Watsco, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing. The supplied text incorporates the 2013 Annual Report by reference but does not include its full financial statements or MD&A.
Business context and key metrics
Watsco distributes air-conditioning, heating and refrigeration equipment, parts and supplies. At year-end, it operated 569 locations across 38 U.S. states, Canada, Mexico and Puerto Rico, serving more than 50,000 contractors and dealers.
| Metric | FY 2013 | Comparable period / change |
|---|---|---|
| Revenue | $3.743 billion | $3.432 billion in 2012; increase of $311 million, or approximately 9.1% |
| Revenue by geography | U.S. $3.325 billion; Canada $318 million; Mexico $100 million | 2012: U.S. $3.088 billion; Canada $240 million; Mexico $104 million |
| Revenue by product | HVAC equipment 64%; other HVAC products 31%; commercial refrigeration 5% | 2012: 63%, 33% and 4%, respectively |
| Supplier concentration | Carrier and affiliates represented 59% of purchases; four key equipment suppliers represented 73% | Carrier was 57% and the four suppliers 72% in 2012 |
| Dividends per share | $1.15 | $7.48 in 2012; $2.23 in 2011 |
Profit, margins, operating cash flow, capital spending, debt and liquidity figures are not clearly provided in the supplied filing text. The report points to the incorporated Annual Report for these details.
Material changes and operating developments
- Revenue increased approximately 9.1% year over year. Canada revenue rose from $240 million to $318 million, while Mexico revenue declined from $104 million to $100 million.
- Watsco’s three Carrier-related joint ventures accounted for 61% of 2013 revenue. Watsco held controlling interests of 70% in Carrier Enterprise I and 60% in each of Carrier Enterprise II and III.
- Watsco could exercise an option to acquire another 10% of Carrier Enterprise I beginning in July 2014.
- HVAC equipment’s share of revenue increased by one percentage point, and commercial refrigeration’s share increased by one point; other HVAC products’ share declined by two points.
Outlook, risks and unusual items
- No specific financial guidance or quantified outlook is included in the supplied text. Management describes a “buy and build” strategy centered on acquisitions, market expansion, product breadth, service and technology.
- Management sees a substantial replacement opportunity as older installed systems reach the end of their useful lives; sales are seasonal and sensitive to weather, with air-conditioning demand typically strongest in the second and third quarters and heating demand in the fourth.
- Supplier concentration is a significant risk: interruption from Carrier or other key suppliers, termination of distribution arrangements, or reduced acceptance of their products could harm operations and results.
- Other stated risks include economic and credit-market weakness, competition and price pressure, acquisition integration and financing, weather, foreign exchange and political exposure, regulations, insurance claims, and potential goodwill impairment. Goodwill and intangibles represented approximately 36% of total assets at year-end.
- Carrier-related joint ventures represented a substantial portion of revenue, and the filing identifies supplier dependence as a material vulnerability. Carrier distribution agreements have no stated term or expiration date; other key supplier agreements generally run one to ten years.
- The notable dividend comparison is $1.15 per share in 2013 versus $7.48 in 2012; the supplied text does not explain the composition of the 2012 amount.
Most important facts for investors to verify
- Review the incorporated Annual Report for net income, earnings per share, gross and operating margins, cash-flow statements, balance-sheet liquidity, debt and credit-facility capacity.
- Check the Annual Report’s quarterly data for fourth-quarter revenue, earnings and seasonal trends; those Q4 figures are not clear in the supplied text.
- Verify the explanation for the large year-over-year change in dividends per share and the Board’s dividend policy.
- Assess Carrier concentration, joint-venture economics and governance, and the status and terms of the additional 10% Carrier Enterprise I purchase option.
- Review disclosures on contingencies, litigation, goodwill impairment testing and any acquisition-related obligations in the full notes to the financial statements.