Watsco, Inc. (NYSE: WSO) reported its third quarter results. Record
sales, operating income, net income attributable to Watsco and
earnings per share (EPS) were achieved for the quarter and
nine-month periods ended September 30, 2019. Record operating cash
flow for the nine-month period ended September 30, 2019 was also
achieved.
Operating results include continued investments
in a variety of technologies to revolutionize Watsco’s
customer-experience, to create a data-driven culture and to enhance
productivity and operational excellence. Watsco’s e-commerce
revenues are expected to approach $1.5 billion for 2019 (a 25%
increase over 2018), and the number of unique users of its
contractor-focused mobile apps has increased 15% to over 88,000
year to date. The Company expects to accelerate the pace of change
and innovation in its markets and is confident that its
industry-specific focus, scale and leadership position will provide
significant long-term value.
Watsco has also focused efforts on making
investments in successful businesses to grow its network and build
further scale. The Company completed several transactions during
2019, investing $133 million of capital in market-leading
businesses through a combination of cash and Watsco shares.
Operating results of acquired businesses were immediately accretive
and are expected to provide new sources of growth as investments
are made in support of their growth plans. The Company’s
debt-to-total capitalization ratio remains low at 9%, consistent
with the Company’s philosophy of maintaining a conservative, risk
averse financial position, that enables the Company to aggressively
invest in attractive opportunities at a low cost of
capital.
Third Quarter Results
Key performance metrics:
- 8% sales growth to a record $1.39 billion (3% on a same-store
basis)
- 4% increase in EPS to a record $2.20 with net income
attributable to Watsco increasing 5% to a record $83 million
- 2% increase in operating profit to a record $125 million (1%
increase on a same-store basis)
- 9.0% operating margin
- 9.2% same-store operating margin versus 9.4% last year (2018
included the benefit of mid-year OEM pricing actions that did not
recur in 2019)
- 6% increase in SG&A expenses, reflecting 35 new or acquired
locations
- Flat same-store SG&A expenses (a 50 basis-point improvement
as a percentage of sales)
- 45% increase in operating cash flow to $129 million
Sales trends (excluding acquisitions):
- 4% growth in HVAC equipment (69% of sales), including 6% growth
in residential products
- 2% increase in other HVAC products (27% of sales)
- 1% increase in commercial refrigeration products (4% of
sales)
Albert H. Nahmad, Watsco’s Chairman and CEO
stated: “Watsco produced strong cash flow and record performance
that reflects sales growth across the Company’s markets, solid
revenue and profit contributions from recent acquisitions and
improved operating efficiencies. We are optimistic that 2019 will
be a record year for our company.”
Nine-Month 2019 Results
Key performance metrics:
- 4% sales growth to a record $3.70 billion (2% on a same-store
basis)
- 2% increase in EPS to a record $5.54 with net income
attributable to Watsco increasing 3% to a record $209 million
- Operating profit was a record $315 million (flat on a
same-store basis)
- 4% increase in SG&A reflecting 35 new or acquired locations
(1% increase on a same-store basis)
- 182% increase in operating cash flow to a record $198
million
Sales trends (excluding acquisitions):
- 3% growth in HVAC equipment (68% of sales), including 4% growth
in residential products
- 1% decrease in other HVAC products (28% of sales)
- 1% decrease in commercial refrigeration products (4% of
sales)
Cash Flow & Dividends
Operating cash flow for the nine-month period
was a record $198 million versus $70 million in 2018. Watsco
expects to meet or exceed its annual goal of producing cash flow in
excess of net income in 2019. Since 2000, Watsco’s operating cash
flow was approximately $2.4 billion compared to net income of
approximately $2.3 billion, surpassing the Company’s stated goal of
generating cash flow in excess of net income.
Watsco has paid cash dividends for 45
consecutive years. Dividends paid increased 16% in 2019 to $180
million. The Company’s philosophy is to share increasing amounts of
cash flow with shareholders through higher dividends while
maintaining a conservative financial position. In January 2019,
Watsco raised its annual dividend 10% to $6.40 per share. Future
increases in dividends will be considered in light of investment
opportunities, cash flow, general economic conditions and the
Company’s overall financial condition.
Acquisitions
On August 1, 2019, Watsco acquired
Peirce-Phelps, Inc., one of the largest HVAC distributors
in North America with current annual sales of
approximately $206 million. Founded in 1925, Peirce-Phelps
serves over 9,000 contractor-customers from 19 locations in
Pennsylvania, New Jersey and Delaware.
2019 results also reflect the following
transactions:
- The acquisition of Dasco Supply, which sells HVAC products from
seven locations and serves over 2,500 customers in New
Jersey, New York and Connecticut. Dasco’s revenues
were $56 million in 2018.
- The purchase of an additional 1.8% ownership interest in
Russell Sigler, Inc. (RSI), which sells HVAC products from 30
locations throughout the Western U.S. with revenues of
approximately $770 million in 2018. Watsco owns 38.1% of RSI and
has the exclusive right to purchase ownership interests held by the
Sigler family, at their discretion, subject to the terms and
conditions set forth in a shareholder agreement.
- The purchase of 20% of Homans Associates from Carrier
Corporation, which raised the Company’s ownership from 80% to 100%.
Homans Associates sells products from 16 locations in the
Northeastern U.S. and now operates as a stand-alone subsidiary.
Homans had revenues of approximately $184 million in 2018.
Technology Investments
Watsco has launched a variety of
technologies and process enhancements to transform how HVAC
contractor customers are served. Speed, productivity and scale are
critical factors as the digital era progresses
and Watsco is making investments intended to ensure an
unparalleled customer-experience. The most notable is the
digitization of Watsco’s interactions with its customer-base
through e-commerce and mobile apps, supported by the industry’s
richest depository of product information of nearly 800,000
SKUs.
Watsco has also launched internal-facing
technologies, including (1) a business intelligence platform to
provide insights to 600+ P&L managers and their teams, (2)
proprietary order fulfillment software to deliver speed,
convenience and order accuracy to customers and (3) demand planning
and inventory optimization software to improve fill-rates and
inventory turns and to reduce real estate requirements.
Technology spending in 2019 increased $1.5
million during the third quarter (3 cents per diluted share) and
increased $4.3 million (10 cents per diluted share) for the
nine-month period, driven in part by the Company’s acquisition of
Alert Labs in August 2018, an early stage company and pioneer in
the Internet of Things (IoT) space. The annual run-rate for
technology related investments (included in SG&A expenses) is
currently $32 million.
Adoption of Lease Accounting
Standard
Effective January 1, 2019, we adopted the
Financial Accounting Standards Board Accounting Standards Update
2016-02, Leases, which requires the recognition of lease
assets and lease liabilities by lessees for those leases classified
as operating leases under previous guidance. We have recorded lease
right-of-use assets and lease liabilities and presented these
amounts separately on our Condensed Consolidated Balance Sheet as
of September 30, 2019. The adoption of this standard did not
have a material impact on our Condensed Consolidated Statement of
Income or Condensed Consolidated Statement of Cash Flows for the
nine months ended September 30, 2019.
Third Quarter Earnings Conference Call
Information
Date: October 17, 2019Time: 10:00
a.m. (EDT)Webcast: http://investors.watsco.comDial-in
number: United States (844) 883-3908 / International (412)
317-9254
A replay of the conference call will be
available on the Company's website.
Use of Non-GAAP Financial Information
In this release, the Company discloses non-GAAP
measures on a “same-store basis”. Information referring to
“same-store basis” exclude the effects of locations closed,
acquired, or locations opened, unless they are within close
geographical proximity to existing locations, during the
immediately preceding 12 months. The Company believes that this
information provides greater comparability regarding its ongoing
operating performance. This measure should not be considered an
alternative to measurements required by U.S. GAAP.
About Watsco
Watsco is the largest distribution network
for heating, air conditioning and refrigeration (HVAC/R) products
with locations in the United
States, Canada, Mexico and Puerto Rico, and on
an export basis to Latin America and the Caribbean.
Watsco estimates that over 300,000 contractors and technicians
visit or call one of its 603 locations each year to get
information, obtain technical support and buy products. HVAC/R
products provide comfort to homes and businesses regardless of the
outdoor climate. Older systems often operate below today’s
government mandated energy efficiency and environmental
standards. Watsco has an opportunity to accelerate the
replacement of these systems at a scale greater than its
competitors as the movement toward reducing energy consumption and
its environmental impact continues. This is especially important
since heating and cooling accounts for approximately half of the
energy consumed in a typical U.S. home. Additional information
about Watsco may be found
at http://www.watsco.com.
This document includes certain “forward-looking
statements” within the meaning of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements can be
distinguished by use of words such as “will,” “would,”
“anticipate,” “expect,” “believe,” “designed,” “plan” or “intend,”
the negative of these terms, and similar references to future
periods. These statements are based on management's current
expectations and are subject to uncertainty and changes in
circumstances. Actual results may differ materially from these
expectations due to changes in economic, business, competitive
market, new housing starts and completions, capital spending in
commercial construction, consumer spending and debt levels,
regulatory and other factors, including, without limitation, the
effects of supplier concentration, competitive conditions within
Watsco’s industry, seasonal nature of sales of Watsco’s products,
the ability of the Company to expand its business, insurance
coverage risks and final GAAP adjustments. Detailed information
about these factors and additional important factors can be found
in the documents that Watsco files with the Securities and Exchange
Commission, such as Form 10-K, Form 10-Q and Form 8-K.
Forward-looking statements speak only as of the date the statements
were made. Watsco assumes no obligation to update forward-looking
information to reflect actual results, changes in assumptions or
changes in other factors affecting forward-looking information.
|
WATSCO, INC.Condensed Consolidated
Statements of Income(In thousands, except share
and per share data)(Unaudited) |
|
|
Quarter Ended September 30, |
|
Nine Months Ended September 30, |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
Revenues |
$ 1,394,915 |
|
|
$ 1,296,007 |
|
|
$ 3,698,047 |
|
|
$ 3,555,327 |
|
Cost of sales |
1,060,224 |
|
|
976,998 |
|
|
2,801,612 |
|
|
2,684,719 |
|
Gross profit |
334,691 |
|
|
319,009 |
|
|
896,435 |
|
|
870,608 |
|
Gross profit margin |
24.0 |
% |
|
24.6 |
% |
|
24.2 |
% |
|
24.5 |
% |
Selling, general &
administrative (SG&A) expenses |
212,902 |
|
|
200,408 |
|
|
589,523 |
|
|
565,519 |
|
Other income |
3,530 |
|
|
3,696 |
|
|
7,939 |
|
|
8,491 |
|
Operating income |
125,319 |
|
|
122,297 |
|
|
314,851 |
|
|
313,580 |
|
Operating margin |
9.0 |
% |
|
9.4 |
% |
|
8.5 |
% |
|
8.8 |
% |
Interest expense, net |
1,434 |
|
|
1,047 |
|
|
3,422 |
|
|
2,375 |
|
Income before income
taxes |
123,885 |
|
|
121,250 |
|
|
311,429 |
|
|
311,205 |
|
Income taxes |
24,230 |
|
|
24,364 |
|
|
60,060 |
|
|
63,678 |
|
Net income |
99,655 |
|
|
96,886 |
|
|
251,369 |
|
|
247,527 |
|
Less: net income
attributable to non-controlling interest |
16,175 |
|
|
17,723 |
|
|
42,697 |
|
|
44,188 |
|
Net income attributable to
Watsco |
$83,480 |
|
|
$79,163 |
|
|
$208,672 |
|
|
$203,339 |
|
|
|
|
|
|
|
|
|
Diluted earnings per
share: |
|
|
|
|
|
|
|
Net income attributable to
Watsco shareholders |
$83,480 |
|
|
$79,163 |
|
|
$208,672 |
|
|
$203,339 |
|
Less: distributed and
undistributed earnings allocated to non-vested restricted common
stock |
6,971 |
|
|
6,448 |
|
|
17,325 |
|
|
16,593 |
|
Earnings allocated to Watsco
shareholders |
$76,509 |
|
|
$72,715 |
|
|
$191,347 |
|
|
$186,746 |
|
|
|
|
|
|
|
|
|
Weighted-average Common and
Class B common shares and equivalent shares used to calculate
diluted earnings per share |
34,788,955 |
|
|
34,399,389 |
|
|
34,569,719 |
|
|
34,366,522 |
|
|
|
|
|
|
|
|
|
Diluted earnings per share for
Common and Class B common stock |
$2.20 |
|
|
$2.11 |
|
|
$5.54 |
|
|
$5.43 |
|
WATSCO, INC.Condensed Consolidated Balance
Sheets (Unaudited, in
thousands) |
|
September 30, |
|
December 31, |
|
2019 |
|
2018 |
|
|
|
|
Cash and cash equivalents |
$60,150 |
|
$82,894 |
Accounts receivable, net |
640,802 |
|
501,908 |
Inventories |
970,475 |
|
837,129 |
Other |
19,400 |
|
19,875 |
Total current assets |
1,690,827 |
|
1,441,806 |
|
|
|
|
Property and equipment,
net |
97,926 |
|
91,046 |
Operating lease right-of-use
assets |
225,366 |
|
- |
Goodwill, intangibles, net and
other |
678,940 |
|
628,181 |
Total assets |
$2,693,059 |
|
$2,161,033 |
|
|
|
|
Accounts payable and accrued
expenses |
$474,701 |
|
$357,320 |
Current portion of long-term
obligations |
67,587 |
|
246 |
Total current liabilities |
542,288 |
|
357,566 |
|
|
|
|
Borrowings under revolving
credit agreement |
169,300 |
|
135,200 |
Operating lease liabilities,
net of current portion |
157,503 |
|
- |
Deferred income taxes and
other liabilities |
70,946 |
|
66,554 |
Total liabilities |
940,037 |
|
559,320 |
|
|
|
|
Watsco's shareholders’
equity |
1,443,109 |
|
1,347,849 |
Non-controlling interest |
309,913 |
|
253,864 |
Shareholders’ equity |
1,753,022 |
|
1,601,713 |
Total liabilities and shareholders’ equity |
$2,693,059 |
|
$2,161,033 |
WATSCO,
INC.Condensed Consolidated Statements of Cash
Flows (Unaudited, in thousands) |
|
Nine Months Ended September 30, |
|
2019 |
|
|
2018 |
|
Cash flows from operating activities: |
|
|
|
Net income |
$251,369 |
|
|
$247,527 |
|
Non-cash items |
30,335 |
|
|
27,575 |
|
Changes in working capital |
(84,173 |
) |
|
(205,037 |
) |
Net cash provided by operating activities |
197,531 |
|
|
70,065 |
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
Capital expenditures, net |
(12,712 |
) |
|
(12,754 |
) |
Business acquisitions, net of cash acquired |
(47,343 |
) |
|
(5,828 |
) |
Investment in unconsolidated entity |
(4,940 |
) |
|
(3,760 |
) |
Net cash used in investing activities |
(64,995 |
) |
|
(22,342 |
) |
|
|
|
|
Cash flows from financing activities: |
|
|
|
Dividends on Common and Class B Common stock |
(180,454 |
) |
|
(154,951 |
) |
Net proceeds under revolving credit agreement |
34,100 |
|
|
94,600 |
|
Proceeds from NCI for investment in PPI and unconsolidated
entity |
17,988 |
|
|
- |
|
Purchase of additional ownership interest from NCI |
(32,400 |
) |
|
- |
|
Other |
5,032 |
|
|
589 |
|
Net cash used in financing activities |
(155,734 |
) |
|
(59,762 |
) |
Effect of foreign exchange rate changes on cash and cash
equivalents |
454 |
|
|
(845 |
) |
Net decrease in cash and cash equivalents |
(22,744 |
) |
|
(12,884 |
) |
Cash and cash equivalents at beginning of period |
82,894 |
|
|
80,496 |
|
Cash and cash equivalents at end of period |
$60,150 |
|
|
$67,612 |
|
Barry S. LoganSenior Vice President(305) 714-4102e-mail:
blogan@watsco.com
Watsco (NYSE:WSO)
Historical Stock Chart
From Apr 2024 to May 2024
Watsco (NYSE:WSO)
Historical Stock Chart
From May 2023 to May 2024