Watsco (NYSE:WSO) benefited from solid sales trends during the second quarter, which helped push revenue up to a record. That sales growth, combined with a lower tax rate and its ability to keep a lid on costs, drove earnings to a record level, too. Add that to its solid showing in the first quarter, and Watsco is on pace for its best year yet.

Watsco results: The raw numbers

Metric

Q2 2018

Q2 2017

Year-Over-Year Change

Net sales

$1.33 billion

$1.28 billion

4.5%

Net income

$90 million

$73.8 million

22%

Earnings per share

$2.40

$2.07

15.9%

Data source: Watsco.

A close-up of an HVAC unit.

Image source: Getty Images.

What happened with Watsco this quarter? 

Healthy HVAC equipment sales growth helped lead the way:

  • HVAC equipment sales rose 6% versus the year-ago period to $906.3 million while revenue from other HVAC products increased 5% to $373.2 million. Sales of commercial refrigeration products, meanwhile, were 1% higher at $53.3 million.
  • Rising revenue helped kick-start earnings growth. However, the company also benefited from its ability to expand operating margin, which rose to a record 10.3% during the quarter. One factor driving the improvement in margin was that selling, general, and administrative (SG&A) expenses only increased by 3% while revenue rose 4.5%, helping to reduce SG&A as a percentage of sales.
  • A lower tax rate also helped boost earnings. The company's effective income tax rate averaged 21% through the first half of the year versus 29% in the same period of 2017.
  • Watsco also continues to generate strong cash flow. That enabled the company to boost its dividend 16% earlier in the year while debt has decreased $238 million over the past year.

What management had to say 

"Watsco's second quarter performance produced the highest sales and profits of any quarter in our history," CEO Albert Nahmad said in the earnings press release. The company noted several factors that drove these results. On the revenue side, Watsco benefited from improving sales trends thanks to strong demand. Furthermore, it saw improved equipment pricing due in part to a higher percentage of sales of high-efficiency systems. Meanwhile, the company was able to leverage those sales improvements into an even bigger gain on the bottom line by keeping a lid on costs, especially SG&A, which has benefited from its ongoing investment in technology.

Watsco has invested $90 million in technology over the last five years in an effort to transform the customer experience. Nahmad said that the "[e]arly results are exciting, but the adoption at scale will take time." So far this year online transactions are up 37% and now account for 29% of total sales, up from 22% at the end of last year. In addition to that, Watsco's business intelligence platform has experienced higher utilization while the company has continued the rollout of its warehouse efficiency programs.

Looking forward 

Watsco's technology investments should continue driving results in the coming years. President A.J. Nahmad stated: "We are inspired by the progress toward adoption at scale and continue to release new iterations and solutions to market. ... We have only scratched the surface of what is possible in terms of value creation and realization."

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends Watsco. The Motley Fool has a disclosure policy.