Watsco, Inc. — Q1 2022 Form 10-Q
Reporting period: Quarter ended March 31, 2022; unaudited. Watsco distributes HVAC/R equipment, parts and supplies across North America, operating 671 locations. The business is seasonal, with residential air-conditioning demand generally strongest in the second and third quarters. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $1,523.6 | $1,136.1 | +34% |
| Gross profit / margin | $450.4 / 29.6% | $294.8 / 25.9% | +53%; margin +3.7 percentage points |
| Operating income / margin | $171.0 / 11.2% | $81.9 / 7.2% | +109% |
| Net income | $134.9 | $66.1 | +104% |
| Net income attributable to Watsco | $113.3 | $55.1 | +106% |
| Diluted EPS | $2.90 | $1.39 | +109% |
| Operating cash flow | $(101.6) | $(37.7) | Greater cash use |
| Capital expenditures | $8.3 | $4.8 | Higher |
- Revenue growth included $90.9 million from acquired locations and $9.5 million from other recently opened locations, offset by $2.0 million from closures. Same-store revenue increased 25%.
- Residential HVAC equipment sales rose 26% on a same-store basis. For residential unitary air-conditioning equipment, average selling price increased 18% and unit volume increased 8%.
- Gross-margin expansion reflected pricing and margin optimization, passing supplier price increases through to customers, and a richer mix of higher-efficiency systems. SG&A rose 30% in dollars but declined to 18.6% of revenue from 19.2%.
- Income tax expense was $35.6 million versus $15.7 million; the effective tax rate attributable to Watsco was 23.8%, compared with 22.0%.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $110.6 million, current assets $2,320.1 million, current liabilities $836.8 million, and working capital $1,483.3 million. Working capital was $1,234.7 million at year-end 2021.
- Revolver borrowings increased to $262.5 million from $89.0 million at December 31, 2021. The company had a $560 million unsecured revolving facility, maturing December 5, 2023, and reported covenant compliance.
- Cash declined by $7.7 million during the quarter to $110.6 million. Operating cash use reflected increases in inventory and receivables; financing cash inflow of $101.4 million included $173.5 million of net revolver proceeds and was partly offset by $75.8 million of dividends.
- Inventory rose to $1,390.3 million from $1,115.5 million at year-end, and receivables rose to $790.0 million from $698.5 million. The company said operating cash flow, cash on hand and borrowing availability should meet foreseeable liquidity needs, while noting funding-market risks.
- Cash dividends paid were $1.95 per share in Q1. On April 1, the board declared a $2.20 per-share quarterly dividend, paid April 29.
Management commentary, outlook and risks
- Management cited strong end-market demand and said product availability had improved by the filing date, with more typical inventory levels being reestablished. Supply-chain disruption, component shortages, labor constraints and transportation delays had constrained fulfillment during parts of the quarter.
- No quantified earnings or revenue guidance is provided in the filing. Management cautioned that Q1 results are not necessarily indicative of full-year results and highlighted seasonal and weather-driven demand.
- Management identified general economic conditions, competition, supplier concentration, commodity costs, housing and commercial construction, consumer spending, liquidity, interest rates, foreign exchange, regulation, cybersecurity, insurance, and COVID-19 developments among relevant risks.
- Potential cash commitments include estimated tax withholding of approximately $119 million when 975,622 CEO restricted shares vest in October 2022, and an estimated contingent purchase amount of approximately $291 million under the RSI shareholder agreement. The filing says available cash and revolver capacity should be sufficient for a potential RSI purchase.
- Carrier and its affiliates supplied 56% of inventory purchases in Q1, down from 61% a year earlier; approximately $149 million was payable to them, net of receivables, at quarter-end. Management stated related-party transactions were on arm’s-length terms.
- Litigation is described as incidental to the business; management did not expect known matters to have a material adverse effect based on information available. Self-insurance reserves were $9.3 million, compared with $7.3 million at year-end.
Most important facts for investors to verify
- Whether strong sales, pricing and margin gains persist as supply availability, costs and demand evolve.
- How seasonal inventory and receivables affect operating cash flow and revolver borrowings through the peak selling season.
- The cash funding and dilution implications, if any, of the CEO share vesting tax obligation and the potential RSI share purchase.
- Ongoing dependence on Carrier as a supplier and the effects of any supply disruption or change in the joint-venture relationship.
- That the $2.20 dividend was declared after quarter-end and future dividends remain at the board’s discretion.