GlobeNewswire Inc | Oct 22, 2020 07:30AM EDT

October 22, 2020

Strong Residential Demand and Gains in Operating Efficiency Drive120 Basis-Point Operating Margin Expansion;Nine-Month Operating Cash Flow Increases 89% to a Record $373 Million

MIAMI, Oct. 22, 2020 (GLOBE NEWSWIRE) -- Watsco, Inc. (NYSE: WSO) reported record operating results, setting new records for sales, operating income, net income and earnings per share (EPS) during the third quarter and nine-month periods ended September 30, 2020. The Company generated record operating cash flow of $373 million through September 30, 2020, an 89% increase over the same period in 2019.

Watscos entrepreneurial culture, which empowers leaders to think and act locally, has proven critically important in response to current business conditions. Technology investments designed to revolutionize Watscos customer experience have also proven critical during a challenging operating environment.Notably, adoption of mobile apps and customer-facing platforms, including e-commerce, has grown, enabling more customers to engage digitally. In addition, curbside / dockside technology has been implemented to facilitate contactless order fulfillment and help customers and employees operate safely and effectively. Taken as a whole, we believe Watscos technology offering is unique to the industry, solidifies existing customer relationships and creates new-customer opportunities to generate long-term growth and market share gains.

Third Quarter Performance Metrics

-- 25% EPS increase to a record $2.76 -- 25% operating income increase to a record $157 million -- 120 basis-point operating margin expansion to a record 10.2% -- 28% growth in net income attributable to Watsco to a record $106 million -- 10% sales growth to a record $1.54 billion (8% same-store increase, including 15% in U.S. markets) -- 12% gross profit increase to a record $374 million (30 basis-point increase in gross margin) -- 4% SG&A expense increase, including new locations -- Flat same-store SG&A expenses (100 basis-point decrease as a percentage of sales)

Sales trends (excluding acquisitions):

-- 10% growth in HVAC equipment (70% of sales), including 19% growth in U.S. residential products -- 2% increase in other HVAC products (27% of sales) -- Flat sales in commercial refrigeration products (3% of sales)

Albert H. Nahmad, Watscos Chairman and CEO commented: We are pleased to deliver another record quarter, especially during a complex business environment. Our core U.S. residential business has remained solid and continues to see above-average growth trends. We further strengthened our balance sheet, as evidenced by our record cash flow and debt reduction. Watsco is virtually debt-free and capable of investing in almost any-sized opportunity to grow our network and leadership position in the estimated $40 billion North American HVAC distribution industry. We express our gratitude to our more than 5,700 employees for their extraordinary efforts during this challenging period.

Nine-MonthPerformance Metrics

-- 5% EPS increase to a record $5.82 -- 5% operating income increase to a record $331 million (operating margins consistent at 8.5%) -- 7% growth in net income attributable to Watsco to a record $224 million -- 5% sales growth to a record $3.9 billion (1% same-store increase, including 6% in U.S. markets) -- 5% gross profit increase to a record $941 million (10 basis-point decline in gross margin) -- 5% increase in SG&A expenses, including new locations -- 1% decrease in same-store SG&A expenses (30 basis-points lower as a percentage of sales)

Sales trends (excluding acquisitions):

-- 3% growth in HVAC equipment (69% of sales), including 8% growth in U.S. residential products -- 2% decrease in other HVAC products (27% of sales) -- 5% decrease in commercial refrigeration products (4% of sales)

Technology Innovation

Watsco continues to lead and innovate through the introduction of new customer-focused technology designed to transform the customer experience and reshape how our industry operates. These investments make it easier for HVAC contractors to do business with Watsco and, in turn, improve the speed, efficiency and growth opportunities of our customers. Specific technology-related achievements thus far in 2020 include:

-- Product Information Management (PIM) is the industrys leading repository of product information delivered seamlessly in digital form through Watscos mobile apps and e-commerce to HVAC contractors in the field. Today Watsco has digitized product information for approximately 850,000 SKUs accessed by more than 300,000 customers and technicians. -- Contractor Assist mobile apps provide customers with interactive access to sales, technical support, product and inventory information, warranty look-up, and much more. Customer use of Watscos innovative mobile apps expanded with average weekly users growing 31% year to date. -- E-Commerce sales continued to grow as more customers transacted online. At September 30, 2020 versus one year ago, the number of customers using e-commerce has grown by 24% and e-commerce sales orders grew by 30%. The current annual run-rate for e-commerce sales is $1.5 billion or approximately 32% of total sales. -- Investments in proprietarywarehouse technology that deliver speed, convenience and order accuracy have improved same-store productivity. Express Pick-up orders have grown 38% year to date enabling faster, more convenient service to customers. The recently-launched curbside capabilities saw more than 12,000 orders fulfilled by more than 2,000 unique users in its first months of use. Inventory turns also improved by 25 basis-points for the twelve month period ended September 30, 2020. -- OnCall Air, Watscos digital sales platform for HVAC/R contractors, and CreditForComfort, its companion financing platform, have also gained traction as more homeowners transact digitally with HVAC contractors. During the third quarter 2020, OnCall Air presented quotes to more than 39,000 households and generated $114 million in gross merchandise value for our customers, a 92% increase over last year. CreditForComfort processed more than 1,800 retail financing applications during the quarter, a 122% increase over last year resulting in an 87% quarter-over-quarter increase in funded loans.

AJ Nahmad, Watscos President, commented: Our journey to drive technology adoption at scale has yielded great results, but we are even more excited at the opportunities that lay ahead. We see increased customer engagement across the entire platform of Watsco technologies. These tools and capabilities are unique in the industry and are designed to help HVAC contractors of any size grow faster and become more efficient. The progress we have made gives us confidence in the long-term and emboldens us to do more.

Financial Strength & Liquidity

The Companys long-standing goal is to maintain a conservative balance sheet that allows it to invest in new growth opportunities as they arise. During the third quarter 2020, Watsco grew its cash position and reduced debt to nearly zero. The Company maintains a $560 million revolving credit facility, the borrowings under which are typically seasonal in nature. Watsco believes its conservative financial position and access to low-cost capital provide confidence to its customers, employees and OEM partners. The strong balance sheet also affords Watsco the capacity to invest in almost any-sized growth opportunity.

Cash Flow & Dividends

Operating cash flow for the nine-month period was a record $373 million versus $198 million in 2019. Watsco expects to meet or exceed its annual goal of producing cash flow in excess of net income in 2020. Since 2000, Watsco has generated operating cash flow of approximately $3.1 billion compared to net income of approximately $2.9 billion, surpassing the Companys stated goal of generating cash flow in excess of net income.

Watsco has paid cash dividends for 46 consecutive years. Dividends paid through September 30, 2020 increased 9% to $197 million. The Companys philosophy is to share increasing amounts of cash flow with shareholders through higher dividends while maintaining a conservative financial position. Effective April 2020, Watsco raised its annual dividend rate 11% to $7.10 per share. Future increases in dividends will be considered in light of investment opportunities, cash flow, general economic conditions and the Companys overall financial condition.

Third Quarter Earnings Conference Call Information

Date: October 22, 2020Time: 10:00 a.m. (EDT)Webcast: http://investors.watsco.comDial-in number: United States (844) 883-3908 / International (412) 317-9254

A replay of the conference call will be available on the Companys website.

Use of Non-GAAP Financial Information

In this release, the Company discloses non-GAAP measures referring to same-store basis, which exclude the effects of locations closed, acquired, or locations opened, in each case during the immediately preceding 12 months unless such locations are within close geographical proximity to existing locations. The Company believes that this information provides greater comparability regarding its ongoing operating performance. These measures should not be considered an alternative to measurements required by U.S. GAAP.

About Watsco

Watscois the largest distribution network for heating, air conditioning and refrigeration (HVAC/R) products with locations inthe United States,Canada,MexicoandPuerto Rico, and on an export basis toLatin Americaand theCaribbean. Watscoestimates that more than 300,000 contractors and technicians visit or call one of its 603 locations each year to get information, obtain technical support and buy products. HVAC/R products provide comfort to homes and businesses regardless of the outdoor climate. Older systems often operate below todays government mandated energy efficiency and environmental standards.Watscohas an opportunity to accelerate the replacement of these systems at a scale greater than its competitors as the movement toward reducing energy consumption and its environmental impact continues. This is especially important since heating and cooling accounts for approximately half of the energy consumed in a typical U.S. home. Additional information aboutWatscomay be found at http://www.watsco.com.

This document includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may address, among other things, our expected financial and operational results and the related assumptions underlying our expected results. These forward-looking statements are distinguished by use of words such as will, would, anticipate, expect, believe, designed, plan, or intend, the negative of these terms, and similar references to future periods. These statements are based on managements current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in economic, business, competitive market, new housing starts and completions, capital spending in commercial construction, consumer spending and debt levels, regulatory and other factors, including, without limitation, the effects of supplier concentration, competitive conditions within Watscos industry, seasonal nature of sales of Watscos products, the ability of the Company to expand its business, insurance coverage risks and final GAAP adjustments. Detailed information about these factors and additional important factors can be found in the documents that Watsco files with the Securities and Exchange Commission, such as Form 10-K, Form 10-Q and Form 8-K. Forward-looking statements speak only as of the date the statements were made. Watsco assumes no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except as required by applicable law.

WATSCO, INC.Condensed Consolidated Statements of Income(In thousands, except share and per share data)(Unaudited)

Quarter Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenues $ 1,536,671 $ 1,394,915 $ 3,900,212 $ 3,698,047 Cost of sales 1,162,908 1,060,224 2,959,635 2,801,612 Gross profit 373,763 334,691 940,577 896,435 Gross profit 24.3 % 24.0 % 24.1 % 24.2 %marginSelling, general& administrative 221,037 212,902 618,476 589,523 (SG&A) expensesOther income 4,055 3,530 9,172 7,939 Operating income 156,781 125,319 331,273 314,851 Operating margin 10.2 % 9.0 % 8.5 % 8.5 %Interest 108 1,434 1,181 3,422 expense, netIncome before 156,673 123,885 330,092 311,429 income taxesIncome taxes 30,467 24,230 63,397 60,060 Net income 126,206 99,655 266,695 251,369 Less: net incomeattributable to 19,717 16,175 43,126 42,697 non-controllinginterestNet incomeattributable to $ 106,489 $ 83,480 $ 223,569 $ 208,672 Watsco Diluted earnings per share:Net incomeattributable to $ 106,489 $ 83,480 $ 223,569 $ 208,672 WatscoshareholdersLess:distributed andundistributedearnings 9,135 6,971 19,175 17,325 allocated tonon-vestedrestrictedcommon stockEarningsallocated to $ 97,354 $ 76,509 $ 204,394 $ 191,347 Watscoshareholders Weighted-averageCommon and ClassB common sharesand equivalent 35,237,022 34,788,955 35,109,043 34,569,719 shares used tocalculatediluted earningsper share Diluted earningsper share for $ 2.76 $ 2.20 $ 5.82 $ 5.54 Common and ClassB common stock

WATSCO, INC.Condensed Consolidated Balance Sheets (Unaudited, in thousands)

September 30, December 31, 2020 2019 Cash and cash equivalents $ 92,600 $ 74,454 Accounts receivable, net 644,124 533,810 Inventories 884,653 920,786 Other 22,742 17,680 Total current assets 1,644,119 1,546,730 Property and equipment, net 97,660 98,523 Operating lease right-of-use assets 218,884 223,369 Goodwill, intangibles, net and other 687,022 687,539 Total assets $ 2,647,685 $ 2,556,161 Accounts payable and accrued expenses $ 538,324 $ 392,296 Current portion of long-term obligations 71,174 69,421 Total current liabilities 609,498 461,717 Borrowings under revolving credit agreement 668 155,700 Operating lease liabilities, net of current 149,075 154,271 portionDeferred income taxes and other liabilities 78,506 69,706 Total liabilities 837,747 841,394 Watsco?s shareholders? equity 1,489,612 1,435,427 Non-controlling interest 320,326 279,340 Shareholders? equity 1,809,938 1,714,767 Total liabilities and shareholders? equity $ 2,647,685 $ 2,556,161

WATSCO, INC.Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands)

Nine Months Ended September 30, 2020 2019 Cash flows from operating activities: Net income $ 266,695 $ 251,369 Non-cash items 35,476 30,335 Changes in working capital net of effects of 70,607 (84,173 )acquisitionsNet cash provided by operating activities 372,778 197,531 Cash flows from investing activities: Capital expenditures, net (11,547 ) (12,712 )Business acquisitions, net of cash acquired ? (47,343 )Investment in unconsolidated entity ? (4,940 )Net cash used in investing activities (11,547 ) (64,995 ) Cash flows from financing activities: Dividends on Common and Class B Common stock (197,454 ) (180,454 )Net (repayments) proceeds under revolving credit (155,032 ) 34,100 agreementProceeds from NCI for investment in PPI and ? 17,988 unconsolidated entityPurchase of additional ownership interest from NCI ? (32,400 )Other 9,716 5,032 Net cash used in financing activities (342,770 ) (155,734 )Effect of foreign exchange rate changes on cash and (315 ) 454 cash equivalentsNet increase (decrease) in cash and cash equivalents 18,146 (22,744 )Cash and cash equivalents at beginning of period 74,454 82,894 Cash and cash equivalents at end of period $ 92,600 $ 60,150

Barry S. LoganExecutive Vice President(305) 714-4102e-mail: blogan@watsco.com