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Watsco Sets New Records for Earnings and Earnings Per Share on Record Sales During Third Quarter

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Watsco, Inc. (NYSE:WSO) today reported record results for the third quarter and for the nine months ended September 30, 2014.

Third Quarter Results

Key performance metrics:

  • Revenues increased 5% to a record $1.135 billion
  • Gross profit margin increased 30 basis-points
  • SG&A decreased 20 basis-points as a percentage of sales to a record low
  • Operating profit increased 10% to a record $105 million
  • Operating margins expanded 50 basis-points to 9.3%
  • Earnings per diluted share increased 18% to a record $1.56

Revenue trends:

  • HVAC equipment (65% of sales) increased 7%
  • U.S. residential equipment increased 8% with gains in market share
  • Double-digit growth in high-efficiency residential systems
  • Other HVAC products (30% of sales) were flat
  • Commercial refrigeration products (5% of sales) increased 14%

Albert Nahmad, Watsco’s President & Chief Executive Officer stated: “Watsco delivered another record quarter through share gains in the United States and Canada, a stronger sales mix of high-efficiency HVAC equipment, higher gross profit margins and improved operating efficiencies.”

Nine-Month Results

Key performance metrics:

  • Revenues increased 5% to a record $3.068 billion
  • Gross profit margin increased 20 basis-points
  • SG&A decreased 20 basis-points as a percentage of sales to a record low
  • Operating profit increased 10% to a record $254 million
  • Operating margins expanded 40 basis-points to 8.3%, matching the record
  • Earnings per diluted share increased 14% to a record $3.64

Revenue trends:

  • HVAC equipment (64% of sales) increased 7%
  • U.S. residential equipment increased 9% with gains in market share
  • Other HVAC products (31% of sales) increased 2%
  • Commercial refrigeration products (5% of sales) increased 7%

These results reflect investments in additional locations, more than 200 new employees and technology initiatives to generate long-term growth and market share. New locations bring density and convenience to contractor customers. New employees, including more outside salespeople, counter-sales personnel, commercial HVAC experts and product line champions, intensify sales and customer-service efforts. Investments in technology, both in talent and capital spending, provide pioneering capabilities to sell products and serve customers as well as greater insight into the business.

Results also reflect a 10% greater ownership interest in Carrier Enterprise LLC, a U.S. joint venture formed with Carrier in 2009. Effective July 1, 2014, the Company increased its ownership interest in Carrier Enterprise LLC to 80% for cash consideration of $88 million.

Dividends

Watsco has paid dividends to shareholders for 40 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. The present quarterly dividend rate is 60 cents per share, an increase of 50% versus a year ago. For the nine-months ended September 30, 2014, dividend payments increased 88% to $49 million.

Outlook for 2014

Watsco’s outlook for full-year 2014 diluted earnings per share is within the range of $4.20 to $4.40 per diluted share, representing a prospective annual growth rate of earnings per share of 14% to 20%.

Conference Call Information

Date: October 23, 2014

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

Webcast: http://investors.watsco.com

Dial-in number: United States (866) 652-5200 / International (412) 317-6060

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

About Watsco

Watsco improves indoor living and working environments with air conditioning and heating solutions that provide comfort regardless of the outdoor climate. Our solutions also promote healthier indoor spaces by removing pollutants from the indoor air that can lead to asthma, allergies and reductions in productivity. Furthermore, since heating and cooling accounts for approximately half of the energy consumed in a typical United States home, we offer consumers the greatest opportunity to save money on energy by replacing existing air conditioning and heating systems with more energy efficient and environmentally friendly solutions.

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 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 our competitors as the movement toward reducing energy consumption and its environmental impact continues. We operate from more than 570 locations in the United States, Canada, Mexico and Puerto Rico, with additional market coverage on an export basis to Latin America and the Caribbean. As the industry leader, significant growth potential remains given that the estimated marketplace in the Americas for HVAC/R products is $35 billion. 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. 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.

WATSCO, INC.

Condensed Consolidated Results of Operations

(In thousands, except per share data)

(Unaudited)

Quarter Ended September 30, Nine Months Ended September 30,
2014 2013 2014 2013
Revenues $1,134,999 $1,081,893 $3,067,753 $2,915,978
Cost of sales 860,234 823,296 2,325,646 2,215,255
Gross profit 274,765 258,597 742,107 700,723
Gross profit margin 24.2 % 23.9 % 24.2 % 24.0 %
SG&A expenses 169,527 163,142 488,336 469,629
Operating income 105,238 95,455 253,771 231,094
Operating margin 9.3 % 8.8 % 8.3 % 7.9 %
Interest expense, net 1,534 1,781 3,790 4,651
Income before income taxes 103,704 93,674 249,981 226,443
Income taxes 32,573 27,556 76,062 66,654
Net income 71,131 66,118 173,919 159,789
Less: net income attributable to noncontrolling interest 16,670 20,419 46,604 49,387
Net income attributable to Watsco, Inc. $54,461 $45,699 $127,315 $110,402
Diluted earnings per share:
Net income attributable to Watsco, Inc. shareholders $54,461 $45,699 $127,315 $110,402
Less: earnings allocated to non-vested (restricted) common stock 4,103 3,246 9,635 7,801

Earnings allocated to all other Watsco, Inc. shareholders

$50,358 $42,453 $117,680 $102,601
Weighted-average Common and Class B common shares and equivalent shares used to calculate diluted earnings per share 32,375,939 32,276,113 32,345,068 32,246,366
Diluted earnings per share for Common and Class B common stock $1.56 $1.32 $3.64 $3.18

WATSCO, INC.

Condensed Consolidated Balance Sheets

(Unaudited, in thousands)

September 30, December 31,
2014 2013
Cash and cash equivalents $16,691 $19,478
Accounts receivable, net 502,522 399,565
Inventories 729,865 583,154
Other 22,258 18,905
Total current assets 1,271,336 1,021,102
Property and equipment, net 45,355 45,418
Goodwill, intangibles, net and other 588,297 603,011
Total assets $1,904,988 $1,669,531
Accounts payable and accrued expenses $340,584 $243,399
Current portion of long-term obligations 167 107
Total current liabilities 340,751 243,506
Borrowings under revolving credit agreement 352,003 230,044
Deferred income taxes and other liabilities 72,673 68,589
Total liabilities 765,427 542,139
Watsco’s shareholders’ equity 881,443 840,396
Noncontrolling interest 258,118 286,996
Shareholders’ equity 1,139,561 1,127,392
Total liabilities and shareholders’ equity $1,904,988 $1,669,531

WATSCO, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

Nine Months Ended September 30,
2014 2013
Cash flow from operating activities:
Net income $173,919 $159,789
Non-cash items 27,596 24,804
Changes in working capital (159,796 ) (133,410 )
Net cash provided by operating activities 41,719 51,183
Cash flow from investing activities:
Capital expenditures, net (8,902 ) (10,693 )
Cash flow from financing activities:
Purchase of additional ownership from noncontrolling interest (87,735 )
Dividends on Common and Class B Common stock (48,884 ) (25,958 )
Distributions to noncontrolling interest (25,817 ) (31,487 )
Other 4,075 2,760
Net proceeds under revolving credit agreement 122,943 (30,010 )
Net cash used in financing activities (35,418 ) (84,695 )
Effect of foreign exchange rate changes on cash and cash equivalents (186 ) (336 )
Net decrease in cash and cash equivalents (2,787 ) (44,541 )
Cash and cash equivalents at beginning of period 19,478 73,770
Cash and cash equivalents at end of period $16,691 $29,229

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