Watsco, Inc. (NYSE: WSO) reported its annual and fourth quarter
2019 results. The Company achieved record results in annual sales,
net income attributable to Watsco, earnings per share (EPS) and
operating cash flow. Watsco also announced today that its
Board of Directors approved an 11% increase in its annual dividend
to $7.10 per share to be reflected in the Company’s next
regular quarterly dividend payment in April 2020.
Watsco continues to invest in its
industry-leading technology platforms designed to revolutionize its
customer-experience and further enhance its offerings to HVAC/R
contractors. The Company believes the pace of innovation and
adoption of technology is accelerating and its customer-focused
solutions, scale and leadership position provides significant
long-term value. To date, nearly 20,000 customers have embraced
Watsco’s technology solutions and the Company has intensified its
effort to add functionality and drive widespread adoption.
Technology spending increased $5.0 million in 2019 or 11 cents per
diluted share ($0.7 million or 2 cents per diluted share for the
fourth quarter). The current annual run-rate for technology
spending (included in SG&A expenses) is $32 million.
Watsco completed several transactions in 2019,
investing $148 million of capital in strong, market-leading
businesses. Results of acquired businesses were accretive to 2019
results and are expected to provide new sources of growth as more
capital is deployed to support their growth plans. Despite these
investments, the Company’s debt-to-total capitalization ratio
remains low, consistent with the Company’s core philosophy to
maintain a conservative, risk-averse financial position, while
possessing a strong balance sheet that can invest in most any
opportunity at a low cost of capital.
Watsco also invested more in its people and
culture during 2019, including incremental investments in its
unique equity and employee wellness programs. The Company believes
these investments are important to performance along with the
continuity of its culture, which empowers employees to think and
act long-term. Incremental SG&A related to these programs was
approximately $3 million (7 cents per diluted share) in 2019,
including:
- a 33% increase in the annual 401(k)
matching contribution, which is made in Watsco common
stock. The Company’s 30-year compounded total shareholder return of
18% has benefited shareholders and employees alike, particularly
the Company’s 3,500+ 401(k) participants, many of whom have spent
their careers with the Company;
- expansion of Watsco’s ownership
culture to more employees through a variety of unique, equity-based
programs, including stock options and the innovative use of
restricted stock that vests at the end of an employee’s career,
and
- implementation of an enriched
wellness program, including greater incentives for employees to
learn more about their health, identify risks and promote
preventive care.
Albert H. Nahmad, Watsco’s Chairman and Chief
Executive Officer, said: “2019 marked a year of continued
investments in technology, the expansion of our network and in our
organization, all with a long-term perspective. We are pleased with
our record cash flow and the resulting dividend raise to reward our
shareholders with consistent returns as we move through this
transformative period.”
Full-Year Results
Key performance metrics:
- 5% sales growth to a record $4.77
billion (2% increase on a same-store basis)
- Record EPS of $6.50 with net income
attributable to Watsco increasing 1% to a record $246 million
- Operating profit of $367 million
with operating margins of 7.7% (7.9% on a same-store basis)
- Gross profit increased 3% a record
$1.16 billion (gross margins declined 30 basis-points)
- SG&A expenses increased 6%,
reflecting new or acquired locations
- Same-store SG&A improved 20
basis-points as a percentage of sales (a 1% increase)
- Record operating cash flow of $336
million or 114% of net income
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)
- Flat sales of commercial
refrigeration products (4% of sales)
Fourth Quarter Results
Key performance metrics:
- 8% sales growth to a record $1.07
billion (1% increase on a same-store basis)
- EPS of 92 cents with net income
attributable to Watsco of $37 million
- Operating profit of $52 million
with operating margins of 4.9%
- Gross profit increased 4% to a
record $261 million (gross margins declined 90 basis-points)
- SG&A expenses increased 10%
reflecting 35 new or acquired locations
- Same-store SG&A improved 10
basis-points as a percentage of sales (a 1% increase)
- 38% increase in operating cash flow
to $138 million
Sales trends (excluding acquisitions):
- 3% growth in HVAC equipment (67% of
sales)
- 2% decrease in other HVAC products
(29% of sales)
- 4% increase in commercial
refrigeration products (4% of sales)
Acquisitions
Watsco grew its network by 35 locations during
2019 primarily through the acquisition of long-standing businesses.
Since 1989, Watsco has acquired more than 60 businesses to become
the established industry leader. This strategy has produced a
30-year compounded annual growth rate for total-shareholder-return
of 18%, which ranks Watsco among the best performing public
companies over this time period. Key components of its
buy-and-build strategy include:
- identify and partner with great
businesses
- retain the leadership team, honor
their culture and empower them
- ask for aggressive growth plans and
help them achieve their ambitions
- motivate the team with long-term
equity and establish an ownership culture
- deploy the industry’s most
comprehensive suite of technologies
- solicit and collaborate on big
ideas to foster a spirit of innovation and growth
Watsco completed the following transactions
during 2019:
- The acquisition of Dasco Supply in
April 2019. Dasco sells HVAC products from seven locations
in New Jersey, New York and Connecticut. Dasco
was founded in 1974 and had revenues of $58 million in
2019;
- The purchase of an additional 1.8%
ownership interest in Russell Sigler, Inc. (RSI) in April 2019. RSI
sells HVAC products from 30 locations throughout the Western U.S.
Watsco owns 38.1% of RSI and has the exclusive right to purchase
ownership interests held by members of the Sigler family, at their
discretion, subject to the terms and conditions set forth in a
shareholder agreement. RSI was founded in 1950 and had revenues of
$799 million in 2019;
- The purchase of 20% of Homans
Associates from Carrier Corporation in June 2019, 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. Founded in 1952 and acquired
by Watsco in 1999, Homans had sales of $215 million in 2019;
- The acquisition of Peirce-Phelps,
Inc. in August 2019, one of the largest HVAC distributors
in North America operating from 19 locations in Pennsylvania,
New Jersey and Delaware. Peirce-Phelps was founded in 1926 and had
sales of $214 million in 2019;
- The acquisition of N&S Supply
in November 2019, which sells HVAC and plumbing products operating
from seven locations in the Hudson Valley of New York and
Connecticut. N&S Supply was founded in 1946 and had sales of
$45 million in 2019.
Mr. Nahmad further commented, “This year’s
acquisitions deepened our presence in the Northeast market, an
important and fast-growing region that adds to Watsco’s geographic
diversity. More importantly, these are simply terrific
entrepreneurs that have joined our family, and we are proud to have
joined theirs. We know that progressive contractors will make
technology part of their daily life and that partnering with Watsco
will allow historical distributors like these to protect and grow
their businesses. Watsco is active in the marketplace and we look
forward to partnering with other great companies as the technology
wave becomes increasingly necessary.”
Technology Investments
Watsco has launched various technologies
and process enhancements to transform how HVAC contractors are
served. Speed, productivity and scale are critical factors in the
digital era and Watsco is making investments 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.
Watsco has also launched internal-facing
technologies, including (1) a business intelligence platform to
provide insights to 700+ 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.
As summarized in the financial information,
Watsco’s full-year SG&A on a same-store basis and excluding
incremental technology investments was flat year over year and
declined 30 basis-points as a percentage of sales. Efficiency gains
in 2019 marks progress following the Company’s launch of a variety
of innovations to enhance operational excellence throughout its
network.
AJ Nahmad, Watsco’s President said: “We continue
to be inspired by our progress and we are investing heavily to
drive adoption to a growing number of customers. In terms of scale,
we serve approximately 300,000 contractors and technicians and
complete over 7 million transactions per year. In other words, we
are scratching the surface of what is possible, yet we can readily
see the benefits that our platforms are providing to our most
active users.”
An update of key technology metrics are as
follows:
E-Commerce and
App Usage |
|
Progress in
2019 versus 2018 |
Growth in e-commerce sales |
|
17% growth to $1.4 billion |
E-commerce transactions |
|
20% increase in transactions to over 1 million |
Unique iOS or Android app weekly users |
|
60% increase in weekly active users |
Retail value of sales for OnCallAir.com |
|
146% increase to over $185 million |
Products (SKUs) digitized and available on-line |
|
6% increase to 728,000 SKUs |
Line items per order on-line versus in-store |
|
32% more line items per order |
Sales attrition rate for e-commerce users |
|
60% less attrition than non-users |
|
|
|
Warehouse Efficiency & Supply Chain |
|
Progress in 2019 versus 2018 |
Locations with Order Fulfillment (OF) software |
|
555 locations versus 369 last year |
Number of orders filled with OF |
|
3.3 million versus 2.6 million last year |
Locations with express pickup |
|
292 locations versus 164 last year |
Locations with supply chain/inventory optimization |
|
Domestic (excluding acquisitions) now installed |
Change in branch-level SG&A as a % of sales |
|
15 basis-points decrease (same-store basis) |
Real estate 5-year reduction in organic square feet |
|
1.1 million square feet (167,000 during 2019) |
Cash Flow & Dividends
Operating cash flow for the year increased 97%
to a record $336 million or 114% of net income. Since 2000,
Watsco’s operating cash flow was approximately $2.7 billion
compared to net income of approximately $2.6 billion, surpassing
the Company’s goal of generating cash flow in excess of net
income.
Watsco has paid cash dividends for 46
consecutive years. Dividends paid during 2019 increased 15% to $241
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 February 2020, Watsco’s Board authorized an
11% increase in Watsco’s annual dividend to $7.10 per share
effective at its next scheduled payment date on April 30, 2020.
Future dividend increases will be considered in light of investment
opportunities, cash flow, general economic conditions and the
Company’s financial condition.
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 December 31, 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
year ended December 31, 2019.
Fourth Quarter Earnings Conference Call
Information
Date: February 13, 2020Time: 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”, which 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.
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 606 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 December 31, |
|
Year Ended December 31, |
|
|
2019 |
|
|
|
2018 |
|
|
|
2019 |
|
|
|
2018 |
|
Revenues |
$ |
1,072,315 |
|
|
$ |
991,326 |
|
|
$ |
4,770,362 |
|
|
$ |
4,546,653 |
|
Cost of sales |
|
811,794 |
|
|
|
741,682 |
|
|
|
3,613,406 |
|
|
|
3,426,401 |
|
Gross profit |
|
260,521 |
|
|
|
249,644 |
|
|
|
1,156,956 |
|
|
|
1,120,252 |
|
Gross profit margin |
|
24.3% |
|
|
|
25.2% |
|
|
|
24.3% |
|
|
|
24.6% |
|
SG&A expenses |
|
210,805 |
|
|
|
191,933 |
|
|
|
800,328 |
|
|
|
757,452 |
|
Other income |
|
2,317 |
|
|
|
791 |
|
|
|
10,256 |
|
|
|
9,282 |
|
Operating income |
|
52,033 |
|
|
|
58,502 |
|
|
|
366,884 |
|
|
|
372,082 |
|
Operating margin |
|
4.9% |
|
|
|
5.9% |
|
|
|
7.7% |
|
|
|
8.2% |
|
Interest expense, net |
|
610 |
|
|
|
365 |
|
|
|
4,032 |
|
|
|
2,740 |
|
Income before income
taxes |
|
51,423 |
|
|
|
58,137 |
|
|
|
362,852 |
|
|
|
369,342 |
|
Income taxes |
|
7,017 |
|
|
|
9,135 |
|
|
|
67,077 |
|
|
|
72,813 |
|
Net income |
|
44,406 |
|
|
|
49,002 |
|
|
|
295,775 |
|
|
|
296,529 |
|
Less: net income attributable
to non-controlling interest |
|
7,128 |
|
|
|
9,409 |
|
|
|
49,825 |
|
|
|
53,597 |
|
Net income attributable to
Watsco |
$ |
37,278 |
|
|
$ |
39,593 |
|
|
$ |
245,950 |
|
|
$ |
242,932 |
|
|
|
|
|
|
|
|
|
Diluted earnings per
share: |
|
|
|
|
|
|
|
Net income attributable to
Watsco shareholders |
$ |
37,278 |
|
|
$ |
39,593 |
|
|
$ |
245,950 |
|
|
$ |
242,932 |
|
Less: distributed and
undistributed earnings allocated to non-vested restricted common
stock (1) |
|
5,058 |
|
|
|
4,394 |
|
|
|
20,411 |
|
|
|
19,788 |
|
Earnings allocated to Watsco
shareholders |
$ |
32,220 |
|
|
$ |
35,199 |
|
|
$ |
225,539 |
|
|
$ |
223,144 |
|
|
|
|
|
|
|
|
|
Weighted-average Common and
Class B common shares and equivalent shares used to calculate
diluted earnings per share |
|
34,989,956 |
|
|
|
34,397,261 |
|
|
|
34,675,641 |
|
|
|
34,374,269 |
|
|
|
|
|
|
|
|
|
Diluted earnings per share for
Common and Class B common stock (1) |
$ |
0.92 |
|
|
$ |
1.02 |
|
|
$ |
6.50 |
|
|
$ |
6.49 |
|
______________
(1) |
|
These amounts include the dilutive impact attributable to the
excess of dividends paid on restricted shares over the net income
allocated to non-vested restricted common stock. Such excess
amounts were $2.0 million in the fourth quarter of 2019 (6 cents
per share) and $1.2 million in the fourth quarter of 2018 (3 cents
per share). The Company expects this dilutive impact to be seasonal
during the first and fourth quarters of each year due to EPS in
such periods generally being less than the quarterly dividend
rate. |
|
|
|
WATSCO,
INC.Condensed Consolidated Balance
Sheets(Unaudited, in
thousands)
|
December 31, 2019 |
|
December 31, 2018 |
|
|
|
|
Cash and cash equivalents |
$ |
74,454 |
|
|
$ |
82,894 |
|
Accounts receivable, net |
|
533,810 |
|
|
|
501,908 |
|
Inventories |
|
920,786 |
|
|
|
837,129 |
|
Other |
|
17,680 |
|
|
|
19,875 |
|
Total current assets |
|
1,546,730 |
|
|
|
1,441,806 |
|
|
|
|
|
Property and equipment,
net |
|
98,523 |
|
|
|
91,046 |
|
Operating lease right-of-use
assets |
|
223,369 |
|
|
|
- |
|
Goodwill, intangibles, net and
other |
|
687,539 |
|
|
|
628,181 |
|
Total assets |
$ |
2,556,161 |
|
|
$ |
2,161,033 |
|
|
|
|
|
Accounts payable and accrued
expenses |
$ |
392,296 |
|
|
$ |
357,320 |
|
Current portion of long-term
obligations |
|
69,421 |
|
|
|
246 |
|
Total current liabilities |
|
461,717 |
|
|
|
357,566 |
|
|
|
|
|
Borrowings under revolving
credit agreement |
|
155,700 |
|
|
|
135,200 |
|
Operating lease liabilities,
net of current portion |
|
154,271 |
|
|
|
- |
|
Deferred income taxes and
other liabilities |
|
69,706 |
|
|
|
66,554 |
|
Total liabilities |
|
841,394 |
|
|
|
559,320 |
|
|
|
|
|
Watsco's shareholders’
equity |
|
1,435,427 |
|
|
|
1,347,849 |
|
Non-controlling interest |
|
279,340 |
|
|
|
253,864 |
|
Shareholders’ equity |
|
1,714,767 |
|
|
|
1,601,713 |
|
Total liabilities and shareholders’ equity |
$ |
2,556,161 |
|
|
$ |
2,161,033 |
|
|
|
|
|
|
|
|
|
WATSCO,
INC.Condensed Consolidated Statements of
Cash Flows(Unaudited, in
thousands)
|
Years Ended December 31, |
|
2019 |
|
2018 |
Cash flows
from operating activities: |
|
|
|
|
|
|
|
Net income |
$ |
295,775 |
|
|
$ |
296,529 |
|
Non-cash items |
|
40,203 |
|
|
|
42,202 |
|
Changes in working capital net of effects of acquisitions: |
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable |
|
8,457 |
|
|
|
(28,831 |
) |
Increase in inventory |
|
(15,525 |
) |
|
|
(78,954 |
) |
Increase (decrease) in accounts payable and accrued
liabilities |
|
12,734 |
|
|
|
(57,398 |
) |
Other |
|
(5,873 |
) |
|
|
(2,991 |
) |
Net cash provided by operating activities |
|
335,771 |
|
|
|
170,557 |
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
Capital expenditures, net |
|
(16,425 |
) |
|
|
(16,925 |
) |
Business acquisitions, net of cash acquired |
|
(59,672 |
) |
|
|
(5,626 |
) |
Investment in unconsolidated entity |
|
(4,940 |
) |
|
|
(3,760 |
) |
Net cash used in investing activities |
|
(81,037 |
) |
|
|
(26,311 |
) |
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
Dividends on Common and Class B Common stock |
|
(241,412 |
) |
|
|
(209,218 |
) |
Net proceeds under revolving credit agreement |
|
20,500 |
|
|
|
113,400 |
|
Distributions to non-controlling interest |
|
(39,272 |
) |
|
|
(46,825 |
) |
Proceeds from non-controlling interest |
|
17,988 |
|
|
|
752 |
|
Purchase of additional ownership from non-controlling interest |
|
(32,400 |
) |
|
|
- |
|
Other |
|
10,573 |
|
|
|
2,288 |
|
Net cash used in financing activities |
|
(264,023 |
) |
|
|
(139,603 |
) |
Effect of foreign exchange rate changes on cash and cash
equivalents |
|
849 |
|
|
|
(2,245 |
) |
Net (decrease) increase in cash and cash equivalents |
|
(8,440 |
) |
|
|
2,398 |
|
Cash and cash equivalents at beginning of year |
|
82,894 |
|
|
|
80,496 |
|
Cash and cash equivalents at end of year |
$ |
74,454 |
|
|
$ |
82,894 |
|
|
|
|
|
|
|
|
|
Barry S. LoganExecutive Vice President(305)
714-4102 e-mail: blogan@watsco.com
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