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) February 14, 2017
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
(Registrants 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 February 14, 2017, Watsco, Inc., a Florida corporation (the Company), issued a press release reporting its financial results for the quarter and year ended December 31, 2016. A copy of the Companys 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.
On February 14, 2017, the Company issued a press release announcing the purchase of an additional 10% ownership interest in Carrier Enterprise Northeast LLC, a joint venture between the Company and Carrier. A copy of the Companys press release is attached hereto as Exhibit 99.2 and is hereby 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 |
Description | |
99.1 | Press release dated February 14, 2017 issued by Watsco, Inc. | |
99.2 | Press release dated February 14, 2017 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: February 14, 2017 |
By: | /s/ Ana M. Menendez | ||||
Ana M. Menendez, | ||||||
Chief Financial Officer |
EXHIBIT INDEX
Exhibit |
Description | |
99.1 | Press release dated February 14, 2017 issued by Watsco, Inc. | |
99.2 | Press release dated February 14, 2017 issued by Watsco, Inc. |
Exhibit 99.1
Watsco Sets Full-Year and Fourth Quarter Records
for Sales, Earnings, EPS and Cash Flow
Technology Investments and Culture of Innovation Continue
to Transform the HVAC Distribution Channel
MIAMI, FLORIDA (BUSINESS WIRE), February 14, 2017 Watsco, Inc. (NYSE: WSO) reported record results for the fourth quarter and year ended December 31, 2016.
Watsco also announced today that it has raised its ownership stake in Carrier Enterprise Northeast LLC, a joint venture with Carrier, to 80% for approximately $43 million in cash. The incremental investment builds on a transaction completed in November 2016, which increased Watscos controlling interest from 60% to 70%. Carrier Enterprise Northeast had sales in 2016 of approximately $500 million from 41 locations in the northeastern United States and 12 locations in Mexico.
2016 Full-Year Results
Key performance metrics:
| Earnings per share increased 5% to a record $5.15 |
| Net income increased 6% to a record $183 million |
| Operating income increased 3% to a record $346 million |
| Operating income for U.S. locations (87% of sales) increased 6% (operating margins expanded 20 basis-points) |
| Operating income for international locations (13% of sales) declined 14% (operating margins declined 120 basis-points) |
| Operating cash flow of $8.52 per share, a 25% increase to a record $278 million |
Sales trends:
| Sales increased 3% to a record $4.2 billion |
| HVAC equipment increased 3% (66% of sales), including 4% growth in the U.S. |
| Other HVAC products increased 1% (29% of sales) |
| Commercial refrigeration products increased 6% (5% of sales) |
Albert H. Nahmad, Watscos Chairman and CEO stated: Watsco produced record results in a year of varying seasonal conditions in certain of our larger U.S. markets and lower international sales and profits due to a stronger U.S. dollar. This performance includes a 17% increase in technology costs for our on-going investments designed to enhance the customer-experience, to optimize the speed and efficiency of our operations and to compete in ways and at a scale that sets us apart in the marketplace.
Mr. Nahmad added: Watsco generated record cash flow of $278 million in 2016, or $8.52 per share, which exceeded net income and represents a 25% increase over last year. Along with our continued focus to drive consistently strong cash flow, we improved inventory turns by approximately 30 basis-points through our recent launch of new supply-chain technologies. We are pleased with the early progress for what will be a long-term project to optimize working capital efficiency while enhancing product availability.
Fourth Quarter Results
Key performance metrics:
| Earnings per share increased 8% to a record 81 cents |
| Net income increased 12% to a record $30 million |
| Operating income increased 7% to a record $58 million (operating margins expanded 40 basis-points to record level) |
| Operating income in U.S. locations increased 11% (operating margins expanded 50 basis-points) |
| Operating income international locations decreased 4% (operating margins declined 30 basis-points) |
| Operating cash flow increased 8% to a record $131 million |
Sales trends:
| Sales increased 1% to a record $914 million |
| HVAC equipment increased 2% (66% of sales), including 3% growth in the U.S. |
| Other HVAC products declined 1% (29% of sales) |
| Commercial refrigeration products increased 3% (5% of sales) |
Mr. Nahmad added: Watsco delivered record performance during the fourth quarter, reflecting mid-single-digit growth in most markets, offset by unfavorable seasonal conditions in certain regions and a decline in international locations. We are focused on achieving another record year in 2017 while driving the adoption and advancement of our technologies with our customers and within our organization.
It is important to note that the first and fourth quarters of each calendar year are highly seasonal due to the nature and timing of the replacement market for air conditioning systems, which is strongest in the second and third quarters. Accordingly, the Companys fourth quarter financial results are disproportionately affected by this seasonality.
Technology Strategy
Watsco has established itself as the leader in the HVAC distribution industry and produced a 21% compounded annual total-shareholder-return over the last 25 years. A variety of scalable technologies have been launched to transform Watsco into a modern, data-based company to continue its outperformance in the digital era. Watscos goals with these technology programs are to further strengthen its leadership position, accelerate sales and profit growth, increase the speed, convenience and efficiency in serving customers and to extend Watscos reach into new geographies and sales channels.
Since 2012, Watscos technology team has grown from approximately 60 employees to 175 employees. Financial performance in 2016 reflects an increase of $3.3 million in technology-related costs (6 cents diluted per share). The present annual run-rate for technology related costs is approximately $23 million.
Examples of innovations that Watsco has launched to enhance the buying experience for its 88,000 customers and the service capabilities of personnel at its 565 locations include:
| Mobile apps, e-commerce and other on-line tools using the industrys most data-rich catalog of product information. |
| Business intelligence and data analytics to enable more insightful decision-making by more than 600+ P&L managers across the company. |
| Supply chain optimization to improve fill-rates, increase inventory turns and reduce real estate requirements and other operational costs over the long-term. |
| Comprehensive order fulfillment software and implementation of wireless warehouses to improve operational efficiency for 7+ million annual customer transactions. |
A summary of key performance indicators for the companys primary technology platforms is as follows:
E-Commerce / App Usage | Progress in 2016 | |
iOS or Android app users | 220% increase in weekly active users | |
Products (SKUs) mastered | 71% increase to over 500,000 SKUs | |
E-commerce transactions | 127% increase in on-line transactions | |
Line items per order on-line versus in-store | 28% more line items per order |
2
Business Intelligence (BI) Platform | ||
Increase in internal BI users Average number of BI queries per day per user Total user inquiries during the year |
12% increase to over 1,500 users 31% increase in queries per user Over 225,000 queries processed | |
Salesman BI-user performance versus non-user | 7-times better sales performance | |
Store manager BI-user performance versus non-user | 5-times better sales performance | |
Supply Chain / Warehouse Optimization | ||
Total company inventory turns Inventory turns for fully-adopted locations Service levels for fully-adopted locations Number of wireless locations Locations with digitized order fulfillment software Locations with express pickup Reduction of real estate requirements |
32 basis-point improvement in turns 80 basis-point improvement in turns 300 basis-point improvement to 97% 359 locations now functioning 150 locations versus 25 locations last year 68 locations (began in late 2016) 500,000 square foot reduction |
A.J. Nahmad, Watscos President said: We are pleased to have made progress across all of these fronts. Our customers and organization continue to embrace technology though we are still in the early stages. We believe our efforts and innovative culture will ultimately redefine how the HVAC distribution channel will serve customers and transact business.
Cash Flow & Dividends
Operating cash flow for the full year was a record $278 million or $8.52 per diluted share and for the fourth quarter was a record $131 million. Since 2000, Watscos operating cash flow was approximately $1.9 billion compared to net income of approximately $1.8 billion, surpassing the Companys stated goal of generating cash flow in excess of net income.
Watsco has paid dividends for over 40 consecutive years with the philosophy of sharing increasing amounts of cash flow through higher dividends while maintaining a conservative financial position. Dividends paid in 2016 increased 30% to $128 million. Watsco recently raised its annual dividend rate 24% to $4.20 per share. Future increases in dividends, if any, will be considered in light of investment opportunities, cash flow, general economic conditions and the Companys overall financial condition.
Other
2016 full-year results include income tax benefits of $2.9 million or 8 cents per diluted share relating to the Companys early adoption of Accounting Standards Update 2016-09, Improvements to Employee-Share-Based Payment Accounting, issued by the Financial Accounting Standards Board on March 30, 2016.
Conference Call Information
Date & time: February 14, 2017 at 10:00 a.m. (EDT)
Webcast: http://investors.watsco.com
Dial-in number: United States (844) 883-3908 / International (412) 317-9254
A replay of the conference call will be available on the Companys website.
Use of Non-GAAP Financial Information
In this release, the Company discloses non-GAAP measure of operating cash flow per share, which is determined by dividing net cash provided by operating activities as shown in the attached Condensed Consolidated Statements of Cash Flows by the weightedaverage Common and Class B common shares and equivalent shares used to calculated earnings per share as shown in the attached Condensed Consolidated
3
Results of Operations. The Company believes that this information provides a meaningful comparison and important correlation of the Companys financial performance and cash flow generation on a per share basis in order to further assess overall performance. This measure should not be considered an alternative to measurements required by accounting principles generally accepted in the United States (GAAP).
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 and heating systems installed in the United States that have been in service for more than 10 years. Older systems often operate below todays 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.
Watscos traditional sales channel is through one of its 565 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, we believe that significant growth potential remains given that the marketplace for HVAC/R products at the consumer level is estimated to be $88 billion annually. Additional information about Watsco may be found at http://www.watsco.com.
Cautionary Statement Regarding Forward-Looking Statements
This document includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on managements 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 Watscos industry, seasonal nature of sales of Watscos 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, except as required by applicable law. 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.
4
WATSCO, INC.
Condensed Consolidated Results of Operations
(In thousands, except per share data)
(Unaudited)
Quarter Ended December 31, | Year Ended December 31, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Revenues |
$ | 913,611 | $ | 903,816 | $ | 4,220,702 | $ | 4,113,239 | ||||||||
Cost of sales |
685,539 | 681,775 | 3,186,118 | 3,105,882 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
228,072 | 222,041 | 1,034,584 | 1,007,357 | ||||||||||||
Gross profit margin |
25.0 | % | 24.6 | % | 24.5 | % | 24.5 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
SG&A expenses |
169,998 | 167,840 | 688,952 | 670,609 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income |
58,074 | 54,201 | 345,632 | 336,748 | ||||||||||||
Operating margin |
6.4 | % | 6.0 | % | 8.2 | % | 8.2 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Interest expense, net |
677 | 1,021 | 3,713 | 5,547 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
57,397 | 53,180 | 341,919 | 331,201 | ||||||||||||
Income taxes |
17,530 | 16,841 | 105,936 | 104,677 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
39,867 | 36,339 | 235,983 | 226,524 | ||||||||||||
Less: net income attributable to non-controlling interest |
10,314 | 9,849 | 53,173 | 53,595 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income attributable to Watsco |
$ | 29,553 | $ | 26,490 | $ | 182,810 | $ | 172,929 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted earnings per share: |
||||||||||||||||
Net income attributable to Watsco shareholders |
$ | 29,553 | $ | 26,490 | $ | 182,810 | $ | 172,929 | ||||||||
Less: distributed and undistributed earnings allocated to non-vested restricted common stock |
3,050 | 2,107 | 14,801 | 13,626 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings allocated to Watsco shareholders |
$ | 26,503 | $ | 24,383 | $ | 168,009 | $ | 159,303 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted-average Common and Class B common shares and equivalent shares used to calculate diluted earnings per share |
32,662,341 | 32,513,121 | 32,616,504 | 32,480,356 | ||||||||||||
Diluted earnings per share for Common and Class B common stock |
$ | 0.81 | $ | 0.75 | $ | 5.15 | $ | 4.90 | ||||||||
|
|
|
|
|
|
|
|
5
WATSCO, INC.
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
December 31, | December 31, | |||||||
2016 | 2015 | |||||||
Cash and cash equivalents |
$ | 56,010 | $ | 35,229 | ||||
Accounts receivable, net |
475,974 | 451,079 | ||||||
Inventories |
685,011 | 673,967 | ||||||
Other |
23,161 | 20,990 | ||||||
|
|
|
|
|||||
Total current assets |
1,240,156 | 1,181,265 | ||||||
Property and equipment, net |
90,502 | 62,715 | ||||||
Goodwill, intangibles, net and other |
543,991 | 544,462 | ||||||
|
|
|
|
|||||
Total assets |
$ | 1,874,649 | $ | 1,788,442 | ||||
|
|
|
|
|||||
Accounts payable and accrued expenses |
$ | 314,688 | $ | 270,117 | ||||
Current portion of long-term obligations |
200 | 184 | ||||||
|
|
|
|
|||||
Total current liabilities |
314,888 | 270,301 | ||||||
Borrowings under revolving credit agreement |
235,294 | 245,300 | ||||||
Deferred income taxes and other liabilities |
72,719 | 69,120 | ||||||
|
|
|
|
|||||
Total liabilities |
622,901 | 584,721 | ||||||
|
|
|
|
|||||
Watscos shareholders equity |
1,005,828 | 957,310 | ||||||
Non-controlling interest |
245,920 | 246,411 | ||||||
|
|
|
|
|||||
Shareholders equity |
1,251,748 | 1,203,721 | ||||||
|
|
|
|
|||||
Total liabilities and shareholders equity |
$ | 1,874,649 | $ | 1,788,442 | ||||
|
|
|
|
WATSCO, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Year Ended December 31, | ||||||||
2016 | 2015 | |||||||
Cash flow from operating activities: |
||||||||
Net income |
$ | 235,983 | $ | 226,524 | ||||
Non-cash items |
40,751 | 38,142 | ||||||
Changes in working capital |
1,022 | (43,283 | ) | |||||
|
|
|
|
|||||
Net cash provided by operating activities |
277,756 | 221,383 | ||||||
|
|
|
|
|||||
Cash flow from investing activities: |
||||||||
|
|
|
|
|||||
Capital expenditures, net |
(42,833 | ) | (22,938 | ) | ||||
|
|
|
|
|||||
Cash flow from financing activities: |
||||||||
Dividends on Common and Class B Common stock |
(127,604 | ) | (98,532 | ) | ||||
Net repayments under revolving credit agreement |
(10,006 | ) | (56,256 | ) | ||||
Distributions to non-controlling interest |
(38,900 | ) | (39,754 | ) | ||||
Purchase of additional ownership from non-controlling interest |
(42,909 | ) | | |||||
Other |
5,503 | 8,222 | ||||||
|
|
|
|
|||||
Net cash used in financing activities |
(213,916 | ) | (186,320 | ) | ||||
|
|
|
|
|||||
Effect of foreign exchange rate changes on cash and cash equivalents |
(226 | ) | (1,343 | ) | ||||
|
|
|
|
|||||
Net increase in cash and cash equivalents |
20,781 | 10,782 | ||||||
Cash and cash equivalents at beginning of year |
35,229 | 24,447 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of year |
$ | 56,010 | $ | 35,229 | ||||
|
|
|
|
6
Exhibit 99.2
Watsco Raises Ownership Interest in
Joint Venture with Carrier to 80%
MIAMI, FLORIDA (BUSINESS WIRE) February 14, 2017 Watsco, Inc. (NYSE: WSO) announced today that it has increased its ownership interest of Carrier Enterprise Northeast LLC, a joint venture with Carrier, to 80% for approximately $43 million in cash. The incremental investment builds on the November 2016 transaction that had increased Watscos controlling interest from 60% to 70%. Carrier Enterprise Northeast had sales in 2016 of approximately $500 million from 41 locations in the northeastern United States and 12 locations in Mexico.
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 and heating systems installed in the United States that have been in service for more than 10 years. Older systems often operate below todays 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.
Watscos traditional sales channel is through one of its 565 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, we believe that significant growth potential remains given that the marketplace for HVAC/R products at the consumer level is estimated to be $88 billion annually. Additional information about Watsco may be found at http://www.watsco.com.