Miami, FL - Watsco, Inc. reported record results for the third quarter and nine months ended September 30, 2013.
Third Quarter Results
Revenues increased 6% to a record $1.1 billion, reflecting an 8% increase in air conditioning and heating (HVAC) equipment (65% of sales), a 3% increase in other HVAC products (31% of sales) and a 1% increase in commercial refrigeration products (4% of sales).
Gross profit increased 7% to a record $259 million with gross margin improving 10 basis-points to 23.9%. Selling, general and administrative (SG&A) expenses increased 4% to $163 million and as a percentage of sales improved 30 basis-points to a record low of 15.1%. Operating income increased 11% to a record $95 million with operating margin expanding 40 basis-points to 8.8%.
Earnings per share increased 11% to a record $1.32 per diluted share on record net income of $46 million, compared to $1.19 per diluted share on net income of $41 million in 2012.
Albert Nahmad, Watsco's President & CEO stated: "Watsco delivered another solid quarter of earnings growth from higher sales, stronger selling margins and the continued effort of our business units to manage operating costs. We again saw strength in the sales of residential HVAC systems in the United States, which grew double-digits and an improved sales trend for commercial products."
Mr. Nahmad added, "Watsco also generated a record level of cash flow for any quarter in its history, and we recently increased our quarterly dividend by 60% to 40 cents per share. With strong cash flow and a healthy balance sheet, we are motivated and believe we are well-positioned to make the right investments to grow our business."
Revenues increased 9% to a record $2.9 billion, including $89 million of sales from new locations. Same-store sales increased 6%, reflecting an 8% increase in HVAC equipment (64% of sales), a 3% increase in other HVAC products (31% of sales) and a 4% increase in commercial refrigeration products (5% of sales).
Gross profit increased 11% to a record $701 million and gross profit margin improved 30 basis-points to 24.0%. On a same-store basis, gross profit increased by 7% with gross profit margin improving 20 basis-points to 23.9%. SG&A expenses increased 7% to $470 million and as a percentage of sales were a record low of 16.1%. SG&A excluding new locations increased 2% to $449 million and as a percentage of sales were a record low of 15.9%.
Operating income increased 21% to a record $231 million with operating margin expanding 70 basis-points to 7.9%. Same-store operating income increased 19% to $228 million with operating margin expanding 90 basis-points to 8.1%.
Earnings per share increased 22% to a record $3.18 per diluted share on record net income of $110 million, compared to $2.61 per diluted share on net income of $89 million in 2012.
Results for the nine months ended September 30, 2013 include 35 new locations from a joint venture formed on April 27, 2012 with Carrier Corporation in Canada, of which Watsco owns 60% and Carrier owns 40%. The results also reflect a 10% greater ownership interest effective July 1, 2012 in Carrier Enterprise LLC, a U.S. joint venture formed with Carrier in 2009.
Cash Flow and Dividends
For the quarter, Watsco generated $128 million of operating cash flow, an all-time record for any quarter in its history. For the nine months ended September 30, 2013, Watsco's operating cash flow was $51 million versus $64 million in the same period in 2012.
At September 30, 2013, cash and cash equivalents were $29 million, borrowings were $285 million and the Company's debt-to-total-capitalization ratio was 20%. The Company expects to generate significant cash flow from operations during the fourth quarter of 2013.
Dividends paid during the first nine-months of 2013 were $26 million. On October 2, 2013, the Company raised its quarterly dividend rate 60% to 40 cents per share. Watsco has paid quarterly dividends for 38 consecutive years.
Mr. Nahmad added: "Our goal is to pay increasing dividends each year while maintaining a conservative balance sheet. Future increases will be considered in light of investment opportunities, cash flow, general economic conditions and our overall financial condition."
Outlook for 2013
Watsco's outlook for full-year 2013 diluted earnings per share is within the range of $3.65 to $3.70 per diluted share, representing a prospective growth rate of 20% to 22% over 2012's results (adjusted to exclude a 33 cent reduction in diluted EPS related to a $5.00 special dividend paid in October 2012).
Watsco is hosting a conference call at 10:00 a.m. (EDT) on October 16, 2013 to discuss its third quarter results. The conference call will be web-cast by CCBN's StreetEvents at http://www.watsco.com. A replay of the conference call will be available on the Company's website. For those unable to connect to the webcast, you may listen via telephone. The dial-in number for callers in the United States is (866) 652-5200 and for international callers is (412) 317-6060.
Use of Non-GAAP Financial Information
In this release, the Company discloses non-GAAP measures of same-store basis and adjusted diluted earnings per share. Information referring to "same-store basis" excludes the effects of locations acquired or locations opened or closed during the immediately preceding 12 months unless they 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 accounting principles generally accepted in the United States (GAAP).