Form 8-K





Washington, D.C. 20549







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

Date of Report (Date of earliest event reported) February 14, 2019




(Exact name of registrant as specified in its charter)




(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)


(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))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐




Item 2.02. Results of Operations and Financial Condition

On February 14, 2019, Watsco, Inc., a Florida corporation (the “Company”), issued a press release reporting its financial results for the quarter and year ended December 31, 2018. 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






99.1    Press release dated February 14, 2019 issued by Watsco, Inc.


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.


Dated: February 14, 2019     By:   /s/ Ana M. Menendez

Ana M. Menendez,

Chief Financial Officer


Exhibit 99.1

Watsco Reports Record Results in 2018, Marking its

30-Year Anniversary in HVAC/R Distribution



Culture of Innovation Continues to Transform Watsco’s Customer-Experience

MIAMI, FLORIDA – (GLOBENEWSWIRE), February 14, 2019 – Watsco, Inc. (NYSE: WSO) reported record results for the year and quarter ended December 31, 2018. Annual records were set for sales, operating income, net income and earnings per share. EPS of $6.49 for the year was consistent with the Company’s outlook of $6.40 to $6.50 provided in its prior earnings release. In addition, in January 2019, Watsco raised its annual dividend 10% to $6.40 per share.

2018 marks Watsco’s 30-year anniversary in HVAC/R distribution. The Company has produced the following results over this period of time (unaudited):


     1989      2018      CAGRs (1)


     $64 million        $4.5 billion      16%

Operating income

     $2 million        $372 million      19%


     $.5 million        $209 million      23%


     16        571     





Compounded annual growth rates (CAGRs) are measured for a 30-year period ended December 31, 2018. Total-shareholder- return includes market appreciation of Watsco’s stock and reinvestment of dividends.

Albert H. Nahmad, Watsco’s Chairman and CEO stated: “We are proud of our track record and industry leadership position, but there is much more for us to achieve in the $35 billion North American HVAC/R distribution market. We continue to challenge Watsco’s leaders to grow, innovate and build on this success, particularly in light of the cultural and technology evolution underway.”    

The Company’s record 2018 results reflect investments in several areas, all from a long-term perspective:



Continuing technology investments to launch, iterate and drive adoption of our proprietary, groundbreaking innovations designed to revolutionize Watsco’s customer-experience. Since 2012, Watsco’s technology team has grown from 60 employees operating ERP and communication systems, to over 200 innovation-focused employees bringing new ways of doing business to life.



Organizational investments, including the addition of over 250 customer-facing personnel and functional leaders, to improve service and help ensure our long-term success. We also recently launched a productivity initiative enabled by our data analytics platform to identify cost savings opportunities and enhance long-term profitability.



Cultural investments, including a 33% increase in the annual 401k matching contribution, which is made in Watsco common stock. The Company’s 30-year compounded total shareholder return of 18% has benefitted shareholders at-large but has also proven meaningful to Watsco’s 401k participants who have spent their careers with the Company.



Further investment is planned in 2019 for an enriched wellness program, including greater incentives for employees to learn more about their health, identify risks and promote preventive care.



The Company also intends to continue to build on its ownership culture through a variety of unique, equity-based programs.

Full-Year 2018 Results

Sales trends:



5% increase in total sales to a record $4.547 billion



6% growth in HVAC equipment (67% of sales)



5% growth in other HVAC products (29% of sales)



Flat sales for commercial refrigeration products (4% of sales)

Key performance metrics:



17% earnings per share (EPS) growth to a record $6.49 (2)



22% increase in net income to a record $243 million (2)



5% increase in gross profit to a record $1.120 billion (10 basis-point increase in gross margin)



5% increase in operating income to a record $372 million (operating margin of 8.2%)



2017 comparisons used to compute growth rates exclude net tax benefits of $10 million or 27 cents per share related to the passage of tax legislation in 2017. On a GAAP basis, 2018 earnings per share increased 12% and net income increased 17%.

Sales growth reflects HVAC equipment unit growth, price increases and a richer mix of high-efficiency systems. Operating results include profit growth and margin expansion in several markets offset by a $7 million profit decline in Florida-based locations on slower sales growth and a $4 million profit decline in Latin America on lower sales (excluding these markets, sales increased 7% and operating profit increased 14%). Results also reflect incremental SG&A of $9 million in field-level incentive compensation, $7 million in health-related costs and $4 million in incremental technology spending, including the addition of Alert Labs, a technology company based in Ontario, Canada, which we acquired in August 2018.

Albert H. Nahmad, Chairman and CEO stated: “2018 represented another record year for our Company. Strong performance was achieved in many markets and others presented a challenge where market conditions slowed after several years of expansion. Growth initiatives have been instituted in partnership with our supplier partners with a focus of gaining market share.”

Mr. Nahmad added: “We also finished the year with a strong balance sheet consistent with our core philosophy to remain conservative and risk averse, while maintaining the capacity and flexibility to invest in opportunities at a low cost of capital. We continue to seek opportunities to grow our network through acquisitions, and we are encouraged by current conditions. We also look to use our financial strength to expand our product portfolio and build on key supplier relationships to provide new opportunities for growth.”

Fourth Quarter Results

Sales trends:



3% increase in total sales to a record $991 million (5% increase in domestic markets)



3% growth in HVAC equipment (66% of sales)



4% growth in other HVAC products (30% of sales)



Flat sales for commercial refrigeration products (4% of sales)

Key performance metrics:



13% EPS growth to a record $1.02 (3)



18% increase in net income to a record $40 million (3)



4% increase in gross profit to a record $250 million (20 basis-point expansion in gross margin)



5% decline in operating income to $59 million (operating margin of 5.9%)



2017 comparisons used to compute growth rates exclude net tax benefits of $10 million or 29 cents per share related to the passage of tax legislation in 2017. On a GAAP basis, 2018 earnings per share decreased 14% and net income decreased 8%.



Operating results include profit growth and margin expansion in several markets offset by a $4 million profit decline in Florida-based locations and a $3 million profit decline in Latin American markets (excluding these markets, sales increased 7% and operating profit increased 9%). Results also reflect incremental SG&A of $4 million in field-level incentive compensation, $2 million in health-related costs and $2 million in added technology spending, including the acquisition of Alert Labs.

It is important to note that the fourth quarter of each calendar year is highly seasonal due to the nature and timing of the replacement of HVAC systems, which is strongest in the second and third quarters. Accordingly, the Company’s fourth quarter financial results are disproportionately affected by seasonality.

Technology Investments

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 largest database of product information. Watsco’s run-rate for e-commerce sales is now approaching 30%, which is supported by the industry’s richest depository of product information of over 685,000 SKUs. Both of these metrics were close to zero just a few years ago.

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).

A.J. Nahmad, Watsco’s President said: “We are proud to be the industry leader in progressive technologies to help customers grow their businesses while improving our operations. We have made progress and are seeing early returns such as reduced customer attrition rates, improved inventory quality and exciting sales growth for customers that are leveraging our technologies.”

Mr. Nahmad added: “We are also so proud to have delivered record results and increasing dividends during such a transformative period. Most importantly, our teams have embraced a culture of innovation and continuous improvement, which we believe positions us well to further scale these technologies and derive value in the years ahead.”

An update of key technology metrics are as follows:


           E-Commerce and App Usage    Progress in 2018 versus 2017
  Growth in e-commerce sales    33% growth in online sales to $1.2 billion
  E-commerce transactions    34% increase in transactions
  Current e-commerce run-rate    29% of sales versus 25% last year
  Unique iOS or Android app weekly users    16% increase in weekly active users
  Products (SKUs) digitized and available on-line    5% increase to over 685,000 SKUs
  Line items per order on-line versus in-store    37% more line items per order
  Sales attrition rate for e-commerce users    2.5-times less attrition than non-users
  Business Intelligence (BI) Platform   
  Increase in internal BI users    7% increase to over 1,600 weekly-users
  Average BI queries per week per user    9% increase in queries per week per user
  Number of total user inquiries during the year    13% increase to 20.3 million queries



           Warehouse Efficiency    Progress in 2018 versus 2017
  Locations with Order Fulfillment (OF) software    369 locations versus 329 last year
  Number of orders filled with OF    2.6 million versus 2.1 million last year
  Delivery truck miles tracked and analyzed    5.8 million miles versus 4.2 million last year
  Locations with express pickup    164 locations versus 134 last year

Dividends & Cash Flow

Watsco has paid cash dividends for more than 40 consecutive years. Dividends paid in 2018 increased 27% to $209 million. The Company’s philosophy is to share increasing amounts of cash flow with shareholders through higher dividends while maintaining a conservative financial position. In January 2019, we raised our annual dividend 10% to $6.40 per share.

Operating cash flow in 2018 was $171 million versus $307 million in 2017, reflecting incremental inventory investments at December 31, 2018 from price increases and for competitive positioning entering 2019. Operating cash flow in 2018 also includes a $50 million tax payment deferred in 2017 and paid in 2018 under hurricane-relief guidance issued by the IRS. Since 2000, Watsco’s operating cash flow was approximately $2.4 billion compared to net income of approximately $2.3 billion, surpassing the Company’s stated goal of generating cash flow in excess of net income.

Sunbelt Markets & Market Share

Watsco’s network consists of 571 locations in 37 U.S. states, Canada, Mexico and Puerto Rico. Watsco also exports products to Latin America and the Caribbean. Sales are concentrated in Sunbelt markets (approximately 71% of sales), which the Company believes are not weather-sensitive. By comparison, the Company estimates industry sales to be 60% in the Sunbelt and 40% in more temperate, weather-sensitive markets. Accordingly, the Company’s sales and operating results may vary in comparison to broad-based industry data.

Watsco’s concentration in the Sunbelt has been a component of its strategy over the last 30 years given the relevance of the following attributes:



On-going population migration to the Sunbelt has been a catalyst for economic expansion and growth in the installed base of HVAC systems.



HVAC systems are an absolute necessity as they provide a comfortable place for homeowners to live or conduct business.



The installed base is replaced more often given the stress and run-times of older systems.



Warm weather patterns in the Sunbelt have consistently produced more dependable market conditions over longer periods (conversely, weather extremes in temperate markets can create greater volatility).



U.S. regulatory changes have been focused on and are more relevant to Sunbelt markets.

The Company strives to gain profitable market share in its markets and regularly makes assessments of changes in share in collaboration with its primary supplier partners.

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 “Tax Act”). 2017 percentage growth comparisons for net income and EPS exclude a one-time net tax benefit of $10 million and 27 cents, respectively, related to passage of the Tax Act. For the year on a GAAP-basis, net income was $243 million in 2018 versus $208 million in 2017 and EPS was $6.49 in 2018 versus $5.81 in 2017. For the fourth quarter on a GAAP-basis, net income was $40 million in 2018 versus $43 million in 2017 and EPS was $1.02 in 2018 versus $1.19 in 2017.



Earnings Conference Call Information

Date: February 14, 2019

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


Dial-in number: United States (844) 883-3908 / International (412) 317-9254

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

About Watsco

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 571 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 91 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

This press release includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. 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. Forward-looking statements speak only as of the date the statement was made. Watsco assumes no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information. Detailed information about these factors and additional important factors can be found in the documents that Watsco files with the Securities and Exchange Commission, such as Form 10-K, Form 10-Q and Form 8-K.




Condensed Consolidated Results of Operations

(In thousands, except per share data)



     Quarter Ended
December 31,
    Year Ended December 31,  
     2018     2017     2018     2017  


   $ 991,326     $ 964,345     $ 4,546,653     $ 4,341,955  

Cost of sales

     741,682       723,415       3,426,401       3,276,296  













Gross profit

     249,644       240,930       1,120,252       1,065,659  

Gross profit margin

     25.2     25.0     24.6     24.5













SG&A expenses

     191,933       181,156       757,452       715,671  













Other income

     791       1,592       9,282       3,886  

Operating income

     58,502       61,366       372,082       353,874  

Operating margin

     5.9     6.4     8.2     8.2













Interest expense, net

     365       1,344       2,740       6,363  













Income before income taxes

     58,137       60,022       369,342       347,511  

Income taxes

     9,135       7,366       72,813       90,221  













Net income

     49,002       52,656       296,529       257,290  

Less: net income attributable to non-controlling interest

     9,409       9,401       53,597       49,069  













Net income attributable to Watsco

   $ 39,593     $ 43,255     $ 242,932     $ 208,221  













Diluted earnings per share:


Net income attributable to Watsco shareholders

   $ 39,593     $ 43,255     $ 242,932     $ 208,221  

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

     4,394 (1)       3,724 (1)       19,788       17,427  













Earnings allocated to Watsco shareholders

   $ 35,199     $ 39,531     $ 223,144     $ 190,794  













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

     34,397,261       33,310,064       34,374,269       32,862,633  

Diluted earnings per share for Common and Class B common stock

   $ 1.02 (1)     $ 1.19 (1)     $ 6.49     $ 5.81  















These amounts include the dilutive impact attributable to the excess of dividends paid on restricted shares over the net income allocated to non-vested restricted common stock. Such excess amounts were $1.2 million in the fourth quarter of 2018 (3 cents per share) and $.2 million in 2017 (1 cent per share). The Company expects this dilutive impact to be seasonal during the first and fourth quarters of each year due to EPS in such periods generally being less than the quarterly dividend rate (presently $1.60 per share).




Condensed Consolidated Balance Sheets

(Unaudited, in thousands)


     December 31,      December 31,  
     2018      2017  

Cash and cash equivalents

   $ 82,894      $ 80,496  

Accounts receivable, net

     501,908        478,133  


     837,129        761,314  

Other current assets

     19,875        17,454  







Total current assets

     1,441,806        1,337,397  

Property and equipment, net

     91,046        91,198  

Goodwill, intangibles, net and other assets

     628,181        618,282  







Total assets

   $ 2,161,033      $ 2,046,877  







Accounts payable and accrued expenses

   $ 357,320      $ 416,233  

Current portion of long-term obligations

     246        244  







Total current liabilities

     357,566        416,477  

Borrowings under revolving credit agreement

     135,200        21,800  

Deferred income taxes and other liabilities

     66,554        57,623  







Total liabilities

     559,320        495,900  







Watsco’s shareholders’ equity

     1,347,849        1,297,953  

Non-controlling interest

     253,864        253,024  







Shareholders’ equity

     1,601,713        1,550,977  







Total liabilities and shareholders’ equity

   $ 2,161,033      $ 2,046,877  










Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)


     Years Ended
December 31,
     2018     2017  

Cash flows from operating activities:


Net income

   $ 296,529     $ 257,290  

Non-cash items

     42,202       25,239  

Changes in working capital, net of effect of acquisitions


Accounts receivable

     (28,831     (1,676


     (78,954     (73,403

Accounts payable and other liabilities

     (57,398     99,956  

Other, net

     (2,991     (886







Net cash provided by operating activities

     170,557       306,520  







Cash flows from investing activities:


Capital expenditures, net

     (16,925     (17,708

Investment in unconsolidated entity

     (3,760     (63,600

Business acquisitions, net of cash acquired








Net cash used in investing activities

     (26,311     (81,308







Cash flows from financing activities:


Dividends on Common and Class B Common stock

     (209,218     (164,147

Distributions to non-controlling interest

     (46,825     (42,831

Purchase of additional ownership from non-controlling interest


Proceeds from non-controlling interest of unconsolidated entity

     752       12,720  

Net proceeds from the sale of Common stock



     2,288       551  

Net repayments under revolving credit agreements

     113,400       (213,494







Net cash used in financing activities

     (139,603     (202,145







Effect of foreign exchange rate changes on cash and cash equivalents

     (2,245     1,419  







Net increase in cash and cash equivalents

     2,398       24,486  

Cash and cash equivalents at beginning of period

     80,496       56,010  







Cash and cash equivalents at end of period

   $ 82,894     $ 80,496