Watsco, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report. The filing incorporates the full annual report, including detailed financial statements and management’s discussion, by reference; those details 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 566 locations across the United States, Canada, Mexico and Puerto Rico, serving approximately 88,000 active contractors and dealers. Its strategy combines acquisitions with expansion of products, locations and customer-facing technology. Three Carrier joint ventures represented 62% of 2015 revenue.
Key financial and operating metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $4.113 billion | $3.945 billion | +$168 million, approximately 4.3% |
| U.S. revenue | $3.711 billion | $3.525 billion | +$186 million |
| Canada revenue | $264 million | $301 million | −$37 million |
| Mexico revenue | $138 million | $119 million | +$19 million |
| Long-lived assets | $602 million | $627 million | −$25 million |
- Product mix: HVAC equipment was 66% of revenue versus 64% in 2014; other HVAC products were 29% versus 31%; commercial refrigeration remained 5%.
- The supplied filing text does not provide clear values for net income, operating profit, margins, cash flow, debt, liquidity or standalone fourth-quarter results. These are in incorporated material not reproduced here.
- Cash dividends paid were $2.80 per share in 2015, up from $2.00 in 2014. In October 2015, the board approved an increase in the quarterly dividend from $0.70 to $0.85 per share, reflected in the January 2016 payment.
Changes, outlook and material considerations
- Revenue increased year over year, led by U.S. growth; Canadian revenue declined while Mexican revenue rose.
- A Department of Energy efficiency mandate raised the minimum standard to 14 SEER in the Southeast and Southwest beginning in 2015. Watsco transitioned out of affected 13-SEER inventory, with the transition expected to finish by June 2016.
- The filing describes continued pursuit of acquisitions and joint ventures, but gives no quantified financial guidance or specific revenue or earnings outlook.
- Demand is seasonal and sensitive to weather: residential cooling demand typically peaks in the second and third quarters, while heating demand is generally highest in the fourth quarter.
- Supplier concentration is significant: the top ten suppliers accounted for 84% of purchases, including 62% from Carrier and 9% from Rheem. Disruption, termination or reduced acceptance of key suppliers’ products could harm operations and financial results.
- Other disclosed risks include competition and pricing pressure, economic and credit-market weakness, acquisition integration, foreign-exchange movements, employee retention, insurance exposure, potential goodwill impairment and cybersecurity risk. Canadian operations use the Canadian dollar; Mexican operations’ functional currency is the U.S. dollar. The company reported no derivatives hedging translation exposure.
- Goodwill and intangible assets represented approximately 30% of total assets at year-end. The filing references legal proceedings in an incorporated financial-statement note but does not describe them in the supplied text.
Important facts for investors to verify
- Review the incorporated 2015 Annual Report for audited earnings, margins, cash flows, balance-sheet liquidity, debt, covenants and quarterly results.
- Assess the effect of Carrier concentration, joint-venture governance and supplier continuity on sales, inventory availability and profitability.
- Verify the completion and financial impact of the 14-SEER inventory transition and the pace of growth in U.S. versus Canadian and Mexican markets.
- Review the incorporated notes for litigation, contingencies, goodwill impairment testing and details of credit facilities and liquidity.
- Consider dividend sustainability alongside operating cash generation, acquisition plans and seasonal working-capital needs.