Watsco Reports Record Results in 2018, Marking its 30-Year Anniversary in HVAC/R Distribution
|Revenues||$64 million||$4.5 billion||16%|
|Operating income||$2 million||$372 million||19%|
|Dividends||$.5 million||$209 million||23%|
(1) Compounded annual growth rates (CAGRs) are measured for a 30-year period ended
The Company’s record 2018 results reflect investments in several areas, all from a long-term perspective:
- Continuing technology investments to launch, iterate and drive adoption of our proprietary, groundbreaking innovations designed to revolutionize Watsco’s customer-experience. Since 2012, Watsco’s technology team has grown from 60 employees operating ERP and communication systems, to over 200 innovation-focused employees bringing new ways of doing business to life.
- Organizational investments, including the addition of over 250 customer-facing personnel and functional leaders, to improve service and help ensure our long-term success. We also recently launched a productivity initiative enabled by our data analytics platform to identify cost savings opportunities and enhance long-term profitability.
- Cultural investments, including a 33% increase in the annual 401k matching contribution, which is made in
Watscocommon stock. The Company’s 30-year compounded total shareholder return of 18% has benefited shareholders at-large but has also proven meaningful to Watsco’s 401k participants who have spent their careers with the Company.
- Further investment is planned in 2019 for an enriched wellness program, including greater incentives for employees to learn more about their health, identify risks and promote preventive care.
- The Company also intends to continue to build on its ownership culture through a variety of unique, equity-based programs.
Full-Year 2018 Results
- 5% increase in total sales to a record
- 6% growth in HVAC equipment (67% of sales)
- 5% growth in other HVAC products (29% of sales)
- Flat sales for commercial refrigeration products (4% of sales)
Key performance metrics:
- 17% earnings per share (EPS) growth to a record
- 22% increase in net income to a record
- 5% increase in gross profit to a record
$1.120 billion(10 basis-point increase in gross margin)
- 5% increase in operating income to a record
$372 million(operating margin of 8.2%)
(2) 2017 comparisons used to compute growth rates exclude net tax benefits of
Sales growth reflects HVAC equipment unit growth, price increases and a richer mix of high-efficiency systems. Operating results include profit growth and margin expansion in several markets offset by a
Mr. Nahmad added: “We also finished the year with a strong balance sheet consistent with our core philosophy to remain conservative and risk averse, while maintaining the capacity and flexibility to invest in opportunities at a low cost of capital. We continue to seek opportunities to grow our network through acquisitions, and we are encouraged by current conditions. We also look to use our financial strength to expand our product portfolio and build on key supplier relationships to provide new opportunities for growth.”
Fourth Quarter Results
- 3% increase in total sales to a record
$991 million(5% increase in domestic markets)
- 3% growth in HVAC equipment (66% of sales)
- 4% growth in other HVAC products (30% of sales)
- Flat sales for commercial refrigeration products (4% of sales)
Key performance metrics:
- 13% EPS growth to a record
- 18% increase in net income to a record
- 4% increase in gross profit to a record
$250 million(20 basis-point expansion in gross margin)
- 5% decline in operating income to
$59 million(operating margin of 5.9%)
(3) 2017 comparisons used to compute growth rates exclude net tax benefits of
Operating results include profit growth and margin expansion in several markets offset by a
It is important to note that the fourth quarter of each calendar year is highly seasonal due to the nature and timing of the replacement of HVAC systems, which is strongest in the second and third quarters. Accordingly, the Company’s fourth quarter financial results are disproportionately affected by seasonality.
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 largest database of product information. Watsco’s run-rate for e-commerce sales is now approaching 30%, which is supported by the industry’s richest depository of product information of over 685,000 SKUs. Both of these metrics were close to zero just a few years ago.
Mr. Nahmad added: “We are also so proud to have delivered record results and increasing dividends during such a transformative period. Most importantly, our teams have embraced a culture of innovation and continuous improvement, which we believe positions us well to further scale these technologies and derive value in the years ahead.”
An update of key technology metrics are as follows:
|E-Commerce and App Usage||Progress in 2018 versus 2017|
|Growth in e-commerce sales||33% growth in online sales to $1.2 billion|
|E-commerce transactions||34% increase in transactions|
|Current e-commerce run-rate||29% of sales versus 25% last year|
|Unique iOS or Android app weekly users||16% increase in weekly active users|
|Products (SKUs) digitized and available on-line||5% increase to over 685,000 SKUs|
|Line items per order on-line versus in-store||37% more line items per order|
|Sales attrition rate for e-commerce users||2.5-times less attrition than non-users|
|Business Intelligence (BI) Platform|
|Increase in internal BI users||7% increase to over 1,600 weekly-users|
|Average BI queries per week per user||9% increase in queries per week per user|
|Number of total user inquiries during the year||13% increase to 20.3 million queries|
|Warehouse Efficiency||Progress in 2018 versus 2017|
|Locations with Order Fulfillment (OF) software||369 locations versus 329 last year|
|Number of orders filled with OF||2.6 million versus 2.1 million last year|
|Delivery truck miles tracked and analyzed||5.8 million miles versus 4.2 million last year|
|Locations with express pickup||164 locations versus 134 last year|
Dividends & Cash Flow
Operating cash flow in 2018 was
Sunbelt Markets & Market Share
Watsco’s network consists of 571 locations in 37 U.S. states, Canada, Mexico and Puerto Rico.
Watsco’s concentration in the Sunbelt has been a component of its strategy over the last 30 years given the relevance of the following attributes:
- On-going population migration to the Sunbelt has been a catalyst for economic expansion and growth in the installed base of HVAC systems.
- HVAC systems are an absolute necessity as they provide a comfortable place for homeowners to live or conduct business.
- The installed base is replaced more often given the stress and run-times of older systems.
- Warm weather patterns in the Sunbelt have consistently produced more dependable market conditions over longer periods (conversely, weather extremes in temperate markets can create greater volatility).
- U.S. regulatory changes have been focused on and are more relevant to Sunbelt markets.
The Company strives to gain profitable market share in its markets and regularly makes assessments of changes in share in collaboration with its primary supplier partners.
Tax Cuts and Jobs Act of 2017
2018 results reflect lower income tax expense as a result of the passage of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). 2017 percentage growth comparisons for net income and EPS exclude a one-time net tax benefit of
Earnings Conference Call Information
A replay of the conference call will be available on the Company's website.
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 571 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 91 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 press release includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. 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, 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.
Senior Vice President
Condensed Consolidated Results of Operations
(In thousands, except per share data)
|Quarter Ended December 31,||Year Ended December 31,|
|Cost of sales||741,682||723,415||3,426,401||3,276,296|
|Gross profit margin||25.2%||25.0%||24.6%||24.5%|
|Interest expense, net||365||1,344||2,740||6,363|
|Income before income taxes||58,137||60,022||369,342||347,511|
|Less: net income attributable to non-controlling interest||9,409||9,401||53,597||49,069|
|Net income attributable to Watsco||$39,593||$43,255||$242,932||$208,221|
|Diluted earnings per share:|
|Net income attributable to Watsco shareholders||$39,593||$43,255||$242,932||$208,221|
|Less: distributed and undistributed earnings allocated to non-vested restricted common stock||4,394 (1)||3,724 (1)||19,788||17,427|
|Earnings allocated to Watsco shareholders||$35,199||$39,531||$223,144||$190,794|
|Weighted-average Common and Class B common shares and equivalent shares used to calculate diluted earnings per share||34,397,261||33,310,064||34,374,269||32,862,633|
|Diluted earnings per share for Common and Class B common stock||$1.02 (1)||$1.19 (1)||$6.49||$5.81|
(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
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
|December 31,||December 31,|
|Cash and cash equivalents||$82,894||$80,496|
|Accounts receivable, net||501,908||478,133|
|Other current assets||19,875||17,454|
|Total current assets||1,441,806||1,337,397|
|Property and equipment, net||91,046||91,198|
|Goodwill, intangibles, net and other assets||628,181||618,282|
|Accounts payable and accrued expenses||$357,320||$416,233|
|Current portion of long-term obligations||246||244|
|Total current liabilities||357,566||416,477|
|Borrowings under revolving credit agreement||135,200||21,800|
|Deferred income taxes and other liabilities||66,554||57,623|
|Watsco's shareholders’ equity||1,347,849||1,297,953|
|Total liabilities and shareholders’ equity||$2,161,033||$2,046,877|
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
|Years Ended December 31,|
|Cash flows from operating activities:|
|Changes in working capital, net of effect of acquisitions|
|Accounts payable and other liabilities||(57,398)||99,956|
|Net cash provided by operating activities||170,557||306,520|
|Cash flows from investing activities:|
|Capital expenditures, net||(16,925)||(17,708)|
|Investment in unconsolidated entity||(3,760)||(63,600)|
|Business acquisitions, net of cash acquired||(5,626)||-|
|Net cash used in investing activities||(26,311)||(81,308)|
|Cash flows from financing activities:|
|Dividends on Common and Class B Common stock||(209,218)||(164,147)|
|Distributions to non-controlling interest||(46,825)||(42,831)|
|Purchase of additional ownership from non-controlling interest||-||(42,688)|
|Proceeds from non-controlling interest of unconsolidated entity||752||12,720|
|Net proceeds from the sale of Common stock||-||247,744|
|Net repayments under revolving credit agreements||113,400||(213,494)|
|Net cash used in financing activities||(139,603)||(202,145)|
|Effect of foreign exchange rate changes on cash and cash equivalents||(2,245)||1,419|
|Net increase in cash and cash equivalents||2,398||24,486|
|Cash and cash equivalents at beginning of period||80,496||56,010|
|Cash and cash equivalents at end of period||$82,894||$80,496|
Source: Watsco, Inc.