Record Annual Cash Flow; Dividend Raised 16% to $5.80 Per Share
Adoption of Customer-Centric Technology Grows as Business Transformation Continues
MIAMI, Feb. 08, 2018 (GLOBE NEWSWIRE) -- Watsco, Inc. (NYSE:WSO) reported record operating results for the fourth quarter and year ended December 31, 2017.
The record operating results reflect continued investment in technologies designed to revolutionize Watsco’s customer-experience, making it easier to do business and helping customers grow their businesses more profitably. Most notably, the digitization of Watsco’s marketplace via e-commerce through iOS/Android-enabled apps and websites with the industry’s most in-depth database of product information made significant progress in 2017. Customer adoption increased enabling more contractors to interact with us 24 hours a day to find products, place orders and obtain technical support. Employees are also empowered with better data, processes and capabilities to serve their customers’ needs.
In addition to record operating performance, Watsco generated record operating cash flow of $302 million in 2017 on net income of $257 million. Watsco also raised $248 million during 2017 from the sale of shares of its common stock under its previously announced “at-the-market” (ATM) stock offering program, sharply reducing debt and positioning the Company to capitalize on long-term growth opportunities.
Watsco also announced today that its Board of Directors approved a 16% increase in its annual dividend to $5.80 per share for each outstanding share of its Common and Class B common stock. The increase will be reflected in the Company’s next regular dividend payment beginning in April 2018.
Fourth Quarter Results
Key performance metrics:
- 47% increase in earnings per share to a record $1.19 (includes 29 cent benefit from tax reform)
- 46% increase in net income to a record $43 million (includes $10 million benefit from tax reform)
- 6% increase in operating income to $61 million (6.4% operating margin)
- Operating cash flow of $117 million
- $243 million of proceeds from ATM share offering
- 91% reduction in debt to $22 million at December 31, 2017
- 6% increase in sales to $964 million
- 7% increase in HVAC equipment (67% of sales)
- 4% increase in other HVAC products (29% of sales)
- 4% decrease in commercial refrigeration products (4% of sales)
Albert Nahmad, Watsco’s Chairman and Chief Executive Officer stated: “Watsco delivered another record quarter with a resumption of strong sales growth rates for residential and commercial HVAC systems from increasing unit demand and an improved mix of higher-efficiency systems. Results also reflect further investments in technology and 150 new customer-facing employees during the course of the year to drive sales growth and market share.”
Mr. Nahmad added: “We are pleased to reward shareholders by raising our annual dividend to $5.80 per share, reflecting our continued confidence to generate strong cash flow while investing in our business. We believe the sale of Watsco shares under the ATM program is both innovative and important as it positions the Company for almost any size investment over the long-term and is consistent with our conservative mindset about debt.”
It is important to note that the fourth quarter of each calendar year is highly seasonal due to the nature and timing of the replacement of HVAC systems, which is strongest in the second and third quarters. Accordingly, the Company’s fourth quarter financial results are disproportionately affected by seasonality.
Full Year Results
Key performance metrics:
- 13% increase in earnings per share to a record $5.81 (includes 27 cent benefit from tax reform)
- 14% increase in net income to a record $208 million (includes $10 million benefit from tax reform)
- 2% increase in operating income to a record $354 million (8.2% operating margin)
- 9% increase in operating cash flow to a record $302 million
- 3% increase in sales to a record $4.34 billion
- 4% increase in HVAC equipment (67% of sales)
- 1% increase in other HVAC products (28% of sales)
- Flat sales for commercial refrigeration products (5% of sales)
Cash Flow & Dividends
Operating cash flow for the full year increased 9% to a record $302 million. Since 2000, Watsco’s cash flow was approximately $2.2 billion compared to net income of approximately $2.0 billion, surpassing the Company’s stated goal of generating cash flow in excess of net income.
Dividends paid in 2017 increased 29% to $164 million. On February 6, 2018, Watsco’s Board of Directors approved a 16% increase in its annual dividend to $5.80 per share on each outstanding share of its Common and Class B common stock. The increase will be reflected in the Company’s dividend payment on April 30, 2018.
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. 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.
Watsco raised $248 million in 2017 from the sale of 1.5 million shares of Common stock under its ATM program. The cash proceeds were used to reduce long-term debt. As of December 31, 2017, the Company’s debt-to-total capitalization was 1%.
Watsco has launched a variety of technologies and process enhancements to transform how HVAC contractor customers are served in the marketplace. Watsco believes that speed, productivity and efficiency will be ever more critical as the digital era progresses and is investing to ensure an unparalleled customer-experience. Since 2012, Watsco’s technology team has grown from approximately 60 employees to 180 employees and the present annual run-rate for technology-related spending is approximately $23 million.
Watsco estimates that over 250,000 contractors and technicians visit or call one of its 560 locations each year to get information and buy products, resulting in over 7 million sale transactions. Innovations to enhance the customer-experience include:
- Mobile apps, websites and e-commerce platforms that employ the industry’s leading, data-rich repository of product information.
- Business intelligence and data analytics expertise to enable insightful assistance and decision-making by 600+ managers.
- Proprietary order fulfillment software to improve speed, accuracy and convenience of the pick, pack and ship process.
- Predictive analytics-driven demand planning and inventory optimization software to improve order fill-rates, increase inventory turns, reduce real estate requirements and improve long-term productivity.
Key performance indicators relative to these technology platforms include:
|E-Commerce and App Usage||Progress in 2017|
|E-commerce sales||50% growth in online sales to over $900 million|
|E-commerce transactions||57% increase in transactions|
|E-commerce run-rate at end of year||25% of sales versus 15% at the end of 2016|
|Unique iOS or Android app users||34% increase in users|
|Products (SKUs) digitized and available on-line||30% increase to over 650,000 SKUs|
|Line items per order on-line versus in-store||33% more line items per order|
|Sales attrition rate for users versus non-users||Attrition rate is 2.5X less for active users|
|Business Intelligence (BI) Platform|
|Increase in internal BI users||11% increase to over 1,500 weekly-users|
|Average number of BI queries per week per user||30% increase in queries|
|Number of total user inquiries during the year||46% increase to 17.9 million queries|
|Number of wireless locations||461 locations Wi-Fi enabled versus 359 last year|
|Locations with Order Fulfillment (OF) software||329 locations versus 150 locations last year|
|Number of orders filled with OF||2.1 million versus 750,000 last year|
|Delivery truck miles tracked and analyzed||4.2 million miles versus 880,000 miles last year|
|Locations with express pickup||134 locations versus 68 locations last year|
|Supply Chain Optimization|
|Inventory turns for fully-adopted locations||80 basis-point improvement over last 2 years|
|Fill-rates for fully-adopted locations||Fill-rates of 97% (up 300 basis-points from inception)|
|Reduction of real estate requirements||487,000 square feet (1 million square feet over 2 years)|
A.J. Nahmad, Watsco’s President said, “We are proud of the progress we’ve made in regard to digitizing our business, but we’ve merely scratched the surface of what is possible in terms of value creation and realization. When our customers win, we win. To that end, our culture is one of continuous improvement, which will consistently enhance our customers’ businesses.”
Tax Cuts and Jobs Act of 2017
Income tax expense in 2017 reflects net tax benefits of $10 million from a reduction in deferred income tax liabilities partially offset by taxes related to undistributed earnings of our international operations and other changes. The impacts from tax reform in 2018 are being evaluated and we currently estimate our 2018 effective income tax rate (net of taxes attributable to non-controlling interest) will be in the range of 21% to 22%.
Watsco will host an investor and analyst meeting on Friday, March 16, 2018 in Miami, Florida from 10:00 a.m. to 1:00 p.m. by invitation only. Leadership will provide a strategic overview of the Company, including an update of the various technology initiatives currently underway. A webcast will be provided on the Company’s website at http://investors.watsco.com.
Conference Call Information
Date: February 8, 2018
Time: 10:00 a.m. (ET)
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.
Watsco provides comfort to homes and businesses regardless of the outdoor climate. There are approximately 92 million central air conditioning and heating systems installed in the United States that have been in service 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 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.
Watsco’s traditional sales channel is the industry’s largest and currently serves 88,000 contractor businesses through 560 locations in the United States, Canada, Mexico and Puerto Rico, and on an export basis to Latin America and the Caribbean. Watsco is a technology company, operating scalable platforms for mobile apps, e-commerce, business intelligence and supply chain. Strategic goals are to accelerate sales and profit growth, increase the speed and convenience of serving customers and to extend its reach into new geographies and sales channels. Watsco is also developing technologies to address the evolving buying habits of consumers in the digital economy. Over the long-term, Watsco believes its focus, scale and innovative culture offer significant advantages to address the consumer market, which is estimated to be $88 billion annually. 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. Forward-looking statements may be identified by the use of words such as “will,” “would,” “anticipate,” “expect,” “believe,” “plan,” “optimistic,” “goal” 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, 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.
Condensed Consolidated Results of Operations
(In thousands, except per share data)
|Quarter Ended December 31,||Year Ended December 31,|
|Cost of sales||723,415||685,539||3,276,296||3,186,118|
|Gross profit margin||25.0||%||25.0||%||24.5||%||24.5||%|
|Interest expense, net||1,344||677||6,363||3,713|
|Income before income taxes||60,022||57,397||347,511||341,919|
|Less: net income attributable to|
|Net income attributable to|
|Diluted earnings per share:|
|Net income attributable to|
|Less: distributed and|
undistributed earnings allocated
to non-vested restricted common
|Earnings allocated to Watsco|
|Weighted-average Common and|
Class B common shares and
equivalent shares used to
calculate diluted earnings per
|Diluted earnings per share for|
Common and Class B common
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
|December 31,||December 31,|
|Cash and cash equivalents||$||80,496||$||56,010|
|Accounts receivable, net||478,133||475,974|
|Total current assets||1,337,397||1,240,156|
|Property and equipment, net||91,198||90,502|
|Goodwill, intangibles, net and other||618,282||543,991|
|Accounts payable and accrued expenses||$||416,233||$||314,688|
|Current portion of long-term obligations||244||200|
|Total current liabilities||416,477||314,888|
|Borrowings under revolving credit agreement||21,800||235,294|
|Deferred income taxes and other liabilities||57,623||72,719|
|Watsco's shareholders’ equity||1,297,953||1,005,828|
|Total liabilities and shareholders’ equity||$||2,046,877||$||1,874,649|
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
|Year Ended December 31,|
|Cash flow from operating activities:|
|Changes in working capital||19,317||1,022|
|Net cash provided by operating activities||301,846||277,756|
|Cash flow from investing activities:|
|Investment in unconsolidated entity||(63,600||)||-|
|Capital expenditures, net||(17,708||)||(42,833||)|
|Net cash used in investing activities||(81,308||)||(42,833||)|
|Cash flow from financing activities:|
|Net repayments under revolving credit agreement||(213,494||)||(10,006||)|
|Dividends on Common and Class B Common stock||(164,147||)||(127,604||)|
|Distributions to non-controlling interest||(42,831||)||(38,900||)|
|Purchase of additional ownership from non-controlling interest||(42,688||)||(42,909||)|
|Proceeds from non-controlling interest for investment in unconsolidated entity||12,720||-|
|Net proceeds from sale of Common stock||247,744||-|
|Net cash used in financing activities||(197,471||)||(213,916||)|
|Effect of foreign exchange rate changes on cash and cash equivalents||1,419||(226||)|
|Net increase in cash and cash equivalents||24,486||20,781|
|Cash and cash equivalents at beginning of period||56,010||35,229|
|Cash and cash equivalents at end of period||$||80,496||$||56,010|
|Barry S. Logan||Watsco, Inc.|
|Senior Vice President||2665 S. Bayshore Drive, Suite 901|
|(305) 714-4102||Miami, Florida 33133, USA|
|e-mail: firstname.lastname@example.org||(305) 714-4100|
|Fax: (305) 858-4492|