10-Q
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wso:Location wso:Entity
 
 
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 Perio
d
 Ended June 30, 2022
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 August 1, 2022 comprised (i) 33,206,880 shares of Common stock, $0.50 par value per share, excluding 4,823,988 treasury shares and (ii) 5,785,409 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.
 
  
 
23
 
Item 4.
 
  
 
23
 
  
Item 1.
 
  
 
23
 
Item 1A.
 
  
 
23
 
Item 2.
 
  
 
23
 
Item 6.
 
  
 
24
 
  
 
25
 
EXHIBITS
  
 
2 of 25

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,
 
     2022      2021      2022      2021  
Revenues
  
$
2,133,755
 
   $ 1,849,640     
$
3,657,325
 
   $ 2,985,758  
Cost of sales
  
 
1,538,222
 
     1,371,699     
 
2,611,434
 
     2,212,996  
    
 
 
    
 
 
    
 
 
    
 
 
 
Gross profit
  
 
595,533
 
     477,941     
 
1,045,891
 
     772,762  
Selling, general and administrative expenses
  
 
314,753
 
     266,697     
 
598,107
 
     484,309  
Other income
  
 
6,317
 
     5,539     
 
10,362
 
     10,210  
    
 
 
    
 
 
    
 
 
    
 
 
 
Operating income
  
 
287,097
 
     216,783     
 
458,146
 
     298,663  
Interest expense, net
  
 
1,110
 
     448     
 
1,668
 
     536  
    
 
 
    
 
 
    
 
 
    
 
 
 
Income before income taxes
  
 
285,987
 
     216,335     
 
456,478
 
     298,127  
Income taxes
  
 
60,481
 
     44,202     
 
96,082
 
     59,867  
    
 
 
    
 
 
    
 
 
    
 
 
 
Net income
  
 
225,506
 
     172,133     
 
360,396
 
     238,260  
Less: net income attributable to
non-controlling
interest
  
 
32,949
 
     28,031     
 
54,541
 
     39,066  
    
 
 
    
 
 
    
 
 
    
 
 
 
Net income attributable to Watsco, Inc.
  
$
192,557
 
   $ 144,102     
$
305,855
 
   $ 199,194  
    
 
 
    
 
 
    
 
 
    
 
 
 
Earnings per share for Common and Class B common stock:
                                   
Basic
  
$
4.94
 
   $ 3.73     
$
7.86
 
   $ 5.16  
    
 
 
    
 
 
    
 
 
    
 
 
 
Diluted
  
$
4.93
 
   $ 3.71     
$
7.83
 
   $ 5.13  
    
 
 
    
 
 
    
 
 
    
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
3 of 25

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,
 
     2022     2021     2022     2021  
Net income
  
$
225,506
 
  $ 172,133    
$
360,396
 
  $ 238,260  
Other comprehensive (loss) income, net of tax
                                
Foreign currency translation adjustment
  
 
(9,381
    4,016    
 
(5,000
    7,473  
Unrealized (loss) gain on cash flow hedging instruments
  
 
  
 
    (6  
 
  
 
    70  
Reclassification of (gain) loss on cash flow hedging

instruments into earnings
  
 
  
 
    (22  
 
  
 
    221  
    
 
 
   
 
 
   
 
 
   
 
 
 
Other comprehensive (loss) income
  
 
(9,381
    3,988    
 
(5,000
    7,764  
    
 
 
   
 
 
   
 
 
   
 
 
 
Comprehensive income
  
 
216,125
 
    176,121    
 
355,396
 
    246,024  
Less: comprehensive income attributable to
non-controlling
interest
  
 
29,833
 
    29,370    
 
52,871
 
    41,707  
    
 
 
   
 
 
   
 
 
   
 
 
 
Comprehensive income attributable to Watsco, Inc.
  
$
186,292
 
  $ 146,751    
$
302,525
 
  $ 204,317  
    
 
 
   
 
 
   
 
 
   
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
4 of 25

Table of Contents
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(In thousands, except per share data)
 
     June 30,
2022
    December 31,
2021
 
ASSETS
                
Current assets:
                
Cash and cash equivalents
  
$
129,049
 
  $ 118,268  
Accounts receivable, net
  
 
983,033
 
    698,456  
Inventories, net
  
 
1,480,519
 
    1,115,469  
Other current assets
  
 
31,330
 
    29,207  
    
 
 
   
 
 
 
Total current assets
  
 
2,623,931
 
    1,961,400  
Property and equipment, net
  
 
119,525
 
    111,019  
Operating lease
right-of-use
assets
  
 
298,223
 
    268,528  
Goodwill
  
 
432,777
 
    434,019  
Intangible assets, net
  
 
183,133
 
    186,896  
Investment in unconsolidated entity
  
 
122,831
 
    114,808  
Other assets
  
 
8,172
 
    9,191  
    
 
 
   
 
 
 
    
$
3,788,592
 
  $ 3,085,861  
    
 
 
   
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
Current liabilities:
                
Current portion of long-term obligations
  
$
88,600
 
  $ 84,501  
Accounts payable
  
 
625,962
 
    364,185  
Accrued expenses and other current liabilities
  
 
346,781
 
    278,036  
    
 
 
   
 
 
 
Total current liabilities
  
 
1,061,343
 
    726,722  
    
 
 
   
 
 
 
Long-term obligations:
                
Borrowings under revolving credit agreement
  
 
203,600
 
    89,000  
Operating lease liabilities, net of current portion
  
 
213,344
 
    187,024  
Finance lease liabilities, net of current portion
  
 
10,204
 
    9,189  
    
 
 
   
 
 
 
Total long-term obligations
  
 
427,148
 
    285,213  
    
 
 
   
 
 
 
Deferred income taxes and other liabilities
  
 
80,326
 
    76,511  
    
 
 
   
 
 
 
Commitments and contingencies
                
Watsco, Inc. shareholders’ equity:
                
Common stock, $0.50 par value
  
 
19,007
 
    18,941  
Class B common stock, $0.50 par value
  
 
2,918
 
    2,895  
Preferred stock, $0.50 par value
  
 
  
 
        
Paid-in
capital
  
 
1,032,291
 
    1,003,932  
Accumulated other comprehensive loss, net of tax
  
 
(37,506
    (34,176
Retained earnings
  
 
905,167
 
    760,796  
Treasury stock, at cost
  
 
(87,440
    (87,440
    
 
 
   
 
 
 
Total Watsco, Inc. shareholders’ equity
  
 
1,834,437
 
    1,664,948  
Non-controlling
interest
  
 
385,338
 
    332,467  
    
 
 
   
 
 
 
Total shareholders’ equity
  
 
2,219,775
 
    1,997,415  
    
 
 
   
 
 
 
    
$
3,788,592
 
  $ 3,085,861  
    
 
 
   
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
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Table of Contents
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS O
F
 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, 2021
  
 
38,799,632
 
 
$
21,836
 
 
$
1,003,932
 
 
$
(34,176
 
$
760,796
 
 
$
(87,440
 
$
332,467
 
 
$
1,997,415
 
Net income
                                     113,298               21,592       134,890  
Other comprehensive income
                             2,935                       1,446       4,381  
Issuances of
non-vested
restricted shares of common stock
     105,882       53       (53                                     —    
Common stock contribution to 401(k) plan
     21,532       11       6,726                                       6,737  
Stock issuances from exercise of stock options and employee stock purchase plan
     24,850       12       4,408                                       4,420  
Share-based compensation
                     8,667                                       8,667  
Cash dividends declared and paid on Common and Class B common stock, $1.95 per share
                                     (75,795                     (75,795
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at March 31, 2022
  
 
38,951,896
 
 
 
21,912
 
 
 
1,023,680
 
 
 
(31,241
 
 
798,299
 
 
 
(87,440
 
 
355,505
 
 
 
2,080,715
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net income
                                     192,557               32,949       225,506  
Other comprehensive (loss)
                             (6,265                     (3,116     (9,381
Issuances of
non-vested
restricted shares of common stock
     21,177       11       (11                                     —    
Forfeitures of
non-vested
restricted shares of common stock
     (10,000     (5     5                                       —    
Common stock contribution to 401(k) plan
     28                9                                       9  
Stock issuances from exercise of stock options and employee stock purchase plan
     21,939       11       3,796                                       3,807  
Retirement of common stock
     (8,181     (4     (2,175                                     (2,179
Share-based compensation
                     6,987                                       6,987  
Cash dividends declared and paid on Common and Class B common stock, $2.20 per share
                                     (85,689                     (85,689
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at June 30, 2022
  
 
38,976,859
 
 
$
21,925
 
 
$
1,032,291
 
 
$
(37,506
 
$
905,167
 
 
$
(87,440
 
$
385,338
 
 
$
2,219,775
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
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, 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
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
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Table of Contents
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITE
D
 STATEMENTS OF CASH FLOWS
(In thousands)
 
 
  
Six Months Ended
June 30,
 
 
  
2022
 
 
2021
 
Cash flows from operating activities:
  
 
Net income
  
$
360,396
 
  $ 238,260  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation and amortization
  
 
15,376
 
    13,877  
Share-based compensation
  
 
14,961
 
    12,351  
Provision for doubtful accounts
  
 
4,139
 
    465  
Deferred income tax provision
  
 
4,098
 
    2,115  
Other income from investment in unconsolidated entity
  
 
(10,362
    (10,210
Other, net
  
 
6,853
 
    5,685  
Changes in operating assets and liabilities, net of effects of acquisitions:
                
Accounts receivable, net
  
 
(289,478
    (283,077
Inventories, net
  
 
(366,359
    (173,539
Accounts payable and other liabilities
  
 
332,217
 
    282,852  
Other, net
  
 
1,231
 
    (6,897
    
 
 
   
 
 
 
Net cash provided by operating activities
  
 
73,072
 
    81,882  
    
 
 
   
 
 
 
Cash flows from investing activities:
                
Capital expenditures
  
 
(18,952
    (11,008
Business acquisitions, net of cash acquired
  
 
(47
    (126,549
Proceeds from sale of equity securities
  
 
  
 
    5,993  
Proceeds from sale of property and equipment
  
 
111
 
    100  
    
 
 
   
 
 
 
Net cash used in investing activities
  
 
(18,888
    (131,464
    
 
 
   
 
 
 
Cash flows from financing activities:
                
Dividends on Common and Class B common stock
  
 
(161,484
    (143,909
Repurchases of common stock to satisfy employee withholding tax obligations
  
 
(2,179
        
Net repayments of finance lease liabilities
  
 
(1,437
    (966
Proceeds from
non-controlling
interest for investment in TEC Distribution LLC
  
 
  
 
    21,040  
Net proceeds from issuances of common stock
  
 
8,228
 
    8,687  
Net proceeds under revolving credit agreement
  
 
114,600
 
    114,167  
    
 
 
   
 
 
 
Net cash used in financing activities
  
 
(42,272
    (981
    
 
 
   
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
  
 
(1,131
    1,283  
    
 
 
   
 
 
 
Net increase (decrease) in cash and cash equivalents
  
 
10,781
 
    (49,280
Cash and cash equivalents at beginning of period
  
 
118,268
 
    146,067  
    
 
 
   
 
 
 
Cash and cash equivalents at end of period
  
$
129,049
 
  $ 96,787  
    
 
 
   
 
 
 
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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Table of Contents
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
June 30, 2022
(In thousands, except share and per share data)
 
1.
BASIS OF PRESENTATION
Basis of Consolidation

Watsco, Inc. (collectively with its subsidiaries, “Watsco,” “we,” “us,” or “our”) was incorporated in Florida in 1956 and is the largest distributor of air conditioning, heating and refrigeration equipment and related parts and supplies (“HVAC/R”) in the HVAC/R distribution industry in North America. The accompanying June 30, 2022 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 2021 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., 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, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022. 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 and the effects of the pandemic have continued to lessen, 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 quarantines, location closures, mandated restrictions, employee 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, potential subsequent waves of
COVID-19
infection or potential new variants, the effectiveness and adoption of
COVID-19
vaccines and therapeutics, the ultimate duration and scope of the pandemic, its impact on our employees, customers and suppliers, the broader implications of the macro-economic recovery on our business, and the extent to which normal economic and operating conditions are impacted. Therefore, we cannot reasonably estimate the future impact of the
COVID-19
pandemic 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,
 
     2022      2021      2022     2021  
Primary Geographical Regions:
                                  
United States
  
$
1,934,435
 
   $ 1,665,253     
$
3,305,775
 
  $ 2,676,519  
Canada
  
 
113,159
 
     113,880     
 
202,582
 
    188,372  
Latin America and the Caribbean
  
 
86,161
 
     70,507     
 
148,968
 
    120,867  
    
 
 
    
 
 
    
 
 
   
 
 
 
    
$
2,133,755
 
   $ 1,849,640     
$
3,657,325
 
  $ 2,985,758  
    
 
 
    
 
 
    
 
 
   
 
 
 
Major Product Lines:
                                  
HVAC equipment
  
 
70
     71   
 
69
    69
Other HVAC products
  
 
26
     26   
 
28
    28
Commercial refrigeration products
  
 
4
     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,
 
     2022      2021      2022      2021  
Basic Earnings per Share:
                                   
Net income attributable to Watsco, Inc. shareholders
  
$
192,557
 
   $ 144,102     
$
305,855
 
   $ 199,194  
Less: distributed and undistributed earnings allocated to
non-vested
restricted common stock
  
 
17,600
 
     12,779     
 
27,902
 
     17,618  
    
 
 
    
 
 
    
 
 
    
 
 
 
Earnings allocated to Watsco, Inc. shareholders
  
$
174,957
 
   $ 131,323     
$
277,953
 
   $ 181,576  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding - Basic
  
 
35,403,171
 
     35,228,061     
 
35,376,223
 
     35,203,925  
Basic earnings per share for Common and Class B common stock
  
$
4.94
 
   $ 3.73     
$
7.86
 
   $ 5.16  
Allocation of earnings for Basic:
                                   
Common stock
  
$
162,229
 
   $ 121,745     
$
257,716
 
   $ 168,324  
Class B common stock
  
 
12,728
 
     9,578     
 
20,237
 
     13,252  
    
 
 
    
 
 
    
 
 
    
 
 
 
    
$
174,957
 
   $ 131,323     
$
277,953
 
   $ 181,576  
    
 
 
    
 
 
    
 
 
    
 
 
 
Diluted Earnings per Share:
                                   
Net income attributable to Watsco, Inc. shareholders
  
$
192,557
 
   $ 144,102     
$
305,855
 
   $ 199,194  
Less: distributed and undistributed earnings allocated to
non-vested
restricted common stock
  
 
17,570
 
     12,748     
 
27,856
 
     17,596  
    
 
 
    
 
 
    
 
 
    
 
 
 
Earnings allocated to Watsco, Inc. shareholders
  
$
174,987
 
   $ 131,354     
$
277,999
 
   $ 181,598  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding - Basic
  
 
35,403,171
 
     35,228,061     
 
35,376,223
 
     35,203,925  
Effect of dilutive stock options
  
 
117,992
 
     199,657     
 
136,595
 
     175,121  
    
 
 
    
 
 
    
 
 
    
 
 
 
Weighted-average common shares outstanding - Diluted
  
 
35,521,163
 
     35,427,718     
 
35,512,818
 
     35,379,046  
    
 
 
    
 
 
    
 
 
    
 
 
 
Diluted earnings per share for Common and Class B
common stock
  
$
4.93
 
   $ 3.71     
$
7.83
 
   $ 5.13  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Anti-dilutive stock options not included above
  
 
185,872
 
     10,907     
 
167,441
 
     7,144  
 
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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, 2022 and 2021, our outstanding Class B common stock was convertible into 2,575,604 and 2,569,236 shares of our Common stock, respectively.
 
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
June 30,
     Six Months Ended
June 30,
 
     2022      2021      2022      2021  
Foreign currency translation adjustment
  
$
(9,381
   $ 4,016     
$
(5,000
   $ 7,473  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized (loss) gain on cash flow hedging instruments
               (6                97  
Income tax expense
                                   (27
    
 
 
    
 
 
    
 
 
    
 
 
 
Unrealized (loss) gain on cash flow hedging instruments, net of tax
               (6                70  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reclassification of (gain) loss on cash flow hedging instruments into earnings
               (28                305  
Income tax expense (benefit)
               6                  (84
    
 
 
    
 
 
    
 
 
    
 
 
 
Reclassification of (gain) loss on cash flow hedging instruments into earnings, net of tax
               (22                221  
    
 
 
    
 
 
    
 
 
    
 
 
 
Other comprehensive (loss) income
  
$
(9,381
   $ 3,988     
$
(5,000
   $ 7,764  
    
 
 
    
 
 
    
 
 
    
 
 
 
The changes in each component of accumulated other comprehensive loss, net of tax, were as follows:
 
Six Months Ended June 30,
   2022      2021  
Foreign currency translation adjustment:
                 
Beginning balance
  
$
(34,176
)
   $ (34,694 )
Current period other comprehensive (loss) income
  
 
(3,330
     4,948  
    
 
 
    
 
 
 
Ending balance
  
 
(37,506
     (29,746
    
 
 
    
 
 
 
Cash flow hedging instruments:
                 
Beginning balance
               (173
Current period other comprehensive income
               43  
Reclassification adjustment
               132  
    
 
 
    
 
 
 
Ending balance
               2  
    
 
 
    
 
 
 
Accumulated other comprehensive loss, net of tax
  
$
(37,506
)
   $ (29,744 )
    
 
 
    
 
 
 
 
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 consisted of $3,164 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 $1,041 in goodwill and intangibles. The fair value of the identified intangible assets was $596 and consisted of $423 in trade names and distribution rights, and $173 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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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. We formed a new, wholly owned subsidiary, Acme Refrigeration LLC, which operates this business. Consideration for the purchase 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.
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 purchase price resulted in the recognition of $38,624 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 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 ROU assets
     53,829  
Goodwill
     18,724  
Intangibles
     19,900  
Accounts payable
     (25,393
Accrued expenses and other current liabilities
     (20,509
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 was not deemed significant to the consolidated financial statements.
 
6.
DERIVATIVES
We enter into foreign currency forward an
d
 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 June 30, 2022, 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,
 
     2022      2021      2022      2021  
(Loss) gain recorded in accumulated other comprehensive loss
             $ (6              $ 97  
(Gain) loss reclassified from accumulated other comprehensive loss into earnings
             $ (28              $ 305  
At June 30, 2022, no
pre-tax
gain (loss) was expected to be reclassified into earnings related to foreign exchange hedging within the next 12 months.
 
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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, 2022, the total notional value of which was $7,800, and such contract subsequently expired in July 2022.
We recognized losses of $52 and $211 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, 2022 and 2021, respectively. We recognized losses of $375 and $184 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, 2022 and 2021, respectively.
The following table summarizes the fair value of derivative instruments, which consist solely of foreign exchange contracts, included in other current assets and accrued expenses and other current liabilities in our condensed consolidated unaudited balance sheets. See Note 7.
 
    
Asset Derivatives
    
Liability Derivatives
 
    
June 30, 2022
    
December 31, 2021
    
June 30, 2022
    
December 31, 2021
 
Derivatives designated as hedging instruments
  
$
  
 
   $        
$
        $     
Derivatives not designated as hedging instruments
  
 
12
 
                         5  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total derivative instruments
  
$
12
 
   $        
$
        $ 5  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
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, 2022 Using
 
 
  
Balance Sheet Location
  
Total
 
  
Level 1
 
  
Level 2
 
  
Level 3
 
            
            
            
            
            
Assets:
                                        
Derivative financial instruments
   Other current assets   
$
12
 
  
 
—  
 
  
$
12
 
  
 
—  
 
Equity securities
   Other assets   
$
650
 
  
$
650
 
  
 
—  
 
  
 
—  
 
Private equities
   Other assets   
$
1,000
 
  
 
—  
 
  
 
—  
 
  
$
1,000
 
 
            
            
            
            
            
 
  
 
  
Total
 
  
        Fair Value Measurements        

at December 31, 2021 Using
 
 
  
Balance Sheet Location
  
Level 1
 
  
Level 2
 
  
Level 3
 
Assets:
                                        
Equity securities
   Other assets    $ 1,790      $ 1,790        —          —    
Private equities
   Other assets    $ 1,000        —          —        $ 1,000  
Liabilities:
                                        
Derivative financial instruments
   Accrued expenses and other current liabilities    $ 5        —        $ 5        —    
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.
Private equities
– other investment in which fair value inputs are unobservable.
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.