Watsco, Inc. — Q1 2013 Form 10-Q
Reporting period: Quarter ended March 31, 2013. Unaudited results; dollar amounts below are in millions except per-share data. Watsco distributes HVAC/R equipment, parts and supplies and operated 574 locations across the U.S., Canada, Mexico and Puerto Rico.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Revenue | $713.6 | $633.5 | Up 13%; includes $62.5 from Carrier Enterprise III locations acquired in 2012. Same-store revenue rose 3%. |
| Gross profit / margin | $175.4 / 24.6% | $150.6 / 23.8% | Gross margin expanded 0.8 percentage points. |
| SG&A | $144.9 | $130.7 | Up 11%; declined as a share of revenue, to 20.3% from 20.6%. |
| Operating income | $30.6 | $19.9 | Operating margin increased to 4.3% from 3.2%. |
| Net income | $21.1 | $13.5 | Includes noncontrolling interests of $7.7 and $5.0, respectively. |
| Net income attributable to Watsco | $13.4 | $8.5 | Up 58%, per management. |
| Diluted EPS | $0.39 | $0.23 | For Common and Class B common stock. |
| Operating cash flow | $(17.5) | $9.5 | Primarily reflected seasonal inventory buildup. |
| Investing cash flow | $(3.0) | $(3.8) | Capital expenditures were $3.1. |
| Financing cash flow | $(31.1) | $(3.3) | Included $29.6 in distributions to noncontrolling interests and $8.6 in dividends. |
Balance sheet and liquidity
- At March 31, cash was $22.0, versus $73.8 at December 31, 2012; inventory was $647.1, up from $546.1.
- Working capital was $757.3, compared with $733.1 at year-end 2012.
- Revolver borrowings were $322.0, up from $316.2. The unsecured revolving facility allows borrowings up to $500.0 and matures in April 2017. Watsco reported compliance with its covenants.
- Management said operating cash flow, cash on hand and available borrowing capacity were expected to meet foreseeable liquidity needs, while noting that access to credit markets and the revolving facility could be affected by market disruptions.
Material changes and management commentary
- Same-store revenue growth reflected a 6% increase in residential HVAC equipment, a 5% decrease in commercial HVAC equipment, a 1% increase in other HVAC products and a 7% increase in commercial refrigeration. Higher-efficiency residential products supported sales mix and average selling prices.
- Management attributed gross-margin expansion to residential pricing and mix and higher gross margins at Carrier Enterprise III. SG&A leverage reflected fixed-cost absorption.
- Watsco’s ownership of Carrier Enterprise I rose from 60% to 70% in July 2012; it retains a 60% controlling interest in Carrier Enterprise II and III. The company said it had no acquisitions in Q1 2013.
- Foreign currency translation reduced other comprehensive income by $2.9. The effective tax rate attributable to Watsco was 36.75%, versus 37.5% in Q1 2012.
Outlook, risks and contingencies
- No specific financial guidance was provided. Management emphasized that Q1 results are not necessarily indicative of full-year results.
- HVAC/R demand is seasonal: residential cooling demand is generally strongest in the second and third quarters and heating demand in the fourth quarter. Weather can materially affect sales.
- Disclosed risks include economic and competitive conditions, supplier concentration, commodity costs, housing activity, commercial construction, liquidity and credit-market access, interest and foreign-exchange rates, regulation, insurance exposure and international political risk. Carrier and affiliates accounted for 55% of purchases, versus 52% a year earlier.
- Litigation is described as incidental to the business; management did not believe known claims would materially adversely affect financial condition or results. Self-insurance reserves were $5.3 at quarter-end.
- The company reported effective disclosure controls. It had not yet completed its SEC-rule internal-control assessment of the 35 Carrier Enterprise III locations, representing approximately 18% of consolidated assets and 9% of Q1 revenue.
Key facts for investors to verify
- How much of reported growth and earnings improvement reflects acquired operations and the increased Carrier Enterprise I ownership, versus ongoing same-store performance.
- Whether seasonal inventory investment converts to cash as the spring and summer selling season progresses.
- Revolver capacity and covenant headroom, including any letters of credit or other constraints not quantified in the filing text.
- Carrier-related supplier concentration and related-party balances; amounts payable to Carrier and affiliates, net of receivables, were approximately $126 million at March 31, compared with $62 million at year-end.
- Performance by product category, weather effects, and the completion of the internal-control assessment for Carrier Enterprise III.