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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, 2023
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

 
 
 

WATSCO, INC.
(Exact name of registrant as specified in its charter)
 
 
 
FLORIDA
 
59-0778222
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

2665 South Bayshore Drive, Suite 901
Miami, FL 33133
 
(Address of principal executive offices, including zip code)
(305714-4100
(Registrant’s telephone number, including area code)
 
 
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 an 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 August 1, 2023 comprised (i) 33,537,550 shares of Common stock, $0.50 par value per share, excluding 4,778,988 treasury shares and (ii) 5,529,187 shares of 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
 
     Page No.  
  
Item 1.
     
        3  
        4  
        5  
        6  
        8  
        9  
Item 2.
        15  
Item 3.
        24  
Item 4.
        24  
  
Item 1.
        24  
Item 1A.
        24  
Item 5.
        24  
Item 6.
        25  
     26  
EXHIBITS
  
 
 
2

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
June 30,
     Six Months Ended
June 30,
 
     2023      2022      2023      2022  
Revenues
  
$
2,003,084
 
   $ 2,133,755     
$
3,553,725
 
   $ 3,657,325  
Cost of sales
  
 
1,440,462
 
     1,538,222     
 
2,542,946
 
     2,611,434  
    
 
 
    
 
 
    
 
 
    
 
 
 
Gross profit
  
 
562,622
 
     595,533     
 
1,010,779
 
     1,045,891  
Selling, general and administrative expenses
  
 
304,155
 
     314,753     
 
591,212
 
     598,107  
Other income
  
 
7,238
 
     6,317     
 
10,878
 
     10,362  
    
 
 
    
 
 
    
 
 
    
 
 
 
Operating income
  
 
265,705
 
     287,097     
 
430,445
 
     458,146  
Interest expense, net
  
 
3,415
 
     1,110     
 
4,030
 
     1,668  
    
 
 
    
 
 
    
 
 
    
 
 
 
Income before income taxes
  
 
262,290
 
     285,987     
 
426,415
 
     456,478  
Income taxes
  
 
56,887
 
     60,481     
 
90,641
 
     96,082  
    
 
 
    
 
 
    
 
 
    
 
 
 
Net income
  
 
205,403
 
     225,506     
 
335,774
 
     360,396  
Less: net income attributable to
non-controlling
interest
  
 
32,639
 
     32,949     
 
52,937
 
     54,541  
    
 
 
    
 
 
    
 
 
    
 
 
 
Net income attributable to Watsco, Inc.
  
$
172,764
 
   $ 192,557     
$
282,837
 
   $ 305,855  
    
 
 
    
 
 
    
 
 
    
 
 
 
Earnings per share for Common and Class B common stock:
                                   
Basic
  
$
4.43
 
   $ 4.94     
$
7.27
 
   $ 7.86  
    
 
 
    
 
 
    
 
 
    
 
 
 
Diluted
  
$
4.42
 
   $ 4.93     
$
7.25
 
   $ 7.83  
    
 
 
    
 
 
    
 
 
    
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
3

WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 
     Quarter Ended
June 30,
    Six Months Ended
June 30,
 
     2023      2022     2023      2022  
Net income
  
$
205,403
 
   $ 225,506    
$
335,774
 
   $ 360,396  
Other comprehensive income (loss), net of tax Foreign currency translation adjustment
  
 
7,115
 
     (9,381  
 
7,375
 
     (5,000
    
 
 
    
 
 
   
 
 
    
 
 
 
Other comprehensive income (loss)
  
 
7,115
 
     (9,381  
 
7,375
 
     (5,000
    
 
 
    
 
 
   
 
 
    
 
 
 
Comprehensive income
  
 
212,518
 
     216,125    
 
343,149
 
     355,396  
Less: comprehensive income attributable to
non-controlling
interest
  
 
34,974
 
     29,833    
 
55,362
 
     52,871  
    
 
 
    
 
 
   
 
 
    
 
 
 
Comprehensive income attributable to Watsco, Inc.
  
$
177,544
 
   $ 186,292    
$
287,787
 
   $ 302,525  
    
 
 
    
 
 
   
 
 
    
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
4

WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(In thousands, except per share data)
 
     June 30,
2023
    December 31,
2022
 
ASSETS
                
Current assets:
                
Cash and cash equivalents
  
$
162,526
 
  $ 147,505  
Accounts receivable, net
  
 
990,663
 
    747,110  
Inventories, net
  
 
1,689,309
 
    1,370,173  
Other current assets
  
 
40,070
 
    33,951  
    
 
 
   
 
 
 
Total current assets
  
 
2,882,568
 
    2,298,739  
Property and equipment, net
  
 
128,065
 
    125,424  
Operating lease
right-of-use
assets
  
 
334,376
 
    317,314  
Goodwill
  
 
431,592
 
    430,711  
Intangible assets, net
  
 
175,766
 
    175,191  
Investment in unconsolidated entity
  
 
141,082
 
    132,802  
Other assets
  
 
9,562
 
    8,033  
    
 
 
   
 
 
 
    
$
4,103,011
 
  $ 3,488,214  
    
 
 
   
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
Current liabilities:
                
Current portion of long-term obligations
  
$
93,099
 
  $ 90,597  
Borrowings under revolving credit agreement
  
 
  
 
    56,400  
Accounts payable
  
 
602,462
 
    456,128  
Accrued expenses and other current liabilities
  
 
260,438
 
    303,397  
    
 
 
   
 
 
 
Total current liabilities
  
 
955,999
 
    906,522  
    
 
 
   
 
 
 
Long-term obligations:
                
Borrowings under revolving credit agreement
  
 
342,900
 
        
Operating lease liabilities, net of current portion
  
 
247,928
 
    232,144  
Finance lease liabilities, net of current portion
  
 
10,975
 
    11,388  
    
 
 
   
 
 
 
Total long-term obligations
  
 
601,803
 
    243,532  
    
 
 
   
 
 
 
Deferred income taxes and other liabilities
  
 
93,159
 
    89,882  
    
 
 
   
 
 
 
Commitments and contingencies
            
Watsco, Inc. shareholders’ equity:
                
Common stock, $0.50 par value
  
 
19,155
 
    19,054  
Class B common stock, $0.50 par value
  
 
2,791
 
    2,757  
Preferred stock, $0.50 par value
  
 
  
 
        
Paid-in
capital
  
 
1,023,147
 
    973,060  
Accumulated other comprehensive loss, net of tax
  
 
(42,760
    (47,710
Retained earnings
  
 
1,121,944
 
    1,029,516  
Treasury stock, at cost
  
 
(86,630
    (87,440
    
 
 
   
 
 
 
Total Watsco, Inc. shareholders’ equity
  
 
2,037,647
 
    1,889,237  
Non-controlling
interest
  
 
414,403
 
    359,041  
    
 
 
   
 
 
 
Total shareholders’ equity
  
 
2,452,050
 
    2,248,278  
    
 
 
   
 
 
 
    
$
4,103,011
 
  $ 3,488,214  
    
 
 
   
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
5
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, 2022
 
 
38,749,887
 
 
$
21,811
 
 
$
973,060
 
 
$
(47,710
 
$
1,029,516
 
 
$
(87,440
 
$
359,041
 
 
$
2,248,278
 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
110,073
 
 
 
 
 
 
 
20,298
 
 
 
130,371
 
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
170
 
 
 
 
 
 
 
 
 
 
 
90
 
 
 
260
 
Issuances of restricted shares of common
stock
 
 
116,510
 
 
 
58
 
 
 
(58
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—  
 
Forfeitures of restricted shares of common
stock
 
 
(2,000
 
 
(1
 
 
1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—  
 
Common stock contribution to 401(k) plan
 
 
35,533
 
 
 
18
 
 
 
8,844
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8,862
 
Stock issuances from exercise of stock
options and employee stock purchase
plan
 
 
75,186
 
 
 
38
 
 
 
12,947
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12,985
 
Issuance of Class B common stock
 
 
632
 
 
 
  
 
 
 
200
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
200
 
Retirement of common stock
 
 
(21,702
 
 
(11
 
 
(6,441
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(6,452
Share-based compensation
 
 
 
 
 
 
 
 
 
 
8,763
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8,763
 
Cash dividends declared and paid on
Common and Class B common stock,
$
2.45
per share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(94,970
 
 
 
 
 
 
 
 
 
 
(94,970
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at March 31, 2023
 
 
38,954,046
 
 
 
21,913
 
 
 
997,316
 
 
 
(47,540
 
 
1,044,619
 
 
 
(87,440
 
 
379,429
 
 
 
2,308,297
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
172,764
 
 
 
 
 
 
 
32,639
 
 
 
205,403
 
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4,780
 
 
 
 
 
 
 
 
 
 
 
2,335
 
 
 
7,115
 
Issuances of restricted shares of common
stock
 
 
38,000
 
 
 
19
 
 
 
(19
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—  
 
Forfeitures of restricted shares of common
stock
 
 
(467
 
 
  
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—  
 
Stock issuances from exercise of stock

options and employee stock purchase
plan
 
 
30,794
 
 
 
15
 
 
 
5,622
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5,637
 
Retirement of common stock
 
 
(1,737
 
 
(1
 
 
(594
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(595
Share-based compensation
 
 
 
 
 
 
 
 
 
 
6,828
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6,828
 
Net proceeds from the sale of Common
stock
 
 
45,000
 
 
 
 
 
 
 
13,994
 
 
 
 
 
 
 
 
 
 
 
810
 
 
 
 
 
 
 
14,804
 
Cash dividends declared and paid on
Common and Class B common stock,
$
2.45
per share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(95,439
 
 
 
 
 
 
 
 
 
 
(95,439
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at June 30, 2023
 
 
39,065,636
 
 
$
21,946
 
 
$
1,023,147
 
 
$
(42,760
 
$
1,121,944
 
 
$
(86,630
 
$
414,403
 
 
$
2,452,050
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Continued on next page.
 
6

(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, 2021
 
 
38,799,632
 
 
$
21,836
 
 
$
1,003,932
 
 
$
(34,176
 
$
760,796
 
 
$
(87,440
 
$
332,467
 
 
$
1,997,415
 
Net income
 
     
 
     
 
     
 
     
 
 
113,298
 
 
     
 
 
21,592
 
 
 
134,890
 
Other comprehensive income
 
     
 
     
 
     
 
 
2,935
 
 
     
 
     
 
 
1,446
 
 
 
4,381
 
Issuances of restricted shares of common stock
 
 
105,882
 
 
 
53
 
 
 
(53
 
     
 
     
 
     
 
     
 
 
—  
 
Common stock contribution to 401(k) plan
 
 
21,532
 
 
 
11
 
 
 
6,726
 
 
     
 
     
 
     
 
     
 
 
6,737
 
Stock issuances from exercise of stock options and employee stock purchase plan
 
 
24,850
 
 
 
12
 
 
 
4,408
 
 
     
 
     
 
     
 
     
 
 
4,420
 
Share-based compensation
 
     
 
     
 
 
8,667
 
 
     
 
     
 
     
 
     
 
 
8,667
 
Cash dividends declared and paid on Common and Class B common stock,
$
1.95
per share
 
     
 
     
 
     
 
     
 
 
(75,795
 
     
 
     
 
 
(75,795
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at March 31, 2022
 
 
38,951,896
 
 
 
21,912
 
 
 
1,023,680
 
 
 
(31,241
 
 
798,299
 
 
 
(87,440
 
 
355,505
 
 
 
2,080,715
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net income
 
     
 
     
 
     
 
     
 
 
192,557
 
 
     
 
 
32,949
 
 
 
225,506
 
Other comprehensive (loss)
 
     
 
     
 
     
 
 
(6,265
 
     
 
     
 
 
(3,116
 
 
(9,381
Issuances of restricted shares of common stock
 
 
21,177
 
 
 
11
 
 
 
(11
 
     
 
     
 
     
 
     
 
 
—  
 
Forfeitures of restricted shares of common stock
 
 
(10,000
 
 
(5
 
 
5
 
 
     
 
     
 
     
 
     
 
 
—  
 
Common stock contribution to 401(k) plan
 
 
28
 
 
 
  
 
 
 
9
 
 
     
 
     
 
     
 
     
 
 
9
 
Stock issuances from exercise of stock options and employee stock purchase plan
 
 
21,939
 
 
 
11
 
 
 
3,796
 
 
     
 
     
 
     
 
     
 
 
3,807
 
Retirement of common stock
 
 
(8,181
 
 
(4
 
 
(2,175
 
     
 
     
 
     
 
     
 
 
(2,179
Share-based compensation
 
     
 
     
 
 
6,987
 
 
     
 
     
 
     
 
     
 
 
6,987
 
Cash dividends declared and paid on
Common and Class B common stock,
$
2.20
per share
 
     
 
     
 
     
 
     
 
 
(85,689
 
     
 
     
 
 
(85,689
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at June 30, 2022
 
 
38,976,859
 
 
$
21,925
 
 
$
1,032,291
 
 
$
(37,506
 
$
905,167
 
 
$
(87,440
 
$
385,338
 
 
$
2,219,775
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
7
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(In thousands)
 
     Six Months Ended
June 30,
 
     2023     2022  
Cash flows from operating activities:
                
Net income
  
$
335,774
 
 
$
360,396
 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
                
Depreciation and amortization
  
 
16,615
 
 
 
15,376
 
Share-based compensation
  
 
13,529
 
 
 
14,961
 
Provision for doubtful accounts
  
 
1,405
 
 
 
4,139
 
Deferred income tax provision
  
 
3,442
 
 
 
4,098
 
Other income from investment in unconsolidated entity
  
 
(10,878
 
 
(10,362
Other, net
  
 
8,381
 
 
 
6,853
 
Changes in operating assets and liabilities, net of effects of acquisitions:
                
Accounts receivable, net
  
 
(243,440
 
 
(289,478
Inventories, net
  
 
(313,634
 
 
(366,359
Accounts payable and other liabilities
  
 
103,442
 
 
 
332,217
 
Other, net
  
 
(3,815
 
 
1,231
 
    
 
 
   
 
 
 
Net cash (used in) provided by operating activities
  
 
(89,179
 
 
73,072
 
    
 
 
   
 
 
 
Cash flows from investing activities:
                
Capital expenditures
  
 
(15,831
 
 
(18,952
Business acquisitions, net of cash acquired
  
 
(2,989
 
 
(47
Proceeds from sale of property and equipment
  
 
1,232
 
 
 
111
 
    
 
 
   
 
 
 
Net cash used in investing activities
  
 
(17,588
 
 
(18,888
    
 
 
   
 
 
 
Cash flows from financing activities:
                
Net proceeds under current revolving credit agreement
  
 
342,900
 
        
Net proceeds from the sale of Common stock
  
 
15,179
 
        
Net proceeds from issuances of Common stock under employee-related plans
  
 
13,827
 
 
 
8,228
 
Payment of fees related to revolving credit agreement
  
 
(580
   
  
 
Net repayments of finance lease liabilities
  
 
(1,795
 
 
(1,437
Repurchases of common stock to satisfy employee withholding tax obligations
  
 
(2,254
 
 
(2,179
Net (repayments) proceeds under prior revolving credit agreement
  
 
(56,400
 
 
114,600
 
Dividends on Common and Class B common stock
  
 
(190,409
 
 
(161,484
    
 
 
   
 
 
 
Net cash provided by (used in) financing activities
  
 
120,468
 
 
 
(42,272
    
 
 
   
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
  
 
1,320
 
 
 
(1,131
    
 
 
   
 
 
 
Net increase in cash and cash equivalents
  
 
15,021
 
 
 
10,781
 
Cash and cash equivalents at beginning of period
  
 
147,505
 
 
 
118,268
 
    
 
 
   
 
 
 
Cash and cash equivalents at end of period
  
$
162,526
 
 
$
129,049
 
    
 
 
   
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
8


WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
June 30, 2023
(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 June 30, 2023 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 2022 Annual Report on Form
10-K.
The condensed consolidated unaudited financial statements include the accounts of Watsco, all of its wholly owned subsidiaries, the accounts of four
joint ventures with Carrier Global Corporation, which we refer to as Carrier, in which we have a controlling interest, the accounts of Carrier InterAmerica Corporation, in which we have an 80% controlling interest, and Carrier has a 20%
non-controlling
interest, and our 38.1% investment in Russell Sigler, Inc., which is accounted for under the equity method of accounting. All significant intercompany balances and transactions have been eliminated in consolidation.
The results of operations for the quarter and six months ended June 30, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023. Sales of residential central air conditioners, heating equipment, and parts and supplies are seasonal. Furthermore, profitability can be impacted favorably or unfavorably based on weather patterns, particularly 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 first and fourth quarters. Demand related to the new construction sectors throughout most of the markets we serve tends to be fairly evenly distributed throughout the year and depends largely on housing completions and related weather and economic conditions.
Equity Method Investments
Investments in which we have the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in investment in unconsolidated entity in our condensed consolidated unaudited balance sheets. Under this method of accounting, our proportionate share of the net income or loss of the investee is included in other income in our condensed consolidated unaudited statements of income. The excess, if any, of the carrying amount of our investment over our ownership percentage in the underlying net assets of the investee is attributed to certain fair value adjustments with the remaining portion recognized as goodwill.
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, income taxes, reserves related to loss contingencies and the valuation of goodwill, indefinite-lived intangible assets, and long-lived assets. While we believe that these estimates are reasonable, actual results could differ from such estimates.
 
9


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:
 
     Quarter Ended
June 30,
    Six Months Ended
June 30,
 
     2023     2022     2023     2022  
Primary Geographical Regions:
                                
United States
  
$
1,799,031
 
  $ 1,934,435    
$
3,194,035
 
  $ 3,305,775  
Canada
  
 
107,360
 
    113,159    
 
188,623
 
    202,582  
Latin America and the Caribbean
  
 
96,693
 
    86,161    
 
171,067
 
    148,968  
    
 
 
   
 
 
   
 
 
   
 
 
 
    
$
2,003,084
 
  $ 2,133,755    
$
3,553,725
 
  $ 3,657,325  
    
 
 
   
 
 
   
 
 
   
 
 
 
Major Product Lines:
                                
HVAC equipment
  
 
69
    70  
 
69
    69
Other HVAC products
  
 
27
    26  
 
27
    28
Commercial refrigeration products
  
 
4
    4  
 
4
    3
    
 
 
   
 
 
   
 
 
   
 
 
 
    
 
100
    100  
 
100
    100
    
 
 
   
 
 
   
 
 
   
 
 
 
3. EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings per share for our Common and Class B common stock:
 
     Quarter Ended
June 30,
     Six Months Ended
June 30,
 
     2023      2022      2023      2022  
Basic Earnings per Share:
                                   
Net income attributable to Watsco, Inc. shareholders
  
$
172,764
 
   $ 192,557     
$
282,837
 
   $ 305,855  
Less: distributed and undistributed earnings allocated to
restricted common stock
  
 
11,933
 
     17,600       
19,341
       27,902  
    
 
 
    
 
 
    
 
 
    
 
 
 
Earnings allocated to Watsco, Inc. shareholders
  
$
160,831
 
   $ 174,957     
$
263,496
 
   $ 277,953  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding—Basic
  
 
36,304,824
 
     35,403,171     
 
36,249,021
 
     35,376,223  
Basic earnings per share for Common and Class B common
stock
  
$
4.43
 
   $ 4.94     
$
7.27
 
   $ 7.86  
Allocation of earnings for Basic:
                                   
Common stock
  
$
146,511
 
   $ 162,229     
$
239,999
 
   $ 257,716  
Class B common stock
    
14,320
       12,728       
23,497
       20,237  
    
 
 
    
 
 
    
 
 
    
 
 
 
    
$
160,831
 
   $ 174,957     
$
263,496
 
   $ 277,953  
    
 
 
    
 
 
    
 
 
    
 
 
 
Diluted Earnings per Share:
                                   
Net income attributable to Watsco, Inc. shareholders
  
$
172,764
 
   $ 192,557     
$
282,837
 
   $ 305,855  
Less: distributed and undistributed earnings allocated to
restricted common stock
  
 
11,916
 
     17,570       
19,322
       27,856  
    
 
 
    
 
 
    
 
 
    
 
 
 
Earnings allocated to Watsco, Inc. shareholders
  
$
160,848
 
   $ 174,987     
$
263,515
 
   $ 277,999  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding—Basic
  
 
36,304,824
 
     35,403,171     
 
36,249,021
 
     35,376,223  
Effect of dilutive stock options
  
 
125,113
 
     117,992       
117,216
       136,595  
    
 
 
    
 
 
    
 
 
    
 
 
 
Weighted-average common shares outstanding—Diluted
  
 
36,429,937
 
     35,521,163       
36,366,237
       35,512,818  
    
 
 
    
 
 
    
 
 
    
 
 
 
Diluted earnings per share for Common and Class B common
stock
  
$
4.42
 
   $ 4.93     
$
7.25
 
   $ 7.83  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Anti-dilutive stock options not included above
  
 
24,328
 
     185,872     
 
79,271
 
     167,441  
 
10
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 June 30, 2023 and 2022, our outstanding Class B common stock was convertible into 3,232,419 and 2,575,604 shares of our Common stock, respectively.
4. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) consists of the foreign currency translation adjustment associated with our Canadian operations’ use of the Canadian dollar as their functional currency.
The change in accumulated other comprehensive loss, net of tax, was as follows:
 
Six Months Ended June 30,
   2023      2022  
Foreign currency translation adjustment:
                 
Beginning balance
  
$
(47,710
)
   $ (34,176 )
Current period other comprehensive income (loss)
  
 
4,950
       (3,330
    
 
 
    
 
 
 
Ending balance
  
$
 
(42,760
  
$
(37,506
    
 
 
    
 
 
 
5. ACQUISITION
Capitol District Supply Co., Inc.
On March 3, 2023, one of our wholly owned subsidiaries acquired Capitol District Supply Co., Inc., a distributor of air conditioning and heating products with annual sales of approximately $13,000, operating from three locations in New York. Consideration for the purchase consisted of $1,282 in cash, net of cash acquired of $144, and $1,851 for repayment of indebtedness.
The results of operations of this acquisition have been included in the condensed consolidated unaudited financial statements from its date of acquisition. The pro forma effect of this acquisition was not deemed significant to the condensed consolidated unaudited financial statements.
6. DEBT
On March 16, 2023, we entered into an unsecured, five-year $600,000 syndicated multicurrency revolving credit agreement, which replaced in its entirety our prior five-year $560,000 unsecured revolving credit agreement that was nearing maturity. Proceeds from the new facility were used to repay the $235,500 outstanding under the prior facility. Additional proceeds may be used for, among other things, funding seasonal working capital needs and 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. The revolving credit facility has a seasonal component from October 1 to March 31, during which the borrowing capacity may be reduced to $500,000 at our discretion (which effectively reduces fees payable in respect of the unused portion of the commitment). Included in the revolving credit facility are a $125,000 swingline loan sublimit, a $10,000 letter of credit sublimit, a $75,000 alternative currency borrowing sublimit, and an $10,000 Mexican borrowing subfacility. The credit agreement matures on March 16, 2028.
Borrowings under the revolving credit facility bear interest at either Term Secured Overnight Financing Rate (“SOFR”) or Daily Simple SOFR-based rates plus 0.10%, plus a spread which ranges from 100.0 to 137.5 basis-points (Term SOFR and Daily Simple SOFR plus 100.0 basis-points at June 30, 2023), depending on our ratio of total debt to EBITDA, or on rates based on the highest of the Federal Funds Effective Rate plus 0.5%, the Prime Rate or Term SOFR plus 1.0%, in each case plus a spread which ranges from 0 to 50.0 basis-points (0 basis-points at June 30, 2023), depending on our ratio of total debt to EBITDA. We pay a variable commitment fee on the unused portion of the commitment under the revolving credit agreement, ranging from 12.5 to 27.5 basis-points (12.5 basis-points at June 30, 2023). We paid fees of $580 in connection with entering into the revolving credit agreement, which are being amortized ratably through the maturity of the facility in March 2028.
At June 30, 2023, $342,900 was 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, 2023.
7. DERIVATIVES
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.
 
11

Derivatives Not Designated as Hedging Instruments
We have 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 June 30, 2023 was $18,800, and such contracts expired in July 2023.
We recognized losses of $1,658 and $52 from foreign currency forward and option contracts not designated as hedging instruments in our condensed consolidated unaudited statements of income for the quarters ended June 30, 2023 and 2022, respectively. We recognized losses of $2,052 and $375 from foreign currency forward and option contracts not designated as hedging instruments in our condensed consolidated unaudited statements of income for the six months ended June 30, 2023 and 2022, respectively.
The following table summarizes the fair value of derivative instruments, which consist solely of foreign exchange contracts, included in other current assets in our condensed consolidated unaudited balance sheets. See Note 8.
 
    
Asset Derivatives
    
Liability Derivatives
 
    
June 30, 2023
    
December 31, 2022
    
June 30, 2023
    
December 31, 2022
 
Derivatives designated as hedging instruments
  
$
  
 
   $        
$
  
 
   $     
Derivatives not designated as hedging instruments
  
 
9
 
            
 
  
 
         
    
 
 
    
 
 
    
 
 
    
 
 
 
Total derivative instruments
  
$
9
 
   $        
$
  
 
   $     
    
 
 
    
 
 
    
 
 
    
 
 
 
8. FAIR VALUE MEASUREMENTS
The following tables present our assets and liabilities carried at fair value that are measured on a recurring basis:
 
 
  
 
 
  
Total
 
  
Fair Value Measurements

at June 30, 2023 Using
 
  
Balance Sheet Location
 
  
Level 1
 
  
Level 2
 
  
Level 3
 
Assets:
                                            
Derivative financial instruments
     Other current assets     
$
9
 
  
 
—  
 
  
$
9
 
  
 
—  
 
Equity securities
     Other assets     
$
779
 
  
$
779
 
  
 
—  
 
  
 
—  
 
Private equities
     Other assets     
$
1,000
 
  
 
—  
 
  
 
—  
 
  
$
1,000
 
       
            Total      Fair Value Measurements
at December 31, 2022 Using
 
   Balance Sheet Location      Level 1      Level 2      Level 3  
Assets:
                                            
Equity securities
     Other assets      $ 678      $ 678        —          —    
Private equities
     Other assets      $ 1,000        —          —        $ 1,000  
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:
Derivative financial instruments
– these derivatives are foreign currency forward and option contracts. See Note 7. Fair value is based on observable market inputs, such as forward rates in active markets; therefore, we classify these derivatives within Level 2 of the valuation hierarchy.
Equity securities
– these investments are exchange-traded equity securities. Fair values for these investments are based on closing stock prices from active markets and are therefore classified within Level 1 of the fair value hierarchy.
Private equities
– other investment in which fair value inputs are unobservable and are therefore classified within Level 3 of the fair value hierarchy.
 
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2

9. SHAREHOLDERS’ EQUITY
At-the-Market
Offering Program
On February 25, 2022, we entered into an amended and restated sales agreement with Robert W. Baird & Co. Inc. and Goldman Sachs & Co. LLC, which enables the Company to issue and sell shares of Common stock in one or more negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), for a maximum aggregate offering amount of up to $300,000 (the “ATM Program”). The offer and sale of our Common stock pursuant to the ATM Program has been registered under the Securities Act pursuant to our automatically effective shelf registration statement on Form
S-3
(File
No. 333-260758).
During the quarter and six months ended June 30, 2023, we
 issued and
 
sold 45,000 shares of Common stock under the ATM Program for net proceeds of $15,179. Direct costs of $375 incurred in connection with the offering were charged against the proceeds from the sale of Common stock and reflected as a reduction of
paid-in
capital. At June 30, 2023, $284,745 remained available for sale under the ATM Program.
Common Stock Dividends
We paid cash dividends of $2.45, $2.20, $4.90, and $4.15 per share on both Common and Class B common stock during the quarters and six months ended June 30, 2023 and 2022, respectively.
Restricted Stock
During the six months ended June 30, 2023, a total of 6,047 shares of Common and Class B common stock with an aggregate fair market value of $1,664 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of restricted stock. These shares were retired upon delivery. During the quarter and six months ended June 30, 2022, 8,181 shares of Class B common stock with an aggregate fair market value of $2,179 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of restricted stock. These shares were retired upon delivery.
Exercise of Stock Options
Cash received from the exercise of stock options during the quarters and six months ended June 30, 2023 and 2022, was $4,526, $3,267, $12,694, and $7,222, respectively.
During the quarter and six months ended June 30, 2023, 1,737 shares of Common stock with an aggregate fair market value of $595, and 17,392 shares of Common stock with an aggregate fair market value of $5,383, respectively, were withheld as payment in lieu of cash for stock option exercises. These shares were retired upon delivery.
Employee Stock Purchase Plan
During the quarters ended June 30, 2023 and 2022, we received net proceeds of $554 and $541, respectively, for shares of our Common stock purchased under our employee stock purchase plan. During the six months ended June 30, 2023 and 2022, we received net proceeds of $1,133 and $1,006, respectively, for shares of our Common stock purchased under our employee stock purchase plan.
10. COMMITMENTS AND CONTINGENCIES
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 several factors, which include historical claims experience, demographic factors, severity factors, and valuations provided by independent third-party actuaries. Management reviews its assumptions with its independent third-party actuaries to evaluate whether the self-insurance reserves are adequate. If actual claims or adverse development of loss reserves occur and exceed these estimates, additional reserves may be required. Reserves in the amounts of $10,961 and $12,256 at June 30, 2023 and December 31, 2022, respectively, were established related to such programs and are included in accrued expenses and other current liabilities in our condensed consolidated unaudited balance sheets.
 
13

11. RELATED PARTY TRANSACTIONS
P
urchases from Carrier and its affiliates comprised 66% and 60% of all inventory purchases made during
th
e quarters ended June 30, 2023 and 2022, respectively. Purchases from Carrier and its affiliates comprised 65% and 58% of all inventory purchases made during the six months ended June 30, 2023 and 2022, respectively. At June 30, 2023 and December 31, 2022, approximately $214,000 and $88,000, respectively, was payable to Carrier and its affiliates, net of receivables. We also sell HVAC products to Carrier and its affiliates. Revenues in our condensed consolidated unaudited statements of income for the quarters and six months ended June 30, 2023 and 2022 included approximately $32,000, $29,000, $54,000, and $50,000, respectively, of sales to Carrier and its affiliates. We believe these transactions are conducted on terms equivalent to an
arm’s-length
basis in the ordinary course of business.
A member of our Board of Directors is the Senior Chairman of Greenberg Traurig, P.A., which serves as our principal outside counsel for compliance and acquisition-related legal services. During the quarters and six months ended June 30, 2023 and 2022, fees for services performed were $58, $97, $71 and $129, respectively, and $25 and $1 was payable at June 30, 2023 and December 31, 2022, respectively.
 
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4

 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, including cond