Watsco, Inc. — Q1 2024 Form 10-Q
Reporting period: Quarter ended March 31, 2024. Figures below are in U.S. dollars; financial statement amounts are unaudited. Watsco distributes HVAC/R equipment, parts and supplies and operated 691 locations across the U.S., Canada, Mexico and Puerto Rico.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $1,565.0 million | $1,550.6 million | +1% |
| Gross profit / margin | $430.6 million / 27.5% | $448.2 million / 28.9% | Profit -4%; margin -140 bps |
| SG&A | $309.5 million | $287.1 million | +8% |
| Operating income / margin | $126.5 million / 8.1% | $164.7 million / 10.6% | -23% |
| Net income attributable to Watsco | $87.0 million | $110.1 million | -21% |
| Diluted EPS | $2.17 | $2.83 | -23% |
| Operating cash flow | $103.7 million | $(47.4) million | +$151.1 million |
Revenue growth included $51.4 million from acquired locations, partly offset by lower same-store sales. Same-store sales fell 2% to $1,512.5 million. Residential unitary system sales declined 3% (units -4%, average selling price +1%); commercial HVAC equipment sales rose 3%. Latin America and Caribbean revenue increased to $86.5 million from $74.4 million, while U.S. revenue was nearly flat.
Gross margin declined primarily because of HVAC equipment pricing and sales mix. Same-store SG&A rose 4%, reaching 19.7% of same-store sales, with higher fixed costs and $5.3 million of nonrecurring items contributing. Higher interest income and lower income taxes partly offset weaker operating performance. The effective tax rate was 21.8%, versus 23.3%.
Cash, debt and liquidity
- At March 31, cash and cash equivalents were $278.9 million and short-term investments were $200.0 million; the latter is a certificate of deposit maturing in September 2024. $176.1 million of cash was held by foreign subsidiaries.
- Working capital was $1,972.2 million, up from $1,679.9 million at year-end, reflecting seasonal inventory and receivables growth, partly offset by higher payables.
- No borrowings were outstanding under the $600 million revolving credit facility at quarter-end; $15.4 million was outstanding at December 31, 2023. The facility matures March 16, 2028, and the company reported compliance with its covenants.
- Operating cash flow benefited mainly from the timing of vendor payments, despite a $307.2 million inventory cash outflow. Investing cash use was $210.9 million, including the $200.0 million certificate of deposit purchase. Financing cash flow was $178.4 million.
- Watsco paid $96.8 million in dividends during the quarter ($2.45 per share). Its board declared a subsequent quarterly dividend of $2.70 per share, paid April 30, 2024.
Material changes, outlook and risks
- In Q1, Watsco sold 712,000 common shares through its at-the-market program for $281.8 million net proceeds, primarily used to repay revolving debt and purchase short-term investments. Only $1.5 million of the original $300 million program remained at March 31. On May 3, 2024, the program was expanded by $400 million, increasing potential equity issuance and dilution.
- Watsco acquired Commercial Specialists, Inc. on February 1, 2024; the distributor had approximately $13 million in annual sales. The company also continues to integrate Gateway Supply, acquired in September 2023.
- No specific earnings or revenue guidance is provided in the filing. Management says operating cash flow, cash, short-term investments, available revolver capacity and ATM proceeds should meet liquidity needs for the foreseeable future, while cautioning that available funds may not be sufficient in all circumstances.
- Sales and profitability are seasonal and can be affected by weather; residential replacement demand typically peaks in Q2 and Q3. Management cited general economic conditions, competition, supplier concentration and supply-chain conditions, commodity costs, housing and commercial construction, inflation, interest rates, foreign exchange, regulation and cybersecurity among factors that could affect results.
- Carrier and affiliates supplied 58% of inventory purchases in Q1, down from 62% a year earlier; approximately $202 million was payable to them at quarter-end, net of receivables. This is a material supplier concentration.
- HVAC/R regulation is driving a transition to higher-efficiency systems and lower-GWP refrigerants; systems using refrigerants with GWP below 750 are required by January 1, 2025. Adoption, product availability and customer demand may affect sales and mix. The company notes potential growth opportunities from efficiency standards and incentives, but does not quantify an expected financial impact.
- Watsco reported ordinary-course litigation and said known claims are not expected to materially adversely affect its financial condition or results. It also identifies uncertainty around self-insurance estimates, foreign cash repatriation, and access to credit markets. The quarter’s foreign currency translation adjustment was an $8.0 million comprehensive loss.
Most important facts for investors to verify
- Whether same-store sales, gross margin and SG&A trends improve during the seasonally stronger selling quarters.
- How much of reported revenue growth and future performance depends on acquired locations, and the integration results for recent acquisitions.
- Use of the expanded ATM capacity, including the scale and timing of further share issuance and resulting dilution.
- Inventory levels, vendor-payment timing and cash conversion as seasonal working-capital needs rise.
- Exposure to Carrier as a supplier and the company’s ability to manage the 2025 refrigerant transition and associated product mix.
- Potential funding needs related to dividends, acquisitions or the RSI shareholder purchase rights, alongside liquidity and covenant capacity.