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10-Q
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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, 2021
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 August 2, 2021 comprised (i) 32,971,067 shares of Common stock, $0.50 par value per share, excluding 4,823,988 treasury shares and (ii) 5,764,118 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.
 
  
 
15
 
 
Item 3.
 
  
 
22
 
 
Item 4.
 
  
 
22
 
  
 
Item 1.
 
  
 
22
 
 
Item 1A.
 
  
 
22
 
 
Item 2.
 
  
 
22
 
 
Item 6.
 
  
 
23
 
  
 
24
 
  
 
2 of 24
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,		  
     2021      2020      2021      2020  
Revenues
   
$
1,849,640
 
    $ 1,355,385     
$
2,985,758
 
    $ 2,363,541  
Cost of sales
   
 
1,371,699
 
      1,036,186     
 
2,212,996
 
      1,796,727  
    
 
 
     
 
 
     
 
 
     
 
 
  
Gross profit
   
 
477,941
 
      319,199     
 
772,762
 
      566,814  
Selling, general and administrative expenses
   
 
266,697
 
      194,053     
 
484,309
 
      397,439  
Other income
   
 
5,539
 
      4,103     
 
10,210
 
      5,117  
    
 
 
     
 
 
     
 
 
     
 
 
  
Operating income
   
 
216,783
 
      129,249     
 
298,663
 
      174,492  
Interest expense, net
   
 
448
 
      283     
 
536
 
      1,073  
    
 
 
     
 
 
     
 
 
     
 
 
  
Income before income taxes
   
 
216,335
 
      128,966     
 
298,127
 
      173,419  
Income taxes
   
 
44,202
 
      24,724     
 
59,867
 
      32,930  
    
 
 
     
 
 
     
 
 
     
 
 
  
Net income
   
 
172,133
 
      104,242     
 
238,260
 
      140,489  
Less: net income attributable to
non-controlling
interest
   
 
28,031
 
      17,664     
 
39,066
 
      23,409  
    
 
 
     
 
 
     
 
 
     
 
 
  
Net income attributable to Watsco, Inc.
   
$
144,102
 
    $ 86,578     
$
199,194
 
    $ 117,080  
    
 
 
     
 
 
     
 
 
     
 
 
  
Earnings per share for Common and Class B common stock:
                                    
Basic
   
$
3.73
 
    $ 2.26     
$
5.16
 
    $ 3.03  
    
 
 
     
 
 
     
 
 
     
 
 
  
Diluted
   
$
3.71
 
    $ 2.26     
$
5.13
 
    $ 3.02  
    
 
 
     
 
 
     
 
 
     
 
 
  
See accompanying notes to condensed consolidated unaudited financial statements.
 
3 of 24
Table of Contents
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 
     Quarter Ended
June 30,		     Six Months Ended
June 30,		  
     2021     2020     2021      2020  
Net income
   
$
172,133
 
   $ 104,242    
$
238,260
 
    $ 140,489  
Other comprehensive income (loss), net of tax
                                  
Foreign currency translation adjustment
   
 
4,016
 
     9,823    
 
7,473
 
      (12,106 ) 
Unrealized (loss) gain on cash flow hedging instruments
   
 
(6
) 
     (1,170 )   
 
70
 
      1,364  
Reclassification of (gain) loss on cash flow hedging instruments into earnings
   
 
(22
) 
     (297 )   
 
221
 
      (182 ) 
    
 
 
    
 
 
    
 
 
     
 
 
  
Other comprehensive income (loss)
   
 
3,988
 
     8,356    
 
7,764
 
      (10,924 ) 
    
 
 
    
 
 
    
 
 
     
 
 
  
Comprehensive income
   
 
176,121
 
     112,598    
 
246,024
 
      129,565  
Less: comprehensive income attributable to
non-controlling
interest
   
 
29,370
 
     20,499    
 
41,707
 
      19,703  
    
 
 
    
 
 
    
 
 
     
 
 
  
Comprehensive income attributable to Watsco, Inc.
   
$
146,751
 
   $ 92,099    
$
204,317
 
    $ 109,862  
    
 
 
    
 
 
    
 
 
     
 
 
  
See accompanying notes to condensed consolidated unaudited financial statements.
 
4 of 24
Table of Contents
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 
     June 30,
2021		     December 31,
2020		  
     (Unaudited)        
ASSETS
                 
Current assets:
                 
Cash and cash equivalents
   
$
96,787
 
   $ 146,067  
Accounts receivable, net
   
 
857,864
 
     535,288  
Inventories, net
   
 
1,044,608
 
     781,299  
Other current assets
   
 
22,803
 
     21,791  
    
 
 
    
 
 
  
Total current assets
   
 
2,022,062
 
     1,484,445  
Property and equipment, net
   
 
104,967
 
     98,225  
Operating lease
right-of-use
assets
   
 
263,682
 
     209,169  
Goodwill
   
 
434,946
 
     412,486  
Intangible assets, net
   
 
190,093
 
     169,929  
Investment in unconsolidated entity
   
 
108,057
 
     97,847  
Other assets
   
 
7,877
 
     12,246  
    
 
 
    
 
 
  
    
$
3,131,684
 
   $ 2,484,347  
    
 
 
    
 
 
  
LIABILITIES AND SHAREHOLDERS’ EQUITY
                 
Current liabilities:
                 
Current portion of long-term obligations
   
$
81,306
 
   $ 71,804  
Accounts payable
   
 
490,921
 
     251,553  
Accrued expenses and other current liabilities
   
 
243,037
 
     163,788  
    
 
 
    
 
 
  
Total current liabilities
   
 
815,264
 
     487,145  
    
 
 
    
 
 
  
Long-term obligations:
                 
Borrowings under revolving credit agreement
   
 
114,167
 
     —    
Operating lease liabilities, net of current portion
   
 
184,925
 
     139,527  
Finance lease liabilities, net of current portion
   
 
6,165
 
     4,811  
    
 
 
    
 
 
  
Total long-term obligations
   
 
305,257
 
     144,338  
    
 
 
    
 
 
  
Deferred income taxes and other liabilities
   
 
79,630
 
     73,103  
    
 
 
    
 
 
  
Commitments and contingencies
               
Watsco, Inc. shareholders’ equity:
                 
Common stock, $0.50 par value
   
 
18,893
 
     18,851  
Class B common stock, $0.50 par value
   
 
2,906
 
     2,846  
Preferred stock, $0.50 par value
   
 
—  
 
     —    
Paid-in
capital
   
 
979,430
 
     950,915  
Accumulated other comprehensive loss, net of tax
   
 
(29,744
) 
     (34,867 ) 
Retained earnings
   
 
691,658
 
     636,373  
Treasury stock, at cost
   
 
(87,440
) 
     (87,440 ) 
    
 
 
    
 
 
  
Total Watsco, Inc. shareholders’ equity
   
 
1,575,703
 
     1,486,678  
Non-controlling
interest
   
 
355,830
 
     293,083  
    
 
 
    
 
 
  
Total shareholders’ equity
   
 
1,931,533
 
     1,779,761  
    
 
 
    
 
 
  
    
$
3,131,684
 
   $ 2,484,347  
    
 
 
    
 
 
  
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, 2020
   
 
38,521,694
 
  
$
21,697
 
  
$
950,915
 
  
$
(34,867
) 
  
$
636,373
 
  
$
(87,440
) 
  
$
293,083
 
   
$
1,779,761
 
Net income
                                      55,092               11,035        66,127  
Other comprehensive income
                              2,474                       1,302        3,776  
Issuances of
non-vested
restricted shares of common stock
      121,934       61       (61 )                                       —    
Forfeitures of
non-vested
restricted shares of common stoc
k
      (43,000 )      (21 )      21                                        —    
Common stock contribution to 401(k) plan
      22,752       11       5,143                                        5,154  
Stock issuances from exercise of stock options and employee stock purchase plan
      24,735       12       3,862                                        3,874  
Share-based compensation
                      6,656                                        6,656  
Cash dividends declared and paid on Common and Class B common stock, $1.775 per share
                                      (68,521 )                       (68,521 ) 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
Balance at March 31, 2021
   
 
38,648,115
 
  
 
21,760
 
  
 
966,536
 
  
 
(32,393
) 
  
 
622,944
 
  
 
(87,440
) 
  
 
305,420
 
   
 
1,796,827
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
Net income
                                      144,102               28,031        172,133  
Other comprehensive income
                              2,649                       1,339        3,988  
Issuances of
non-vested
restricted shares of common stock
      44,881       22       (22 )                                       —  
Forfeitures of
non-vested
restricted shares of common stock
      (7,589 )      (4 )      4                                        —  
Stock issuances from exercise of stock options and employee stock purchase plan
      34,311       18       5,658                                        5,676  
Retirement of common stock
      (2,965 )      (1 )      (862 )                                       (863 ) 
Share-based compensation
                      5,569                                        5,569  
Common stock issued for Acme Refrigeration of Baton Rouge LLC
      8,492       4       2,547                                        2,551  
Investment in TEC Distribution LLC
                                                      21,040        21,040  
Cash dividends declared and paid on Common and Class B common stock, $1.95 per shar
e
                                      (75,388 )                       (75,388 ) 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
Balance at June 30, 2021
   
 
38,725,245
 
  
$
21,799
 
  
$
979,430
 
  
$
(29,744
) 
  
$
691,658
 
  
$
(87,440
) 
  
$
355,830
 
   
$
1,931,533
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
 
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, 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 stoc
k
      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 purchase plan
      32,073       16       4,529                                       4,545  
Retirement of common stock
      (6,377 )      (4 )      (1,092 )                                      (1,096 ) 
Share-based compensatio
n
                      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
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
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,		  
     2021     2020  
Cash flows from operating activities:
                 
Net income
   
$
238,260
 
   $ 140,489  
Adjustments to reconcile net income to net cash provided by operating activities:
                 
Depreciation and amortization
   
 
13,877
 
     12,898  
Share-based compensation
   
 
12,351
 
     10,140  
Deferred income tax provision
   
 
2,115
 
     1,676  
Other income from investment in unconsolidated entity
   
 
(10,210
) 
     (5,117 ) 
Other, net
   
 
6,150
 
     6,475  
Changes in operating assets and liabilities, net of effects of acquisitions:
                 
Accounts receivable, net
   
 
(283,077
) 
     (146,512 ) 
Inventories, net
   
 
(173,539
) 
     63,432  
Accounts payable and other liabilities
   
 
282,852
 
     182,957  
Other, net
   
 
(6,897
) 
     (5,183 ) 
    
 
 
    
 
 
  
Net cash provided by operating activities
   
 
81,882
 
     261,255  
    
 
 
    
 
 
  
Cash flows from investing activities:
                 
Business acquisitions, net of cash acquired
   
 
(126,549
) 
     —    
Capital expenditures
   
 
(11,008
) 
     (8,019 ) 
Proceeds from sale of property and equipment
   
 
100
 
     37  
Proceeds from sale of equity securities
   
 
5,993
 
     —    
    
 
 
    
 
 
  
Net cash used in investing activities
   
 
(131,464
) 
     (7,982 ) 
    
 
 
    
 
 
  
Cash flows from financing activities:
                 
Dividends on Common and Class B common stock
   
 
(143,909
) 
     (129,315 ) 
Net repayments of finance lease liabilities
   
 
(966
) 
     (651 ) 
Repurchases of common stock to satisfy employee withholding tax obligations
      —         (1,034 ) 
Payment of fees related to revolving credit agreement
      —         (189 ) 
Net proceeds from issuances of common stock
   
 
8,687
 
     6,233  
Proceeds from
non-controlling
interest for investment in TEC Distribution LLC
   
 
21,040
 
     —    
Net proceeds (repayments) under revolving credit agreement
   
 
114,167
 
     (122,343 ) 
    
 
 
    
 
 
  
Net cash used in financing activities
   
 
(981
) 
     (247,299 ) 
    
 
 
    
 
 
  
Effect of foreign exchange rate changes on cash and cash equivalents
   
 
1,283
 
     (855 ) 
    
 
 
    
 
 
  
Net (decrease) increase in cash and cash equivalents
   
 
(49,280
) 
     5,119  
Cash and cash equivalents at beginning of period
   
 
146,067
 
     74,454  
    
 
 
    
 
 
  
Cash and cash equivalents at end of period
   
$
96,787
 
   $ 79,573  
    
 
 
    
 
 
  
Supplemental cash flow information:
                 
Common stock issued for Acme Refrigeration of Baton Rouge LLC
   
$
2,551
 
     —    
See accompanying notes to condensed consolidated unaudited financial statements.
 
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WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
June 30, 2021
(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”) w
a
s 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, 2021 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 disclosu
r
es 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 2020 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, the accounts of Carrier InterAmerica Corporation, of which we have an 80% controlling interest and Carrier has a 20%
non-controlling
interest, and our 38.1% investment in Russell Sigler, Inc. (“RSI”), 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, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021. 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.
Impact of
COVID-19
Pandemic
Since
COVID-19
was declared a pandemic in March 2020, it has impacted our operations and the operations of our customers and suppliers. Although we learned to navigate
COVID-19
while maintaining our operations in all material respects, the pandemic continued to impact our business and operating results throughout 2020. However, as economic activity has been recovering, the impact of the pandemic on our business has been more reflective of greater economic and marketplace dynamics, which include supply chain disruptions and labor shortages, rather than pandemic-related issues such as location closures, mandated restrictions and employee illness. Notwithstanding the recent resurgence of economic activity, in light of variant strains of the virus that have emerged, the
COVID-19
pandemic could once again impact our operations and the operations of our customers and suppliers as a result of quarantines, location closures, illnesses, and travel 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 resumption of high levels of infection and hospitalization, new variants of the virus, the resulting impact on our employees, customers, suppliers, and vendors, and the remedial actions and any stimulus measures adopted by federal, state, and local governments, and to what extent normal economic and operating conditions are
impacted
. Therefore, we cannot
reasonably
estimate
the future impact at this time
.
 
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Table of Contents
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,		  
     2021     2020     2021     2020  
Primary Geographical Regions:
                                 
United States
   
$
1,665,253
 
   $ 1,226,649    
$
2,676,519
 
   $ 2,126,193  
Canada
   
 
113,880
 
     71,917    
 
188,372
 
     127,258  
Latin America and the Caribbean
   
 
70,507
 
     56,819    
 
120,867
 
     110,090  
    
 
 
    
 
 
    
 
 
    
 
 
  
    
$
1,849,640
 
   $ 1,355,385    
$
2,985,758
 
   $ 2,363,541  
    
 
 
    
 
 
    
 
 
    
 
 
  
Major Product Lines:
                                 
HVAC equipment
   
 
71
% 
     71 %   
 
69
% 
     69 % 
Other HVAC products
   
 
26
% 
     26 %   
 
28
% 
     28 % 
Commercial refrigeration products
   
 
3
% 
     3 %   
 
3
% 
     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,		  
     2021      2020      2021      2020  
Basic Earnings per Share:
                                    
Net income attributable to Watsco, Inc. shareholders
   
$
144,102
 
    $ 86,578     
$
199,194
 
    $ 117,080  
Less: distributed and undistributed earnings allocated to
non-vested
restricted common stock
      12,779        7,439        17,618        11,082  
    
 
 
     
 
 
     
 
 
     
 
 
  
Earnings allocated to Watsco, Inc. shareholders
   
$
131,323
 
    $ 79,139     
$
181,576
 
    $ 105,998  
    
 
 
     
 
 
     
 
 
     
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding - Basic
   
 
35,228,061
 
      35,042,958     
 
35,203,925
 
      35,019,003  
Basic earnings per share for Common and Class B common stock
   
$
3.73
 
    $ 2.26     
$
5.16
 
    $ 3.03  
Allocation of earnings for Basic:
                                    
Common stock
   
$
121,745
 
    $ 73,323     
$
168,324
 
    $ 98,202  
Class B common stock
   
 
9,578
 
      5,816        13,252        7,796  
    
 
 
     
 
 
     
 
 
     
 
 
  
    
$
131,323
 
    $ 79,139     
$
181,576
 
    $ 105,998  
    
 
 
     
 
 
     
 
 
     
 
 
  
Diluted Earnings per Share:
                                    
Net income attributable to Watsco, Inc. shareholders
   
$
144,102
 
    $ 86,578     
$
199,194
 
    $ 117,080  
Less: distributed and undistributed earnings allocated to
non-vested
restricted common stock
      12,748        7,439        17,596        11,082  
    
 
 
     
 
 
     
 
 
     
 
 
  
Earnings allocated to Watsco, Inc. shareholders
   
$
131,354
 
    $ 79,139     
$
181,598
 
    $ 105,998  
    
 
 
     
 
 
     
 
 
     
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding - Basic
   
 
35,228,061
 
      35,042,958     
 
35,203,925
 
      35,019,003  
Effect of dilutive stock options
   
 
199,657
 
      21,753        175,121        25,347  
    
 
 
     
 
 
     
 
 
     
 
 
  
Weighted-average common shares outstanding - Diluted
   
 
35,427,718
 
      35,064,711        35,379,046        35,044,350  
    
 
 
     
 
 
     
 
 
     
 
 
  
Diluted earnings per share for Common and Class B common stock
   
$
3.71
 
    $ 2.26     
$
5.13
 
    $ 3.02  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Anti-dilutive stock options not included above
      10,907
 
      208,641     
 
7,144
 
      182,122  
 
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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, 2021 and 2020, our outstanding Class B common stock was convertible into 2,569,236 and 2,575,482 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 and changes in the unrealized (losses) gains on cash flow hedging instruments. The tax effects allocated to
each
component of other comprehensive income (loss) were as follows:
 
     Quarter Ended
June 30,		      Six Months Ended
June 30,		  
     2021      2020      2021      2020  
Foreign currency translation adjustment
   
$
4,016
 
    $ 9,823     
$
7,473
 
    $ (12,106 ) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized (loss) gain on cash flow hedging instruments
   
 
(6
) 
      (1,606 )    
 
97
 
      1,867  
Income tax benefit (expense)
      —          436     
 
(27
) 
      (503 ) 
    
 
 
     
 
 
     
 
 
     
 
 
  
Unrealized (loss) gain on cash flow hedging instruments, net of ta
x
   
 
(6
) 
      (1,170 )    
 
70
 
      1,364  
    
 
 
     
 
 
     
 
 
     
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reclassification of (gain) loss on cash flow hedging instruments into earnings
   
 
(28
) 
      (406 )    
 
305
 
      (249 ) 
Income tax expense (benefit)
   
 
6
 
      109     
 
(84
) 
      67  
    
 
 
     
 
 
     
 
 
     
 
 
  
Reclassification of (gain) loss on cash flow hedging instruments into earnings, net of tax
   
 
(22
) 
      (297 )    
 
221
 
      (182 ) 
    
 
 
     
 
 
     
 
 
     
 
 
  
Other comprehensive income (loss)
   
$
3,988
 
    $ 8,356     
$
7,764
 
    $ (10,924 ) 
    
 
 
     
 
 
     
 
 
     
 
 
  
The changes in each component of accumulated other comprehensive loss, net of tax, were as follows:
 
Six Months Ended June 30,
    2021      2020  
Foreign currency translation adjustment:
                  
Beginning balance
   
$
(34,694
)
    $ (38,599 )
Current period other comprehensive income (loss)
   
 
4,948
        (7,927 ) 
    
 
 
     
 
 
  
Ending balanc
e
   
 
(29,746
) 
      (46,526 ) 
    
 
 
     
 
 
  
Cash flow hedging instruments:
                  
Beginning balance
   
 
(173
) 
      (451 ) 
Current period other comprehensive income
   
 
43
        818  
Reclassification adjustment
   
 
132
        (109 ) 
    
 
 
     
 
 
  
Ending balance
   
 
2
        258  
    
 
 
     
 
 
  
Accumulated other comprehensive loss, net of tax
   
$
(29,744
)
    $ (46,268 )
    
 
 
     
 
 
  
 
5.
ACQUISITIONS
Acme Refrigeration of Baton
Rouge
LLC
On May 7, 2021, we acquired certain assets and assumed certain liabilities of Acme Refrigeration of Baton Rouge LLC, a distributor of air conditioning, heating, and refrigeration products, operating from 18 locations in Louisiana and Mississippi, for $22,855 less certain average revolving indebtedness. Consideration for the net purchase price consisted of $18,051 in cash, 8,492 shares of Common stock having a fair value of $2,551, and $3,141 for repayment of indebtedness, net of cash acquired of $1,340.
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Table of Contents
Temperature Equipment Corporation
On April 9, 2021, we acquired certain assets and assumed certain liabilities
comprising
the HVAC distribution business of Temperature Equipment Corporation, an HVAC distributor operating from 32 locations in Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri and Wisconsin. We formed a new, stand-alone joint venture with Carrier, TEC Distribution LLC (“TEC”), that operate
s
this business. We have an 80% controlling interest in TEC
,
and
Carrier
has a 20%
non-controlling
interest. Consideration for the purchase was paid in cash, consisting of $105,200 paid to Temperature Equipment Corporation (Carrier contributed $21,040
 
and w
e
 contributed $
84,160)
and $
1,497
for repayment
o
f 
indebtedness.
The preliminary purchase
 price resulted in the recognition of $
37,282
in goodwill and intangibles. The fair value of the identified intangible assets was $
19,900
and consisted of $
15,700
in trade names and distribution rights, and $
4,200
in customer relationships to be amortized over an
18-year
period. The tax basis of such goodwill 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 our
80
%
controlling interest in TEC based on their respective preliminary fair values as of April 9, 2021:
 
Accounts receivable
    $ 33,315  
Inventories
      71,395  
Other current assets
      962  
Property and equipment
      2,590  
Operating lease
right-of-use
assets
      53,829  
Goodwill
      17,382  
Intangibles
      19,900  
Accounts payable
      (25,393 ) 
Accrued expenses and other current liabilities
      (19,237 ) 
Operating lease liabilities, net of current portion
      (48,046 ) 
    
 
 
  
Total
    $ 106,697  
    
 
 
  
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 these acquisitions were not deemed significant to the consolidated financial statements.
 
6.
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.
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 months. At June 30, 2021, no foreign currency forward contracts were designated as cash flow hedges.
The impact from foreign exchange derivative instruments designated as cash flow hedges was as follows:
 
     Quarter Ended
June 30,		      Six Months Ended
June 30,		  
     2021      2020      2021      2020  
(Loss) gain recorded in accumulated other comprehensive los
s
   
$
(6
) 
    $ (1,606 )    
$
97
 
    $ 1,867  
(Gain) loss reclassified from accumulated other comprehensive loss into earnings
   
$
(28
) 
    $ (406 )    
$
305
 
    $ (249 ) 
At June 30, 2021, no
pre-tax
gain (loss) is expected to be reclassified into earnings related to foreign exchange hedging within the next 12 months.
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. We had only one foreign currency exchange contract not designated as a hedging instrument at June 30, 2021, the total notional value of which was $5,000, and such contract subsequently expired in July 2021.
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We recognized losses of $211 and $317 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, 2021 and 2020, respectively. We recognized (losses) gains of $(184) and $511 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, 2021 and 2020, respectively
.
The following table summarizes the fair value of derivative instruments, which consist solely of foreign exchange contracts, included in accrued expenses and other current liabilities in our condensed consolidated unaudited balance sheets. See Note 7.
 
    
Asset Derivatives
     
Liability Derivatives
  
    
June 30, 2021
     
December 31, 2020
     
June 30, 2021
     
December 31, 2020
  
Derivatives designated as hedging instruments
    $ —        $ —       
$
 —        $ 91  
Derivatives not designated as hedging instruments
      —          —       
 
5
        10  
    
 
 
     
 
 
     
 
 
     
 
 
  
Total derivative instruments
    $ —        $ —       
$
5
 
    $ 101  
    
 
 
     
 
 
     
 
 
     
 
 
  
 
 
7.
FAIR VALUE MEASUREMENTS
The following tables present our assets and liabilities carried at fair value that are measured on a recurring basis:
 
                 Fair Value Measurements
at June 30, 2021 Using		  
    
Balance Sheet Location
   
Total
      Level 1      Level 2      Level 3  
Assets:
                                         
Equity securities
    Other assets   
$
1,579
 
   
$
1,579
 
   
$
—  
 
   
$
—  
 
Liabilities:
                                         
Derivative financial instruments
    Accrued expenses and other current liabilities   
$
5
 
   
$
—  
 
   
$
5
 
   
$
—  
 
       
                 Fair Value Measurements
at December 31, 2020 Using		  
    
Balance Sheet Location
   
Total
      Level 1      Level 2      Level 3  
Assets:
                                         
Equity securities
    Other assets    $ 6,065      $ 6,065      $ —        $ —    
Liabilities:
                                         
Derivative financial instruments
    Accrued expenses and other current liabilities    $ 101      $ —        $ 101      $ —    
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
– 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.
Derivative financial instruments
– these derivatives are foreign currency forward and option contracts. See Note 6. 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.
During the six months ended June 30, 2021, we recognized a realized gain of $3,815 recorded in our condensed consolidated unaudited statement of income attributable to the sale of certain equity securities.
 
8.
SHAREHOLDERS’ EQUITY
Common Stock Dividends
We paid cash dividends of $1.95, $1.775, $3.725, and $3.375 per share of both Common stock and Class B common stock during the quarters and six months ended June 30, 2021 and 2020, respectively.
 
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Non-Vested
Restricted Stock
There were no shares of
non-vested
restricted stock that vested during the quarter and six months ended June 30, 2021. During the quarter and six months ended June 30, 2020, 1,504 shares of Common and Class B common stock with an aggregate fair market value of $243, and 6,332 shares of Common and Class B common stock with an aggregate fair market value of $1,034, respectively, were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of
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 six months ended June 30, 2021 and 2020, was $4,377, $3,217, $7,846, and $5,405, respectively.
During the quarter and six months ended June 30, 2021, 2,965 shares of Common stock with an aggregate fair market value of $863 were withheld as payment in lieu of cash for stock option exercises. These shares were retired upon delivery. During the quarter and six months ended June 30, 2020, 4,873 shares of Common stock with an aggregate fair market value of $853 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, 2021 and 2020, we received net proceeds of $436 and $475, respectively, for shares of our Common stock purchased under our employee stock purchase plan. During the six months ended June 30, 2021 and 2020, we received net proceeds of $841 and $828, respectively, for shares of our Common stock purchased under our employee stock purchase plan.
 
9.
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 a number of 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 $7,478 and $5,404 at June 30, 2021 and December 31, 2020, respectively, were established related to such programs and are included in accrued expenses and other current liabilities in our condensed consolidated unaudited balance sheets.
 
10.
RELATED PARTY TRANSACTIONS
Purchases from Carrier and its affiliates comprised 72% and 63% of all inventory purchases made during the quarters ended June 30, 2021 and 2020, respectively. Purchases from Carrier and its affiliates comprised 67% and 60% of all inventory purchases made during the six months ended June 30, 2021 and 2020, respectively. At June 30, 2021
a
nd December 31, 2020, approximately $150,000 and $81,000, 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, 2021 and 2020 included approximately $33,000, $33,000, $56,000, and $55,000, 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, 2021 and 2020, fees to this firm for services performed were $32, $0, $98 and $0, respectively. At June 30, 2021 and December 31, 2020, $1 and $8, respectively, was payable to this firm.