UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-K
For
Annual Reports Pursuant to Section 13 or 15(d)
of
the Securities Exchange Act of 1934
For
the Fiscal Year Ended February 28, 2007
Commission
File Number 0-12490
ACR
GROUP, INC.
(Exact
name of registrant as specified in its Charter)
Texas
|
74-2008473
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
3200
Wilcrest Drive, Suite 440, Houston, Texas
|
77042
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (713) 780-8532
Title
of Each Class
|
Name
of Each Exchange on which Registered
|
Common
Stock, par value $.01 per share
|
American
Stock Exchange
|
Securities
registered pursuant to Section 12(b) of the Act:
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities
Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes ¨ No x
Indicate
by check mark whether the registrant: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding
12 months (or for any 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
by check mark if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure
will be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in the
Exchange Act Rule 12b-2) Yes ¨ No x
The
aggregate market value of the voting stock (common stock) held by non-affiliates
of the registrant as of August 31, 2006, the last business day of the
registrant’s most recently completed second quarter was $50,425,151 based on the
closing sale price on that date. For purposes of determining this number all
executive officers and directors of the registrant as of August 31, 2006
are considered to be affiliates of the registrant. This number is provided
only
for purposes of the report on Form 10-K and does not represent an admission
by
either the registrant or any such person as to the status of such person.
The
number of shares outstanding of the registrant’s common stock as of
April 30, 2007: 12,113,078 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
The
registrant’s definitive Proxy Statement for its Annual Meeting of Shareholders
to be held in August 2007 is incorporated by reference in answer to Part III
of
this report.
TABLE
OF CONTENTS
|
|
Page
|
PART I
|
|
|
Item 1.
|
Business
|
4
|
Item 1A.
|
Risk
Factors
|
6
|
Item 1B.
|
Unresolved
Staff Comments
|
8
|
Item 2.
|
Properties
|
8
|
Item 3.
|
Legal
Proceedings
|
8
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
8
|
|
|
|
PART II
|
|
|
Item 5.
|
Market
for Registrant’s Common Equity and Related Stockholder
Matters
|
8
|
Item 6.
|
Selected
Financial Data
|
11
|
Item 7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
12
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
18
|
Item 8.
|
Financial
Statements and Supplementary Data
|
19
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
36
|
Item 9A.
|
Controls
and Procedures
|
36
|
|
|
|
PART III
|
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
37
|
Item 11.
|
Executive
Compensation
|
37
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
37
|
Item 13.
|
Certain
Relationships and Related Transactions
|
37
|
Item 14.
|
Principal
Accountant Fees and Services
|
37
|
|
|
|
PART IV
|
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
37
|
PART
I
Item 1.
Business.
General
ACR
Group, Inc. (which, together with its subsidiaries is herein referred to as
the
“Company”, we, us or our) is a Texas corporation based in Houston. In 1990, the
Company began to acquire and operate businesses engaged in the wholesale
distribution of heating, ventilating, air conditioning and refrigeration
(“HVAC”) equipment and supplies. The Company acquired its first operating
company in 1990. Since 1990, we have grown through acquisitions and organic
start-ups to 54 branch operations located in predominantly Sunbelt states.
We
are now among the largest independently owned HVAC distribution companies in
the
United States. All of our operations are in the same line of business. The
Company plans to continue expanding in the Sunbelt of the United States and
in
other geographic areas with a high rate of economic growth, through both
acquisitions and internal growth.
The
HVAC Distribution Industry
Our
description of the HVAC industry relates mainly to central air-conditioning
and
heating systems that are used in residential and light commercial applications.
Large commercial buildings usually have specialized climate control requirements
that are met directly by manufacturers without the involvement of distributors.
However, distributors acting as an intermediary between manufacturers and the
contractors or end users that install or service the HVAC systems generally
serve the residential and light commercial HVAC markets in the United States.
There are over 1,000 wholesale distributors of HVAC products in the United
States. It is a fragmented industry, with the largest distributor having
approximately a 7% share of a market estimated at between $25 and $30 billion.
There
are
many manufacturers of products used in the HVAC industry, and no single
manufacturer dominates the market for a range of products. The manufacturers
of
central HVAC equipment sell their products under multiple brand names and
generally limit the number and territory of wholesalers that may distribute
their brands, but exclusivity is rare. Many manufacturers of HVAC parts and
supplies will generally permit any distributor who satisfies customary
commercial credit standards to sell their products. In addition, there are
some
manufacturers, primarily of equipment, that distribute their own products
through factory branches. The widespread availability of HVAC products to
distributors results in significant competition. The industry traditionally
has
been characterized by closely-held businesses with operations limited to local
or regional geographic areas; however, there is a gradual process of
consolidation in the HVAC distribution industry, as many of these companies
reach maturity and face strategic business issues such as ownership succession,
changing markets and lack of capital to finance growth.
The
commercial and residential segments of the HVAC industry are further divided
into two markets—new construction sales and replacement and/or repair sales.
Some distributors choose to specialize in serving the new construction markets
while others focus on the repair/replacement market, commonly referred to as
the
“aftermarket.” Although homebuilding represents an important component of HVAC
distribution sales, the aftermarket is generally estimated to comprise
approximately a 70% share of industry revenues. The aftermarket increases in
size continuously, as new residential installations add to the installed base
of
HVAC systems. The mechanical life of central HVAC equipment varies significantly
by geographic area due to usage and extent of maintenance. Many consumers
replace HVAC units before the end of their useful life because of the
availability of more energy efficient models and a desire to ensure operating
reliability of their HVAC system.
Our
Position in the HVAC Industry
We
are
among the largest independent distributors in the HVAC industry. We are one
of
only three independent HVAC distributors whose stock is publicly traded, so
it
is difficult to easily obtain reliable financial information about our
competitors. Some of the HVAC equipment manufacturers own all or a portion
of
their distribution networks but they do not disclose separate financial
information about their distribution operations. Trade associations for the
HVAC
and related distribution industries publish rankings based on information
voluntarily supplied by their members and estimates derived by researchers.
Such
rankings place us among the top fifteen HVAC distributors in the U.S.
Our
Growth Strategy
Since
entering the industry with our first acquisition in 1990, we have focused on
building the Company through both acquisitions and organic growth. We have
concentrated on business development in the Sunbelt states because of the need
for air conditioning in that area of the country and because of the higher
rate
of population growth in southern and western states than in other areas of
the
country. Although we have made ten acquisitions, we do not consider ourselves
to
be a “consolidator”.
Rather,
we have frequently engaged in a “buy and build” strategy, where we have acquired
a small company to gain a presence in a certain market and subsequently built
the company through organic growth. We encourage management of our business
units to continually seek opportunities to open additional branch operations.
Our experience is that most new branches will generate above average revenue
growth during their first five years, so we try to maintain a pipeline of
planned new branches to help sustain a growth rate higher than average for
our
industry. Our decentralized business philosophy is also attractive to many
experienced managers in our industry, and we have successfully attracted many
of
our key personnel from competitors.
At
the
end of April 2007, our operations were in Texas (16 branches), Florida (11
branches), California (9 branches), Georgia (6 branches), Colorado (4 branches),
Arizona (3 branches), New Mexico (2 branches), and one branch in Louisiana,
Nevada, and Tennessee. We do not have a dedicated business development staff;
instead, we rely on our reputation in the industry and on referrals from our
industry relationships to alert us to business opportunities. As our industry
is
comprised mainly of family-owned businesses, our goal is to attract the present
owners and management of such businesses by offering certain advantages related
to economies of scale, lower cost of products from volume purchasing, new
product lines, and financial, administrative and technical support.
Our
Operating Philosophy
We
support a decentralized operating culture where branch managers are responsible
for all decisions that affect customer service. Each of our business units
has
an administrative office that is responsible for coordinating branch activities
and performing accounting and clerical functions. Branch managers are
responsible, within limitations, for all the operations of their stores,
including ordering inventory, order fulfillment and customer pricing. Branch
managers have the capability and responsibility to take care of their customers’
needs. Branch managers receive monthly operating income statements and have
significant financial incentives to develop and manage profitable operations.
Our
organizational structure is relatively flat. Branch employees, including outside
salespersons, generally report to the branch manager. The branch managers and
the administrative office personnel report to the business unit president.
Business unit presidents report to the corporate office. We do not have a
mid-level management structure, although we occasionally employ product
specialists for our HVAC equipment brands.
We
currently have eleven employees in our corporate office who perform the duties
associated with publicly traded companies and provide functional support to
our
business units. These duties include investor relations, external financial
reporting, treasury management, risk management, information technology support,
human resources and payroll.
All
of
our operations use the same enterprise resource planning (ERP) software and
central computer system. We believe this feature is essential to enable us
to
obtain consistent financial information, maintain an appropriate control
structure and regularly monitor our operations with a relatively small corporate
office staff.
Our
Business Model
Our
branch operations are organized into business units that are generally assembled
by geographic proximity. A president manages the operations of each business
unit. We presently have five business units, which have from seven to sixteen
branches. With 54 branches for most of fiscal 2007, our revenues average over
$4
million per branch, which is significantly in excess of the average for our
industry. We believe that large branches are more easily successful within
our
decentralized operating structure. Although we have smaller branches that are
profitable, we do not open new branches unless we believe they have the
potential to generate annual sales of at least $3 million at maturity.
In
all
respects other than their geographic locations, our business units are
sufficiently similar that we consider them to be a single business segment
for
financial reporting purposes. This determination is based on a review of the
aggregation criteria set out in Statement of Financial Accounting Standards
(“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related
Information, including:
•
|
nature
of products and services
|
•
|
customer
markets served
|
•
|
methods
used to acquire and distribute products
|
•
|
economic
characteristics that influence the results of operations in different
geographical areas
|
Description
of our Business
We
are a
key link in the HVAC industry supply chain between manufacturers and contractors
and other technically trained end-users. We do not manufacture any products
and
we do not perform any service on HVAC systems. To sustain our position in the
supply chain, we focus on providing value to both our suppliers and our
customers. For our suppliers, we maintain a stocking inventory of their products
in our physical locations, market their products to local contractors and users
through an outside sales force, handle product returns and process warranties.
For our customers, we try to be a “one-stop shop” where they can obtain all the
products needed for their work. All of our stores have a sales counter where
customers can purchase products. We also provide trade credit to our customers,
deliver to their places of business or job sites and offer technical training
and advice.
Our
principal customers are the dealers and contractors who install and service
residential and light commercial HVAC systems. We also sell to commercial and
institutional end-users that employ HVAC service technicians. We estimate that
approximately 80% of our business is for residential applications. Although
some
HVAC distributors also sell products used by contractors who install and service
commercial refrigeration equipment, that industry segment represents an
insignificant percentage of our business.
Our
customers include both those whose principal business is to install HVAC systems
in new construction and those who principally repair, service and replace
systems already installed. We have no way to precisely measure the sales volume
to each of these industry segments, but we believe that our sales mix
approximates that of the entire industry, which is estimated to be 30% for
new
construction and 70% for the service and replacement aftermarket.
Maintenance
of a large and diverse inventory base is an important element in our sales.
We
regularly purchase inventory from over 400 suppliers. Approximately 34% of
our
revenues are from sales of HVAC equipment; the remaining 66% of our sales is
from installation supplies and service parts. Our principal suppliers of HVAC
equipment are International Comfort Products (ICP), a subsidiary of Carrier
Corporation, and Haier USA (Haier), which imports consumer products manufactured
in China. All of our business units sell equipment brands manufactured by ICP
and Haier. Prior to fiscal 2006, two of the Company’s business units primarily
sold equipment supplied by Goodman Manufacturing (Goodman)
Executive
Officers of the Registrant
The
Company’s executive officers are as follows:
Name
|
Age
|
Position
with the Company
|
Alex
Trevino, Jr.
|
70
|
Chairman
of the Board and President
|
Anthony
R. Maresca
|
56
|
Senior
Vice President, Treasurer and Chief Financial Officer
|
A.
Stephen Trevino
|
44
|
Senior
Vice President, Secretary and General
Counsel
|
Alex
Trevino, Jr. has served as Chairman of the Board since 1988 and as President
and
Chief Executive Officer of the Company since July 1990.
Anthony
R. Maresca has been employed by the Company since 1985. In November 1985 he
was
elected Senior Vice President, Chief Financial Officer and Treasurer.
Mr. Maresca is a certified public accountant.
A.
Stephen Trevino has been employed by the Company since March 1999, initially
serving as General Counsel and directing various administrative functions.
He
was elected Senior Vice President and Secretary in August 2000. In August 2005,
he was also appointed president of one of the Company’s business units.
Employees
As
of
February 28, 2007, the Company and its subsidiaries had approximately 483
full-time employees. Neither the Company nor its subsidiaries routinely use
temporary labor. There are no Company employees represented by any collective
bargaining units. Management considers the Company’s relations with its
employees to be good.
Government
Regulations, Environmental and Health and Safety
Matters
The
HVAC
industry and the Company are subject to federal, state and local laws and
regulations relating to the generation, storage, handling, emission,
transportation and discharge of materials into the environment. These include
laws and regulations implementing the Clean Air Act, relating to minimum energy
efficiency standards of HVAC systems and the production, servicing and disposal
of certain ozone-depleting refrigerants used in such systems, including those
established at the Montreal Protocol in 1992 concerning the phase-out of
CFC-based refrigerants. The Company’s operations are also subject to health and
safety requirements including the Occupational, Safety and Health Act (OSHA).
The Company is also subject to regulations concerning the transport of hazardous
materials, including regulations adopted pursuant to the Motor Carrier Safety
Act of 1990. The Company believes that its business is operated in substantial
compliance with all applicable federal, state and local provisions relating
to
the protection of the environment, transport of hazardous materials and health
and safety requirements.
The
HVAC
industry and the Company were also subject to a Department of Energy mandate
that required, effective January 23, 2006, that HVAC equipment suppliers
manufacture products with a higher standard of energy efficiency. Prior to
January 23, 2006, the minimum standard for energy efficiency as measured by
industry guidelines was 10 SEER (seasonal energy efficiency rating, the value
used to measure energy efficiency). On the effective date, the new standard
increased the minimum allowed efficiency to 13 SEER. The transition of products
to 13 SEER took place during 2006. The new standard does not prohibit the sale
or installation of products below 13 SEER that were manufactured before January
2006, and there are certain market niches where demand for lower efficiency
HVAC
equipment will continue so long as there is product availability.
Website
Access to Company Reports
The
Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports are available free
of
charge on the Company’s website at www.acrgroup.com as soon as reasonably
practical after such material is electronically filed with or furnished to
the
Securities and Exchange Commission.
Also,
copies of the Company’s annual report will be made available free of charge upon
written request.
Item 1A.
Risk
Factors.
Business
Risk Factors
Supplier
Concentration
The
Company maintains distribution agreements with its key equipment suppliers.
Some
of the distribution agreements contain provisions that restrict or limit the
sale of competitive products in the markets served. Other than the markets
where
such restrictions and limitations may apply, we may distribute other
manufacturers’ lines of air conditioning or heating equipment. Purchases from a
key supplier comprised 33% of all purchases made in fiscal 2007. Any significant
interruption by this manufacturer or a termination of a distribution agreement
could disrupt the operations of our business units. Future results of operations
are also materially dependent upon the continued market acceptance of
manufacturers’ products and their ability to continue to manufacture products
that comply with laws relating to environmental and efficiency standards.
Seasonality
Much
of
the HVAC industry is seasonal; sales of HVAC equipment and service are generally
highest during the times of the year when climatic conditions require the
greatest use of such systems. Because of our geographic concentration in the
Sunbelt, our sales of air conditioning products are substantially greater than
of heating products. Likewise, our sales volume is highest in the summer months
when air conditioning use is greatest. Accordingly, our revenues are higher
in
our second fiscal quarter ending August 31, and our revenues are lower in
our fourth quarter ending the last day of February. Sales of refrigeration
equipment, parts, and supplies which are generally to commercial customers,
are
subject to less seasonality.
New
Construction Cyclicality
Unlike
the replacement aftermarket, which is seasonal based on weather conditions,
the
unit sales volume of the new construction segment of the HVAC industry varies
based on the economic factors that impact residential and commercial new
construction. These factors are historically cyclical and include macroeconomic
conditions such as interest rate environment, level of investment activity
in
real estate compared to alternative investment opportunities, consumer sentiment
and availability of mortgage financing. Although we estimate that only about
30%
of the Company’s sales are related to new construction, if there is a
significant reduction in new construction activity for a period of time, the
Company’s sales and income could be materially affected.
Competition
We
operate in highly competitive environments. We compete with a number of
independent distributors and also with several air conditioning and heating
equipment manufacturers that distribute a significant portion of their products
through their own distribution organizations in certain markets. Competition
within any given geographic market is based upon product availability, customer
service, price and quality. Competitive pressures or other factors could cause
our products or services to lose market acceptance or result in significant
price erosion, either of which would have a material adverse effect on
profitability.
General
Risk Factors
Risks
Related to Insurance Coverage
We
carry
general liability, comprehensive property damage, workers’ compensation and
other insurance coverage that management considers adequate for the protection
of the Company’s assets and operations. There can be no assurance, however, that
the coverage limits of such policies will be adequate to cover losses and
expenses for lawsuits brought or which may be brought against us.
A
loss in
excess of insurance coverage could have a material adverse effect on our
financial position and/or profitability. Self-insurance risks related to
employee medical benefits and casualty insurance programs are retained by the
Company. Reserves are established based on claims filed and estimates of claims
incurred but not yet reported. Assurance cannot be provided that actual claims
will not exceed present estimates. We limit exposure to catastrophic losses
by
maintaining excess and aggregate liability coverage and implementing loss
control programs.
Information
about Forward-Looking Statements
This
Form
10-K contains or incorporates by reference statements that are not historical
in
nature and that are intended to be, and are hereby identified as,
“forward-looking statements” as defined in the Private Securities Litigation
Reform Act of 1995, including statements regarding, among other items,
(i) business and acquisition strategies, (ii) potential acquisitions,
(iii) financing plans and (iv) industry, demographic and other trends
affecting the Company’s financial condition or results of operations. These
forward-looking statements are based largely on management’s expectations and
are subject to a number of risks and uncertainties, certain of which are beyond
their control.
Actual
results could differ materially from these forward-looking statements as a
result of several factors, including:
•
|
general
economic conditions affecting general business spending,
|
•
|
consumer
spending,
|
•
|
consumer
debt levels,
|
•
|
prevailing
interest rates,
|
•
|
seasonal
nature of product sales,
|
•
|
changing
rates of new housing starts,
|
•
|
weather
conditions,
|
•
|
effects
of supplier concentration,
|
•
|
competitive
factors within the HVAC industry,
|
•
|
insurance
coverage risks,
|
•
|
viability
of the Company’s business strategy.
|
In
light
of these uncertainties, there can be no assurance that the forward-looking
information contained herein will be realized or, even if substantially
realized, that the information will have the expected consequences to or effects
on the Company or its business or operations. A discussion of certain of these
risks and uncertainties that could cause actual results to differ materially
from those predicted in such forward-looking statements is included in
Item 7 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations”. Forward-looking statements speak only as of the date the
statement was made. The Company assumes no obligation to update forward-looking
information or the discussion of such risks and uncertainties to reflect actual
results, changes in assumptions or changes in other factors affecting
forward-looking information.
Item 1B.
Unresolved
Staff Comments.
None.
Item 2.
Properties.
The
Company and its subsidiaries occupy office and warehouse space under operating
leases with various terms ranging generally from five to ten years. Many of
the
leases contain extension options. At February 28, 2007 the Company operated
54 branch locations in 10 states and one distribution center and its corporate
headquarters in Houston, Texas. Generally, a branch location will contain 15,000
to 30,000 square feet of showroom and warehouse space. Branch locations that
include a subsidiary’s corporate office are sometimes larger. The Company owns
its branch facilities in Pasadena, TX and Gainesville, FL, and a building and
land that are leased to the company that purchased the Company’s filter
manufacturing operations in 2004. All of the owned properties are subject to
mortgage liens. For further details see Note 4 to the Company’s financial
statements.
Item 3.
Legal
Proceedings.
We
are
subject to various legal proceedings arising in the ordinary course of business.
We vigorously defend all matters in which the Company or its business units
are
named defendants and, for insurable losses, maintain insurance to protect
against adverse judgments, claims or assessments. Although the adequacy of
existing insurance coverage or the outcome of any legal proceedings cannot
be
predicted with certainty, we do not believe the ultimate liability associated
with any claims or litigation will have a material impact to our financial
condition or results of operations.
Item 4.
Submission
of Matters to a Vote of Security Holders.
No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year ended February 28, 2007.
PART
II
Item 5.
Market for the Registrant’s Common Equity and Related Stockholder Matters.
On
March 20, 2006, the Company’s common stock began trading on the American
Stock Exchange®
under
the symbol “BRR”. Prior to that date, the stock was traded in the
over-the-counter market under the symbols “ACRG”, “ACRG.OB” or “ACRG.BB”,
depending on the source of the quote.
As
of
April 30, 2007, there were 393 holders of record of the Company’s common
stock. This number does not include the beneficial owners of shares held in
the
name of a broker or nominee.
During
fiscal 2007, 2006 and 2005 the Company issued 135,000, 50,000 and 1,084,000
shares, respectively, of unregistered restricted stock of which 386,582 shares
were vested at February 28, 2007.
The
Company has never declared or paid cash dividends on its common stock. The
Company’s loan agreement with its senior lender expressly prohibits the payment
of dividends by the Company. See Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Liquidity and Capital Resources,
and Note 4 of Notes to Consolidated Financial Statements.
The
table
below sets forth the high and low sales prices based upon actual transactions.
|
High
|
|
Low
|
|
|
|
|
Fiscal
Year 2007
|
|
|
|
1st
quarter ended 5/31/06
|
$4.15
|
|
$3.45
|
2nd
quarter ended 8/31/06
|
5.93
|
|
3.95
|
3rd
quarter ended 11/30/06
|
6.47
|
|
4.80
|
4th
quarter ended 2/28/07
|
5.97
|
|
4.60
|
Fiscal
Year 2006:
|
|
|
|
1st
quarter ended 5/31/05
|
$4.19
|
|
$2.67
|
2nd
quarter ended 8/31/05
|
3.19
|
|
2.33
|
3rd
quarter ended 11/30/05
|
2.95
|
|
2.22
|
4th
quarter ended 2/28/06
|
3.74
|
|
2.78
|
Stock
Performance Graph
The
following graph compares the cumulative 5-year total return to shareholders
on
the Company’s common stock relative to the cumulative total returns of the AMEX
Composite index, the NASDAQ Non-Financial index and the DJ Wilshire Building
Materials & Fixtures index. An investment of $100 (with reinvestment of all
dividends) is assumed to have been made in the company's common stock and in
each of the indexes on 2/28/2002 and its relative performance is tracked through
2/28/2007. We have chosen the DJ Wilshire Building Materials & Fixtures
index to replace the NASDAQ Non-Financial index as the comparative
line-of-business index because we believe it more accurately represents the
Company’s industry.
|
|
2/02
|
2/03
|
2/04
|
2/05
|
2/06
|
2/07
|
|
|
|
|
|
|
|
|
ACR
Group, Inc.
|
|
100.00
|
82.39
|
315.22
|
810.87
|
760.87
|
1002.80
|
AMEX
Composite
|
|
100.00
|
85.22
|
126.83
|
142.87
|
161.06
|
172.91
|
NASDAQ
Non-Financial
|
|
100.00
|
76.85
|
114.32
|
115.69
|
127.13
|
133.89
|
DJ
Wilshire Building Materials & Fixtures
|
|
100.00
|
77.68
|
131.32
|
167.56
|
198.35
|
221.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/02
|
2/03
|
2/04
|
2/05
|
2/06
|
2/07
|
|
|
|
|
|
|
|
|
ACR
Group, Inc.
|
|
|
-17.61%
|
282.59%
|
157.24%
|
-6.17%
|
31.80%
|
AMEX
Composite
|
|
|
-14.78%
|
48.82%
|
12.65%
|
12.73%
|
7.35%
|
NASDAQ
Non-Financial
|
|
|
-23.15%
|
48.75%
|
1.20%
|
9.89%
|
5.31%
|
DJ
Wilshire Building Materials & Fixtures
|
|
|
-22.32%
|
69.04%
|
27.60%
|
18.37%
|
11.58%
|
Item 6.
Selected Financial Data.
The
following selected financial data of the Company have been derived from the
audited consolidated financial statements. This summary should be read in
conjunction with the audited consolidated financial statements and related
notes
included in Item 8 of this Report. Since February 28, 2003, the
increase in sales has resulted principally from internal expansion. The Company
has never paid any dividends.
The
Company’s income tax provision in fiscal year 2003 was reduced primarily by the
benefit of a previously unrecognized net operating loss carryforward.
The
cumulative effect of accounting change in fiscal 2003 was attributable to the
adoption of SFAS No. 142, “Goodwill and Other Intangible Assets”.
Selected
Financial Data
(in
thousands, except per share data)
|
Year
Ended February 28 or 29,
|
|
2007
|
2006
|
2005
|
2004
|
2003
|
Income
Statement Data:
|
|
|
|
|
|
Sales
|
$239,643
|
$204,312
|
$199,553
|
$174,353
|
$161,822
|
Gross
profit
|
61,036
|
48,331
|
46,645
|
38,558
|
35,673
|
Operating
income
|
10,994
|
5,134
|
7,330
|
4,452
|
2,690
|
Income
before income taxes
|
9,286
|
4,558
|
6,799
|
3,759
|
1,277
|
Provision
for income taxes
|
(3,544)
|
(1,804)
|
(2,588)
|
(1,364)
|
(277)
|
Cumulative
effect of accounting change
|
—
|
—
|
—
|
—
|
(483)
|
|
|
|
|
|
|
Net
income
|
$5,742
|
$2,754
|
$4,211
|
$2,395
|
$517
|
|
|
|
|
|
|
Earnings
(loss) per common share:
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
Before
cumulative effect of accounting change
|
$.51
|
$.25
|
$.39
|
$.22
|
$.09
|
Cumulative
effect of accounting change
|
—
|
—
|
—
|
—
|
(.04)
|
|
$.51
|
$.25
|
$.39
|
$.22
|
$.05
|
Diluted:
|
|
|
|
|
|
Before
cumulative effect of accounting change
|
$.49
|
$.24
|
$.38
|
$.22
|
$.09
|
Cumulative
effect of accounting change
|
—
|
—
|
—
|
—
|
(.04)
|
|
$.49
|
$.24
|
$.38
|
$.22
|
$.05
|
|
|
|
|
|
As
of February 28 or 29,
|
|
2007
|
2006
|
2005
|
2004
|
2003
|
Balance
Sheet Data:
|
|
|
|
|
|
Working
capital
|
$41,692
|
$34,489
|
$35,375
|
$25,881
|
$22,605
|
Total
assets
|
83,160
|
76,036
|
67,704
|
58,727
|
52,728
|
Long-term
obligations
|
26,314
|
24,872
|
27,881
|
23,258
|
22,855
|
Shareholders’
equity
|
27,286
|
21,146
|
17,704
|
13,058
|
10,663
|
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Results
of Operations
The
following table presents information derived from the consolidated statements
of
income expressed as a percentage of revenues for the years ended February 28,
2007, 2006 and 2005.
|
Fiscal
Year Ended
|
|
February
28,
|
|
2007
|
|
2006
|
|
2005
|
Sales
|
100.0%
|
|
100.0%
|
|
100.0%
|
Cost
of sales
|
74.5
|
|
76.3
|
|
76.6
|
Gross
profit
|
25.5
|
|
23.7
|
|
23.4
|
Selling,
general and administrative expenses
|
20.9
|
|
21.1
|
|
19.7
|
Operating
income
|
4.6
|
|
2.6
|
|
3.7
|
Interest
expense
|
1.0
|
|
0.7
|
|
0.5
|
Interest
derivative loss (gain)
|
-
|
|
(0.1)
|
|
0.1
|
Other
non-operating income
|
(0.3)
|
|
(0.3)
|
|
(0.3)
|
Income
before income taxes
|
3.9
|
|
2.3
|
|
3.4
|
Income
taxes
|
1.5
|
|
0.9
|
|
1.3
|
Net
Income
|
2.4
|
|
1.4
|
|
2.1
|
Disclosures
below that refer to “same-store” comparisons exclude branch operations that were
opened or closed after the beginning of fiscal 2006. We opened five branches
in
fiscal 2007 and two branches after the beginning of fiscal 2006. In addition,
we
acquired two branch operations effective as of the beginning of fiscal 2006.
There were no branches closed in either fiscal year.
Comparison
of Fiscal Year Ended February 28, 2007 to Fiscal Year Ended February 28,
2006
Net
income increased 109% in fiscal 2007 compared to fiscal 2006, as operating
results improved at each of our five business units. The largest gains in
operating income occurred at our business units in the southeastern U.S., as
our
business unit based in Florida continued a string of consecutive years in which
its profitability has grown significantly. Our business unit based in Georgia
recovered from fiscal 2006, when it had an operating loss that resulted largely
from transitioning the primary line of HVAC equipment that it
sells.
We
generally expect that new branch operations may be unprofitable for the first
12
to 18 months of operations although, historically, some new branch operations
have become profitable in less than 12 months, and in other cases, branches
have
incurred losses for longer than 18 months from inception. Aggregate operating
losses of branches opened or acquired in fiscal 2007 and 2006 were $430,000
and
$190,000, respectively, thereby reducing earnings per share in fiscal 2007
by
$0.02 and in fiscal 2006 by $0.01.
Consolidated
sales increased 17% in fiscal 2007 compared to fiscal 2006, and same-store
sales
increased 13% from fiscal 2006 to 2007. The increase in same-store sales
resulted from strong demand for our products, especially during the first two
quarters of fiscal 2007, a transition to higher efficiency air conditioning
equipment that sells for higher prices, and increases in the costs of
commodity-based products such as copper and steel that resulted in higher unit
sale prices. All of the increase in sales from fiscal 2006 to fiscal 2007 was
organic; the Company made no acquisitions in fiscal 2007.
Our
gross
margin on sales increased to 25.5% in fiscal 2007 from 23.7% in fiscal 2006.
All
of the increase was attributable to point-of-sale pricing. Higher selling
margins in fiscal 2007 reflected our ability to sell higher efficiency HVAC
equipment, which was mandated by the federal government, at higher margins
in
fiscal 2007 than we obtained on less efficient equipment in fiscal 2006. In
addition, we were able to command higher margins in fiscal 2007 on our remaining
inventory of lower efficiency equipment because of the finite supply that
resulted after production of such products was phased out late in fiscal 2006.
Selling,
general and administrative (“SG&A”) expenses expressed as a percentage of
sales declined to 20.9% in fiscal 2007 from 21.1% in fiscal 2006. Same-store
SG&A expenses increased 11% in fiscal 2007 compared to fiscal 2006,
principally because of variable expenses associated with higher levels of sales,
gross profit and operating income in fiscal 2007. Excluding commissions and
other incentive compensation, same-store SG&A expenses increased 5% from
fiscal 2006 to 2007. Total payroll costs were 58% and 57% of SG&A expenses
in fiscal 2007 and 2006, respectively. Variable compensation increased from
12%
of SG&A expenses in fiscal 2006 to 15% of SG&A expenses in fiscal
2007.
Interest
expense increased 65% in fiscal 2007, compared to fiscal 2006, reflecting both
higher average interest rates on our variable rate debt and a higher average
level of outstanding borrowings in fiscal 2007. Average outstanding funded
debt
was $35.0 million in fiscal 2007, compared to $27.2 million in fiscal 2006,
as
we used our line of credit to support working capital requirements associated
with the higher volume of sales in fiscal 2007 and our investment in new branch
operations. As a percentage of sales, interest expense was 1.0% in fiscal 2007
and 0.7% in fiscal 2006.
Until
October 2006, our interest rate swap agreements did not qualify for hedge
accounting and were accounted for as investments. So long as the swap agreements
were accounted for as investments, changes in the market value of the agreements
were reflected as interest derivative gain or loss in our statements of income.
In fiscal 2007 and 2006, the swap agreements generated gains of $84,000 and
$247,000, respectively, based on both monthly payments received for the
difference between the fixed rate stated in the swap agreements and the market
rate and changes in the market value of the instruments. Other non-operating
income, which consists principally of finance charges collected from customers,
declined 1% in fiscal 2007 from fiscal 2006.
The
Company’s effective tax rate was 38.2% in fiscal 2007, compared to 39.6% in
fiscal 2006. The effective tax rate declined primarily due to lower state income
taxes resulting from a shift of earnings to lower tax states compared to fiscal
2006.
Comparison
of Fiscal Year Ended February 28, 2006 to Fiscal Year Ended February 28,
2005
Net
income declined to $2,754,000 in fiscal 2006 from $4,211,000 in fiscal 2005,
a
decline of 35%. The decline in net income from fiscal 2005 to fiscal 2006 was
a
result of a reduction in sales at the Company’s business units based in Georgia
and in Colorado from termination of the rights to distribute the Goodman brand
of HVAC equipment in February 2005. Although these business units secured
distribution rights for other brands of comparable equipment, there were initial
delays in obtaining an appropriate quantity and mix of inventory at each
affected branch location. Subsequently, these business units experienced
difficulty through the remainder of the fiscal year converting a significant
percentage of their customers to the new equipment brands. In fiscal 2005,
Goodman equipment had represented approximately 60% and 20% of sales by the
Georgia and Colorado-based business units, respectively. Operating income at
these two business units declined by $4.2 million in fiscal 2006 compared to
fiscal 2005. The combined operating income at the Company’s other branch
operations that were not affected by the Goodman brand transition increased
$2.1
million, or 28%, in fiscal 2006 over fiscal 2005, with the Florida-based
business unit delivering strong growth in both sales and income.
Same-store
sales decreased 3% in fiscal 2006 compared to fiscal 2005. The fiscal 2006
comparison was significantly affected by the decline in sales of Goodman brand
equipment described above. At the branch operations that did not sell Goodman
brand equipment, same-store sales increased 17% in fiscal 2006 over fiscal
2005.
Sales growth in fiscal 2006 was strong throughout the year in both Florida
and
Nevada, buoyed by robust regional economies and new housing starts. In Texas,
favorable economic and weather conditions boosted sales during the last two
quarters of fiscal 2006. An acquisition in Florida also added $3.2 million
to
sales in fiscal 2006.
The
Company’s gross margin percentage was 23.7% in fiscal 2006, compared to 23.4% in
fiscal 2005. The increase in gross margin percentage from fiscal 2005 to fiscal
2006 resulted entirely from greater purchase volume rebates and payment
discounts, rather than point-of-sale pricing.
Consolidated
selling, general and administrative (“SG&A”) expenses increased 10% in
fiscal 2006 from fiscal 2005. Expressed as a percentage of sales, SG&A
expenses were 21.1% in fiscal 2006, compared to 19.7% in fiscal 2005. Same-store
SG&A expenses increased 4% in fiscal 2006 from 2005. At the business units
that suffered sales declines in fiscal 2006 from the equipment brand transition,
management did not undertake corresponding cost reduction measures, which would
have required forced staff reductions, but allowed attrition to reduce SG&A
expenses below prior year levels. Total payroll costs were 57% and 58% of
SG&A expenses in fiscal 2006 and 2005, respectively. Variable compensation
decreased from 14% of SG&A expenses in fiscal 2005 to 12% of SG&A
expenses in fiscal 2006, as a result of lower operating income in fiscal
2006.
Interest
expense increased 41% in fiscal 2006 due principally to short-term interest
rates that rose continuously during the year. Average funded indebtedness
increased 8% over fiscal 2005, as the Company used its revolving credit line
for
working capital both to access favorable payment terms with suppliers and to
finance customer receivables and inventories associated with new branch
operations. In fiscal 2006 and 2005, interest expense was 0.7% and 0.5% of
sales, respectively. As described above, the Company’s interest rate swap
agreements were accounted for as investments in fiscal 2006 and 2005. Such
agreements generated a gain of $247,000 in fiscal 2006 and a loss of $50,000
in
fiscal 2005, based on monthly payments made or received for the difference
between the fixed rate and the market rate and changes in the market value
of
the derivatives. Such gains and losses are principally a function of changes
in
the expected yield on long-term debt instruments. Other non-operating income,
which consists principally of finance charges collected from customers,
increased 15% from fiscal 2005 to 2006.
An
increase in the Company’s effective tax rate from 38.1% in fiscal 2005 to 39.6%
in fiscal 2006 occurred primarily due to higher state income taxes in 2006.
Liquidity
and Capital Resources
The
Company used $0.3 million of cash in operations in fiscal 2007 compared to
generating $3.7 million cash flow from operations in fiscal 2006. The positive
cash flow generated in fiscal 2006 resulted principally from extended payment
terms that the Company negotiated with its largest supplier for inventory
shipments in the fourth quarter of the fiscal year. In March 2006, the Company
paid $3.6 million to the supplier pursuant to the extended payment terms.
Accounts receivable represented 46 days of gross sales at the end of fiscal
2007, compared to 45 days at the end of fiscal 2006. Inventories increased
$5.3
million from February 28, 2006 to February 28, 2007, of which $3.7
million was at branch operations that we opened in fiscal 2007.
The
Company made capital expenditures of $1.8 million in fiscal 2007, compared
to
$1.5 million in fiscal 2006. A majority of the assets acquired by the Company
in
both fiscal years were for leasehold improvements at new and relocated branch
operations and for warehouse equipment.
Net
cash
provided by financing activities was $1.2 million in fiscal 2007, compared
to
net cash used in financing activities of $3.2 million in fiscal 2006. The
Company utilizes a cash management system that applies cash generated from
operations, as discussed above, to reduce indebtedness under its revolving
credit line. The additional funds borrowed in fiscal 2007 were for new branch
openings.
As
of
February 28, 2007, the Company has a credit arrangement (“Agreement”) with
a commercial bank, which includes both a $45 million revolving line of credit
and a $5 million credit line that may be used for capital expenditures or to
purchase real estate. The amount that may be borrowed under the revolving credit
line is limited to a borrowing base consisting of 85% of eligible accounts
receivable, and from 50% to 65% of eligible inventory, depending on the time
of
year. At February 28, 2007, the Company’s available credit under the
revolver was $11.2 million. The Agreement terminates in August 2008.
As
of
February 28, 2007, the Company had outstanding borrowings of $24,361,000 on
the revolving line of credit and $624,000 under the capital expenditure
facility. In addition, the Company had an outstanding letter of credit for
$926,000 against the line of credit. Borrowings under the capital expenditure
facility are repaid in equal monthly principal installments of $6,593 plus
interest.
Borrowings
under both facilities bear interest based on the prime rate or LIBOR, plus
a
spread that is dependent on the Company’s financial performance. As of
February 28, 2007, the applicable interest rate on both facilities was the
prime rate, or LIBOR plus 1.375%, and the Company had elected the LIBOR option
(5.375%) at February 28, 2007 for substantially all amounts outstanding
under the facilities. A commitment fee of 0.25% is paid on the unused portion
of
the revolving credit line.
The
Agreement contains customary loan covenants with respect to the Company’s net
worth, fixed charge coverage, leverage ratio, and ratio of funded debt to
earnings before interest, income tax, depreciation, amortization and non-cash
compensation expense. The Agreement also contains various affirmative and
negative covenants unrelated to the Company’s financial performance, including a
prohibition on payment of dividends. Failure to comply with any financial or
non-financial covenant, if not promptly cured, constitutes an Event of Default
under the Agreement. Certain other specified events and any Material Adverse
Change, as determined by the bank, also constitute an Event of Default. The
existence of an Event of Default gives the bank a right to accelerate all
outstanding indebtedness under the Agreement. As of February 28, 2007, the
Company was in compliance with all of the required financial and non-financial
covenants.
The
Agreement does not require the Company to use lockbox or similar arrangements
pursuant to which the bank would exercise control over collection proceeds
and
the discretion to reduce indebtedness under the Agreement. If an event of
default exists, the bank may offset against the Company’s indebtedness all funds
of the Company that are held in accounts at the bank. The Company is not
required to maintain deposit balances at the bank, although the Company has
elected to utilize the bank’s treasury management services.
We
expect
that cash flows from operations and the borrowing availability under our
revolving credit facility will provide sufficient liquidity to meet the
Company’s normal operating requirements, debt service and expected capital
expenditures. Subject to limitations set forth in the Agreement, funds available
under the revolving credit facility may be utilized to finance
acquisitions.
Contractual
Obligations and Off-Balance Sheet Arrangements
The
Company’s future contractual obligations and potential commercial commitments as
of February 28, 2007 are summarized as follows (in thousands):
|
Payments
Due by Period
|
Contractual
Obligations
|
Total
|
Less
than 1 Year
|
1-3
Years
|
4-5
Years
|
After
5
Years
|
Revolving
credit facility
|
$24,361
|
―
|
$24,361
|
―
|
―
|
Long-term
debt
|
1,345
|
131
|
627
|
74
|
513
|
Capital
lease obligations
|
572
|
160
|
303
|
109
|
―
|
Operating
leases
|
30,836
|
7,806
|
12,771
|
7,060
|
3,199
|
Estimated
interest payments
|
4,173
|
2,488
|
1,343
|
145
|
197
|
Total
Contractual Obligations (including interest)
|
$61,287
|
$10,585
|
$39,405
|
$7,388
|
$3,909
|
|
|
|
Expiration
Per Period
|
Other
Commercial Commitments
|
Amounts
Committed
|
Less
Than 1 Year
|
Consigned
inventory
|
|
$6,278
|
$6,278
|
Standby
letter of credit
|
|
926
|
926
|
Total
Other Commercial Commitments
|
$7,204
|
$7,204
|
As
described above under Liquidity and Capital Resources, most of the Company’s
indebtedness bears interest at variable rates. In addition, borrowings
outstanding under the revolving credit line fluctuate. The estimated interest
payments reflected in the table above are based on both the amount outstanding
under the revolving credit facility and the variable interest rate in effect
as
of February 28, 2007.
In
October 2006 the Company entered into two interest rate swap agreements totaling
$20 million whereby the Company has agreed to exchange, at monthly intervals,
the difference between the fixed rates of 5.04% and 5.07% and LIBOR, amounts
as
calculated by reference to a notional principal amount of $10 million on each
interest rate swap agreement. The interest rate swaps mature in November 2009
and 2011 respectively.
At
inception, the derivatives qualify for hedge accounting. The fair value of
the
derivatives represented a liability of $142,963 at February 28, 2007. The
derivatives were effective as hedges at February 28, 2007. The liability to
record the hedges at fair value will only be realized if the Company terminates
the derivative contracts prior to maturity.
The
majority of operating lease commitments is for office and warehouse space
occupied by the Company’s branch operations. The Company also has operating
leases for vehicles and office equipment. Management believes that its capital
resources are better utilized for working capital needed to support the growth
of operations than for investment in real property and other capital assets
that
may be leased.
Consigned
inventory is held at a majority of the Company’s branch locations in Texas,
California and Georgia. Under terms of the consignment program, the Company
pays
for such inventory in the month after it is sold. The supplier of the consigned
inventory, Haier USA, retains title and legal control over the inventory until
it is purchased by the Company.
The
Company customarily issues purchase orders to suppliers for inventory based
on
current requirements. Such purchase orders are usually fulfilled by suppliers,
and accepted by the Company, in less than sixty days. Most of such orders do
not
represent contractual obligations and may be amended or canceled prior to
fulfillment.
A
standby
letter of credit is used as collateral under a self-insurance program for
workers’ compensation, general liability and vehicles. The letter of credit is
not expected to result in any material loss or obligation, as insurance claims
under the program are paid in the ordinary course of business.
The
Company has no off-balance sheet arrangements. The Company has not entered
into
any transactions with unconsolidated entities such as special-purpose entities
that would be established for the purpose of facilitating off-balance sheet
arrangements.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Standards (“SFAS”) No. 157, “Fair Value Measurements.”
This Statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The provisions of SFAS No. 157 are effective for
the
Company beginning March 1, 2008. We are currently evaluating the impact of
adopting SFAS No. 157 on our consolidated financial statements but the Company
believes the impact, if any, will not be material to the consolidated financial
statement.
In
September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” SAB No. 108 addresses how
the effects of prior year uncorrected misstatements should be considered when
quantifying misstatements in current year financial statements. SAB No. 108
requires companies to quantify misstatements using a balance sheet and income
statement approach and to evaluate whether either approach results in
quantifying an error that is material in light of relevant quantitative and
qualitative factors. SAB No. 108 permits existing public companies to initially
apply its provisions either by (i) restating prior financial statements as
if
the “dual approach” had always been used or (ii) recording the cumulative effect
of initially applying the “dual approach” as adjustments to the carrying value
of assets and liabilities as of January 1, 2006 with an offsetting adjustment
recorded to the opening balance of retained earnings. Use of the “cumulative
effect” transition method requires detailed disclosure of the nature and amount
of each individual error being corrected through the cumulative adjustment
and
how and when it arose. The adoption of SAB No. 108 did not have a material
impact on the Company’s consolidated financial statements.
In
June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement No. 109” (“FIN No. 48”). This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in a company’s financial statements in accordance with SFAS No. 109,
“Accounting for Income Taxes.”
This
interpretation seeks to reduce the diversity in practice associated with certain
aspects of measurement and recognition in accounting for income taxes. In
addition, it requires expanded disclosure with respect to the uncertainty in
income taxes. FIN No. 48 is effective for fiscal years beginning after December
15, 2006; thus, the Company’s effective date is March 1, 2007. The Company has
not evaluated the potential impact to the consolidated financial statements,
but
believes the impact if any, is not expected to be material to the consolidated
financial statements.
Critical
Accounting Policies
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make assumptions
and estimates that affect reported amounts and related disclosures. Actual
results, once known, may vary from these estimates. We base our estimates on
historical experience, current trends and other factors that are believed to
be
reasonable under the circumstances. We believe that the following accounting
policies require a higher degree of judgment in making its estimates and,
therefore, are critical accounting policies.
Allowance
for Doubtful Accounts
The
Company records an allowance for doubtful accounts for estimated losses
resulting from the inability to collect accounts receivable from customers.
The
Company establishes the allowance based on historical experience, credit risk
of
specific customers and transactions, and other factors. We believe that the
lack
of customer concentration is a significant factor that mitigates the Company’s
accounts receivable credit risk. Two customers represented 6% and 2% of
consolidated fiscal 2007 sales, respectively, and no other customer comprised
as
much as 1% of sales. The number of customers and their distribution across
the
geographic areas served by the Company help to reduce the Company’s credit
exposure to a single customer or to economic events that affect a particular
geographic region. Although we believe that our allowance for doubtful accounts
is adequate, any future condition that would impair the ability of a broad
section of the Company’s customer base to make payments on a timely basis may
require us to record additional allowances.
Inventories
Inventories
consist of HVAC equipment, parts and supplies and are valued at the lower of
cost or market value using the moving average cost method. At February 28,
2007, all inventories represented finished goods held for sale. When necessary,
the carrying value of obsolete or excess inventory is reduced to estimated
net
realizable value. The process for evaluating the value of obsolete or excess
inventory requires estimates by management concerning future sales levels and
the quantities and prices at which such inventory can be sold in the ordinary
course of business.
The
Company holds a substantial amount of HVAC equipment inventory at several
branches on consignment from a supplier. The terms of this arrangement provide
that the inventory is held for sale in bonded warehouses at the branch premises,
with payment due only when products are sold. The supplier retains legal title
to the consigned inventory. The Company is responsible for damage to and loss
of
inventory that may occur at its premises.
This
consignment arrangement allows the Company to have inventory available for
sale
to customers without incurring a payment obligation for the inventory prior
to a
sale. Because of the control retained by the supplier and the uncertain time
when a payment obligation will be incurred, the Company does not record the
consigned inventory as an asset upon receipt with a corresponding liability.
Rather, the Company records a liability to the supplier only upon sale of the
inventory to a customer. The amount of the consigned inventory is disclosed
in
the Notes to the Company’s financial statements as a contingent
obligation.
Vendor
Rebates
The
Company receives rebates from certain vendors based on the volume of product
purchased from the vendor. The Company records rebates when they are earned,
(i.e., as specified purchase volume levels are reached or are reasonably assured
of attainment). Vendor rebates attributable to unsold inventory are carried
as a
reduction of the carrying value of inventory until such inventory is sold,
at
which time the related rebates are used to reduce cost of
sales.
Goodwill
Goodwill
represents the excess of purchase price paid over the fair value of net assets
acquired in connection with business acquisitions. The assessment of
recoverability of goodwill requires management to project future operating
results and other variables to estimate the fair value of the enterprise. Future
operating results can be affected by changes in market or industry conditions.
Self-Insurance
Reserves
The
Company is self-insured for various levels of general liability, workers’
compensation, vehicle, and employee medical coverage. The level of exposure
from
catastrophic events is limited by stop-loss and aggregate liability reinsurance
coverage. When estimating the self-insurance liabilities and related reserves,
the Company considers a number of factors, which include historical claims
experience, demographic factors and severity factors. If actual claims or
adverse development of loss reserves occurs and exceed these estimates,
additional reserves may be required that could materially impact the
consolidated results of operations.
Interest
Rate Derivative Instruments
The
Company has interest rate derivatives that qualify for hedge accounting in
accordance with SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. The fair value of these derivative instruments is reflected
on the Company’s balance sheets, and changes in the fair value of such
derivatives are recorded net of deferred tax benefit in other comprehensive
loss. Payments received or paid by the Company during the term of the derivative
contract as a result of differences between the fixed interest rate of the
derivative and the market interest rate are recorded as adjustments to interest
expense.
Safe
Harbor Statement
This
Annual Report on Form 10-K 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 statements of historical facts. Forward-looking statements involve risks
and uncertainties, which 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 applicable
securities laws. In addition to other factors and matters discussed elsewhere
herein, the following are important factors 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 conditions that affect the level of
construction activity.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
The
Company is subject to market risk exposure related to changes in interest rates
on its bank 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. The Company may, at its option,
fix the interest rate for borrowings under the facility based on a spread over
LIBOR for 30 days to 3 months.
At
February 28, 2007 the Company had $25.0 million outstanding under its bank
credit facility, of which $5.0 million is subject to variable interest rates.
Based on this balance, an immediate change of one percent in the interest rate
would cause a change in interest expense of approximately $50,000, and no change
per basic share, on an annual basis. The Company has two interest rate
derivative instruments of $10 million each for a total notional amount of $20
million that expire in November 2009 and 2011, respectively. The instruments
fix
LIBOR at 5.04% and 5.07% respectively, on the notional amounts.
Item 8.
Financial Statements and Supplementary Data.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
OF
ACR GROUP, INC. AND SUBSIDIARIES
|
|
|
Page
|
Report
of Independent Registered Public Accounting Firm
|
21
|
Consolidated
Balance Sheets as of February 28, 2007 and 2006
|
22
|
Consolidated
Statements of Income for the fiscal years ended February 28, 2007,
2006 and 2005
|
24
|
Consolidated
Statements of Shareholders’ Equity for the fiscal years ended
February 28, 2007, 2006 and 2005
|
25
|
Consolidated
Statements of Cash Flows for the fiscal years ended February 28,
2007, 2006 and 2005
|
26
|
Notes
to Consolidated Financial Statements
|
28
|
Schedule
of Valuation and Qualifying Accounts
|
43
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and Shareholders
ACR
Group, Inc.
We
have
audited the accompanying consolidated balance sheets of ACR Group, Inc. and
subsidiaries as of February 28, 2007 and 2006 and the related consolidated
statements of income, shareholders’ equity, and cash flows for each of the three
years in the period ended February 28, 2007. Our audits also included the
financial statement schedule listed in the index at Item 15(a). These
financial statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion of the effectiveness of the Company’s internal control over financial
reporting. Accordingly we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements and schedule, assessing the accounting principles
used
and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and the schedule. 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 financial position of ACR Group, Inc. and
subsidiaries at February 28, 2007 and 2006 and the results of their
operations and their cash flows for each of the three years in the period ended
February 28, 2007, in conformity with accounting principles generally accepted
in the United States of America.
As
discussed in Note 1 to the Consolidated Financial Statements, effective March
1,
2006, the Company adopted the provisions of FAS 123(R) “Share-based
Payments”.
Also,
in
our opinion, the schedule listed in the accompanying index presents fairly,
in
all material respects, the information set forth therein for the years ended
February 28, 2007, 2006 and 2005.
BDO
Seidman, LLP
Houston,
Texas
May 25,
2007
ACR
GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(in
thousands)
ASSETS
|
February
28,
|
Current
assets:
|
2007
|
2006
|
Cash
|
$1,135
|
$1,275
|
Accounts
receivable, net
|
23,330
|
22,380
|
Inventories,
net
|
43,516
|
38,264
|
Prepaid
expenses and other current assets
|
1,619
|
1,250
|
Deferred
income taxes
|
1,652
|
1,338
|
|
|
|
Total
current assets
|
71,252
|
64,507
|
|
|
|
Property
and equipment, net
|
5,647
|
4,844
|
Goodwill
|
5,408
|
5,408
|
Interest
derivative asset
|
―
|
298
|
Other
assets
|
853
|
979
|
|
|
|
Total
assets
|
$83,160
|
$76,036
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ACR
GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except per share data)
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
February
28,
|
|
2007
|
2006
|
|
|
|
Current
liabilities:
|
|
|
Current
maturities of long-term debt
|
$131
|
$128
|
Current
maturities of capital lease obligations
|
160
|
145
|
Accounts
payable
|
23,106
|
25,002
|
Accrued
expenses and other current liabilities
|
5,931
|
4,597
|
Income
tax payable
|
232
|
146
|
Total
current liabilities
|
29,560
|
30,018
|
|
|
|
Borrowings
under revolving credit agreement
|
24,361
|
22,940
|
Long-term
notes, net of current maturities
|
1,214
|
1,344
|
Long-term
capital lease obligations, net of current maturities
|
412
|
248
|
Interest
derivative liability
|
143
|
―
|
Deferred
income taxes
|
184
|
340
|
Total
long-term liabilities
|
26,314
|
24,872
|
|
|
|
|
|
|
Commitments
and contingencies (Notes 5 and 10)
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
Preferred
stock, $.01 par, authorized 2,000,000 shares, none outstanding
|
―
|
―
|
Common
stock, $.01 par, authorized 25,000,000 shares, 12,113,078 and 12,000,294
issued and outstanding at February 28, 2007 and 2006, respectively
|
121
|
120
|
Paid-in
capital
|
43,286
|
44,413
|
Accumulated
other comprehensive loss, net of tax
|
(88)
|
―
|
Unearned
restricted stock compensation
|
―
|
(1,612)
|
Accumulated
deficit
|
(16,033)
|
(21,775)
|
|
|
|
Total
shareholders’ equity
|
27,286
|
21,146
|
|
|
|
Total
liabilities and shareholders’ equity
|
$83,160
|
$76,036
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ACR
GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(in
thousands, except per share data)
|
For
the Years Ended
February
28,
|
|
2007
|
2006
|
2005
|
Sales
|
$239,643
|
$204,312
|
$199,553
|
Cost
of sales
|
178,607
|
155,981
|
152,908
|
Gross
profit
|
61,036
|
48,331
|
46,645
|
Selling,
general and administrative expenses
|
50,042
|
43,197
|
39,315
|
Operating
income
|
10,994
|
5,134
|
7,330
|
Interest
expense
|
2,451
|
1,489
|
1,060
|
Interest
derivative (gain) loss
|
(84)
|
(247)
|
50
|
Other
non-operating income
|
(659)
|
(666)
|
(579)
|
|
|
|
|
Income
before income taxes
|
9,286
|
4,558
|
6,799
|
Provision
(benefit) for income taxes:
|
|
|
|
Current
|
3,960
|
1,577
|
2,709
|
Deferred
|
(416)
|
227
|
(121)
|
|
|
|
|
Net
income
|
$5,742
|
$2,754
|
$4,211
|
|
|
|
|
Earnings
per common share:
|
|
|
|
Basic
|
$.51
|
$.25
|
$.39
|
Diluted
|
$.49
|
$.24
|
$.38
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ACR
GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(in
thousands, except share data)
|
No.
of
Shares
Outstanding
|
Par
Value
|
Paid-in
Capital
|
Unearned
Restricted
Stock
Compensation
|
Accumulated
Other Comprehensive Income (loss)
|
Accumulated
Deficit
|
Total
|
Balance,
February 29, 2004
|
10,681,294
|
$107
|
$41,691
|
$—
|
$—
|
$(28,740)
|
$13,058
|
Issuances
of shares of restricted common stock
|
1,084,000
|
11
|
2,261
|
(2,272)
|
—
|
—
|
—
|
Stock
issuances from exercise of stock options
|
39,000
|
—
|
46
|
—
|
—
|
—
|
46
|
Amortization
of unearned restricted stock compensation
|
—
|
—
|
—
|
389
|
—
|
—
|
389
|
Net
income
|
—
|
—
|
—
|
—
|
—
|
4,211
|
4,211
|
|
|
|
|
|
—
|
|
|
Balance,
February 28, 2005
|
11,804,294
|
118
|
43,998
|
(1,883)
|
—
|
(24,529)
|
17,704
|
Issuances
of shares of restricted common stock
|
50,000
|
1
|
136
|
(137)
|
—
|
—
|
—
|
Stock
issuances from exercise of stock options
|
146,000
|
1
|
171
|
—
|
—
|
—
|
172
|
Amortization
of unearned restricted stock compensation
|
—
|
—
|
—
|
408
|
—
|
—
|
408
|
Tax
benefit from restricted stock compensation
|
—
|
—
|
108
|
—
|
—
|
—
|
108
|
Net
income
|
—
|
—
|
—
|
—
|
—
|
2,754
|
2,754
|
|
|
|
|
|
—
|
|
|
Balance,
February 28, 2006
|
12,000,294
|
120
|
44,413
|
(1,612)
|
—
|
(21,775)
|
21,146
|
Effect
of adoption of SFAS 123(R)
|
—
|
—
|
(1,612)
|
1,612
|
—
|
—
|
—
|
Issuances
(net) of shares of restricted common stock
|
89,284
|
1
|
(165)
|
—
|
—
|
—
|
(164)
|
Stock
issuances from exercise of stock options
|
23,500
|
—
|
35
|
—
|
—
|
—
|
35
|
Restricted
stock compensation
|
—
|
—
|
512
|
—
|
—
|
—
|
512
|
Tax
benefit from restricted stock compensation
|
—
|
—
|
103
|
—
|
—
|
—
|
103
|
Comprehensive
Income:
|
|
|
|
|
|
|
|
Net
Income
|
—
|
—
|
—
|
—
|
—
|
5,742
|
5,742
|
Other
comprehensive loss, change in fair market value of interest derivative,
net of tax
|
—
|
—
|
—
|
—
|
(88)
|
—
|
(88)
|
Comprehensive
Income:
|
|
|
|
|
|
|
5,654
|
Balance,
February 28, 2007
|
12,113,078
|
$121
|
$43,286
|
$—
|
$(88)
|
$(16,033)
|
$27,286
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ACR
GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
2007
|
2006
|
2005
|
Cash
flows from operating activities:
|
|
|
|
Net
income
|
$5,742
|
$2,754
|
$4,211
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
Depreciation
and amortization
|
1,008
|
889
|
914
|
Provision
for doubtful accounts
|
799
|
735
|
557
|
Loss
(gain) on sale of assets
|
(28)
|
(19)
|
30
|
Market
value of interest derivative
|
(84)
|
(247)
|
50
|
Deferred
income taxes
|
(416)
|
227
|
(121)
|
Amortization
of unearned restricted stock compensation
|
512
|
408
|
389
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|
|
|
Accounts
receivable
|
(1,748)
|
(2,196)
|
(3,205)
|
Inventories
|
(5,252)
|
(5,341)
|
(4,740)
|
Prepaid
expenses and other assets
|
(220)
|
(882)
|
509
|
Accounts
payable
|
(1,896)
|
6,728
|
(1,002)
|
Accrued
expenses and other liabilities
|
1,258
|
574
|
874
|
Tax
benefit from restricted stock compensation
|
-
|
108
|
-
|
Net
cash (used in) provided by operating activities
|
(325)
|
3,738
|
(1,534)
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
Purchase
of property and equipment
|
(1,452)
|
(1,180)
|
(817)
|
Business
acquisition, net of cash acquired
|
—
|
(148)
|
―
|
Proceeds
from disposition of assets
|
11
|
59
|
236
|
Receipts
(payments) on derivative instrument
|
382
|
(120)
|
(445)
|
|
|
|
|
Net
cash used in investing activities
|
(1,059)
|
(1,389)
|
(1,026)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
borrowings (payments) on revolving credit facility
|
1,420
|
(3,060)
|
4,914
|
Proceeds
from long-term debt
|
―
|
―
|
875
|
Payments
on long-term debt
|
(316)
|
(321)
|
(1,192)
|
Proceeds
from exercise of stock options
|
35
|
172
|
46
|
Tax
benefit from restricted stock compensation
|
103
|
-
|
—
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
1,242
|
(3,209)
|
4,643
|
|
|
|
|
Net
(decrease) increase in cash
|
(140)
|
(860)
|
2,083
|
Cash
at beginning of year
|
1,275
|
2,135
|
52
|
|
|
|
|
Cash
at end of year
|
$1,135
|
$1,275
|
$2,135
|
|
|
|
|
Schedule
of non-cash investing and financing activities:
|
|
|
|
Purchases
of property and equipment
|
|
|
|
For
notes payable
|
$—
|
$—
|
$32
|
Under
capital leases
|
367
|
277
|
87
|
Supplemental
cash flow information:
|
|
|
|
Interest
paid
|
2,451
|
1,489
|
1,060
|
Interest
derivative payments (receipts)
|
(571)
|
(120)
|
445
|
Income
taxes paid
|
3,710
|
1,951
|
2,225
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ACR
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts
in thousands, except share and per share data)
1—Description
of Business and Summary of Significant Accounting Policies
Description
of Business
ACR
Group, Inc.’s (which together with its subsidiaries is herein referred to as the
“Company”, we, us or our) principal business is the wholesale distribution of
heating, ventilating, air conditioning and refrigeration (“HVAC”) equipment,
parts and supplies in the southern United States, including operations in:
Arizona, California, Colorado, Florida, Georgia, Louisiana, Nevada, New Mexico,
Tennessee and Texas. Approximately 34% of our revenues are from sales of HVAC
equipment; the remaining 66% of our sales is from installation supplies and
service parts. Substantially all of the Company’s sales are to contractor
dealers and institutional end-users.
Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information, allows the aggregation of an enterprise’s
segments if they are similar. The Company operates in different geographic
areas; however, we have reviewed the aggregation criteria and determined that
the Company operates as one segment based on the high degree of similarity
of
the following aspects of our operations:
|
nature
of products and services
|
|
customer
markets served
|
|
methods
used to acquire and distribute products
|
|
economic
characteristics that influence the results of operations in different
geographical areas
|
Basis
of Consolidation
The
consolidated financial statements include the accounts of the Company and all
of
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Use
of Estimates
The
preparation of consolidated financial statements in accordance with U.S.
generally accepted accounting principles requires the Company to make estimates
and judgments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an ongoing basis the Company evaluates significant
estimates. These estimates include valuation reserves for accounts receivable,
inventory and income taxes including the valuation allowance for deferred tax
assets, reserves related to self-insurance programs, valuation of goodwill,
contingencies and litigation. Estimates are based on historical experience
and
on various other assumptions that are believed to be reasonable, the results
of
which form the basis for making judgments about the carrying value of our assets
and liabilities. Actual results may differ from these estimates under different
assumptions or conditions.
Revenue
Recognition
Revenue
is recognized in accordance with Securities and Exchange Commission Staff
Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” (which
superceded SAB No. 101, “Revenue Recognition in Financial Statements,” as
amended). Revenue consists of sales of HVAC products. SAB 104 requires that
four
basic criteria must be met before revenue can be recognized: (1) persuasive
evidence of an arrangement exists, (2) delivery has occurred or services
have been rendered, (3) the amounts recognized are fixed and determinable,
and (4) collectibility is reasonably assured. Revenue is recorded when
shipment of products has occurred. Assessment of collection is based on a number
of factors, including past transactions, credit-worthiness of customers,
historical trends and other information. Substantially all customer returns
relate to products that are returned under warranty obligations underwritten
by
manufacturers, effectively eliminating the risk of loss for customer returns.
Allowance
for Doubtful Accounts
The
Company records an allowance for doubtful accounts for estimated losses
resulting from the inability to collect accounts receivable from customers.
The
Company establishes the allowance based on historical experience, credit risk
of
specific customers and transactions, and other factors. Management believes
that
the lack of customer concentration is a significant factor that mitigates the
Company’s accounts receivable credit risk. The two largest customers represented
6% and 2% of consolidated fiscal 2007 sales, respectively, and no other customer
comprised as much as 1% of sales.
The
number of customers and their distribution across the geographic areas served
by
the Company help to reduce the Company’s credit exposure to a single customer or
to economic events that affect a particular geographic region. At
February 28, 2007 and 2006, the allowance for doubtful accounts totaled
$1,090 and $906 respectively. Although the Company believes that its allowance
for doubtful accounts is adequate, any future condition that would impair the
ability of a broad section of the Company’s customer base to make payments on a
timely basis may require the Company to record additional allowances.
Inventories
Inventories
consist of HVAC equipment, parts and supplies and are valued at the lower of
cost or market value using the moving average cost method. At February 28,
2007 and 2006, all inventories represented finished goods held for sale. When
necessary, the carrying value of obsolete or excess inventory is reduced to
estimated net realizable value. The process for evaluating the value of obsolete
or excess inventory requires estimates by management concerning future sales
levels and the quantities and prices at which such inventory can be sold in
the
ordinary course of business. Inventory reserve policies are reviewed
periodically, reflecting current risks, trends and changes in industry
conditions. A reserve for estimated inventory shrinkage is also maintained
to
consider inventory shortages determined from cycle counts and physical
inventories. At February 28, 2007 and 2006, inventory reserves totaled $420
and $548, respectively.
The
Company has an arrangement with an HVAC equipment manufacturer and a bonded
warehouse agent whereby HVAC equipment is held for sale in bonded warehouses
located at the premises of certain of the Company’s operations, with payment due
only when products are sold. The supplier retains legal title with respect
to
the consigned inventory. The Company is responsible for damage to and loss
of
inventory that may occur at its premises. Such inventory is accounted for as
consigned merchandise and is not recorded on the Company’s balance sheets. The
cost of consigned inventory held in the bonded warehouses was $6,278 and $9,407
at February 28, 2007 and 2006, respectively.
Vendor
Rebates
The
Company receives rebates from certain vendors based on the volume of product
purchased from the vendor. The Company records rebates when they are earned,
(i.e., as specified purchase volume levels are reached or are reasonably assured
of attainment). The Company’s accounting for rebates is in accordance with
Emerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor.” EITF 02-16 requires that the Company record rebates as a reduction of
inventory until the related product is sold, at which time such rebates are
reflected as a reduction of cost of sales in the consolidated statements of
income. Throughout the year, the Company estimates the amount of the rebate
earned based on our estimate of purchases to date relative to the purchase
levels that mark our progress toward earning the rebates. Quarterly revision
of
these estimates of earned vendor rebates is based on actual purchase levels.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation and amortization are provided
on
the straight-line method over the following estimated useful lives.
|
|
Buildings
|
20-40
years
|
Leasehold
improvements
|
Lesser
of useful life or lease term
|
Furniture
and fixtures
|
5-7
years
|
Vehicles
|
3-6
years
|
Warehouse
and office equipment
|
3-10
years
|
The
Company reviews the carrying value of property, plant, and equipment for
impairment whenever events and circumstances indicate that the carrying value
of
an asset may not be recoverable from the estimated future cash flows expected
to
result from its use and eventual disposition. In cases where undiscounted
expected future cash flows are less than the carrying value, an impairment
loss
is recognized equal to an amount by which the carrying value exceeds the fair
value of assets. The factors considered by management in performing this
assessment include current operating results, trends, and prospects, as well
as
the effects of obsolescence, demand, competition, and other economic factors,
There was no impairment charge recorded for the years ended February 28, 2007,
2006, and 2005.
Goodwill
Goodwill
is recorded when the purchase price paid for an acquisition exceeds the
estimated fair value of the net identified tangible and intangible assets
acquired. In accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” an annual
impairment review is performed, or more frequently if indicators of potential
impairment exist, to determine if the carrying value of the recorded goodwill
is
impaired. The impairment review process compares the fair value of the reporting
unit in which goodwill resides to its carrying value. The Company’s reporting
unit is at the enterprise or consolidated company level. If the fair value
of
the reporting unit is less than its carrying value, an impairment loss is
recorded to the extent that the implied fair value of goodwill (as defined
under
SFAS No. 142) within the reporting unit is less than its carrying value.
At
February 28, 2007, the Company had goodwill of $5,408. During fiscal 2006,
the
Company recorded additional goodwill of $150 related to an acquisition. The
Company completed its annual impairment test as of February 28, 2007. The
impairment test was conducted at the enterprise level (the reporting unit)
for
the Company, and no impairment charge was necessary for the year ended
February 28, 2007.
Interest
Rate Derivative Instruments
At
February 28, 2007, the Company’s interest rate derivative instruments qualify as
hedges, in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The fair value of the derivative instruments
is reflected on the Company’s balance sheets, and changes in the fair value of
such derivatives are recorded in accumulated other comprehensive income (loss),
net of income tax, if the derivative is effective as a hedge. Ineffective
portions of changes in fair value of interest rate derivative instrument are
recognized in earnings. Payments made or received by the Company during the
term
of the derivative contract as a result of differences between the fixed interest
rate of the derivative instruments and the market interest rate are offset
against interest expense in the Company’s statement of income. At February 28,
2007, the Company’s derivative interest rate instruments were effective as
hedges.
At
February 28, 2007, the Company had two $10 million notional value derivative
instruments maturing in 2009 and 2011, at fixed rates of 5.04% and 5.07%,
respectively both of which are less then the current market rate. At February
28, 2006 we had a $15 million notional value derivative instrument at a fixed
rate of 4.38%, which was terminated prio rto the scheduled maturity. At
February 28, 2007 the Company recorded $143 in interest derivative
liability, and at February 28, 2006 recorded $298 as an interest derivative
asset to report the instruments at fair value. For the year ended
February 28, 2007 the Company recorded in accumulated other comprehensive
loss a decline in fair value of $88, net of tax. For the years ended February
28, 2006 and 2005, the Company recorded an unrealized gain (loss) of $247 and
$(50), respectively, from changes in the fair value of interest rate derivative
instruments and payments made or received as a result of differences between
the
fixed interest rate of the derivative instruments and the market interest rate
during such periods.
Comprehensive
Income
SFAS
No.
130, “Reporting Comprehensive Income,” establishes the rules for the reporting
and display of comprehensive income (loss) and its components. SFAS No. 130
requires the Company to include unrealized gains or losses, net of related
taxes, on changes in the fair value of outstanding hedge positions. Generally,
gains are attributed to an increase in the LIBOR rate over the fixed rate on
our
interest rate hedges and losses are attributed to a decrease in the LIBOR rate
over the fixed rate on our interest rate hedges.
Self-Insurance
Reserves
We
are
self-insured for various levels of general liability, workers’ compensation,
vehicle, and employee medical coverage. The level of exposure from catastrophic
events is limited by stop-loss and aggregate liability reinsurance coverage.
When estimating the self-insurance liabilities and related reserves, the Company
considers a number of factors, which include historical claims experience,
demographic factors and severity factors.
If
actual
claims or adverse development of loss reserves occur and exceed these estimates,
additional reserves may be required that could materially impact the
consolidated results of operations. The estimation process contains uncertainty
since management must use judgment to estimate the ultimate cost that will
be
incurred to settle reported claims and unreported claims for incidents incurred
but not reported as of the balance sheet date. In February 2005, the Company
began to self-insure its general liability, workers’ compensation, and vehicle
liability exposures. At February 28, 2007 and 2006, $1,163 and $702 of
reserves were established related to all such insurance programs.
Income
Taxes
The
Company and its subsidiaries file a consolidated federal income tax return.
The
Company uses the liability method in accounting for income taxes. Under the
liability method, deferred tax assets and liabilities are determined based
on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. As income tax returns are
generally not filed until well after the fiscal year financial statements are
completed, the amounts recorded at fiscal year-end reflect estimates of what
the
final amounts will be when the actual income tax returns are filed for that
fiscal year. In addition, estimates are often required with respect to, among
other things, the appropriate state income tax rates to use in the various
states where the Company and its subsidiaries are required to file, the
potential utilization of operating loss carryforwards for both federal and
state
income tax purposes and valuation allowances required, if any, for tax assets
that may not be realizable in the future.
Stock-Based
Compensation
Prior
to
March 1, 2006, the Company accounted for share-based compensation for stock
options under the disclosure-only provisions of SFAS No. 123, “Accounting for
Stock Based Compensation.” Accordingly, no compensation cost was recognized
for the options granted under the Company’s stock option plan prior to March 1,
2006. Effective March 1, 2006, the Company adopted the provisions of SFAS No.
123 (Revised 2004), “Share-Based Payment,” (“SFAS 123R”). This Statement is
a revision of SFAS No. 123 and supersedes Accounting Principles Board (APB)
Opinion No. 25, “Accounting for Stock Issued to Employees.” Using the fair value
method and a Black-Scholes option pricing model, compensation cost recognized
in
the fiscal year ended February 28, 2007 included compensation costs for all
stock option-based payments granted prior to, but not yet exercised, as of
March
1, 2006. As prescribed by the modified prospective transition method in SFAS
No. 123R, results for prior periods have not been restated.
The
Company accounts for share-based compensation for restricted stock based on
the
market value at the grant date and records current expense based upon a
straight-line amortization over the vesting period.
As
a
result of adopting SFAS No. 123R, stock-based compensation expense for stock
options in the fiscal year ended February 28, 2007 was $3 net of tax. The
Company had no outstanding stock options after the quarter ended May 31,
2006.
Had
compensation expense for stock options been determined consistent with SFAS
123,
prior to March 1, 2006 the Company’s net income and earnings per share would
have been changed to the following pro forma amounts:
|
Year
Ended February 28,
|
|
2006
|
2005
|
|
|
|
Net
income applicable to common shareholders as reported
|
$2,754
|
$4,211
|
Total
stock-based employee compensation gain (expense) under fair value
method
for all awards, net of tax
|
19
|
(58)
|
Pro
forma income applicable to common shareholders
|
$2,773
|
$4,153
|
Earnings
per share:
|
|
|
Basic:
|
|
|
As
reported
|
$.25
|
$.39
|
Pro
forma
|
.25
|
.39
|
Diluted:
|
|
|
As
reported
|
$.24
|
$.38
|
Pro
forma
|
.24
|
.38
|
No
options were granted during fiscal 2007, 2006 and 2005.
Supplier/Sources
of Supply
The
Company has one primary supplier of HVAC equipment and repair parts. Purchases
from this supplier comprised 33% of total purchases in fiscal 2007 and 25%
in
fiscal 2006. Prior to fiscal 2006, the Company purchased a majority of its
equipment and repair parts from two primary suppliers. Purchases from such
suppliers comprised 43% of all purchases made in fiscal 2005. The Company has
not encountered any significant difficulty to date in obtaining equipment and
repair parts to support its operations at current or expected near-term future
levels. Any significant interruption by such a manufacturer, or a termination
of
a distributor agreement, could temporarily disrupt the operations of certain
subsidiaries. The Company believes that its relationships with suppliers of
complementary equipment products are a mitigating factor against this
risk.
Reclassifications
Certain
reclassifications were made to the prior years’ financial statements to conform
with current year presentation.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements.” This Statement defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The provisions of SFAS No. 157 are effective for the Company beginning
March 1, 2008. We are currently evaluating the impact of adopting SFAS No.
157
on our consolidated financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” SAB No. 108 addresses how
the effects of prior year uncorrected misstatements should be considered when
quantifying misstatements in current year financial statements. SAB No. 108
requires companies to quantify misstatements using a balance sheet and income
statement approach and to evaluate whether either approach results in
quantifying an error that is material in light of relevant quantitative and
qualitative factors. SAB No. 108 permits existing public companies to initially
apply its provisions either by (i) restating prior financial statements as
if
the “dual approach” had always been used or (ii) recording the cumulative effect
of initially applying the “dual approach” as adjustments to the carrying value
of assets and liabilities as of January 1, 2006 with an offsetting adjustment
recorded to the opening balance of retained earnings. Use of the “cumulative
effect” transition method requires detailed disclosure of the nature and amount
of each individual error being corrected through the cumulative adjustment
and
how and when it arose. The adoption of SAB No. 108 did not have a material
impact on the Company’s consolidated financial statements.
In
June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement No. 109” (“FIN No. 48”). This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in a company’s financial statements in accordance with SFAS No. 109,
“Accounting for Income Taxes.” This interpretation seeks to reduce the diversity
in practice associated with certain aspects of measurement and recognition
in
accounting for income taxes. In addition, it requires expanded disclosure with
respect to the uncertainty in income taxes. FIN No. 48 is effective for annual
periods after December 15, 2006, which for the Company its fiscal year beginning
March 1, 2007. The Company has not evaluated the potential impact to the
consolidated financial statements, but believes its impact if any, will not
be
material to the consolidated financial statements.
2—Property
and Equipment
Net
property and equipment consisted of the following at the end of February:
|
|
|
|
2007
|
2006
|
Land
|
$311
|
$311
|
Building
and leasehold improvements
|
5,071
|
4,519
|
Furniture
and fixtures
|
432
|
356
|
Vehicles
|
922
|
926
|
Warehouse
and office equipment
|
6,450
|
5,575
|
|
13,186
|
11,687
|
Less:
accumulated depreciation and amortization
|
(7,539)
|
(6,843)
|
Net
property and equipment
|
$5,647
|
$4,844
|
Capitalized
lease assets of $925 and $806, together with accumulated amortization of $208
and $303, are included in net property and equipment as of February 28,
2007 and 2006.
3—Accrued
Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities consisted of the following at the end
of
February:
|
2007
|
2006
|
Bonuses
and commissions
|
$2,321
|
$1,433
|
Vacation
|
558
|
499
|
Taxes,
other than income taxes
|
966
|
893
|
Self-insurance
reserves
|
1,163
|
702
|
Professional
fees
|
101
|
97
|
Customer
deposit
|
101
|
488
|
Deferred
rent
|
234
|
171
|
Other
|
487
|
314
|
|
$5,931
|
$4,597
|
4—Debt
Debt
is
summarized as follows at the end of February:
|
2007
|
2006
|
Borrowings
under revolving credit agreement
|
$24,361
|
$22,940
|
Other
long-term debt:
|
|
|
Capital
expenditure facility
|
624
|
704
|
Note
payable to sellers of real property
|
683
|
710
|
Other
|
38
|
58
|
Total
other long-term debt
|
1,345
|
1,472
|
|
25,706
|
24,412
|
Less
current maturities
|
(131)
|
(128)
|
Long-term
debt, less current maturities
|
$25,575
|
$24,284
|
In
fiscal
2007, the Company amended its credit arrangement (“Agreement”) with a commercial
bank to expand its revolving credit facility from $35 million to $45 million
and
to extend the maturity date of the agreement by one year to August 31, 2008.
All
other material terms of the credit arrangement were unchanged. Under the
arrangement, the Company also has a $5 million credit line that may be used
for
capital expenditures or to purchase real estate. The amount that may be borrowed
under the revolving credit facility is limited to a borrowing base consisting
of
85% of eligible accounts receivable, and from 50% to 65% of eligible inventory,
depending on the time of year. At February 28, 2007, the Company’s
available credit under the revolving credit line was $11.2 million.
As
of
February 28, 2007, the Company had outstanding borrowings of $24,361 on the
revolving line of credit and $624 under the capital expenditure facility. In
addition, the Company had an outstanding letter of credit for $926 against
the
line of credit. Borrowings under the capital expenditure facility are repaid
in
equal monthly principal installments of $7, plus interest. Borrowings under
both
facilities bear interest based on the prime rate or LIBOR, plus a spread that
is
dependent on the Company’s financial performance. As of February 28, 2007,
the applicable interest rate on both facilities was either the prime rate or
LIBOR plus 1.375%, and the Company had elected the LIBOR option (5.375% at
February 28, 2007) for all amounts outstanding under the facilities. A
commitment fee of 0.25% is paid on the unused portion of the revolving credit
line. The line of credit is secured by the Company’s accounts receivable and
inventory.
The
Agreement contains customary loan covenants with respect to the Company’s net
worth, fixed charge coverage, leverage ratio, and ratio of funded debt to
earnings before interest, income tax, depreciation, amortization and non-cash
compensation expense. The Agreement also contains various affirmative and
negative covenants unrelated to the Company’s financial performance, including a
prohibition on payment of dividends. Failure to comply with any financial or
non-financial covenant, if not promptly cured, constitutes an event of default
under the Agreement. Certain other specified events and any material adverse
change, as determined by the bank, also constitute an event of default. The
existence of an event of default gives the bank a right to accelerate all
outstanding indebtedness under the Agreement. As of February 28, 2007, the
Company was in compliance with all of the required financial and non-financial
covenants.
The
Agreement does not require the Company to use lockbox or similar arrangements
pursuant to which the bank would exercise control over collection proceeds
and
the discretion to reduce indebtedness under the Agreement. If an Event of
Default exists, the bank may offset against the Company’s indebtedness all funds
of the Company that are held in accounts at the bank. The Company is not
required to maintain deposit balances at the bank, although the Company has
elected to utilize the bank’s treasury management services.
In
2000,
the Company purchased real estate in Gainesville, Florida that is occupied
as a
branch operation for approximately $957. Of the purchase price, the sellers
financed $825 for a term of 25 years at an interest rate of 8.25% per
annum. The note is secured by a deed of trust on the real estate and all
improvements. As of February 28, 2007 and 2006, the note payable balance
was $683 and $710, respectively.
Based
upon the borrowing rates currently available to the Company for debt instruments
with similar terms and average maturities, the carrying value of long-term
debt
approximates fair value.
Future
maturities of debt are as follows:
Year:
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
|
$131
|
$24,952
|
$36
|
$37
|
$37
|
$513
|
5—Lease
Commitments
The
Company leases warehouse equipment, office equipment and vehicles under capital
leases. As of February 28, 2007 future minimum lease payments under capital
leases are as follows:
|
|
Year
ended February 28,
|
Capital lease
payments
|
2008
|
$190
|
2009
|
180
|
2010
|
164
|
2011
|
125
|
2012
|
34
|
|
|
Total
minimum lease payments
|
693
|
Less
amounts representing interest
|
(121)
|
|
|
Present
value of future minimum lease payments
|
572
|
Less
current maturities of capital lease obligations
|
(160)
|
|
|
Long-term
obligations under capital leases
|
$412
|
|
|
Additionally,
the Company leases its corporate offices, office and warehouse space occupied
by
its HVAC operations, office equipment and various vehicles under non-cancelable
operating lease agreements that expire at various dates through 2017. The leases
for its branch facilities often require that the Company pay the taxes,
insurance and maintenance expenses related to the leased properties. Certain
of
the Company’s lease agreements include renewal and/or purchase
options.
Future
minimum lease payments under such leases are as follows:
Year:
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Lease
Payments
|
$6,729
|
$5,819
|
$5,228
|
$3,905
|
$2,445
|
$3,106
|
Rental
expenses were $7,931, $6,531 and $5,149 in 2007, 2006 and 2005, respectively.
6—Income
Taxes
Federal
and state income tax provisions (benefits) are as follows:
|
Year
Ended February 28,
|
|
2007
|
2006
|
2005
|
Federal
|
|
|
|
Current
|
$3,440
|
$1,285
|
$2,476
|
Deferred
|
(418)
|
198
|
(104)
|
State
|
|
|
|
Current
|
520
|
292
|
233
|
Deferred
|
2
|
29
|
(17)
|
|
$3,544
|
$1,804
|
$2,588
|
The
difference between the income tax provision (benefits) computed at the statutory
federal income tax rate and the financial statement provision for taxes is
summarized below:
|
Year
Ended February 28,
|
|
2007
|
2006
|
2005
|
U.S.
tax at statutory rate
|
$3,157
|
$1,550
|
$2,312
|
State
income tax, net of federal benefit
|
309
|
212
|
258
|
Increase
(reduction) in tax expense
|
|
|
|
Resulting
from:
|
|
|
|
Change
in valuation allowance
|
—
|
—
|
(115)
|
Nondeductible
expenses
|
82
|
92
|
78
|
Other
provision adjustments
|
(4)
|
(50)
|
55
|
Income
tax provision
|
$3,544
|
$1,804
|
$2,588
|
The
Company is required to establish a valuation allowance for deferred tax assets
if, based on the weight of available evidence, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation
of
future taxable income during the periods in which those temporary differences
become deductible. Management considers both the projected future taxable income
and tax planning strategies in making this assessment. Based upon the level
of
historical taxable income and projections for future taxable income in the
periods which the deferred tax assets are deductible, management believes that
a
valuation allowance is not required, as it is more likely than not that the
results of future operations will generate sufficient taxable income to realize
the deferred tax assets.
Significant
components of our net deferred tax assets, net of deferred tax liabilities,
at
February 28 were as follows:
|
2007
|
2006
|
Current
deferred tax assets:
|
|
|
Section 263A
capitalization
|
$802
|
$701
|
Allowance
for doubtful accounts
|
467
|
226
|
Accrued
vacation
|
218
|
196
|
Inventory
reserves
|
165
|
215
|
Total
current deferred tax assets
|
$1,652
|
$1,338
|
|
|
|
Long-term
deferred tax assets (liabilities):
|
|
|
Fixed
asset depreciation
|
$289
|
$219
|
Interest
rate derivative
|
55
|
(101)
|
Restricted
stock expense
|
175
|
139
|
State
NOL carryforwards
|
77
|
79
|
Goodwill
and other amortization
|
(780)
|
(676)
|
Total
net long-term deferred tax liabilities
|
(184)
|
(340)
|
Net
deferred tax assets
|
$1,468
|
$998
|
The
state
net operating loss carryovers included in long-term deferred tax asset, begin
to
expire in 2010.
7-
Stock Based Compensation
Restricted
Stock Awards
Effective
March 1, 2004, the Chief Financial Officer and the General Counsel of the
Company entered into employment contracts that each provide for the contingent
issuance of 500,000 shares of restricted stock upon continuation of employment
for six years. Under the agreements, the restricted stock vests annually
pro-rata over such period. Compensation expense recognized under the agreements
was $358 in each of fiscal years 2007, 2006 and 2005.
Effective
March 1, 2004, two of the outside directors of the Company each received
restricted stock grants of 42,000 shares, subject to continuation of service
as
a director for four years. Additionally, effective August 18, 2005, another
outside director of the Company received 25,000 shares, subject to continuation
of service as a director for four years. Such shares vest annually pro-rata
over
such periods. For fiscal years ended February 28, 2007, 2006 and 2005 the
Company recognized $47, $39 and $30, respectively, as compensation expense
related to the director’s restricted stock grants.
Effective
June 1, 2005, the Company issued 25,000 shares of restricted stock to a
non-officer, subject to continuation of employment for five years. Additionally,
effective April 15, 2006, the Company issued 135,000 shares to non-officer
employees, subject to continuation of employment for five years. Such shares
vest annually pro-rata over such periods. For fiscal year ended February 28,
2007 and 2006 the Company recognized $107 and $11, respectively, as compensation
expense related to such restricted stock grants.
In
fiscal
2007, the Company acquired shares of the Company’s stock in connection with
employee restricted stock grants, whereby Company shares were tendered by
employees for the payment of applicable statutory withholding taxes at the
date
of vesting. For the fiscal year ended February 28, 2007, 45,716 shares were
acquired at a cost of $163. No shares were acquired in the fiscal years ended
February 28, 2006 and 2005. The Company subsequently retired such shares
acquired.
Stock
Options
The
Company had a stock option plan for key employees and directors of the Company
and its subsidiaries. The plan provided for the granting of up to 500,000
non-qualified and/or incentive stock options. The options expired after five
years and could be extended for a period of up to five years. There were 23,500
options exercised in March 2006. All of the remaining unexercised options
expired in the same month. The stock option plan expired in the quarter ending
August 31, 2006 and the Company has elected to discontinue using stock options
as a form of compensation.
A
summary
of the Company’s stock option activity and related information follows:
|
|
|
|
|
|
|
|
Year
Ended February 28,
|
|
2007
|
2006
|
2005
|
|
Options
|
Weighted
Average
Exercise
Price
|
Options
|
Weighted
Average
Exercise
Price
|
Options
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
Outstanding—
|
|
|
|
|
|
|
Beginning
of year
|
52,000
|
$1.50
|
225,500
|
$1.26
|
272,500
|
$1.25
|
Granted
|
—
|
—
|
—
|
—
|
—
|
—
|
Exercised
|
(23,500)
|
1.50
|
(146,000)
|
1.18
|
(39,000)
|
1.18
|
Forfeited
|
(28,500)
|
1.25
|
(27,500)
|
1.25
|
(8,000)
|
1.26
|
|
|
|
|
|
|
|
Outstanding—
|
|
|
|
|
|
|
End
of year
|
—
|
—
|
52,000
|
1.50
|
225,500
|
1.26
|
Exercisable—
|
|
|
|
|
|
|
End
of year
|
—
|
—
|
52,000
|
1.50
|
225,500
|
1.26
|
8—Profit
Sharing Plan
The
Company has a qualified profit sharing plan (“Plan”) under Section 401(k)
of the Internal Revenue Code. The Plan is open to all eligible employees. The
Company matches 50% of the participant’s contributions, not to exceed 3% of each
participant’s compensation. Company contributions to the Plan were $377, $314
and $289 for fiscal 2007, 2006 and 2005 respectively.
9—Earnings per
Share
Basic
earnings per share of common stock is computed by dividing net income by the
weighted-average number of shares outstanding, including the vested restricted
shares. Diluted earnings per share is obtained by dividing net income by the
weighted average outstanding shares adjusted for the dilutive effects of
outstanding stock options and unvested shares of restricted stock using the
treasury stock method. All of the Company’s outstanding stock options are
included in the diluted earnings per share calculation.
The
following summarizes the common shares used to calculate earnings per share
of
common stock, including the potentially dilutive impact of stock options and
restricted shares, using the treasury stock method:
|
|
|
|
|
Year
ended February 28,
|
|
2007
|
2006
|
2005
|
Denominator
for basic earnings per share-weighted average shares
|
11,225,526
|
11,006,175
|
10,696,398
|
Effect
of dilutive securities:
|
|
|
|
Employee
stock options
|
-
|
26,920
|
101,190
|
Restricted
stock grants
|
399,542
|
327,188
|
230,460
|
|
|
|
|
Denominator
for diluted earnings per share—adjusted weighted average shares and
assumed conversions
|
11,625,068
|
11,360,283
|
11,028,048
|
|
|
|
|
10—Legal
Proceedings
We
are
subject to various legal proceedings arising in the ordinary course of business.
We vigorously defend all matters in which the Company or its business units
are
named defendants and, for insurable losses, maintain significant levels of
insurance to protect against adverse judgments, claims or assessments. Although
the adequacy of existing insurance coverage or the outcome of any legal
proceedings cannot be predicted with certainty, we do not believe the ultimate
liability associated with any claims or litigation will have a material impact
to our financial condition or results of operations.
11—Summarized
Quarterly Data (Unaudited)
The
following is a summary of the unaudited results of operations for each quarter
in fiscal years 2007 and 2006:
|
|
|
|
|
|
Quarter
|
|
First
|
Second
|
Third
|
Fourth
|
Fiscal
year ended February 28, 2007
|
|
|
|
|
Sales
|
$61,924
|
$76,143
|
$56,014
|
$45,562
|
Gross
profit
|
15,255
|
19,915
|
14,229
|
11,637
|
Net
income (loss)
|
1,684
|
3,365
|
919
|
(226)
|
|
|
|
|
|
Basic
|
$.15
|
$.30
|
$.08
|
$(.02)
|
|
|
|
|
|
Diluted
|
$.15
|
$.29
|
$.08
|
$(.02)
|
|
|
|
|
|
Fiscal
year ended February 28, 2006
|
|
|
|
|
Sales
|
$47,538
|
$61,140
|
$50,013
|
$45,621
|
Gross
profit
|
11,115
|
14,351
|
11,805
|
11,060
|
Net
income
|
160
|
1,856
|
654
|
84
|
|
|
|
|
|
Basic
|
$.01
|
$.17
|
$.06
|
$.01
|
|
|
|
|
|
Diluted
|
$.01
|
$.17
|
$.06
|
$.01
|
|
|
|
|
|
Quarterly
earnings per common share amounts may not add up to the fiscal year amounts
due
to rounding.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
Item 9A.
Controls and Procedures.
The
Company performed an evaluation of the disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934
(the “Exchange Act”) as of February 28, 2007. This evaluation was performed
under the supervision and with the participation of the Company’s management,
including the Chief Executive Officer and Chief Financial Officer. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective in
producing the timely recording, processing, summarizing and reporting of
information and in accumulating and communicating of information to management
as appropriate to allow for timely decisions with regard to required disclosure.
No
changes were made to the Company’s internal controls over financial reporting
during the last fiscal quarter that materially affected, or are reasonably
likely to materially affect, the Company’s internal controls over financial
reporting.
PART
III
This
part
of Form 10-K, which includes Items 10 through 14, is omitted because the Company
will file definitive proxy material pursuant to Regulation 14A not more than
120
days after February 28, 2007, including the information required by Items 10
through 14, which is incorporated herein by reference.
PART
IV
Item 15.
Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1)
Financial Statements included in Item 8.
See
Index
to Financial Statements of ACR Group, Inc. set forth in Item 8, Financial
Statements and Supplementary Data.
(a)(2)
Index to Financial Statement Schedules included in Item 15.
The
following financial statement schedule for the years ended February 28, 2007,
2006 and 2005 is included in this report:
Schedule
II - Valuation and Qualifying Accounts
All
other
schedules are omitted because they are not applicable or the required
information is included in the financial statements or notes thereto.
(a)(3)
Exhibits
The
following exhibits are filed with or incorporated by reference into this report.
The exhibits which are denoted by an asterisk (*) were previously filed as
a part of, and are hereby incorporated by reference from, either (a) Annual
Report on Form 10-K for fiscal year ended June 30, 1991 (referred to as
“1991 10-K”), or (b) Annual Report on Form 10-K for fiscal year ended
February 28, 1993 (referred to as “1993 10-K”), or (c) Annual Report
on Form 10-K for fiscal year ended February 28, 1998 (referred to as “1998
10-K”), or (d)Annual Report on Form 10-K for fiscal year ended February 29,
2004 (referred to as “2004 10-K”) or (e) Quarterly Report on Form 10-Q for
the quarter ended August 31, 2004 (referred to as “August 31, 2004 10-Q”)
or (f) Current Report on Form 8-K filed on September 22, 2005
(referred to as “September 22, 2005 8-K”),(g) Current Report on Form 8-K filed
on June 20, 2006 (referred to as “June 20, 2006 8-K”), or (h) current report on
Form 8-K filed on September 18, 2006 (referred to as “September 18, 2006
8-K”).
|
|
Exhibit
Number
|
Description
|
|
|
*3.1
|
Restated
Articles of Incorporation (Exhibit 3.1 to 1991 10-K)
|
|
|
*3.2
|
Articles
of Amendment to Articles of Incorporation (Exhibit 3.2 to 1993
10-K)
|
|
|
*3.3
|
Amended
and Restated Bylaws (Exhibit 3.2 to 1991 10-K)
|
|
|
*3.4
|
Amendment
to Bylaws dated December 8, 1992 (Exhibit 3.4 to 1993 10-K)
|
|
|
*4.1
|
Specimen
of Common Stock Certificate of ACR Group, Inc. (Exhibit 4.1 to 1993
10-K)
|
|
|
*10.1
|
Employment
Agreement between the Company and Alex Trevino, Jr. dated as of March
1,
1998 (Exhibit 10.1 to 1998 10-K)
|
|
|
*10.2
|
Employment
Agreement between the Company and Anthony R. Maresca dated as of
March 1,
2004 (Exhibit 10.3A to 2004 10-K)
|
|
|
*10.2A
|
Amendment
to Exhibit “A” of the Employment Agreement between the Company and Anthony
R. Maresca effective as of March 1, 2004. (Exhibit 10.3B to August
31,
2004 10-Q)
|
|
|
*10.3
|
Employment
Agreement between the Company and A. Stephen Trevino dated as of
March 1,
2004. (Exhibit 10.19 to 2004 10-K)
|
|
|
*10.3A
|
Amendment
to Exhibit “A” of the Employment Agreement between the Company and A.
Stephen Trevino effective as of March 1, 2004. (Exhibit 10.18A to
August
31, 2004 10-Q)
|
|
|
*10.4
|
Credit
Agreement between the Company and Wells Fargo Bank, N.A. dated
September 7, 2004. (Exhibit 10.20 to August 31, 2004
10-Q)
|
|
|
*10.5
|
Amendment
to Credit Agreement dated as of August 31, 2005 between the Company
and
Wells Fargo Bank, N.A. (Exhibit 10.1 to September 22, 2005
8-K)
|
|
|
*10.6
|
Second
Amendment to Credit Agreement dated June 14, 2006, by and among ACR
Group,
Inc. and Wells Fargo Bank, N.A. (Exhibit 10.1 to June 20, 2006
8-K)
|
|
|
*10.6A
|
Third
Amendment to Credit Agreement by and among ACR Group, Inc. and Wells
Fargo
Bank N.A. effective as of September 13, 2006. (Exhibit 10.1 to September
18, 2006 8-K)
|
|
|
*10.7
|
1996
Stock Option Plan of ACR Group, Inc. (Exhibit 4 to RS
333-16325)
|
|
|
|
|
*10.8
|
Director
Restricted Stock Agreement between the Company and Roland H. St.
Cyr dated
as of March 1, 2004. (Exhibit 10.17 to 2004 10-K)
|
|
|
*10.9
|
Director
Restricted Stock Agreement between the Company and Alan D. Feinsilver
dated as of March 1, 2004. (Exhibit 10.18 to 2004 10-K)
|
|
|
*10.10
|
Director
Restricted Stock Agreement between the Company and Thomas J. Reno
dated as
of October 26, 2005 (Exhibit 10.10 to 2006 10-K)
|
|
|
21.1
|
Subsidiaries
of the Company
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm
|
|
|
31.1
|
Certificate
of the Chief Executive Officer pursuant to Securities Exchange Act
Rules
13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
31.2
|
Certificate
of the Chief Financial Officer pursuant to Securities Exchange Act
Rules
13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
32.1
|
Certification
from the Chief Executive Officer of ACR Group, Inc. pursuant to 18
U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002.
|
|
|
32.2
|
Certification
from the Chief Financial Officer of ACR Group, Inc. pursuant to 18
U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002.
|
(b)
Reports on Form 8-K.
None.
(c)
Exhibits
See
Item 15(a)(3), above.
SCHEDULE
II
ACR
GROUP, INC. AND SUBSIDIARIES
SCHEDULE
OF VALUATION AND QUALIFYING ACCOUNTS
(in
thousands)
Description
|
Balance
at beginning of period
|
Charged
to costs and expenses
|
Write-offs
|
Balance
at end of period
|
|
|
|
|
|
Year
ended February 28, 2007:
|
|
|
|
|
Allowance
for doubtful accounts
|
$906
|
$799
|
$615
|
$1,090
|
Inventory
reserves
|
|
548
|
506
|
634
|
420
|
|
|
|
|
|
|
|
Year
ended February 28, 2006:
|
|
|
|
|
|
Allowance
for doubtful accounts
|
918
|
735
|
747
|
906
|
Inventory
reserves
|
|
370
|
596
|
418
|
548
|
|
|
|
|
|
|
|
Year
ended February 28, 2005:
|
|
|
|
|
|
Allowance
for doubtful accounts
|
793
|
557
|
432
|
918
|
Inventory
reserves
|
|
164
|
351
|
145
|
370
|
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.
|
|
|
|
|
|
|
ACR
GROUP, INC.
|
|
|
|
|
Date:
May 29, 2007
|
|
By:
|
/S/ ANTHONY
R.
MARESCA
|
|
|
|
|
Anthony
R. Maresca
Senior
Vice President and
Chief
Financial Officer
|
Pursuant
to the requirement 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.
|
|
|
Signature
|
|
|
|
|
|
/S/ ALEX
TREVINO,
JR.
Alex
Trevino, Jr.
|
Chairman
of the Board, President and Chief Executive Officer
(Principal
executive officer)
|
May
29, 2007
|
|
|
|
/S/ ANTHONY
R.
MARESCA
Anthony
R. Maresca
|
Senior
Vice President, Chief Financial Officer and Director
(Principal
financial and accounting officer)
|
May
29, 2007
|
|
|
|
/S/ A.
STEPHEN
TREVINO
A.
Stephen Trevino
|
Senior
Vice President, General Counsel and Director
|
May
29, 2007
|
|
|
|
/S/ ALAN
D.
FEINSILVER
Alan
D. Feinsilver
|
Director
|
May
29, 2007
|
|
|
|
/S/ ROLAND
H.
ST.
CYR
Roland
H. St. Cyr
|
Director
|
May
29, 2007
|
|
|
|
/S/ THOMAS
J.
RENO
Thomas
J. Reno
|
Director
|
May
29, 2007
|
|
|
|
/S/ MARSHALL
G.
WEBB
Marshall
G. Webb
|
Director
|
May
29, 2007
|
|
|
|
/S/ JO
E.
SHAW,
JR.
Jo
E. Shaw, Jr.
|
Director
|
May
29, 2007
|