Watsco Reports Record Sales, Operating Profit, Net Income and Cash Flow During First Quarter
Key performance metrics:
- 2% increase in operating profit to a record
$55 million(10 basis-point expansion in operating margin to 5.9%)
- 4% increase in same-store operating profit (30 basis-point expansion in same-store margins to a record 6.1%)
- 1% increase in gross profit to a record
$234 million(20 basis-points improvement in gross margin)
- 1% increase in selling, general & administrative expenses (SG&A)
- Flat SG&A on a same-store basis (10 basis-point decline as a percentage of sales)
- 2% increase in net income to a record
- Earnings per share (EPS) of
88 centsversus 89 centslast year (1)
- Operating cash flow was a record
$53 millionversus a cash use of $42 millionlast year
- EPS in 2019 includes
3 centsof incremental dilution related to dividends paid on non-vested restricted stock. Dilution occurs when the quarterly cash dividends per share exceeds EPS (usually during the seasonal first and fourth quarters as EPS is typically less than the quarterly dividend rate). For 2019, this impact is not currently expected to affect EPS during the second or third quarters or in determining annual EPS.
- 1% sales growth to a record
$931 million(flat on a same-store basis)
- 2% growth in HVAC equipment (67% of sales)
- 2% decrease in other HVAC products (29% of sales)
- 4% decrease in commercial refrigeration products (4% of sales)
Watsco has launched a variety of technologies and process enhancements to transform how HVAC contractor customers are served. Speed, productivity and scale are critical factors as the digital era progresses and Watsco is investing to ensure an unparalleled customer-experience.
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 richest depository of product information of over 685,000 SKUs.
Watsco has also launched internal-facing technologies, including (1) a business intelligence platform to provide insights to 600+ P&L managers and their teams, (2) proprietary order fulfillment software to deliver speed, convenience and order accuracy to customers (currently used at two-thirds of the Company’s locations), and (3) demand planning and inventory optimization software to improve fill-rates and inventory turns and to reduce real estate requirements (currently implemented in 60% of the Company’s supply chain).
Technology spending increased
Specific technology-related achievements during the first quarter included:
- E-commerce sales run-rate is approaching 30% of revenues (over
$1.2 billionduring the last 12 months).
- Unique users of Watsco’s iOS/Android-enabled Contractor Assist mobile apps reached 50,000.
- Distributor managed inventory (DMI) was launched to digitally-enable seamless stocking and replenishment of product at a customer’s place of business.
- Commercial launch of Sentree, Watsco’s proprietary IoT device for remotely monitoring the health and operational condition of installed HVAC systems to connect HVAC users and our customers in an unprecedented way.
- Numerous sales and productivity initiatives were implemented, made possible by Watsco’s data analytics platform and teams, to leverage technology and reduce operating costs.
- Order Fulfillment (OF) software was launched at 76 additional locations (branch penetration is now at 77%) to improve speed, accuracy and efficiency in our locations.
- Broader deployment and enhanced capabilities for demand planning and inventory optimization.
- Broader use of enhanced processes for freight optimization designed to reduce freight costs.
Cash Flow & Dividends
Operating cash flow in 2019 was a record
Acquisition of DASCO Supply
Mr. Nahmad commented: “DASCO has a wonderful legacy and a close-knit team, and we are honored to become part of their family. Their success over the last 45 years is due to strong relationships along with great service, a broad range of products and convenient locations. To provide on-going continuity, DASCO will operate as a subsidiary of Watsco under its present name and leadership team, and we will provide the resources and technology where needed to assist in achieving their growth plans.”
Adoption of Lease Accounting Standard
Effective January 1, 2019, we adopted the Financial Accounting Standards Board Accounting Standards Update 2016-02, Leases, which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. We have recorded lease right-of-use assets and lease liabilities and presented these amounts separately on our Condensed Consolidated Balance Sheet as of March 31, 2019. The adoption of this standard did not have a material impact on our Condensed Consolidated Results of Operations or Condensed Consolidated Statement of Cash Flows for the three-month period ended March 31, 2019.
First Quarter Earnings Conference Call Information
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.” Information referring to “same-store basis” exclude the effects of locations closed, acquired, or locations opened, unless they are within close geographical proximity to existing locations, during the immediately preceding 12 months. 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.
The Company computes a non-GAAP measure, “debt-to-total capitalization,” as a means to describe the relative amount of interest-bearing debt to its total capital. This ratio is calculated by dividing (i) the sum of short-term and long-term interest bearing debt by (ii) the sum of short-term debt, long-term debt and shareholders’ equity.
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 582 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. 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. Detailed information about these factors and additional important factors can be found in the documents that
|Condensed Consolidated Results of Operations|
|(In thousands, except per share data)|
|Quarter Ended March 31,|
|Cost of sales||697,518||695,744|
|Gross profit margin||25.1%||24.9%|
|Interest expense, net||776||565|
|Income before income taxes||54,356||53,372|
|Less: net income attributable to non-controlling interest||8,767||8,158|
|Net income attributable to Watsco||$35,037||$34,219|
|Diluted earnings per share:|
|Net income attributable to Watsco shareholders||$35,037||$34,219|
|Less: distributed and undistributed earnings to non-vested restricted common stock||4,924 (1)||3,775 (1)|
|Earnings allocated to Watsco shareholders||$30,113||$30,444|
|Weighted-average Common and Class B common shares and equivalent shares used to calculate diluted earnings per share||34,402,602||34,320,110|
|Diluted earnings per share for Common and Class B common stock||$0.88(1)||$0.89(1)|
|(1) Amounts include earnings dilution of $2.0 million in 2019 (6 cents of EPS) in 2019 and $1.0 million in 2018 (3 cents of EPS) related to dividends paid on non-vested restricted stock. Dilution occurs when quarterly cash dividends exceed EPS (usually during the seasonal first and fourth quarters as EPS is typically less than the quarterly dividend rate). For 2019, this impact is not expected to affect EPS during the second and third quarter or in determining annual EPS. As of March 31, 2019, there were 3,124,651 shares of non-vested restricted stock outstanding.|
|Condensed Consolidated Balance Sheets|
|(Unaudited, in thousands)|
|March 31,||December 31,|
|Cash and cash equivalents||$77,273||$82,894|
|Accounts receivable, net||504,719||501,908|
|Total current assets||1,490,384||1,441,806|
|Property and equipment, net||91,026||91,046|
|Lease right-of-use assets||185,476||0|
|Goodwill, intangibles, net and other||632,057||628,181|
|Accounts payable and accrued expenses||$408,927||$357,320|
|Current portion of lease liabilities||58,506||246|
|Total current liabilities||469,773||357,566|
|Borrowings under revolving credit agreement||137,500||135,200|
|Deferred income taxes and other liabilities||66,181||66,554|
|Watsco's shareholders’ equity||1,335,212||1,347,849|
|Total liabilities and shareholders’ equity||$2,398,943||$2,161,033|
|Condensed Consolidated Statements of Cash Flows|
|(Unaudited, in thousands)|
|Quarters Ended March 31,|
|Cash flow from operating activities:|
|Changes in working capital||(4,500)||(95,755)|
|Net cash provided by (used in) operating activities||52,936||(41,614)|
|Cash flow from investing activities:|
|Capital expenditures, net||(4,103)||(3,432)|
|Cash flow from financing activities:|
|Dividends on Common and Class B Common stock||(59,965)||(46,581)|
|Net proceeds under revolving credit agreement||2,300||69,200|
|Proceeds from short-term debt||2,340||-|
|Distributions to non-controlling interest||-||(2,178)|
|Net cash (used in) provided by financing activities||(54,856)||23,339|
|Effect of foreign exchange rate changes on cash and cash equivalents||402||(716)|
|Net decrease in cash and cash equivalents||(5,621)||(22,423)|
|Cash and cash equivalents at beginning of period||82,894||80,496|
|Cash and cash equivalents at end of period||$77,273||$58,073|
Senior Vice President
Source: Watsco, Inc.