Watsco Inc.
(
WSO
) delivered a record second quarter both in terms of revenue and
profits. Adjusted EPS in the quarter was $1.15, a 6% increase the
year-ago quarter earnings of $1.09, but missing the Zacks Consensus
Estimate of $1.30.
Total revenue increased 15% to $1.01 billion, missing the Zacks
Consensus Estimate of $1.04 billion. Same-store sales increased 2%,
including a hike of 5% in air conditioning and heating (HVAC)
equipment and a 16% rise in commercial refrigeration products,
while sales of other HVAC products dropped 4%.
Cost and Margins
Cost of sales increased 15% to $773 million in the quarter. Gross
profit was up 12% to $238 million. However, gross profit margin
dropped 50 basis-points (bps) to 23.6%. Gross margin plummeted due
to higher sales mix of HVAC products and commercial products which
generate lower margins than non-equipment products.
Selling, general and administrative expenses rose 11% to $152
million in the quarter. Income from operations increased 14% to
$85.9 million. Operating margin remained flat year over year at
8.5%.
Financial Operations
Cash and cash equivalents were $35.2 million as of June 30, 2012,
compared with $18.1 million as of March 31, 2012. For the first
half of fiscal 2012, operating cash flow was $60 million compared
with $42 million in the comparable period of 2011.
Long-term debt for the company was $236 million as of June 30,
2012 compared with $42.5 million as of March 31, 2012. In April,
Watsco completed the refinancing of its credit facilities with a
syndicate of banks. The new facility with a maturity period of 5
years provides borrowings of up to $500 million. As of June 30,
2012, the company's debt-to-total-capitalization is 16%.
Watsco paid $41 million as dividends so far in 2012. Earlier in
January, Watsco's Board of Directors approved a 9% increase in the
quarterly dividend to 62 cents per share. It marked the 11th
consecutive year of steady dividend increase.
2012 Outlook
The company expects earnings in the band of $3.15 to $3.25 per
share, down from the previous expectation of $3.25-$3.40 per share.
This represents a growth rate between 15% and 19% over 2011.
Our Take
The company continues to increase its market share through
strategic acquisitions and expansion of its product offering. The
company's earlier joint ventures with Carrier not only added new
products to its sales mix, but also marked Watsco's entry into the
international markets with the addition of Latin American and
Caribbean sales operations.
Recently, Watsco has acquired about 60% shares of Carrier's HVAC
network in Canada to form a joint venture. The company expects the
acquisition to be accretive in 2012. With the deal closure, the
company's sales run-rate is roughly $3.4 billion.
Furthermore, the company sees huge potential in the replacement
market as old units get replaced by more energy-efficient units in
the coming years. There are approximately 89 million central air
conditioning and heating systems installed in the United States
that have been in service for more than 10 years, with the older
systems operating below government mandated energy efficiency and
environmental standards.
Watsco is positioned to benefit as an aging installed base of
equipment gets replaced by newer high efficiency equipment.
Moreover, higher efficiency units drive higher pricing and higher
margins for the company.
Currently, we have a long-term Outperform recommendation on Watsco.
The company, which competes with J
ohnson Controls Inc.
(
JCI
) and privately held Gensco Inc., retains a short-term Zacks #3
Rank (Hold).
JOHNSON CONTROL (JCI): Free Stock Analysis
Report
WATSCO INC (WSO): Free Stock Analysis Report
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