Watsco, Inc. 10-Q Summary: Period Ended June 30, 2009
Business Context and Reporting Period
This Form 10-Q covers the quarterly and six-month periods ended June 30, 2009, for Watsco, Inc., the largest independent distributor of HVAC/R equipment and supplies in the United States. The company operates 505 locations across 35 states. The reporting period reflects the impact of a late start to the cooling season, current economic conditions, and lower pricing on commodity-sensitive products.
Key Financial Metrics
| Metric (in thousands) | Q2 2009 | Q2 2008 | 6M 2009 | 6M 2008 |
|---|---|---|---|---|
| Revenues | $404,971 | $509,822 | $696,314 | $890,221 |
| Gross Profit | $100,985 | $131,060 | $175,219 | $229,064 |
| Gross Margin | 24.9% | 25.7% | 25.2% | 25.7% |
| Operating Income | $26,294 | $42,326 | $24,732 | $55,152 |
| Net Income | $16,282 | $26,050 | $15,110 | $33,694 |
| Diluted EPS | $0.56 | $0.90 | $0.52 | $1.17 |
| Cash from Operations (6M) | $27,559 (2009) vs $46,978 (2008) | |||
| Cash & Equivalents | $45,303 (as of June 30, 2009) | |||
| Debt (Revolving Credit) | $20,000 outstanding (Capacity: $300,000) |
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 21% in Q2 and 22% for the six months ended June 30, 2009, compared to 2008. This was driven by an 18% decline in HVAC equipment sales and a 27% decline in HVAC parts and supplies.
- Margin Compression: Gross profit margins declined 80 basis points in Q2 and 50 basis points for the six-month period. Management attributed this to lower margins on commodity products (copper, sheet metal, refrigerant) and a sales mix shift toward lower-margin equipment.
- Expense Management: Selling, general, and administrative (SG&A) expenses decreased 16% in Q2 and 13% for the six months. However, SG&A as a percentage of revenue increased due to the revenue decline and fixed cost inefficiencies.
- Bad Debt Provision: The provision for doubtful accounts increased significantly, with a $1.7 million higher bad debt expense noted for the six-month period compared to the prior year.
Outlook, Risks, and Unusual Items
- Joint Venture Formation: On July 1, 2009, Watsco formed "Carrier Enterprise LLC," a joint venture with Carrier Corporation. Watsco acquired a 60% interest for approximately $172 million (including $147 million in stock and $25 million in contributed locations). This venture will operate 110 locations.
- Capital Allocation: To fund the joint venture capital contribution, Watsco amended its credit agreement (incurring a $5.3 million fee) and utilized cash on hand plus additional borrowings.
- Dividends: The company maintained its dividend policy, declaring a quarterly cash dividend of $0.48 per share on July 1, 2009.
- Risks: Key risks include general economic conditions, weather patterns affecting seasonal demand, fluctuations in commodity costs, and the successful integration of the new joint venture. The filing notes that disruptions in credit markets could affect borrowing costs.
Investor Verification Checklist
- Joint Venture Impact: Verify the pro forma financial impact of the Carrier Enterprise joint venture, as full historical and pro forma data was not yet available at the time of filing.
- Commodity Exposure: Assess the sensitivity of future margins to copper and refrigerant prices, which accounted for approximately 13% of revenues.
- Credit Facility Usage: Monitor the utilization of the $300 million revolving credit facility, particularly following the $20 million drawdown to fund the joint venture capital contribution.
- Bad Debt Trends: Review the trend in the provision for doubtful accounts, which increased materially year-over-year, indicating potential credit quality issues in the current economic environment.
- Seasonality: Confirm the extent to which the "late start" to the cooling season impacted Q2 results versus a permanent demand shift.