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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 September 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:
(305714-4100
 
 
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 November 1, 2021 comprised (i) 33,025,976 shares of Common stock, $0.50 par value per share, excluding 4,823,988 treasury shares and (ii) 5,746,980 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.
 
  
 
16
 
     
Item 3.
 
  
 
24
 
     
Item 4.
 
  
 
24
 
   
  
     
     
Item 1.
 
  
 
24
 
     
Item 1A.
 
  
 
24
 
     
Item 2.
 
  
 
25
 
     
Item 6.
 
  
 
25
 
   
  
 
26
 
   
  
     
 
2 of 26

PART I. FINANCIAL INFORMATION
 
ITEM 1.
CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF INCOME
(In thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Quarter Ended
September 30,
     Nine Months Ended
September 30,
 
     2021      2020      2021      2020  
Revenues
  
$
1,782,569
 
   $ 1,536,671     
$
4,768,327
 
   $ 3,900,212  
Cost of sales
  
 
1,299,905
 
     1,162,908     
 
3,512,901
 
     2,959,635  
    
 
 
    
 
 
    
 
 
    
 
 
 
Gross profit
  
 
482,664
 
     373,763     
 
1,255,426
 
     940,577  
Selling, general and administrative expenses
  
 
281,922
 
     221,037     
 
766,231
 
     618,476  
Other income
  
 
6,057
 
     4,055     
 
16,267
 
     9,172  
    
 
 
    
 
 
    
 
 
    
 
 
 
Operating income
  
 
206,799
 
     156,781     
 
505,462
 
     331,273  
Interest expense, net
  
 
221
 
     108     
 
757
 
     1,181  
    
 
 
    
 
 
    
 
 
    
 
 
 
Income before income taxes
  
 
206,578
 
     156,673     
 
504,705
 
     330,092  
Income taxes
  
 
41,734
 
     30,467     
 
101,601
 
     63,397  
    
 
 
    
 
 
    
 
 
    
 
 
 
Net income
  
 
164,844
 
     126,206     
 
403,104
 
     266,695  
Less: net income attributable to
non-controlling
interest
  
 
23,979
 
     19,717     
 
63,045
 
     43,126  
    
 
 
    
 
 
    
 
 
    
 
 
 
Net income attributable to Watsco, Inc.
  
$
140,865
 
   $ 106,489     
$
340,059
 
   $ 223,569  
    
 
 
    
 
 
    
 
 
    
 
 
 
Earnings per share for Common and Class B common stock:
                                   
Basic
  
$
3.64
 
   $ 2.77     
$
8.80
 
   $ 5.83  
    
 
 
    
 
 
    
 
 
    
 
 
 
Diluted
  
$
3.62
 
   $ 2.76     
$
8.75
 
   $ 5.82  
    
 
 
    
 
 
    
 
 
    
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
3 of 26

WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
     2021     2020     2021     2020  
Net income
  
$
164,844
 
  $ 126,206    
$
403,104
 
  $ 266,695  
Other comprehensive (loss) income, net of tax
                                
Foreign currency translation adjustment
  
 
(8,219
    5,514    
 
(746
    (6,592
Unrealized (loss) gain on cash flow hedging instruments
  
 
  
 
    (416  
 
70
 
    948  
Reclassification of (gain) loss on cash flow hedging instruments into earnings
  
 
  
 
    (509  
 
221
 
    (691
    
 
 
   
 
 
   
 
 
   
 
 
 
Other comprehensive (loss) income
  
 
(8,219
    4,589    
 
(455
    (6,335
    
 
 
   
 
 
   
 
 
   
 
 
 
Comprehensive income
  
 
156,625
 
    130,795    
 
402,649
 
    260,360  
Less: comprehensive income attributable to
non-controlling
interest
  
 
21,114
 
    21,283    
 
62,821
 
    40,986  
    
 
 
   
 
 
   
 
 
   
 
 
 
Comprehensive income attributable to Watsco, Inc.
  
$
135,511
 
  $ 109,512    
$
339,828
 
  $ 219,374  
    
 
 
   
 
 
   
 
 
   
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
4 of 26

WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
     September 30,
2021
    December 31,
2020
 
     (Unaudited)        
ASSETS
                
Current assets:
                
Cash and cash equivalents
  
$
137,201
 
  $ 146,067  
Accounts receivable, net
  
 
771,042
 
    535,288  
Inventories, net
  
 
1,042,144
 
    781,299  
Other current assets
  
 
30,474
 
    21,791  
    
 
 
   
 
 
 
Total current assets
  
 
1,980,861
 
    1,484,445  
Property and equipment, net
  
 
105,842
 
    98,225  
Operating lease
right-of-use
assets
  
 
262,965
 
    209,169  
Goodwill
  
 
432,514
 
    412,486  
Intangible assets, net
  
 
187,662
 
    169,929  
Investment in unconsolidated entity
  
 
111,776
 
    97,847  
Other assets
  
 
9,301
 
    12,246  
    
 
 
   
 
 
 
    
$
3,090,921
 
  $ 2,484,347  
    
 
 
   
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
Current liabilities:
                
Current portion of long-term obligations
  
$
82,712
 
  $ 71,804  
Accounts payable
  
 
454,498
 
    251,553  
Accrued expenses and other current liabilities
  
 
259,483
 
    163,788  
    
 
 
   
 
 
 
Total current liabilities
  
 
796,693
 
    487,145  
    
 
 
   
 
 
 
Long-term obligations:
                
Borrowings under revolving credit agreement
  
 
1,724
 
     
Operating lease liabilities, net of current portion
  
 
182,772
 
    139,527  
Finance lease liabilities, net of current portion
  
 
6,676
 
    4,811  
    
 
 
   
 
 
 
Total long-term obligations
  
 
191,172
 
    144,338  
    
 
 
   
 
 
 
Deferred income taxes and other liabilities
  
 
81,531
 
    73,103  
    
 
 
   
 
 
 
Commitments and contingencies
            
Watsco, Inc. shareholders’ equity:
                
Common stock, $0.50 par value
  
 
18,913
 
    18,851  
Class B common stock, $0.50 par value
  
 
2,904
 
    2,846  
Preferred stock, $0.50 par value
  
 
  
 
        
Paid-in capital
  
 
988,310
 
    950,915  
Accumulated other comprehensive loss, net of tax
  
 
(35,098
)
 
 
    (34,867
Retained earnings
  
 
756,992
 
    636,373  
Treasury stock, at cost
  
 
(87,440
    (87,440
    
 
 
   
 
 
 
Total Watsco, Inc. shareholders’ equity
  
 
1,644,581
 
    1,486,678  
Non-controlling
interest
  
 
376,944
 
    293,083  
    
 
 
   
 
 
 
Total shareholders’ equity
  
 
2,021,525
 
    1,779,761  
    
 
 
   
 
 
 
    
$
3,090,921
 
  $ 2,484,347  
    
 
 
   
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
5 of 26

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 stock
     (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 share
                                     (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
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net income
                                     140,865               23,979       164,844  
Other comprehensive loss
                             (5,354                     (2,865     (8,219
Issuances of
non-vested
restricted shares of common stock
     21,828       11       (11                             —    
Stock issuances from exercise of stock options and employee stock purchase plan
     14,413       7       2,480                               2,487  
Retirement of common stock
     (3,250     (2     (892                             (894
Share-based compensation
                     6,308                               6,308  
Common stock issued for Makdad Industrial Supply Co., Inc.
     3,627       2       995                               997  
Cash dividends declared and paid on Common and Class B common stock, $1.95 per share
                                     (75,531             (75,531
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at September 30, 2021
  
 
38,761,863
 
 
$
21,817
 
 
$
988,310
 
 
$
(35,098
 
$
756,992
 
 
$
(87,440
 
$
376,944
 
 
$
2,021,525
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
 
Continued on next page.
6 of 26

(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 purchase 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
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net income
                                     106,489               19,717       126,206  
Other comprehensive income
                             3,023                       1,566       4,589  
Issuances of
non-vested
restricted shares of common stock
     20,000       10       (10                                     —    
Forfeitures of
non-vested
restricted shares of common stock
     (3,589     (2     2                                       —    
Stock issuances from exercise of stock options and employee stock purchase plan
     55,473       28       8,438                                       8,466  
Retirement of common stock
     (11,943     (6     (2,749                                     (2,755
Share-based compensation
                     5,489                                       5,489  
Cash dividends declared and paid on Common and Class B common stock, $1.775 per share
                                     (68,139                     (68,139
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at September 30, 2020
  
 
38,448,020
 
 
$
21,660
 
 
$
940,015
 
 
$
(43,245
 
$
658,622
 
 
$
(87,440
 
$
320,326
 
 
$
1,809,938
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
7 of 2
6

WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
 
 
 
 
 
 
 
 
     Nine Months Ended
September 30,
 
     2021     2020  
Cash flows from operating activities:
 
 
 
 
 
 
 
 
Net income
  
$
403,104
 
  $ 266,695  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation and amortization
  
 
20,874
 
    19,350  
Share-based compensation
  
 
18,659
 
    15,802  
Non-cash
contribution to 401(k) plan
  
 
5,154
 
    4,543  
Deferred income tax provision
  
 
3,966
 
    3,177  
Other income from investment in unconsolidated entity
  
 
(16,267
    (9,172
Other, net
  
 
1,969
 
    1,776  
Changes in operating assets and liabilities, net of effects of acquisitions:
                
Accounts receivable, net
  
 
(198,011
    (113,017
Inventories, net
  
 
(170,662
    34,448  
Accounts payable and other liabilities
  
 
263,752
 
    158,094  
Other, net
  
 
(12,866
    (8,918
    
 
 
   
 
 
 
Net cash provided by operating activities
  
 
319,672
 
    372,778  
    
 
 
   
 
 
 
Cash flows from investing activities:
                
Business acquisitions, net of cash acquired
  
 
(129,462
        
Capital expenditures
  
 
(16,770
    (11,608
Proceeds from sale of property and equipment
  
 
108
 
    61  
Proceeds from sale of equity securities
  
 
5,993
 
        
    
 
 
   
 
 
 
Net cash used in investing activities
  
 
(140,131
    (11,547
    
 
 
   
 
 
 
Cash flows from financing activities:
                
Dividends on Common and Class B common stock
  
 
(219,440
    (197,454
Net repayments of finance lease liabilities
  
 
(1,482
    (1,003
Repurchases of common stock to satisfy employee withholding tax obligations
  
 
(894
    (2,299
Payment of fees related to revolving credit agreement
  
 
(22
    (189
Net proceeds (repayments) under revolving credit agreement
  
 
1,724
 
    (155,032
Net proceeds from issuances of common stock
  
 
11,173
 
    13,207  
Proceeds from
non-controlling
interest for investment in TEC Distribution LLC
  
 
21,040
 
    —    
    
 
 
   
 
 
 
Net cash used in financing activities
  
 
(187,901
    (342,770
    
 
 
   
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
  
 
(506
    (315
    
 
 
   
 
 
 
Net (decrease) increase in cash and cash equivalents
  
 
(8,866
    18,146  
Cash and cash equivalents at beginning of period
  
 
146,067
 
    74,454  
    
 
 
   
 
 
 
Cash and cash equivalents at end of period
  
$
137,201
 
  $ 92,600  
    
 
 
   
 
 
 
Supplemental cash flow information:
                
Common stock issued for Acme Refrigeration of Baton Rouge LLC
  
$
2,551
 
    —    
Common stock issued for Makdad Industrial Supply Co., Inc.
  
$
997
 
    —    
See accompanying notes to condensed consolidated unaudited financial statements.
 
8 of 2
6

WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
September 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”) 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 September 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 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 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 nine months ended September 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 and into 2021. 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.
 
9 of 26

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
September 30,
    Nine Months Ended
September 30,
 
     2021     2020     2021     2020  
Primary Geographical Regions:
                                
United States
  
$
1,615,319
 
  $ 1,391,340    
$
4,291,838
 
  $ 3,517,533  
Canada
  
 
102,491
 
    91,429    
 
290,863
 
    218,687  
Latin America and the Caribbean
  
 
64,759
 
    53,902    
 
185,626
 
    163,992  
    
 
 
   
 
 
   
 
 
   
 
 
 
    
$
 
1,782,569
 
  $
 
1,536,671    
$
 
4,768,327
 
  $
 
3,900,212  
    
 
 
   
 
 
   
 
 
   
 
 
 
Major Product Lines:
                                
HVAC equipment
  
 
69
%
 
    70  
 
69
%
 
    70
Other HVAC products
  
 
27
    27  
 
27
    27
Commercial refrigeration products
  
 
4
    3  
 
4
    3
    
 
 
   
 
 
   
 
 
   
 
 
 
    
 
100
    100  
 
100
    100
    
 
 
   
 
 
   
 
 
   
 
 
 
 
10 of 26

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
September 30,
     Nine Months Ended
September 30,
 
     2021      2020      2021      2020  
Basic Earnings per Share:
                                   
Net income attributable to Watsco, Inc. shareholders
  
$
140,865
 
   $ 106,489     
$
340,059
 
   $ 223,569  
Less: distributed and undistributed earnings allocated to
non-vested
restricted common stock
  
 
12,590
 
     9,146     
 
30,182
 
     19,178  
    
 
 
    
 
 
    
 
 
    
 
 
 
Earnings allocated to Watsco, Inc. shareholders
  
$
128,275
 
   $ 97,343     
$
309,877
 
   $ 204,391  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 -
 
Basic
  
 
35,260,126
 
     35,099,871     
 
35,222,865
 
     35,046,156  
Basic earnings per share for Common and Class B common stock
  
$
3.64
 
   $ 2.77     
$
8.80
 
   $ 5.83  
Allocation of earnings for Basic:
                                   
Common stock
  
$
118,905
 
   $ 90,197     
$
287,217
 
   $ 189,364  
Class B common stock
  
 
9,370
 
     7,146     
 
22,660
 
     15,027  
    
 
 
    
 
 
    
 
 
    
 
 
 
    
$
128,275
 
   $ 97,343     
$
309,877
 
   $ 204,391  
    
 
 
    
 
 
    
 
 
    
 
 
 
Diluted Earnings per Share:
                                   
Net income attributable to Watsco, Inc. shareholders
  
$
140,865
 
   $ 106,489     
$
340,059
 
   $ 223,569  
Less: distributed and undistributed earnings allocated to
non-vested
restricted common stock
  
 
12,563
 
     9,135     
 
30,132
 
     19,175  
    
 
 
    
 
 
    
 
 
    
 
 
 
Earnings allocated to Watsco, Inc. shareholders
  
$
128,302
 
   $ 97,354     
$
309,927
 
   $ 204,394  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 -
 
Basic
  
 
35,260,126
 
     35,099,871     
 
35,222,865
 
     35,046,156  
Effect of dilutive stock options
  
 
181,852
 
     137,151     
 
177,389
 
     62,887  
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Weighted-average common shares outstanding
 -
 
Diluted
  
 
35,441,978
 
     35,237,022     
 
35,400,254
 
     35,109,043  
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Diluted earnings per share for Common and Class B common stock
  
$
3.62
 
   $ 2.76     
$
8.75
 
   $ 5.82  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Anti-dilutive stock options not included above
  
 
63,959
 
     3,750     
 
27,513
 
     27,755  
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 September 30, 2021 and 2020, our outstanding Class B common stock was convertible into 2,575,698 and 2,576,570 shares of our Common stock, respectively.
 
11 of 26

4. OTHER COMPREHENSIVE (LOSS) INCOME
Other comprehensive (loss) income 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 (loss) income were as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
     2021     2020     2021     2020  
Foreign currency translation adjustment
  
$
 
(8,219
  $
 
5,514    
$
 
(746
  $
 
(6,592
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized (loss) gain on cash flow hedging instruments
              (570  
 
97
 
    1,297  
Income tax benefit (expense)
              154    
 
(27
    (349
    
 
 
   
 
 
   
 
 
   
 
 
 
Unrealized (loss) gain on cash flow hedging instruments, net of tax
              (416  
 
70
 
    948  
    
 
 
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reclassification of (gain) loss on cash flow hedging instruments into earnings
              (697  
 
305
 
    (946
Income tax expense (benefit)
              188    
 
(84
    255  
    
 
 
   
 
 
   
 
 
   
 
 
 
Reclassification of (gain) loss on cash flow hedging instruments into earnings, net of tax
              (509  
 
221
 
    (691
    
 
 
   
 
 
   
 
 
   
 
 
 
Other comprehensive (loss) income
  
$
(8,219
  $ 4,589    
$
(455
  $ (6,335
    
 
 
   
 
 
   
 
 
   
 
 
 
The changes in each component of accumulated other comprehensive loss, net of tax, were as follows:
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September
 30,
   2021     2020  
Foreign currency translation adjustment:
                
Beginning balance
  
$
 
(34,694
)
  $
 
(38,599 )
Current period other comprehensive loss
  
 
(406
    (4,349
    
 
 
   
 
 
 
Ending balance
  
 
(35,100
    (42,948
    
 
 
   
 
 
 
Cash flow hedging instruments:
                
Beginning balance
  
 
(173
    (451
Current period other comprehensive income
  
 
43
      568  
Reclassification adjustment
  
 
132
      (414
    
 
 
   
 
 
 
Ending balance
  
 
2
      (297
    
 
 
   
 
 
 
Accumulated other comprehensive loss, net of tax
  
$
(35,098
  $ (43,245
    
 
 
   
 
 
 
5. ACQUISITIONS
Makdad Industrial Supply Co., Inc.
On August 20, 2021, one of our wholly owned subsidiaries acquired Makdad Industrial Supply Co., Inc., a distributor of air conditioning and heating products operating from six locations in Pennsylvania. Consideration for the purchase price consisted of $3,117 in cash and the issuance of 3,627 shares of Common stock having a fair value of $997, net of cash acquired of $204. The purchase price resulted in the recognition of $981 in goodwill. The tax basis of such goodwill is deductible for income tax purposes over 15 years.
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. The purchase price resulted in the recognition of $3,710 in goodwill and intangibles. The fair value of the identified intangible assets was $2,124 and consisted of $1,508 in trade names and distribution rights, and $616 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.
 
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6

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 operates 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 we contributed $84,160) and $1,497 for repayment of indebtedness
.
The preliminary purchase price resulted in the recognition of $37,352 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
  
 
71,325
 
Other current assets
  
 
962
 
Property and equipment
  
 
2,590
 
Operating lease
right-of-use
assets
  
 
53,829
 
Goodwill
  
 
17,452
 
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 intended 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 September 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

September 30,
 
 
Nine Months Ended

September 30,
 
 
  
2021
 
  
2020
 
 
2021
 
  
2020
 
(Loss) gain recorded in accumulated other comprehensive loss
  
$
 
 
  
$
 
(570
 
$
97
 
  
$
1,297
 
(Gain) loss reclassified from accumulated other comprehensive loss into earnings
  
$
 
  
$
(697
 
$
305
 
  
$
(946
At September 30, 2021, no
pre-tax
gain (loss) is expected to be reclassified into earnings related to foreign exchange hedging within the next 12 months.
 
13 of 2
6

Derivatives Not Designated as Hedging Instruments
We have also entered into foreign currency forward and option contracts that are either not designated as hedges or did not qualify for hedge accounting. These derivative instruments were effective economic hedges for all of the periods presented. The fair value gains and losses on these contracts are recognized in earnings as a component of selling, general and administrative expenses. The total notional value of our foreign currency exchange contracts not designated as hedging instruments at September 30, 2021 was $4,200, and such contracts subsequently expired during October 2021.
We recognized gains (losses) of $83 and $(454) from foreign currency forward and option contracts not designated as hedging instruments in our condensed consolidated unaudited statements of income for the quarters ended September 30, 2021 and 2020, respectively. We recognized (losses) gains of $(101) and $57 from foreign currency forward and option contracts not designated as hedging instruments in our condensed consolidated unaudited statements of income for the nine months ended September 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
 
 
  
September 30, 2021
 
  
December 31, 2020
 
  
September 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 September 30, 2021 Using
 
 
  
Balance Sheet Location
  
Total
 
  
Level 1
 
  
Level 2
 
  
Level 3
 
Assets:
  
 
  
     
  
     
  
     
  
     
Equity securities
  
Other assets
  
$
 1,750
 
  
$
 1,750
 
  
$
 
  
 
  
$
 
  
 
Liabilities:
  
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Derivative financial instruments
  
Accrued expenses and other current liabilities