UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
| ☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended June 30, 2020
or
| ☐ | Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Transition Period From
to
Commission file number 1-5581
I.R.S. Employer Identification Number 59-0778222
WATSCO, INC.
(a Florida Corporation)
2665 South Bayshore Drive, Suite 901
Miami, Florida 33133
Telephone:
(305) 714-4100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common stock, $0.50 par value | WSO | New York Stock Exchange | ||
Class B common stock, $0.50 par value | WSOB | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
☒
No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
☒
No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2
of the Exchange Act.Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||
Emerging growth company | ☐ | ||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).Yes
☐
No
☒
The registrant’s common stock outstanding as of October 28, 2019August 3, 2020 comprised (i)32,647,671 32,822,626 shares of Common stock, $0.50 par value per share, excluding5,453,477 5,597,873 shares of
4,823,988
treasury shares and (ii)Class B common stock, $0.50 par value
per share, excluding 48,263 treasury shares.WATSCO, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM
10-Q
TABLE OF CONTENTS
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EXHIBITS | ||||||||||
2 of 2627
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS |
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF INCOME
(In thousands, except per share data)
Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues | $ | 1,394,915 | $ | 1,296,007 | $ | 3,698,047 | $ | 3,555,327 | ||||||||
Cost of sales | 1,060,224 | 976,998 | 2,801,612 | 2,684,719 | ||||||||||||
Gross profit | 334,691 | 319,009 | 896,435 | 870,608 | ||||||||||||
Selling, general and administrative expenses | 212,902 | 200,408 | 589,523 | 565,519 | ||||||||||||
Other income | 3,530 | 3,696 | 7,939 | 8,491 | ||||||||||||
Operating income | 125,319 | 122,297 | 314,851 | 313,580 | ||||||||||||
Interest expense, net | 1,434 | 1,047 | 3,422 | 2,375 | ||||||||||||
Income before income taxes | 123,885 | 121,250 | 311,429 | 311,205 | ||||||||||||
Income taxes | 24,230 | 24,364 | 60,060 | 63,678 | ||||||||||||
Net income | 99,655 | 96,886 | 251,369 | 247,527 | ||||||||||||
Less: net income attributable to non-controlling interest | 16,175 | 17,723 | 42,697 | 44,188 | ||||||||||||
Net income attributable to Watsco, Inc. | $ | 83,480 | $ | 79,163 | $ | 208,672 | $ | 203,339 | ||||||||
Earnings per share for Common and Class B common stock: | ||||||||||||||||
Basic | $ | 2.20 | $ | 2.12 | $ | 5.54 | $ | 5.44 | ||||||||
Diluted | $ | 2.20 | $ | 2.11 | $ | 5.54 | $ | 5.43 | ||||||||
Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net income | $ | 99,655 | $ | 96,886 | $ | 251,369 | $ | 247,527 | ||||||||
Other comprehensive (loss) income, net of tax | ||||||||||||||||
Foreign currency translation adjustment | (3,038 | ) | 4,269 | 7,264 | (7,422 | ) | ||||||||||
Unrealized gain (loss) on cash flow hedging instruments | 255 | 231 | (798 | ) | 762 | |||||||||||
Reclassification of gain on cash flow hedging instruments into earnings | (140 | ) | (915 | ) | (542 | ) | (57 | ) | ||||||||
Other comprehensive (loss) income | (2,923 | ) | 3,585 | 5,924 | (6,717 | ) | ||||||||||
Comprehensive income | 96,732 | 100,471 | 257,293 | 240,810 | ||||||||||||
Less: comprehensive income attributable to non-controlling interest | 15,146 | 19,006 | 44,693 | 41,708 | ||||||||||||
Comprehensive income attributable to Watsco, Inc. | $ | 81,586 | $ | 81,465 | $ | 212,600 | $ | 199,102 | ||||||||
September 30, 2019 | December 31, 2018 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 60,150 | $ | 82,894 | ||||
Accounts receivable, net | 640,802 | 501,908 | ||||||
Inventories | 970,475 | 837,129 | ||||||
Other current assets | 19,400 | 19,875 | ||||||
Total current assets | 1,690,827 | 1,441,806 | ||||||
Property and equipment, net | 97,926 | 91,046 | ||||||
Operating lease right-of-use assets | 225,366 | — | ||||||
Goodwill | 407,009 | 391,998 | ||||||
Intangible assets, net | 171,310 | 147,851 | ||||||
Other assets | 100,621 | 88,332 | ||||||
| $ | 2,693,059 | $ | 2,161,033 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of other long-term obligations | $ | 67,587 | $ | 246 | ||||
Accounts payable | 311,317 | 200,229 | ||||||
Accrued expenses and other current liabilities | 163,384 | 157,091 | ||||||
Total current liabilities | 542,288 | 357,566 | ||||||
Long-term obligations: | ||||||||
Borrowings under revolving credit agreement | 169,300 | 135,200 | ||||||
Operating lease liabilities, net of current portion | 157,503 | — | ||||||
Other long-term obligations, net of current portion | 1,863 | 552 | ||||||
Total long-term obligations | 328,666 | 135,752 | ||||||
Deferred income taxes and other liabilities | 69,083 | 66,002 | ||||||
Commitments and contingencies | ||||||||
Watsco, Inc. shareholders’ equity: | ||||||||
Common stock, $0.50 par value | 18,734 | 18,476 | ||||||
Class B common stock, $0.50 par value | 2,751 | 2,691 | ||||||
Preferred stock, $0.50 par value | — | — | ||||||
Paid-in capital | 894,917 | 832,121 | ||||||
Accumulated other comprehensive loss, net of tax | (42,040 | ) | (45,968 | ) | ||||
Retained earnings | 656,187 | 627,969 | ||||||
Treasury stock, at cost | (87,440 | ) | (87,440 | ) | ||||
Total Watsco, Inc. shareholders’ equity | 1,443,109 | 1,347,849 | ||||||
Non-controlling interest | 309,913 | 253,864 | ||||||
Total shareholders’ equity | 1,753,022 | 1,601,713 | ||||||
| $ | 2,693,059 | $ | 2,161,033 | |||||
(In thousands, except share and per share data) | Common Stock, Class B Common Stock and Preferred Stock Shares | Common Stock, Class B Common Stock and Preferred Stock Amount | Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Treasury Stock | Non- controlling Interest | Total | ||||||||||||||||||||||||
Balance at December 31, 2018 | 37,461,643 | $ | 21,167 | $ | 832,121 | $ | (45,968 | ) | $ | 627,969 | $ | (87,440 | ) | $ | 253,864 | $ | 1,601,713 | |||||||||||||||
Net income | 35,037 | 8,767 | 43,804 | |||||||||||||||||||||||||||||
Other comprehensive income | 2,783 | 1,412 | 4,195 | |||||||||||||||||||||||||||||
Issuances of non-vested restricted shares ofcommon stock | 77,049 | 39 | (39 | ) | — | |||||||||||||||||||||||||||
Forfeitures of non-vested restricted shares ofcommon stock | (5,000 | ) | (3 | ) | 3 | — | ||||||||||||||||||||||||||
Common stock contribution to 401(k) plan | 30,715 | 15 | 4,259 | 4,274 | ||||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan | 8,925 | 4 | 1,121 | 1,125 | ||||||||||||||||||||||||||||
Retirement of common stock | (2,985 | ) | (1 | ) | (427 | ) | (428 | ) | ||||||||||||||||||||||||
Share-based compensation | 4,537 | 4,537 | ||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $1.60 per share | (59,965 | ) | (59,965 | ) | ||||||||||||||||||||||||||||
Balance at March 31, 2019 | 37,570,347 | $ | 21,221 | $ | 841,575 | $ | (43,185 | ) | $ | 603,041 | $ | (87,440 | ) | $ | 264,043 | $ | 1,599,255 | |||||||||||||||
Net income | 90,155 | 17,755 | 107,910 | |||||||||||||||||||||||||||||
Other comprehensive incom e | 3,039 | 1,613 | 4,652 | |||||||||||||||||||||||||||||
Issuances of non-vested restricted shares ofcommon stock | 26,354 | 13 | (13 | ) | — | |||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan | 15,807 | 9 | 1,942 | 1,951 | ||||||||||||||||||||||||||||
Retirement of common stock | (3,608 | ) | (2 | ) | (553 | ) | (555 | ) | ||||||||||||||||||||||||
Share-based compensation | 4,324 | 4,324 | ||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $1.60 per share | (60,213 | ) | (60,213 | ) | ||||||||||||||||||||||||||||
Common stock issued for Dunphey & Associates Supply Co., Inc. | 50,952 | 25 | 7,425 | 7,450 | ||||||||||||||||||||||||||||
Investment in unconsolidated entity | 988 | 988 | ||||||||||||||||||||||||||||||
Decrease in non-controlling interest in CarrierEnterprise II | (25,768 | ) | (6,632 | ) | (32,400 | ) | ||||||||||||||||||||||||||
Balance at June 30, 2019 | 37,659,852 | $ | 21,266 | $ | 828,932 | $ | (40,146 | ) | $ | 632,983 | $ | (87,440 | ) | $ | 277,767 | $ | 1,633,362 | |||||||||||||||
Net income | 83,480 | 16,175 | 99,655 | |||||||||||||||||||||||||||||
Other comprehensive (loss) | (1,894 | ) | (1,029 | ) | (2,923 | ) | ||||||||||||||||||||||||||
Issuances of non-vested restricted shares of common stock | 37,834 | 19 | (19 | ) | — | |||||||||||||||||||||||||||
Forfeitures of non-vested restricted shares of common stock | (5,337 | ) | (3 | ) | 3 | — | ||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan | 36,374 | 19 | 4,510 | 4,529 | ||||||||||||||||||||||||||||
Retirement of common stock | (4,030 | ) | (2 | ) | (667 | ) | (669 | ) | ||||||||||||||||||||||||
Share-based compensation | 3,706 | 3,706 | ||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $1.60 per share | (60,276 | ) | (60,276 | ) | ||||||||||||||||||||||||||||
Common stock issued for Peirce-Phelps, Inc. | 372,543 | 186 | 58,452 | 58,638 | ||||||||||||||||||||||||||||
Investment in Peirce-Phelps, Inc. | 17,000 | 17,000 | ||||||||||||||||||||||||||||||
Balance at September 30, 2019 | 38,097,236 | $ | 21,485 | $ | 894,917 | $ | (42,040 | ) | $ | 656,187 | $ | (87,440 | ) | $ | 309,913 | $ | 1,753,022 | |||||||||||||||
Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenues | $ | 1,355,385 | $ | 1,371,854 | $ | 2,363,541 | $ | 2,303,132 | ||||||||
Cost of sales | 1,036,186 | 1,043,870 | 1,796,727 | 1,741,388 | ||||||||||||
Gross profit | 319,199 | 327,984 | 566,814 | 561,744 | ||||||||||||
Selling, general and administrative expenses | 194,053 | 196,549 | 397,439 | 376,621 | ||||||||||||
Other income | 4,103 | 2,965 | 5,117 | 4,409 | ||||||||||||
Operating income | 129,249 | 134,400 | 174,492 | 189,532 | ||||||||||||
Interest expense, net | 283 | 1,212 | 1,073 | 1,988 | ||||||||||||
Income before income taxes | 128,966 | 133,188 | 173,419 | 187,544 | ||||||||||||
Income taxes | 24,724 | 25,278 | 32,930 | 35,830 | ||||||||||||
Net income | 104,242 | 107,910 | 140,489 | 151,714 | ||||||||||||
Less: net income attributable to non-controlling interest | 17,664 | 17,755 | 23,409 | 26,522 | ||||||||||||
Net income attributable to Watsco, Inc. | $ | 86,578 | $ | 90,155 | $ | 117,080 | $ | 125,192 | ||||||||
Earnings per share for Common and Class B common stock: | ||||||||||||||||
Basic | $ | 2.26 | $ | 2.40 | $ | 3.03 | $ | 3.34 | ||||||||
Diluted | $ | 2.26 | $ | 2.40 | $ | 3.02 | $ | 3.34 | ||||||||
(In thousands, except share and per share data) | Common Stock, Class B Common Stock and Preferred Stock Shares | Common Stock, Class B Common Stock and Preferred Stock Amount | Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Treasury Stock | Non- controlling Interest | Total | ||||||||||||||||||||||||
Balance at December 31, 2017 | 37,228,715 | $ | 21,050 | $ | 804,008 | $ | (34,221 | ) | $ | 594,556 | $ | (87,440 | ) | $ | 253,024 | $ | 1,550,977 | |||||||||||||||
Cumulative-effect adjustment | 301 | (301 | ) | — | ||||||||||||||||||||||||||||
Net income | 34,219 | 8,158 | 42,377 | |||||||||||||||||||||||||||||
Other comprehensive loss | (3,649 | ) | (2,092 | ) | (5,741 | ) | ||||||||||||||||||||||||||
Issuances of non-vested restricted shares ofcommon stock | 91,609 | 46 | (46 | ) | — | |||||||||||||||||||||||||||
Forfeitures of non-vested restricted shares ofcommon stock | (3,000 | ) | (2 | ) | 2 | — | ||||||||||||||||||||||||||
Common stock contribution to 401(k) plan | 17,318 | 9 | 2,936 | 2,945 | ||||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan | 37,130 | 19 | 4,322 | 4,341 | ||||||||||||||||||||||||||||
Retirement of common stock | (5,041 | ) | (3 | ) | (911 | ) | (914 | ) | ||||||||||||||||||||||||
Share-based compensation | 4,400 | 4,400 | ||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $1.25 per share | (46,581 | ) | (46,581 | ) | ||||||||||||||||||||||||||||
Distributions to non-controlling interest | (2,178 | ) | (2,178 | ) | ||||||||||||||||||||||||||||
Balance at March 31, 2018 | 37,366,731 | $ | 21,119 | $ | 814,711 | $ | (37,569 | ) | $ | 581,893 | $ | (87,440 | ) | $ | 256,912 | $ | 1,549,626 | |||||||||||||||
Net income | 89,957 | 18,307 | 108,264 | |||||||||||||||||||||||||||||
Other comprehensive loss | (2,890 | ) | (1,671 | ) | (4,561 | ) | ||||||||||||||||||||||||||
Issuances of non-vested restricted shares ofcommon stock | 8,500 | 4 | (4 | ) | — | |||||||||||||||||||||||||||
Forfeitures of non-vested restricted shares ofcommon stock | (5,000 | ) | (2 | ) | 2 | — | ||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan | 11,935 | 6 | 1,595 | 1,601 | ||||||||||||||||||||||||||||
Retirement of common stock | (14,534 | ) | (7 | ) | (2,492 | ) | (2,499 | ) | ||||||||||||||||||||||||
Share-based compensation | 3,747 | 3,747 | ||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $1.45 per share | (54,184 | ) | (54,184 | ) | ||||||||||||||||||||||||||||
Balance at June 30, 2018 | 37,367,632 | $ | 21,120 | $ | 817,559 | $ | (40,459 | ) | $ | 617,666 | $ | (87,440 | ) | $ | 273,548 | $ | 1,601,994 | |||||||||||||||
Net income | 79,163 | 17,723 | 96,886 | |||||||||||||||||||||||||||||
Other comprehensive income | 2,302 | 1,283 | 3,585 | |||||||||||||||||||||||||||||
Issuances of non-vested restricted shares ofcommon stock | 10,000 | 5 | (5 | ) | — | |||||||||||||||||||||||||||
Forfeitures of non-vested restricted shares ofcommon stock | (2,000 | ) | (1 | ) | 1 | — | ||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan | 10,835 | 5 | 1,294 | 1,299 | ||||||||||||||||||||||||||||
Retirement of common stock | (9,206 | ) | (5 | ) | (1,626 | ) | (1,631 | ) | ||||||||||||||||||||||||
Share-based compensation | 3,671 | 3,671 | ||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $1.45 per share | (54,186 | ) | (54,186 | ) | ||||||||||||||||||||||||||||
Common stock issued for Alert Labs , Inc. | 47,103 | 24 | 8,156 | 8,180 | ||||||||||||||||||||||||||||
Investment in unconsolidated entity | 752 | 752 | ||||||||||||||||||||||||||||||
Balance at September 30, 2018 | 37,424,364 | $ | 21,148 | $ | 829,050 | $ | (38,157 | ) | $ | 642,643 | $ | (87,440 | ) | $ | 293,306 | $ | 1,660,550 | |||||||||||||||
| Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 251,369 | $ | 247,527 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 17,983 | 16,500 | ||||||
Share-based compensation | 11,992 | 11,769 | ||||||
Non-cash contribution to 401(k) plan | 4,274 | 2,945 | ||||||
Deferred income tax provision | 2,765 | 3,925 | ||||||
Other income from investment in unconsolidated | (7,939 | ) | (8,491 | ) | ||||
Other, net | 1,260 | 927 | ||||||
Changes in operating assets and liabilities, net of effects of acquisitions: | ||||||||
Accounts receivable | (102,813 | ) | (126,181 | ) | ||||
Inventories | (74,448 | ) | (50,566 | ) | ||||
Accounts payable and other liabilities | 99,627 | (23,286 | ) | |||||
Other, net | (6,539 | ) | (5,004 | ) | ||||
Net cash provided by operating activities | 197,531 | 70,065 | ||||||
Cash flows from investing activities: | ||||||||
Business acquisitions, net of cash acquired | (47,343 | ) | (5,828 | ) | ||||
Capital expenditures | (14,007 | ) | (12,897 | ) | ||||
Investment in unconsolidated entity | (4,940 | ) | (3,760 | ) | ||||
Proceeds from sale of property and equipment | 1,295 | 143 | ||||||
Net cash used in investing activities | (64,995 | ) | (22,342 | ) | ||||
Cash flows from financing activities: | ||||||||
Dividends on Common and Class B common stock | (180,454 | ) | (154,951 | ) | ||||
Purchase of additional ownership from non-controlling interest | (32,400 | ) | — | |||||
Repurchases of common stock to satisfy employee withholding tax obligations | (1,528 | ) | (3,782 | ) | ||||
Net repayments of other long-term obligations | (920 | ) | (182 | ) | ||||
Distributions to non-controlling interest | — | (2,178 | ) | |||||
Proceeds from non-controlling interest for investment in unconsolidated entity | 988 | 752 | ||||||
Net proceeds from issuances of common stock | 7,480 | 5,979 | ||||||
Proceeds from non-controlling interest for investment in Peirce-Phelps, Inc. | 17,000 | — | ||||||
Net proceeds under revolving credit agreement | 34,100 | 94,600 | ||||||
Net cash used in financing activities | (155,734 | ) | (59,762 | ) | ||||
Effect of foreign exchange rate changes on cash and cash equivalents | 454 | (845 | ) | |||||
Net decrease in cash and cash equivalents | (22,744 | ) | (12,884 | ) | ||||
Cash and cash equivalents at beginning of period | 82,894 | 80,496 | ||||||
Cash and cash equivalents at end of period | $ | 60,150 | $ | 67,612 | ||||
Supplemental cash flow information: | ||||||||
| Common stock issued for Peirce-Phelps, Inc. | $ | 58,638 | — | |||||
| Common stock issued for Dunphey & Associates Supply Co., Inc. | $ | 7,450 | — | |||||
Common stock issued for Alert Labs, Inc. | — | $ | 8,180 | |||||
See accompanying notes to condensed consolidated unaudited financial statements.
7
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income | $ | 104,242 | $ | 107,910 | $ | 140,489 | $ | 151,714 | ||||||||
Other comprehensive income (loss), net of tax | ||||||||||||||||
Foreign currency translation adjustment | 9,823 | 5,297 | (12,106 | ) | 10,302 | |||||||||||
Unrealized (loss) gain on cash flow hedging instruments | (1,170 | ) | (517 | ) | 1,364 | (1,053 | ) | |||||||||
Reclassification of gain on cash flow hedging instruments into earnings | (297 | ) | (128 | ) | (182 | ) | (402 | ) | ||||||||
Other comprehensive income (loss) | 8,356 | 4,652 | (10,924 | ) | 8,847 | |||||||||||
Comprehensive income | 112,598 | 112,562 | 129,565 | 160,561 | ||||||||||||
Less: comprehensive income attributable to non-controlling interest | 20,499 | 19,368 | 19,703 | 29,547 | ||||||||||||
Comprehensive income attributable to Watsco, Inc. | $ | 92,099 | $ | 93,194 | $ | 109,862 | $ | 131,014 | ||||||||
See accompanying notes to condensed consolidated unaudited financial statements.
4 of 2
7
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
June 30, 2020 | December 31, 2019 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 79,573 | $ | 74,454 | ||||
Accounts receivable, net | 676,569 | 533,810 | ||||||
Inventories | 854,368 | 920,786 | ||||||
Other current assets | 20,959 | 17,680 | ||||||
Total current assets | 1,631,469 | 1,546,730 | ||||||
Property and equipment, net | 97,143 | 98,523 | ||||||
Operating lease right-of-use assets | 226,544 | 223,369 | ||||||
Goodwill | 408,772 | 411,217 | ||||||
Intangible assets, net | 163,638 | 172,004 | ||||||
Investment in unconsolidated entity | 99,950 | 94,833 | ||||||
Other assets | 9,211 | 9,485 | ||||||
| $ | 2,636,727 | $ | 2,556,161 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of lease liabilities | $ | 69,823 | $ | 69,421 | ||||
Accounts payable | 377,445 | 239,666 | ||||||
Accrued expenses and other current liabilities | 191,590 | 152,630 | ||||||
Total current liabilities | 638,858 | 461,717 | ||||||
Long-term obligations: | ||||||||
Borrowings under revolving credit agreement | 33,357 | 155,700 | ||||||
Operating lease liabilities, net of current portion | 157,214 | 154,271 | ||||||
Finance lease liabilities, net of current portion | 2,315 | 2,009 | ||||||
Total long-term obligations | 192,886 | 311,980 | ||||||
Deferred income taxes and other liabilities | 68,901 | 67,697 | ||||||
Commitments and contingencies | ||||||||
Watsco, Inc. shareholders’ equity: | ||||||||
Common stock, $0.50 par value | 18,804 | 18,768 | ||||||
Class B common stock, $0.50 par value | 2,826 | 2,765 | ||||||
Preferred stock, $0.50 par value | — | — | ||||||
Paid-in capital | 928,845 | 907,877 | ||||||
Accumulated other comprehensive loss, net of tax | (46,268 | ) | (39,050 | ) | ||||
Retained earnings | 620,272 | 632,507 | ||||||
Treasury stock, at cost | (87,440 | ) | (87,440 | ) | ||||
Total Watsco, Inc. shareholders’ equity | 1,437,039 | 1,435,427 | ||||||
Non-controlling interest | 299,043 | 279,340 | ||||||
Total shareholders’ equity | 1,736,082 | 1,714,767 | ||||||
| $ | 2,636,727 | $ | 2,556,161 | |||||
See accompanying notes to condensed consolidated unaudited financial statements.
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WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except share and per | Common Stock, Class B Common Stock and Preferred Stock Shares | Common Stock, Class B Common Stock and Preferred Stock Amount | Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Treasury Stock | Non-controlling Interest | Total | ||||||||||||||||||||||||
Balance at December 31, 2019 | 38,194,056 | $ | 21,533 | $ | 907,877 | $ | (39,050 | ) | $ | 632,507 | $ | (87,440 | ) | $ | 279,340 | $ | 1,714,767 | |||||||||||||||
Net income | 30,502 | 5,745 | 36,247 | |||||||||||||||||||||||||||||
Other comprehensive (loss) | (12,739 | ) | (6,541 | ) | (19,280 | ) | ||||||||||||||||||||||||||
Issuances of non-vested restrictedshares of common | 113,765 | 57 | (57 | ) | — | |||||||||||||||||||||||||||
Common stock contribution to 401(k) plan | 25,216 | 13 | 4,530 | 4,543 | ||||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan | 18,674 | 9 | 2,532 | 2,541 | ||||||||||||||||||||||||||||
Retirement of common stock | (4,828 | ) | (2 | ) | (789 | ) | (791 | ) | ||||||||||||||||||||||||
Share-based compensation | 6,097 | 6,097 | ||||||||||||||||||||||||||||||
Cash dividends declared and Common and Class B common stock, $1.60 per | (61,238 | ) | (61,238 | ) | ||||||||||||||||||||||||||||
Balance at March 31, 2020 | 38,346,883 | 21,610 | 920,190 | (51,789 | ) | 601,771 | (87,440 | ) | 278,544 | 1,682,886 | ||||||||||||||||||||||
Net income | 86,578 | 17,664 | 104,242 | |||||||||||||||||||||||||||||
Other comprehensive income | 5,521 | 2,835 | 8,356 | |||||||||||||||||||||||||||||
Issuances of non-vested restrictedshares of common | 15,500 | 8 | (8 | ) | — | |||||||||||||||||||||||||||
Stock issuances from exercise of stock options and p urchaseplan | 32,073 | 16 | 4,529 | 4,545 | ||||||||||||||||||||||||||||
Retirement of common stock | (6,377 | ) | (4 | ) | (1,092 | ) | (1,096 | ) | ||||||||||||||||||||||||
Share-based compensation | 5,226 | 5,226 | ||||||||||||||||||||||||||||||
Cash dividends declared and Common and Class B stock, $1.775 per | (68,077 | ) | (68,077 | ) | ||||||||||||||||||||||||||||
Balance at June 30, 2020 | 38,388,079 | $ | 21,630 | $ | 928,845 | $ | (46,268 | ) | $ | 620,272 | $ | (87,440 | ) | $ | 299,043 | $ | 1,736,082 | |||||||||||||||
Continued on next page.
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(In thousands, except share and per | Common Stock, Class B Common Stock and Preferred Stock Shares | Common Stock, Class B Common Stock and Preferred Stock Amount | Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Treasury Stock | Non-controlling Interest | Total | ||||||||||||||||||||||||
Balance at December 31, 2018 | 37,461,643 | $ | 21,167 | $ | 832,121 | $ | (45,968 | ) | $ | 627,969 | $ | (87,440 | ) | $ | 253,864 | $ | 1,601,713 | |||||||||||||||
Net income | 35,037 | 8,767 | 43,804 | |||||||||||||||||||||||||||||
Other comprehensive income | 2,783 | 1,412 | 4,195 | |||||||||||||||||||||||||||||
Issuances of non-vested restrictedshares of common stock | 77,049 | 39 | (39 | ) | — | |||||||||||||||||||||||||||
Forfeitures of non-vested estricted r shares of common stock | (5,000 | ) | (3 | ) | 3 | — | ||||||||||||||||||||||||||
Common stock contribution to 401(k) plan | 30,715 | 15 | 4,259 | 4,274 | ||||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock plan | 8,925 | 4 | 1,121 | 1,125 | ||||||||||||||||||||||||||||
Retirement of common stock | (2,985 | ) | (1 | ) | (427 | ) | (428 | ) | ||||||||||||||||||||||||
Share-based compensation | 4,537 | 4,537 | ||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $1.60 per share | (59,965 | ) | (59,965 | ) | ||||||||||||||||||||||||||||
Balance at March 31, 2019 | 37,570,347 | 21,221 | 841,575 | (43,185 | ) | 603,041 | (87,440 | ) | 264,043 | 1,599,255 | ||||||||||||||||||||||
Net income | 90,155 | 17,755 | 107,910 | |||||||||||||||||||||||||||||
Other comprehensive income | 3,039 | 1,613 | 4,652 | |||||||||||||||||||||||||||||
Issuances of non-vested restrictedshares of common stock | 26,354 | 13 | (13 | ) | — | |||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan | 15,807 | 9 | 1,942 | 1,951 | ||||||||||||||||||||||||||||
Retirement of common stock | (3,608 | ) | (2 | ) | (553 | ) | (555 | ) | ||||||||||||||||||||||||
Share-based compensation | 4,324 | 4,324 | ||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $1.60 per share | (60,213 | ) | (60,213 | ) | ||||||||||||||||||||||||||||
Common stock issued for Dunphey & Associates Supply Co., Inc. | 50,952 | 25 | 7,425 | 7,450 | ||||||||||||||||||||||||||||
Investment in unconsolidated entity | 988 | 988 | ||||||||||||||||||||||||||||||
Decrease in non-controlling interest inCarrier Enterprise II | (25,768 | ) | (6,632 | ) | (32,400 | ) | ||||||||||||||||||||||||||
Balance at June 30, 2019 | 37,659,852 | $ | 21,266 | $ | 828,932 | $ | (40,146 | ) | $ | 632,983 | $ | (87,440 | ) | $ | 277,767 | $ | 1,633,362 | |||||||||||||||
See accompanying notes to condensed consolidated unaudited financial statements.
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WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 140,489 | $ | 151,714 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 12,898 | 11,656 | ||||||
Share-based compensation | 10,140 | 8,174 | ||||||
Deferred income tax provision | 1,676 | 1,156 | ||||||
Other income from investment in unconsolidated entity | (5,117 | ) | (4,409 | ) | ||||
Other, net | 6,475 | 5,644 | ||||||
Changes in operating assets and liabilities, net of effects of acquisition: | ||||||||
Accounts receivable | (146,512 | ) | (146,441 | ) | ||||
Inventories | 63,432 | (117,591 | ) | |||||
Accounts payable and other liabilities | 182,957 | 161,685 | ||||||
Other, net | (5,183 | ) | (3,141 | ) | ||||
Net cash provided by operating activities | 261,255 | 68,447 | ||||||
Cash flows from investing activities: | ||||||||
Capital expenditures | (8,019 | ) | (9,197 | ) | ||||
Business acquisition, net of cash acquired | — | (16,761 | ) | |||||
Investment in unconsolidated entity | — | (4,940 | ) | |||||
Proceeds from sale of property and equipment | 37 | 92 | ||||||
Net cash used in investing activities | (7,982 | ) | (30,806 | ) | ||||
Cash flows from financing activities: | ||||||||
Dividends on Common and Class B common stock | (129,315 | ) | (120,178 | ) | ||||
Net (repayments) proceeds under revolving credit agreement | (122,343 | ) | 84,400 | |||||
Repurchases of common stock to satisfy employee withholding tax obligations | (1,034 | ) | (983 | ) | ||||
Net repayments of long-term obligations | (651 | ) | (230 | ) | ||||
Payment of fees related to revolving credit agreement | (189 | ) | — | |||||
Purchase of additional ownership from non-controlling interest | — | (32,400 | ) | |||||
Proceeds from non-controlling interest for investment in unconsolidated entity | — | 988 | ||||||
Net proceeds from issuances of common stock | 6,233 | 3,076 | ||||||
Net cash used in financing activities | (247,299 | ) | (65,327 | ) | ||||
Effect of foreign exchange rate changes on cash and cash equivalents | (855 | ) | 707 | |||||
Net increase (decrease) in cash and cash equivalents | 5,119 | (26,979 | ) | |||||
Cash and cash equivalents at beginning of period | 74,454 | 82,894 | ||||||
Cash and cash equivalents at end of period | $ | 79,573 | $ | 55,915 | ||||
Supplemental cash flow information: | ||||||||
Common stock issued for Dunphey & Associates Supply Co., Inc. | — | $ | 7,450 | |||||
See accompanying notes to condensed consolidated unaudited financial statements.
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WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
1. | BASIS OF PRESENTATION |
Basis of Consolidation
Watsco, Inc. (collectively with its subsidiaries, “Watsco,” “we,” “us,” or “our”) was incorporated in Florida in 1956 and is the largest distributor of air conditioning, heating and refrigeration equipment and related parts and supplies (“HVAC/R”) in the HVAC/R distribution industry in North America. The accompanying SeptemberJune 30, 20192020 interim condensed consolidated unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, but we believe the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation have been included in the condensed consolidated unaudited financial statements included herein. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 20182019 Annual Report on Form
10-K.
On April 3, 2020, United Technologies Corporation completed the spin-off of Carrier Corporation into an independent, publicly traded company, now named Carrier Global Corporation (NYSE: CARR), which we refer to as Carrier.
The condensed consolidated unaudited financial statements contained in this report include the accounts of Watsco, all of its wholly owned subsidiaries and the accounts of ,
in each of which Watsco maintains a controlling interest. All significant intercompany balances and transactions have been eliminated in consolidation.The results of operations for the quarter and ninesix months ended SeptemberJune 30, 20192020 are not necessarily indicative of the results to be expected for the year ending December 31, 2019.2020. Sales of residential central air conditioners, heating equipment, and parts and supplies are seasonal. Furthermore, results of operationsprofitability can be impacted favorably or unfavorably based on weather patterns, primarilyparticularly during the Summer and Winter selling seasons. Demand related to the residential central air conditioning replacement market is typically highest in the second and third quarters, and demand for heating equipment is usually highest in the fourth quarter. Demand related to the new construction market is generallysectors throughout most of the markets we serve tends to be fairly evenly distributed throughout the year subject toand depends largely on housing completions and related weather and economic conditions, including their effect on the number of housing completions.conditions.
Use of Estimates
The preparation of condensed consolidated unaudited financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated unaudited financial statements and the reported amounts of revenues and expenses for the reporting period. Significant estimates include valuation reserves for accounts receivable, net realizable value adjustments to inventories, andvaluation reserves for income taxes, reserves related to loss contingencies and the valuation of goodwill, indefinite-livedindefinite-lived intangible assets and long-lived intangible assets. While we believe that these estimates are reasonable, actual results could differ from such estimates.
Impact of COVID-19 Pandemic
A novel strain of coronavirus, COVID-19, surfaced in December 2019 and has spread around the world, including to the United States. In March 2020, the World Health Organization declared COVID-19 a pandemic.The COVID-19 pandemic has impacted and could further impact our operations and the operations of our suppliers and vendors as a result of quarantines, facility closures, illnesses, and travel and logistics restrictions. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to the magnitude, duration, spread, severity, and impact of the COVID-19 pandemic, the effects of the COVID-19 pandemic on our employees, customers, suppliers, and vendors, and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred
as a result of
the C
OVID-19pandemic
. Therefore, we cannot reasonably estimate the impact at this time.
Recently Adopted Accounting Standards
Financial Instruments—Credit Losses
In FebruaryJune 2016, the Financial Accounting Standards Board (“FASB”) issued guidance on accountingthat modifies the impairment model to utilize an expected loss methodology in place of the incurred loss methodology for leases,financial instruments, including trade receivables, contract assets, long-term receivables and
off-balance
sheet credit exposures. Under the new standard, an entity will be required to consider a broader range of information to estimate expected credit losses, including historical information, current conditions and a reasonable9 of 2
7
forecast period, which requires lessees to recognize most leases on their balance sheetsmay result in earlier recognition of certain losses. This guidance is effective for the rightsinterim and obligations created by those leases. In July 2018, the FASB issued updated guidance that provides an additional transition method of adoption that allows entities to initially apply the standard at the adoption date and recognizeannual periods beginning after December 15, 2019 using a cumulative-effect adjustment to the opening balance of retained earnings.modified retrospective approach. The adoption of this standard and its related amendments (collectively, the “New Lease Standard”) on January 1, 2019guidance did not result in the recognition of a cumulative adjustment to opening retained earnings under the additional transition method, nor did it have a significantmaterial impact on our consolidated statements of income or cash flows. See Note 2.financial statements.
Intangibles—Goodwill and Other
In January 2017, the FASB issued guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this updated standard, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity also should consider income tax effects from anyWe do not expect theThe adoption of this guidance todid not have a material impact on our consolidated financial statements.
tax-deductible
goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if any. This guidance is effective prospectively and is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted. 2. | REVENUES
Disaggregation of Revenues The following table presents our revenues disaggregated by primary geographical regions and major product lines within our single reporting segment:
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The following table presents the calculation of basic and diluted earnings per share for our Common and Class B common stock:
Diluted earnings per share for our Common stock assumes the conversion of all of our Class B common stock into Common stock as of the beginning of the fiscal year; therefore, no allocation of earnings to Class B common stock is required. At 11 of 2 7
Other comprehensive income (loss) income (loss)
The changes in each component of accumulated other comprehensive loss, net of tax, were as follows:
Effective May 31, 2019, we purchased an additional , which we refer to as Carrier Enterprise , for cash consideration of $32,400, which increased our ownership in Homans to 100%. Homans previously operated as a division of Carrier Enterprise II and subsequent to the purchase operates as a stand-alone subsidiary of the Company with
On June 21, 2017, our first joint non-controlling interest. Carrier Enterprise I acquired its ownership interest in RSI for cash consideration of $63,600, of which we contributed $50,880 and Carrier contributed $12,720. Effective June 29, 2018, Carrier Enterprise I acquired an additional 1.4% ownership interest in RSI, which increased CarrierEnterprise I’s ownership interest in RSI to 36.3% for cash consideration of $3,760, 12 of 27 Carrier Enterprise I is a party to a shareholders’ agreement (the “Shareholders’ Agreement”) with RSI and its shareholders. Pursuant to the Shareholders’ Agreement, RSI’s shareholders have the right to sell, and Carrier Enterprise I has the obligation to purchase, their respective shares of RSI for a purchase price determined based on either book value or a multiple of EBIT, the latter of which Carrier Enterprise I used to calculate the price paid for its investment in RSI. RSI’s shareholders may transfer their respective shares of RSI common stock only to members of the Sigler family or to Carrier Enterprise I, and, at any time from and after the date on which Carrier Enterprise I owns two out of RSI’s six board members, this investment in RSI is accounted for under the equity method.
N&S Supply of Fishkill, Inc. On November 26, 2019, one of our wholly owned subsidiaries acquired certain assets and assumed certain liabilities of N&S Supply of Fishkill, Inc., a distributor of air conditioning, heating and plumbing products operating from 7 locations in New York and Connecticut. The purchase price was composed of cash consideration of $12,000, the issuance of 22,435 shares of Common stock having a fair value of $4,032 and the payment of certain indebtedness. The purchase price resulted in the recognition of $2,644 in goodwill. The tax basis of the acquired goodwill recognized is deductible for income tax purposes over 15 years. Peirce-Phelps, Inc. On August 1, 2019, Carrier Enterprise I acquired substantially all the HVAC assets and assumed certain of the liabilities of Peirce-Phelps, Inc. (“PPI”), an HVAC distributor operating from 19 locations in Pennsylvania, New Jersey, and Delaware, for $85,000 less certain average revolving indebtedness. Consideration for the net purchase price consisted of $10,000 in cash, 372,543 shares of Common stock having a fair value of $58,344, net of a discount for lack of marketability, and the payment of certain average revolving indebtedness. Carrier contributed cash of $17,000 to Carrier Enterprise I in connection with the acquisition of PPI. The purchase price resulted in the recognition of $28,884 in goodwill and intangibles. The fair value of the identified intangible assets was $19,000 and consisted of $13,500 in trade names and distribution rights, and $5,500 in customer relationships to be amortized over an 18-year period. The tax basis of the acquired goodwill recognized is deductible for income tax purposes over 15 years.The table below presents the allocation of the total consideration to tangible and intangible assets acquired and liabilities assumed from the acquisition of PPI based on the respective fair values as of August 1, 2019:
Dunphey & Associates Supply Co., Inc. On April 2, 2019, one of our wholly owned subsidiaries acquired certain assets and assumed certain liabilities of Dunphey & Associates Supply Co., Inc., a distributor of air conditioning and heating products operating from 7 locations in New Jersey, New York and the identified intangible assets was $5,300 and The results of operations of these acquisitions have been included in the consolidated financial statements from their respective dates of acquisition. The pro forma effect of the 13 of 27
We maintain an unsecured, syndicated multicurrency revolving credit agreement, which we use to fund seasonal working capital needs and for other general corporate purposes, including acquisitions, dividends (if and as declared by our Board of Directors), capital expenditures, stock repurchases and issuances of letters of credit. On April 10, 2020, we increased the aggregate borrowing capacity of our revolving credit agreement from $500,000 to $560,000. The credit agreement matures on December 5, 2023.At June 30, 2020 and December 31, 2019, $33,357 and $155,700, respectively, were outstanding under the revolving credit agreement. The revolving credit agreement contains customary affirmative and negative covenants, including financial covenants with respect to consolidated leverage and interest coverage ratios, and other customary restrictions. We believe we were in compliance with all covenants at June 30, 2020.
We enter into foreign currency forward and option contracts to offset the earnings impact that foreign exchange rate fluctuations would otherwise have on certain monetary liabilities that are denominated in nonfunctional currencies. Cash Flow Hedging Instruments We enter into foreign currency forward contracts that are designated as cash flow hedges. The settlement of these derivatives results in reclassifications from accumulated other comprehensive loss to earnings for the period in which the settlement of these instruments occurs. The maximum period for which we hedge our cash flow using these instruments is 12 one year or The impact from foreign exchange derivative instruments designated as cash flow hedges was as follows:
At pre-tax gain Derivatives Not Designated as Hedging Instruments We have also entered into foreign currency forward and option contracts that are either not designated as hedges or did not qualify for hedge accounting. These derivative instruments were effective economic hedges for all of the periods presented. The fair value gains and losses on these contracts are recognized in earnings as a component of selling, general and administrative expenses. The total notional value of our foreign currency exchange contracts not designated as hedging instruments at subsequently expired during July 2020 . We recognized from foreign currency forward and option contracts not designated as hedging instruments in our condensed consolidated unaudited statements of income for thesix months ended respectively. The following table summarizes the fair value of derivative instruments, which consist solely of foreign exchange contracts, included in other current assets and accrued expenses and other current liabilities in our condensed consolidated unaudited balance sheets. See Note 10 .
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The following tables present our assets and liabilities carried at fair value that are measured on a recurring basis:
The following is a description of the valuation techniques used for these assets and liabilities, as well as the level of input used to measure fair value: Equity securities Derivative financial instruments We paid cash dividends of $1.775, $1.60, Non-Vested Restricted StockDuring the quarter and non-vested restricted stock. These shares were retired upon delivery. During the quarter and non-vested restricted stock. These shares were retired upon delivery.Exercise of Stock Options Cash received from Common stock issued as a result of stock options exercised during the quarters and $ 3,217, $1,526, $5,405, and During the quarter and 15 of 2 7 Employee Stock Purchase Plan During the quarters ended of our Common stock under our employee stock purchase plan. During the respectively, for shares of our Common stock
Litigation, Claims and Assessments We are involved in litigation incidental to the operation of our business. We vigorously defend all matters in which we or our subsidiaries are named defendants and, for insurable losses, maintain significant levels of insurance to protect against adverse judgments, claims or assessments that may affect us. Although the adequacy of existing insurance coverage and the outcome of any legal proceedings cannot be predicted with certainty, based on the current information available, we do not believe the ultimate liability associated with any known claims or litigation will have a material adverse effect on our financial condition or results of operations. Self-Insurance Self-insurance reserves are maintained relative to company-wide casualty insurance and health benefit programs. The level of exposure from catastrophic events is limited by the purchase of stop-loss and aggregate liability reinsurance coverage. When estimating the self-insurance liabilities and related reserves, management considers a number of factors, which include historical claims experience, demographic factors, severity factors,
Purchases from Carrier and its affiliates comprised 63% of all inventory purchases made during both the quarters ended June 30, 2020 and 2019. Purchases from Carrier and its affiliates comprised 60% and statements of income for the quarters and arm’s-length basis in the ordinary course of business.16 of 7
Forward-Looking Statements This Quarterly Report on Form 10-Q contains or incorporates by reference statements that are not historical in nature and that are intended to be, and are hereby identified as, “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Statements which are not historical in nature, including the words “anticipate,” “estimate,” “could,” “should,” “may,” “plan,” “seek,” “expect,” “believe,” “intend,” “target,” “will,” “project,” “focused,” “outlook,” “goal,” “designed,” and variations of these words and negatives thereof and similar expressions are intended to identify forward-looking statements, including statements regarding, among others, (i) economic conditions, (ii) business and acquisition strategies, (iii) potential acquisitions and/or joint ventures and investments in unconsolidated entities, (iv) financing plans, and (v) industry, demographic and other trends affecting our financial condition or results of operations. These forward-looking statements are based on management’s current expectations, are not guarantees of future performance and are subject to a number of risks, uncertainties, and changes in circumstances, certain of which are beyond our control. Actual results could differ materially from these forward-looking statements as a result of several factors, including, but not limited to:general economic conditions, both in the United States and in the international markets we serve; competitive factors within the HVAC/R industry; effects of supplier concentration; fluctuations in certain commodity costs; consumer spending; consumer debt levels; the continued impact of the COVID-19 pandemic;new housing starts and completions; capital spending in the commercial construction market; access to liquidity needed for operations; seasonal nature of product sales; weather patterns and conditions; insurance coverage risks; federal, state, and local regulations impacting our industry and products; prevailing interest rates; foreign currency exchange rate fluctuations; international cybersecurity risk; and the continued viability of our business strategy. We believe these forward-looking statements are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on current expectations. For additional information regarding important factors that may affect our operations and could cause actual results to vary materially from those anticipated in the forward-looking statements, please see the discussion COVID-19 Pandemic, Item 1A “Risk Factors” contained in Part II of this Quarterly Report on this Form10-Q and Item 1A “Risk Factors” of our Annual Report on Form10-K for the year ended December 31, The following information should be read in conjunction with the condensed consolidated unaudited financial statements, including the notes thereto, included under Part I, Item 1 of this Quarterly Report on Form 10-Q. In addition, reference should be made to our audited consolidated financial statements and notes thereto10-K for the year ended December 31, Company Overview Watsco, Inc. was incorporated in Florida in 1956, and, together with its subsidiaries (collectively, “Watsco,” or “we,” “us,” or “our”) is the largest distributor of air conditioning, heating, and refrigeration equipment, and related parts and supplies (“HVAC/R”) in the HVAC/R distribution industry in North America. At 17 of 27 Revenues primarily consist of sales of air conditioning, heating, and refrigeration equipment, and related parts and supplies. Selling, general and administrative expenses primarily consist of selling expenses, the largest components of which are salaries, commissions, and marketing expenses that are variable and correlate to changes in sales. Other significant selling, general and administrative expenses relate to the operation of warehouse facilities, including a fleet of trucks and forklifts, and facility rent, a majority of which we operate under non-cancelable operating leases.Sales of residential central air conditioners, heating equipment, and parts and supplies are seasonal. Furthermore, Impact of the COVID-19 PandemicA novel strain of coronavirus, COVID-19, surfaced in December 2019 and has spread around the world, including to the United States. In March 2020, the World Health Organization declaredCOVID-19 a pandemic. TheCOVID-19 pandemic significantly impacted business during the second quarter of 2020. Certain U.S. states were under executive orders requiring that all workers remain at home unless their work was critical, essential, or life-sustaining. We believe that, based on the various standards published to date, the work our employees are performing is essential, and as such we continued to operate with certain modifications. A few of our locations experienced short-term closures forCOVID-19 employee health concerns or operated at a diminished capacity, which negatively impacted sales during the quarter and may continue to negatively impact sales until theCOVID-19 pandemic moderates. As of the date of this filing, while all of our locations currently continue to operate, we have restricted public access to our branches and have instituted contactless sales and servicing capabilities designed to safeguard our employees and customers.At the end of the second quarter of 2020, many of the markets in which we operate had begun to ease COVID-19 restrictions that had been in place earlier in the period. However, as of the date of this filing, viral infections have begun to increase, resulting in the resumption of restrictions in certain markets in which we operate. As a result, significant uncertainty exists concerning the magnitude of the impact and duration of theCOVID-19 pandemic.In response to the pandemic, we have implemented plans intended to preserve adequate liquidity and ensure that our business can continue to operate during this uncertain time. In addition, we have taken actions to reduce costs, including reductions in fixed-cost compensation, rent abatement, changes to vendor terms and various austerity measures to curtail discretionary spending in light of the circumstances. Other variable costs, including hourly wages, overtime, sales commissions, temporary labor, performance-based compensation, advertising, and delivery expenses are expected to moderate consistent with our overall business activity. If and to the extent restrictions ease and normal economic conditions and operations resume, the various austerity measures to curtail discretionary spending may cease. With respect to liquidity, we believe that our balance sheet remains strong with $79.6 million in cash, $33.4 million in borrowings drawn from our $560.0 million credit facility and $1.7 billion of shareholders’ equity as of June 30, 2020. Our quarterly dividend plans remain currently unchanged, most recently at $1.775 per share. Future dividends and/or changes in dividend rates are at the sole discretion of the Board of Directors and depend upon factors including, but not limited to, cash flow generated by operations, profitability, financial condition, cash requirements, and future prospects. During these uncertain times, we believe that our scale, our current low debt-level, conservative leverage ratio, and our historical ability to generate cash flow positions us well as we work through the impacts of the COVID-19 pandemic.The full impact of the COVID-19 pandemic on our financial condition and results of operations will depend on future developments, such as the ultimate duration and scope of the pandemic, its impact on our employees, customers, and suppliers, how quickly normal economic conditions and operations resume and whether the pandemic exacerbates other risks disclosed in Item 1A “Risk Factors” of our Annual Report on Form10-K for the year ended December 31, 2019. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders.Joint Ventures with Carrier Global Corporation On April 3, 2020, United Technologies Corporation completed the spin-off of Carrier Corporation into an independent, publicly traded company, named Carrier Global Corporation (“Carrier”).In 2009, we formed a joint venture with Carrier, non-controlling interest. On August 1, 2019, Carrier Enterprise I acquired substantially all of the HVAC assets and assumed certain of the liabilities of Peirce-Phelps, Inc. (“PPI”), an HVAC distributor operating from 19 locations in Pennsylvania, New Jersey, and Delaware.18 of 27 In 2011, we formed a second joint venture with Carrier, in which Carrier contributed 28 of its company-owned locations in the Northeast U.S., and we contributed 14 locations in the Northeast U.S., and we then purchased Carrier’s distribution operations in Mexico, which included seven locations. Collectively, the Northeast locations and the Mexico operations are referred to as Carrier Enterprise II. We have an 80% controlling interest in Carrier Enterprise II, and Carrier has a 20% stand-alone, wholly owned subsidiaries.non-controlling interest. Effective May 31, 2019, we purchased an additional 20% ownership interest in Homans Associates II LLC (“Homans”) from Carrier Enterprise II, following which we owned 100% of Homans. Homans previously operated as a division of Carrier Enterprise II and now operates as one of our In 2012, we formed a third joint venture, which we refer to as Carrier Enterprise III, with non-controlling interest.Critical Accounting Policies Management’s discussion and analysis of financial condition and results of operations is based upon the condensed consolidated unaudited financial statements included in this Quarterly Report on Form 10-Q, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these condensed consolidated unaudited financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated unaudited financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. At least quarterly, management reevaluates its judgments and estimates, which are based on historical experience, current trends, and various other assumptions that are believed to be reasonable under the circumstances.Our critical accounting policies are included in our 10-K, as filed with the SEC on February 28, 10-K for the year ended December 31, New Accounting Standards Refer to Note 1 to our condensed consolidated unaudited financial statements included in this Quarterly Report on Form 10-Q for a discussion of recently adopted Results of Operations The following table summarizes information derived from our condensed consolidated unaudited statements of income, expressed as a percentage of revenues, for the quarters and
Note: Due to rounding, percentages may not add up to 100. The following narratives reflect our acquisition of the HVAC distribution In the following narratives, computations and other information referring to “same-store basis” exclude the effects of locations closed, acquired, or locations opened, in each case during the immediately preceding 12 months, unless 19 of 27 The table below summarizes the changes in our locations for the 12 months ended
Revenues Revenues for the Gross Profit Gross profit for the non-equipment products.Selling, General and Administrative Expenses Selling, general and administrative expenses for the Other Income Other income of Interest Expense, Net Interest expense, net for the Income Taxes Income taxes decreased to 20 of 27 Net Income Attributable to Watsco, Inc. Net income attributable to Watsco for the quarter ended June 30, 2020 decreased $3.6 million, or 4%, compared to the same period in 2019. The decrease was primarily driven by lower revenues and gross profit, partially offset by lower selling, general and administrative expenses, higher other income, and a reduction in interest expense, net. First Half of 2020 Compared to First Half of 2019 Revenues Revenues for the first half of 2020 increased $60.4 million, or 3%, including $127.5 million attributable to the new locations acquired and $2.3 million from other locations opened during the preceding 12 months, offset by $7.7 million from locations closed. Sales of HVAC equipment (69% of sales) increased 3%, sales of other HVAC products (28% of sales) were flat and sales of commercial refrigeration products (3% of sales) decreased 8%. On a same-store basis, revenues decreased $61.7 million, or 3%, as compared to the same period in 2019, reflecting a 2% decrease in sales of HVAC equipment (69% of sales), which included a 1% increase in sales of residential HVAC equipment (2% increase in U.S. markets and an 11% decrease in international markets) and a 14% decrease in sales of commercial HVAC equipment, a 4% decrease in sales of other HVAC products (28% of sales) and an 8% decrease in commercial refrigeration products (3% of sales). The decrease in HVAC equipment revenues was primarily attributable to lower sales of commercial HVAC equipment due to pandemic-related market disruption, partially offset by a 2% increase in volume of residential HVAC equipment. Gross Profit Gross profit for the first half of 2020 increased $5.1 million, or 1%, primarily as a result of increased revenues. Gross profit margin for the six months ended non-equipment products and a lower benefit of pricing actions taken by our HVAC equipment suppliers.Selling, General and Administrative Expenses Selling, general and administrative expenses for the Other Income Other income of $5.1 million and $4.4 million for the first half of 2020 and 2019, respectively, represented our share of the net income of RSI. Interest Expense, Net Interest expense, net for the first half of 2020 decreased $0.9 million, or 46%, primarily as a result of a decrease in average outstanding borrowings and a lower effective interest rate for the 2020 period, in each case under our revolving credit facility, as compared to the same period in 2019. Income Taxes Income taxes decreased to $32.9 million for the first half of 2020, as compared to $35.8 million for the first half of 2019 and represent a composite of the income taxes attributable to our wholly owned operations and income taxes attributable to the Carrier joint ventures, which are primarily taxed as partnerships for income tax Net Income Attributable to Watsco, Inc. Net income attributable to Watsco for the non-controlling 21 of Liquidity and Capital Resources We assess our liquidity in terms of our ability to generate cash to execute our business strategy and fund operating and investing activities, taking into consideration the seasonal demand for HVAC/R products, which peaks in the months of May through August. Significant factors that could affect our liquidity include the following: cash needed to fund our business (primarily working capital requirements); borrowing capacity under our revolving credit facility; the ability to attract long-term capital with satisfactory terms; acquisitions, including joint ventures and investments in unconsolidated entities; dividend payments; capital expenditures; and the timing and extent of common stock repurchases. Sources and Uses of Cash We rely on cash flows from operations and borrowing capacity under our revolving credit agreement to fund seasonal working capital needs and for other general corporate purposes, including dividend payments (if and as declared by our Board of Directors), capital expenditures, business acquisitions, and development of our long-term operating and technology strategies. Additionally, we may also generate cash through the issuance and sale of our Common stock. As of We believe that our operating cash flows, cash on hand, and funds available for borrowing under our revolving credit agreement are sufficient to meet our liquidity needs in the foreseeable future. However, there can be no assurance that our current sources of available funds will be sufficient to meet our cash requirements. Our access to funds under our revolving credit agreement depends on the ability of the syndicate banks to meet their respective funding commitments. Disruptions in the credit and capital markets could adversely affect our ability to draw on our revolving credit agreement and may also adversely affect the determination of interest rates, particularly rates based on LIBOR, which is one of the base rates under our revolving credit agreement. LIBOR is the subject of recent proposals for reform that currently provide for the phase-out of LIBOR by 2021. The consequences of these developments with respect to LIBOR cannot be entirely predicted but could result in an increase in the cost of our debt, as it is currently anticipated that lenders will replace LIBOR with Working Capital Working capital Cash Flows The following table summarizes our cash flow activity for the
The individual items contributing to cash flow changes for the periods presented are detailed in the condensed consolidated unaudited statements of cash flows contained in this Quarterly Report on Form 10-Q. Operating Activities The increase in net cash provided by operating activities was primarily due to a reduction in the 22 of 27 Investing Activities Net cash used in investing activities was Financing Activities The increase in net cash used in financing activities was primarily attributable to Revolving Credit Agreement We maintain an unsecured, At Purchase of Additional Ownership Interest from Joint Venture Effective May 31, 2019, we purchased an additional 20% ownership interest in Homans from Carrier Enterprise II for cash consideration of $32.4 million, which increased our ownership in Homans to 100%. Homans previously operated as a division of Carrier Enterprise II and subsequent to the purchase operates as a stand-alone subsidiary of the Company with 16 locations in the Northeastern U.S. Investment in Unconsolidated Entity On June 21, 2017, Carrier Enterprise I acquired a 34.9% ownership interest in RSI, an HVAC distributor operating from 30 locations in the Western U.S. for cash consideration of $63.6 million, of which we contributed $50.9 million, and Carrier contributed $12.7 million. Effective June 29, 2018, Carrier Enterprise I acquired an additional 1.4% ownership interest in RSI, which increased Carrier Enterprise I’s ownership interest in RSI to 36.3% Carrier Enterprise I is a party to a shareholders’ agreement (the “Shareholders’ Agreement”) with RSI and its shareholders. Pursuant to the Shareholders’ Agreement, RSI’s shareholders have the right to sell, and Carrier Enterprise I has the obligation to purchase, their respective shares of RSI for a purchase price determined based on either book value or a multiple of EBIT, the latter of which Carrier Enterprise I used to calculate the price paid for its investment in RSI. RSI’s shareholders may transfer their respective shares of RSI common stock only to members of the Sigler family or to Carrier Enterprise I, and, at any time from and after the date on which Carrier Enterprise I owns 85% or more of RSI’s outstanding common stock, it has the right, but not the obligation, to purchase from RSI’s shareholders the remaining outstanding shares of RSI common stock. At Acquisitions On November 26, 2019, one of our wholly owned subsidiaries acquired certain assets and assumed certain liabilities of N&S, a distributor of air conditioning, heating and plumbing products operating from seven locations in New York and Connecticut. The purchase price was composed of cash consideration of $12.0 million, the issuance of 22,435 shares of Common stock having a fair value of $4.0 million and the payment of certain indebtedness. On August 1, 2019, Carrier Enterprise I acquired substantially all the HVAC assets and assumed certain of the liabilities of PPI, an HVAC distributor operating from 19 locations in Pennsylvania, New Jersey, and Delaware, for $85.0 million less certain average revolving indebtedness. Consideration for the net purchase price consisted of $10.0 million in cash, 372,543 shares of Common stock having a fair value of $58.3 million, net of a discount for lack of marketability, and the payment of certain average revolving indebtedness. Carrier contributed cash of $17.0 million to Carrier Enterprise I in connection with the acquisition of PPI. On April 2, 2019, one of our wholly owned subsidiaries acquired certain assets and assumed certain liabilities of DASCO, a distributor of air conditioning and heating products operating from seven locations in New Jersey, New York and Connecticut. The purchase price was composed of cash consideration of $16.8 million and the issuance of 50,952 shares of Common stock having a fair value of 23 of We continually evaluate potential acquisitions and/or joint ventures and investments in unconsolidated entities. We routinely hold discussions with several acquisition candidates. Should suitable acquisition opportunities arise that would require additional financing, we believe our financial position and earnings history provide a sufficient basis for us to either obtain additional debt financing at competitive rates and on reasonable terms or raise capital through the issuance of equity securities. Common Stock Dividends We paid cash dividends of Company Share Repurchase Program In September 1999, our Board of Directors authorized the repurchase, at management’s discretion, of up to 7,500,000 shares of common stock in the open market or via private transactions. Shares repurchased under the program are accounted for using the cost method and result in a reduction of shareholders’ equity. We last repurchased shares under this plan in 2008. In aggregate, 6,370,913 shares of Common and Class B common stock have been repurchased at a cost of $114.4 million since the inception of the program. At
There have been no material changes to the information regarding market risk provided in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the year ended December 31, ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended Our management, with the participation of our CEO, EVP and CFO, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, and, based on that evaluation, our CEO, EVP and CFO concluded that our disclosure controls and procedures were effective, at a reasonable assurance level, at and as of such date. Changes in Internal Control over Financial Reporting We are continuously seeking to improve the efficiency and effectiveness of our operations and of our internal controls. This results in refinements to processes throughout the Company. However, there were no changes in internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the quarter ended In accordance with the rules and regulations of the SEC, we have not yet assessed the internal control over financial reporting of N&S, PPI or DASCO, which collectively represented approximately 6% of our total consolidated assets at PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Information with respect to this item may be found in Note 12 to our condensed consolidated unaudited financial statements contained in this Quarterly Report on Form 10-Q under the caption “Litigation, Claims and Assessments,” which information is incorporated by reference in this Item 1 of Part II of this Quarterly Report on Form10-Q. 24 of 27 ITEM 1A. RISK FACTORS Information about risk factors for the quarter ended 10-K for the year ended December 31, COVID-19 PandemicA novel strain of coronavirus, COVID-19, surfaced in December 2019 and has spread around the world, including to the United States. In March 2020, the World Health Organization declaredCOVID-19 a pandemic. TheCOVID-19 pandemic began to impact our operations late in the first quarter of 2020 and is likely to continue to adversely affect our business and results of operations, including as government authorities impose or reimpose mandatory closures, work-from-home orders and social distancing protocols, or impose other restrictions. These actions could materially adversely affect our ability to adequately staff and maintain our operations, impair our ability to sustain sufficient financial liquidity and adversely impact our financial results. While our locations continue to operate, we have restricted public access to our branches and a few of our locations experienced short-term closures forCOVID-19 employee health concerns or are operating at a diminished capacity, negatively impacting sales for the second quarter of 2020.COVID-19 related factors that have impacted, or may negatively impact, sales, gross margin and other results of operations in the future include, but are not limited to: limitations on the ability of our suppliers to manufacture, or procure from manufacturers, the products we sell, or to meet delivery requirements and commitments; limitations on the ability of our employees to perform their work due to illness or other disruptions caused by the pandemic, including local, state, or federal orders requiring employees to remain at home; limitations on the ability of carriers to deliver our products to customers; limitations on the ability of our customers to conduct their businesses and purchase our products; and limitations on the ability of our customers to pay us on a timely basis. Moreover, theCOVID-19 pandemic could alter the mix of our business due to a shift in consumer demand towards repair of equipment rather than replacement, as well as changes in our sales mix toward value-oriented equipment and lower demand and/or disruption to new construction and commercial markets, which would result in a reduction in our sales and consequential gross margin.As we cannot predict the duration or scope of the COVID-19 pandemic, the anticipated negative financial impact to our results of operations cannot be reasonably estimated but could be material and last for an extended period of time.ITEM 6. EXHIBITS
26 of 27 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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