Watsco, Inc. (NYSE: WSO) reported record sales, operating profit,
net income and cash flow for the quarter ended March 31, 2019.
Key performance metrics:
- 2% increase in operating profit to a record $55 million (10
basis-point expansion in operating margin to 5.9%)
- 4% increase in same-store operating profit (30 basis-point
expansion in same-store margins to a record 6.1%)
- 1% increase in gross profit to a record $234 million (20
basis-points improvement in gross margin)
- 1% increase in selling, general & administrative expenses
(SG&A)
- Flat SG&A on a same-store basis (10 basis-point decline as
a percentage of sales)
- 2% increase in net income to a record $35 million
- Earnings per share (EPS) of 88 cents versus 89 cents last year
(1)
- Operating cash flow was a record $53 million versus a cash use
of $42 million last year________
- EPS in 2019 includes 3 cents of incremental dilution related to
dividends paid on non-vested restricted stock. Dilution occurs when
the quarterly cash dividends per share exceeds EPS (usually during
the seasonal first and fourth quarters as EPS is typically less
than the quarterly dividend rate). For 2019, this impact is not
currently expected to affect EPS during the second or third
quarters or in determining annual EPS.
Sales trends:
- 1% sales growth to a record $931 million (flat on a same-store
basis)
- 2% growth in HVAC equipment (67% of sales)
- 2% decrease in other HVAC products (29% of sales)
- 4% decrease in commercial refrigeration products (4% of
sales)
Albert H. Nahmad, Watsco’s Chairman and CEO
said: “The first quarter is historically the most seasonal quarter
of the year, yet we achieved record profitability despite cooler
and wetter weather in certain markets, strong year-over-year sales
comparisons and one less selling-day in 2019 versus 2018. Our
results also reflect investments in 12 new locations and the
acceleration of several technology initiatives to drive greater
adoption and use throughout our network. We also implemented a
number of productivity initiatives as evidenced by our flat
same-store SG&A to enhance opportunities for profit growth in
2019. Although it is early, we are optimistic that 2019 will be
another record year for our Company.”
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 investing 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 over 685,000 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 (currently used at
two-thirds of the Company’s locations), and (3) demand planning and
inventory optimization software to improve fill-rates and inventory
turns and to reduce real estate requirements (currently implemented
in 60% of the Company’s supply chain).
Technology spending increased $1.5 million
during the quarter (3 cents per diluted share), driven in part by
the Company’s recent acquisition of Alert Labs, an early stage
start up and pioneer in the IoT space.
Specific technology-related achievements during
the first quarter included:
- E-commerce sales run-rate is approaching 30% of revenues (over
$1.2 billion during the last 12 months).
- Unique users of Watsco’s iOS/Android-enabled Contractor Assist
mobile apps reached 50,000.
- Distributor managed inventory (DMI) was launched to
digitally-enable seamless stocking and replenishment of product at
a customer’s place of business.
- Commercial launch of Sentree, Watsco’s proprietary IoT device
for remotely monitoring the health and operational condition of
installed HVAC systems to connect HVAC users and our customers in
an unprecedented way.
- Numerous sales and productivity initiatives were implemented,
made possible by Watsco’s data analytics platform and teams, to
leverage technology and reduce operating costs.
- Order Fulfillment (OF) software was launched at 76 additional
locations (branch penetration is now at 77%) to improve speed,
accuracy and efficiency in our locations.
- Broader deployment and enhanced capabilities for demand
planning and inventory optimization.
- Broader use of enhanced processes for freight optimization
designed to reduce freight costs.
A.J. Nahmad, Watsco’s President said: “As
entrepreneurs with a long-term point of view, we are proud to
deliver another record quarter with increasing dividends while
continuing to strategically invest in transforming our
customer-experience. The equation is simple – when our customers
win, we win and that core belief has fueled our technology
investments and continues to guide our progress.”
Cash Flow & Dividends
Operating cash flow in 2019 was a record $53
million versus a cash use of $42 million in 2018. At March 31, 2019
the Company’s debt-to-total capitalization ratio was 8%. The
Company has targeted cash flow from operations to exceed net income
in 2019. Since 2000, Watsco’s operating cash flow was approximately
$2.4 billion compared to net income of approximately $2.2 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 during the first quarter
increased 29% to $60 million compared to last year. 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, we raised our
annual dividend 10% to $6.40 per share.
Acquisition of DASCO Supply
Watsco recently announced that it completed the
acquisition of DASCO Supply, a distributor of air conditioning and
heating products based in Whippany, New Jersey. Founded in
1974, DASCO operates seven locations in New Jersey, New
York and Connecticut, serving over 2,500 air conditioning
and heating contractors and offering approximately 15,000 SKUs of
products for both residential and commercial use. DASCO had
revenues of approximately $56 million in 2018.
Mr. Nahmad commented: “DASCO has a wonderful
legacy and a close-knit team, and we are honored to become part of
their family. Their success over the last 45 years is due to strong
relationships along with great service, a broad range of products
and convenient locations. To provide on-going continuity, DASCO
will operate as a subsidiary of Watsco under its present
name and leadership team, and we will provide the resources and
technology where needed to assist in achieving their growth
plans.”
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 March 31, 2019. The adoption of this standard did not have
a material impact on our Condensed Consolidated Results of
Operations or Condensed Consolidated Statement of Cash Flows for
the three-month period ended March 31, 2019.
First Quarter Earnings Conference Call
Information
Date: April 23, 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. These measures should not be considered an
alternative to measurements required by U.S. GAAP.
The Company computes a non-GAAP measure,
“debt-to-total capitalization,” as a means to describe the relative
amount of interest-bearing debt to its total capital. This ratio is
calculated by dividing (i) the sum of short-term and long-term
interest bearing debt by (ii) the sum of short-term debt, long-term
debt and shareholders’ equity.
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 582 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 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 Results of
Operations |
(In thousands, except per share
data) |
(Unaudited) |
|
|
Quarter Ended March 31, |
|
2019 |
|
2018 |
Revenues |
$931,278 |
|
$926,577 |
Cost of sales |
697,518 |
|
695,744 |
Gross profit |
233,760 |
|
230,833 |
Gross profit
margin |
25.1% |
|
24.9% |
SG&A expenses |
180,072 |
|
178,534 |
Other income |
1,444 |
|
1,638 |
Operating income |
55,132 |
|
53,937 |
Operating margin |
5.9% |
|
5.8% |
Interest expense,
net |
776 |
|
565 |
Income before income
taxes |
54,356 |
|
53,372 |
Income taxes |
10,552 |
|
10,995 |
Net income |
43,804 |
|
42,377 |
Less: net income
attributable to non-controlling interest |
8,767 |
|
8,158 |
Net income attributable
to Watsco |
$35,037 |
|
$34,219 |
|
|
|
|
Diluted earnings per
share: |
|
|
|
Net income attributable
to Watsco shareholders |
$35,037 |
|
$34,219 |
Less: distributed and
undistributed earnings to non-vested restricted common stock |
4,924
(1) |
|
3,775
(1) |
Earnings allocated to
Watsco shareholders |
$30,113 |
|
$30,444 |
|
|
|
|
Weighted-average Common
and Class B common shares and equivalent shares used to calculate
diluted earnings per share |
34,402,602 |
|
34,320,110 |
|
|
|
|
Diluted earnings per
share for Common and Class B common stock |
$0.88(1) |
|
$0.89(1) |
|
(1) Amounts include earnings dilution of $2.0 million
in 2019 (6 cents of EPS) in 2019 and $1.0 million in 2018 (3 cents
of EPS) related to dividends paid on non-vested restricted stock.
Dilution occurs when quarterly cash dividends exceed EPS (usually
during the seasonal first and fourth quarters as EPS is typically
less than the quarterly dividend rate). For 2019, this impact is
not expected to affect EPS during the second and third quarter or
in determining annual EPS. As of March 31, 2019, there were
3,124,651 shares of non-vested restricted stock outstanding. |
WATSCO, INC. |
Condensed Consolidated Balance
Sheets |
(Unaudited, in thousands) |
|
|
March 31, |
|
December 31, |
|
2019 |
|
2018 |
|
|
|
|
Cash and cash
equivalents |
$77,273 |
|
$82,894 |
Accounts receivable,
net |
504,719 |
|
501,908 |
Inventories |
893,640 |
|
837,129 |
Other |
14,752 |
|
19,875 |
Total
current assets |
1,490,384 |
|
1,441,806 |
|
|
|
|
Property and equipment,
net |
91,026 |
|
91,046 |
Lease right-of-use
assets |
185,476 |
|
0 |
Goodwill, intangibles,
net and other |
632,057 |
|
628,181 |
Total
assets |
$2,398,943 |
|
$2,161,033 |
|
|
|
|
Accounts payable and
accrued expenses |
$408,927 |
|
$357,320 |
Current portion of
lease liabilities |
58,506 |
|
246 |
Short-term
borrowings |
2,340 |
|
0 |
Total
current liabilities |
469,773 |
|
357,566 |
|
|
|
|
Borrowings under
revolving credit agreement |
137,500 |
|
135,200 |
Lease liabilities |
126,234 |
|
0 |
Deferred income taxes
and other liabilities |
66,181 |
|
66,554 |
Total
liabilities |
799,688 |
|
559,320 |
|
|
|
|
Watsco's shareholders’
equity |
1,335,212 |
|
1,347,849 |
Non-controlling
interest |
264,043 |
|
253,864 |
Shareholders’
equity |
1,599,255 |
|
1,601,713 |
Total
liabilities and shareholders’ equity |
$2,398,943 |
|
$2,161,033 |
WATSCO, INC. |
Condensed Consolidated Statements of Cash
Flows |
(Unaudited, in thousands) |
|
|
Quarters Ended March 31, |
|
2019 |
|
2018 |
Cash flow from
operating activities: |
|
|
|
Net
income |
$43,804 |
|
$42,377 |
Non-cash
items |
13,632 |
|
11,764 |
Changes
in working capital |
(4,500) |
|
(95,755) |
Net cash
provided by (used in) operating activities |
52,936 |
|
(41,614) |
|
|
|
|
Cash flow from
investing activities: |
|
|
|
Capital
expenditures, net |
(4,103) |
|
(3,432) |
|
|
|
|
Cash flow from
financing activities: |
|
|
|
Dividends
on Common and Class B Common stock |
(59,965) |
|
(46,581) |
Net
proceeds under revolving credit agreement |
2,300 |
|
69,200 |
Proceeds
from short-term debt |
2,340 |
|
- |
Distributions to non-controlling interest |
- |
|
(2,178) |
Other |
469 |
|
2,898 |
Net cash
(used in) provided by financing activities |
(54,856) |
|
23,339 |
Effect of foreign
exchange rate changes on cash and cash equivalents |
402 |
|
(716) |
Net decrease in cash
and cash equivalents |
(5,621) |
|
(22,423) |
Cash and cash
equivalents at beginning of period |
82,894 |
|
80,496 |
Cash and cash
equivalents at end of period |
$77,273 |
|
$58,073 |
|
Barry S. LoganSenior Vice President(305)
714-4102e-mail: blogan@watsco.com
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