Strong Sales Growth, Higher Margins and Operating Efficiencies Drive PerformanceCustomer Adoption of Transformative Technologies Grows as Business Evolution ContinuesDividend Raised 13% to $8.80 Effective April 2022
MIAMI, April 21, 2022 (GLOBE NEWSWIRE) -- Watsco, Inc. (NYSE: WSO) reported record operating results for the first quarter ended March 31, 2022.
Q1 Performance Highlights
These results reflect added investments to grow adoption of Watsco’s industry-leading 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. Taken as a whole, we believe that Watsco’s technology offering is solidifying existing customer relationships and creating new customer acquisition opportunities that are producing consistent gains in market share.
Albert H. Nahmad, Watsco’s Chairman and CEO, commented: “Watsco delivered exceptional performance during the first quarter. The Company achieved strong performance across all geographic markets and product categories and reflects a combination of strong unit growth, our ability to capture increased cost of goods through higher selling prices, a richer mix of high-efficiency systems and what, we believe, are technology-driven gains in market share. Our teams and associates are accomplishing extraordinary things and we thank them for their commitment and remarkable efforts to serve customers under what continues to be challenging circumstances. Although it is still early in the year, we are encouraged by current demand trends and expect Watsco to produce another record year.”
Q1 Same-Store Performance
A.J Nahmad, Watsco’s President, commented: “We are particularly pleased with the continued adoption of our technology platforms by more and more customers. These platforms enable contractors to sell more high-efficiency HVAC systems, which benefits the consumer in the form of lower energy costs and benefits our climate in the form of reduced CO2e emissions over time. 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.”
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 replacement demand for 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.
External Factors Influencing ResultsCertain factors continued to influence the HVAC/R industry along with the Company’s operating performance during the first quarter.
Industry Trends and Watsco Initiatives to Drive PerformanceThe Company believes there are important catalysts emerging that will positively influence future replacement demand for HVAC systems above and beyond the traditional assumptions about the replacement cycle and average useful life. These catalysts include:
These catalysts are expected to influence demand and contractor behavior in the years ahead and, as such, Watsco is making investments to capitalize on the opportunities these changes will bring about. We believe Watsco possesses unique advantages given its scale, technology platforms, capacity to invest, and its diverse group of OEM relationships.
Additional information
Technology Updates
Watsco continues to invest in technologies that are transforming the HVAC/R distribution landscape. Specific technology-related highlights for the first quarter of 2022 include:
Climate Change and ESG Focus
Watsco’s business model 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 U.S. household energy consumption. As such, replacing HVAC systems at higher efficiency levels is one of the most meaningful steps homeowners can take to reduce electricity consumption and carbon footprint over time.
The overwhelming majority of new HVAC systems sold by Watsco replace systems that likely operate well below current minimum efficiency standards in the U.S and may use more harmful refrigerants that have been subsequently phased-out. As consumers replace HVAC systems with new, higher-efficiency systems, homeowners will consume less energy, save costs and reduce the carbon footprint over time.
The sale of high-efficiency systems has long been a focus of Watsco and the Company has invested in tools and technology intended to capture an increasingly richer sales mix over time. In addition, regulatory mandates, such as those that will take effect beginning in 2023, periodically increase the required minimum SEER, thus providing a catalyst for greater sales of higher-efficiency systems. Recently enacted regulations will increase the current minimum SEER beginning in 2023 (in general terms, to 14 SEER from 13 SEER in the Northern U.S. and to 15 SEER from 14 SEER for the Southern U.S.).
The Company offers a broad variety of systems that operate well beyond the minimum SEER standards ranging from base-level efficiency to systems that exceed 20 SEER. Watsco’s sales of higher-efficiency residential HVAC systems (those above base-level efficiency) during the first quarter grew 31% versus last year, outpacing the overall growth rate of 26% for U.S. residential HVAC equipment. Based on estimates validated by independent sources, Watsco averted an estimated 11.4 million metric tons of CO2e emissions from January 1, 2020 to March 31, 2022 through the sale of replacement HVAC systems at higher-efficiency standards. More information, including sources and assumptions used to support the Company’s estimates, can be found at www.watsco.com/environment.
A.J. Nahmad added: “We are encouraged by the continued adoption of Watsco’s technology platforms and the ability of that technology to influence the products sold to homeowners. At scale, our technology offering can contribute meaningfully to ongoing efforts to combat climate change. As more homeowners become cognizant of their energy consumption and its impact on climate change, Watsco’s technology provides HVAC/R contractors an edge in the marketplace. We have invested in additional resources and training to help contractors succeed in this evolving marketplace and we are committed to doing even more over time.”
Cash Flow & Dividends
Watsco’s operating cash flow for the quarter was a $102 million use of cash, reflecting working capital investments (accounts receivable and inventory) commensurate with significant growth in sales. From 2016 through 2021, operating cash flow was approximately $2.0 billion versus net income of approximately $1.9 billion, surpassing the Company’s goal of generating cash flow in excess of net income.
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 invest in additional organic and inorganic opportunities.
In April 2022, Watsco’s annual dividend was increased 13% to $8.80 per share, which will be reflected in its next scheduled quarterly payment date on April 29, 2022. Future dividend increases will be considered in light of investment opportunities, cash flow, general economic conditions and the Company’s financial condition.
First Quarter Earnings Conference Call Information
Date: April 21, 2022Time: 10:00 a.m. (ET)Webcast: http://investors.watsco.comDial-in number: United States (844) 883-3908 / International (412) 317-9254
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 U.S. GAAP.
About Watsco
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-K. Forward-looking statements speak only as of the date the statements were 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.
WATSCO, INC.Condensed Consolidated Results of Operations(In thousands, except share and per share data)(Unaudited)
Quarter Ended March 31, | |||||||
2022 | 2021 | ||||||
Revenues | $1,523,570 | $1,136,118 | |||||
Cost of sales | 1,073,212 | 841,297 | |||||
Gross profit | 450,358 | 294,821 | |||||
Gross profit margin | 29.6% | 25.9% | |||||
SG&A expenses | 283,354 | 217,612 | |||||
Other income | 4,045 | 4,671 | |||||
Operating income | 171,049 | 81,880 | |||||
Operating margin | 11.2% | 7.2% | |||||
Interest expense, net | 558 | 88 | |||||
Income before income taxes | 170,491 | 81,792 | |||||
Income taxes | 35,601 | 15,665 | |||||
Net income | 134,890 | 66,127 | |||||
Less: net income attributable to non-controlling interest | 21,592 | 11,035 | |||||
Net income attributable to Watsco | $113,298 | $55,092 | |||||
Diluted earnings per share: | |||||||
Net income attributable to Watsco shareholders | $113,298 | $55,092 | |||||
Less: distributed and undistributed earnings allocated to non-vested restricted common stock | 10,297 | 6,054(1) | |||||
Earnings allocated to Watsco shareholders | $103,001 | $49,038 | |||||
Weighted-average Common and Class B common shares and equivalent shares used to calculate diluted earnings per share | 35,504,380 | 35,329,833 | |||||
Diluted earnings per share for Common and Class B common stock | $2.90 | $1.39(1) |
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(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 $1.2 million in the first quarter of 2021 (3 cents per share). The Company expects this dilutive impact to be seasonal during the first and fourth quarters of each year due to EPS in such periods generally being less than the quarterly dividend rate. |
WATSCO, INC.Condensed Consolidated Balance Sheets(Unaudited, in thousands)
March 31, | December 31, | ||||||
2022 | 2021 | ||||||
Cash and cash equivalents | $ | 110,607 | $ | 118,268 | |||
Accounts receivable, net | 790,013 | 698,456 | |||||
Inventories, net | 1,390,298 | 1,115,469 | |||||
Other | 29,210 | 29,207 | |||||
Total current assets | 2,320,128 | 1,961,400 | |||||
Property and equipment, net | 115,385 | 111,019 | |||||
Operating lease right-of-use assets | 288,660 | 268,528 | |||||
Goodwill, intangibles, net and other | 749,716 | 744,914 | |||||
Total assets | $ | 3,473,889 | $ | 3,085,861 | |||
Accounts payable and accrued expenses | $ | 750,027 | $ | 642,221 | |||
Current portion of long-term obligations | 86,812 | 84,501 | |||||
Total current liabilities | 836,839 | 726,722 | |||||
Borrowings under revolving credit agreement | 262,500 | 89,000 | |||||
Operating lease liabilities, net of current portion | 205,163 | 187,024 | |||||
Deferred income taxes and other liabilities | 88,672 | 85,700 | |||||
Total liabilities | 1,393,174 | 1,088,446 | |||||
Watsco's shareholders’ equity | 1,725,210 | 1,664,948 | |||||
Non-controlling interest | 355,505 | 332,467 | |||||
Shareholders’ equity | 2,080,715 | 1,997,415 | |||||
Total liabilities and shareholders’ equity | $ | 3,473,889 | $ | 3,085,861 |
WATSCO, INC.Condensed Consolidated Statements of Cash Flows(Unaudited, in thousands)
Quarter Ended March 31, | |||||||
2022 | 2021 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 134,890 | $ | 66,127 | |||
Non-cash items | 20,737 | 14,708 | |||||
Changes in working capital, net of effects of acquisition | |||||||
Accounts receivable | (91,775) | (61,072) | |||||
Inventories, net | (273,703) | (204,593) | |||||
Accounts payable and other liabilities | 107,755 | 149,914 | |||||
Other, net | 474 | (2,829) | |||||
Net cash used in operating activities | (101,622) | (37,745) | |||||
Cash flows from investing activities: | |||||||
Capital expenditures, net | (8,171) | (4,772) | |||||
Proceeds from sale of equity securities | - | 5,993 | |||||
Other | (47) | - | |||||
Net cash (used in) provided by investing activities | (8,218) | 1,221 | |||||
Cash flows from financing activities: | |||||||
Dividends on Common and Class B Common stock | (75,795) | (68,521) | |||||
Net proceeds under revolving credit agreement | 173,500 | 48,900 | |||||
Other | 3,707 | 3,371 | |||||
Net cash provided by (used in) financing activities | 101,412 | (16,250) | |||||
Effect of foreign exchange rate changes | 767 | 582 | |||||
Net decrease in cash and cash equivalents | (7,661) | (52,192) | |||||
Cash and cash equivalents at beginning of period | 118,268 | 146,067 | |||||
Cash and cash equivalents at end of period | $ | 110,607 | $ | 93,875 |
Barry S. Logan Executive Vice President (305) 714-4102 e-mail: blogan@watsco.com
Source: Watsco, Inc.