Watsco Sets New Records for Sales, Operating Income, Net Income and EPS During First Quarter
25% EPS Growth and 20 Basis-Point Operating Margin Expansion
Adoption of Customer-Focused Technologies Grows as Business Transformation Continues
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)
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
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
- 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.
Dividends & Cash Flow
The Company has targeted cash flow from operations to exceed net income in 2018. Since 2000, Watsco’s operating cash flow was approximately
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
First Quarter Earnings Conference Call Information
Date:
Time:
Webcast: http://investors.watsco.com
Dial-in number:
A replay of the conference call will be available on the Company's website.
About
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, 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 | ||
Senior Vice President
(305) 714-4102
e-mail: blogan@watsco.com
Source: Watsco, Inc.
