Watsco Reports Record Breaking Fourth Quarter and 2021 Full Year Performance
Sales, Profits, Operating Margin and EPS at Record Levels
Fourth Quarter: EPS up 77% to
2021 Year: EPS up 54% on Record Sales of
13% Dividend Raise to
Watsco’s distribution strategy began in 1989. Today, the Company operates the industry’s largest sales network for heating, air conditioning and refrigeration (HVAC/R) products with 671 locations covering portions of the United States, Canada, Mexico and Puerto Rico and serving on an export basis, Latin America and the Caribbean. Watsco estimates that more than 350,000 contractors and technicians visit, call or digitally engage one of its locations each year to get information, obtain technical support or buy products.
|Total shareholder return (1)||19%|
(1) Compound annual growth rates (CAGRs) are measured for the 32-year period ended December 31, 2021. Total shareholder return reflects market appreciation of Watsco’s stock and reinvestment of dividends.
Watsco’s entrepreneurial and technology-driven culture produced record results in 2021. New records were achieved for sales, gross profit, gross margin, operating income, operating margin, net income and earnings per share (EPS) for the fourth quarter and year. These results reflect incremental investments to expand adoption of Watsco’s technology platforms, which collectively transform the customer experience, enhance operational efficiency and help contractors grow faster as they deliver a more contemporary experience to homeowners and businesses. As the digital age influences how HVAC/R products and services are sold, we believe that Watsco’s customer-focused technologies, scale and leadership position offer significant long-term value.
Fourth Quarter Results
Key Performance Metrics
- 77% increase in EPS to a record
$2.02on record net income attributable to Watscoof $79 million
- 31% sales growth to a record
$1.5 billion(21% growth on a same-store basis)
- 76% increase in operating income to a record
$123 million(65% increase on a same-store basis)
- 210 basis-point operating margin expansion to a record 8.1% (same-store operating margin of 8.2%)
- 46% gross profit increase to a record
$412 million(34% increase on a same-store basis)
- 290 basis-point gross margin increase to a record 27.3%
- 36% increase in SG&A expenses (24% increase on a same-store basis)
Sales trends (excluding acquisitions):
- 22% growth in HVAC equipment (68% of sales)
- 17% increase in other HVAC products (28% of sales)
- 35% increase in commercial refrigeration products (4% of sales)
It is important to note that the first and fourth quarter of each calendar year are highly seasonal due to the nature and timing of the replacement of HVAC/R systems, which is strongest in the second and third quarters. Accordingly, the Company’s first and fourth quarter financial results are disproportionately affected by seasonality.
Key Performance Metrics
- 54% increase in EPS to a record
$10.78on record net income attributable to Watscoof $419 million
- 24% sales growth to a record
$6.3 billion(18% growth on a same-store basis)
- 57% increase in operating income to a record
$629 million(49% increase on a same-store basis)
- 210 basis-point operating margin expansion to a record 10.0% (same-store operating margin of 10.1%)
- 36% gross profit increase to a record
$1.7 billion(28% increase on a same-store basis)
- 240 basis-point gross margin increase to a record 26.6%
- 27% increase in SG&A expenses (19% increase on a same-store basis)
Sales trends (excluding acquisitions):
- 18% growth in HVAC equipment (69% of sales)
- 17% increase in other HVAC products (27% of sales)
- 29% increase in commercial refrigeration products (4% of sales)
Several unique factors influenced the HVAC/R industry along with the Company’s operating performance in 2021. Collectively, these provided opportunities to better serve customers and develop additional market share in a complex operating environment.
Pricing. HVAC/R manufacturers experienced significant inflationary pressures during 2021 and raised prices throughout the year.
Product Availability. HVAC/R manufacturers experienced supply chain disruptions during 2021 from constrained component availability, labor shortages, transportation delays and other logistical challenges, which impacted lead times and availability of products. These constraints hampered our ability to fulfill contractor demand at various points during the year. Despite these disruptions, Watsco delivered strong unit growth in 2021. Product availability has improved in recent months and inventory levels are being reestablished to meet strong end-market demand.
People Investments. In response to strong demand along with new branch openings,
Operating Expenses. As a result of supply chain disruptions, Watsco’s field leadership and front-line employees did extraordinary things to serve customers, resulting in higher personnel costs and other SG&A expense increases. For example, Watsco’s logistics costs increased 22% or
Climate Change and Reductions in CO2e Emissions
We believe that Watsco’s business plays an important and significant role in the drive to lower CO2e emissions. According to the Department of Energy, heating and air conditioning accounts for roughly half of
The overwhelming majority of new HVAC systems sold by
The metric used to measure the energy efficiency of HVAC systems is the seasonal energy efficiency rating, or “SEER”. The higher the SEER rating of a system, the greater its efficiency. The sale of high-efficiency systems has long been a focus of
The Company offers a broad variety of systems that operate beyond the minimum SEER standards, including systems that operate at over 20 SEER. Watsco’s sales of higher-efficiency residential HVAC systems grew 26% organically in 2021, outpacing the overall growth rate of 17% for
Continued Technology Innovation
Watsco’s technologies continue to transform how HVAC/R contractors operate in the digital age. Speed, productivity and scale are critical long-term factors, and
- Product Information Management (PIM) is Watsco’s leading database of product information delivered seamlessly through our mobile apps and e-commerce platforms. Watsco’s PIM database now includes approximately 960,000 SKUs accessed by more than 350,000 contractors and technicians on an annual basis.
- 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 more. The authenticated user community (users that are using the mobile app while linked to an e-commerce account) grew 11% compared to last year to more than 41,000 users.
- E-Commerce sales reached nearly
$2 billionin 2021 and grew 31% during the year, outpacing overall growth rates. In U.S.markets, the number of e-commerce transactions grew 18% to 1.5 million sales orders, and the number of active e-commerce users grew 18% as more customers engage with us digitally.
- OnCall Air®, Watsco’s digital sales platform used by contractors and CreditForComfort®, its companion consumer financing platform, increased penetration as more customers digitally engaged with homeowners.
OnCall Air® presented quotes to approximately 180,000 households during 2021, a 65% increase over last year and facilitated the sale of $633million in gross merchandise value from contractors to consumers, an 82% increase over 2020. Additionally, OnCall Air® is a catalyst for continued growth in higher-SEER systems as contractors sell disproportionately more high-efficiency systems through the platform than those that do not.
- Proprietary warehouse technology investments have enabled faster and more reliable customer service. Express Pick-up lets contractors streamline the traditional fulfillment of orders providing quicker service and more efficient job completion. Watsco also provides curbside pick-up and touchless payment capabilities to facilitate contactless order fulfillment. Other tools have 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 store productivity.
Cash Flow & Dividends
Watsco’s operating cash flow was
Watsco has paid cash dividends to shareholders for 48 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.
Fourth Quarter Earnings Conference Call Information
A replay of the conference call will be available on the Company's website.
Use of Non-GAAP Financial Information
In this release, the Company discloses non-GAAP measures on a “same-store basis”, which exclude the effects of locations closed, acquired, or locations opened, in each case during the immediately preceding 12 months, unless such locations are within close geographical proximity to existing locations. The Company believes that this information provides greater comparability regarding its ongoing operating performance. These measures should not be considered an alternative to measurements required by
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 350,000 contractors and technicians visit or call one of its 671 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||1,099,746||872,472||4,612,647||3,832,107|
|Gross profit margin||27.3||%||24.4||%||26.6||%||24.2||%|
|Interest expense, net||239||58||996||1,239|
|Income before income taxes||122,827||69,703||627,532||399,795|
|Less: net income attributable to non-controlling interest||16,745||10,467||79,790||53,593|
|Net income attributable to
|Diluted earnings per share:|
|Net income attributable to
|Less: distributed and undistributed earnings allocated to non-vested restricted common stock||7,092||5,869 (1)||37,222||23,140|
|Earnings allocated to
|Weighted-average Common and Class B common shares and equivalent shares used to calculate diluted earnings per share||35,493,822||35,274,252||35,423,838||35,150,571|
|Diluted earnings per share for Common and Class B common stock||$||2.02||$||10.78||$||7.01|
(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 amount was
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
|Cash and cash equivalents||$||118,268||$||146,067|
|Accounts receivable, net||698,456||535,288|
|Total current assets||1,961,400||1,484,445|
|Property and equipment, net||111,019||98,225|
|Operating lease right-of-use assets||268,528||209,169|
|Accounts payable and accrued expenses||$||642,221||$||415,341|
|Current portion of long-term obligations||84,501||71,804|
|Total current liabilities||726,722||487,145|
|Borrowings under revolving credit agreement||89,000||-|
|Operating lease liabilities, net of current portion||187,024||139,527|
|Deferred income taxes and other liabilities||85,700||77,914|
|Non-controlling interest (“NCI”)||332,467||293,083|
|Total liabilities and shareholders’ equity||$||3,085,861||$||2,484,347|
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
|Cash flows from operating activities:|
|Changes in working capital, net of acquisitions|
|Accounts payable and other liabilities||182,819||33,936|
|Net cash provided by operating activities||349,566||534,379|
|Cash flows from investing activities:|
|Business acquisitions, net of cash acquired||(129,462||)||-|
|Capital expenditures, net||(24,108||)||(16,342||)|
|Net cash used in investing activities||(148,577||)||(16,342||)|
|Cash flows from financing activities:|
|Dividends on Common and Class
|Distributions to noncontrolling interest||(61,980||)||(42,401||)|
|Net proceeds (repayments) under revolving credit agreement||89,000||(155,700||)|
|Proceeds from NCI for investment in
|Net cash used in financing activities||(228,602||)||(448,493||)|
|Effect of foreign exchange rate changes on cash and cash equivalents||(186||)||2,069|
|Net (decrease) increase in cash and cash equivalents||(27,799||)||71,613|
|Cash and cash equivalents at beginning of year||146,067||74,454|
|Cash and cash equivalents at end of year||$||118,268||$||146,067|
Executive Vice President
Source: Watsco, Inc.