Watsco, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing was signed February 28, 2013. Although the request refers to 2012 Q4, this is an annual report; the supplied text does not provide a clear standalone fourth-quarter financial summary.
Business context and key financial metrics
Watsco distributes HVAC/R equipment, parts and supplies to more than 50,000 contractors and dealers. At year-end it operated 573 locations across 38 U.S. states, Canada, Mexico and Puerto Rico. The filing identifies Watsco as the largest distributor in its industry and describes a strategy of acquisitions and growth within existing markets.
| Metric | FY 2012 | Comparable period |
|---|---|---|
| Revenue | $3.432 billion | $2.978 billion in 2011; increase of approximately 15.2% |
| U.S. revenue | $3.088 billion | $2.939 billion in 2011 |
| Canada revenue | $240 million | No Canada revenue reported in 2011 table |
| Mexico revenue | $104 million | $39 million in 2011 |
| Revenue mix by product | HVAC equipment 63%; other HVAC products 33%; commercial refrigeration 4% | 2011: 61%, 32% and 7%, respectively |
| Cash dividends per share | $7.48 | $2.23 in 2011 |
| Long-lived assets | $659 million | $434 million at December 31, 2011 |
The supplied filing text refers readers to the incorporated 2012 Annual Report for the consolidated financial statements and management’s discussion and analysis. It does not provide clear values for net income, operating income, margins, cash flows, total debt, or liquidity; those figures should not be inferred from this excerpt.
Material changes and developments
- Revenue rose from 2011, with acquisitions and expanded operations contributing to the change. The geographic figures show new reported Canadian revenue and higher Mexico revenue; the filing excerpt does not provide a complete organic-growth bridge.
- In 2012 Watsco increased its ownership of Carrier Enterprise I to 70%, acquired 60% control of Carrier Enterprise III in Canada, and continued to hold a 60% controlling interest in Carrier Enterprise II. The Carrier joint ventures together represented 61% of 2012 revenue.
- Carrier Enterprise III added 35 Canadian locations. Watsco reported 573 locations, 629 trucks and approximately 4,600 employees at year-end.
- Purchases from Carrier and its affiliates were 57% of 2012 purchases, up from 54% in 2011; purchases from four key HVAC/R equipment suppliers were 72% of purchases.
- The company paid $7.48 per share in dividends in 2012, compared with $2.23 in 2011. The excerpt does not explain the composition of the 2012 amount.
Outlook, risks and other disclosures
The filing describes growth opportunities in the replacement market, product expansion, technology investment and further acquisitions or joint ventures, but the supplied text contains no quantified earnings or revenue guidance. Management cautions that results depend on economic conditions, weather and seasonality, housing and commercial construction, customer credit, and access to liquidity.
- Supplier concentration: Dependence on Carrier and other major suppliers creates exposure to supply interruptions, agreement termination and changes in product acceptance.
- Acquisitions and joint ventures: Integration challenges, undiscovered liabilities, financing needs and possible shareholder dilution could affect results and liquidity.
- Seasonality and competition: Residential air-conditioning demand is typically strongest in the second and third quarters; heating demand is generally strongest in the fourth quarter. Weather and price competition can affect performance.
- Other risks: The filing identifies economic and credit-market conditions, foreign exchange and political risks, insurance exposures, regulation, and potential goodwill or intangible-asset impairment. Goodwill and intangibles represented approximately 37% of total assets at year-end.
- Governance and controls: Chairman and CEO Albert H. Nahmad and affiliated entities held approximately 52% of combined voting power. Watsco concluded disclosure controls were effective at a reasonable assurance level; it had not yet assessed internal controls at the 35 Carrier Enterprise III locations, representing approximately 19% of consolidated assets and 7% of revenue.
Important facts for investors to verify
- Review the incorporated 2012 Annual Report for complete income statements, cash flows, balance sheets, margins, debt, liquidity, and the drivers of earnings and revenue growth.
- Assess how much of 2012’s revenue increase came from acquisitions, joint ventures and organic performance, including the effects of the Canadian operations.
- Review the Carrier joint-venture agreements, ownership economics, distribution rights and the planned timing and terms of Watsco’s remaining Carrier Enterprise I purchase option.
- Confirm the nature and sustainability of the $7.48 per-share dividend and its funding from operating cash flow.
- Evaluate supplier concentration, including Carrier’s share of purchases, and the potential effect of a supply disruption or distribution-agreement change.
- Review the full risk-factor and legal-proceedings disclosures and the status of internal-control assessment for Carrier Enterprise III.