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, 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
(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 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).
☒ 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.
| ☒ | 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 October 31, 2022 comprised (i) 33,263,057 s5,473,122 shares of Class B common stock, $0.50 par value per share, excluding 48,263 treasury shares.
h
ares of Common stock, $0.50 par value per share, excluding 4,823,988 treasury shares and (ii) WATSCO, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM
10-Q
TABLE OF CONTENTS
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| Item 1. |
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| Item 1A. |
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| Item 6. |
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| EXHIBITS |
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2 of 27
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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2022 |
2021 |
2022 |
2021 |
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| 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 2
7
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| Quarter Ended September 30, |
Nine Months Ended September 30, |
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| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net income |
$ |
$ | $ |
$ | ||||||||||||
| Other comprehensive loss, net of tax |
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| Foreign currency translation adjustment |
( |
) |
( |
) | ( |
) |
( |
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| Unrealized gain on cash flow hedging instruments |
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| Reclassification of loss on cash flow hedging instruments into earnings |
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| Other comprehensive loss |
( |
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( |
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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 2
7
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(In thousands, except per share data)
September 30, 2022 |
December 31, 2021 |
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| 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 |
( |
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( |
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| Retained earnings |
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| Treasury stock, at cost |
( |
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( |
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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 2
7
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 |
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| Balance at December 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 |
( |
) | — | |||||||||||||||||||||||||||||
| 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, 2022 |
( |
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| Net income |
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| Other comprehensive (loss) |
( |
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| Issuances of non-vested restricted shares of common stock |
( |
) | — | |||||||||||||||||||||||||||||
| Forfeitures of non-vested restrictedshares 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 |
( |
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) | ( |
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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 June 30, 2022 |
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| Net income |
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| Other comprehensive (loss) |
( |
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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 |
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| Retirement of common stock |
( |
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) | ( |
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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 September 30, 2022 |
$ |
$ |
$ |
( |
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$ |
$ |
( |
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$ |
$ |
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Continued on next page.
6 of 2
7
| (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 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
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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 stoc k |
( |
) | — | |||||||||||||||||||||||||||||
| 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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( |
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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 options and employee stock purchase plan |
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| 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) |
( |
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) | ( |
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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 |
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| Retirement of common stock |
( |
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) | ( |
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| 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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$ |
$ |
( |
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$ |
$ |
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See accompanying notes to condensed consolidated unaudited financial statements.
7 of 2
7
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended September 30, |
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2022 |
2021 |
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| 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 |
( |
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( |
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| Other, net |
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| Changes in operating assets and liabilities, net of effects of acquisitions: |
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| Accounts receivable, net |
( |
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( |
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| Inventories, net |
( |
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( |
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| Accounts payable and other liabilities |
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| Other, net |
( |
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( |
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| Net cash provided by operating activities |
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| Cash flows from investing activities: |
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| Capital expenditures |
( |
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( |
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| Business acquisitions, net of cash acquired |
( |
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( |
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| Proceeds from sale of equity securities |
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| Proceeds from sale of property and equipment |
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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 |
( |
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( |
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| Net (repayments) proceeds under revolving credit agreement |
( |
) |
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| Repurchases of common stock to satisfy employee withholding tax obligations |
( |
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( |
) | ||||
| Net repayments of finance lease liabilities |
( |
) |
( |
) | ||||
| Payment of fees related to revolving credit agreement |
( |
) | ||||||
| Proceeds from non-controlling interest for investment in TEC Distribution LLC |
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| Net proceeds from issuances of common stoc k |
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| Net cash used in financing activities |
( |
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( |
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| Effect of foreign exchange rate changes on cash and cash equivalents |
( |
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( |
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| Net increase (decrease) 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 |
— |
$ |
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| Common stock issued for Makdad Industrial Supply Co., Inc. |
— |
$ |
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See accompanying notes to condensed consolidated unaudited financial statements.
8 of 2
7
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
September 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 September 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 nine months ended September 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 the
COVID-19
Pandemic and Economic and Marketplace Dynamics Since
COVID-19
was declared a pandemic in March 2020, it has had widespread impacts on global financial markets and business practices. Although we learned to navigate COVID-19
while maintaining our operations in all material respects, the pandemic impacted our operations, and the operations of our customers and suppliers, throughout 2020 and into 2021. However, as 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 inflation, 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 these macro-economic and marketplace dynamics impact our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, therefore, we cannot reasonably estimate the future impact of such dynamics at this time. 9 of 2
7
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, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Primary Geographical Regions: |
||||||||||||||||
| United States |
$ |
$ | $ |
$ | ||||||||||||
| Canada |
||||||||||||||||
| Latin America and the Caribbean |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
$ |
$ | $ |
$ | |||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Major Product Lines: |
||||||||||||||||
| HVAC equipment |
% |
% | % |
% | ||||||||||||
| Other HVAC products |
% |
% | % |
% | ||||||||||||
| Commercial refrigeration products |
% |
% | % |
% | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
% |
% | % |
% | |||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
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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, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
| 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, 2022 and 2021, our outstanding Class B common stock was convertible into 2,575,725 and 2,575,698 shares of our Common stock, respectively.
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4. |
OTHER COMPREHENSIVE LOSS |
Other comprehensive
loss consists of the foreign currency translation adjustment associated with our Canadian operations’ use of the Canadian dollar as their functional currency and changes in the unrealized gains on cash flow hedging instruments. The tax effects allocated to each component of other comprehensive loss were as follows:
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Foreign currency translation adjustment |
$ |
( |
) |
$ | ( |
) | $ |
( |
) |
$ | ( |
) | ||||
| Unrealized gain on cash flow hedging instruments |
||||||||||||||||
| Income tax expense |
( |
) | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Unrealized gain on cash flow hedging instruments, net of tax |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Reclassification of loss on cash flow hedging instruments into earnings |
||||||||||||||||
| Income tax benefit |
( |
) | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Reclassification of loss on cash flow hedging instruments into earnings, net of tax |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other comprehensive loss |
$ |
( |
) |
$ | ( |
) | $ |
( |
) |
$ | ( |
) | ||||
| |
|
|
|
|
|
|
|
|||||||||
The changes in each component of accumulated other comprehensive loss, net of tax, were a
s
follows:
| Nine Months Ended September 30, |
2022 |
2021 |
||||||
| 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 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.
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.
12 of 2
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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 % 105,200 paid to Temperature Equipment Corporation (Carrier contributed $21,040 and we contributed $84,160 ) and $1,497 for repayment of indebtedness.
non-controlling
interest. Consideration for the purchase was paid in cash, consisting of $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 |
$ | |||
Inventories |
||||
Other current assets |
||||
Property and equipment |
||||
Operating lease ROU 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 was 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, 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 September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
G ain recorded in accumulated other comprehensive loss |
$ | $ | $ |
$ | ||||||||||||
L oss reclassified from accumulated other comprehensive loss into earnings |
$ | $ | $ |
$ | ||||||||||||
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 7,500 , and such contract subsequently expired in October 2022 .
instrument
at September 30, 2022, the total notional value of which was $13 of 2
7
We recognized (losses) 149 ) and $83 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, 2022 and 2021, respectively. We recognized losses of $524 and $101 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, 2022 and 2021, respectively.
gains
of $(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. Se 7.
e
Note
Asset Derivatives |
Liability Derivatives |
|||||||||||||||
September 30, 2022 |
December 31, 2021 |
September 30, 2022 |
December 31, 2021 |
|||||||||||||
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:
Total |
Fair Value Measurements at September 30, 2022 Using |
|||||||||||||||||
Balance Sheet Location |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||||
Assets: |
||||||||||||||||||
Equity securities |
Other assets | $ |
$ |
— |
— |
|||||||||||||
Private equities |
Other assets | $ |
— |
— |
$ |
|||||||||||||
Liabilities: |
||||||||||||||||||
Derivative financial instruments |
Accrued expenses and other current liabilities | $ |
— |
$ |
— |
|||||||||||||
Total |
Fair Value Measurements at December 31, 2021 Using |
|||||||||||||||||
Balance Sheet Location |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||||
Assets: |
||||||||||||||||||
Equity securities |
Other assets | $ | $ | — | — | |||||||||||||
Private equities |
Other assets | $ | — | — | $ | |||||||||||||
Liabilities: |
||||||||||||||||||
Derivative financial instruments |
Accrued expenses and other current liabilities | $ | — | $ | — | |||||||||||||
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
Private equities
Derivative financial instruments
During the nine months ended September 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.
14 of 2
7
8. |
SHAREHOLDERS’ EQUITY |
At-the-Market
On August 6, 2021, we entered into a sales agreement with Robert W. Baird & Co. Inc. (“Baird”), which enables the Company to issue and sell shares of Common stock in one or more negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), for a maximum aggregate offering amount of up to $300,000 (the “ATM Program”). The offer and sale of our Common stock pursuant to the ATM Program has been registered under the Securities Act pursuant to our automatically effective shelf registration statement on Form
S-3
(File No. 333-260758).
On February 25, 2022, we entered into an amended and restated sales agreement, together with Baird and Goldman Sachs & Co. LLC (“GS”), for the purpose of adding GS as an additional sales agent and making necessary conforming changes. The amended and restated sales agreement otherwise retains all material terms of the original sales agreement. As of September 30, 2022, no shares of Common stock had been sold under the ATM Program.
Common Stock Dividends
We paid cash dividends of $2.20 , $1.95 , $