Business context and reporting period
Watsco, Inc. filed this Form 10-K for the fiscal year ended December 31, 2011. It is a distributor of air-conditioning, heating and refrigeration equipment, parts and supplies, operating 542 locations across 38 U.S. states, Mexico and Puerto Rico and serving more than 50,000 contractors and dealers.
Watsco follows a “buy and build” strategy, combining acquisitions with expansion of product lines, locations and customer-service capabilities. In 2011 it formed Carrier Enterprise II with Carrier, including Northeast U.S. operations and seven acquired locations in Mexico. Watsco holds a 60% controlling interest in both Carrier joint ventures; together, the ventures represented 55% of 2011 revenue.
Key financial and operating metrics
- Revenue: The filing describes 2011 HVAC/R distribution revenue of $2.98 billion. It does not provide a clear comparable-period revenue total or growth rate in the supplied text.
- Revenue mix: HVAC equipment was 61% of revenue in 2011, versus 60% in 2010; other HVAC products were 32%, versus 33%; commercial refrigeration was 7% in both years.
- Profit, margins and cash flow: The supplied text does not provide clear values for net income, operating income, margins or cash flow. The detailed financial statements and MD&A are incorporated by reference from the 2011 Annual Report.
- Debt and liquidity: The supplied text does not provide clear debt, cash, borrowing availability or liquidity values. It notes that revolving credit agreements restrict repurchases of remaining authorized shares.
- Dividends and repurchases: Cash dividends were $2.23 per share in 2011, compared with $2.04 in 2010. No issuer or affiliated-purchaser share repurchases occurred in the fourth quarter. Of 7.5 million shares authorized for repurchase, 6.4 million had been repurchased through year-end.
- Scale: Watsco operated 542 locations, 666 vehicles and had approximately 4,300 employees at year-end.
Material changes versus prior comparable period
- Watsco established Carrier Enterprise II in 2011, adding Carrier’s Northeast locations and Mexico distribution operations. Mexico operations represented approximately 1% of consolidated 2011 revenue.
- Carrier and its affiliates accounted for 54% of purchases in 2011, up from 52% in 2010 and 41% in 2009. Purchases from the four key HVAC/R equipment suppliers were 71% in 2011, compared with 72% in 2010.
- Equipment’s share of revenue increased by one percentage point from 2010, while other HVAC products’ share declined by one point; refrigeration’s share was unchanged.
Outlook, commentary and risks
- The filing provides no specific numeric earnings or revenue guidance. Management describes a strategic focus on acquisitions, customer service, product expansion and the residential replacement market.
- Sales are seasonal: air-conditioning demand is typically strongest in the second and third quarters, while heating demand is usually strongest in the fourth quarter. Weather severity can affect results.
- Supplier concentration is a major risk: Carrier and affiliates represented 54% of 2011 purchases. Supply interruptions, agreement termination or reduced acceptance of supplier products could adversely affect operations, cash flows and liquidity.
- Other stated risks include economic weakness and limited credit access, competition and price erosion, acquisition integration and undiscovered liabilities, customer credit losses, weather, regulation, foreign-exchange fluctuations and reliance on key personnel.
- Goodwill and intangible assets represented approximately 31% of total assets at year-end and could be impaired if conditions or expected cash flows deteriorate.
- Watsco said known litigation was not expected to have a material adverse effect based on information then available. Disclosure controls were judged effective; however, internal controls over financial reporting for 35 Carrier Enterprise II locations had not yet been assessed. Those locations represented approximately 11% of consolidated assets and 6% of 2011 revenue.
Important facts for investors to verify
- Review the incorporated 2011 Annual Report for audited revenue, earnings, margins, cash flow, debt, liquidity and year-over-year comparisons; the supplied filing text does not show those detailed figures.
- Assess the financial contribution, leverage and integration of Carrier Enterprise II and the broader Carrier joint ventures, including their combined 55% share of 2011 revenue.
- Monitor Carrier and other supplier concentration, distribution agreement terms, and any changes in product availability or supplier relationships.
- Check the results of the pending internal-control assessment for Carrier Enterprise II locations and any subsequent material findings.
- Evaluate seasonality, weather exposure, dividend sustainability and credit-agreement restrictions alongside the company’s acquisition plans.