Watsco, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Watsco distributes HVAC/R equipment, parts and supplies across North America. It operated 673 locations at quarter-end. Results are seasonal, with residential air-conditioning demand typically strongest in the second and third quarters. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2021 | Q3 2020 | First 9 months 2021 | First 9 months 2020 |
|---|---|---|---|---|
| Revenue | $1,782.6 | $1,536.7 | $4,768.3 | $3,900.2 |
| Gross profit | $482.7 | $373.8 | $1,255.4 | $940.6 |
| Gross margin | 27.1% | 24.3% | 26.3% | 24.1% |
| Operating income | $206.8 | $156.8 | $505.5 | $331.3 |
| Net income attributable to Watsco | $140.9 | $106.5 | $340.1 | $223.6 |
| Diluted EPS | $3.62 | $2.76 | $8.75 | $5.82 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $319.7 | $372.8 |
Q3 revenue rose 16% and Watsco-attributable net income rose 32%; nine-month revenue rose 22% and attributable net income rose 52%. Q3 and nine-month gross margins expanded by 280 and 220 basis points, respectively. SG&A rose 28% in Q3 and 24% year to date; as a share of revenue it was 15.8% in Q3 versus 14.4%, and 16.1% year to date versus 15.9%.
Liquidity, cash flow and debt
- Cash and cash equivalents were $137.2 at September 30, 2021, down from $146.1 at December 31, 2020; $99.1 was held by foreign subsidiaries.
- Working capital was $1,184.2, including $94.5 added by acquired locations. The company attributed the increase to higher receivables, seasonal demand and inventory build.
- Nine-month operating cash flow declined $53.1 to $319.7, primarily because of higher receivables and inventory. Investing cash outflow was $140.1, including $129.5 for acquisitions. Financing cash outflow was $187.9, including $219.4 in dividends.
- The company had $1.7 outstanding under its $560.0 revolving credit facility at quarter-end; capacity may be reduced to $460.0 seasonally. The facility matures December 5, 2023. Watsco reported compliance with its covenants.
- Current liabilities included $82.7 of current portion of long-term obligations. Long-term obligations also included operating and finance lease liabilities; the filing does not present a single total-debt measure in the supplied text.
Changes, acquisitions and notable items
- Same-store revenue increased 8% in Q3 and 17% for the first nine months. Management cited price increases, product mix and demand; Q3 same-store residential HVAC equipment sales rose 5%, with a 4% increase in average selling price and 1% increase in volume.
- Watsco acquired Temperature Equipment Corporation’s HVAC distribution business in April through an 80%-owned joint venture with Carrier, acquired Acme Refrigeration in May, and acquired Makdad Industrial Supply in August. Acquisitions contributed $112.4 of Q3 revenue and $217.1 of nine-month revenue.
- The company recorded a $3.8 realized gain from selling certain equity securities during the first nine months. It also established a $300.0 at-the-market share offering program; no shares had been sold by September 30.
- Dividends paid per share were $1.95 in Q3 and $5.675 for the first nine months. A further $1.95 quarterly dividend was declared October 1 and paid October 29, 2021.
Outlook, risks and contingencies
- No numerical full-year guidance is provided. Management said product availability had improved and it was encouraged by volume trends and suppliers’ ability to meet strong demand, while noting supply-chain disruption had affected Q3 residential sales.
- Management identified component availability, labor shortages and transportation delays as marketplace pressures. COVID-19 variants could again affect employees, customers, suppliers or operations; the future impact could not be reasonably estimated.
- Other stated risks include supplier concentration, commodity costs, housing and commercial construction activity, seasonality and weather, foreign exchange, interest rates, liquidity, regulation and cybersecurity. Carrier and affiliates supplied 59% of Q3 inventory purchases and 64% year to date.
- Watsco disclosed an estimated $318.0 contingent purchase amount under its agreement with RSI shareholders. It said operating cash flow, cash and revolving-credit availability should be sufficient for a potential purchase. The company reported ordinary-course litigation and did not expect known claims to materially harm results or financial condition.
- Management concluded disclosure controls were effective. Acquired businesses, collectively about 8% of consolidated assets and 5% of Q3 revenue, had not yet been included in the company’s internal-control assessment.
Key facts for investors to verify
- Whether stronger pricing and product mix, and improving supply availability, persist without further margin pressure from SG&A, logistics and labor costs.
- How much of revenue and earnings growth reflects acquired locations versus same-store performance, and the acquisitions’ subsequent contribution to cash flow.
- Working-capital trends, particularly receivables and inventory, and their effect on operating cash conversion.
- Carrier-related supply dependence and the potential size, timing and funding of any RSI shareholder put obligation.
- Any use of the $300.0 ATM program, future dividend decisions, and changes in revolving-credit availability or borrowing costs.