WSO Watsco Inc

14% EPS Growth and 40-Basis Point Operating Margin Expansion

Watsco, Inc. (NYSE: WSO) reported record results for the second quarter and six months ended June 30, 2017. The results reflect continued investment in a variety of technologies to revolutionize Watsco’s customer-experience, create a data-driven culture, to empower more insightful decision-making and enhance productivity and operational efficiency. The Company has also made additional investments in products and people to grow and develop market share for supplier partners.

Second Quarter Results

Key performance metrics:

• 14% increase in earnings per share to a record $2.07
• 10% increase in operating income to a record $129 million
• 40 basis-point expansion in operating margins to 10.1%
• 30 basis-point improvement in gross profit margin
• 10 basis-point reduction in SG&A as a percentage of sales

Sales trends:

• 5% sales growth to a record $1.28 billion
• 7% increase in HVAC equipment (67% of sales), including 8% growth in the U.S.
• 2% increase in other HVAC products (28% of sales)
• 3% growth in commercial refrigeration products (5% of sales)

Albert H. Nahmad, Watsco’s Chairman and CEO stated: “Our second quarter performance produced the highest sales and profits of any quarter in Watsco's history. Earnings growth and margin expansion were driven by a combination of solid sales growth, improved selling margins and operating efficiencies."

Mr. Nahmad added: “We believe technology changes progressing in our industry will accelerate and our industry-specific focus, scale and leadership position will serve us well. In time, we believe peers and competitors will realize that Watsco is an attractive succession plan and join forces with us to adapt and evolve in the changing environment. In this regard, we continue to actively seek acquisitions and investments to grow our network and leverage investments across an expanding enterprise.”

First-Half Results

Key performance metrics:

• 10% increase in earnings per share to a record $2.80
• 6% increase in operating income to a record $178 million
• 20 basis-point expansion in operating margins to 8.3%
• 20 basis-point improvement in gross profit margin
• Flat SG&A as a percentage of sales

Sales trends:

• 4% sales growth to a record $2.15 billion
• 5% increase in HVAC equipment (66% of sales)
• 1% increase in other HVAC products (29% of sales)
• 4% growth in commercial refrigeration products (5% of sales)

Mr. Nahmad added: “First-half results reflect further investments in technology and additional headcount of approximately 150 customer-facing employees intended to enhance long-term sales growth and market share. We remain optimistic that 2017 will be a record year for our company.”

Acquisition of 35% of Russell Sigler, Inc.

On June 21, 2017, Watsco’s Carrier Enterprise business unit, a joint venture between Watsco and Carrier Corporation, acquired 35% ownership of Russell Sigler, Inc. (RSI). RSI was established in 1950 and is one of the largest HVAC distributors in North America with annual sales of approximately $650 million. It serves over 10,000 customers from 30 locations throughout Arizona, California, Idaho, New Mexico, Nevada and portions of Texas. Products sold include residential and commercial HVAC equipment manufactured by Carrier as well as parts, supplies and accessories sourced from over 700 other vendors. Consideration for the purchase was $63.6 million paid in cash (the Company contributed 80%, or $50.9 million). Carrier Enterprise has the exclusive right to purchase shares if and when any current RSI owner wishes to sell shares in the future.

Acquisition of Joint Venture Interests

In February 2017, Watsco raised its ownership of Carrier Enterprise Northeast LLC, also a joint venture with Carrier Corporation, to 80% for approximately $43 million in cash. The incremental investment builds on a November 2016 transaction, which increased Watsco’s controlling interest from 60% to 70%. Carrier Enterprise Northeast had sales in 2016 of approximately $500 million from 41 locations in the northeastern United States and 12 locations in Mexico. First-half results include a contribution of 8 cents per share from the increased ownership interest.

Technology Strategy

Watsco is actively transforming its business into the digital age by investing in scalable platforms for mobile apps, e-commerce, business intelligence and supply chain optimization. Strategic goals are to further strengthen Watsco’s leadership position, accelerate sales and profit growth, increase the speed and convenience of serving customers and extend the Company’s reach into new geographies and sales channels. Technology-related spending over the last twelve months was approximately $23 million.

Dividends & Cash Flow

In April 2017, Watsco’s Board of Directors approved a 19% increase in its annual dividend to $5.00 per share on each outstanding share of its Common and Class B common stock. The increase will be reflected in the Company’s dividend payment on July 31, 2017.

Watsco has paid dividends for over 40 consecutive years with the philosophy of sharing increasing amounts of cash flow through higher dividends while maintaining a conservative financial position. Future increases in dividends, if any, will be considered in light of investment opportunities, cash flow, general economic conditions and the Company’s overall financial condition.

The Company has targeted cash flow from operations to exceed net income in 2017. From 2000 to 2016, Watsco’s operating cash flow was approximately $1.9 billion compared to net income of approximately $1.8 billion, surpassing the Company’s stated goal of generating cash flow in excess of net income.

Conference Call Information

Date: July 25, 2017Time: 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.

About Watsco

Watsco provides comfort to homes and businesses regardless of the outdoor climate. There are approximately 92 million central air conditioning and heating systems installed in the United States that have been in service more than 10 years. 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.

Watsco’s traditional sales channel is the industry’s largest and currently serves 88,000 contractor businesses through 562 locations in the United States, Canada, Mexico and Puerto Rico, and on an export basis to Latin America and the Caribbean. Watsco is a technology company, operating scalable platforms for mobile apps, e-commerce, business intelligence and supply chain. Strategic goals are to accelerate sales and profit growth, increase the speed and convenience of serving customers and to extend its reach into new geographies and sales channels. Watsco is also developing technologies to address the evolving buying habits of consumers in the digital economy. Over the long-term, Watsco believes its focus, scale and innovative culture offer significant advantages to address the consumer market, which is estimated to be $88 billion annually. 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. Forward-looking statements may be identified by the use of words such as “will,” “would,” “anticipate,” “expect,” “believe,” “plan,” “optimistic,” “goal” 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. Forward-looking statements speak only as of the date the statement was 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, except as required by applicable law. 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.

   

WATSCO, INC.

Condensed Consolidated Results of Operations

(In thousands, except per share data)

(Unaudited)

  Quarter Ended June 30, Six Months Ended June 30, 2017   2016 2017   2016 Revenues $1,275,924 $1,214,435 $2,148,019 $2,065,859 Cost of sales 965,646   922,574   1,619,185   1,561,551   Gross profit 310,278 291,861 528,834 504,308 Gross profit margin 24.3 % 24.0 % 24.6 % 24.4 % SG&A expenses (1) 180,930   174,271   350,787   336,050   Operating income 129,348 117,590 178,047 168,258 Operating margin 10.1 % 9.7 % 8.3 % 8.1 % Interest expense, net 1,647   1,054   2,902   2,040   Income before income taxes 127,701 116,536 175,145 166,218 Income taxes 36,854   35,112   50,530   50,620   Net income 90,847 81,424 124,615 115,598 Less: net income attributable to noncontrolling interest 17,091   16,803   24,678   25,440   Net income attributable to Watsco $73,756   $64,621   $99,937   $90,158     Diluted earnings per share: Net income attributable to Watsco shareholders $73,756 $64,621 $99,937 $90,158 Less: distributed and undistributed earnings allocated to non-vested (restricted) common stock 6,186   5,251   8,374   7,302   Earnings allocated to Watsco shareholders $67,570   $59,370   $91,563   $82,856     Weighted-average Common and Class B common shares and equivalent shares used to calculate diluted earnings per share 32,708,646 32,606,336 32,694,306 32,576,326   Diluted earnings per share for Common and Class B common stock $2.07   $1.82   $2.80   $2.54    

(1) Selling, general and administrative expenses.

     

WATSCO, INC.

Condensed Consolidated Balance Sheets

(Unaudited, in thousands)

 

June 30, 2017

December 31, 2016 Cash and cash equivalents $51,034 $56,010 Accounts receivable, net 613,193 475,974 Inventories 770,012 685,011 Other 17,502 23,161 Total current assets 1,451,741 1,240,156   Property and equipment, net 92,255 90,502 Goodwill, intangibles, net and other 610,422 543,991 Total assets $2,154,418 $1,874,649   Accounts payable and accrued expenses $422,556 $314,688 Current portion of long-term obligations 1,880 200 Total current liabilities 424,436 314,888   Borrowings under revolving credit agreement 379,300 235,294 Deferred income taxes and other liabilities 70,322 72,719 Total liabilities 874,058 622,901   Watsco's shareholders’ equity 1,018,665 1,005,828 Non-controlling interest 261,695 245,920 Shareholders’ equity 1,280,360 1,251,748 Total liabilities and shareholders’ equity $2,154,418 $1,874,649    

WATSCO, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

  Six Months Ended June 30, 2017   2016 Cash flow from operating activities: Net income $124,615 $115,598 Non-cash items 21,677 21,099 Changes in working capital (114,053 ) (94,764 ) Net cash provided by operating activities 32,239   41,933     Cash flow from investing activities:

Investment in unconsolidated entity

(63,600 ) - Capital expenditures, net (10,237 ) (4,994 ) Net cash used in investing activities (73,837 ) (4,994 )   Cash flow from financing activities: Net proceeds under revolving credit agreement 144,006 22,025

Proceeds from non-controlling interest for investment in unconsolidated entity

12,720 - Dividends on Common and Class B Common stock (74,835 ) (60,164 ) Purchase of additional ownership from non-controlling interest (42,688 ) - Distributions to non-controlling interest (6,799 ) (7,114 ) Other 3,488   3,575   Net cash provided by (used in) financing activities 35,892   (41,678 ) Effect of foreign exchange rate changes on cash and cash equivalents 730   54   Net decrease in cash and cash equivalents (4,976 ) (4,685 ) Cash and cash equivalents at beginning of period 56,010   35,229   Cash and cash equivalents at end of period $51,034   $30,544    

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Watsco, Inc.Barry S. Logan, 305-714-4102Senior Vice Presidentblogan@watsco.com