Exhibit 99.1

Watsco Reports Strong Second Quarter Results and Record Cash Flow

 

 

Steady Recovery in Market Conditions Leads to Record June Results;

Technology Adoption Accelerates and Provides Competitive Advantage;

Balance Sheet Well-Positioned for Investments in Growth and Expansion

MIAMI, FLORIDA – (GLOBENEWSWIRE), July 23, 2020 – Watsco, Inc. (NYSE: WSO) reported second quarter results and provided an update regarding its technology initiatives designed to transform its customer-experience.

Technology Innovation Transforming Customer Experience

Watsco continues to lead and innovate through the introduction of new customer-focused technology designed to transform its customer experience and reshape how our industry operates. In light of the challenges posed by the COVID-19 pandemic, Watsco’s innovations have become ever more critical in the daily life of an HVAC/R contractor. As a result, the Company believes it is uniquely positioned to separate itself from its competition with many of these innovations setting the standard for serving HVAC/R contractors.

New innovations added in 2020 include:

 

   

Dockside/curbside pickup to facilitate contactless order fulfillment

 

   

Digital customer outreach and training and rapid customer onboarding process for e-commerce

 

   

Aggressive promotion of OnCall Air®, a proprietary digital sales platform that enables contractors to remotely generate proposals for homeowners

 

   

Expanded consumer financing through CreditForComfort®

Customer use of Watsco’s innovative mobile apps expanded with average weekly users growing 34% compared to a year ago to over 22,000. E-commerce sales continued to grow at a faster pace than overall growth. The current annual run-rate for e-commerce sales is approximately $1.5 billion and, as a percentage of sales was 33% at June 30, 2020 versus 29% at December 31, 2019.

OnCall Air®, Watsco’s digital sales platform for HVAC/R contractors, and CreditForComfort®, its companion financing platform, have also gained traction. During the second quarter, OnCall Air® presented quotes to more than 36,000 households and generated $107 million in gross merchandise value for our customers, a 66% increase over last year. CreditForComfort® processed nearly 2,000 retail financing transactions, a 170% increase over last year.

These capabilities provide for a differentiated customer experience that make it possible for HVAC/R contractors to engage digitally with Watsco at every stage in their daily routine. Taken as a whole, Watsco’s technology offering is unique to the industry and enabled our entrepreneurial leaders to serve customers effectively and with minimal disruption in the current COVID-19 operating environment.

AJ Nahmad, Watsco’s President, commented: “We are encouraged by the accelerated adoption of our technology and the new innovations recently launched. More customers are using our tools as the backbone of their business, allowing them to operate safely and more efficiently as well as providing modern-day tools to interact with homeowners and other end-users. We are energized and committed to doing more to help our customers grow and thrive in this environment.”

Financial Strength & Liquidity

Watsco further strengthened its strong balance sheet during the second quarter, generating the highest level of cash flow for any quarter in its history. At June 30, 2020, the Company had $80 million in cash, $33 million in borrowings drawn from its $560 million credit facility and $1.7 billion of shareholders’ equity. Over the 12 months ended June 30, 2020, Watsco produced $529 million of operating cash flow versus net income of $285 million, repaid

 

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$186 million in debt and increased dividends 11% to an annual rate of $7.10 per share. The Company believes its conservative financial position and access to low-cost capital provide confidence to customers, employees and OEM partners. The strong balance sheet also affords Watsco the capacity to invest in almost any size opportunity.

Second Quarter Results

Key performance metrics:

 

   

Earnings per share of $2.26 on net income attributable to Watsco of $87 million

 

   

Sales of $1.36 billion compared to $1.37 billion last year

 

   

Gross profit of $319 million (gross margins declined 30 basis-points)

 

   

Operating profit of $129 million with operating margins of 9.5%

 

   

Selling, general and administrative (SG&A) expenses declined 1% (includes 26 acquired locations)

 

   

On a same-store basis:

 

   

Sales decreased 6%

 

   

Operating profit decreased 7%

 

   

Operating margins were 9.7% versus 9.8% last year

 

   

SG&A declined 7% (a 20 basis-point improvement as a percentage of sales)

 

   

Record operating cash flow of $219 million versus $16 million last year

 

   

85% reduction in borrowings year-over-year to $33 million

Sales trends (excluding acquisitions):

 

   

4% decrease in HVAC equipment (70% of sales), including flat sales in residential products

 

   

9% decrease in other HVAC products (27% of sales)

 

   

15% decrease in commercial refrigeration products (3% of sales)

Albert H. Nahmad, Chairman and CEO, commented: “Watsco’s entrepreneurial culture and decentralized operating philosophy, which empowers leaders to think and act locally, are critically important given the diverse business conditions in our various markets. In a short period of time, our leaders deployed more technology and implemented new ideas to enhance the customer experience in a challenging environment. During the quarter, our residential HVAC equipment business recovered steadily and drove record, double-digit sales and profit growth rates in June 2020 versus 2019 with on-going momentum into July. We will continue to innovate, drive performance and look for opportunities to grow our business.”

First-Half 2020 Results

Key performance metrics:

 

   

Earnings per share of $3.02 on net income attributable to Watsco of $117 million

 

   

3% increase in sales to a record $2.36 billion (3% decrease on a same-store basis)

 

   

Record gross profit of $567 million (gross margins declined 40 basis-points)

 

   

Operating profit of $174 million with operating margins of 7.4%

 

   

SG&A expenses increased 6% including 26 acquired locations (a 2% same-store decrease)

 

   

Record operating cash flow of $261 million versus $68 million last year

Sales trends (excluding acquisitions):

 

   

2% decrease in HVAC equipment (69% of sales), including a 1% increase in residential products

 

   

4% decrease in other HVAC products (28% of sales)

 

   

8% decrease in commercial refrigeration products (3% of sales)

 

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Cash Flow, Liquidity & Dividends

Operating cash flow was a record $261 million for the first half of 2020 versus $68 million for the same period last year. The Company recently upgraded its demand planning software and introduced new process improvements to enhance inventory turns, product availability and overall asset quality. Over the long-term, the Company believes these innovations will result in meaningful working capital improvement and operating efficiencies.

The Company believes cash flow from operations will exceed net income in 2020. Since 2000, Watsco’s cumulative operating cash flow was approximately $3.0 billion compared to cumulative net income of approximately $2.7 billion, surpassing the Company’s goal of generating cash flow in excess of net income.

In April 2020, the Company expanded its revolving credit facility from $500 million to $560 million with no change to pricing or terms. The revolving credit facility matures in December 2023. At June 30, 2020, the Company’s debt-to-total capital ratio was 2%.

Watsco has paid cash dividends for 46 consecutive years. Effective April 2020, the Company increased its annual dividend rate by 11% to $7.10 per share. The Company’s philosophy is to share increasing amounts of cash flow with shareholders through higher dividends while maintaining a conservative financial position. Future dividends will be considered in light of investment opportunities, cash flow, general economic conditions and the Company’s financial position.

Second Quarter Earnings Conference Call Information

Date: July 23, 2020

Time: 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 Company’s website.

Use of Non-GAAP Financial Information

In this release, the Company discloses non-GAAP measures referring to “same-store basis,” which excludes 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 also includes a non-GAAP measure, “debt-to-total capitalization”, as a means to describe the relative amount of interest-bearing debt to total capital at June 30, 2020. This ratio is calculated by dividing (i) the sum of all interest bearing bank debt by (ii) the sum of all interest-bearing bank debt and shareholders’ equity. 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 more than 300,000 contractors and technicians visit or call one of its 603 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. 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 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

 

3


“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, seasonal nature of sales of Watsco’s products, 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.

 

4


WATSCO, INC.

Condensed Consolidated Results of Operations

(In thousands, except share and per share data)

(Unaudited)

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     2020     2019     2020     2019  

Revenues

   $ 1,355,385     $ 1,371,854     $ 2,363,541     $ 2,303,132  

Cost of sales

     1,036,186       1,043,870       1,796,727       1,741,388  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     319,199       327,984       566,814       561,744  

Gross profit margin

     23.6     23.9     24.0     24.4
  

 

 

   

 

 

   

 

 

   

 

 

 

SG&A expenses

     194,053       196,549       397,439       376,621  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income

     4,103       2,965       5,117       4,409  

Operating income

     129,249       134,400       174,492       189,532  

Operating margin

     9.5     9.8     7.4     8.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense, net

     283       1,212       1,073       1,988  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     128,966       133,188       173,419       187,544  

Income taxes

     24,724       25,278       32,930       35,830  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     104,242       107,910       140,489       151,714  

Less: net income attributable to non-controlling interest

     17,664       17,755       23,409       26,522  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Watsco

   $ 86,578     $ 90,155     $ 117,080     $ 125,192  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share:

        

Net income attributable to Watsco shareholders

   $ 86,578     $ 90,155     $ 117,080     $ 125,192  

Less: distributed and undistributed earnings allocated to non-vested restricted common stock

     7,439       7,511       11,082       10,354  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings allocated to Watsco shareholders

   $ 79,139     $ 82,644     $ 105,998     $ 114,838  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average Common and Class B common shares and equivalent shares used to calculate diluted earnings per share

     35,064,711       34,462,960       35,044,350       34,432,948  

Diluted earnings per share for Common and Class B common stock

   $ 2.26     $ 2.40     $ 3.02     $ 3.34  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

5


WATSCO, INC.

Condensed Consolidated Balance Sheets

(Unaudited, in thousands)

 

     June 30,      December 31,  
     2020      2019  

Cash and cash equivalents

   $ 79,573      $ 74,454  

Accounts receivable, net

     676,569        533,810  

Inventories

     854,368        920,786  

Other

     20,959        17,680  
  

 

 

    

 

 

 

Total current assets

     1,631,469        1,546,730  

Property and equipment, net

     97,143        98,523  

Operating lease right-of-use assets

     226,544        223,369  

Goodwill, intangibles, net and other

     681,571        687,539  
  

 

 

    

 

 

 

Total assets

   $ 2,636,727      $ 2,556,161  
  

 

 

    

 

 

 

Accounts payable and accrued expenses

   $ 569,035      $ 392,296  

Current portion of lease liabilities

     69,823        69,421  
  

 

 

    

 

 

 

Total current liabilities

     638,858        461,717  

Borrowings under revolving credit agreement

     33,357        155,700  

Operating lease liabilities, net of current portion

     157,214        154,271  

Deferred income taxes and other liabilities

     71,216        69,706  
  

 

 

    

 

 

 

Total liabilities

     900,645        841,394  
  

 

 

    

 

 

 

Watsco’s shareholders’ equity

     1,437,039        1,435,427  

Non-controlling interest

     299,043        279,340  
  

 

 

    

 

 

 

Shareholders’ equity

     1,736,082        1,714,767  
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 2,636,727      $ 2,556,161  
  

 

 

    

 

 

 

 

6


WATSCO, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

     Six Months Ended June 30,  
     2020     2019  

Cash flows from operating activities:

    

Net income

   $ 140,489     $ 151,714  

Non-cash items

     26,072       22,221  

Changes in working capital, net of acquisition

    

Accounts receivable

     (146,512     (146,441

Inventories

     63,432       (117,591

Accounts payable and other liabilities

     182,957       161,685  

Other, net

     (5,183     (3,141
  

 

 

   

 

 

 

Net cash provided by operating activities

     261,255       68,447  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures, net

     (7,982     (9,105

Business acquisition, net of cash acquired

     —         (16,761

Investment in unconsolidated entity

     —         (4,940
  

 

 

   

 

 

 

Net cash used in investing activities

     (7,982     (30,806
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Dividends on Common and Class B common stock

     (129,315     (120,178

Net (repayments) proceeds under revolving credit agreement

     (122,343     84,400  

Purchase of additional ownership from NCI

     —         (32,400

Other

     4,359       2,851  
  

 

 

   

 

 

 

Net cash used in financing activities

     (247,299     (65,327
  

 

 

   

 

 

 

Effect of foreign exchange rate changes on cash and cash equivalents

     (855     707  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     5,119       (26,979

Cash and cash equivalents at beginning of period

     74,454       82,894  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 79,573     $ 55,915  
  

 

 

   

 

 

 

 

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