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, 2023
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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices, including zip code)
(305 ) 714-4100
(Registrant’s telephone number, including area code)
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.
☒ 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
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 an 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 Yes ☐ No ☒
12b-2
of the Exchange Act).The registrant’s common stock outstanding as of October 30, 2023 comprised (i) 33,866,284 shares of Common stock, $0.50 par value per share, excluding 4,778,988 treasury shares and (ii) 5,527,941 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
2 of 28
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, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
| 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: |
||||||||||||||||
| Basic |
$ |
$ | $ |
$ | ||||||||||||
| |
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| Diluted |
$ |
$ | $ |
$ | ||||||||||||
| |
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|
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See accompanying notes to condensed consolidated unaudited financial statements.
3 of 28
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Net income |
$ |
$ | $ |
$ | ||||||||||||
| Other comprehensive (loss) income, net of tax Foreign currency translation adjustment |
( |
) |
( |
) | ( |
) | ||||||||||
| |
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| Other comprehensive (loss) income |
( |
) |
( |
) | ( |
) | ||||||||||
| |
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| Comprehensive income |
||||||||||||||||
| Less: comprehensive income attributable to non-controlling interest |
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| |
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|
|||||||||
| Comprehensive income attributable to Watsco, Inc. |
$ |
$ | $ |
$ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
See accompanying notes to condensed consolidated unaudited financial statements.
4 of 28
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(In thousands, except per share data)
September 30, 2023 |
December 31, 2022 |
|||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ |
$ | ||||||
| Accounts receivable, net |
||||||||
| 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 |
||||||||
| Investment in unconsolidated entity |
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| Other assets |
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| |
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$ |
$ | |||||||
| |
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|
|||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
| Current liabilities: |
||||||||
| Current portion of lease liabilities |
$ |
$ | ||||||
| Borrowings under revolving credit agreement |
||||||||
| 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: |
||||||||
| Common stock, $ |
||||||||
| Class B common stock, $ |
||||||||
| Preferred stock, $ |
||||||||
| Paid-in capital |
||||||||
| Accumulated other comprehensive loss, net of tax |
( |
) |
( |
) | ||||
| Retained earnings |
||||||||
| Treasury stock, at cost |
( |
) |
( |
) | ||||
| |
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|
|||||
| Total Watsco, Inc. shareholders’ equity |
||||||||
| Non-controlling interest |
||||||||
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|
|||||
| Total shareholders’ equity |
||||||||
| |
|
|
|
|||||
$ |
$ | |||||||
| |
|
|
|
|||||
See accompanying notes to condensed consolidated unaudited financial statements.
5 of 28
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except share and per share data) |
Common Stock, Class B Common Stock and Preferred Stock Shares |
Common Stock, Class B Common Stock and Preferred Stock Amount |
Paid-In Capital |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Treasury Stock |
Non-controlling Interest |
Total |
||||||||||||||||||||||||
Balance at December 31, 2022 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||||
Net income |
||||||||||||||||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||||||||||
Issuances of restricted shares of common stock |
( |
) |
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Forfeitures of restricted shares of common stock |
( |
) |
( |
) |
||||||||||||||||||||||||||||
Common stock contribution to 401(k) plan |
||||||||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan |
||||||||||||||||||||||||||||||||
Issuance of Class B common stock |
||||||||||||||||||||||||||||||||
Retirement of common stock |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||
Share-based compensation |
||||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $ |
( |
) |
( |
) | ||||||||||||||||||||||||||||
Balance at March 31, 2023 |
( |
) |
( |
) |
||||||||||||||||||||||||||||
Net income |
||||||||||||||||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||||||||||
Issuances of restricted shares of common stock |
( |
) |
||||||||||||||||||||||||||||||
Forfeitures of restricted shares of common stock |
( |
) |
||||||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan |
||||||||||||||||||||||||||||||||
Retirement of common stock |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||
Share-based compensation |
||||||||||||||||||||||||||||||||
Net proceeds from the sale of Common stock |
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Cash dividends declared and paid on Common and Class B common stock, $ |
( |
) |
( |
) | ||||||||||||||||||||||||||||
Balance at June 30, 2023 |
( |
) |
( |
) |
||||||||||||||||||||||||||||
Net income |
||||||||||||||||||||||||||||||||
Other comprehensive (loss) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||||
Issuances of restricted shares of common stock |
( |
) |
||||||||||||||||||||||||||||||
Forfeitures of restricted shares of common stock |
( |
) |
( |
) |
||||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan |
||||||||||||||||||||||||||||||||
Retirement of common stock |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||||
Share-based compensation |
||||||||||||||||||||||||||||||||
Common stock issued for Gateway Supply Company, Inc. |
||||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $ |
( |
) |
( |
) | ||||||||||||||||||||||||||||
Balance at September 30, 2023 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||||
Continued on next page.
6 of 28
(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 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||||
Net income |
||||||||||||||||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||||||||||
Issuances of restricted shares of common stock |
( |
) |
||||||||||||||||||||||||||||||
Common stock contribution to 401(k) plan |
||||||||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan |
||||||||||||||||||||||||||||||||
Share-based compensation |
||||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $ |
( |
) |
( |
) | ||||||||||||||||||||||||||||
Balance at March 31, 2022 |
( |
) |
( |
) |
||||||||||||||||||||||||||||
Net income |
||||||||||||||||||||||||||||||||
Other comprehensive (loss) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||||
Issuances of restricted shares of common stock |
( |
) |
||||||||||||||||||||||||||||||
Forfeitures of restricted shares of common stock |
( |
) |
( |
) |
||||||||||||||||||||||||||||
Common stock contribution to 401(k) plan |
||||||||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan |
||||||||||||||||||||||||||||||||
Retirement of common stock |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||
Share-based compensation |
||||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $ |
( |
) |
( |
) | ||||||||||||||||||||||||||||
Balance at June 30, 2022 |
( |
) |
( |
) |
||||||||||||||||||||||||||||
Net income |
||||||||||||||||||||||||||||||||
Other comprehensive (loss) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||||
Issuances of restricted shares of common stock |
( |
) |
||||||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan |
||||||||||||||||||||||||||||||||
Retirement of common stock |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||
Share-based compensation |
||||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $ |
( |
) |
( |
) | ||||||||||||||||||||||||||||
Balance at September 30, 2022 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||||
See accompanying notes to condensed consolidated unaudited financial statements.
7 of 28
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(In thousands)
| Nine Months Ended September 30, |
||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ |
$ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
||||||||
| Share-based compensation |
||||||||
| Non-cash contribution to 401(k) plan |
||||||||
| Deferred income tax provision |
||||||||
| Other income from investment in unconsolidated entity |
( |
) |
( |
) | ||||
| Other, net |
||||||||
| Changes in operating assets and liabilities, net of effects of acquisitions: |
||||||||
| Accounts receivable, net |
( |
) |
( |
) | ||||
| Inventories, net |
( |
) |
( |
) | ||||
| Accounts payable and other liabilities |
||||||||
| Other, net |
( |
) |
( |
) | ||||
| |
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|
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| Net cash provided by operating activities |
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| |
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|
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| Cash flows from investing activities: |
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| Capital expenditures |
( |
) |
( |
) | ||||
| Business acquisitions, net of cash acquired |
( |
) |
( |
) | ||||
| Proceeds from sale of property and equipment |
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|
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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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| Net proceeds under current revolving credit agreement |
||||||||
| Net proceeds from issuances of Common stock under employee-related plans |
||||||||
| Net proceeds from the sale of Common stock |
||||||||
| Payment of fees related to revolving credit agreement |
( |
) |
||||||
| Repurchases of common stock to satisfy employee withholding tax obligations |
( |
) |
( |
) | ||||
| Net repayments of finance lease liabilities |
( |
) |
( |
) | ||||
| Net repayments under prior revolving credit agreement |
( |
) |
( |
) | ||||
| Dividends on Common and Class B common stock |
( |
) |
( |
) | ||||
| |
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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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| Net increase in cash and cash equivalents |
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| Cash and cash equivalents at beginning of period |
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| |
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|
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| Cash and cash equivalents at end of period |
$ |
$ | ||||||
| |
|
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|
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Supplemental cash flow information: |
||||||||
| Common stock issued for Gateway Supply Company, Inc. |
$ |
|||||||
See accompanying notes to condensed consolidated unaudited financial statements.
8 of 28
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
September 30, 2023
(In thousands, except share and per share data)
1. BASIS OF PRESENTATION
Basis of Consolidation
Watsco, Inc. (collectively with its subsidiaries, “Watsco,” the Company”, “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, 2023 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 2022 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, in which we have a controlling interest, the accounts of Carrier InterAmerica Corporation, in 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, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023. 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.
9 of 28
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, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Primary Geographical Regions: |
||||||||||||||||
| United States |
$ |
$ | $ |
$ | ||||||||||||
| Canada |
||||||||||||||||
| Latin America and the Caribbean |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
$ |
$ | $ |
$ | |||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Major Product Lines: |
||||||||||||||||
| HVAC equipment |
% |
% | % |
% | ||||||||||||
| Other HVAC products |
% |
% | % |
% | ||||||||||||
| Commercial refrigeration products |
% |
% | % |
% | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
% |
% | % |
% | |||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
10 of 28
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, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
Basic Earnings per Share: |
||||||||||||||||
Net income attributable to Watsco, Inc. shareholders |
$ |
$ | $ |
$ | ||||||||||||
Less: distributed and undistributed earnings allocated to 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 restricted common stock |
||||||||||||||||
Earnings allocated to Watsco, Inc. shareholders |
$ |
$ | $ |
$ | ||||||||||||
Weighted-average common shares outstanding—Basic |
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Effect of dilutive stock options |
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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 3,229,118 and 2,575,725 shares of our Common stock, respectively.
as
of the
beginning of the fiscal year; therefore, no allocation of earnings to Class B common stock is required. At September 30, 2023 and 2022, our
outstanding Class B common stock was convertible into 11 of 28
4. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) consists of the foreign currency translation adjustment associated with our Canadian operations’ use of the Canadian dollar as their functional currency.
The change in accumulated other comprehensive loss, net of tax, was as follows:
Nine Months Ended September 30, |
2023 |
2022 |
||||||
Foreign currency translation adjustment: |
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Beginning balance |
$ |
( |
) |
$ | ( |
) | ||
Current period other comprehensive income (loss) |
( |
) | ||||||