SEC Filing | Watsco, Inc.

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10-Q

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 June 30, 2020

☐	Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From

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.

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 3, 2020 comprised (i) 32,822,626 shares of Common stock, $0.50 par value per share, excluding 4,823,988 treasury shares and (ii) 5,597,873 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.
PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Unaudited Financial Statements

	Condensed Consolidated Unaudited Statements of Income – Quarters and Six Months Ended June 30, 2020 and 2019		3

	Condensed Consolidated Unaudited Statements of Comprehensive Income – Quarters and Six Months Ended June 30, 2020 and 2019		4

	Condensed Consolidated Balance Sheets – June 30, 2020 (Unaudited) and December 31, 2019		5

	Condensed Consolidated Unaudited Statements of Shareholders’ Equity – Quarters and Six Months Ended June 30, 2020 and 2019		6

	Condensed Consolidated Unaudited Statements of Cash Flows – Six Months Ended June 30, 2020 and 2019		8

	Notes to Condensed Consolidated Unaudited Financial Statements		9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		24

Item 4.	Controls and Procedures		24

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		24

Item 1A.	Risk Factors		25

Item 6.	Exhibits		26

SIGNATURE			27

EXHIBITS

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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,
	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

See accompanying notes to condensed consolidated unaudited financial statements.

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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.

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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 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, 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 restricted shares of common stock		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 paid on Common and Class B common stock, $1.60 per share														(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 restricted shares of common stock		15,500			8			(8	)														—
Stock issuances from exercise of stock options and employee stock p urchase plan		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 paid on Common and Class B common stock, $1.775 per share														(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 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 r estricted 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 income											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

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