding computation of per share earnings--clearly determinable Not Applicable
(12) Statement regarding computation of ratios Not Applicable
(13) Portions of Annual Report to Stockholders 14 - 35
(16) Letter regarding change in a certifying accountant Not Applicable
(18) Letter regarding change in accounting principles Not Applicable
(21) Subsidiary of the registrant Previously Filed
(22) Published report regarding matters submitted to vote of security holders Not Applicable
(23) Consents of experts and counsel Not Applicable
(24) Power of attorney Not Applicable
(27) Financial data schedule 36
(28) Information from reports furnished to state insurance regulatory authorities Not Applicable
As to any security holder requesting a copy of the Form 10-K, the Company will furnish any exhibit indicated in the above list as filed with the Form 10-K upon payment to it of its expenses in furnishing such exhibit.
This page intentionally left blank.
EXHIBIT 13 INDEX
Page
Inside back cover 15 - 16
Ten Year Review 17 - 18
Management Discussions 19 - 21
Report of Independent Accountants 22
Consolidated Statement of Income 23
Consolidated Balance Sheet 24
Consolidated Statement of Cash Flows 25
Notes to Consolidated Financial Statements 26 - 35
Inside Back Cover Info
Shareholder and Investor Information
Corporate Information Corporate Headquarters:
Noland Company 2700 Warwick Boulevard Newport News, Virginia 23607 (804) 928-9000
Wholly Owned Subsidiary:
Noland Properties, Inc. Suite 400, Central Fidelity National Bank 2700 Washington Avenue Newport News, Virginia 23607 (804) 247-8200 (After May 1, 1995)
Investor Inquiries or Request for Form 10-K:
Call or write: Richard L. Welborn Assistant Vice President-Finance and Tax Administrator 2700 Warwick Boulevard Newport News, Virginia 23607 (804) 928-9000
Auditors:
Coopers & Lybrand L.L.P. 11832 Rock Landing Drive Newport News, Virginia 23606
Legal Counsel:
Hunton & Williams P.O. Box 1535 Richmond, Virginia 23212
Stock Information
The Company's common stock is traded over the counter as part of NASDAQ's National Market System (symbol: NOLD). On March 15, 1995, the approximate number of holders of record of the Company's common stock was 2,450.
Market Prices: The following table sets forth the reported high and low prices for the common stock on the NASDAQ system: _________________________________ _______________High _____Low_____ Qtr. 4 $21.75 $18.75 Qtr. 3 $22.00 $19.50 Qtr. 2 $21.50 $17.00 Qtr. 1 $18.50 $15.00 Qtr. 4 $17.25 $15.00 Qtr. 3 $18.00 $15.25 Qtr. 2 $18.50 $15.00 Qtr. 1 $18.75 $15.00 _________________________________ P/E Ratio:* _________________High______Low____
1994 13 9
1993 21 17 _________________________________ *Based on final, full-year earnings
Dividend Policy:
Noland has paid regular cash dividends for 62 consecutive years; and, while there can be no assurance as to future dividends because they are dependent on earnings, capital requirements and financial condition, the Company intends to continue that policy. Dividend payments are subject to the restrictions described in the Notes to the Consolidated Financial Statements.
Dividends Paid:
The Company paid quarterly dividends of $.06 per share in each quarter of 1993 and 1994.
Registrar: Noland Company
Transfer Agent: Mellon Financial Services Four Station Square Pittsburgh, Pennsylvania 15219-1173 (412) 236-8000
Annual Meeting: April 26, 1995, 4:00 p.m. Noland's Corporate Headquarters Newport News, Virginia
[FN] * Based on 3,700,876 shares outstanding.
(1) Net income for 1987 includes $362,000 ($.10 per share) due to the cumulative effect on prior years of a change in accounting for deferred income taxes.
(2) Net income for 1986 includes $813,000 ($.22 per share) due to a change in accounting for pension costs.
[FN] * Based on 3,700,876 shares outstanding.
(1) Net income for 1987 includes $362,000 ($.10 per share) due to the cumulative effect on prior years of a change in accounting for deferred income taxes.
(2) Net income for 1986 includes $813,000 ($.22 per share) due to a change in accounting for pension costs.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion focuses on the consolidated results of operations, financial condition and cash flows of Noland Company. This section should be read in conjunction with the consolidated financial statements and notes.
Results of Operations
Sales for 1994 increased $37.3 million to $440.2 million or 9.2 percent greater than 1993's sales of $402.9 million. Sales for 1993 were 2.2 percent less than 1992's sales of $412.1 million. Strong conditions in the key markets of construction activity and factory production, combined with an aggressive sales and marketing program, produced the $37.3 million sales increase. All four product departments had sales growth for the year, led by a 15 percent increase for the industrial department. The possibilities for potential sales growth by the industrial department through systems- selling programs aimed at reducing customers' procurement costs remain strong.
Sales for the air conditioning/refrigeration department also should continue to grow, aided by the opening in late December 1994 of a five-branch complex dedicated to serve air conditioning contractors in South Florida.
Gross profit, as a percent of sales, continued to improve in 1994 to 19.6 percent compared to 19.2 percent for 1993 and 18.7 percent for 1992. The higher gross profit percentages represent the continuing efforts of the Company to improve margins. These efforts focused on reducing costs of buying merchandise for resale and pricing strategies that allow a profit commensurate with the services provided by a full service wholesaler.
Operating expenses increased 4.8 percent over 1993 to a total of $78.3 million. The increase is due primarily to personnel- related costs. In 1993 operating expenses were 2.0 percent greater
than 1992. Operating expenses, as a percent of sales, were 17.8 percent, 18.5 percent, and 17.8 percent in 1994, 1993, and 1992, respectively. 1994 and 1993 operating expenses include a $562,000 and $548,000 charge, respectively, due to the adoption of Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits Other than Pensions" in 1993. SFAS No. 106 requires the Company to accrue annually the net periodic postretirement benefit cost rather than recognizing the cost when benefits are paid. The Accumulated Postretirement Benefit Obligation at January 1, 1993 was $4.1 million and is being amortized over 20 years.
Interest expense increased in 1994 after four consecutive years of decreases, to a total of $2.6 million or 8.4 percent greater than 1993. The increase is due largely to higher average short-term borrowings and higher rates.
The results of the 1994 activity generated net income of $6.2 million, or 89 percent greater than in 1993. Net income for 1993 was $3.3 million compared to $4.1 million for 1992. Adversely affecting 1993 earnings was a $419,000 loss on the sale of the Company's former North Little Rock, Arkansas property.
The Company sells products to many thousands of customers. Although there is no customer which accounts for 10 percent or more of the Company's sales, there are several customers of which the loss of any one could have a material adverse effect on the Company's business.
Looking ahead, rising interest rates are already having a dampening effect on housing construction, which could affect growth in 1995. However, there appears to be enough business in the pipeline, when combined with previously mentioned factors, to afford opportunities for growth in 1995.
Liquidity and Capital Resources
The Company maintains its short and long-term liquidity through: (1) cash flow from operations; (2) short-term financings; (3) bank line of credit arrangements, when needed; and (4) additional long-term debt, when needed.
During 1994 the Company generated $4.6 million in cash flow from operations and $5.6 million in cash flow from net borrowing activity. This cash, along with $762,000 from beginning cash, was used to purchase $10.9 million in capital assets and pay dividends.
The Company's financial position remains strong with working capital of $65.6 million and a current ratio of 2.2 to 1. Management believes the Company's liquidity, working capital and capital resources are sufficient to meet the working capital and capital expenditure needs of the foreseeable future.
Impact of Inflation
Reported results, for the most part, are net of the impact of inflation because of the Company's use of the LIFO (last-in, first-out) inventory method. During inflationary periods, this method removes artificial profits induced by inflation and presents operating results in truer, more absolute terms. Since adopting LIFO in 1974, the Company has avoided both the recognition of these inflationary profits and the unnecessary payment of related taxes on such income. At approximate replacement cost, the Company's inventory investment was $96.1 million at year-end 1994, while the LIFO inventory balance was $64.5 million -- a difference accumulated since 1974 of $31.6 million.
For purposes of financial reporting, the depreciation charge to earnings for the use of capital assets is reflected on the straight-line basis which does not necessarily keep pace with rising replacement costs of those assets.
REPORT OF INDEPENDENT ACCOUNTANTS Coopers & Lybrand L.L.P. a professional services firm
COOPERS & LYBRAND
To the Board of Directors and Stockholders of Noland Company:
We have audited the accompanying consolidated balance sheets of Noland Company and Subsidiary as of December 31, 1994, 1993 and 1992, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Noland Company and Subsidiary as of December 31, 1994, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
Newport News, Virginia Coopers & Lybrand L.L.P. February 28, 1995
[FN] The accompanying notes are an integral part of the financial statements.
[FN] The accompanying notes are an integral part of the financial statements.
[FN] The accompanying notes are an integral part of the financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOLAND COMPANY AND SUBSIDIARY
1. Principal Business of the Company
Noland Company is a wholesale distributor of mechanical equipment and supplies. These products are categorized under plumbing/heating, electrical, industrial and air conditioning/refrigeration.
Markets for these products are all areas of construction-- residential, nonresidential (commercial, institutional and industrial) and non-building (highways, sewer, water and utilities); manufacturing; domestic water systems; and maintenance /repair /modernization.
Noland Properties, Inc., a wholly owned subsidiary, holds and manages the real estate holdings of the Company and acquires sites and provides facilities to house the Company's various branches as required.
2. Summary of Significant Accounting Policies
a. Principles of Consolidation
The consolidated financial statements include the accounts of Noland Company and its wholly owned subsidiary, Noland Properties, Inc. All material intercompany transactions have been eliminated.
b. Inventory
Inventory is stated at the lower of cost or market. The cost of inventory has been principally determined by the last-in, first-out (LIFO) method since 1974.
c. Property and Equipment
Property and equipment are valued at cost less accumulated depreciation. Depreciation is computed by the straight-line method based on estimated useful lives of properties and equipment.
Expenditures for maintenance and repairs are charged to earnings as incurred. Upon disposition, the cost and related accumulated depreciation are removed and the resulting gain or loss is reflected in income for the period.
Property in excess of current needs consists primarily of land held for possible future expansion and branch facilities not currently in use.
d. Retirement Plan
The Company has a noncontributory retirement plan that covers all employees with one year or more of service. Benefits are based on years of service and compensation during active employment. The Company's policy is to fund annually the minimum funding requirements under the Employee Retirement Income Security Act of 1974.
e. Postretirement Benefit Plans
The Company offers postretirement health and life benefits to substantially all employees who retire with the required years of service. Health care benefits consist of a reimbursement towards the purchase of the retirees' health plan of choice. The amount of reimbursement is based on years of service. Life insurance in the amount of $3,000 is provided to all retirees. Additional coverage may be purchased in an amount up to a total of fifty percent of final earnings. The Company pays a share of the cost of such additional coverage. The cost of these benefits is funded on a pay- as-you-go-basis.
Net periodic postretirement cost for 1994 and 1993 was accrued based on the provisions of Statement of Financial Accounting Standards No. 106 "Employers' Accounting For Postretirement Benefits Other Than Pensions." In 1992, postretirement benefit costs were recognized as claims were paid.
f. Income Taxes
A deferred tax asset or liability is recognized for the deferred tax consequences of all temporary differences.
g. Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Due to the short maturity period of cash and cash equivalents, the carrying amount approximates the fair value.
The Company has no requirements for compensating balances. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.
h. Extra Compensation
All employees with at least one year of service participate in one or more of the Company's extra compensation plans which are based on earnings before income taxes and certain adjustments. The cost of these plans was $2,175,000 in 1994, $1,658,000 in 1993 and $1,280,000 in 1992.
i. Unearned Compensation - Restricted Stock Plan
In 1994 the stockholders approved a restricted stock plan for senior executives of the Company. Under the Plan, 50,000 shares in the aggregate, limited to 10,000 shares per year, may be granted as restricted stock. Participants may not dispose or otherwise transfer stock granted for three years from date of grant. Restrictions lapse at the rate of 20 percent of the stock per year beginning at the end of the third year. Upon issuance of stock under the plan, unearned compensation equivalent to the market value at the date of grant is charged to stockholders' equity and subsequently amortized over seven years. In 1994, $82,000 was charged to unearned compensation - restricted stock, with $12,000 amortized to compensation expense, leaving a balance of $70,000 at December 31, 1994.
3. Accounts Receivable
Accounts receivable are net of an allowance for doubtful accounts of $968,000 for 1994 and 1993 and $2,206,000 for 1992. Bad debt charges, net of recoveries, were $774,000 for 1994, $816,000
for 1993 and $2,800,000 for 1992.
4. Inventory
Comparative year-end inventories are as follows:
1994 1993 1992 (In thousands) Inventory, at approximate replacement cost $96,100 $86,879 $82,258
Reduction to LIFO 31,642 31,404 31,392
LIFO inventory $64,458 $55,475 $50,866
During 1992, liquidation of certain inventory layers carried at lower costs which prevailed in prior years as compared with costs of 1992 purchases had the effect of increasing 1992 net income $429,000 ($.12 per share).
5. Notes Payable
a. Short-term Borrowings:
Amounts payable to banks were $14,100,000; 7,000,000 and $3,500,000 at December 31, 1994, 1993, and 1992, respectively. The average interest rate, which is based on existing Federal Funds rates, at December 31, 1994, 1993, and 1992 was 6.08 percent, 3.48 percent, and 3.72 percent, respectively. The carrying amount of these short-term borrowings approximates fair value because of the short maturity of the borrowings.
The Company had unused lines of credit totaling $18.4 million at December 31, 1994.
b. Long-term Debt:
1994 1993 1992 (In thousands)
Promissory note, 9.60% interest payable quarterly, $600,000 due June 1995, $1,850,000 due annually June 1996 through 2000 with balance due June 2001. (1) $11,800 $12,400 $13,000
Promissory note, 10.15% interest payable quarterly, $1,375,000 due January 1995. (1) 1,375 2,625 3,875 Promissory note, variable interest payable weekly (6.63% at December 31, 1994), fully revolving basis through June 1, 1996. (1) 10,000 10,000 10,000 Industrial revenue financings, variable interest payable quarterly (5.69% to 7.50% at December 31, 1994) with varying maturities from 1995 to 2004. (1)(2) 15,330 15,460 15,690 Other 525 - 32 39,030 40,485 42,597 Less current maturities 2,116 1,980 2,086 $36,914 $38,505 $40,511
(1) Subject to agreements that require the Company to maintain not less than $55,000,000 in working capital and not less than a 1.75-to-1 year-end current ratio. Cash dividends cannot exceed 50 percent of earnings, excluding net gains on disposition of capital assets, reckoned accumulatively from January 1, 1986. Earnings retained since that date not restricted under this provision amount to $7,878,000.
(2) Industrial Development Revenue Refunding Bonds are callable at the option of the bondholders upon giving seven days notice to the Trustee. The carrying value of these bonds is a reasonable estimate of fair value as interest rates are based on prevailing market rates. At December 31, 1994, property and equipment with a net book value of $922,000 was pledged as collateral. In addition, to ensure payment of the long-term refunding bonds refunding bonds the Company has caused to be delivered to the Trustee an irrevocable, direct pay letter of credit in favor of the Trustee in the amount of $15,615,000. The contract amount of the letter of credit is a reasonable estimate of its fair value as the value is fixed over the life of the commitment. No material loss is anticipated due to nonperformance by the counterparties to those agreements.
The fair value of the remaining $23.7 million of long-term debt is estimated based on the borrowing rates currently available to the Company for loans with similar terms and average maturities. The fair value of this long-term debt is $24.2 million for 1994.
Annual maturities of long-term debt for the five years subsequent to December 31, 1994, are as follows: 1995, $2,116,000; 1996, $3,647,000; 1997, $3,228,000; 1998, $1,864,000; 1999, $3,840,000.
6. Postretirement Health Care and Life Insurance Benefits
Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The Accumulated Postretirement Benefit Obligation (APBO) is being amortized over twenty years. The change in accounting reduced 1993 net income $342,000 or nine cents per share. Net postretirement benefit cost reflects the impact of a plan amendment which reduced 1993 cost by approximately $400,000. There are no plan assets. The discount rate used to calculate the APBO was 8.5 percent for 1994 and 7.5 percent for 1993.
The components of net periodic postretirement benefit costs for 1994 and 1993 are: (In thousands) 1994 1993 Service cost - benefits earned during the period $ 50 $ 53 Interest cost on accumulated postretirement benefit obligation 309 292 Net amortization and deferral 203 203 Net postretirement benefit cost $ 562 $ 548
The following table sets forth the plans' combined postretirement benefit liability as of December 31, 1994 and 1993: (In thousands) 1994 1993 Accumulated postretirement benefit obligation: Retirees $(2,676) $(2,288) Fully eligible active employees (565) (863)
Other active plan participants (704) (898) (3,945) (4,049) Unrecognized transition obligation 3,660 3,863 Unrecognized net loss 81 66 Postretirement liability recognized in the balance sheet $ (204) $ (120) Postretirement benefit costs for 1992 were recognized as claims were paid and totaled $287,000.
7. Retirement Plan The components of the provision for net periodic pension cost were as follows: 1994 1993 1992 (In thousands) Service cost - benefits earned during the period $ 843 $ 749 $ 847 Interest cost on projected benefit obligation 2,177 2,128 2,038 Actual return on assets 650 (4,272) (1,877) Net amortization and deferral (4,204) 339 (2,051) Net pension cost $ 534 $(1,056) $(1,043)
Assumptions used in the accounting were: 1994 1993 1992 Discount rate 8.5% 7.5% 8.0% Rate of increase in future compensation levels 4.0% 4.0% 4.0% Long-term rate of return 8.0% 8.0% 8.0%
The following table sets forth the Plan's funded status and the related amounts recognized in the Company's balance sheet at December 31, 1994, 1993, and 1992.
1994 1993 1992 (In thousands)
Actuarial present value of projected benefit obligation, based on employment service to date and current salary levels:
Vested benefits $(25,250) $(27,501) $(25,076) Nonvested benefits (230) (494) (426) Accumulated benefit obligation (25,480) (27,995) (25,502) Additional amounts related to projected salary increases (2,127) (2,219) (2,228) Projected benefit obligation (27,607) (30,214) (27,730) Plan assets at fair value; primarily U.S. Government and corporate bonds and equity securities 39,856 42,733 40,339 Plan assets in excess of projected benefit obligation 12,249 12,519 12,609 Unrecognized net loss/(gain) from past experience different from that assumed (9) (245) (256) Unrecognized net asset at January 1, 1986, being recognized principally over 8.5 years - (568) (1,703) Prepaid pension $ 12,240 $ 11,706 $ 10,650
8. Income Taxes The components of income tax expense are as follows: 1994 1993 1992 (In thousands) Federal: Current $3,723 $1,310 $2,127 Deferred - 436 24 State: Current 618 239 363 Deferred - 11 4 Total $4,341 $1,996 $2,518
The components of the net deferred tax liability are:
1994 1993 1992 (In thousands) Current deferred (assets) Accounts receivable $ (365) $ (365) $ (830) Inventory (1,072) (875) (1,004) Accrued vacation (564) (523) (509)
Total net current deferred (asset) (2,001) (1,763) (2,343) Noncurrent deferred (assets) liabilities Property and equipment 4,702 4,706 4,900 Pension asset 4,606 4,405 4,007 Postretirement benefit liability (77) (206) - Other (593) (501) (108) Total net noncurrent deferred liability 8,638 8,404 8,799 Net deferred liability $6,637 $6,641 $6,456
The reasons for the difference between total tax expense and the amount computed by applying the statutory federal income tax rate to income before income taxes are as follows:
1994 1993 1992 (In thousands) Statutory rate applied to pretax income $3,593 $1,799 $2,248 State income taxes, net of federal tax benefit 409 158 240 Other 339 39 30 Total tax expense $4,341 $1,996 $2,518
9. Postemployment Benefits Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" was adopted January 1, 1994. This Statement is not material to the Company's financial condition or results of operations.
10. Lease Commitments The Company leases some of the warehouse and office facilities used in its business. These leases have varying expiration dates and often include renewal and purchase options. Certain leases require the Company to pay escalations in cost over base amounts for taxes, insurance, or other operating expenses incurred by lessor.
Rental expense under operating leases for 1994, 1993, and 1992 was $711,000, $792,000, and $764,000, respectively.
Minimum payments due for years after 1994 under noncancelable operating leases are $887,000 in 1995, $735,000 in 1996, $599,000 in 1997, $538,000 in 1998 and $275,000 thereafter.
11. Concentration of Credit Risk
The Company sells its products to all major areas of construction and manufacturing markets throughout the Southern United States. When the Company grants credit, it is primarily to customers whose ability to pay is dependent upon the construction and manufacturing industry economics prevailing in the Southern United States; however, concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of customers comprising the Company's customer base. The Company performs ongoing credit evaluations of its customers and in certain situations requires collateral. The Company maintains reserves for potential credit losses, and such losses have been within management's expectations.
12. Contingencies
The Company is a defendant in various lawsuits arising in the normal course of business. In the opinion of management, the outcome of these lawsuits will not have a material adverse effect on the Company's financial position.