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
(a Florida
Corporation)
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 | ||
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 daysYes ☒ 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 Yes ☒ No ☐
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).
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. | ☒ | 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 ☐ No ☒
12b-2
of the Exchange Act). YesThe 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. |
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| Item 2. |
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| Item 3. |
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| Item 4. |
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| Item 1. |
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| Item 1A. |
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| Item 2. |
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| Item 6. |
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26 |
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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, |
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| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues |
$ |
$ | $ |
$ | ||||||||||||
| Cost of sales |
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| Gross profit |
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| Selling, general and administrative expenses |
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| Other income |
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| Operating income |
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| Interest expense, net |
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| Income before income taxes |
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| Income taxes |
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| Net income |
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| Less: net income attributable to non-controlling interest |
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| Net income attributable to Watsco, Inc. |
$ |
$ | $ |
$ | ||||||||||||
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| Earnings per share for Common and Class B common stock: |
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| Basic |
$ |
$ | $ |
$ | ||||||||||||
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| Diluted |
$ |
$ | $ |
$ | ||||||||||||
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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 |
$ |
$ | $ |
$ | ||||||||||||
| Other comprehensive (loss) income, net of tax |
||||||||||||||||
| Foreign currency translation adjustment |
( |
) |
( |
) |
( |
) | ||||||||||
| Unrealized (loss) gain on cash flow hedging instruments |
( |
) | ||||||||||||||
| Reclassification of (gain) loss on cash flow hedging instruments into earnings |
( |
) | ( |
) | ||||||||||||
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| Other comprehensive (loss) income |
( |
) |
( |
) |
( |
) | ||||||||||
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| Comprehensive income |
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| Less: comprehensive income attributable to non-controlling interest |
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| Comprehensive income attributable to Watsco, Inc. |
$ |
$ | $ |
$ | ||||||||||||
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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 |
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| (Unaudited) | ||||||||
| ASSETS |
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| Current assets: |
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| Cash and cash equivalents |
$ |
$ | ||||||
| Accounts receivable, net |
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| Inventories, net |
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| Other current assets |
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| Total current assets |
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| Property and equipment, net |
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| Operating lease right-of-use |
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| Goodwill |
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| Intangible assets, net |
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| Investment in unconsolidated entity |
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| Other assets |
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$ |
$ | |||||||
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| LIABILITIES AND SHAREHOLDERS’ EQUITY |
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| Current liabilities: |
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| Current portion of long-term obligations |
$ |
$ | ||||||
| Accounts payable |
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| Accrued expenses and other current liabilities |
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| Total current liabilities |
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| Long-term obligations: |
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| Borrowings under revolving credit agreement |
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| Operating lease liabilities, net of current portion |
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| Finance lease liabilities, net of current portion |
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| Total long-term obligations |
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| Deferred income taxes and other liabilities |
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| Commitments and contingencies |
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| Watsco, Inc. shareholders’ equity: |
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| Common stock, $ |
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| Class B common stock, $ |
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| Preferred stock, $ |
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| Paid-in capital |
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| Accumulated other comprehensive loss, net of tax |
( |
) |
( |
) | ||||
| Retained earnings |
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| Treasury stock, at cost |
( |
) |
( |
) | ||||
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| Total Watsco, Inc. shareholders’ equity |
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| Non-controlling interest |
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| Total shareholders’ equity |
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$ |
$ | |||||||
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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 |
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 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
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| Net income |
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| Other comprehensive income |
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| Issuances of non-vested restricted shares of common stock |
( |
) | — | |||||||||||||||||||||||||||||
| Forfeitures of non-vested restricted shares of common stock |
( |
) | ( |
) | — | |||||||||||||||||||||||||||
| Common stock contribution to 401(k) plan |
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| Stock issuances from exercise of stock options and employee stock purchase plan |
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| Share-based compensation |
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| Cash dividends declared and paid on Common and Class B common stock, $ |
( |
) | ( |
) | ||||||||||||||||||||||||||||
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| Balance at March 31, 2021 |
( |
) |
( |
) |
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| Net income |
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| Other comprehensive income |
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| Issuances of non-vested restricted shares of common stock |
( |
) | — | |||||||||||||||||||||||||||||
| Forfeitures of non-vested restricted shares of common stock |
( |
) | ( |
) | — | |||||||||||||||||||||||||||
| Stock issuances from exercise of stock options and employee stock purchase plan |
||||||||||||||||||||||||||||||||
| Retirement of common stock |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||
| Share-based compensation |
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| Common stock issued for Acme Refrigeration of Baton Rouge LLC |
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| Investment in TEC Distribution LLC |
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| Cash dividends declared and paid on Common and Class B common stock, $ |
( |
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| Balance at June 30, 2021 |
( |
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( |
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| Net income |
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| Other comprehensive loss |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Issuances of non-vested restricted shares of common stock |
( |
) | — | |||||||||||||||||||||||||||||
| Stock issuances from exercise of stock options and employee stock purchase plan |
||||||||||||||||||||||||||||||||
| Retirement of common stock |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||
| Share-based compensation |
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| Common stock issued for Makdad Industrial Supply Co., Inc. |
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| Cash dividends declared and paid on Common and Class B common stock, $ |
( |
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| Balance at September 30, 2021 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
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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 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
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| Net income |
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| Other comprehensive (loss) |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Issuances of non-vested restricted shares of common stock |
( |
) | — | |||||||||||||||||||||||||||||
| Common stock contribution to 401(k) plan |
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| Stock issuances from exercise of stock options and employee stock purchase plan |
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| Retirement of common stock |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||
| Share-based compensation |
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| Cash dividends declared and paid on Common and Class B common stock, $ |
( |
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| Balance at March 31, 2020 |
( |
) |
( |
) |
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| Net income |
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| Other comprehensive income |
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| Issuances of non-vested restricted shares of common stock |
( |
) | — | |||||||||||||||||||||||||||||
| Stock issuances from exercise of stock options and employee stock purchase plan |
||||||||||||||||||||||||||||||||
| Retirement of common stock |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||
| Share-based compensation |
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| Cash dividends declared and paid on Common and Class B common stock, $ |
( |
) | ( |
) | ||||||||||||||||||||||||||||
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| Balance at June 30, 2020 |
( |
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( |
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| Net income |
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| Other comprehensive income |
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| Issuances of non-vested restricted shares of common stock |
( |
) | — | |||||||||||||||||||||||||||||
| Forfeitures of non-vested restricted shares of common stock |
( |
) | ( |
) | — | |||||||||||||||||||||||||||
| Stock issuances from exercise of stock options and employee stock purchase plan |
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| Retirement of common stock |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||
| Share-based compensation |
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| Cash dividends declared and paid on Common and Class B common stock, $ |
( |
) | ( |
) | ||||||||||||||||||||||||||||
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| Balance at September 30, 2020 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
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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, |
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| 2021 | 2020 | |||||||
| Cash flows from operating activities: |
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| Net income |
$ |
$ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
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| Depreciation and amortization |
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| Share-based compensation |
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| Non-cash contribution to 401(k) plan |
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| Deferred income tax provision |
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| Other income from investment in unconsolidated entity |
( |
) |
( |
) | ||||
| Other, net |
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| Changes in operating assets and liabilities, net of effects of acquisitions: |
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| Accounts receivable, net |
( |
) |
( |
) | ||||
| Inventories, net |
( |
) |
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| Accounts payable and other liabilities |
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| Other, net |
( |
) |
( |
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| Net cash provided by operating activities |
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| Cash flows from investing activities: |
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| Business acquisitions, net of cash acquired |
( |
) |
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| Capital expenditures |
( |
) |
( |
) | ||||
| Proceeds from sale of property and equipment |
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| Proceeds from sale of equity securities |
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| Net cash used in investing activities |
( |
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( |
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| Cash flows from financing activities: |
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| Dividends on Common and Class B common stock |
( |
) |
( |
) | ||||
| Net repayments of finance lease liabilities |
( |
) |
( |
) | ||||
| Repurchases of common stock to satisfy employee withholding tax obligations |
( |
) |
( |
) | ||||
| Payment of fees related to revolving credit agreement |
( |
) |
( |
) | ||||
| Net proceeds (repayments) under revolving credit agreement |
( |
) | ||||||
| Net proceeds from issuances of common stock |
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| Proceeds from non-controlling interest for investment in TEC Distribution LLC |
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| Net cash used in financing activities |
( |
) |
( |
) | ||||
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| Effect of foreign exchange rate changes on cash and cash equivalents |
( |
) |
( |
) | ||||
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| Net (decrease) increase in cash and cash equivalents |
( |
) |
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| Cash and cash equivalents at beginning of period |
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| Cash and cash equivalents at end of period |
$ |
$ | ||||||
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| Supplemental cash flow information: |
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| Common stock issued for Acme Refrigeration of Baton Rouge LLC |
$ |
— | ||||||
| Common stock issued for Makdad Industrial Supply Co., Inc. |
$ |
— | ||||||
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 |
$ |
$ | $ |
$ | ||||||||||||
| Canada |
||||||||||||||||
| Latin America and the Caribbean |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
$ |
$ |
$ |
$ |
|||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Major Product Lines: |
||||||||||||||||
| HVAC equipment |
% |
% | % |
% | ||||||||||||
| Other HVAC products |
% |
% | % |
% | ||||||||||||
| Commercial refrigeration products |
% |
% | % |
% | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
% |
% | % |
% | |||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
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 |
$ |
$ | $ |
$ | ||||||||||||
| Less: distributed and undistributed earnings allocated to non-vested restricted common stock |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Earnings allocated to Watsco, Inc. shareholders |
$ |
$ | $ |
$ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-average common shares outstanding - Basic |
||||||||||||||||
| Basic earnings per share for Common and Class B common stock |
$ |
$ | $ |
$ | ||||||||||||
| Allocation of earnings for Basic: |
||||||||||||||||
| Common stock |
$ |
$ | $ |
$ | ||||||||||||
| Class B common stock |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
$ |
$ | $ |
$ | |||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Diluted Earnings per Share: |
||||||||||||||||
| Net income attributable to Watsco, Inc. shareholders |
$ |
$ | $ |
$ | ||||||||||||
| Less: distributed and undistributed earnings allocated to non-vested restricted common stock |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Earnings allocated to Watsco, Inc. shareholders |
$ |
$ | $ |
$ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-average common shares outstanding - Basic |
||||||||||||||||
| Effect of dilutive stock options |
||||||||||||||||
| |
|
|
|
|
|
|
|
|
||||||||
| Weighted-average common shares outstanding - Diluted |
||||||||||||||||
| |
|
|
|
|
|
|
|
|
||||||||
| Diluted earnings per share for Common and Class B common stock |
$ |
$ | $ |
$ | ||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Anti-dilutive stock options not included above |
||||||||||||||||
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 |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
( |
) | ||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unrealized (loss) gain on cash flow hedging instruments |
( |
) | ||||||||||||||
| Income tax benefit (expense) |
( |
) |
( |
) | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Unrealized (loss) gain on cash flow hedging instruments, net of tax |
( |
) | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Reclassification of (gain) loss on cash flow hedging instruments into earnings |
( |
) | ( |
) | ||||||||||||
| Income tax expense (benefit) |
( |
) |
||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Reclassification of (gain) loss on cash flow hedging instruments into earnings, net of tax |
( |
) | ( |
) | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Other comprehensive (loss) income |
$ |
( |
) |
$ | $ |
( |
) |
$ | ( |
) | ||||||
| |
|
|
|
|
|
|
|
|||||||||
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 |
$ |
( |
) |
$ |
( |
) | ||
| Current period other comprehensive loss |
( |
) |
( |
) | ||||
| |
|
|
|
|||||
| Ending balance |
( |
) |
( |
) | ||||
| |
|
|
|
|||||
| Cash flow hedging instruments: |
||||||||
| Beginning balance |
( |
) |
( |
) | ||||
| Current period other comprehensive income |
||||||||
| Reclassification adjustment |
( |
) | ||||||
| |
|
|
|
|||||
| Ending balance |
( |
) | ||||||
| |
|
|
|
|||||
| Accumulated other comprehensive loss, net of tax |
$ |
( |
) |
$ | ( |
) | ||
| |
|
|
|
|||||
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 .
12 of 2
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 |
$ |
|||
| Inventories |
||||
| Other current assets |
||||
| Property and equipment |
||||
| Operating lease right-of-use assets |
||||
| Goodwill |
||||
| Intangibles |
||||
| Accounts payable |
( |
) | ||
| Accrued expenses and other current liabilities |
( |
) | ||
| Operating lease liabilities, net of current portion |
( |
) | ||
| |
|
|||
| Total |
$ |
|||
| |
|
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 |
$ |
$ |
( |
) |
$ |
$ |
||||||||||
| (Gain) loss reclassified from accumulated other comprehensive loss into earnings |
$ |
$ |
( |
) |
$ |
$ |
( |
) | ||||||||
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 |
$ |
$ |
$ |
$ |
||||||||||||
| Derivatives not designated as hedging instruments |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total derivative instruments |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
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 |
|||||||||||||||||