Watsco, Inc. 2009 Form 10-K Summary
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2009. Watsco, Inc. is the largest distributor of air conditioning, heating, and refrigeration (HVAC/R) equipment and related parts in the United States. The company operates a "buy and build" strategy, acquiring market leaders and integrating them to expand product lines and geographic reach. As of year-end, Watsco operated 505 locations across 36 states and Puerto Rico, serving over 50,000 customers.
Key Financial Metrics
Specific consolidated revenue, net income, cash flow, and margin figures are not provided in the text of this filing, as the "Selected Financial Data" and "Management's Discussion and Analysis" sections are incorporated by reference from the 2009 Annual Report. However, the following financial data points are disclosed:
- Capital Expenditures: $5.9 million for the year ended December 31, 2009.
- Dividends Paid: $1.89 per share for Common and Class B stock in 2009 (compared to $1.75 in 2008 and $1.31 in 2007).
- Stock Repurchases: 6.4 million shares repurchased at a cost of $114.4 million since the program's inception; no repurchases occurred in the fourth quarter of 2009.
- Goodwill and Intangibles: Represented approximately 31% of total assets as of December 31, 2009.
- Market Value: Aggregate market value of voting stock held by non-affiliates was approximately $1,206 million as of June 30, 2009.
Material Changes and Strategic Developments
The most significant event in 2009 was the formation of a joint venture with Carrier Corporation on July 1, 2009:
- Carrier Enterprise, LLC: Watsco acquired a 60% controlling interest in this new entity, which distributes Carrier, Bryant, and Payne products. Watsco contributed 15 locations, while Carrier contributed 95 locations and an export division.
- Transaction Value: Consideration included $172.0 million in cash and 3,080,469 shares of Watsco common stock (fair value of $151.1 million).
- Supplier Concentration: Due to the joint venture, purchases from Carrier and its affiliates increased dramatically from 13% in 2008 to 41% of all purchases in 2009. Purchases from the top six suppliers comprised 66% of total purchases.
- Accounting Firm Change: On June 23, 2009, the company dismissed Grant Thornton LLP and engaged KPMG LLP as its independent registered public accounting firm.
Outlook, Risks, and Management Commentary
Management highlights several risks and forward-looking considerations:
- Economic Conditions: The company notes the significant contraction in the global and U.S. economy and the lack of credit availability in 2008-2009. While internal funds are currently sufficient, long-term disruptions could force measures such as reducing dividends or deferring capital expenditures.
- Seasonality: Sales are seasonal, with residential air conditioning demand peaking in the second and third quarters and heating equipment demand in the fourth quarter.
- Integration Risks: The success of the Carrier Enterprise joint venture depends on integration, retention of key employees, and continued market acceptance of Carrier products.
- Internal Controls: The company has not yet assessed the internal controls of the 95 locations added via the Carrier joint venture, which represent approximately 43% of total consolidated assets and 29% of revenues for the year.
- Goodwill Impairment: With goodwill representing 31% of assets, future impairments are possible if economic conditions or industry trends deteriorate.
Investor Verification Checklist
- Verify the full consolidated revenue, net income, and operating margin figures in the 2009 Annual Report (incorporated by reference), as they are absent from this text.
- Review the Carrier Enterprise joint venture agreement details to understand the specific terms of the option to purchase an additional 20% interest from Carrier.
- Assess the impact of the 41% supplier concentration with Carrier on future pricing power and supply chain stability.
- Monitor the internal control assessment for the newly acquired Carrier locations, which will be required in future filings.
- Confirm the status of the revolving credit agreement and any covenants that might restrict future dividends or capital expenditures given the economic climate.