Watsco Inc. (WSO) reported fiscal 2011 third quarter results, registering an EPS of $1.02, a 5% increase over 97 cents reported in the year-earlier quarter, but below the Zacks Consensus Estimate of $1.14.
Total revenue increased 12% year over year to $914 million in the reported quarter, this included $6 million added by new locations. Revenue reported during the quarter missed the Zacks Consensus Estimate of $914 million.
During the quarter Same-Store-Sales increased 4%, including a 5% hike in air conditioning and heating (HVAC) equipment, 1% increase in other HVAC products, and 4% increase in commercial refrigeration products.
Costs and Margins
Cost of sales in the quarter increased 13% to $694.6 million from the year-earlier quarter. Gross profit was up 12% year over year to $219.4 million. However gross margin dipped 10 basis points year over year to 24% in the quarter.
On a same-store basis gross profit was up 4% year over year, while gross margins decreased 10 basis points year over year to 24.0% from a higher sales mix of HVAC equipment, which generates lower margins than non-equipment products.
SG&A expenses during the quarter increased 10% to $145 million from $131 million in the year-ago quarter. Income from operations soared 16% to $74.3 million from $64 million in the prior-year quarter. Consequently, operating margin also increased 20 basis points year over year to 8.1%.
Financial Position
As of September 30, 2011, cash and cash equivalents increased to $21.0 million from $18.6 million as of June 30, 2010. For the first none months of 2011, Watsco used $59 million of operating cash flow primarily to fund approximately $87 million of incremental vendor payments from one-time changes in payment terms. The company expects seasonal reductions in working capital during the fourth quarter and expects to generate positive operating cash flow for the year.
Watsco’s borrowings were $115 million, reflecting $45 million of cash used to fund the recent acquisition of the locations in the Northeast United States and Mexico.
Watsco's Board of Directors has approved a 9% increase in the quarterly dividend to 62 cents per share. Watsco has increased its annual dividend since 2001.
Our Take
Watsco continues to increase its market share through strategic acquisitions and expansion of its product offering. The company’s joint venture with Carrier not only added new products to its sales mix, but also marked its entry into international markets with the addition of the Latin American and Caribbean sales operations as well as Northeastern U.S. Moreover, the company continues to benefit from the transition to higher-efficiency air-conditioning equipment.
United States currently has 74 million central air conditioning and heating systems installed, which are older than 10 years. These systems are generally below the government mandated energy efficiency and environmental standards. Thus, Watsco has a great opportunity to replace these older systems with its lower energy consumption and environment-friendly solutions.
However, decline in housing starts, reduction of the tax credit for homeowners for purchasing a high efficiency HVAC unit and higher costs of replacing with the R410A refrigerant, remain concerns. The shares of Watsco currently retain a Zacks #5 Rank (short-term Strong Sell recommendation).
Watsco is the largest distributor of air conditioning, heating and refrigeration equipment as well as related parts and supplies in the United States. The company operates 508 locations serving over 50,000 customers in 36 states, Puerto Rico, Latin America and the Caribbean. Watsco competes with the likes of Johnson Controls Inc. (JCI), Gensco Inc and Gustave A. Larson Company.
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