Category Archives: Watsco

Watsco – Major Products and Services

The company’s key products and services include the following:

  • Residential central air conditioners
  • Light commercial air conditioners
  • Gas furnaces
  • Electric furnaces
  • Oil furnaces
  • Commercial air conditioning and heating equipment and systems
  • Specialized equipment
  • Parts and supplies
  • Condensing units
  • Compressors
  • Evaporators
  • Valves
  • Refrigerant
  • Walk-in coolers and ice machines

Watsco – SWOT Analysis

Watsco is one of the largest independent distributors of HVAC products in the US.Through its large distributor network and superior market position the company enhances its brand image and is in a favorable position to effectively meet competitive pressures. However, increasing raw material prices could affect the company’s operating margins.



Strong market position Innovations Strategic acquisition

Overdependence on the US market Weak financial performance



Growing replacement market Growth in US HVAC market

Increasing raw material prices Growing competition from Asia Slow down of US economy


Strong Market Position
Watsco is one of the largest independent distributors of HVAC products in the US. The company has approximately 1,300 distributors in the US. Watsco serves over 40,000 contractor customers from 434 locations in 34 states in the US and Puerto Rico. Its products consist of a wide variety of air conditioning, heating and refrigeration equipment, parts and supplies used in residential, light commercial and industrial applications.The company carries approximately 50,000 SKUs of HVAC/R equipment, parts and supplies for residential and light commercial applications. Strong market position enhances its brand image and enables the company to attract large customers. In addition, Strong market position increases the bargaining power of the company.

Technology used in the HVAC distribution industry has typically focused on simple inventory management and customer billing applications. Watsco has implemented new technologies to add greater value and ultimately revolutionize the distribution channel. Key innovations by Watsco include the development of, the introduction of eCommerce capabilities on each subsidiary website and a business model that promotes a harmony of independent subsidiary operations with cost-saving muscle of the largest HVAC distributor. is a unique service that matches a consumer’s request for HVAC service with a qualified contractor. The service assists consumers in making informed HVAC decisions, while helping Watsco’s contractor customers acquire more business. The early implementation of eCommerce capabilities on all of its subsidiary websites has made Watsco one of the leaders in the online business environment. Watsco’s experience in delivering eCommerce services results in better service to the growing number of contractor customers conducting business over the Internet. Watsco’s most important innovation is the ability to leverage the purchasing power of the largest independent HVAC distributor, while continuing with local accountability for each subsidiary. New technology brings opportunities for improved execution at the point-of-sale, improved selling margins, greater merchandising capabilities, advanced service to customers and opportunities for reductions in working capital. These new innovations help the company to attain competitive edge over its peers.

Strategic Acquisition
Watsco focuses on inorganic growth for growth in its earnings. In 2007, Watsco acquired ACR Group, which is one of the nation’s largest distributors of air conditioning and heating products. ACR is based in Houston, Texas and operates from 54 locations serving over 12,000 air conditioning and heating contractors throughout Florida, Texas, California, Georgia, Tennessee, Arizona, Colorado, Louisiana, Nevada and New Mexico. The ACR transaction added over $200 million of annualized revenues and 54 new locations supplementing the company’s market coverage in key Sunbelt states and adding six locations in two new states to Watsco’s national footprint. This acquisition helps Watsco to increase its profitability, operational flexibility and productivity.


Overdependence on the US Market
Watsco depends heavily on the US market for its revenues. The company derives almost all of its revenues from its domestic market. Considering the sluggish nature of the US market, there is a need for Watsco to widen the horizons of its operations beyond the US as any downturn in the US economy could have an adverse effect on the company’s operations and revenues. Also, with very little or no presence in emerging countries like India and China, where the demand for HVAC products and services is increasing, Watsco is loosing immense opportunity.

Weak Financial Performance
The company has recorded weak financial performance in 2007.Watsco’s revenue decreased from $1,771.2 million in 2006 to $1,758 million in 2007, a decrease of 0.7% compared with 2006. The decrease in revenues was due to a decline of 5% in sales of HVAC equipment and an 11% decline in the sale of other HVAC products.The decrease in sales was primarily related to a decline in sales of the new construction market.
Watsco also witnessed significant decrease in its net and operating profits for the same time period. The net profit decreased from $82.4 million in 2006 to $65.6 million in 2007. The operating profit of the company decreased from $135.4 million in 2006 to $111.2 million in 2007. Weak financial performance does not provide financial stability to the company and limits its growth avenues in the future. It can also negatively affect investor confidence


Growing Replacement Market
The company expects a big boom in the replacement market for air conditioners as new environmental regulations come into effect. For instance, many of its air conditioning systems utilize hydrochlorofluorocarbons (HCFCs) as refrigerants. The 1990 Clean Air Act amendments and the Montreal Protocol will require the phase-out of the production of these refrigerants. The use of all HCFCs in new equipment within the US must be phased out by 2010. The phase-in of substitute refrigerants, in turn, would necessitate replacement or modification of much of the air conditioning equipment already installed. Similarly, new regulations would require more anti-leak and anti-scaling products for homes and commercial purposes. About 70% of Watsco’s sales are to the replacement market. This would provide the company a significant market opportunity.

Growth in US HVAC Market
The US HVAC market has witnessed strong growth in recent past. Demand in the US for heating, ventilation and air conditioning (HVAC) equipment is forecast to increase 3.2 percent per year to $16.8 billion in 2011. Strong gains in nonresidential construction, along with ongoing growth in the residential replacement market drive the HVAC market. Growth in the replacement sector will benefit from rising interest in more energy efficient building systems driven by rising energy prices, spurring the replacement of older HVAC equipment with newer models. Changing regulations regarding minimum efficiency requirements for many of these systems will also affect sales of HVAC equipment. The company provides a wide range of HVAC products. Hence the company is well positioned to capitalize on the growing HVAC market.


Increasing Raw Material Prices
Steel, copper and aluminum account for the bulk of the company’s raw material purchases. The price of steel, a key raw material used for the manufacturing of HVAC products has increased in recent years. The price of cold rolled steel coil rose from $530 per ton in March 2007 to a high of $805 per ton in March 2008.The ongoing industry consolidation in the steel industry, which recently saw Mittal Steel taking over Arcelor to become the world largest steel conglomerate and Tata Steel taking over Corus to become the fifth largest steel conglomerate may create some monopoly in the market and lead to further increase in the prices.
Similarly, the price of copper increased from $6,452 per ton in March 2007 to $8,439 per ton in March 2008. Also, global prices of aluminum increased due to the rise in demand from China and Taiwan. The price of aluminum increased from $2,382 per ton in December 2007 to $2,777 per ton in February 2008. Continuing increase in the prices of raw materials, particularly, steel could have an adverse effect on the company’s operating results. Steel is one of the major raw materials for the HVAC industry and a continuous rise in prices could impact the margins of the company.

Growing Competition from Asia
The emergence of production facilities in Asia, especially China, where labor and manufacturing costs are extremely low, is posing a major threat to market participants in the US. Once local demand is met, Asian manufacturers look toward the US markets to maintain their pace of growth, thereby affecting the prospects of the native US companies. Unlike the US companies, Asian manufacturers have the additional advantage of a flexible legal framework, limiting the scope for litigation and thereby, eliminating various business restrictions, obstacles, and costs.
Recent global expansion by South Korea and China based air-conditioning manufacturers, particularly in the market for small residential units, has also resulted in intensification of price competition. The price competition in the market is mainly centered on residential air conditioning as retail customers are more price sensitive than commercial customers. Increased price competition puts pressure on the company’s margins and impedes growth in its market share.

Slow Down of US Economy
According to the IMF world economy outlook, the real GDP growth of the US and is expected to slowdown in 2008. The GDP growth of the US economy is forecasted to slow down from 3.3% in 2006 to 2.8% in 2008. The US, Watsco’s largest geographical market, accounts for the majority of the total revenues in the fiscal year 2007. Therefore, a weak economic outlook for US may put pressure on the revenues of the company.

Watsco – Top Competitors

The following companies are the major competitors of Watsco, Inc

  • ACR Group, Inc.
  • Gustave A. Larson Company
  • US Airconditioning Distributors
  • American Standard Companies Inc.
  • Consolidated Electrical Distributors, Inc.
  • Hudson Highland Group, Inc.
  • Kelly Services, Inc.
  • Lennox International Inc.
  • Mestek, Inc.
  • National Technical Systems Inc
  • Robert Half International Inc.
  • United Technologies Corporation
  • York International Corporation

Watsco – Company View

A statement by Albert H. Nahmad, Chairman, President and Chief Executive Officer of Watsco is given below. The statement has been taken from the company’s 2007 annual report.

Watsco celebrated its 60th anniversary in 2007—a testimony to our long-term focus and long-term success. Originally a manufacturer of HVAC/R components, Watsco entered HVAC/R distribution in 1989, and today HVAC/R distribution comprises 100% of our business. Since 1989, distribution revenues have grown at a compounded annual rate of 20% from $65 million to $1.8 billion and the market capitalization of the company has increased more than 60-fold to over $1.0 billion. It’s a great track record and Watsco remains a work in process as our market share is just 8% of the estimated $26 billion market for HVAC/R products.

2007 was a blockbuster year for cash flow and we achieved the third best earnings performance in our history. Watsco again delivered solid operating results in challenging conditions, gained market share, strengthened our financial position and acquired our largest business ever.

Revenues of $1.8 billion generated operating income of $111 million and earnings of $2.43 per diluted share. Since 2000, Watsco’s revenues and earnings per diluted share have grown at a compounded annual rate of 5% and 22%, respectively. Watsco’s financial condition continues to remain strong with stockholders’ equity reaching $550 million and a debt-to-total capitalization ratio of 9%, even after completing our largest acquisition to date in August 2007.

Operating cash flow was a record $107 million ($3.84 per share)—successfully delivering on our stated goal of generating cash flow in excess of net income. Since 2000, Watsco has generated approximately $500 million in operating cash flow with total net income of approximately $400 million. We believe this is an exceptional scorecard in terms of delivering value as a company.

We are also proud of our track record for sending cash to our shareholders through increasing dividends. We’ve paid dividends for over 30 years and since 2000 our dividend has grown at a compounded annual rate of 44%. 2007 marks the sixth consecutive year of a dividend increase, a strong signal of our commitment and confidence in our cash flow story. We have also used cash to repurchase our stock. We acquired $9 million of stock in 2007 and $110 million since the launch of the stock repurchase program in 1999.

Watsco’s strategy of acquiring great, well-established HVAC/R distributors reached an important milestone in 2007 with the purchase of ACR Group, Inc. The ACR transaction added over $200 million of annualized revenues and 54 new locations supplementing our market coverage in key Sunbelt states and adding six locations in two new states to Watsco’s national footprint. ACR has a strong management team in place and, consistent with our philosophy, our job is to support the ACR team in building our business.

As usual we are looking for more opportunities to build our network. We are fortunate to have a strong and liquid financial position and have worked hard to build and maintain relationships with some of the best businesses in our industry. Our goal remains to have more of these great businesses join the Watsco family and support their future growth plans.

The replacement market for air conditioning and heating systems is a significant cornerstone and fundamental for our company given its size (approximately 75% of revenues), consistency and higher levels of profitability. In fact, the relevance of the replacement market is intensifying given the growing consumer focus toward energy-efficiency and a recent government mandate that raised the minimum efficiency standards of many of the products we sell.

Over half of a home’s energy use is consumed by the air conditioning and heating system—far more than any other product in the home. In 2007 we introduced more high-efficiency products into our network that can dramatically increase the performance of a home’s HVAC system. These high-efficiency products provide opportunities for larger sales tickets and increased profits for our contractor customers while delivering value to end users who reduce their energy consumption and lower their utility bills. The trend in the replacement market toward higher-efficiency systems is especially important in the Sunbelt, which represents over 90% of our business volume. In the Sunbelt HVAC/R products are an absolute necessity, the useful lives of systems are shorter and utility companies are actively seeking solutions to conserve energy. Since the products we distribute can play such a large role in energy efficiency, we are excited about the opportunities looking forward.

We are proud of our relationship with over 40,000 licensed contractors who perform HVAC/R installation, maintenance, and replacement services for homeowners and businesses. There are over 120 million homes in the U.S. with central air conditioning and heating systems that will eventually wear out and need to be replaced. We focus on providing quality products and world-class service throughout the life cycle of these systems on a scale unparalleled in our industry. With exceptional operating managers, dedicated employees and a strong financial position we are well equipped to achieve our short- and long-term objectives. In short, Watsco is well positioned and fully committed to continue growing and delivering solid financial results while strengthening relationships with our manufacturers and customers.

Watsco – Locations and Subsidiaries

Head Office

Watsco, Inc

Watsco, Inc

2665 South Bayshore Drive

Suite 901

Coconut Grove

Florida 33133


P:1 305 714 4100

F:1 305 858 4492

Other Locations and Subsidiaries

ACR Group 3200 Wilcrest Dr. Suite 440 Houston Texas 77042 USA

Air Systems Distributors LLC

2151 W Hillsboro Blvd


Deerfield Beach

Florida 33442


Atlantic Service and Supply LLC

6525 Baker Boulevard

Ft. Worth

Texas 76118


Baker Distributing Company

14610 Breakers Drive


Florida 32258


Coastline Distribution 14610 Breakers Dr. Jacksonville Florida 32258 USA

Comfort Products Distributing LLC

13202 I St.


Nebraska 68137


East Coast Metal Distributors

1313 South Briggs Avenue


North carolina 27703


Gemaire Texas

407 Garden Oaks


Texas 77018 5501


Gemaire Distributors LLC

Heating and Cooling Supply LLC

2151 W Hillsboro Blvd

1669 Brandywine Ave. Suite A


Chula Vista

Deerfield Beach

California 91911

Florida 33442



Homans Associates LLC/Heat Incorporated

NSI Supply


4050 W. Mesa Vista

250 Ballardvale Street

Las Vegas

P.O. Box 694

Nevada 89118



Massachusetts 01887