Watsco, Inc. (NYSE:WSO) reported record results for the quarter and
for the nine-month period ended September 30, 2017.
In addition to record operating results, Watsco
has generated record cash flow in 2017, representing a 26% increase
over the same period last year. Over the last 12 months, operating
cash flow was $316 million versus net income of $245 million
reflecting progress from the use of new technologies designed to
improve inventory turns and enhance overall business efficiency.
The results reflect disruptions from Hurricanes
Harvey, Irma and Maria, which impacted certain of the Company’s
largest markets during August and September. More than 300
locations experienced some impact with 190 location closures,
including key markets in Florida, Texas, Georgia and Puerto Rico.
Export activities to the Caribbean-basin and markets in Central
Mexico following the Mexico City earthquake also experienced
disruption and closure. Collectively, markets directly impacted by
location closures represent 35% of sales. The estimated earnings
per share impact was approximately 10 cents per share. Sales trends
have strengthened in the early part of the fourth quarter as a
result of the repair, restoration and replacement activities that
are underway. Longer term, the Company believes the necessity of
HVAC-related products in these Sunbelt markets coupled with the
continued rebuilding and reinvestment activities present an
opportunity for growth.
The results also reflect continued investment in
a variety of technologies to revolutionize Watsco’s
customer-experience, to create a data-driven culture, to empower
more insightful decision-making and to enhance productivity and
operational efficiency. The Company has also made additional
investments in products and people to grow and develop market share
for our supplier partners.
Third Quarter Results
Key performance metrics:
- 2% increase in earnings per share to a record $1.82
- 3% increase in net income to a record $65 million
- Flat SG&A expenses
- 4% decrease in operating income to $114 million (9.3% operating
margin)
- 46% increase in operating cash flow to $152 million
Sales trends:
- 1% decrease in sales to $1.23 billion (flat on a same-store
basis)
- Flat sales for HVAC equipment (68% of sales), including 2%
increase in residential products
- 4% decrease in other HVAC products (27% of sales)
- 4% decrease in commercial refrigeration products (5% of
sales)
Albert H. Nahmad, Chairman and CEO said: “Watsco
produced strong cash flow and a record quarter for net income and
earnings per share despite the substantial disruptions and strong
sales comparisons from a year ago. We believe we gained share in
our markets during the quarter, reflecting the efforts of the
Watsco team in collaboration with our vendor partners.”
Mr. Nahmad added: “We appreciate the efforts of
our more than 1,800 employees that were impacted by the storms for
their dedication and commitment in serving the 30,000-plus
customers that operate in the impacted areas.”
Nine-Month Results
Key performance metrics:
- 7% increase in earnings per share to a record $4.62
- 8% increase in net income to a record $165 million
- 2% increase in operating income to a record $293 million (8.7%
operating margin)
- 26% increase in operating cash flow to a record $185
million
Sales trends:
- 2% increase in sales to a record $3.38 billion (3% increase on
same-store basis)
- 3% increase in HVAC equipment (67% of sales)
- Flat sales for other HVAC products (28% of sales)
- 1% growth in commercial refrigeration products (5% of
sales)
Technology Strategy
Watsco continues to transform 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 increase the speed and convenience of
serving customers, to improve operating efficiency and to extend
the Company’s reach into new geographies and sales channels.
Technology-related spending over the last twelve months was
approximately $23 million.
Mr. Nahmad added: “We continue to make progress
with our industry-leading technologies and estimate e-commerce
sales can reach $1 billion this year. There is no question
technology changes are accelerating and we expect that our
industry-specific focus, scale and leadership position will serve
us, and our customers, 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.”
Cash Flow & Dividends
Operating cash flow for the quarter increased
46% to $152 million and for the nine-month period increased 26% to
a record $185 million. The Company has targeted operating
cash flow 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.
Dividends paid in 2017 increased 32%
to $119 million. 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.
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.
Outlook for 2017
Watsco expects continued record performance in
2017 with full-year diluted earnings per share in the range of
$5.50 to $5.60 per share.
Acquisition of 35% of Russell Sigler,
Inc.
In June 2017, Watsco’s Carrier Enterprise
business unit 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. RSI serves over 10,000 customers from
30 locations throughout Arizona, California, Idaho, New Mexico,
Nevada and portions of Texas. Carrier Enterprise has the exclusive
right to purchase shares if and when any current RSI owner wishes
to sell shares in the future. Third quarter results include 5 cents
per share attributable to the Company’s ownership interest in
RSI.
Acquisition of Joint Venture
Interests
In February 2017, Watsco raised
its ownership of Carrier Enterprise Northeast LLC, a joint
venture with Carrier, to 80% from 70% for approximately $43
million in cash. Carrier Enterprise Northeast had sales of
approximately $500 million in 2016 from 41 locations in
the northeastern United States and 12 locations
in Mexico. Nine-month results include a contribution
of 12 cents per share from the increased ownership
interest.
Conference Call Information
Date: October 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.
Use of Non-GAAP Financial
Information
In this release, the Company discloses non-GAAP
measure of same-store basis. Information referring to same-store
basis excludes the effects of locations acquired or locations
opened or closed during the immediately preceding 12 months unless
they 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 accounting principles generally accepted in the United
States (GAAP).
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 September 30, |
|
Nine Months Ended September 30, |
|
|
2017 |
|
|
|
2016 |
|
|
|
2017 |
|
|
|
2016 |
|
Revenues |
|
$1,229,591 |
|
|
|
$1,241,232 |
|
|
|
$3,377,610 |
|
|
|
$3,307,091 |
|
Cost of sales |
|
933,696 |
|
|
|
939,028 |
|
|
|
2,552,881 |
|
|
|
2,500,579 |
|
Gross profit |
|
295,895 |
|
|
|
302,204 |
|
|
|
824,729 |
|
|
|
806,512 |
|
Gross profit
margin |
|
24.1 |
% |
|
|
24.3 |
% |
|
|
24.4 |
% |
|
|
24.4 |
% |
SG&A expenses
(1) |
|
183,728 |
|
|
|
182,904 |
|
|
|
534,515 |
|
|
|
518,954 |
|
Other income |
|
2,294 |
|
|
|
- |
|
|
|
2,294 |
|
|
|
- |
|
Operating income |
|
114,461 |
|
|
|
119,300 |
|
|
|
292,508 |
|
|
|
287,558 |
|
Operating margin |
|
9.3 |
% |
|
|
9.6 |
% |
|
|
8.7 |
% |
|
|
8.7 |
% |
Interest expense,
net |
|
2,117 |
|
|
|
996 |
|
|
|
5,019 |
|
|
|
3,036 |
|
Income before income
taxes |
|
112,344 |
|
|
|
118,304 |
|
|
|
287,489 |
|
|
|
284,522 |
|
Income taxes |
|
32,325 |
|
|
|
37,786 |
|
|
|
82,855 |
|
|
|
88,406 |
|
Net income |
|
80,019 |
|
|
|
80,518 |
|
|
|
204,634 |
|
|
|
196,116 |
|
Less: net income
attributable to non-controlling interest |
|
14,990 |
|
|
|
17,419 |
|
|
|
39,668 |
|
|
|
42,859 |
|
Net income attributable
to Watsco |
|
$65,029 |
|
|
|
$63,099 |
|
|
|
$164,966 |
|
|
|
$153,257 |
|
|
|
|
|
|
|
|
|
Diluted earnings per
share: |
|
|
|
|
|
|
|
Net income attributable
to Watsco shareholders |
|
$65,029 |
|
|
|
$63,099 |
|
|
|
$164,966 |
|
|
|
$153,257 |
|
Less: distributed
and undistributed earnings allocated to non-vested restricted
common stock |
|
5,468 |
|
|
|
5,078 |
|
|
|
13,840 |
|
|
|
12,383 |
|
Earnings allocated to
Watsco shareholders |
|
$59,561 |
|
|
|
$58,021 |
|
|
|
$151,126 |
|
|
|
$140,874 |
|
|
|
|
|
|
|
|
|
Weighted-average Common
and Class B common shares and equivalent shares used to calculate
diluted earnings per share |
|
32,746,366 |
|
|
|
32,650,153 |
|
|
|
32,711,850 |
|
|
|
32,601,115 |
|
|
|
|
|
|
|
|
|
Diluted earnings per
share for Common and Class B common stock |
|
$1.82 |
|
|
|
$1.78 |
|
|
|
$4.62 |
|
|
|
$4.32 |
|
(1) Selling, general and administrative expenses.
WATSCO, INC.Condensed
Consolidated Balance Sheets (Unaudited, in
thousands) |
|
|
|
|
|
September 30,
2017 |
|
December 31, 2016 |
Cash and cash
equivalents |
|
$66,667 |
|
|
$56,010 |
Accounts receivable,
net |
|
568,457 |
|
|
475,974 |
Inventories |
|
786,056 |
|
|
685,011 |
Other |
|
17,761 |
|
|
23,161 |
Total
current assets |
|
1,438,941 |
|
|
1,240,156 |
|
|
|
|
Property and equipment,
net |
|
91,483 |
|
|
90,502 |
Goodwill, intangibles,
net and other |
|
617,795 |
|
|
543,991 |
Total
assets |
|
$2,148,219 |
|
|
$1,874,649 |
|
|
|
|
Accounts payable and
accrued expenses |
|
$460,155 |
|
|
$314,688 |
Current portion of
long-term obligations |
|
244 |
|
|
200 |
Total
current liabilities |
|
460,399 |
|
|
314,888 |
|
|
|
|
Borrowings under
revolving credit agreement |
|
284,700 |
|
|
235,294 |
Deferred income taxes
and other liabilities |
|
71,085 |
|
|
72,719 |
Total
liabilities |
|
816,184 |
|
|
622,901 |
|
|
|
|
Watsco's shareholders’
equity |
|
1,052,139 |
|
|
1,005,828 |
Non-controlling
interest |
|
279,896 |
|
|
245,920 |
Shareholders’
equity |
|
1,332,035 |
|
|
1,251,748 |
Total
liabilities and shareholders’ equity |
|
$2,148,219 |
|
|
$1,874,649 |
Condensed Consolidated Statements of Cash
Flows(Unaudited, in thousands) |
|
|
|
Nine Months Ended September 30, |
|
|
2017 |
|
|
|
2016 |
|
Cash flow from
operating activities: |
|
|
|
Net
income |
|
$204,634 |
|
|
|
$196,116 |
|
Non-cash
items |
|
30,446 |
|
|
|
31,670 |
|
Changes
in working capital |
|
(50,375 |
) |
|
|
(81,486 |
) |
Net cash
provided by operating activities |
|
184,705 |
|
|
|
146,300 |
|
Cash flow from
investing activities: |
|
|
|
Investment in
unconsolidated entity |
|
(63,600 |
) |
|
- |
Capital
expenditures, net |
|
(13,690 |
) |
|
|
(8,314 |
) |
Net cash used in investing activities |
|
(77,290 |
) |
|
|
(8,314 |
) |
Cash flow from
financing activities: |
|
|
|
Dividends on Common and Class B common stock |
|
(119,468 |
) |
|
|
(90,298 |
) |
Purchase of additional ownership from non-controlling interest |
|
(42,688 |
) |
|
- |
Distributions to non-controlling interest |
|
(6,799 |
) |
|
|
(26,027 |
) |
Net proceeds (repayments) under revolving credit agreement |
|
49,406 |
|
|
|
(25,900 |
) |
Proceeds from non-controlling interest for investment in
unconsolidated entity |
|
12,720 |
|
|
- |
Net proceeds from sale of Common stock |
|
5,391 |
|
|
|
- |
|
Other |
|
3,156 |
|
|
|
4,852 |
|
Net cash
used in financing activities |
|
(98,282 |
) |
|
|
(137,373 |
) |
Effect of foreign
exchange rate changes on cash and cash equivalents |
|
1,524 |
|
|
|
68 |
|
Net increase in cash
and cash equivalents |
|
10,657 |
|
|
|
681 |
|
Cash and cash
equivalents at beginning of period |
|
56,010 |
|
|
|
35,229 |
|
Cash and cash
equivalents at end of period |
|
$66,667 |
|
|
|
$35,910 |
|
Barry S. Logan
Senior
Vice President
(305) 714-4102
e-mail: blogan@watsco.com
Watsco, Inc.2665 S. Bayshore Drive, Suite
901Miami, Florida 33133, USA(305) 714-4100Fax: (305)
858-4492www.watsco.com
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