Watsco Inc. is the largest distributor of air conditioning, heating and refrigeration equipment and related parts and supplies (HVAC/R) in the HVAC/R distribution industry. Watsco was founded more than 60 years ago as a manufacturer of parts and components for HVAC/R equipment and entered the distribution segment in 1989. The Company’s revenues in HVAC/R distribution have increased from $64.1 million in 1989 to $3.4 billion in 2012 via a strategy of acquiring companies with established market position and subsequently building revenues and profit through a combination of adding locations, products, services and other initiatives.
Watsco’s goal is to build a network of locations that provide the finest service and product availability for HVAC/R contractors, assisting and supporting them as they serve homeowners and businesses. Watsco has more than 4,600 employees assisting approximately 50,000 contractors who in turn, service, repair or replace HVAC/R systems. At December 31, 2012, the Company operated from 573 locations in 38 U.S. states, Canada, Mexico and Puerto Rico with additional market coverage on an export basis to Latin America and the Caribbean. Watsco is the only publicly-traded HVAC/R distributor. The Company’s Common stock is traded on the New York Stock Exchange (NYSE) and the Professional Segment of NYSE Euronext in Paris under the ticker symbol WSO; the Company’s Class B common stock is traded on the NYSE under the ticker symbol WSOB.
Watsco was founded in 1947 as a heating and cooling equipment and door and window parts manufacturer originally known as Wagner Tools. In 1963, Watsco became a publicly listed company, joined the American Stock Exchange in 1968 and later joined the NYSE in 1994.
Chairman, President and Chief Executive Officer, Albert H. Nahmad, has been with Watsco since December 1972 when he acquired a controlling interest in the Company from its founder, William Wagner. From 1973 to 1988, Watsco grew from $5 million in revenues to $25 million as a manufacturer of parts, components and tools used in the HVAC/R industry. In 1989, the Company shifted its focus from manufacturing to distribution by acquiring Gemaire Distributors Inc., a South Florida-based Rheem distributor. In 1990, Watsco acquired the California Rheem distributor Heating & Cooling Supply Inc., and within five years, purchased two other Rheem distributors, one in Texas and another in North Carolina.
By 1997, Watsco added other OEMs to the mix and moved into commercial refrigeration as a result of the acquisition of Baker Distributing Company. Watsco exited the manufacturing business in 1999 selling it to International Comfort Products Corporation, now part of Carrier Corporation (Carrier). In addition to divesting its manufacturing business in 1998, Watsco sold its staffing unit, Dunhill Staffing Systems, Inc., to ATS Group LLC in 2007 in order to focus solely on the distribution of HVAC/R products.
Watsco continued its acquisition strategy in the 2000s acquiring a number of other businesses including Pameco (52 locations), East Coast Metal Distributors (27 locations), ACR Group, Inc. (54 locations) and several other smaller businesses. In 2009, Watsco completed its largest acquisition to date with the formation of a joint venture with Carrier.
Residential HVAC Distribution Industry
The HVAC/R distribution industry is highly fragmented with approximately 2,300 distribution companies. The industry in the U.S. and Canada is well-established, having had its primary period of growth during the post-World War II era with the advent of affordable central air conditioning and heating systems for both residential and commercial applications. The advent of HVAC/R products in Latin America and the Caribbean is also well-established, but has emerged in more recent years as economies have grown and products have become more affordable and have matured from luxury to necessity.
The estimated annual market for residential HVAC/R products in the Americas is approximately $35 billion. Residential central air conditioners are manufactured primarily by seven major companies that together account for approximately 90% of all units shipped in the U.S. each year. These companies are: Carrier Corporation (Carrier), a subsidiary of United Technologies Corporation, Goodman Manufacturing Company, L.P. (Goodman), a subsidiary of Daikin Industries, Ltd., Rheem Manufacturing Company (Rheem), Trane Inc., a subsidiary of Ingersoll-Rand Company Limited, York International Corporation, a subsidiary of Johnson Controls, Inc., Lennox International, Inc. and Nordyne Corporation (Nordyne), a subsidiary of Nortek Corporation. These manufacturers distribute their products through a combination of factory-owned and independent distributors who, in turn, supply the equipment and related parts and supplies to contractors and dealers nationwide that sell to and install the products for consumers, businesses and other end-users.
Central air conditioning and heating equipment is sold to the residential replacement market, the commercial market and residential new construction market. The replacement market has increased in importance over the past several years as a result of the aging of the installed base of residential central air conditioners and furnaces, the introduction of new higher energy efficient models, the remodeling and expansion of existing homes, the addition of central air conditioning to homes that previously had only heating products and consumers’ overall unwillingness to live without air conditioning or heating products. The mechanical life of central air conditioning and furnaces varies by geographical region due to usage and is estimated to range from 8 to 20 years. According to data published by the Energy Information Administration, there are approximately 89 million central air conditioning and heating systems installed in the U.S. that have been in service for more than 10 years. Many installed units are reaching the end of their useful lives, thus providing a growing and stable replacement market.