GlobeNewswire Inc | Feb 11, 2021 07:30AM EST

February 11, 2021

Annual Records Achieved for EPS, Sales, Profitability and Cash Flow

10% Dividend Raise to $7.80 Following Record Performance

MIAMI, Feb. 11, 2021 (GLOBE NEWSWIRE) -- Watsco, Inc. (NYSE: WSO) reported record fourth quarter results. Watsco set new annual records for earnings per share (EPS), sales, operating income, net income and operating cash flow.

Watsco also announced that its Board of Directors approved a 10% increase in its annual dividend to $7.80 per share to be reflected in the Companys next regular quarterly payment inApril 2021.

Watscos entrepreneurial culture, which empowers leaders to think and act locally, proved critically important in responding to changing market conditions during 2020. The Companys technology platforms supported customers and facilitated higher levels of engagement and connectivity, which led to more customer acquisition and market share gains. In addition, Watscos internally-focused technology platforms, designed to promote operational excellence in each of the Companys 600 locations, yielded efficiencies and contributed to the Companys record cash flow.

Albert H. Nahmad, Watscos Chairman and CEO commented: We are excited to deliver another record year, especially given the unique business challenges faced in 2020. Our coreU.S.residential business remained solid, generating 17% growth during the quarter and reflecting the continued trend towards higher-efficiency systems. We express our gratitude to our more than 5,700 employees for their extraordinary efforts during this challenging year. We are optimistic and look forward to another strong year in 2021.

Fourth Quarter Results

Key performance metrics:

-- 24% EPS growth to $1.14 -- 23% increase in net income attributable to Watsco to a record $46 million -- 8% sales growth to a record $1.15 billion (7% increase on a same-store basis) -- 34% increase in operating profit to a record $70 million with 110 basis-point operating margin expansion -- 8% gross profit increase to a record $282 million with 10 basis-point increase in gross margin -- 2% increase in SG&A expenses (110 basis-point improvement as a percentage of sales) -- 17% increase in operating cash flow to a record $162 million

Sales Trends (excluding acquisitions):

-- 9% increase in HVAC equipment (67% of sales), including 13% overall growth in U.S. markets and 17% growth in U.S. residential equipment -- 7% increase in other HVAC products (30% of sales) -- 2% increase in commercial refrigeration products (3% of sales)

Mr. Nahmad added: Looking to the long-term, we believe there is opportunity to be a significant participant and contributor in efforts to address climate change. The sale of higher-efficiency products has long been a fundamental opportunity given the size and age of the installed base of HVAC systems in the U.S., many of which are operating under old efficiency standards that result in higher energy use and costs to homeowners. We have a role to play in educating contractors and consumers on the benefits of higher-efficiency systems that both reduce energy costs and contribute to a healthier climate. Watsco plans to actively collaborate with its OEM partners and key stakeholders to lead these ongoing efforts in its marketplace.

It is important to note that the fourth quarter of each calendar year is highly seasonal due to the nature and timing of the replacement of HVAC systems, which is strongest in the second and third quarters. Accordingly, the Companys fourth quarter financial results are disproportionately affected by seasonality.

Full-Year Results

Key performance metrics:

-- 8% EPS growth to a record $7.01 -- 10% increase in net income attributable to Watsco to a record $270 million -- 6% sales growth to a record $5.05 billion (2% increase on a same-store basis) -- 9% operating profit growth to a record $401 million (7% on a same-store basis) -- 20 basis-point operating margin expansion to 7.9% (40 basis-point increase on a same-store basis to 8.1%) -- 6% increase in gross profit to a record $1.22 billion (10 basis-point decline in gross margins) -- 4% increase in SG&A expenses, including new locations and acquisitions -- 1% decrease in same-store SG&A expenses and a 50 basis-point improvement as a percentage of sales -- 59% increase in operating cash flow to a record $534 million or 165% of net income

Sales trends (excluding acquisitions):

-- 4% growth in HVAC equipment (69% of sales), including 7% growth in U.S. markets and 10% growth in U.S. residential equipment -- Flat sales of other HVAC products (28% of sales) -- 4% decrease in commercial refrigeration products (3% of sales)

Mr. Nahmad further commented: Our performance in 2020 resulted in record cash flow and debt-reduction. As a result, we are pleased to raise our dividend 10% to $7.80 per share effective April 2021. Watscois debt-free and capable of investing in almost any-sized opportunity to grow our network and leadership position in the estimated$40 billionNorth American HVAC distribution industry.

Technology Innovation

Watsco continues to aggressively invest in technologies to transform its customer-experience. These investments make it easier for HVAC contractors to do business with Watsco and, in turn, improve the speed, efficiency and growth opportunities for our customers. More recent platforms have also been established to help customers develop and grow their business involving one of the most important consumer purchases in the home. Specific technology-related achievements 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 platform to HVAC contractors in the field. Watsco has digitized product information for approximately 875,000 SKUs, an increase of 20% over 2019, which are accessed by more than 300,000 contractors and technicians. -- Contractor Assist mobile apps provide customers in the field with real-time access to critical information to make technicians more efficient, including technical support, product detail and inventory information, warranty look-up, the ability to purchase product and much more. The user community of Watscos innovative mobile apps grew to over 120,000 in 2020. The number of average weekly users grew 27% during 2020. -- E-Commerce sales continued to grow as more customers transacted online. In 2020, Watscos e-commerce sales exceeded $1.5 billion with 20% growth in customers transacting through its e-commerce platform. E-commerce revenues increased to 33% of sales versus 31% in 2019. Additional e-commerce highlights include:

E-Commerce Metrics 2020 vs. 2019 E-commerce Sales 10% increase to $1.53 billion E-commerce Customer Growth 20% increase to over 16,000 customers E-commerce super-users (>70% 26% increase to over 2,400 customers use) E-commerce Order Growth 20% increase to over 1.2 million transactions E-commerce Line Items per Order 27% higher than traditional orders Attrition rate for e-commerce 69% less attrition than non-users users

-- OnCall Air, Watscos digital sales platform for use by HVAC/R contractors, and CreditForComfort, its companion consumer financing platform, both continue to see increased penetration as our customers digitally engage with homeowners. In 2020, OnCall Air presented quotes to approximately 109,000 households, a 78% increase over the prior year, and generated nearly $350 million in gross merchandise value, an 89% increase over 2019. CreditForComfort processed more than 5,000 financing applications in 2020, an increase of 137% over the prior year, and grew the dollar value of loans by more than 180%. -- Investments in Watscos proprietarywarehouse technology that delivers speed, convenience and order accuracy have resulted in faster, better and more accurate servicing of customers. Express Pick-up allows contractors to streamline the traditional fulfillment of orders, enabling quicker service. In response to the COVID-19 pandemic, Watsco also launched curbside pick-up and touchless payment capabilities to facilitate contactless order fulfillment. More tools were developed to optimize demand planning and inventory levels. Taken as a whole, these investments enhance the customer experience, streamline branch operations and benefit same-store productivity.

Warehouse Efficiency & Supply Chain 2020 vs. 2019 Locations with Order Fulfillment (OF) More than 550 or 92% of total software branches Locations with Express Pick-up 452 locations, up 24% over last year Express Pick-Up Orders Fulfilled More than 250,000 orders, up 47% from 2019 Curbside Orders Fulfilled (introduced More than 22,000 orders since July in 2020) 1, 2020

AJ Nahmad, Watscos President, commented: 2020 marked further progress toward our long-term goal of scaling Watscos technologies for HVAC/R contractors. As more and more customers adapt to operating in the digital age, we believe that Watsco has the industrys most sophisticated tools to help customers grow and operate with speed. Even more exciting is the progress we are seeing with newer platforms like OnCall Air and CreditForComfort, which make it possible for contractors to win more frequently with homeowners. Our horizon remains long-term, and we have merely scratched the surface of what is possible.

Balance Sheet, Cash Flow & Dividends

Watscos long-standing goal is to maintain a conservative balance sheet to allow investment in new growth opportunities whenever they arise. During 2020, Watsco generated record cash flow and finished the year debt-free. The Company maintains a $560 million revolving credit facility. Watsco believes its conservative financial position and access to low-cost capital provide confidence to its customers, employees and OEM partners.

Operating cash flow for the year increased 59% to a record $534 million. Since 2000, Watscos cumulative operating cash flow was $3.2 billion compared to net income of $2.9 billion, surpassing the Companys goal of generating cash flow in excess of net income.

Watsco has paid cash dividends for 47 consecutive years with the philosophy of sharing increasing amounts of cash flow with shareholders through dividends over time, while maintaining a conservative financial position with flexibility to invest in future growth.

In February 2021, Watscos Board authorized a 10% increase in Watscos annual dividend to $7.80 per share effective at its next scheduled payment date on April 30, 2021. Future dividend increases will be considered in light of investment opportunities, cash flow, general economic conditions and the Companys financial condition.

Fourth Quarter Earnings Conference Call Information

Date: February 11, 2021 at 10:00 a.m. (ET)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 on a 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 over 300,000 contractors and technicians visit or call one of its 600 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 as these systems accounts for approximately half of the energy consumed in a typical 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 per share data)(Unaudited) Quarter Ended December 31, Year Ended December 31, 2020 2019 2020 2019 Revenues $ 1,154,716 $ 1,072,315 $ 5,054,928 $ 4,770,362 Cost of sales 872,472 811,794 3,832,107 3,613,406 Gross profit 282,244 260,521 1,222,821 1,156,956 Gross profit 24.4 % 24.3 % 24.2 % 24.3 %marginSG&A expenses 214,575 210,805 833,051 800,328 Other income 2,092 2,317 11,264 10,256 Operating income 69,761 52,033 401,034 366,884 Operating margin 6.0 % 4.9 % 7.9 % 7.7 %Interest 58 610 1,239 4,032 expense, netIncome before 69,703 51,423 399,795 362,852 income taxesIncome taxes 13,226 7,017 76,623 67,077 Net income 56,477 44,406 323,172 295,775 Less: net incomeattributable to 10,467 7,128 53,593 49,825 non-controllinginterestNet incomeattributable to $ 46,010 $ 37,278 $ 269,579 $ 245,950 Watsco Diluted earnings per share:Net incomeattributable to $ 46,010 $ 37,278 $ 269,579 $ 245,950 WatscoshareholdersLess:distributed andundistributedearnings 5,869 5,058 23,140 20,411 allocated tonon-vestedrestrictedcommon stock (1)Earningsallocated to $ 40,141 $ 32,220 $ 246,439 $ 225,539 Watscoshareholders Weighted-averageCommon and ClassB common sharesand equivalent 35,274,252 34,989,956 35,150,571 34,675,641 shares used tocalculatediluted earningsper share Diluted earningsper share forCommon and Class $ 1.14 $ 0.92 $ 7.01 $ 6.50 B common stock(1)

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(1) These amounts include the dilutive impact attributable to the excess of dividends paid on restricted shares over the net income allocated to non-vested restricted common stock. Such excess amounts were $1.9 million in the fourth quarter of 2020 (5 cents per share) and $2.0 million in the fourth quarter of 2019 (6 cents per share). The Company expects this dilutive impact to be seasonal during the first and fourth quarters of each year due to EPS in such periods generally being less than the quarterly dividend rate.

WATSCO, INC.Condensed Consolidated Balance Sheets(Unaudited, in thousands) December 31, December 31, 2020 2019 Cash and cash equivalents $ 146,067 $ 74,454Accounts receivable, net 535,288 533,810Inventories 793,869 920,786Other 21,791 17,680Total current assets 1,497,015 1,546,730 Property and equipment, net 98,225 98,523Operating lease right-of-use assets 209,169 223,369Goodwill, intangibles, net and other 692,508 687,539Total assets $ 2,496,917 $ 2,556,161 Accounts payable and accrued expenses $ 427,911 $ 392,296Current portion of long-term obligations 71,804 69,421Total current liabilities 499,715 461,717 Borrowings under revolving credit agreement - 155,700Operating lease liabilities, net of current portion 139,527 154,271Deferred income taxes and other liabilities 77,914 69,706Total liabilities 717,156 841,394 Watsco's shareholders? equity 1,486,678 1,435,427Non-controlling interest 293,083 279,340Shareholders? equity 1,779,761 1,714,767Total liabilities and shareholders? equity $ 2,496,917 $ 2,556,161

WATSCO, INC.Condensed Consolidated Statements of Cash Flows(Unaudited, in thousands) Year Ended December 31, 2020 2019 Cash flows from operating activities: Net income $ 323,172 $ 295,775 Non-cash items 44,061 40,203 Changes in working capital, net of effects of 167,146 (207 )acquisitionsNet cash provided by operating activities 534,379 335,771 Cash flows from investing activities: Capital expenditures, net (16,342 ) (16,425 )Business acquisitions, net of cash acquired - (59,672 )Investment in unconsolidated entity - (4,940 )Net cash used in investing activities (16,342 ) (81,037 ) Cash flows from financing activities: Dividends on Common and Class B Common stock (265,713 ) (241,412 )Net (repayments) proceeds under revolving (155,700 ) 20,500 credit agreementDistributions to non-controlling interest (42,401 ) (39,272 )Proceeds from non-controlling interest - 17,988 Purchase of additional ownership interest from - (32,400 )NCIOther 15,321 10,573 Net cash used in financing activities (448,493 ) (264,023 )Effect of foreign exchange rate changes on 2,069 849 cash and cash equivalentsNet increase (decrease) in cash and cash 71,613 (8,440 )equivalentsCash and cash equivalents at beginning of year 74,454 82,894 Cash and cash equivalents at end of year $ 146,067 $ 74,454

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