The second quarter for Watsco Inc. (WSO: 56.82 +0.10 +0.18%) was stellar, the company having reported a record-breaking performance. More specifically, Watsco’s revenue, gross profit, operating profit, net income and earnings per share (EPS) all touched historical highs.EPS in the quarter was $1.08, up an impressive 93% from 56 cents in the year-ago quarter, and outstripped the Zacks Consensus Estimate of 97 cents. The results were driven by growth in sales of higher-efficiency HVAC systems and a 27-cent per share spike from results of Carrier Enterprise, a joint venture formed with Carrier Corporation.
Revenues increased 114% to $865 million, of which $400 million was contributed by Carrier Enterprise. Same-store sales increased 14%, reflecting growth in air conditioning and heating (HVAC) equipment, other HVAC products and refrigeration products of 25%, 3% and 5%, respectively. Sales of HVAC equipment (which contributed 53% of sales) were driven by robust growth in unit sales and an improving sales mix of higher-efficiency replacement air conditioning and heating systems.
Revenues at the new Carrier Enterprise locations increased 19% to $400 million. Operating income more than doubled to $32 million in 2010 and operating margins expanded 340 basis points to 8.0%. The growth was ascribed to sales growth, higher gross margins and lower selling, general, administrative and engineering expenses as a percentage of sales.
Cost of sales increased 118% to $663.7 million in the quarter and as a percentage of revenue, it increased 160 basis points to 76.7%. Even though gross profit soared 99% to a record $201 million, gross margin dipped 160 basis points to 23.3% due to lower selling margins for Carrier Enterprise. On a same-store basis, gross profit increased 12% to $113 million and gross margin declined 30 basis points to 24.7%, reflecting a sales mix weighed towards lower margin HVAC equipment.
Selling, general, administrative and engineering expenses increased 74% to $130.1 million in the quarter and as a percentage of sales plummeted 340 basis points to 15%, an all-time low for the company. Watsco’s operating income in the quarter was a record $70.9 million, increasing 170% year over year, with operating margin soaring 170 basis points to 8.2%. Same-store operating income increased 45% to $38 million with a 180 basis-point increase in the operating margin to 8.4%.
Financial Position
Watsco had cash and cash equivalents of $87.7 million as of June 30, 2010, up from $74 million as of March 31, 2010. During the first half of 2010, Watsco generated a record $57 million of operating cash flow.
Debt-to-capitalization ratio went down to 3% as of June 30, 2010, from 6% as of March 31, 2010.
Outlook
The company expects a shift toward higher-efficiency and environmentally sensitive HVAC systems to continue as conservation efforts, consumer awareness and the regulatory norms intensify. Further, there is pent-up demand for replacement HVAC systems, which will likely benefit the company over the next several years as the economy strengthens and replacement activity returns to its historical pattern.
Our TakeHome construction remains near an all-time low and restoration of building activity will add revenue. The company-added sales of commercial products have turned positive and are expected to recover further as capital spending improves.Watsco uses acquisitions to increase its market share. Despite the economic slowdown, the company continues to actively seek acquisition opportunities to allow further penetration into existing markets and expand into new geographic markets. The company’s joint-venture with Carrier not only added new products to its sales mix, but also marked Watsco’s entry into international markets with the addition of the Latin American and Caribbean sales operations.
Moreover, the company continues to benefit from the transition to higher-efficiency air-conditioning equipment. Watsco sees huge potential in the replacement market for the next few years.
Watsco continues to benefit immensely from the transition to higher-efficiency air-conditioning equipment. The equipment suppliers have to comply with regulations to manufacture products with a higher standard of efficiency. The company sees huge potential in the replacement market as old units get replaced by more energy-efficient units in the coming years.
We view the transition to higher energy-efficient units as the most critical factor for growth over the next couple of years. Moreover, higher efficiency units drive higher pricing and higher margins for the company.
Watsco is the largest distributor of air conditioning, heating and refrigeration equipment as well as related parts and supplies (HVAC/R) in the United States. The company operated 506 locations serving over 50,000 customers in 36 states, Puerto Rico, Latin America and the Caribbean.
| Overall Summary: |  65%, Bullish 35%, Bearish | Trade Quality: | Upside 60%, Fair Downside 30%, Poor |
| Analysts' Targets | |
| SunTrust Robinson Humphrey | $67 |
| Strong Buy | |
| Friday, January 15, 2010 | |
No comments:
Post a Comment