ACR Group Reports First Quarter Fiscal 2008 Results

HOUSTON, July 16 /PRNewswire-FirstCall/ -- ACR Group, Inc. , a leading national wholesale distributor of heating, ventilation and air conditioning ("HVAC") equipment and supplies, today announced results for the first quarter ended May 31, 2007 (fiscal 2008).

ACR Group reported total revenues of $59.5 million in the first quarter, a 4.0 percent decrease from revenues of $61.9 million in the year-ago period. Net income for the quarter declined 50.9 percent to $828,000, or $0.07 per diluted share, compared with net income of $1.7 million, or $0.15 per diluted share, in the first quarter of fiscal 2007. Net income in the fiscal 2007 first quarter included a gain of $218,000 attributable to an increase in the fair market value of an interest rate swap agreement, and no such gain in the first quarter of fiscal 2008.

The year-over-year decline in revenue and profitability was attributable to a material weakening in several key geographies with high exposure to residential new construction end-markets, in addition to generally cooler- than-normal weather conditions, which diminished demand for air conditioning products in various key regions throughout the Sunbelt. Results in the quarter were also impacted by a combined pre-tax loss of $200,000 associated with the opening of three Arizona-based branches in fiscal 2007.

"Our first quarter results were impacted by a continued slowing in residential new construction, particularly in our Florida and Nevada markets which, in recent years, have contributed positively to our record growth," said Alex Trevino, Jr., President and CEO of ACR Group. "Weakness in the residential housing market and more temperate weather conditions have served to intensify competitive pressures in several core markets, contributing to a year-over-year decline in our same-store-sales and overall profitability in the quarter compared to the prior-year period."

Gross margin decreased 35 basis points to 24.3 percent in the fiscal 2008 first quarter, compared to 24.6 percent in the year-ago period. The modest year-over-year decline in gross margin was attributable to increased competition for a reduced volume of business in key markets, resulting in increased pricing pressure and compressed selling margins. In addition, the Company reported that the sale of higher margin installation supplies, a group of products typically sold into the new construction segment of the market, were lower in the fiscal 2008 first quarter.

The Company's operating margin declined by 214 basis points to 2.6 percent in the first quarter, compared with 4.8 percent in the year-ago period. Same- store selling, general and administrative expenses as a percentage of sales grew by 2.6 percent during the fiscal 2008 first quarter.

First Quarter Fiscal 2008: Financial Summary

Total revenues declined 4.0 percent to $59.5 million in the first quarter of fiscal 2008, down from $61.9 million in the year-ago period.

Same-store sales, which exclude three Arizona-based branches opened after the first quarter fiscal 2007, decreased 7.0 percent in the first quarter of fiscal 2008 when compared to the year-ago period.

Gross margin declined to 24.3 percent in the first quarter of fiscal 2008, compared to 24.6 percent in the year-ago period.

Net income decreased 50.9 percent to $828,000 in the first quarter of fiscal 2008, compared to $1.7 million in the year-ago period.

Summary of Definitive Merger Agreement

On July 5, 2007, Watsco, Inc. and ACR Group jointly announced they had executed a definitive merger agreement under which Watsco will acquire ACR's outstanding common stock in a cash tender offer of $6.75 per share. The offer represents a 42% premium to ACR Group's 90-day average closing price through July 3, 2007.

Upon conclusion of the transaction, ACR will operate as a subsidiary of Watsco under its present name and management team. Both companies expect the transaction to close in August 2007.

In accordance with the merger agreement, the tender offer is conditioned upon at least 66 2/3% of the outstanding ACR shares being tendered, as well as customary regulatory approvals, completion of financing and certain closing conditions. ACR's board of directors has unanimously recommended that ACR's shareholders tender their shares in the offer. Approval of the transaction by ACR's shareholders is not required. Officers of ACR have executed agreements in support of the transaction representing 26% of ACR's outstanding shares.

Trevino concluded: "This acquisition represents an attractive opportunity for our managers and staff, as well as a premium valuation for our shareholders. There are a number of operational and strategic similarities between ACR and Watsco, including a shared approach to service and distribution which emphasizes seasoned industry expertise and a 'decentralized' branch model. We look forward to tapping the financial resources and guidance of Watsco's team to accelerate our growth strategies."

About ACR Group, Inc.

With nearly $240 million in revenue during the trailing 12-month period ended May 31, 2007, ACR Group, Inc. is one of the largest independent distributors of heating, ventilation and air conditioning (HVAC) equipment and supplies in North America. The Company is one of the leading distributors of HVAC products to both residential and commercial contractors at 54 branch locations throughout ten states. The Company is committed to building a regional presence throughout the Sunbelt states and in other geographies with the potential for sustained economic growth.

Forward-Looking Statements

Statements in this release that relate to management's expectations or beliefs concerning future plans, expectations, events, and performance are "forward-looking" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results or events could differ materially from those anticipated in the forward-looking statements due to a variety of factors including, without limitation, weather conditions, the effects of competitive pricing, general economic conditions, and availability of capital. For more detailed information on the risks and uncertainties associated with these forward-looking statements and the Company's other activities, see the periodic reports filed by the Company with the Securities and Exchange Commission such as Form 10-K, Form 10-Q and Form 8-K.

ACR GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED INCOME STATEMENTS (In thousands, except per share amounts) (Unaudited) Three Months Ended May 31, 2007 2006 Sales $59,454 $61,924 Cost of sales 45,013 46,669 Gross profit 14,441 15,255 Selling, general and administrative expenses 12,878 12,305 Operating income 1,563 2,950 Interest expense 506 543 Interest derivative gain - (218) Other non-operating income (142) (114) Income before income taxes 1,199 2,739 Provision for income taxes 371 1,055 Net income $828 $1,684 Earnings per share: Basic $.07 $.15 Diluted $.07 $.15 Weighted average shares outstanding: Basic 11,385 11,215 Diluted 11,628 11,478 ACR GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) ASSETS May 31, February 28, 2007 2007 Current assets: Cash $1,228 $1,135 Accounts receivable, net 28,089 23,330 Inventories, net 46,370 43,516 Prepaid expenses and other current assets 1,772 1,619 Deferred income taxes 1,702 1,652 Total current assets 79,161 71,252 Property and equipment, net 5,534 5,647 Goodwill 5,408 5,408 Interest derivative asset 81 - Other assets 869 853 Total assets $91,053 $83,160 ACR GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY May 31, February 28, 2007 2007 Current liabilities: Current maturities of long-term debt $130 $131 Current maturities of capital lease obligations 185 160 Accounts payable 27,237 23,106 Accrued expenses and other current liabilities 4,928 5,931 Income tax payable 518 232 Total current liabilities 32,998 29,560 Long term obligations: Borrowings under revolving credit agreement 27,996 24,361 Long-term notes, net of current maturities 1,182 1,214 Long-term capital lease obligations, net of current maturities 417 412 Interest derivative liability - 143 Deferred income taxes 271 184 Total long-term liabilities 29,866 26,314 Commitments and contingencies Shareholders' equity: Preferred stock, $.01 par value - - Common stock, $.01 par value 121 121 Paid-in capital 43,362 43,286 Accumulated other comprehensive income (loss), net of tax 51 (88) Accumulated deficit (15,345) (16,033) Total shareholders' equity 28,189 27,286 Total liabilities and shareholders' equity $91,053 $83,160