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
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 Watsco’s 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, Watsco’s 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 Company’s 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. Watsco’s 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 Watsco’s reach into new geographies and sales channels.
Since 2012, Watsco’s 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 industry’s 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 company’s 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 |
|
|
|
Business Intelligence (BI) Platform
|
|
|
Increase in internal BI users |
|
12% increase to over 1,500 users |
Average number of BI queries per day per user |
|
31% increase in queries per user |
Total user inquiries during the year |
|
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 |
|
32 basis-point improvement in turns |
Inventory turns for fully-adopted locations |
|
80 basis-point improvement in turns |
Service levels for fully-adopted locations |
|
300 basis-point improvement to 97% |
Number of wireless locations |
|
359 locations now functioning |
Locations with digitized order fulfillment software |
|
150 locations versus 25 locations last year |
Locations with express pickup |
|
68 locations (began in late 2016) |
Reduction of real estate requirements |
|
500,000 square foot reduction |
|
|
|
A.J. Nahmad, Watsco’s 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, Watsco’s operating cash flow was approximately $1.9 billion compared to net income of
approximately $1.8 billion, surpassing the Company’s 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 Company’s 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 Company’s 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. (EST)
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 Company's 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
“weighted–average Common and Class B common shares and equivalent shares used to calculated earnings per share” as shown in the
attached Condensed Consolidated Results of Operations. The Company believes that this information provides a meaningful comparison
and important correlation of the Company’s 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 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. This is
especially important since heating and cooling accounts for approximately half of the energy consumed in a typical U.S. home.
Watsco’s 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 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, 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.
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
Watsco's 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 |
|
|
|
|
|
|
|
|
|
|
|
Watsco, Inc.
Barry S. Logan, 305-714-4102
Senior Vice President
blogan@watsco.com
View source version on businesswire.com: http://www.businesswire.com/news/home/20170214005490/en/