Watsco Reports Record-Breaking Second Quarter
EPS Jumps 33% to
Operating Margin and Net Income
Market Share Gains Realized by Industry-Leading Technologies, Entrepreneurial Culture,
Scale Advantage, Strong Balance Sheet, Brand Diversification, ESG Focus
Second Quarter Results
- 33% increase in EPS to a record
- 15% sales growth to a record
$2.13 billion(14% growth on a same-store basis)
- 25% increase in gross profit to a record
$596 million(210 bps increase in gross margin)
- 18% increase in SG&A expenses (17% increase on a same-store basis)
- 32% increase in operating income to a record
$287 million(31% growth on a same-store basis)
- 180 basis-point expansion in operating margin to a record 13.5%
Sales trends (excluding acquisitions):
- 13% increase in HVAC equipment (70% of sales), including 15% growth in
U.S.residential HVAC equipment
- 15% increase in other HVAC products (26% of sales)
- 26% increase in commercial refrigeration products (4% of sales)
The HVAC/R industry has experienced above average demand since 2020 driven by broad consumer strength, renewed investment in the home and an ever-growing installed base of 110+ million HVAC systems in the
During the same period,
2023 Outlook, Important Fundamentals & Growth Drivers
Looking to 2023, due to recent changes in monetary policy to curb inflation and the consequential slowdown in the economy, the Company believes that the North American HVAC/R demand trends and other recent catalysts that have benefited performance will moderate toward more historical levels.
However, the Company believes its unique fundamentals along with upcoming industry changes provide incremental growth opportunities in the years ahead. The essential nature of HVAC/R products, Watsco’s scale, leading technology platforms, financial strength, entrepreneurial culture and OEM relationships are important competitive advantages that support the Company’s ability to grow and capture more profitable share going forward.
Regulatory Catalysts & Movement Toward Electrification. To address the environmental impact of HVAC systems, new federal regulatory standards have been promulgated that are expected to buttress industry growth in the years ahead. In general, these changes will raise the minimum efficiency standard, and therefore the average selling price, of base-level systems sold in 2023. The regulatory standards also require systems to transition to new refrigerants, beginning in 2025. Historically, these changes increase the cost to service and repair existing systems, which in turn influences the decision to replace them. In addition, there are industry and governmental initiatives underway that are expected to improve the efficacy of heat pumps, which offer the potential for accelerated growth as an alternative to the millions of fossil-fuel heating products present in the installed base.
Product Breadth and End-Market Diversity.
OEM and Supplier Relationships. As the leading distributor of HVAC/R products in
Geographic Positioning & Density in Key Markets: Approximately 60% of Watsco’s revenues are derived in core Sunbelt markets such as
Network Expansion. Watsco’s network has grown 15%, or by 88 locations, over the last three years, mostly from the completion of five acquisitions of market-leading businesses, located primarily in markets that Watsco did not previously serve. In aggregate, the sales of acquired locations over the last 12 months were approximately
Advent of Ductless, High-Efficiency HVAC Products. Watsco is the leading distributor of ductless HVAC products used in residential and commercial applications in
Financial Strength & Liquidity
Watsco’s strong financial position has been critical to recent performance. From
Despite these uses of capital, Watsco’s balance sheet remains in pristine condition to invest in most any size opportunity. At June 30, 2022, the Company had $129 million in cash, $204 million in seasonal borrowings and $2.2 billion of shareholders’ equity. The Company believes this financial strength, access to low-cost capital and its historical ability to generate cash flow provide comfort and confidence to the Company’s stakeholders.
Culture of Innovation
- 53% increase in EPS to a record
- 22% sales growth to a record
$3.66 billion(19% growth on a same-store basis)
- 35% increase in gross profit to a record
$1.05 billion(270 bps increase in gross margin)
- 23% increase in SG&A expenses (18% increase on a same-store basis) (16.4% as a percentage of sales)
- 53% increase in operating income to a record
- 250 basis point expansion in operating margin to a record 12.5%
Sales trends (excluding acquisitions):
- 18% increase in HVAC equipment (69% of sales), including 20% growth in
- 19% increase in other HVAC products (27% of sales)
- 30% increase in commercial refrigeration products (4% of sales)
Watsco’s record sales and profitability during the first half of 2022 reflects strong sales, effective price realization, a continued shift towards higher-efficiency HVAC equipment and an expansion in sales of other higher-margin HVAC products. Our year-to-date performance is incremental to the record results in 2021 when same-store sales grew 22% and EPS grew 70% versus the same period last year. The prior year’s comparative results were primarily driven by the post-COVID recovery of the Company’s
Watsco continues to aggressively invest in technologies to transform its customer experience. Specific technology-related updates for the second quarter and year-to-date period include:
- Product Information Management (PIM) is Watsco’s leading repository of product information delivered seamlessly through Watsco’s mobile apps and e-commerce platform. Watsco’s PIM database now includes approximately 1.2 million SKUs accessed by more than 350,000 contractors and technicians on an annual basis.
- Contractor Assist Mobile apps provide customers real-time access to critical information that improves their speed and productivity. This includes real time technical support, product detail, inventory availability, warranty look-up, system match ups, e-commerce and more. The authenticated user community (users that are using the mobile app while linked to an e-commerce account) grew 27% during the quarter compared to last year to more than 32,000 users.
- E-Commerce sales grew 25% year-to-date with the annual run-rate, outpacing organic sales growth rates, and now exceeds
$2.2 billionannually. E-commerce sales are 33% of total sales inclusive of acquired revenues.
- 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 2022,
OnCall Air® presented quotes to approximately 73,000 households, a 25% increase over last year, and generated $300million in gross merchandise value, a 44% increase over the same period last year.
Climate Change and ESG Impacts
Watsco’s business model plays an important and significant role in the drive to lower CO2e emissions. According to the Department of Energy, heating, and air conditioning accounts for roughly half of U.S. household energy consumption. Replacement of older systems is one of the most meaningful steps homeowners can take to reduce electricity consumption and carbon footprint over time.
The overwhelming majority of new HVAC systems sold by Watsco replace systems that likely operate well below current federal minimum efficiency standards in the U.S. and may use refrigerants that have been phased out. As consumers replace HVAC systems with new, higher-efficiency systems, homeowners will consume less energy, save money, and reduce the carbon footprint.
Based on estimates validated by independent sources, Watsco averted an estimated 12.9 million metric tons of CO2e emissions from January 1, 2020 to June 30, 2022 through the sale of replacement HVAC systems at higher-efficiency standards. More information, including sources and assumptions used to support the Company’s estimates, can be found at www.watsco.com/environment.
Beyond energy efficiency, two other industry fundamentals provide opportunities for Watsco and its customers to combat climate change. First, a
A.J. Nahmad added: “Watsco can make meaningful contributions toward the on-going efforts to combat climate change, especially as more homeowners become cognizant of their energy consumption and its impact on climate change. We believe Watsco’s technology provides HVAC/R contractors an edge in the marketplace. We are investing in additional resources and training to help contractors succeed in this evolving marketplace and we are committed to doing even more over time.”
Cash Flow & Dividends
Watsco’s operating cash flow for the first half of 2022 was
Watsco has paid cash dividends to shareholders for 48 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 2022, Watsco increased its annual dividend rate to $8.80 per share. Future dividend increases will be considered in light of investment opportunities, general economic conditions, and the Company’s financial position.
Second Quarter Earnings Conference Call Information
Webcast: http://investors.watsco.com (a replay 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
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.
Watsco’s has the opportunity to be a significant and important contributor toward climate change as its business plays an important role in the drive to lower CO2e emissions. According to the Department of Energy, heating and air conditioning accounts for roughly half of U.S. household energy consumption. As such, replacing HVAC systems at higher efficiency levels is one of the most meaningful steps homeowners can take to reduce electricity consumption and carbon footprint over time.
The overwhelming majority of new HVAC systems sold by Watsco replace systems that likely operate well below current minimum efficiency standards in the U.S. As consumers replace HVAC systems with new, higher-efficiency systems, homeowners will consume less energy, save costs, and reduce the carbon footprint over time.
Based on estimates validated by independent sources, Watsco averted an estimated 12.94 million metric tons of CO2e emissions from January 1, 2020 to June 30, 2022 through the sale of replacement HVAC systems at higher-efficiency standards. More information, including sources and assumptions used to support the Company’s estimates, can 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, seasonal nature of sales of Watsco’s products, 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
Executive Vice President
Condensed Consolidated Results of Operations
(In thousands, except per share data)
||Six Months Ended
|Cost of sales||1,538,222||1,371,699||2,611,434||2,212,996|
|Gross profit margin||27.9%||25.8%||28.6%||25.9%|
|Interest expense, net||1,110||448||1,668||536|
|Income before income taxes||285,987||216,335||456,478||298,127|
|Less: net income attributable to non-controlling interest||32,949||28,031||54,541||39,066|
|Net income attributable to
|Diluted earnings per share:|
|Net income attributable to
|Less: distributed and undistributed earnings allocated to non-vested restricted common stock||17,570||12,748||27,856||17,596|
|Earnings allocated to
|Weighted-average Common and Class B common shares and equivalent shares used to calculate diluted earnings per share||35,521,163||35,427,718||35,512,818||35,379,046|
|Diluted earnings per share for Common and Class B common stock|
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
|Cash and cash equivalents|
|Accounts receivable, net||983,033||698,456|
|Total current assets||2,623,931||1,961,400|
|Property and equipment, net||119,525||111,019|
|Operating lease right-of-use assets||298,223||268,528|
|Accounts payable and accrued expenses|
|Current portion of long-term obligations||88,600||84,501|
|Total current liabilities||1,061,343||726,722|
|Borrowings under revolving credit agreement||203,600||89,000|
|Operating lease liabilities, net of current portion||213,344||187,024|
|Deferred income taxes and other liabilities||90,530||85,700|
|Total liabilities and shareholders’ equity|
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
|Six Months Ended
|Cash flows from operating activities:|
|Changes in working capital, net of effects of acquisitions|
|Accounts receivable, net||(289,478)||(283,077)|
|Accounts payable and other liabilities||332,217||282,852|
|Net cash provided by operating activities||73,072||81,882|
|Cash flows from investing activities:|
|Capital expenditures, net||(18,841)||(10,908)|
|Business acquisitions, net of cash acquired||(47)||(126,549)|
|Proceeds from sale of equity securities||-||5,993|
|Net cash used in investing activities||(18,888)||(131,464)|
|Cash flows from financing activities:|
|Dividends on Common and Class B common stock||(161,484)||(143,909)|
|Proceeds from NCI for investment in
|Net proceeds under revolving credit agreement||114,600||114,167|
|Net cash used in financing activities||(42,272)||(981)|
|Effect of foreign exchange rate changes||(1,131)||1,283|
|Net increase (decrease) in cash and cash equivalents||10,781||(49,280)|
|Cash and cash equivalents at beginning of period||118,268||146,067|
|Cash and cash equivalents at end of period||$||129,049||$||96,787|
Source: Watsco, Inc.