Form 10-Q
2019Q3December 31falseWATSCO INC0000105016 0000105016 2019-01-01 2019-09-30 0000105016 2019-07-01 2019-09-30 0000105016 2018-07-01 2018-09-30 0000105016 2018-01-01 2018-09-30 0000105016 2019-09-30 0000105016 2018-12-31 0000105016 2019-01-01 2019-03-31 0000105016 2019-04-01 2019-06-30 0000105016 2018-01-01 2018-03-31 0000105016 2018-04-01 2018-06-30 0000105016 2018-09-30 0000105016 2017-12-31 0000105016 2018-03-31 0000105016 2018-06-30 0000105016 2019-03-31 0000105016 2019-06-30 0000105016 wso:CarrierAndItsAffiliatesMember us-gaap:SupplierConcentrationRiskMember us-gaap:CostOfGoodsTotalMember 2019-01-01 2019-09-30 0000105016 us-gaap:CashFlowHedgingMember us-gaap:ForeignExchangeForwardMember 2019-01-01 2019-09-30 0000105016 wso:CarrierAndItsAffiliatesMember us-gaap:SupplierConcentrationRiskMember 2019-01-01 2019-09-30 0000105016 us-gaap:CommonStockMember 2019-01-01 2019-09-30 0000105016 us-gaap:CommonClassBMember 2019-01-01 2019-09-30 0000105016 wso:GreenbergTraurigMember 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xbrli:shares iso4217:USD xbrli:shares wso:Location wso:board-member
Table of Contents
 
 
 
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
September 30, 2019
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 Rule
12b-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 2
8
, 2019 comprised (i)
32,647,671
shares of Common stock, $0.50 par value per share, excluding
4,823,988
treasury shares and (ii)
5,453,477
shares of
Class B common stock, $0.50 par value
per share, excluding 48,263 treasury shares. 
 
 
 

 
Table of Contents
 
WATSCO, INC. AND SUBSIDIARIES
 
QUARTERLY REPORT ON FORM
10-Q
TABLE OF CONTENTS
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
 
 
 
 
 
 
 
 
 
 
 
4
 
 
 
 
 
 
 
 
 
 
 
5
 
 
 
 
 
 
 
 
 
 
 
6
 
 
 
 
 
 
 
 
 
 
 
8
 
 
 
 
 
 
 
 
 
 
 
9
 
 
 
 
 
 
 
 
Item 2.
 
 
 
17
 
 
 
 
 
 
 
 
Item 3.
 
 
 
24
 
 
 
 
 
 
 
 
Item 4.
 
 
 
24
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
24
 
 
 
 
 
 
 
 
Item 1A.
 
 
 
24
 
 
 
 
 
 
 
 
Item 6.
 
 
 
25
 
 
 
 
 
 
 
 
26
 
 
 
 
 
 
EXHIBITS
 
 
 
 
2 of 26
 

 
Table of Contents
 
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
 
                                 
 
 
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
3 of 26
 

 
Table of Contents
 
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
                                 
 
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
 
                                 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
4 of 26
 

 
Table of Contents
 
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
                 
 
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
 
                 
 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
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Table of Contents
 
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF SHAREHOLDERS’ EQUITY
(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 of
common stock
   
77,049
     
39
     
(39
)    
     
     
     
     
—  
 
Forfeitures of
non-vested
restricted 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 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 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 in Carrier
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
 
                                                                 
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
 
                                                                 
Continued on next page.
 
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Table of Contents 
 
                                                                 
(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 of
common stock
   
91,609
     
46
     
(46
)    
     
     
     
     
—  
 
Forfeitures of
non-vested
restricted shares of
common 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 of
common stock
   
8,500
     
4
     
(4
)    
     
     
     
     
—  
 
Forfeitures of
non-vested
restricted shares of
common stock
   
(5,000
)    
(2
)    
2