GlobeNewswire Inc | Apr 22, 2021 07:30AM EDT

April 22, 2021

Double-Digit Sales Growth, Higher Gross Margins and Operating Efficiencies Drive Record Performance

Customer-Adoption of Technologies Grows as Business Evolution Continues

MIAMI, April 22, 2021 (GLOBE NEWSWIRE) -- Watsco, Inc. (NYSE: WSO) reported record first quarter operating results, establishing new records for sales, operating income, operating margins, net income and earnings per share (EPS).

Watscos entrepreneurial culture continues to be critically important in response to the varying business conditions in the marketplace. The Company believes the pace of change and innovation is accelerating as adoption of its technology platforms gains further momentum. These platforms are designed to revolutionize the customer experience, providing contractors speed and efficiency as well as supporting their growth in unparalleled ways. In terms of results, new customer acquisition is increasing and attrition rates with existing customers are decreasing, providing meaningful contributions to sales and overall operating performance. The Company continues to make incremental investments to add more capabilities and functionality, to develop and launch new innovations and drive adoption by more customers.

First Quarter Results

Key Performance Metrics

-- 93% increase in EPS to a record $1.39 -- 81% increase in operating income to a record $82 million -- 270 basis-point operating margin expansion to a record 7.2% -- 19% gross profit increase to a record $295 million -- 130 basis-point gross margin increase to a record 25.9% -- 7% increase in SG&A expenses and a 100 basis-point reduction in SG&A as a percentage of sales

Sales trends:

-- 13% sales growth to a record $1.14 billion -- 14% growth in HVAC equipment (67% of sales), including 18% growth in residential products -- 11% increase in other HVAC products (29% of sales) -- 10% increase in commercial refrigeration products (4% of sales)

Albert H. Nahmad, Watscos Chairman & CEO stated: Watsco delivered another record quarter with solid earnings growth and margin expansion. These results are attributable to strong sales growth, a richer sales mix of high-efficiency systems, better selling margins and operating efficiencies. First quarter results also reflect continued investments in products, technology and people to drive sales and innovation throughout our business. As we head into the selling season, we are focused on the same proven fundamentals growth in customer adoption of our industry-leading technologies, driving profitable sales and share gains for our supplier partners. Our first quarter results are a good start in what we expect to be a record year for our company.

Mr. Nahmad added: Sales of residential HVAC systems with energy-efficiency ratings above the minimum energy-standard grew 20% this quarter, a progression that began more than a decade ago. We believe that the products we sell play a key role in advancing energy efficiency, providing Watsco the opportunity to be an important contributor to address climate change. There are an estimated 110 million HVAC systems installed in the U.S., many of which operate under old efficiency standards. Replacing the installed base to todays minimum standards can help reduce energy consumption, but even greater conservation and cost savings can be achieved with the higher-efficiency products that we offer. Higher-efficiency HVAC systems also offer healthier and more comfortable indoor living and working environments regardless of the outdoor climate. We are investing capital and leveraging our technology to increase awareness of these benefits among contractors and consumers. As the industry leader, Watsco has an important role to play and we can do so at scale.

It is an important caution that the first and fourth calendar quarters are generally seasonal with demand for air conditioning and heating products being the highest during the second and third quarter of each calendar year. Accordingly, first quarter 2021 results are disproportionately affected by this seasonality in addition to general economic conditions.

Technology Innovation

Watscocontinues to aggressively invest in technologies to transform its customer experience. Specific technology-related trends in 2021 include:

-- Product Information Management (PIM)is Watscos industry-leading repository of product information delivered seamlessly through Watscos mobile apps and e-commerce platform.WatscosPIM includes approximately 900,000 SKUs accessed by more than 300,000 contractors and technicians annually. -- Contractor Assist mobile appsprovide customers real-time field access to critical information, including technical support, product detail and inventory information, warranty look-up, the ability to purchase product through links to e-commerce and much more. The authenticated user community (users that are using the mobile app while linked to an e-commerce account) grew 11% to approximately 21,000 users at the end of the first quarter compared to a year ago. -- E-Commerce sales annual run-rate currently exceeds $1.6 billion and grew 18% in comparison to the first quarter last year. The number of e-commerce transactions grew 30% to nearly 300,000 during the quarter. -- OnCall Air,Watscos digital sales platform used by HVAC/R contractors andCreditForComfort,its companion consumer financing platform, both increased penetration as more customers digitally engaged with homeowners. During the first quarter of 2021, OnCall Air presented quotes to approximately 34,000 households, an 111% increase over the prior year, and generated $105 millionin gross merchandise value, an 111% increase over 2020.CreditForComfort processed approximately 1,000 financing applications during the quarter, a 61% increase, and grew total loan-value by 86% versus the same period in 2020. -- Proprietarywarehouse technology investments have enabled faster, better and more reliable service. Express Pick-up allows contractors to streamline the traditional fulfillment of orders providing quicker service. Watscoalso launched curbside pick-up and touchless payment capabilities last year to facilitate contactless order fulfillment. More tools have also been developed to optimize demand planning and inventory levels. Taken as a whole, these investments are designed to enhance the customer experience, streamline branch operations and benefit same-store productivity.

A.J. Nahmad, Watscos President said: We have continued to make progress toward our long-term goal of scaling Watscos technologies for more and more HVAC/R contractors. As customers adapt to the digital age, we believe thatWatscohas the industrys most sophisticated tools to help customers grow and operate with speed. We are especially excited about the progress of our newer platforms likeOnCall Airand CreditForComfort, which make it possible for contractors to win more frequently with homeowners. Our horizon remains long-term, and we believe we are merely scratching the surface of what is possible.

Cash Flow & Dividends

Watscos operating cash flow for the quarter was a $38 million use of cash, reflecting the build-up of inventories prior to the selling season. The Company has targeted operating cash flow to exceed net income in 2021. Since 2000, operating cash flow was approximately$3.2 billionversus net income of$2.9 billion, surpassing the Companys goal.

Watscohas paid cash dividends to shareholders for 47 consecutive years. The Companys philosophy is to share increasing amounts of cash flow through higher dividends while maintaining a conservative financial position with continued capacity to build its distribution network. EffectiveApril 2021,Watscoincreased its annual dividend rate by 10% to$7.80per share.

Acquisition of TEC

On April 12, 2021, Watsco announced that it had completed the acquisition ofTemperature Equipment Corporation(TEC). Founded inChicagoin 1935, TEC serves approximately 10,000 HVAC customers from 32 locations inIllinois,Indiana,Kansas,Michigan,Minnesota,MissouriandWisconsin. TEC generated sales of$291 millionin 2020, providing a broad product offering including residential, light-commercial and applied HVAC systems from Carrier as well as parts, supplies and accessories sourced from approximately 1,200 vendors. More information about TEC can be found atwww.tecmungo.com.

Watscois actively seeking additional opportunities to invest in what remains a fragmented$40 billionNorth American HVAC distribution industry.

First Quarter Earnings Conference Call Information

Date: April 22, 2021Time: 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.

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 633 locations each year to get information, obtain technical support and buy products.

The Company believes there is long-term opportunity to be a significant participant and contributor in efforts to address climate change. HVAC/R products provide comfort to homes and businesses regardless of the outdoor climate. Older systems often operate below current government-mandated energy efficiency and environmental standards, resulting in higher energy use and costs to homeowners.Sales of higher-efficiency replacement systems have long been a fundamental opportunity inWatscos marketplace. Watscoplans to actively collaborate with its OEM partners and key stakeholders to lead these ongoing efforts in its marketplace. Additional information aboutWatscomay be found atwww.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, the seasonality of product sales, 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 thatWatscofiles with theSecurities 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.Watscoassumes 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 March 31, 2021 2020 Revenues $ 1,136,118 $ 1,008,156 Cost of sales 841,297 760,541 Gross profit 294,821 247,615 Gross profit margin 25.9% 24.6% SG&A expenses 217,612 203,386 Other income 4,671 1,014 Operating income 81,880 45,243 Operating margin 7.2% 4.5% Interest expense, net 88 790 Income before income taxes 81,792 44,453 Income taxes 15,665 8,206 Net income 66,127 36,247 Less: net income attributable to 11,035 5,745 non-controlling interestNet income attributable to Watsco $ 55,092 $ 30,502 Diluted earnings per share: Net income attributable to Watsco $ 55,092 $ 30,502 shareholdersLess: distributed and undistributedearnings allocated to non-vested 6,054 5,233 restricted common stock (1)Earnings allocated to Watsco shareholders $ 49,038 $ 25,269 Weighted-average Common and Class B commonshares and equivalent shares used to 35,329,834 35,023,989 calculate diluted earnings per share Diluted earnings per share for Common and $ 1.39 $ 0.72 Class B common stock (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 $1.2 (1) million in the first quarter of 2021 (3 cents per share) and $2.6 million in the first quarter of 2020 (7 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)

March 31, December 31, 2021 2020 Cash and cash equivalents $ 93,875 $ 146,067Accounts receivable, net 596,513 535,288Inventories, net 986,648 781,299Other 18,319 21,791Total current assets 1,695,355 1,484,445 Property and equipment, net 100,378 98,225Operating lease right-of-use assets 203,603 209,169Goodwill, intangibles, net and other 692,928 692,508Total assets $ 2,692,264 $ 2,484,347 Accounts payable and accrued expenses $ 558,053 $ 415,341Current portion of long-term obligations 72,767 71,804Total current liabilities 630,820 487,145 Borrowings under revolving credit agreement 48,900 -Operating lease liabilities, net of current portion 132,829 139,527Deferred income taxes and other liabilities 82,888 77,914Total liabilities 895,437 704,586 Watsco's shareholders? equity 1,491,407 1,486,678Non-controlling interest 305,420 293,083Shareholders? equity 1,796,827 1,779,761Total liabilities and shareholders? equity $ 2,692,264 $ 2,484,347

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

Quarter Ended March 31, 2021 2020 Cash flows from operating activities: Net income $ 66,127 $ 36,247 Non-cash items 14,708 17,593 Changes in working capital (118,580 ) (11,981 )Net cash (used in) provided by operating (37,745 ) 41,859 activities Cash flows from investing activities: Proceeds from sale of equity securities 5,993 - Capital expenditures, net (4,772 ) (3,849 )Net cash provided by (used in) investing 1,221 (3,849 )activities Cash flows from financing activities: Dividends on Common and Class B Common stock (68,521 ) (61,238 )Net proceeds under revolving credit agreement 48,900 443 Other 3,371 1,407 Net cash used in financing activities (16,250 ) (59,388 )Effect of foreign exchange rate changes on cash 582 (1,840 )and cash equivalentsNet decrease in cash and cash equivalents (52,192 ) (23,218 )Cash and cash equivalents at beginning of year 146,067 74,454 Cash and cash equivalents at end of year $ 93,875 $ 51,236

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