) delivered a record third quarter both in terms of revenue and
profits. Adjusted EPS in the quarter was $1.19, up 17% from the
year-ago quarter earnings of $1.02, but missing the Zacks
Consensus Estimate of $1.27.
Total revenue increased 12% to $1.02 billion, but lagged the
Zacks Consensus Estimate of $1.05 billion. Same-store sales
increased 1%, including a hike of 1% in air conditioning and
heating (HVAC) equipment and a 16% rise in commercial
refrigeration products, while sales of other HVAC products
Cost and Margins
Cost of sales increased 12% to $778 million in the quarter.
Gross profit was up 11% to $242 million. However, gross profit
margin dropped 20 basis points (bps) to 23.8%, hurt by higher
sales mix of HVAC products and commercial products, which
generate lower margins than non-equipment products.
Selling, general and administrative expenses rose 8% to $157
million in the quarter. Income from operations increased 15% to
record $86 million. Operating margin increased 30 basis points to
8.4%, aided by expansion in international markets and improved
Cash and cash equivalents were $46 million as of September 30,
2012, compared with $35.2 million as of June 30, 2012. For the
quarter, operating cash flow was a record $124 million. For the
first nine months ended September 30, 2012, Watsco generated
operating cash flow of $64 million compared with a cash usage of
$59 million in the comparable period last year.
Long-term debt for the company was $220 million as of
September 30, 2012 compared with $236 million as of June 30,
Watsco paid $62 million as dividends so far in 2012. Earlier
in October, Watsco's board of directors announced a special cash
dividend of $5.00 per share. Even though the company intends to
continue paying quarterly cash dividends, but hinted a moderation
in the dividend rate in 2013, due consideration to its financial
position, government tax policy and general economic
The company expects earnings in the band of $3.00 to $3.10 per
share, down from the previous expectation of $3.15-$3.25 per
share. This represents a growth rate between 9% and 13% over
Watsco has immense potential in the replacement market of air
conditioners and heating systems in the U.S, as nearly 89 million
of them are more than 10 years old. Backed by its solid balance
sheet, Watsco can continue to increase its dividend and make
additional investments going forward. Watsco also stands to
benefit from a recovery in the housing market.
Watsco's business is subject to federal, state and local laws
and regulations relating to the storage, handling, transportation
and release of hazardous materials into the environment. These
laws and regulations include the Clean Air Act, relating to
minimum energy efficiency standards of HVAC systems and the
production, servicing and disposal of certain ozone-depleting
refrigerants used in such systems.
HVAC units use R-22, a refrigerant that has been identified as
a contributor to ozone depletion. The EPA has mandated that all
HVAC manufacturers cease production of R-22 refrigerant starting
January, 2010 and then cease entirely by January 1, 2020. R-22
will be replaced with an environment-friendly and more efficient
R 410A refrigerant, which will lead to incremental costs.
The company, which competes with
Johnson Controls Inc.
), currently retains a short-term Zacks #4 Rank (Sell
JOHNSON CONTROL (JCI): Free Stock Analysis
WATSCO INC (WSO): Free Stock Analysis Report
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