Watsco Sets New Records for Sales, Operating Income, Net Income and EPS During First Quarter
April 24 2018 - 7:30AM
25% EPS Growth and 20 Basis-Point
Operating Margin Expansion
Watsco, Inc. (NYSE:WSO) reported record results for the quarter
ended March 31, 2018.
The record results reflect continued investment
in technologies designed to revolutionize Watsco’s
customer-experience and help customers grow their businesses. Most
notably, the digitization of Watsco’s marketplace via e-commerce
and iOS/Android-enabled apps, supported by the industry’s most
complete database of product information, made further progress.
Ecommerce sales run-rate is approaching 30% of revenues.
Key performance metrics:
- 25% earnings per share growth to a record 89 cents
- 31% increase in net income to $34 million
- 11% operating income increase to a record $54 million
- 20 basis-point expansion in operating margins to 5.8%
- 6% sales growth to a record $927 million (7% increase in U.S.
markets)
- 6% increase in gross profit to a record $231 million (20
basis-point lower gross margin)
- 20 basis-point decline in SG&A as a percentage of sales to
19.3%
- $191 million debt reduction versus a year ago
Sales trends:
- 8% growth in HVAC equipment (66% of sales)
- 5% growth for other HVAC products (29% of sales)
- Flat sales for commercial refrigeration products (5% of
sales)
Albert H. Nahmad, Watsco’s Chairman and CEO
stated: “Watsco delivered another record quarter with strong growth
rates for residential and commercial HVAC systems from increasing
unit demand and an improved mix of high-efficiency systems. The
results also reflect investments in 140 new customer-facing
employees positioned to drive long-term growth, enhance customer
service and build market share. Although it is early, we are
optimistic that 2018 will be a record year for our company.”
It is important to note that the first quarter
of each calendar year is highly seasonal due to the nature and
timing of the replacement market for air conditioning systems,
which is strongest in the second and third quarters. Accordingly,
the Company’s first quarter financial results are
disproportionately affected by this seasonality.
Technology Strategy
Watsco has launched a variety of technologies
and process enhancements to transform how HVAC contractor customers
are served in the marketplace. Watsco believes that speed,
productivity and efficiency will be ever more critical as the
digital era progresses and is investing to ensure an unparalleled
customer-experience among HVAC wholesale distributors. Since 2012,
Watsco’s technology team has grown from approximately 60 employees
to 180 employees and the present annual run-rate for
technology-related spending is approximately $24 million.
Customer adoption of Watsco’s technology
platforms increased during the first quarter, enabling more
contractor interaction 24 hours a day to find products, place
orders and obtain technical support. The customer-obsessed
innovations introduced by Watsco include:
- Mobile apps, websites and e-commerce platforms that employ the
industry’s leading, data-rich repository of product
information.
- Business intelligence and data analytics expertise to enable
insightful assistance and decision-making by 600+ managers.
- Proprietary order fulfillment software to improve speed,
accuracy and convenience of the pick, pack and ship process.
- Predictive analytics-driven demand planning and inventory
optimization software to improve order fill-rates, increase
inventory turns, reduce real estate requirements and improve
long-term productivity.
A.J. Nahmad, Watsco’s President said, “We are
inspired by the initial progress and we look forward to seeing
adoption at scale, which will take time. In terms of scale, we
service approximately 250,000 contractors and technicians across
our 563 locations and complete over 7 million sale transactions a
year. We have only scratched the surface of what is possible in
terms of value creation and realization. What’s important is that
these investments are helping our customers win, and when our
customers win, we win.”
Dividends & Cash Flow
Watsco has paid cash dividends for over 40
consecutive years. The Company’s philosophy is to share increasing
amounts of cash flow with shareholders through higher dividends
while maintaining a conservative financial position. We announced a
16% increase in our annual dividend rate to $5.80 per share
effective April 2018. Future increases in dividends will be
considered in light of investment opportunities, cash flow, general
economic conditions and the Company’s overall financial
condition.
The Company has targeted cash flow from
operations to exceed net income in 2018. Since 2000, Watsco’s
operating cash flow was approximately $2.2 billion compared to net
income of approximately $2.0 billion, surpassing the Company’s
stated goal of generating cash flow in excess of net income.
Tax Cuts and Jobs Act of
2017
First quarter 2018 results reflect lower income
tax expense as a result of the passage of the Tax Cuts and Jobs Act
of 2017. The Company’s effective income tax rate (net of taxes
attributable to non-controlling interest) was 21% for the first
quarter of 2018 versus 29% last year.
Technology Summit for Institutional
Investors
Watsco and Baird LLC are hosting a
technology-focused meeting for institutional investors on Friday,
May 18, 2018 in Miami, Florida from 10:00 a.m. to 1:00 p.m. by
invitation only. Leadership will provide a strategic overview of
the Company, including an update of the various technology
initiatives currently underway. A concurrent webcast will be
provided on the Company’s website.
First Quarter Earnings Conference Call
Information
Date: April 24, 2018Time: 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.
About Watsco
Watsco operates 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 250,000 contractors and technicians
visit or call one of its 563 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. 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.
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. 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. 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) |
|
|
|
Quarters Ended March 31, |
|
|
2018 |
|
2017 |
Revenues |
|
$926,577 |
|
$872,095 |
Cost of sales |
|
695,744 |
|
653,539 |
Gross profit |
|
230,833 |
|
218,556 |
Gross profit
margin |
|
24.9% |
|
25.1% |
SG&A expenses |
|
178,534 |
|
169,857 |
Other Income |
|
1,638 |
|
0 |
Operating income |
|
53,937 |
|
48,699 |
Operating margin |
|
5.8% |
|
5.6% |
Interest expense,
net |
|
565 |
|
1,255 |
Income before income
taxes |
|
53,372 |
|
47,444 |
Income taxes |
|
10,995 |
|
13,676 |
Net income |
|
42,377 |
|
33,768 |
Less: net income
attributable to non-controlling interest |
|
8,158 |
|
7,587 |
Net income attributable
to Watsco |
|
$34,219 |
|
$26,181 |
|
|
|
|
|
Diluted earnings per
share: |
|
|
|
|
Net income attributable
to Watsco shareholders |
|
$34,219 |
|
$26,181 |
Less: distributed and
undistributed earnings allocated to non-vested restricted common
stock |
|
3,775 |
|
3,120 |
Earnings allocated to
Watsco shareholders |
|
$30,444 |
|
$23,061 |
|
|
|
|
|
Weighted-average Common
and Class B common shares and equivalent shares used to calculate
diluted earnings per share |
|
34,320,110 |
|
32,679,806 |
|
|
|
|
|
Diluted earnings per
share for Common and Class B common stock |
|
$0.89 |
|
$0.71 |
WATSCO, INC. |
Condensed Consolidated Balance
Sheets |
(Unaudited, in thousands) |
|
|
|
March
31, |
|
December 31, |
|
|
2018 |
|
2017 |
Cash and cash
equivalents |
|
$58,073 |
|
$80,496 |
Accounts receivable,
net |
|
486,651 |
|
478,133 |
Inventories |
|
810,021 |
|
761,314 |
Other |
|
16,979 |
|
17,454 |
Total
current assets |
|
1,371,724 |
|
1,337,397 |
Property and equipment,
net |
|
90,238 |
|
91,198 |
Goodwill, intangibles,
net and other |
|
614,316 |
|
618,282 |
Total
assets |
|
$2,076,278 |
|
$2,046,877 |
|
|
|
|
|
Accounts payable and
accrued expenses |
|
$377,495 |
|
$416,233 |
Current portion of
long-term obligations |
|
236 |
|
244 |
Total
current liabilities |
|
377,731 |
|
416,477 |
|
|
|
|
|
Borrowings under
revolving credit agreement |
|
91,000 |
|
21,800 |
Deferred income taxes
and other liabilities |
|
57,921 |
|
57,623 |
Total
liabilities |
|
526,652 |
|
495,900 |
Watsco's shareholders’
equity |
|
1,292,714 |
|
1,297,953 |
Non-controlling
interest |
|
256,912 |
|
253,024 |
Shareholders’
equity |
|
1,549,626 |
|
1,550,977 |
Total
liabilities and shareholders’ equity |
|
$2,076,278 |
|
$2,046,877 |
Condensed Consolidated Statements of Cash
Flows |
(Unaudited, in thousands) |
|
|
|
Quarters Ended March 31, |
|
|
2018 |
|
2017 |
Cash flow from
operating activities: |
|
|
|
|
Net
income |
|
$42,377 |
|
$33,768 |
Non-cash
items |
|
11,764 |
|
11,882 |
Changes
in working capital |
|
(95,755) |
|
(11,333) |
Net cash
(used in) provided by operating activities |
|
(41,614) |
|
34,317 |
|
|
|
|
|
Cash flow from
investing activities: |
|
|
|
|
Capital
expenditures, net |
|
(3,432) |
|
(4,127) |
|
|
|
|
|
Cash flow from
financing activities: |
|
|
|
|
Dividends
on Common and Class B Common stock |
|
(46,581) |
|
(37,383) |
Net
proceeds under revolving credit agreement |
|
69,200 |
|
45,006 |
Purchase
of additional ownership from non-controlling interest |
|
- |
|
(42,688) |
Distributions to non-controlling interest |
|
(2,178) |
|
(6,798) |
Other |
|
2,898 |
|
2,934 |
Net cash
provided by (used in) financing activities |
|
23,339 |
|
(38,929) |
Effect of foreign
exchange rate changes on cash and cash equivalents |
|
(716) |
|
150 |
Net decrease in cash
and cash equivalents |
|
(22,423) |
|
(8,589) |
Cash and cash
equivalents at beginning of period |
|
80,496 |
|
56,010 |
Cash and cash
equivalents at end of period |
|
$58,073 |
|
$47,421 |
|
|
|
|
|
Barry S. LoganSenior Vice President(305) 714-4102e-mail:
blogan@watsco.com
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