Form 8-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported) October 27, 2015

 

LOGO

WATSCO, INC.

 

(Exact name of registrant as specified in its charter)

Florida

 

(State or other jurisdiction of incorporation)

 

1-5581   59-0778222
(Commission File Number)   (IRS Employer Identification No.)

2665 South Bayshore Drive, Suite 901

Miami, Florida 33133

 

(Address of principal executive offices, including zip code)

(305) 714-4100

 

(Registrant’s telephone number, including area code)

N/A

 

(Former name or former address, if changed since last report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d- 2(b))
¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 


Item 2.02. Results of Operations and Financial Condition

On October 27, 2015, Watsco, Inc., a Florida corporation (the “Company”), issued a press release reporting its financial results for the quarter and nine months ended September 30, 2015. A copy of the Company’s press release is furnished as Exhibit 99.1 to this Current Report on Form 8-K and is hereby incorporated by reference in this Item 2.02.

Item 7.01. Regulation FD Disclosure

The information set forth in Item 2.02 of this Current Report on Form 8-K is incorporated by reference in this Item 7.01.

The information contained in this Current Report on Form 8-K, including Exhibit 99.1 attached hereto, shall be deemed “furnished” and not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any Company filing under the Securities Act of 1933, as amended.

Item 9.01. Financial Statements and Exhibits

 

(d) Exhibits

 

Exhibit

Number

  

Description

99.1    Press release dated October 27, 2015 issued by Watsco, Inc.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    WATSCO, INC.
Dated: October 27, 2015     By:   /s/ Ana M. Menendez
       

Ana M. Menendez,

Chief Financial Officer


EXHIBIT INDEX

 

Exhibit

Number

  

Description

99.1    Press release dated October 27, 2015 issued by Watsco, Inc.
EX-99.1

Exhibit 99.1

Watsco Sets Records for Sales, Net Income, EPS, Cash Flow &

Boosts Annual Dividend 21% to $3.40 Per Share

 

 

MIAMI, FLORIDA – (BUSINESS WIRE), October 27, 2015 – Watsco, Inc. (NYSE: WSO) reported record results for the third quarter and for the nine months ended September 30, 2015.

Third Quarter Results

Sales trends:

    4% growth to a record $1.18 billion (5% on same-store basis)
    5% growth in HVAC equipment (66% of sales), including 8% growth in the U.S.
    3% growth in other HVAC products (29% of sales)
    2% growth in commercial refrigeration products (5% of sales)

Key performance metrics:

    5% increase in earnings per share to a record $1.64
    5% growth in operating income to a record $111 million
    10 basis-point expansion in operating margins to 9.4%
    10 basis-point increase in gross profit margin
    Flat SG&A as a percentage of sales

Albert Nahmad, Watsco’s President & Chief Executive Officer stated: “Watsco delivered another solid quarter of performance driven by sales growth, share gains, improved selling margins and expanded operating margins. We also generated more cash flow this quarter than in any other quarter in our history. We experienced healthy sales growth for residential HVAC systems in the United States from strong unit growth and the continued trend toward higher-efficiency systems.”

Mr. Nahmad added: “We are also pleased to increase Watsco’s annual dividend to $3.40 per share beginning in January. As evidenced by our long-term track record, we have confidence that our business can produce meaningful earnings growth and cash flow. It is always our intention to share cash flow through increasing dividends while retaining the ability to invest in our network and evaluate additional opportunities that come our way.”

Nine-Month Results

Sales trends:

    5% growth to a record $3.21 billion
    7% growth in HVAC equipment (66% of sales), including 8% growth in the U.S.
    2% growth in other HVAC products (29% of sales)
    2% growth in commercial refrigeration products (5% of sales)

Key performance metrics:

    14% increase in earnings per share to a record $4.16
    11% growth in operating income to a record $283 million
    50 basis-point expansion in operating margins to a record 8.8%
    30 basis-point increase in gross profit margin
    20 basis-point improvement in SG&A as a percentage of sales to a record low


Technology Strategy

Watsco has established itself as the leader in the HVAC distribution industry and produced a 20% compounded annual total-shareholder-return over the last 25 years.

Watsco is currently building on this growth and is actively increasing its investment in a number of scalable technologies. The goals of the strategy are to further strengthen Watsco’s leadership position in the marketplace, accelerate sales and profit growth through innovation, increase the speed, convenience and efficiency in serving customers and to extend Watsco’s reach into new geographies and sales channels. Watsco believes its scale and large number of locations for product fulfillment relative to its competitors offer an advantage as the digital marketplace progresses.

Since 2012, Watsco has grown its technology team from approximately 60 employees to over 170 employees while achieving record levels of operating performance. The 2015 nine-month financial performance reflects an increase of $5.4 million, or 64%, in technology-related costs (10 cents per share for the nine-month period and 4 cents per share for the third quarter).

Examples of innovations that Watsco has created to enhance the buying experience for its 88,000 customers and the service capabilities of personnel at its 567 locations:

 

    Mobile apps and other on-line tools to enable e-commerce and establish the industry’s most data-rich catalog of product information.
    Business intelligence and data analytics to enable more insightful decision-making by more than 700 P&L managers across the company.
    Supply chain optimization to improve fill-rates, increase inventory turns and reduce infrastructure costs over the long-term.
    Tools to improve operational efficiency for 7+ million annual customer transactions.

The present annual run-rate for costs associated with these initiatives is approximately $20 million. The Company will discuss its technology strategy at its upcoming annual investor and analyst meeting on December 18, 2015.

Cash Flow & Dividends

For the third quarter, operating cash flow was a record $174 million versus $107 million same period last year. For the nine-month period, operating cash flow increased to $100 million compared to $42 million in 2014. The Company expects further seasonal increases in operating cash flow during the fourth quarter and to achieve its continuing annual goal of producing operating cash flow equal to net income.

Watsco announced today that its Board of Directors approved a 21% increase in the annual dividend rate to $3.40 per share, which will be reflected in the Company’s next regular dividend declaration in January 2016.

Revised Outlook for 2015

Watsco’s revised outlook for 2015 diluted earnings per share is growth of 12% to 13%, or approximately $4.85 to $4.90 per share.

Conference Call Information

Date: October 27, 2015

Time: 10:00 a.m. (EDT)

Webcast: http://investors.watsco.com

Dial-in number: United States (866) 777-2509 / International (412) 317-5413

A replay of the conference call will be available on the Company’s website.

About Watsco

Watsco improves indoor living and working environments with air conditioning and heating solutions that provide comfort regardless of the outdoor climate. There are approximately 89 million central air conditioning

 

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and heating systems installed in the United States that have been in service for 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 our 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.

Watsco’s traditional sales channel is the sale of products from one of its 567 locations in the United States, Canada, Mexico and Puerto Rico, and on an export basis to Latin America and the Caribbean. This network has been built over the last 25 years and serves 88,000 active customers. Watsco is developing and investing in technologies to enable sales via e-commerce, on-line marketplaces and through the retail sales channel. As the industry leader, significant growth potential remains given that the estimated marketplace for HVAC/R products at the consumer level is estimated to be $80 billion. Additional information about Watsco may be found at http://www.watsco.com.

Forward-Looking Statements

This document contains or incorporates by reference statements that are not historical in nature and that are intended to be, and are hereby identified as, “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Statements which are not historical in nature, including the words “anticipate,” “estimate,” “could,” “should,” “may,” “plan,” “seek,” “expect,” “believe,” “intend,” “target,” “will,” “project,” “focused,” “outlook” and variations of these words and negatives thereof and similar expressions are intended to identify forward-looking statements, including statements regarding, among others, (i) economic conditions, (ii) business and acquisition strategies, (iii) potential acquisitions and/or joint ventures, (iv) financing plans and (v) industry, demographic and other trends affecting our financial condition or results of operations. These forward-looking statements are based on management’s current expectations, are not guarantees of future performance and are subject to a number of risks, uncertainties and changes in circumstances, certain of which are beyond our control. Actual results could differ materially from these forward-looking statements as a result of several factors, including, but not limited to general economic conditions, competitive factors within the HVAC/R industry, effects of supplier concentration, fluctuations in certain commodity costs, consumer spending, consumer debt levels, new housing starts and completions, capital spending in the commercial construction market, access to liquidity needed for operations, seasonal nature of product sales, weather conditions, insurance coverage risks, federal, state and local regulations impacting our industry and products, prevailing interest rates, foreign currency exchange rate fluctuations, international political risk, cybersecurity risk and the continued viability of our business strategy.

We believe these forward-looking statements are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on current expectations. For additional information regarding other important factors that may affect our operations and could cause actual results to vary materially from those anticipated in the forward-looking statements see the discussion included in Item 1A “Risk Factors” of our most recent Annual Report on Form 10-K, as well as the other documents and reports that we file with the SEC. Forward-looking statements speak only as of the date the statement was made. We assume no obligation to update forward-looking information or the discussion of such risks and uncertainties to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except as required by applicable law. We qualify any and all of our forward-looking statements by these cautionary factors.

 

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WATSCO, INC.

Condensed Consolidated Results of Operations

(In thousands, except per share data)

(Unaudited)

 

     Quarter Ended September 30,     Nine Months Ended September 30,  
     2015     2014     2015 (1)     2014  

Revenues

   $ 1,177,012      $ 1,134,999      $ 3,209,423      $ 3,067,753   

Cost of sales

     891,166        860,234        2,424,107        2,325,646   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     285,846        274,765        785,316        742,107   

Gross profit margin

     24.3     24.2     24.5     24.2
  

 

 

   

 

 

   

 

 

   

 

 

 

SG&A expenses

     175,166        169,527        502,769        488,336   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     110,680        105,238        282,547        253,771   

Operating margin

     9.4     9.3     8.8     8.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense, net

     1,519        1,534        4,526        3,790   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     109,161        103,704        278,021        249,981   

Income taxes

     34,517        32,573        87,836        76,062   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     74,644        71,131        190,185        173,919   

Less: net income attributable to non-controlling interest

     16,676        16,670        43,746        46,604   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Watsco

   $ 57,968      $ 54,461      $ 146,439      $ 127,315   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share:

        

Net income attributable to Watsco shareholders

   $ 57,968      $ 54,461      $ 146,439      $ 127,315   

Less: distributed and undistributed earnings allocated to non-vested (restricted) common stock

     4,592        4,103        11,505        9,635   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings allocated to Watsco shareholders

   $ 53,376      $ 50,358      $ 134,934      $ 117,680   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average Common and Class B common shares and equivalent shares used to calculate diluted earnings per share

     32,498,857        32,375,939        32,469,313        32,345,068   

Diluted earnings per share for Common and Class B common stock

   $ 1.64      $ 1.56      $ 4.16      $ 3.64   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Diluted earnings per share for the nine-month period in 2015 reflect a 13 cent per share benefit from a 10% greater ownership in Carrier Enterprise LLC, a U.S. joint venture formed with Carrier Corporation in 2009. Watsco increased its ownership in Carrier Enterprise to 80% on July 1, 2014.

Note: Reference in this press release to ‘total-shareholder-return’ reflects market appreciation of Watsco’s common stock and dividends.

 

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WATSCO, INC.

Condensed Consolidated Balance Sheets

(Unaudited, in thousands)

 

    

September 30,

2015

    

December 31,

2014

 

Cash and cash equivalents

   $ 28,505       $ 24,447   

Accounts receivable, net

     510,004         434,234   

Inventories

     751,944         677,990   

Other

     24,041         20,664   
  

 

 

    

 

 

 

Total current assets

     1,314,494         1,157,335   

Property and equipment, net

     63,297         53,480   

Goodwill, intangibles, net and other

     551,668         580,252   
  

 

 

    

 

 

 

Total assets

   $ 1,929,459       $ 1,791,067   
  

 

 

    

 

 

 

Accounts payable and accrued expenses

   $ 328,502       $ 286,853   

Current portion of long-term obligations

     2,535         169   
  

 

 

    

 

 

 

Total current liabilities

     331,037         287,022   

Borrowings under revolving credit agreement

     304,941         303,199   

Deferred income taxes and other liabilities

     71,916         68,807   
  

 

 

    

 

 

 

Total liabilities

     707,894         659,028   
  

 

 

    

 

 

 

Watsco’s shareholders’ equity

     955,362         883,960   

Non-controlling interest

     266,203         248,079   
  

 

 

    

 

 

 

Shareholders’ equity

     1,221,565         1,132,039   
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 1,929,459       $ 1,791,067   
  

 

 

    

 

 

 

WATSCO, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

     Nine Months Ended September 30,  
     2015      2014  

Cash flow from operating activities:

     

Net income

   $ 190,185       $ 173,919   

Non-cash items

     29,577         27,596   

Changes in working capital

     (120,004      (159,796
  

 

 

    

 

 

 

Net cash provided by operating activities

     99,758         41,719   
  

 

 

    

 

 

 

Cash flow from investing activities:

     
  

 

 

    

 

 

 

Capital expenditures, net

     (19,907      (8,902
  

 

 

    

 

 

 

Cash flow from financing activities:

     

Dividends on Common and Class B Common stock

     (73,840      (48,884

Net proceeds under revolving credit agreement

     3,327         122,943   

Distributions to non-controlling interest

     (13,266      (25,817

Purchase of additional ownership from non-controlling interest

     —           (87,735

Other

     8,752         4,075   
  

 

 

    

 

 

 

Net cash used in financing activities

     (75,027      (35,418
  

 

 

    

 

 

 

Effect of foreign exchange rate changes on cash and cash equivalents

     (766      (186
  

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

     4,058         (2,787

Cash and cash equivalents at beginning of period

     24,447         19,478   
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 28,505       $ 16,691   
  

 

 

    

 

 

 

 

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