Press release·05/03/2024 22:59:58

Forward-Looking Statements

This Quarterly Report contains forward-looking statements regarding economic conditions, business strategies, potential acquisitions, financing plans, and industry trends. Actual results could differ due to several factors, including general economic conditions, competitive factors, supply chain issues, commodity costs, consumer spending and debt levels, housing market trends, capital spending, liquidity needs, weather patterns, insurance risks, regulations, interest rates, inflation, currency fluctuations, international risks, cyber risks, and business strategy viability.

Company Overview

Watsco is the largest HVAC/R distributor in North America, operating 691 locations in 43 U.S. states, Canada, Mexico, and Puerto Rico as of March 31, 2024. Revenues consist primarily of HVAC/R equipment sales. Expenses mainly comprise variable selling expenses and fixed warehouse facility costs. Sales are seasonal, peaking in summer and winter months. Profitability can vary based on weather and sales mix.

Climate Change & CO2 Reductions

Replacing older HVAC systems with higher efficiency systems significantly reduces electricity use and emissions. Watsco focuses on selling high-efficiency units, often exceeding minimum standards. Tighter regulations also raise efficiency requirements over time. From 2020-2024, Watsco estimates their sales averted 20.1 million metric tons of CO2e emissions. New tax credits and rebates should further boost demand for high-efficiency products like heat pumps.

Critical Accounting Estimates

There were no significant changes to critical accounting estimates. See the 2023 Form 10-K filed February 23, 2024 for details.

New Accounting Standards

See Note 1 for discussion of recently adopted and upcoming accounting standards.

Results of Operations

	Q1 2024	Q1 2023	Change
Revenues (millions)	$1,565.0	$1,550.6	+$14.4 (+1%)
Gross Profit (millions)	$430.6	$448.2	-$17.6 (-4%)
Gross Margin	27.5%	28.9%	-140 bps
SG&A Expenses (millions)	$309.5	$287.1	+$22.4 (+8%)
SG&A as % of Revenues	19.8%	18.5%	+130 bps
Operating Income %	8.1%	10.6%	-250 bps
Effective Tax Rate	21.8%	23.3%	-150 bps
Net Income Attributable to Watsco (millions)	$87.9	$110.0	-$23.1 (-21%)

• Revenues increased 1% driven by locations opened or acquired in the last 12 months, partially offset by a 2% same-store sales decline.
• Gross margins dropped due to HVAC equipment pricing and sales mix.
• Higher SG&A expenses as a percentage of revenues stemmed from fixed cost deleveraging on lower same-store sales and $5.3 million in nonrecurring costs.
• Lower net income reflected reduced gross profit and higher SG&A costs, partially offset by lower income taxes and higher interest income.

Liquidity & Capital Resources

Cash sources include operating cash flow, $600 million revolving credit facility, and at-the-market (ATM) equity program. Uses of cash include working capital, dividends, capex, and acquisitions. Watsco believes available funds can meet foreseeable liquidity needs.

	Q1 2024	Q1 2023
Operating Cash Flow (millions)	$103.7	$(47.4)
Investing Cash Flow (millions)	$(210.9)	$(10.4)
Financing Cash Flow (millions)	$178.4	$51.3

• Higher operating cash reflected timing of vendor payments and increased inventory.
• More cash used in investing was due to $200 million in short-term investments purchased.
• Additional financing cash was primarily due to $281.8 million in ATM offering proceeds.

Revolving Credit Facility

• $600 million capacity; matures March 2028
• No amounts outstanding at March 31, 2024
• Compliant with financial covenants at 3/31/24

ATM Equity Program

• Sold 712,000 shares for $281.8 million in net proceeds in Q1 2024
• Used proceeds to pay down debt and purchase short-term investments
• Increased program capacity by $400 million on May 3, 2024

Unconsolidated Entity

• Have 38.4% stake in RSI, an HVAC distributor
• Carrying value of remaining RSI shares held by other investors is approximately $441 million as of March 31, 2024
• Entered agreement providing option to use Watsco shares to fund up to 80% of potential RSI share repurchases

Recent Acquisitions

• Acquired CSI, a distributor with $13 million in sales, on February 1, 2024 for $7.4 million
• Acquired GWS, a $180 million distributor, on September 1, 2023 for $105.6 million
  
• Acquired Capitol, a $13 million distributor, on March 3, 2023 for $3.1 million

Common Stock Dividends & DRIP

• Declared dividends of $2.45/share in both Q1 2024 and Q1 2023
• Board declared Q2 2024 dividend of $2.70/share on 4/1/24
• Dividend Reinvestment Plan launched 3/29/24 but no shares issued as of 3/31/24

Share Repurchases

• 7.5 million share repurchase program authorized
• 6.4 million shares repurchased to date
• 1.1 million shares remain authorized for repurchase
• Assessing impact of new 1% excise tax prior to further buybacks