Watsco, Inc. (NYSE: WSO) reported record third quarter and
nine-month operating results for the periods ended September 30,
2021.
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 achieved new performance records for sales,
gross profit, gross margin, operating income, operating margin, net
income and earnings per share (EPS) for both periods.
This performance includes stepped-up investments
to grow customer adoption of Watsco’s various technology platforms,
which collectively revolutionize the customer experience, enhance
operational efficiency and help contractors grow and better serve
homeowners and businesses. The Company believes the pace of
innovation and change is accelerating, and its customer focused
solutions, scale and leadership position provide significant
long-term value. As examples, sales growth rates of contractors
that are active users far outpace growth rates among non-users, and
annual attrition rates are meaningfully lower among active
technology users as compared to traditional customers.
Watsco has also made substantial incremental
investments in its network during 2021. The Company completed three
acquisitions so far this year, investing $114 million of capital in
strong, market-leading businesses and has opened 20 new stores to
drive future growth and support local customers.
Looking ahead, Watsco believes it can
meaningfully contribute to sustainability and greenhouse gas
emissions reduction through the sale of new HVAC equipment that
replaces older systems operating at lower efficiencies. Based on
estimates validated by independent sources, since January 1, 2020
through September 30, 2021, Watsco facilitated the reduction of an
estimated 19.4 billion pounds of CO2e emissions from the sale of
replacement residential air conditioners, heat pumps and furnaces.
Albert H. Nahmad, Watsco’s Chairman & CEO
commented: “We believe that Watsco can play a role at scale in
addressing climate change given that many of the estimated 110
million HVAC systems, installed in the U.S., operate under older
energy efficiency standards and historically use high-global
warming potential refrigerants and natural gas. We are investing
resources and leveraging our technology to increase awareness among
contractors, business owners and consumers, and we will collaborate
with our OEM partners to impact climate change.”
Third Quarter Results
Key Performance Metrics
- 31% increase in EPS to a record
$3.62
- 16% sales growth to a record $1.78
billion (8% growth on a same-store basis)
- 32% increase in operating income to
a record $207 million (25% increase on a same-store
basis)
- 140 basis-point operating margin
expansion to a record 11.6% (same-store operating margin of
11.8%)
- 29% gross profit increase to a
record $483 million (20% increase on a same-store basis)
- 280 basis-point gross margin
increase to a record 27.1%
- 28% increase in SG&A expenses
(17% increase on a same-store basis)
- 113% increase in operating cash
flow to a record $238 million
Sales trends (excluding acquisitions):
- 7% growth in HVAC equipment (69% of
sales)
- 12% increase in other HVAC products
(27% of sales)
- 27% increase in commercial
refrigeration products (4% of sales)
Nine-Month Period Results
Key Performance Metrics
- 50% increase in EPS to a record
$8.75
- 22% sales growth to a record $4.77
billion (17% growth on a same-store basis)
- 53% increase in operating income to
a record $505 million (46% increase on a same-store basis)
- 210 basis-point operating margin
expansion to a record 10.6% (same-store operating margin was
10.6%)
- 33% gross profit increase to a
record $1.26 billion (27% growth on a same-store basis)
- 220 basis-point gross margin
increase to a record 26.3%
- 24% increase in SG&A expenses
(17% increase on a same-store basis)
Sales trends (excluding acquisitions):
- 16% growth in HVAC equipment (69%
of sales)
- 16% increase in other HVAC products
(27% of sales)
- 28% increase in commercial
refrigeration products (4% of sales)
Watsco Fundamentals
Watsco operates in diverse, highly localized
markets. As the scaled distributor in a highly fragmented $50
billion industry, Watsco possesses certain fundamentals that we
believe offer both long-term stability and future growth
opportunities: Geographic Markets.
Watsco operates the largest network in the industry with no single
location accounting for more than 3% of sales. On average, a
location has $8 million of sales with approximately seven employees
operating from 20,000 square feet of warehouse space. In most
markets, we have several business units operating multiple
locations, offering a diverse assortment of products to meet our
customers’ needs.
Customers. Watsco serves approximately 350,000
contractors and technicians, increasingly through the use of
digital tools, including e-commerce and mobile apps. Products are
generally purchased ‘when-needed,’ which is usually within minutes
or hours of a contractor’s visit to a home or business. The Company
estimates replacement and repair of HVAC systems accounts for
approximately 70% of Watsco’s sales. We believe this customer
diversity and the immediacy for replacement HVAC products
prioritizes the value of our services and mitigates risk of
inflationary pressures on profitability.
Products. Watsco offers the industry’s largest
inventory of products sourced from more than 1,300 vendors,
available in-store or on-line. The Company sources HVAC equipment
(69% of sales thus far in 2021) from 20 domestic and international
OEMs and sells over 25 brand-names with a wide variety of price
points, efficiencies and capacities to meet the needs of
contractors. To enable e-commerce and other digital solutions,
Watsco has mastered the industry’s largest product information
database with rich data for over 900,000 SKUs, offering customers
product solutions nearly anywhere, anytime on any device. The
Company believes its scale and diversity provides a long-term
advantage in its markets.
Technology & Innovation. Watsco’s
technologies continue to transform how we serve and support HVAC/R
contractors. Speed, productivity and scale are critical factors to
serve customers in a digital world and Watsco has invested heavily
to ensure an unparalleled customer experience. Our technology
strategy was defined several years ago and is intended to transform
a complete manual process into a complete digital process. In
addition to evolving our customer’s experience, we have launched
and are scaling technologies to transform the homeowner experience,
which, in turn, will help our customers grow. We further believe
our innovative tools and culture provide a significant long-term
advantage.
Factors Impacting 2021
Performance
A number of unique factors are influencing the
HVAC/R industry during 2021. Collectively these factors present
opportunities for Watsco to better serve customers and develop
additional market share in a complex operating environment. The
following summarizes the factors that have impacted 2021’s
performance:
Pricing. Throughout 2021, HVAC/R manufacturers
have experienced significant inflationary pressures and have raised
prices accordingly. In turn, we have raised our selling prices,
resulting in higher year-to-date sales and enhanced profitability.
The Company actively monitors market conditions through a variety
of processes and technologies and communicates with suppliers to
sustain competitiveness and profitability. During the first nine
months of 2021, sales of residential HVAC equipment in U.S. markets
(excluding acquisitions) increased 16%, including a 6% increase in
average selling price.
Product Availability. All OEMs and manufacturers
have experienced some level of supply chain disruptions caused by
component availability, labor shortages, transportation delays and
other supply chain challenges, all of which have impacted typical
lead times and overall availability of HVAC products. While supply
chain disruptions impacted third quarter residential sales, Watsco
nonetheless experienced growth in residential units during the
quarter. This is all the more positive considering the strong third
quarter comparative performance experienced last year. More
recently, product availability has improved and we are encouraged
by current volume trends and the OEMs ability to meet strong
end-market demand.
Operating Expenses. As a result of the supply
chain disruptions, Watsco’s field leadership and front-line
associates have done extraordinary things to service customers,
which has resulted in higher personnel costs and other SG&A
expense increases. For example, Watsco’s logistics costs increased
20% or $19 million (33 cents per share) during the nine-month
period, reflecting higher-than-normal inventory movement across our
network to meet customer demand. We expect this incremental cost to
be temporary headwind and moderate in 2022 as the supply chain
normalizes.
Technology Investments. Watsco continues to
invest in its transformative technologies, especially as it relates
to increasing customer adoption and gaining market share. Headcount
dedicated to technology increased by 20% compared to a year ago and
overall spending has increased $5 million in 2021 (10 cents per
share). Technology spending was $41 million over the last 12 months
ended September 30, 2021.
People Investments. In response to strong demand
and consistent with our long-term focus, Watsco added over 450
employees since a year ago in support of defined growth
initiatives, including staffing 20 new locations. In addition,
Watsco’s culture to reward performance through a number of
pay-for-performance programs has resulted in a $36 million increase
in performance-based compensation (65 cent EPS impact for the
nine-month period ended September 30, 2021).
Mr. Nahmad added: “We believe we have delivered
extraordinary performance under extraordinary circumstances thus
far in 2021. Despite the unprecedented operating environment, our
teams continue to focus on their first priority, serving customers,
and we will continue to make investments to enable growth,
competitiveness and to build the industry’s most innovative
technologies.”
Cash Flow & Dividends
Watsco’s operating cash flow for the quarter
increased 113% to a record $238 million. For the nine-month period
ended September 30, 2021, operating cash flow was $320 million
versus $373 million last year, reflecting investments in working
capital consistent with sales growth. The Company has targeted
operating cash flow to exceed net income in 2021. Since 2016,
operating cash flow was approximately $1.9 billion versus
net income of $1.8 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.
Third Quarter Earnings Conference Call
Information
Date: October 20, 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 673 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 September 30, |
|
Nine Months Ended September 30, |
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
Revenues |
$ |
1,782,569 |
|
|
$ |
1,536,671 |
|
|
$ |
4,768,327 |
|
|
$ |
3,900,212 |
|
Cost of sales |
|
1,299,905 |
|
|
|
1,162,908 |
|
|
|
3,512,901 |
|
|
|
2,959,635 |
|
Gross profit |
|
482,664 |
|
|
|
373,763 |
|
|
|
1,255,426 |
|
|
|
940,577 |
|
Gross profit margin |
|
27.1 |
% |
|
|
24.3 |
% |
|
|
26.3 |
% |
|
|
24.1 |
% |
SG&A expenses |
|
281,922 |
|
|
|
221,037 |
|
|
|
766,231 |
|
|
|
618,476 |
|
Other income |
|
6,057 |
|
|
|
4,055 |
|
|
|
16,267 |
|
|
|
9,172 |
|
Operating income |
|
206,799 |
|
|
|
156,781 |
|
|
|
505,462 |
|
|
|
331,273 |
|
Operating margin |
|
11.6 |
% |
|
|
10.2 |
% |
|
|
10.6 |
% |
|
|
8.5 |
% |
Interest expense, net |
|
221 |
|
|
|
108 |
|
|
|
757 |
|
|
|
1,181 |
|
Income before income
taxes |
|
206,578 |
|
|
|
156,673 |
|
|
|
504,705 |
|
|
|
330,092 |
|
Income taxes |
|
41,734 |
|
|
|
30,467 |
|
|
|
101,601 |
|
|
|
63,397 |
|
Net income |
|
164,844 |
|
|
|
126,206 |
|
|
|
403,104 |
|
|
|
266,695 |
|
Less: net income attributable
to non-controlling interest |
|
23,979 |
|
|
|
19,717 |
|
|
|
63,045 |
|
|
|
43,126 |
|
Net income attributable to
Watsco |
$ |
140,865 |
|
|
$ |
106,489 |
|
|
$ |
340,059 |
|
|
$ |
223,569 |
|
|
|
|
|
|
|
|
|
Diluted earnings per
share: |
|
|
|
|
|
|
|
Net income attributable to
Watsco shareholders |
$ |
140,865 |
|
|
$ |
106,489 |
|
|
$ |
340,059 |
|
|
$ |
223,569 |
|
Less: distributed and
undistributed earnings allocated to non-vested restricted common
stock |
|
12,563 |
|
|
|
9,135 |
|
|
|
30,132 |
|
|
|
19,175 |
|
Earnings allocated to Watsco
shareholders |
$ |
128,302 |
|
|
$ |
97,354 |
|
|
$ |
309,927 |
|
|
$ |
204,394 |
|
|
|
|
|
|
|
|
|
Weighted-average Common and
Class B common shares and equivalent shares used to calculate
diluted earnings per share |
|
35,441,978 |
|
|
|
35,237,022 |
|
|
|
35,400,254 |
|
|
|
35,109,043 |
|
|
|
|
|
|
|
|
|
Diluted earnings per share for
Common and Class B common stock |
$ |
3.62 |
|
|
$ |
2.76 |
|
|
$ |
8.75 |
|
|
$ |
5.82 |
|
WATSCO, INC.Condensed
Consolidated Balance Sheets (Unaudited, in
thousands)
|
September 30, |
|
December 31, |
|
2021 |
|
2020 |
|
|
|
|
Cash and cash equivalents |
$ |
137,201 |
|
$ |
146,067 |
Accounts receivable, net |
|
771,042 |
|
|
535,288 |
Inventories, net |
|
1,042,144 |
|
|
781,299 |
Other |
|
30,474 |
|
|
21,791 |
Total current assets |
|
1,980,861 |
|
|
1,484,445 |
|
|
|
|
Property and equipment,
net |
|
105,842 |
|
|
98,225 |
Operating lease right-of-use
assets |
|
262,965 |
|
|
209,169 |
Goodwill, intangibles, net and
other |
|
741,253 |
|
|
692,508 |
Total assets |
$ |
3,090,921 |
|
$ |
2,484,347 |
|
|
|
|
Accounts payable and accrued
expenses |
$ |
713,981 |
|
$ |
415,341 |
Current portion of long-term
obligations |
|
82,712 |
|
|
71,804 |
Total current liabilities |
|
796,693 |
|
|
487,145 |
|
|
|
|
Borrowings under revolving
credit agreement |
|
1,724 |
|
|
- |
Operating lease liabilities,
net of current portion |
|
182,772 |
|
|
139,527 |
Deferred income taxes and
other liabilities |
|
88,207 |
|
|
77,914 |
Total liabilities |
|
1,069,396 |
|
|
704,586 |
|
|
|
|
Watsco's shareholders’
equity |
|
1,644,581 |
|
|
1,486,678 |
Non-controlling interest |
|
376,944 |
|
|
293,083 |
Shareholders’ equity |
|
2,021,525 |
|
|
1,779,761 |
Total liabilities and shareholders’ equity |
$ |
3,090,921 |
|
$ |
2,484,347 |
WATSCO, INC.Condensed
Consolidated Statements of Cash Flows (Unaudited,
in thousands)
|
Nine Months Ended September 30, |
|
2021 |
|
2020 |
Cash flows from operating
activities: |
|
|
|
Net income |
$ |
403,104 |
|
|
$ |
266,695 |
|
Non-cash items |
|
34,355 |
|
|
|
35,476 |
|
Changes in working capital, net of acquisitions |
|
|
|
Accounts receivable, net |
|
(198,011 |
) |
|
|
(113,017 |
) |
Inventories, net |
|
(170,662 |
) |
|
|
34,448 |
|
Accounts payable and other liabilities |
|
263,752 |
|
|
|
158,094 |
|
Other, net |
|
(12,866 |
) |
|
|
(8,918 |
) |
Net cash provided by operating activities |
|
319,672 |
|
|
|
372,778 |
|
|
|
|
|
Cash flows from investing
activities: |
|
|
|
Business acquisitions, net of cash acquired |
|
(129,462 |
) |
|
|
- |
|
Capital expenditures, net |
|
(16,662 |
) |
|
|
(11,547 |
) |
Proceeds from sale of equity securities |
|
5,993 |
|
|
|
- |
|
Net cash used in investing activities |
|
(140,131 |
) |
|
|
(11,547 |
) |
|
|
|
|
Cash flows from financing
activities: |
|
|
|
Dividends on Common and Class B Common stock |
|
(219,440 |
) |
|
|
(197,454 |
) |
Net proceeds (repayments) under revolving credit agreement |
|
1,724 |
|
|
|
(155,032 |
) |
Other |
|
8,775 |
|
|
|
9,716 |
|
Proceeds from NCI for investment in TEC Distribution LLC |
|
21,040 |
|
|
|
- |
|
Net cash used in financing activities |
|
(187,901 |
) |
|
|
(342,770 |
) |
Effect of foreign exchange
rate changes on cash and cash equivalents |
|
(506 |
) |
|
|
(315 |
) |
Net (decrease) increase in
cash and cash equivalents |
|
(8,866 |
) |
|
|
18,146 |
|
Cash and cash equivalents at
beginning of period |
|
146,067 |
|
|
|
74,454 |
|
Cash and cash equivalents at
end of period |
$ |
137,201 |
|
|
$ |
92,600 |
|
Barry S. Logan
Executive Vice
President
(305) 714-4102e-mail:
blogan@watsco.com
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