GlobeNewswire Inc | Jul 23, 2020 07:30AM EDT

July 23, 2020

Steady Recovery in Market Conditions Leads to Record June Results;Technology Adoption Accelerates and Provides Competitive Advantage;Balance Sheet Well-Positioned for Investments in Growth and Expansion

MIAMI, July 23, 2020 (GLOBE NEWSWIRE) -- Watsco, Inc. (NYSE: WSO) reported second quarter results and provided an update regarding its technology initiatives designed to transform its customer-experience.

Technology Innovation Transforming Customer Experience

Watsco continues to lead and innovate through the introduction of new customer-focused technology designed to transform its customer experience and reshape how our industry operates. In light of the challenges posed by the COVID-19 pandemic, Watscos innovations have become ever more critical in the daily life of an HVAC/R contractor. As a result, the Company believes itis uniquely positioned to separate itself from its competition with many of these innovations setting the standard for serving HVAC/R contractors.

New innovations added in 2020 include:

-- Dockside/curbside pickup to facilitate contactless order fulfillment -- Digital customer outreach and training and rapid customer onboarding process for e-commerce -- Aggressive promotion of OnCall Air, a proprietary digital sales platform that enables contractors to remotely generate proposals for homeowners -- Expanded consumer financing through CreditForComfort

Customer use of Watscos innovative mobile apps expanded with average weekly users growing 34% compared to a year ago to over 22,000. E-commerce sales continued to grow at a faster pace than overall growth. The current annual run-rate for e-commerce sales is approximately $1.5 billion and, as a percentage of sales was 33% at June 30, 2020 versus 29% at December 31, 2019.

OnCall Air, Watscos digital sales platform for HVAC/R contractors, and CreditForComfort, its companion financing platform, have also gained traction. During the second quarter, OnCall Air presented quotes to more than 36,000 households and generated $107 million in gross merchandise value for our customers, a 66% increase over last year. CreditForComfort processed nearly 2,000 retail financing transactions, a 170% increase over last year.

These capabilities provide for a differentiated customer experience that make it possible for HVAC/R contractors to engage digitally with Watsco at every stage in their daily routine. Taken as a whole, Watscos technology offering is unique to the industry and enabled our entrepreneurial leaders to serve customers effectively and with minimal disruption in the current COVID-19 operating environment.

AJ Nahmad, Watscos President, commented: We are encouraged by the accelerated adoption of our technology and the new innovations recently launched. More customers are using our tools as the backbone of their business, allowing them to operate safely and more efficiently as well as providing modern-day tools to interact with homeowners and other end-users. We are energized and committed to doing more to help our customers grow and thrive in this environment.

Financial Strength & Liquidity

Watsco further strengthened its strong balance sheet during the second quarter, generating the highest level of cash flow for any quarter in its history. AtJune 30, 2020, the Company had$80 millionin cash,$33 millionin borrowings drawn from its$560 millioncredit facility and$1.7 billionof shareholders equity. Over the 12 months ended June 30, 2020, Watsco produced $529 million of operating cash flow versus net income of $285 million, repaid $186 million in debt and increased dividends 11% to an annual rate of $7.10 per share. The Company believes its conservative financial position and access to low-cost capital provide confidence to customers, employees and OEM partners. The strong balance sheet also affordsWatscothe capacity to invest in almost any size opportunity.

Second Quarter Results

Key performance metrics:

-- Earnings per share of $2.26 on net income attributable to Watsco of $87 million -- Sales of $1.36 billion compared to $1.37 billion last year -- Gross profit of $319 million (gross margins declined 30 basis-points) -- Operating profit of $129 million with operating margins of 9.5% -- Selling, general and administrative (SG&A) expenses declined 1% (includes 26 acquired locations) -- On a same-store basis: Sales decreased 6%Operating profit decreased 7%Operating margins were 9.7% versus 9.8% last yearSG&A declined 7% (a 20 basis-point improvement as a percentage of sales) -- Record operating cash flow of $219 million versus $16 million last year -- 85% reduction in borrowings year-over-year to $33 million

Sales trends (excluding acquisitions):

-- 4% decrease in HVAC equipment (70% of sales), including flat sales in residential products -- 9% decrease in other HVAC products (27% of sales) -- 15% decrease in commercial refrigeration products (3% of sales)

Albert H. Nahmad, Chairman and CEO, commented: Watscos entrepreneurial culture and decentralized operating philosophy, which empowers leaders to think and act locally, are critically important given the diverse business conditions in our various markets. In a short period of time, our leaders deployed more technology and implemented new ideas to enhance the customer experience in a challenging environment. During the quarter, our residential HVAC equipment business recovered steadily and drove record, double-digit sales and profit growth rates in June 2020 versus 2019 with on-going momentum into July. We will continue to innovate, drive performance and look for opportunities to grow our business.

First-Half 2020 Results

Key performance metrics:

-- Earnings per share of $3.02 on net income attributable to Watsco of $117 million -- 3% increase in sales to a record $2.36 billion (3% decrease on a same-store basis) -- Record gross profit of $567 million (gross margins declined 40 basis-points) -- Operating profit of $174 million with operating margins of 7.4% -- SG&A expenses increased 6% including 26 acquired locations (a 2% same-store decrease) -- Record operating cash flow of $261 million versus $68 million last year

Sales trends (excluding acquisitions):

-- 2% decrease in HVAC equipment (69% of sales), including a 1% increase in residential products -- 4% decrease in other HVAC products (28% of sales) -- 8% decrease in commercial refrigeration products (3% of sales)

Cash Flow, Liquidity & Dividends

Operating cash flow wasa record $261 millionfor the first half of 2020 versus$68 millionfor the same period last year. The Company recently upgraded its demand planning software and introduced new process improvements to enhance inventory turns, product availability and overall asset quality. Over the long-term, the Company believes these innovations will result in meaningful working capital improvement and operating efficiencies.

The Company believes cash flow from operations will exceed net income in 2020. Since 2000, Watscos cumulative operating cash flow was approximately$3.0 billioncompared to cumulative net income of approximately$2.7 billion, surpassing the Companys goal of generating cash flow in excess of net income.

InApril 2020, the Company expanded its revolving credit facility from $500 million to$560 millionwith no change to pricing or terms. The revolving credit facility matures inDecember 2023. AtJune 30, 2020, the Companys debt-to-total capital ratio was 2%.

Watscohas paid cash dividends for 46 consecutive years. Effective April 2020, the Company increased its annual dividend rate by 11% to$7.10per share. The Companys philosophy is to share increasing amounts of cash flow with shareholders through higher dividends while maintaining a conservative financial position. Future dividends will be considered in light of investment opportunities, cash flow, general economic conditions and the Companys financial position.

Second Quarter Earnings Conference Call Information

Date: July 23, 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 Company's website.

Use of Non-GAAP Financial Information

In this release, the Company discloses non-GAAP measures referring to same-store basis, which excludes 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 also includes a non-GAAP measure, debt-to-total capitalization, as a means to describe the relative amount of interest-bearing debt to total capital at June 30, 2020. This ratio is calculated by dividing (i) the sum of all interest bearing bank debt by (ii) the sum of all interest-bearing bank debt and shareholders equity. 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 management's 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 Results of Operations(In thousands, except share and per share data)(Unaudited)

Quarter Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019Revenues $1,355,385 $1,371,854 $2,363,541 $2,303,132Cost of sales 1,036,186 1,043,870 1,796,727 1,741,388Gross profit 319,199 327,984 566,814 561,744Gross profit margin 23.6% 23.9% 24.0% 24.4%SG&A expenses 194,053 196,549 397,439 376,621Other income 4,103 2,965 5,117 4,409Operating income 129,249 134,400 174,492 189,532Operating margin 9.5% 9.8% 7.4% 8.2%Interest expense, net 283 1,212 1,073 1,988Income before income taxes 128,966 133,188 173,419 187,544Income taxes 24,724 25,278 32,930 35,830Net income 104,242 107,910 140,489 151,714Less: net incomeattributable to 17,664 17,755 23,409 26,522non-controlling interestNet income attributable to $86,578 $90,155 $117,080 $125,192Watsco Diluted earnings per share:Net income attributable to $86,578 $90,155 $117,080 $125,192Watsco shareholdersLess: distributed andundistributed earnings 7,439 7,511 11,082 10,354allocated to non-vestedrestricted common stockEarnings allocated to $79,139 $82,644 $105,998 $114,838Watsco shareholders Weighted-average Commonand Class B common shares and equivalent shares used 35,064,711 34,462,960 35,044,350 34,432,948to calculate dilutedearnings per share Diluted earnings per sharefor Common and Class B $2.26 $2.40 $3.02 $3.34common stock

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

June 30, December 31, 2020 2019 Cash and cash equivalents $79,573 $74,454Accounts receivable, net 676,569 533,810Inventories 854,368 920,786Other 20,959 17,680Total current assets 1,631,469 1,546,730 Property and equipment, net 97,143 98,523Operating lease right-of-use assets 226,544 223,369Goodwill, intangibles, net and other 681,571 687,539Total assets $2,636,727 $2,556,161 Accounts payable and accrued expenses $569,035 $392,296Current portion of lease liabilities 69,823 69,421Total current liabilities 638,858 461,717 Borrowings under revolving credit agreement 33,357 155,700Operating lease liabilities, net of current portion 157,214 154,271Deferred income taxes and other liabilities 71,216 69,706Total liabilities 900,645 841,394 Watsco's shareholders? equity 1,437,039 1,435,427Non-controlling interest 299,043 279,340Shareholders? equity 1,736,082 1,714,767Total liabilities and shareholders? equity $2,636,727 $2,556,161

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

Six Months Ended June 30, 2020 2019Cash flows from operating activities: Net income $140,489 $151,714Non-cash items 26,072 22,221Changes in working capital, net of acquisition Accounts receivable (146,512) (146,441)Inventories 63,432 (117,591)Accounts payable and other liabilities 182,957 161,685Other, net (5,183) (3,141) Net cash provided by operating activities 68,447 261,255 Cash flows from investing activities: Capital expenditures, net (7,982) (9,105)Business acquisition, net of cash acquired - (16,761)Investment in unconsolidated entity - (4,940)Net cash used in investing activities (7,982) (30,806) Cash flows from financing activities: Dividends on Common and Class B common stock (129,315) (120,178)Net (repayments) proceeds under revolving credit 84,400agreement (122,343)Purchase of additional ownership from NCI - (32,400)Other 4,359 2,851Net cash used in financing activities (247,299) (65,327)Effect of foreign exchange rate changes on cash and (855) 707cash equivalentsNet increase (decrease) in cash and cash equivalents 5,119 (26,979)Cash and cash equivalents at beginning of period 74,454 82,894Cash and cash equivalents at end of period $79,573 $55,915

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