Watsco Sets New Records for Sales, Operating Income, Operating Margins, Net Income and EPS During Second Quarter
Watsco’s 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, continues to see momentum. E-commerce sales run-rate is approaching 30% of revenues.
Second Quarter Results
Sales trends:
- 5% sales growth to a record
$1.333 billion - 6% growth in HVAC equipment (68% of sales)
- 5% growth in other HVAC products (28% of sales)
- 1% growth in commercial refrigeration products (4% of sales)
Key performance metrics:
- 16% earnings per share (EPS) growth to a record
$2.40 - 22% increase in net income to a record
$90 million - 6% increase in operating income to a record
$137 million - 20 basis-point expansion in operating margins to a record 10.3%
- 3% increase in gross profit to a record
$321 million (20 basis-points lower gross margin) - 3% increase in SG&A and a 20 basis-point decline in SG&A as a percentage of sales
$238 million debt reduction versus a year ago
Sales trends improved during the quarter and reflect strong unit demand, improved equipment pricing and a richer sales mix of high-efficiency systems. Gross profit comparisons from 2018 to 2017 include a 70-basis point improvement in selling margins for HVAC equipment offset by a non-recurring benefit in 2017 related to sales of refrigerant products and lower vendor incentives in 2018 due to timing of purchases. SG&A reflects on-going investments in technology and additional customer-facing headcount.
Mr. Nahmad added: “Pioneering investments of this magnitude require time and patience to determine their impact and value, especially given the focus of transforming our customer experience, which has been slow to evolve for decades. We also have the opportunity to transform our business through people, process and technology to gain market share, develop more efficient processes and reduce costs. Much foundational work has occurred to enable this transformation, and we are now challenging our leadership to accelerate adoption and utilization of these innovative platforms designed to create and capture incremental value in the coming years.”
First Half Results
Sales trends:
- 5% sales growth to a record
$2.259 billion - 6% growth in HVAC equipment (67% of sales), including 7% growth in residential products
- 6% growth in other HVAC products (29% of sales)
- Flat sales of commercial refrigeration products (4% of sales)
Key performance metrics:
- 19% earnings per share growth to a record
$3.32 - 24% increase in net income to a record
$124 million - 7% increase in operating income to a record
$191 million - 20 basis-point expansion in operating margins to 8.5%
- 4% increase in gross profit to a record
$552 million (20 basis-points lower gross margin) - 4% increase in SG&A and a 10 basis-point decline in SG&A as a percentage of sales
Technology Strategy
Customer adoption of Watsco’s technology platforms increased during 2018, enabling more 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 to enable insightful 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.
Key performance indicators related to the Company’s technology initiatives include:
E-Commerce and App Usage | Progress in 2018 | |
E-commerce sales E-commerce transactions Current e-commerce run-rate Unique iOS or Android app weekly users Products (SKUs) digitized and available on-line Line items per order on-line versus in-store |
36% growth in online sales 37% increase in transactions 29% of sales versus 22% at end of 2017 14% increase in weekly active users 9% increase to over 650,000 SKUs 37% more line items per order |
|
Business Intelligence (BI) Platform | ||
Increase in internal BI users Average BI queries per week per user Number of total user inquiries during the year |
9% increase to over 1,600 weekly-users 10% increase in queries per week per user 13% increase to 10.6 million queries |
|
Warehouse Efficiency | ||
Locations with Order Fulfillment (OF) software Number of orders filled with OF Delivery truck miles tracked and analyzed Locations with express pickup |
337 locations versus 329 in December 2017 1.3 million versus less than 1 million last year 3.1 million miles versus 1.6 million last year 157 locations versus 134 in December 2017 |
|
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
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 six months of 2018 versus 29% last year.
Second 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 568 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.
Condensed Consolidated Results of Operations
(In thousands, except share and per share data)
(Unaudited)
Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenues | $ | 1,332,743 | $ | 1,275,924 | $ | 2,259,320 | $ | 2,148,019 | |||||||
Cost of sales | 1,011,977 | 965,646 | 1,707,721 | 1,619,185 | |||||||||||
Gross profit | 320,766 | 310,278 | 551,599 | 528,834 | |||||||||||
Gross profit margin | 24.1 | % | 24.3 | % | 24.4 | % | 24.6 | % | |||||||
SG&A expenses | 186,577 | 180,930 | 365,111 | 350,787 | |||||||||||
Other income | 3,157 | - | 4,795 | - | |||||||||||
Operating income | 137,346 | 129,348 | 191,283 | 178,047 | |||||||||||
Operating margin | 10.3 | % | 10.1 | % | 8.5 | % | 8.3 | % | |||||||
Interest expense, net | 763 | 1,647 | 1,328 | 2,902 | |||||||||||
Income before income taxes | 136,583 | 127,701 | 189,955 | 175,145 | |||||||||||
Income taxes | 28,319 | 36,854 | 39,314 | 50,530 | |||||||||||
Net income | 108,264 | 90,847 | 150,641 | 124,615 | |||||||||||
Less: net income attributable to non-controlling interest | 18,307 | 17,091 | 26,465 | 24,678 | |||||||||||
Net income attributable to Watsco | $ | 89,957 | $ | 73,756 | $ | 124,176 | $ | 99,937 | |||||||
Diluted earnings per share: | |||||||||||||||
Net income attributable to Watsco shareholders | $ | 89,957 | $ | 73,756 | $ | 124,176 | $ | 99,937 | |||||||
Less: distributed and undistributed earnings allocated to non-vested restricted common stock | 7,374 | 6,186 | 10,144 | 8,374 | |||||||||||
Earnings allocated to Watsco shareholders | $ | 82,583 | $ | 67,570 | $ | 114,032 | $ | 91,563 | |||||||
Weighted-average Common and Class B common shares and equivalent shares used to calculate diluted earnings per share | 34,379,195 | 32,708,646 | 34,349,815 | 32,694,306 | |||||||||||
Diluted earnings per share for Common and Class B common stock | $ | 2.40 | $ | 2.07 | $ | 3.32 | $ | 2.80 | |||||||
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
June 30, 2018 | December 31, 2017 | ||||
Cash and cash equivalents | $ | 72,000 | $ | 80,496 | |
Accounts receivable, net | 659,887 | 478,133 | |||
Inventories | 872,902 | 761,314 | |||
Other current assets | 16,664 | 17,454 | |||
Total current assets | 1,621,453 | 1,337,397 | |||
Property and equipment, net | 91,312 | 91,198 | |||
Goodwill, intangibles, net and other assets | 612,855 | 618,282 | |||
Total assets | $ | 2,325,620 | $ | 2,046,877 | |
Accounts payable and accrued expenses | $ | 521,204 | $ | 416,233 | |
Current portion of long-term obligations | 1,719 | 244 | |||
Total current liabilities | 522,923 | 416,477 | |||
Borrowings under revolving credit agreement | 141,600 | 21,800 | |||
Deferred income taxes and other liabilities | 59,103 | 57,623 | |||
Total liabilities | 723,626 | 495,900 | |||
Watsco's shareholders’ equity | 1,328,446 | 1,297,953 | |||
Non-controlling interest | 273,548 | 253,024 | |||
Shareholders’ equity | 1,601,994 | 1,550,977 | |||
Total liabilities and shareholders’ equity | $ | 2,325,620 | $ | 2,046,877 | |
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Six Months Ended June 30, | |||||||
2018 | 2017 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 150,641 | $ | 124,615 | |||
Non-cash items | 18,397 | 21,677 | |||||
Changes in working capital | (188,294 | ) | (111,282 | ) | |||
Net cash (used in) provided by operating activities | (19,256 | ) | 35,010 | ||||
Cash flows from investing activities: | |||||||
Capital expenditures, net | (8,738 | ) | (10,237 | ) | |||
Investment in unconsolidated entity | - | (63,600 | ) | ||||
Net cash used in investing activities | (8,738 | ) | (73,837 | ) | |||
Cash flows from financing activities: | |||||||
Dividends on Common and Class B Common stock | (100,765 | ) | (74,835 | ) | |||
Distributions to non-controlling interest | (2,178 | ) | (6,799 | ) | |||
Purchase of additional ownership from non-controlling interest | - | (42,688 | ) | ||||
Proceeds from non-controlling interest for investment in unconsolidated entity | - | 12,720 | |||||
Other | 3,917 | 717 | |||||
Net proceeds under revolving credit agreement | 119,800 | 144,006 | |||||
Net cash provided by financing activities | 20,774 | 33,121 | |||||
Effect of foreign exchange rate changes on cash and cash equivalents | (1,276 | ) | 730 | ||||
Net decrease in cash and cash equivalents | (8,496 | ) | (4,976 | ) | |||
Cash and cash equivalents at beginning of period | 80,496 | 56,010 | |||||
Cash and cash equivalents at end of period | $ | 72,000 | $ | 51,034 | |||
Senior Vice President
(305) 714-4102
e-mail: blogan@watsco.com
(305) 714-4100
Fax: (305) 858-4492
www.watsco.com
Source: Watsco, Inc.