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.