Watsco, Inc. (NYSE: WSO) reported record second quarter and
first-half operating results for the periods ended June 30, 2021,
establishing new records for sales, operating income, operating
margin, net income and earnings per share (EPS) for both periods.
Watsco’s entrepreneurial culture, which empowers
leaders to think and act locally, continues to drive record
performance with nearly all operating metrics reaching record
levels. The Company’s industry-leading, customer-focused
technologies have helped facilitate this record performance as
contractors grow and expand their capacity to meet the needs of
unprecedented demand for HVAC/R products. Notably, adoption of
Watsco’s mobile apps, e-commerce platform, and other
customer-facing platforms has grown meaningfully, enabling more
customers to engage with us digitally. In addition,
curbside/dockside technology, which allows for rapid and
contactless order fulfillment, has broadened and continues to
benefit our customers in terms of faster service. Taken as a whole,
Watsco’s technology offering is unique to the industry, has
solidified existing customer relationships and created new customer
acquisition opportunities to generate long-term growth and market
share gains.
Complementing its record organic growth, Watsco
invested in future growth and expanded its network during the
second quarter with the acquisition of two market-leading
businesses, Temperature Equipment Corporation (TEC) and Acme
Refrigeration of Baton Rouge (Acme). The acquired businesses had
annualized sales of approximately $350 million in 2020 and
currently serve more than 14,000 customers from 50 locations.
Consistent with Watsco’s culture, these companies are being led by
their legacy management teams 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 remained low at 6% as of June
30, 2021, 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 has acquired 65 businesses since 1989
and remains active in pursuing additional opportunities to invest
in what remains a fragmented $50 billion North American
HVAC/R distribution industry.
Second Quarter Results
Key Performance Metrics
- 64% increase in EPS to a record
$3.71
- 36% sales growth to a record $1.85
billion (29% growth on a same-store basis)
- 68% increase in operating income to
a record $217 million (59% increase on a same-store basis)
- 220 basis-point operating margin
expansion to a record 11.7% (same-store operating margin of
11.8%)
- 50% gross profit increase to a
record $478 million (40% increase on a same-store basis)
- 220 basis-point gross margin
increase to 25.8%
- 37% increase in SG&A expenses
(28% increase on a same-store basis)
Sales trends (excluding acquisitions):
- 29% growth in HVAC equipment (71%
of sales), including 28% growth in residential products and 32%
growth in commercial products
- 25% increase in other HVAC products
(26% of sales)
- 45% increase in commercial
refrigeration products (3% of sales)
Albert H. Nahmad, Watsco’s Chairman & CEO
stated: “Watsco delivered a blowout quarter with solid earnings
growth and margin expansion from a combination of strong sales
across all markets, a richer sales mix of high-efficiency systems,
better selling margins, operating efficiencies and contributions
from recently completed acquisitions. Our results also reflect
continued investments in products, technology and people to drive
sales and innovation throughout our business. Our teams remain
focused on providing an exceptional customer experience as
evidenced by the continued growth in customer adoption of our
industry-leading technologies.”
The Company believes that the products it sells,
most notably new HVAC equipment to replace older residential
systems that inherently operate at lower efficiencies, can play a
key role in advancing CO2 reduction. Watsco can therefore be an
important contributor to address climate change. Based on estimates
and models validated by two independent sources, there was an
estimated CO2 reduction of 1.8 billion pounds resulting from
Watsco’s sale of residential HVAC replacement systems over the 12
month period ended June 30, 2021.
Mr. Nahmad added: “We believe that Watsco can
play a key role in addressing climate change at a large scale given
that most of the estimated 110 million HVAC systems installed in
the U.S. operate under old efficiency standards. We are investing
capital and leveraging our technology to increase awareness among
contractors and consumers and will collaborate with our OEM
partners to impact change over the long-term.”
First-Half 2021 Results
Key Performance Metrics
- 70% increase in EPS to a record
$5.13
- 26% sales growth to a record $2.99
billion (22% growth on a same-store basis)
- 71% increase in operating income to
a record $299 million (64% increase on a same-store basis)
- 260 basis-point operating margin
expansion to a record 10.0% (same-store operating margin of
10.0%)
- 36% gross profit increase to a
record $773 million (31% growth on a same-store basis)
- 190 basis-point gross margin
increase to a record 25.9%
- 22% increase in SG&A expenses
(17% increase on a same-store basis)
- 60 basis-point improvement in
SG&A as a percentage of sales
Sales trends (excluding acquisitions):
- 23% growth in HVAC equipment (69%
of sales), including 24% growth in residential products and 16%
growth in commercial products
- 19% increase in other HVAC products
(27% of sales)
- 28% increase in commercial
refrigeration products (4% of sales)
Technology Innovation
Watsco continues to aggressively invest in
technologies to transform its customer experience. Specific
technology-related trends for the second quarter of 2021
include:
- Product
Information Management (PIM) is Watsco’s industry-leading
repository of product information delivered seamlessly through
Watsco’s mobile apps and e-commerce
platform. Watsco’s PIM includes approximately 900,000
SKUs accessed by more than 350,000 contractors and technicians on
an annual basis.
-
Contractor Assist mobile apps provide customers real-time
field access to critical information, including technical support,
product detail and inventory information, warranty look-up, the
ability to purchase product through links to e-commerce and more.
The authenticated user community (users that are using the mobile
app while linked to an e-commerce account) grew 12% compared to
last year to more than 25,000 users.
-
E-Commerce sales annual run-rate currently exceeds $1.7 billion and
grew 28% during the second quarter over last year. The number of
e-commerce transactions grew 22% to more than 400,000 during the
quarter.
- OnCall
Air®, Watsco’s digital sales platform used by HVAC/R
contractors and CreditForComfort®, its companion consumer
financing platform, both increased penetration as more customers
digitally engaged with homeowners. During the second quarter of
2021, OnCall Air® presented quotes to approximately 58,000
households, an 84% increase over last year, and generated $208
million in gross merchandise value, a 97% increase over
2020. The number of customers using CreditForComfort® grew 17%
and processed approximately 1,800 financing applications during the
quarter with 13% growth in total loan-value versus the same period
in 2020.
-
Proprietary warehouse technology investments have enabled
faster, better and more reliable customer service. Express Pick-up
allows contractors to streamline the traditional fulfillment of
orders providing quicker service, allowing contractors to complete
their work more efficiently. Watsco also launched curbside
pick-up and touchless payment capabilities last year to facilitate
contactless order fulfillment. More tools have also been developed
to optimize demand planning and inventory levels. Taken as a whole,
these investments are designed to enhance the customer experience,
streamline branch operations and benefit same-store
productivity.
Cash Flow & Dividends
Watsco’s operating cash flow for the first half
of 2021 was $82 million versus $261 million for the same period in
2020, reflecting the growth in working capital driven by higher
sales growth. The Company has targeted operating cash flow to
exceed net income in 2021. Since 2000, operating cash flow was
approximately $3.3 billion versus net income of $3.2
billion, surpassing the Company’s goal.
Watsco has paid cash dividends to
shareholders for 47 consecutive years. The Company’s philosophy is
to share increasing amounts of cash flow through higher dividends
while maintaining a conservative financial position with continued
capacity to build its distribution network. Effective April
2021, Watsco increased its annual dividend rate by 10%
to $7.80 per share.
Acquisitions
On April 9, 2021, Watsco completed the
acquisition of TEC. Founded in Chicago in 1935, TEC
serves approximately 10,000 HVAC customers from 32 locations in
Illinois, Indiana, Kansas, Michigan,
Minnesota, Missouri and Wisconsin. TEC annual sales
were $291 million in 2020. TEC constitutes a joint
venture transaction with Carrier Global Corporation (Carrier).
Watsco owns 80% of TEC and Carrier 20%.
On May 7, 2021, Watsco completed the acquisition
of Acme. Founded in 1945, Acme serves approximately 4,000 HVAC
customers from 18 locations in Louisiana and Mississippi. Acme
generated $60 million in sales in 2020.
These acquisitions are the latest examples of
Watsco’s strategy to invest in growth opportunities and expand its
industry-leading position. Since entering HVAC/R distribution in
1989, Watsco’s revenues have increased from $64 million to an
annual, pro-forma run-rate approaching $6 billion following its
unique “buy and build” philosophy.
Second Quarter Earnings Conference Call
Information
Date: July 22, 2021Time: 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, in each case
during the immediately preceding 12 months, unless such locations
are within close geographical proximity to existing locations. 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 350,000 contractors and technicians
visit or call one of its 655 locations each year to get
information, obtain technical support and buy products.
The Company believes there is long-term
opportunity to be a significant participant and contributor in
efforts to address climate change. HVAC/R products provide comfort
to homes and businesses regardless of the outdoor climate. Older
systems often operate below current government-mandated energy
efficiency and environmental standards, resulting in higher energy
use and costs to homeowners. Sales of higher-efficiency
replacement systems have long been a fundamental opportunity
in Watsco’s marketplace. Watsco plans to actively
collaborate with its OEM partners and key stakeholders to lead
these ongoing efforts in its marketplace. Additional information
about Watsco may be found at 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 may address,
among other things, our expected financial and operational results
and the related assumptions underlying our expected results. These
forward-looking statements are 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, the seasonality of product
sales, 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, except as required by
applicable law.
WATSCO, INC.Condensed
Consolidated Results of Operations(In thousands,
except per share data)(Unaudited)
|
Quarter Ended June 30, |
|
Six Months Ended June 30, |
|
|
2021 |
|
|
|
2020 |
|
|
|
2021 |
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
$ |
1,849,640 |
|
|
$ |
1,355,385 |
|
|
$ |
2,985,758 |
|
|
$ |
2,363,541 |
|
Cost of sales |
|
1,371,699 |
|
|
|
1,036,186 |
|
|
|
2,212,996 |
|
|
|
1,796,727 |
|
Gross profit |
|
477,941 |
|
|
|
319,199 |
|
|
|
772,762 |
|
|
|
566,814 |
|
Gross profit
margin |
|
25.8% |
|
|
|
23.6% |
|
|
|
25.9% |
|
|
|
24.0% |
|
SG&A
expenses |
|
266,697 |
|
|
|
194,053 |
|
|
|
484,309 |
|
|
|
397,439 |
|
Other income |
|
5,539 |
|
|
|
4,103 |
|
|
|
10,210 |
|
|
|
5,117 |
|
Operating
income |
|
216,783 |
|
|
|
129,249 |
|
|
|
298,663 |
|
|
|
174,492 |
|
Operating
margin |
|
11.7% |
|
|
|
9.5% |
|
|
|
10.0% |
|
|
|
7.4% |
|
Interest expense,
net |
|
448 |
|
|
|
283 |
|
|
|
536 |
|
|
|
1,073 |
|
Income before
income taxes |
|
216,335 |
|
|
|
128,966 |
|
|
|
298,127 |
|
|
|
173,419 |
|
Income taxes |
|
44,202 |
|
|
|
24,724 |
|
|
|
59,867 |
|
|
|
32,930 |
|
Net income |
|
172,133 |
|
|
|
104,242 |
|
|
|
238,260 |
|
|
|
140,489 |
|
Less: net income
attributable to non-controlling interest |
|
28,031 |
|
|
|
17,664 |
|
|
|
39,066 |
|
|
|
23,409 |
|
Net income
attributable to Watsco |
$ |
144,102 |
|
|
$ |
86,578 |
|
|
$ |
199,194 |
|
|
$ |
117,080 |
|
|
|
|
|
|
|
|
|
Diluted earnings
per share: |
|
|
|
|
|
|
|
Net income
attributable to Watsco shareholders |
$ |
144,102 |
|
|
$ |
86,578 |
|
|
$ |
199,194 |
|
|
$ |
117,080 |
|
Less: distributed
and undistributed earnings allocated to non-vested restricted
common stock |
|
12,748 |
|
|
|
7,439 |
|
|
|
17,596 |
|
|
|
11,082 |
|
Earnings allocated
to Watsco shareholders |
$ |
131,354 |
|
|
$ |
79,139 |
|
|
$ |
181,598 |
|
|
$ |
105,998 |
|
|
|
|
|
|
|
|
|
Weighted-average
Common and Class B common shares and equivalent shares used to
calculate diluted earnings per share |
|
35,427,718 |
|
|
|
35,064,711 |
|
|
|
35,379,046 |
|
|
|
35,044,350 |
|
|
|
|
|
|
|
|
|
Diluted earnings
per share for Common and Class B common stock |
$ |
3.71 |
|
|
$ |
2.26 |
|
|
$ |
5.13 |
|
|
$ |
3.02 |
|
WATSCO, INC.Condensed
Consolidated Balance Sheets (Unaudited, in
thousands)
|
June 30, |
|
December 31, |
|
|
2021 |
|
|
|
2020 |
|
|
|
|
|
Cash and cash equivalents |
$ |
96,787 |
|
|
$ |
146,067 |
|
Accounts receivable, net |
|
857,864 |
|
|
|
535,288 |
|
Inventories, net |
|
1,044,608 |
|
|
|
781,299 |
|
Other |
|
22,803 |
|
|
|
21,791 |
|
Total current assets |
|
2,022,062 |
|
|
|
1,484,445 |
|
|
|
|
|
Property and equipment,
net |
|
104,967 |
|
|
|
98,225 |
|
Operating lease right-of-use
assets |
|
263,682 |
|
|
|
209,169 |
|
Goodwill, intangibles, net and
other |
|
740,973 |
|
|
|
692,508 |
|
Total assets |
$ |
3,131,684 |
|
|
$ |
2,484,347 |
|
|
|
|
|
Accounts payable and accrued
expenses |
$ |
733,958 |
|
|
$ |
415,341 |
|
Current portion of long-term
obligations |
|
81,306 |
|
|
|
71,804 |
|
Total current liabilities |
|
815,264 |
|
|
|
487,145 |
|
|
|
|
|
Borrowings under revolving
credit agreement |
|
114,167 |
|
|
|
- |
|
Operating lease liabilities,
net of current portion |
|
184,925 |
|
|
|
139,527 |
|
Deferred income taxes and
other liabilities |
|
85,795 |
|
|
|
77,914 |
|
Total liabilities |
|
1,200,151 |
|
|
|
704,586 |
|
|
|
|
|
Watsco's shareholders’
equity |
|
1,575,703 |
|
|
|
1,486,678 |
|
Non-controlling interest |
|
355,830 |
|
|
|
293,083 |
|
Shareholders’ equity |
|
1,931,533 |
|
|
|
1,779,761 |
|
Total liabilities and shareholders’ equity |
$ |
3,131,684 |
|
|
$ |
2,484,347 |
|
WATSCO, INC.Condensed
Consolidated Statements of Cash Flows (Unaudited,
in thousands)
|
Six Months Ended June 30, |
|
|
2021 |
|
|
|
2020 |
|
Cash flows from operating
activities: |
|
|
|
Net income |
$ |
238,260 |
|
|
$ |
140,489 |
|
Non-cash items |
|
24,283 |
|
|
|
26,072 |
|
Changes in working capital, net of acquisitions |
|
|
|
Accounts receivable, net |
|
(283,077 |
) |
|
|
(146,512 |
) |
Inventories, net |
|
(173,539 |
) |
|
|
63,432 |
|
Accounts payable and other liabilities |
|
282,852 |
|
|
|
182,957 |
|
Other, net |
|
(6,897 |
) |
|
|
(5,183 |
) |
Net cash provided by operating activities |
|
81,882 |
|
|
|
261,255 |
|
|
|
|
|
Cash flows from investing
activities: |
|
|
|
Business acquisitions, net of cash acquired |
|
(126,549 |
) |
|
|
- |
|
Capital expenditures, net |
|
(10,908 |
) |
|
|
(7,982 |
) |
Proceeds from sale of equity securities |
|
5,993 |
|
|
|
- |
|
Net cash used in investing activities |
|
(131,464 |
) |
|
|
(7,982 |
) |
|
|
|
|
Cash flows from financing
activities: |
|
|
|
Dividends on Common and Class B common stock |
|
(143,909 |
) |
|
|
(129,315 |
) |
Net proceeds (repayments) under revolving credit agreement |
|
114,167 |
|
|
|
(122,343 |
) |
Proceeds from NCI for investment in TEC Distribution LLC |
|
21,040 |
|
|
|
- |
|
Other |
|
7,721 |
|
|
|
4,359 |
|
Net cash used in financing activities |
|
(981 |
) |
|
|
(247,299 |
) |
Effect of foreign exchange
rate changes on cash and cash equivalents |
|
1,283 |
|
|
|
(855 |
) |
Net (decrease) increase in
cash and cash equivalents |
|
(49,280 |
) |
|
|
5,119 |
|
Cash and cash equivalents at
beginning of period |
|
146,067 |
|
|
|
74,454 |
|
Cash and cash equivalents at
end of period |
$ |
96,787 |
|
|
$ |
79,573 |
|
Barry S. LoganExecutive Vice President(305)
714-4102e-mail: blogan@watsco.com
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