WATSCO INC annual report, FY2019

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Watsco, Inc. — FY2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; the supplied text does not provide a clear set of Q4-only results. The filing incorporates the full financial statements and MD&A from the 2019 Annual Report, which are not included in the supplied text.

Business context

Watsco is a North American distributor of air conditioning, heating and refrigeration equipment, parts and supplies. At year-end, it operated 606 locations across 38 U.S. states, Canada, Mexico and Puerto Rico, serving more than 100,000 active contractors and dealers. It described the industry as fragmented and estimated the U.S. and Canadian installed market for relevant equipment and supplies at approximately $97 billion.

Financial and operating metrics

  • HVAC/R distribution revenue was approximately $4.8 billion in 2019; the supplied text does not provide a comparable 2018 revenue figure.
  • Equipment accounted for 68% of revenue, other HVAC products 28%, and commercial refrigeration 4%. In 2018, those shares were 67%, 29% and 4%, respectively.
  • Revenue by geography: United States 88%, Canada 6%, and Latin America and the Caribbean 6%.
  • The three Carrier joint ventures represented 58% of 2019 revenue. The top ten suppliers accounted for 83% of purchases, including Carrier at 62% and Rheem at 9%.
  • The supplied text does not provide clear values for net income, EPS, cash flow, margins, debt, cash balances, working capital, or credit-facility availability. These figures are in financial information incorporated by reference.
  • Goodwill, intangibles and long-lived assets represented approximately 39% of total assets at year-end.

Material changes and comparisons

  • In 2019, Carrier Enterprise I acquired substantially all HVAC assets of Peirce-Phelps, operating from 19 locations. Watsco also purchased an additional 20% interest in Homans Associates, bringing its ownership to 100%.
  • The 2019 acquisitions of N&S Supply, Peirce-Phelps and DASCO collectively represented approximately 7% of consolidated assets at year-end and 3% of 2019 revenue. Their internal controls had not yet been assessed, as permitted under SEC rules.
  • Equipment’s share of revenue rose one percentage point versus 2018, while other HVAC products’ share declined one point; refrigeration remained unchanged.
  • Watsco reported no share repurchases in 2017–2019. The company had 1,129,087 shares remaining under its repurchase authorization at year-end.

Outlook, risks and unusual items

  • No specific revenue, earnings or cash-flow guidance is provided in the supplied text. Management cited an aging installed base and replacement demand as long-term market supports, and expected higher-efficiency products to sell at higher prices. The impact of upcoming efficiency standards was not yet clear.
  • Seasonality and weather can materially affect results: residential air-conditioning replacement demand is generally strongest in the second and third quarters, while heating demand typically peaks in the fourth quarter.
  • Supplier concentration is a key risk. Disruption, termination, product-quality issues or tariffs affecting major suppliers could impair product availability, increase costs or reduce demand. The filing noted uncertainty about potential COVID-19-related supplier disruption following the outbreak in China in December 2019.
  • Other stated risks include competition and price erosion, economic and credit-market weakness, acquisition integration, foreign exchange, cybersecurity, and regulatory changes. LIBOR reform was also identified as a potential borrowing-cost risk.
  • Carrier’s parent had announced a planned separation of Carrier, expected in 2020, but Watsco said the effect and timing were uncertain.
  • Watsco reported effective disclosure controls at year-end and no material changes to internal control over financial reporting during the fourth quarter.

Investor verification priorities

  1. Review the incorporated 2019 Annual Report for complete income statement, balance sheet, cash-flow, margin, debt and liquidity figures, plus comparable 2018 results.
  2. Verify organic growth and acquisition contributions, particularly from Peirce-Phelps, Homans and other 2019 acquisitions.
  3. Assess exposure to Carrier and Rheem, including supplier agreements, joint-venture economics and any impacts from Carrier’s separation.
  4. Check the financial impact of seasonality, weather, tariff changes, COVID-19 supply disruption and forthcoming efficiency standards.
  5. Review the credit agreement, debt maturities, covenants, and the carrying values and impairment assumptions for goodwill and other long-lived assets.