Watsco EPS Jumps 93% Setting First Quarter Records for Sales, Operating Profit, Operating Margins and Net Income
Double-Digit Sales Growth, Higher Gross Margins and
Operating Efficiencies Drive Record Performance
Customer-Adoption of Technologies Grows as Business Evolution Continues
Watsco’s entrepreneurial culture continues to be critically important in response to the varying business conditions in the marketplace. The Company believes the pace of change and innovation is accelerating as adoption of its technology platforms gains further momentum. These platforms are designed to revolutionize the customer experience, providing contractors speed and efficiency as well as supporting their growth in unparalleled ways. In terms of results, new customer acquisition is increasing and attrition rates with existing customers are decreasing, providing meaningful contributions to sales and overall operating performance. The Company continues to make incremental investments to add more capabilities and functionality, to develop and launch new innovations and drive adoption by more customers.
First Quarter Results
Key Performance Metrics
- 93% increase in EPS to a record
- 81% increase in operating income to a record
- 270 basis-point operating margin expansion to a record 7.2%
- 19% gross profit increase to a record
- 130 basis-point gross margin increase to a record 25.9%
- 7% increase in SG&A expenses and a 100 basis-point reduction in SG&A as a percentage of sales
- 13% sales growth to a record
- 14% growth in HVAC equipment (67% of sales), including 18% growth in residential products
- 11% increase in other HVAC products (29% of sales)
- 10% increase in commercial refrigeration products (4% of sales)
It is an important caution that the first and fourth calendar quarters are generally seasonal with demand for air conditioning and heating products being the highest during the second and third quarter of each calendar year. Accordingly, first quarter 2021 results are disproportionately affected by this seasonality in addition to general economic conditions.
Watsco continues to aggressively invest in technologies to transform its customer experience. Specific technology-related trends in 2021 include:
- Product Information Management (PIM) is Watsco’s industry-leading repository of product information delivered seamlessly through Watsco’s mobile apps and e-commerce platform. Watsco’s PIM includes approximately 900,000 SKUs accessed by more than 300,000 contractors and technicians annually.
- Contractor Assist mobile apps provide customers real-time field access to critical information, including technical support, product detail and inventory information, warranty look-up, the ability to purchase product through links to e-commerce and much more. The authenticated user community (users that are using the mobile app while linked to an e-commerce account) grew 11% to approximately 21,000 users at the end of the first quarter compared to a year ago.
- E-Commerce sales annual run-rate currently exceeds
$1.6 billionand grew 18% in comparison to the first quarter last year. The number of e-commerce transactions grew 30% to nearly 300,000 during the quarter.
- OnCall Air®, Watsco’s digital sales platform used by HVAC/R contractors and CreditForComfort®, its companion consumer financing platform, both increased penetration as more customers digitally engaged with homeowners. During the first quarter of 2021, OnCall Air® presented quotes to approximately 34,000 households, an 111% increase over the prior year, and generated
$105million in gross merchandise value, an 111% increase over 2020. CreditForComfort® processed approximately 1,000 financing applications during the quarter, a 61% increase, and grew total loan-value by 86% versus the same period in 2020.
- Proprietary warehouse technology investments have enabled faster, better and more reliable service. Express Pick-up allows contractors to streamline the traditional fulfillment of orders providing quicker service. Watsco also launched curbside pick-up and touchless payment capabilities last year to facilitate contactless order fulfillment. More tools have also been developed to optimize demand planning and inventory levels. Taken as a whole, these investments are designed to enhance the customer experience, streamline branch operations and benefit same-store productivity.
Cash Flow & Dividends
Watsco’s operating cash flow for the quarter was a
Watsco has paid cash dividends to shareholders for 47 consecutive years. The Company’s philosophy is to share increasing amounts of cash flow through higher dividends while maintaining a conservative financial position with continued capacity to build its distribution network. Effective April 2021, Watsco increased its annual dividend rate by 10% to $7.80 per share.
Acquisition of TEC
Watsco is actively seeking additional opportunities to invest in what remains a fragmented $40 billion North American HVAC distribution industry.
First Quarter Earnings Conference Call Information
A replay of the conference call will be available on the Company's website.
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 633 locations each year to get information, obtain technical support and buy products.
The Company believes there is long-term opportunity to be a significant participant and contributor in efforts to address climate change. HVAC/R products provide comfort to homes and businesses regardless of the outdoor climate. Older systems often operate below current government-mandated energy efficiency and environmental standards, resulting in higher energy use and costs to homeowners. Sales of higher-efficiency replacement systems have long been a fundamental opportunity in Watsco’s marketplace. Watsco plans to actively collaborate with its OEM partners and key stakeholders to lead these ongoing efforts in its marketplace. Additional information about Watsco may be found at www.watsco.com.
This document includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may address, among other things, our expected financial and operational results and the related assumptions underlying our expected results. 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, the seasonality of product sales, 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 Watsco files with the Securities and Exchange Commission, such as Form 10-K, Form 10-Q and Form 8-
Condensed Consolidated Results of Operations
(In thousands, except per share data)
|Cost of sales||841,297||760,541|
|Gross profit margin||25.9%||24.6%|
|Interest expense, net||88||790|
|Income before income taxes||81,792||44,453|
|Less: net income attributable to non-controlling interest||11,035||5,745|
|Net income attributable to
|Diluted earnings per share:|
|Net income attributable to
|Less: distributed and undistributed earnings allocated to non-vested restricted common stock (1)||6,054||5,233|
|Earnings allocated to
|Weighted-average Common and Class B common shares and equivalent shares used to calculate diluted earnings per share||35,329,834||35,023,989|
|Diluted earnings per share for Common and Class B common stock (1)||$||1.39||$||0.72|
|(1)||These amounts include the dilutive impact attributable to the excess of dividends paid on restricted shares over the net income allocated to non-vested restricted common stock. Such excess amounts were
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
|Cash and cash equivalents||$||93,875||$||146,067|
|Accounts receivable, net||596,513||535,288|
|Total current assets||1,695,355||1,484,445|
|Property and equipment, net||100,378||98,225|
|Operating lease right-of-use assets||203,603||209,169|
|Accounts payable and accrued expenses||$||558,053||$||415,341|
|Current portion of long-term obligations||72,767||71,804|
|Total current liabilities||630,820||487,145|
|Borrowings under revolving credit agreement||48,900||-|
|Operating lease liabilities, net of current portion||132,829||139,527|
|Deferred income taxes and other liabilities||82,888||77,914|
|Total liabilities and shareholders’ equity||$||2,692,264||$||2,484,347|
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
|Cash flows from operating activities:|
|Changes in working capital||(118,580||)||(11,981||)|
|Net cash (used in) provided by operating activities||(37,745||)||41,859|
|Cash flows from investing activities:|
|Proceeds from sale of equity securities||5,993||-|
|Capital expenditures, net||(4,772||)||(3,849||)|
|Net cash provided by (used in) investing activities||1,221||(3,849||)|
|Cash flows from financing activities:|
|Dividends on Common and Class
|Net proceeds under revolving credit agreement||48,900||443|
|Net cash used in financing activities||(16,250||)||(59,388||)|
|Effect of foreign exchange rate changes on cash and cash equivalents||582||(1,840||)|
|Net decrease in cash and cash equivalents||(52,192||)||(23,218||)|
|Cash and cash equivalents at beginning of year||146,067||74,454|
|Cash and cash equivalents at end of year||$||93,875||$||51,236|
Executive Vice President
Source: Watsco, Inc.