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Watsco, Inc.$159.46($.10)(.06%)

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 Watsco Achieves Record Sales, Earnings, Net Income and EPS During Second Quarter
   Tuesday, July 25, 2017 7:30:01 AM ET

Watsco, Inc. (WSO ) reported record results for the second quarter and six months ended June 30, 2017. The results reflect continued investment in a variety of technologies to revolutionize Watsco’s customer-experience, create a data-driven culture, to empower more insightful decision-making and enhance productivity and operational efficiency. The Company has also made additional investments in products and people to grow and develop market share for supplier partners.

Second Quarter Results

Key performance metrics:

-- 14% increase in earnings per share to a record $2.07

-- 10% increase in operating income to a record $129 million

-- 40 basis-point expansion in operating margins to 10.1%

-- 30 basis-point improvement in gross profit margin

-- 10 basis-point reduction in SG&A as a percentage of sales

Sales trends:

-- 5% sales growth to a record $1.28 billion

-- 7% increase in HVAC equipment (67% of sales), including 8% growth in the U.S.

-- 2% increase in other HVAC products (28% of sales)

-- 3% growth in commercial refrigeration products (5% of sales)

Albert H. Nahmad, Watsco’s Chairman and CEO stated: "Our second quarter performance produced the highest sales and profits of any quarter in Watsco’s history. Earnings growth and margin expansion were driven by a combination of solid sales growth, improved selling margins and operating efficiencies."

Mr. Nahmad added: "We believe technology changes progressing in our industry will accelerate and our industry-specific focus, scale and leadership position will serve us well. In time, we believe peers and competitors will realize that Watsco is an attractive succession plan and join forces with us to adapt and evolve in the changing environment. In this regard, we continue to actively seek acquisitions and investments to grow our network and leverage investments across an expanding enterprise."

First-Half Results

Key performance metrics:

-- 10% increase in earnings per share to a record $2.80

-- 6% increase in operating income to a record $178 million

-- 20 basis-point expansion in operating margins to 8.3%

-- 20 basis-point improvement in gross profit margin

-- Flat SG&A as a percentage of sales

Sales trends:

-- 4% sales growth to a record $2.15 billion

-- 5% increase in HVAC equipment (66% of sales)

-- 1% increase in other HVAC products (29% of sales)

-- 4% growth in commercial refrigeration products (5% of sales)

Mr. Nahmad added: "First-half results reflect further investments in technology and additional headcount of approximately 150 customer-facing employees intended to enhance long-term sales growth and market share. We remain optimistic that 2017 will be a record year for our company."

Acquisition of 35% of Russell Sigler, Inc.

On June 21, 2017, Watsco’s Carrier Enterprise business unit, a joint venture between Watsco and Carrier Corporation, acquired 35% ownership of Russell Sigler, Inc. (RSI). RSI was established in 1950 and is one of the largest HVAC distributors in North America with annual sales of approximately $650 million. It serves over 10,000 customers from 30 locations throughout Arizona, California, Idaho, New Mexico, Nevada and portions of Texas. Products sold include residential and commercial HVAC equipment manufactured by Carrier as well as parts, supplies and accessories sourced from over 700 other vendors. Consideration for the purchase was $63.6 million paid in cash (the Company contributed 80%, or $50.9 million). Carrier Enterprise has the exclusive right to purchase shares if and when any current RSI owner wishes to sell shares in the future.

Acquisition of Joint Venture Interests

In February 2017, Watsco raised its ownership of Carrier Enterprise Northeast LLC, also a joint venture with Carrier Corporation, to 80% for approximately $43 million in cash. The incremental investment builds on a November 2016 transaction, which increased Watsco’s controlling interest from 60% to 70%. Carrier Enterprise Northeast had sales in 2016 of approximately $500 million from 41 locations in the northeastern United States and 12 locations in Mexico. First-half results include a contribution of 8 cents per share from the increased ownership interest.

Technology Strategy

Watsco is actively transforming its business into the digital age by investing in scalable platforms for mobile apps, e-commerce, business intelligence and supply chain optimization. Strategic goals are to further strengthen Watsco’s leadership position, accelerate sales and profit growth, increase the speed and convenience of serving customers and extend the Company’s reach into new geographies and sales channels. Technology-related spending over the last twelve months was approximately $23 million.

Dividends & Cash Flow

In April 2017, Watsco’s Board of Directors approved a 19% increase in its annual dividend to $5.00 per share on each outstanding share of its Common and Class B common stock. The increase will be reflected in the Company’s dividend payment on July 31, 2017.

Watsco has paid dividends for over 40 consecutive years with the philosophy of sharing increasing amounts of cash flow through higher dividends while maintaining a conservative financial position. Future increases in dividends, if any, will be considered in light of investment opportunities, cash flow, general economic conditions and the Company’s overall financial condition.

The Company has targeted cash flow from operations to exceed net income in 2017. From 2000 to 2016, Watsco’s operating cash flow was approximately $1.9 billion compared to net income of approximately $1.8 billion, surpassing the Company’s stated goal of generating cash flow in excess of net income.

Conference Call Information

Date: July 25, 2017 Time: 10:00 a.m. (EDT) Webcast: http://investors.watsco.com Dial-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

Watsco provides comfort to homes and businesses regardless of the outdoor climate. There are approximately 92 million central air conditioning and heating systems installed in the United States that have been in service more than 10 years. Older systems often operate below today’s government mandated energy efficiency and environmental standards. Watsco has 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.

Watsco’s traditional sales channel is the industry’s largest and currently serves 88,000 contractor businesses through 562 locations in the United States, Canada, Mexico and Puerto Rico, and on an export basis to Latin America and the Caribbean. Watsco is a technology company, operating scalable platforms for mobile apps, e-commerce, business intelligence and supply chain. Strategic goals are to accelerate sales and profit growth, increase the speed and convenience of serving customers and to extend its reach into new geographies and sales channels. Watsco is also developing technologies to address the evolving buying habits of consumers in the digital economy. Over the long-term, Watsco believes its focus, scale and innovative culture offer significant advantages to address the consumer market, which is estimated to be $88 billion annually. Additional information about Watsco may 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. Forward-looking statements may be identified by the use of words such as "will," "would," "anticipate," "expect," "believe," "plan," "optimistic," "goal" 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 Watsco’s industry, seasonal nature of sales of Watsco’s products, the ability of the Company to expand its business, insurance coverage risks and final GAAP adjustments. Forward-looking statements speak only as of the date the statement was 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. 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.

                                                                                                                                                             
                                                                                                                                      WATSCO, INC.
                                                                                                                      Condensed Consolidated Results of Operations
                                                                                                                          (In thousands, except per share data)
                                                                                                                                       (Unaudited)
                                                                                                                                                                                                     
                                                                                                                         Quarter Ended June 30,                                                                                   Six Months Ended June 30,
                                                                                                        2017                              2016                                                 2017                              2016
                                                                                          --------------------------------                     --------------------------------                     --------------------------------                     --------------------------------
Revenues                                                                                  $1,275,924                                           $1,214,435                                           $2,148,019                                           $2,065,859
Cost of sales                                                                                965,646                           922,574                         1,619,185                         1,561,551  
                                                                                          ---------- --------------------                      ---------- --------------------                      ---------- --------------------                      ---------- --------------------
Gross profit                                                                                 310,278                                              291,861                                              528,834                                              504,308
Gross profit margin                                                                             24.3 %                                               24.0 %                                               24.6 %                                               24.4 %
                                                                                          ---------- --------------------                      ---------- --------------------                      ---------- --------------------                      ---------- --------------------
SG&A expenses (1)                                                                            180,930                           174,271                           350,787                           336,050  
                                                                                          ---------- --------------------                      ---------- --------------------                      ---------- --------------------                      ---------- --------------------
Operating income                                                                             129,348                                              117,590                                              178,047                                              168,258
Operating margin                                                                                10.1 %                                                9.7 %                                                8.3 %                                                8.1 %
                                                                                          ---------- --------------------                      ---------- --------------------                      ---------- --------------------                      ---------- --------------------
Interest expense, net                                                                          1,647                             1,054                             2,902                             2,040  
                                                                                          ---------- --------------------                      ---------- --------------------                      ---------- --------------------                      ---------- --------------------
Income before income taxes                                                                   127,701                                              116,536                                              175,145                                              166,218
Income taxes                                                                                  36,854                            35,112                            50,530                            50,620  
                                                                                          ---------- --------------------                      ---------- --------------------                      ---------- --------------------                      ---------- --------------------
Net income                                                                                    90,847                                               81,424                                              124,615                                              115,598
Less: net income attributable to noncontrolling interest                                      17,091                            16,803                            24,678                            25,440  
                                                                                          ---------- --------------------                      ---------- --------------------                      ---------- --------------------                      ---------- --------------------
Net income attributable to Watsco                                                            $73,756                           $64,621                           $99,937                           $90,158  
                                                                                          ========== ====================                      ========== ====================                      ========== ====================                      ========== ====================
                                                                                                                                                                                                                                                          
Diluted earnings per share:
Net income attributable to Watsco shareholders                                               $73,756                                              $64,621                                              $99,937                                              $90,158
Less: distributed and undistributed earnings allocated to non-vested                           6,186                             5,251                             8,374                             7,302  
(restricted) common stock
                                                                                          ---------- --------------------                      ---------- --------------------                      ---------- --------------------                      ---------- --------------------
Earnings allocated to Watsco shareholders                                                    $67,570                           $59,370                           $91,563                           $82,856  
                                                                                          ========== ====================                      ========== ====================                      ========== ====================                      ========== ====================
                                                                                                                                                                                                                                                          
Weighted-average Common and Class B common shares and equivalent                          32,708,646                                           32,606,336                                           32,694,306                                           32,576,326
shares used to calculate diluted earnings per share
                                                                                                                                                                                                                                                          
Diluted earnings per share for Common and Class B common stock                                 $2.07                             $1.82                             $2.80                             $2.54  
                                                                                          ========== ====================                      ========== ====================                      ========== ====================                      ========== ====================
                                                                                                                                                                                                                                                                     
(1) Selling, general and administrative expenses.
                                                                                                                                                                                                                                                                     
                                                                                         
                                                                    WATSCO, INC.
                                                        Condensed Consolidated Balance Sheets
                                                              (Unaudited, in thousands)
                                                                                                                                 
                                                                                              June 30, 2017                       December 31, 2016
                                                                                             -------------                      --------------------
Cash and cash equivalents                                                                          $51,034                                   $56,010
Accounts receivable, net                                                                           613,193                                   475,974
Inventories                                                                                        770,012                                   685,011
Other                                                                                               17,502                                    23,161
                                                                                             -------------                      --------------------
  Total current assets                                                                           1,451,741                                 1,240,156
                                                                                                                                 
Property and equipment, net                                                                         92,255                                    90,502
Goodwill, intangibles, net and other                                                               610,422                                   543,991
                                                                                             -------------                      --------------------
  Total assets                                                                                  $2,154,418                                $1,874,649
                                                                                             =============                      ====================
                                                                                                                                 
Accounts payable and accrued expenses                                                             $422,556                                  $314,688
Current portion of long-term obligations                                                             1,880                                       200
                                                                                             -------------                      --------------------
  Total current liabilities                                                                        424,436                                   314,888
                                                                                                                                 
Borrowings under revolving credit agreement                                                        379,300                                   235,294
Deferred income taxes and other liabilities                                                         70,322                                    72,719
                                                                                             -------------                      --------------------
  Total liabilities                                                                                874,058                                   622,901
                                                                                             -------------                      --------------------
                                                                                                                                 
Watsco’s shareholders’ equity                                         1,018,665                                 1,005,828
Non-controlling interest                                                                           261,695                                   245,920
                                                                                             -------------                      --------------------
Shareholders’ equity                                                  1,280,360                                 1,251,748
                                                                                             -------------                      --------------------
  Total liabilities and shareholders’ equity                         $2,154,418                                $1,874,649
                                                                                             =============                      ====================
                                                                                                                                 
                                                                      
                                                                                WATSCO, INC.
                                                               Condensed Consolidated Statements of Cash Flows
                                                                          (Unaudited, in thousands)
                                                                                           
                                                                                                                       Six Months Ended June 30,
                                                                                                       2017                             2016
                                                                                          ------------------------------                     --------------------------------
Cash flow from operating activities:
  Net income                                                                              $124,615                                             $115,598
  Non-cash items                                                                            21,677                                               21,099
  Changes in working capital                                                              (114,053 )                                            (94,764 )
                                                                                          -------- --------------------                      ---------- --------------------
     Net cash provided by operating activities                                              32,239                            41,933  
                                                                                          -------- --------------------                      ---------- --------------------
                                                                                                                                              
Cash flow from investing activities:
                                                                                           (63,600 )                                                  -
  Investment in unconsolidated entity
  Capital expenditures, net                                                                (10,237 )                                             (4,994 )
                                                                                          -------- --------------------                      ---------- --------------------
     Net cash used in investing activities                                                 (73,837 )                                             (4,994 )
                                                                                          -------- --------------------                      ---------- --------------------
                                                                                                                                              
Cash flow from financing activities:
  Net proceeds under revolving credit agreement                                            144,006                                               22,025
                                                                                            12,720                                                    -
  Proceeds from non-controlling interest for investment in
  unconsolidated entity
  Dividends on Common and Class B Common stock                                             (74,835 )                                            (60,164 )
  Purchase of additional ownership from non-controlling interest                           (42,688 )                                                  -
  Distributions to non-controlling interest                                                 (6,799 )                                             (7,114 )
  Other                                                                                      3,488                             3,575  
                                                                                          -------- --------------------                      ---------- --------------------
     Net cash provided by (used in) financing activities                                    35,892                           (41,678 )
                                                                                          -------- --------------------                      ---------- --------------------
Effect of foreign exchange rate changes on cash and cash equivalents                           730                                54  
                                                                                          -------- --------------------                      ---------- --------------------
Net decrease in cash and cash equivalents                                                   (4,976 )                                             (4,685 )
Cash and cash equivalents at beginning of period                                            56,010                            35,229  
                                                                                          -------- --------------------                      ---------- --------------------
Cash and cash equivalents at end of period                                                 $51,034                           $30,544  
                                                                                          ======== ====================                      ========== ====================
                                                                                                                                                         

http://cts.businesswire.com/ct/CT?id=bwnews&sty=20170725005494r1&sid=cmtx6&distro=nx&

View source version on businesswire.com: http://www.businesswire.com/news/home/20170725005494/en/

SOURCE: Watsco, Inc.

Watsco, Inc. 
Barry S. Logan, 305-714-4102 
Senior Vice President 
blogan@watsco.com


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