Watsco Reports Record Third Quarter Results and Dividend Raise to $6.40 Per Share
Third Quarter Results
Key performance metrics:
- 16% earnings per share (EPS) growth to a record
$2.11 - 22% increase in net income to a record
$79 million - 5% sales growth to a record
$1.296 billion - 8% increase in gross profit to a record
$319 million - 50 basis-point increase in gross margin
- 7% increase in operating income to a record
$122 million - 10 basis-point expansion in operating margins to 9.4%
Sales trends:
- 7% growth in HVAC equipment (68% of sales)
- 4% growth in other HVAC products (28% of sales)
- Flat sales for commercial refrigeration products (4% of sales)
Results reflect unit growth in HVAC equipment, realization of price increases and a richer mix of high-efficiency systems. Comparable growth rates were achieved for residential and commercial products. Results include a
Nine-Month Results
Key performance metrics:
- 18% earnings per share growth to a record
$5.43 - 23% increase in net income to a record
$203 million - 5% sales growth to a record
$3.555 billion - 6% increase in gross profit to a record
$871 million - 10 basis-point expansion in gross margin
- 7% increase in operating income to a record
$314 million - 10 basis-point expansion in operating margins to 8.8%
Sales trends:
- 7% growth in HVAC equipment (68% of sales), including 7% growth in residential products
- 5% growth in other HVAC products (28% of sales)
- Flat sales for commercial refrigeration products (4% of sales)
Sunbelt Markets & Market Share
Watsco’s network consists of 568 locations in 37 U.S. states, Canada, Mexico and Puerto Rico.
Watsco’s concentration in Sunbelt markets has been a cornerstone of its strategy over the last 30 years given the following attributes:
- On-going population migration to the Sunbelt is a catalyst for economic expansion and provides growth opportunities.
- HVAC systems are an absolute necessity by providing a comfortable place to live or conduct business.
- The installed base is highly-dense and systems are 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 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. Based on the most recent data available, the Company believes it has gained share in its markets during 2018.
Technology Investments & Data-Driven Productivity Initiative
Leveraging the Company’s data analytics capabilities,
Substantial incremental SG&A investments have been made over the last three years as
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.”
Organizational Investments
In addition, an enriched wellness program will be launched in 2019, including greater incentives to employees to learn more about their health, identify risks and promote preventive care. The Company considers an active wellness program as an important component of its culture.
Alert Labs Acquisition
During the quarter,
“Alert Labs has an exceptional team of innovators with an entrepreneurial culture that is consistent and complementary to ours,” said
Dividends & Cash Flow
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 20% for the nine-month period ended
Outlook for 2018
Third 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 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 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 September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenues | $ | 1,296,007 | $ | 1,229,591 | $ | 3,555,327 | $ | 3,377,610 | |||||||
Cost of sales | 976,998 | 933,696 | 2,684,719 | 2,552,881 | |||||||||||
Gross profit | 319,009 | 295,895 | 870,608 | 824,729 | |||||||||||
Gross profit margin | 24.6 | % | 24.1 | % | 24.5 | % | 24.4 | % | |||||||
SG&A expenses | 200,408 | 183,728 | 565,519 | 534,515 | |||||||||||
Other income | 3,696 | 2,294 | 8,491 | 2,294 | |||||||||||
Operating income | 122,297 | 114,461 | 313,580 | 292,508 | |||||||||||
Operating margin | 9.4 | % | 9.3 | % | 8.8 | % | 8.7 | % | |||||||
Interest expense, net | 1,047 | 2,117 | 2,375 | 5,019 | |||||||||||
Income before income taxes | 121,250 | 112,344 | 311,205 | 287,489 | |||||||||||
Income taxes | 24,364 | 32,325 | 63,678 | 82,855 | |||||||||||
Net income | 96,886 | 80,019 | 247,527 | 204,634 | |||||||||||
Less: net income attributable to non-controlling interest | 17,723 | 14,990 | 44,188 | 39,668 | |||||||||||
Net income attributable to Watsco | $ | 79,163 | $ | 65,029 | $ | 203,339 | $ | 164,966 | |||||||
Diluted earnings per share: | |||||||||||||||
Net income attributable to Watsco shareholders | $ | 79,163 | $ | 65,029 | $ | 203,339 | $ | 164,966 | |||||||
Less: distributed and undistributed earnings allocated to non-vested restricted common stock | 6,448 | 5,468 | 16,593 | 13,840 | |||||||||||
Earnings allocated to Watsco shareholders | $ | 72,715 | $ | 59,561 | $ | 186,746 | $ | 151,126 | |||||||
Weighted-average Common and Class B common shares and equivalent shares used to calculate diluted earnings per share | 34,399,389 | 32,746,366 | 34,366,522 | 32,711,850 | |||||||||||
Diluted earnings per share for Common and Class B common stock | $ | 2.11 | $ | 1.82 | $ | 5.43 | $ | 4.62 |
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
September 30, | December 31, | ||||
2018 | 2017 | ||||
Cash and cash equivalents | $ | 67,612 | $ | 80,496 | |
Accounts receivable, net | 602,753 | 478,133 | |||
Inventories | 810,869 | 761,314 | |||
Other current assets | 20,611 | 17,454 | |||
Total current assets | 1,501,845 | 1,337,397 | |||
Property and equipment, net | 91,275 | 91,198 | |||
Goodwill, intangibles, net and other assets | 637,628 | 618,282 | |||
Total assets | $ | 2,230,748 | $ | 2,046,877 | |
Accounts payable and accrued expenses | $ | 392,243 | $ | 416,233 | |
Borrowings under revolving credit agreement | 116,400 | - | |||
Current portion of long-term obligations | 178 | 244 | |||
Total current liabilities | 508,821 | 416,477 | |||
Borrowings under revolving credit agreement | - | 21,800 | |||
Deferred income taxes and other liabilities | 61,377 | 57,623 | |||
Total liabilities | 570,198 | 495,900 | |||
Watsco's shareholders’ equity | 1,367,244 | 1,297,953 | |||
Non-controlling interest | 293,306 | 253,024 | |||
Shareholders’ equity | 1,660,550 | 1,550,977 | |||
Total liabilities and shareholders’ equity | $ | 2,230,748 | $ | 2,046,877 |
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Nine Months Ended September 30, | |||||||
2018 | 2017 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 247,527 | $ | 204,634 | |||
Non-cash items | 27,575 | 30,446 | |||||
Changes in working capital, net of effect of acquisition | (205,037 | ) | (45,701 | ) | |||
Net cash provided by operating activities | 70,065 | 189,379 | |||||
Cash flows from investing activities: | |||||||
Capital expenditures, net | (12,754 | ) | (13,690 | ) | |||
Investment in unconsolidated entity | (3,760 | ) | (63,600 | ) | |||
Business acquisition, net of cash acquired | (5,828 | ) | - | ||||
Net cash used in investing activities | (22,342 | ) | (77,290 | ) | |||
Cash flows from financing activities: | |||||||
Dividends on Common and Class B Common stock | (154,951 | ) | (119,468 | ) | |||
Distributions to non-controlling interest | (2,178 | ) | (6,799 | ) | |||
Purchase of additional ownership from non-controlling interest | - | (42,688 | ) | ||||
Proceeds from non-controlling interest related to unconsolidated entity | 752 | 12,720 | |||||
Other | 2,015 | 3,873 | |||||
Net proceeds under revolving credit agreement | 94,600 | 49,406 | |||||
Net cash used in financing activities | (59,762 | ) | (102,956 | ) | |||
Effect of foreign exchange rate changes on cash and cash equivalents | (845 | ) | 1,524 | ||||
Net (decrease) increase in cash and cash equivalents | (12,884 | ) | 10,657 | ||||
Cash and cash equivalents at beginning of period | 80,496 | 56,010 | |||||
Cash and cash equivalents at end of period | $ | 67,612 | $ | 66,667 |
Senior Vice President
(305) 714-4102
e-mail: blogan@watsco.com
Source: Watsco, Inc.