Table of Contents
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
(Address of principal executive offices) |
(Zip Code) | |
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
| ☒ | Accelerated filer | ☐ | ||||
Non-accelerated filer |
☐ | Smaller reporting company | ||||
| Emerging growth company | ||||||
Table of Contents
WATSCO, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
2 of 26
Table of Contents
| Quarter Ended June 30, |
Six Months Ended June 30, |
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| 2024 | 2023 | 2024 | 2023 | |||||||||||||
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 (income) 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. |
$ |
$ | $ |
$ | ||||||||||||
Earnings per share for Common and Class B common stock: |
||||||||||||||||
Basic |
$ |
$ | $ |
$ | ||||||||||||
Diluted |
$ |
$ | $ |
$ | ||||||||||||
| Quarter Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net income |
$ |
$ | $ |
$ | ||||||||||||
| Other comprehensive (loss) income, net of tax Foreign currency translation adjustment |
( |
) |
( |
) |
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| |
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| Other comprehensive (loss) income |
( |
) |
( |
) |
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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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June 30, 2024 |
December 31, 2023 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ |
$ | ||||||
Short-term cash investments |
||||||||
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 |
||||||||
Intangible assets, net |
||||||||
Investment in unconsolidated entity |
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Other assets |
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$ |
$ | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Current portion of lease liabilities |
$ |
$ | ||||||
Accounts payable |
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Accrued expenses and other current liabilities |
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Total current liabilities |
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Long-term obligations: |
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Borrowings under revolving credit agreement |
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Operating lease liabilities, net of current portion |
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Finance lease liabilities, net of current portion |
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Total long-term obligations |
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Deferred income taxes and other liabilities |
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Commitments and contingencies |
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Watsco, Inc. shareholders’ equity: |
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Common stock, $ |
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Class B common stock, $ |
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Preferred stock, $ |
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Paid-in capital |
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Accumulated other comprehensive loss, net of tax |
( |
) |
( |
) | ||||
Retained earnings |
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Treasury stock, at cost |
( |
) |
( |
) | ||||
Total Watsco, Inc. shareholders’ equity |
||||||||
Non-controlling interest |
||||||||
Total 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, 2023 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||||
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 |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||
Net proceeds from the sale of Common stock |
||||||||||||||||||||||||||||||||
Common stock issued for Commercial Specialists, Inc. |
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Share-based compensation |
||||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $ |
( |
) | ( |
) | ||||||||||||||||||||||||||||
Balance at March 31, 2024 |
( |
) |
( |
) |
||||||||||||||||||||||||||||
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 |
||||||||||||||||||||||||||||||||
Dividend reinvestment plan |
— | — | ||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $ |
( |
) | ( |
) | ||||||||||||||||||||||||||||
Balance at June 30, 2024 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||||
(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 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
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| Net income |
||||||||||||||||||||||||||||||||
| Other comprehensive income |
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| Issuances of restricted shares of common stock |
( |
) | — | |||||||||||||||||||||||||||||
| Forfeitures of 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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| Issuance of Class B common stock |
— | |||||||||||||||||||||||||||||||
| Retirement of common stock |
( |
( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||
| Share-based compensation |
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| Cash dividends declared and paid on Common and Class B common stock, $ |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| |
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| Balance at March 31, 2023 |
( |
) |
( |
) |
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| |
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| Net income |
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| Other comprehensive income |
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| 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, $ |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| |
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| Balance at June 30, 2023 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
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Six Months Ended June 30, |
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2024 |
2023 |
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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 (used in) 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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Provision for doubtful accounts |
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Deferred income tax provision |
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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 |
( |
) | ||||||
Net cash provided by (used in) operating activities |
( |
) | ||||||
Cash flows from investing activities: |
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Purchases of short-term cash investments |
( |
) |
||||||
Capital expenditures |
( |
) |
( |
) | ||||
Business acquisitions, net of cash acquired |
( |
) |
( |
) | ||||
Proceeds from sale of property and equipment |
||||||||
Net cash used in investing activities |
( |
) |
( |
) | ||||
Cash flows from financing activities: |
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Net proceeds from the sale of Common stock |
||||||||
Net proceeds from issuances of Common stock under employee-related plans |
||||||||
Net proceeds from Dividend Reinvestment Plan |
||||||||
Payment of fees related to revolving credit agreement |
( |
) | ||||||
Net repayments under prior revolving credit agreement |
( |
) | ||||||
Repurchases of common stock to satisfy employee withholding tax obligations |
( |
) |
( |
) | ||||
Net repayments of finance lease liabilities |
( |
) |
( |
) | ||||
Net (repayments) proceeds under current revolving credit agreement |
( |
) |
||||||
Dividends on Common and Class B common stock |
( |
) |
( |
) | ||||
Net cash provided by financing activities |
||||||||
Effect of foreign exchange rate changes on cash and cash equivalents |
( |
) |
||||||
Net increase in cash and cash equivalents |
||||||||
Cash and cash equivalents at beginning of period |
||||||||
Cash and cash equivalents at end of period |
$ |
$ | ||||||
Supplemental cash flow information: |
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Common stock issued for Commercial Specialists, Inc. |
$ |
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1. |
BASIS OF PRESENTATION |
2. |
REVENUES |
Quarter Ended June 30, |
Six Months Ended June 30, |
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2024 |
2023 |
2024 |
2023 |
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| Primary Geographical Regions: |
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| United States |
$ |
$ |
$ |
$ |
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| Canada |
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| Latin America and the Caribbean |
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| |
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$ |
$ |
$ |
$ |
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| Major Product Lines: |
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| HVAC equipment |
% |
% |
% |
% | ||||||||||||
| Other HVAC products |
% |
% |
% |
% | ||||||||||||
| Commercial refrigeration products |
% |
% |
% |
% | ||||||||||||
| |
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% |
% |
% |
% | |||||||||||||
| |
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3. |
EARNINGS PER SHARE |
Quarter Ended June 30, |
Six Months Ended June 30, |
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2024 |
2023 |
2024 |
2023 |
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| Basic Earnings per Share: |
||||||||||||||||
| Net income attributable to Watsco, Inc. shareholders |
$ |
$ |
$ |
$ |
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| Less: distributed and undistributed earnings allocated to restricted common stock |
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| |
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| Earnings allocated to Watsco, Inc. shareholders |
$ |
$ |
$ |
$ |
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| |
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| Weighted-average common shares outstanding - Basic |
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| Basic earnings per share for Common and Class B common stock |
$ |
$ |
$ |
$ |
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Quarter Ended June 30, |
Six Months Ended June 30, |
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2024 |
2023 |
2024 |
2023 |
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| Allocation of earnings for Basic: |
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| Common stock |
$ |
$ |
$ |
$ |
||||||||||||
| Class B common stock |
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| |
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$ |
$ |
$ |
$ |
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| |
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| Diluted Earnings per Share: |
||||||||||||||||
| Net income attributable to Watsco, Inc. shareholders |
$ |
$ |
$ |
$ |
||||||||||||
| Less: distributed and undistributed earnings allocated to restricted common stock |
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| |
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|
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| Earnings allocated to Watsco, Inc. shareholders |
$ |
$ |
$ |
$ |
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| |
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| Weighted-average common shares outstanding - Basic |
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| Effect of dilutive stock options |
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| |
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| Weighted-average common shares outstanding - Diluted |
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| |
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| Diluted earnings per share for Common and Class B common stock |
$ |
$ |
$ |
$ |
||||||||||||
| Anti-dilutive stock options not included above |
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4. |
OTHER COMPREHENSIVE (LOSS) INCOME |
| Six Months Ended June 30, |
2024 | 2023 | ||||||
| Foreign currency translation adjustment: |
||||||||
| Beginning balance |
$ |
( |
) |
$ | ( |
) | ||
| Current period other comprehensive (loss) income |
( |
) |
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| |
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| Ending balance |
$ |
( |
) |
$ | ( |
) | ||
| |
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5. |
ACQUISITIONS |
| Accounts receivable |
$ | |||
| Inventories |
||||
| Other current assets |
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| Property and equipment |
||||
| Operating lease ROU assets |
||||
| Goodwill |
||||
| Intangibles |
||||
| Other assets |
||||
| Current portion of long-term liabilities |
( |
) | ||
| Accounts payable |
( |
) | ||
| Accrued expenses and other current liabilities |
( |
) | ||
| Operating lease liabilities, net of current portion |
( |
) | ||
| Finance lease liabilities, net of current portion |
( |
) | ||
| Other liabilities |
( |
) | ||
| |
|
|||
| Total |
$ | |||
| |
|
6. |
DERIVATIVES |
7. |
FAIR VALUE MEASUREMENTS |
Total |
Fair Value Measurements at June 30, 2024 Using |
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| Balance Sheet Location |
Level 1 |
Level 2 |
Level 3 |
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| Assets: |
||||||||||||||||||
| Certificate of deposit |
Short-term cash investments | $ |
— | $ |
— | |||||||||||||
| Derivative financial instruments |
Other current assets | $ |
— | $ |
— | |||||||||||||
| Equity securities |
Other assets | $ |
$ |
— | — | |||||||||||||
| Private equities |
Other assets | $ |
— | — | $ |
|||||||||||||
| Total | Fair Value Measurements at December 31, 2023 Using |
|||||||||||||||||
| Balance Sheet Location |
Level 1 | Level 2 | Level 3 | |||||||||||||||
| Assets: |
||||||||||||||||||
| Derivative financial instruments |
Other current assets | $ | — | $ | — | |||||||||||||
| Equity securities |
Other assets | $ | $ | — | — | |||||||||||||
| Private equities |
Other assets | $ | — | — | $ | |||||||||||||
8. |
SHAREHOLDERS’ EQUITY |
9. |
COMMITMENTS AND CONTINGENCIES |
10. |
RELATED PARTY TRANSACTIONS |
Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains or incorporates by reference statements that are not historical in nature and that are intended to be, and are hereby identified as, “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Statements which are not historical in nature, including the words “anticipate,” “estimate,” “could,” “should,” “may,” “plan,” “seek,” “expect,” “believe,” “intend,” “target,” “will,” “project,” “focused,” “outlook,” “goal,” “designed,” and variations of these words and negatives thereof and similar expressions are intended to identify forward-looking statements, including statements regarding, among others, (i) economic conditions, (ii) business and acquisition strategies, (iii) potential acquisitions and/or joint ventures and investments in unconsolidated entities, (iv) financing plans, and (v) industry, demographic and other trends affecting our financial condition or results of operations. These forward-looking statements are based on management’s current expectations, are not guarantees of future performance and are subject to a number of risks, uncertainties, and changes in circumstances, certain of which are beyond our control. Actual results could differ materially from these forward-looking statements as a result of several factors, including, but not limited to:
| • | general economic conditions, both in the United States and in the international markets we serve; |
| • | competitive factors within the HVAC/R industry; |
| • | effects of supplier concentration, including conditions that impact the supply chain; |
| • | fluctuations in certain commodity costs; |
| • | consumer spending; |
| • | consumer debt levels; |
| • | new housing starts and completions; |
| • | capital spending in the commercial construction market; |
| • | access to liquidity needed for operations; |
| • | seasonal nature of product sales; |
| • | weather patterns and conditions; |
| • | insurance coverage risks; |
| • | federal, state, and local regulations impacting our industry and products; |
| • | prevailing interest rates; |
| • | the effect of inflation; |
| • | foreign currency exchange rate fluctuations; |
| • | international risk; |
| • | cybersecurity risk; and |
| • | the continued viability of our business strategy. |
We believe these forward-looking statements are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on current expectations. For additional information regarding important factors that may affect our operations and could cause actual results to vary materially from those anticipated in the forward-looking statements, please see Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023, as well as the other documents and reports that we file with the SEC. Forward-looking statements speak only as of the date the statements were made. We assume no
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Table of Contents
obligation to update forward-looking information or the discussion of such risks and uncertainties to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information, except as required by applicable law. We qualify any and all of our forward-looking statements by these cautionary factors.
The following information should be read in conjunction with the condensed consolidated unaudited financial statements, including the notes thereto, included under Part I, Item 1 of this Quarterly Report on Form 10-Q. In addition, reference should be made to our audited consolidated financial statements and notes thereto, and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2023.
Company Overview
Watsco, Inc. was incorporated in Florida in 1956, and, together with its subsidiaries (collectively, “Watsco,” the “Company,” or “we,” “us,” or “our”) 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. At June 30, 2024, we operated from 691 locations in 43 U.S. States, Canada, Mexico, and Puerto Rico with additional market coverage on an export basis to portions of Latin America and the Caribbean.
Revenues primarily consist of sales of air conditioning, heating, and refrigeration equipment, and related parts and supplies. Selling, general and administrative expenses primarily consist of selling expenses, the largest components of which are salaries, commissions, and marketing expenses that are variable and correlate to changes in sales. Other significant selling, general and administrative expenses relate to the operation of warehouse facilities, including a fleet of trucks and forklifts, and facility rent, a majority of which we operate under non-cancelable operating leases.
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.
Climate Change and Reductions in CO2e Emissions
We believe that our business plays an important and significant role in the drive to lower CO2e emissions. According to the United States Department of Energy, heating and air conditioning accounts for roughly half of household energy consumption in the United States. As such, replacing older, less efficient HVAC systems with higher efficiency systems is one of the most meaningful steps homeowners can take to reduce their electricity costs and carbon footprints.
The overwhelming majority of new HVAC systems that we sell replace systems that likely operate below current minimum efficiency standards in the United States and may use more harmful refrigerants that have been, or are being, phased-out. As consumers replace HVAC systems with new, higher-efficiency systems, homeowners will consume less energy, save costs, and reduce their carbon footprints.
The sale of high-efficiency systems has long been a focus of ours, and we have invested in tools and technology intended to capture an increasingly richer sales mix over time. In addition, regulatory mandates will likely periodically increase the required minimum Seasonal Energy Efficiency Ratio rating, referred to as SEER, thus providing a catalyst for greater sales of higher-efficiency systems. Recently enacted regulations increased the current minimum SEER beginning in 2023 (generally, to 14 SEER from 13 SEER in the Northern U.S. and to 15 SEER from 14 SEER for the Southern U.S.).
Additionally, the American Innovation and Manufacturing Act of 2020 granted the U.S. Environmental Protection Agency the authority to regulate hydrofluorocarbon (“HFC”) refrigerants. Although HFCs were introduced as alternatives to ozone-depleting substances like chlorofluorocarbons and hydrochlorofluorocarbons, they are now recognized as potent greenhouse gases due to their high global warming potential (“GWP”). Consequently, a phasedown of HFC production and consumption by 85% over a 15-year period commenced on January 1, 2022, and regulations were established requiring HVAC systems to use refrigerants with a GWP under 750 by January 1, 2025. In response to these regulations, OEMs have begun the transition to new refrigerants. These regulations advance product innovation, improve homeowner energy efficiency, reduce the carbon footprint of end-users and increase average selling prices over time. We offer a broad variety of systems that operate above the minimum SEER standards, ranging from base-level efficiency to systems that exceed 20 SEER. Based on estimates validated by independent sources, we averted an estimated 20.9 million metric tons of CO2e emissions from January 1, 2020 to June 30, 2024 through the sale of replacement residential HVAC systems at higher-efficiency standards.
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Federal Tax Credits and State Incentives
Demand for higher-efficiency products, such as variable-speed systems and heat pumps, is expected to increase due to the passage of the U.S. Inflation Reduction Act of 2022 (the “IRA”) in August 2022. This legislation is intended, in part, to promote the replacement of existing systems in favor of high-efficiency heat pump systems that reduce greenhouse gas emissions, as compared to older systems, and thereby combat climate change. Programs under the IRA include enhanced tax credits for homeowners who install qualifying HVAC equipment and tax deductions for owners of commercial buildings that are upgraded to achieve defined energy savings. The IRA also sets aside $4.3 billion for state-administered consumer rebate programs designed to promote energy savings for low and medium-income households, including HVAC systems. Further details, including qualifying products, specific programs, states participating, and other regulatory requirements contemplated by the IRA are still being finalized.
Critical Accounting Estimates
Management’s discussion and analysis of financial condition and results of operations is based upon the condensed consolidated unaudited financial statements included in this Quarterly Report on Form 10-Q, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these condensed consolidated unaudited financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated unaudited financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. At least quarterly, management reevaluates its judgments and estimates, which are based on historical experience, current trends, and various other assumptions that are believed to be reasonable under the circumstances.
Our critical accounting estimates are included in our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on February 23, 2024. We believe that there have been no significant changes during the quarter ended June 30, 2024 to the critical accounting estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.
New Accounting Standards
Refer to Note 1 to our condensed consolidated unaudited financial statements included in this Quarterly Report on Form 10-Q for a discussion of recently adopted, and to be adopted, accounting standards.
Results of Operations
The following table summarizes information derived from our condensed consolidated unaudited statements of income, expressed as a percentage of revenues, for the quarters and six months ended June 30, 2024 and 2023:
| Quarter Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| Cost of sales |
72.9 | 71.9 | 72.7 | 71.6 | ||||||||||||
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| Gross profit |
27.1 | 28.1 | 27.3 | 28.4 | ||||||||||||
| Selling, general and administrative expenses |
14.9 | 15.2 | 17.0 | 16.6 | ||||||||||||
| Other income |
0.4 | 0.4 | 0.4 | 0.3 | ||||||||||||
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| Operating income |
12.6 | 13.3 | 10.7 | 12.1 | ||||||||||||
| Interest (income) expense, net |
(0.2 | ) | 0.2 | (0.2 | ) | 0.1 | ||||||||||
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| Income before income taxes |
12.8 | 13.1 | 10.9 | 12.0 | ||||||||||||
| Income taxes |
2.8 | 2.8 | 2.3 | 2.6 | ||||||||||||
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|
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| Net income |
10.0 | 10.3 | 8.6 | 9.4 | ||||||||||||
| Less: net income attributable to non-controlling interest |
1.6 | 1.6 | 1.4 | 1.5 | ||||||||||||
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| Net income attributable to Watsco, Inc. |
8.5 | % | 8.6 | % | 7.2 | % | 8.0 | % | ||||||||
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Note: Due to rounding, percentages may not total 100.
The following narratives reflect our acquisitions of Commercial Specialists, Inc. (“CSI”) in February 2024, Gateway Supply Company, Inc. (“GWS”) in September 2023, and Capitol District Supply Co., Inc. (“Capitol”) in March 2023. We did not acquire any businesses during the quarter ended June 30, 2024.
In the following narratives, computations and other information referring to “same-store basis” exclude the effects of locations closed, acquired, or locations opened, in each case during the immediately preceding 12 months, unless such locations are within close geographical proximity to existing locations. At June 30, 2024 and 2023, three and four locations, respectively, that we opened during the immediately preceding 12 months were near existing locations and were therefore included in “same-store basis” information.
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The table below summarizes the changes in our locations for the 12 months ended June 30, 2024:
| Number of Locations |
||||
| June 30, 2023 |
673 | |||
| Opened |
3 | |||
| Acquired |
16 | |||
| Closed |
(2 | ) | ||
|
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|
|||
| December 31, 2023 |
690 | |||
| Opened |
3 | |||
| Acquired |
2 | |||
| Closed |
(4 | ) | ||
|
|
|
|||
| June 30, 2024 |
691 | |||
|
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Second Quarter of 2024 Compared to Second Quarter of 2023
Revenues
| Quarter Ended June 30, | ||||||||||||||||
| (in millions) | 2024 | 2023 | Change | |||||||||||||
| Revenues |
$ | 2,139.3 | $ | 2,003.1 | $ | 136.2 | 7 | % | ||||||||
The increase in revenues for the second quarter of 2024 included $56.1 million attributable to new locations acquired and $4.1 million from other locations opened during the preceding 12 months, offset by $2.0 million from locations closed.
| Quarter Ended June 30, | ||||||||||||||||
| (in millions) | 2024 | 2023 | Change | |||||||||||||
| Same-store sales |
$ | 2,079.1 | $ | 2,001.1 | $ | 78.0 | 4 | % | ||||||||
The following table presents our revenues (excluding acquisitions) for the second quarter of 2024, as a percentage of sales, by major product lines and the related percentage change in revenues from the prior period:
| % of Sales | ||||||||||||
| 2024 | 2023 | % Change | ||||||||||
| HVAC equipment |
71 | % | 69 | % | 8 | % | ||||||
| Other HVAC products |
25 | % | 27 | % | (1 | %) | ||||||
| Commercial refrigeration products |
4 | % | 4 | % | 1 | % | ||||||
HVAC equipment sales reflect an 8% increase in residential products, which is composed of unitary compressor-bearing systems, furnaces, and other indoor components (8% increase in U.S. markets and a 3% increase in international markets), and an 8% increase in sales of commercial HVAC equipment (7% increase in U.S. markets and a 12% increase in international markets). The majority component of residential unitary compressor-bearing systems represent “ducted” systems produced by a variety of OEMs. Sales of ducted residential compressor-bearing systems increased 9% during the second quarter of 2024, reflecting a 6% increase in unit volume and a 3% increase in average selling price. Domestic sales of residential unitary compressor-bearing systems increased 8%, reflecting a 7% increase in units and a 1% increase in average selling price.
Gross Profit
| Quarter Ended June 30, | ||||||||||||||||
| (in millions) | 2024 | 2023 | Change | |||||||||||||
| Gross profit |
$ | 579.8 | $ | 562.6 | $ | 17.2 | 3 | % | ||||||||
| Gross margin |
27.1 | % | 28.1 | % | ||||||||||||
Gross profit margin declined 100 basis-points primarily due to the impact of pricing and sales mix for HVAC equipment in 2024 as compared to the same period in 2023.
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Selling, General and Administrative Expenses
| Quarter Ended June 30, | ||||||||||||||||
| (in millions) | 2024 | 2023 | Change | |||||||||||||
| Selling, general and administrative expenses |
$ | 319.0 | $ | 304.2 | $ | 14.8 | 5 | % | ||||||||
| Selling, general and administrative expenses as a percentage of revenues |
14.9 | % | 15.2 | % | ||||||||||||
Selling, general and administrative expenses for the second quarter of 2024 increased primarily due to newly acquired locations and higher revenues. On a same-store basis, selling, general and administrative expenses increased 2% as compared to 2023 primarily due to higher revenues.
Other Income
Other income of $8.1 million and $7.2 million for the second quarters of 2024 and 2023, respectively, represented our share of the net income of Russell Sigler, Inc. (“RSI”), in which we have a 38.4% equity interest.
Interest Income, Net
Interest income, net for the second quarter of 2024 increased $8.3 million, or 244%, primarily due to interest earned on cash and short-term investments and lower average borrowings under our revolving credit facility for the 2024 period as compared to the same period in 2023.
Income Taxes
| Quarter Ended June 30, | ||||||||||||||||
| (in millions) | 2024 | 2023 | Change | |||||||||||||
| Income taxes |
$ | 59.1 | $ | 56.9 | $ | 2.2 | 4 | % | ||||||||
| Effective income tax rate |
24.3 | % | 24.6 | % | ||||||||||||
Income taxes represent a composite of the income taxes attributable to our wholly owned operations and income taxes attributable to our joint ventures with Carrier Global Corporation (“Carrier”), which are primarily taxed as partnerships for income tax purposes; therefore, Carrier is responsible for its proportionate share of income taxes attributable to its share of earnings from these joint ventures. The decrease in the effective income tax rate was primarily due to higher share-based compensation deductions in 2024 as compared to the same period in 2023.
Net Income Attributable to Watsco, Inc.
Net income attributable to Watsco for the quarter ended June 30, 2024 increased $8.6 million, or 5%, compared to the same period in 2023. The increase was primarily driven by higher revenues, gross profit and interest income, partially offset by higher selling, general and administrative expenses.
First Half of 2024 Compared to First Half of 2023
Revenues
| Six Months Ended June 30, | ||||||||||||||||
| (in millions) | 2024 | 2023 | Change | |||||||||||||
| Revenues |
$ | 3,704.3 | $ | 3,553.7 | $ | 150.6 | 4 | % | ||||||||
The increase in revenues for the first half of 2024 included $107.6 million attributable to new locations acquired and $5.1 million from other locations opened during the preceding 12 months, offset by $2.9 million from locations closed.
| Six Months Ended June 30, | ||||||||||||||||
| (in millions) | 2024 | 2023 | Change | |||||||||||||
| Same-store sales |
$ | 3,591.6 | $ | 3,550.8 | $ | 40.8 | 1 | % | ||||||||
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The following table presents our revenues (excluding acquisitions) for the six months ended June 30, 2024 as a percentage of sales, by major product lines and the related percentage change in revenues from the prior period:
| % of Sales | ||||||||||||
| 2024 | 2023 | % Change | ||||||||||
| HVAC equipment |
70 | % | 69 | % | 4 | % | ||||||
| Other HVAC products |
26 | % | 27 | % | (3 | %) | ||||||
| Commercial refrigeration products |
4 | % | 4 | % | 2 | % | ||||||
HVAC equipment sales reflect a 3% increase in residential products, which is composed of unitary compressor-bearing systems, furnaces, and other indoor components, (3% increase in U.S. markets and a 4% increase in international markets) and a 5% increase in sales of commercial HVAC equipment (4% increase in U.S. markets and an 11% increase in international markets). The majority component of residential unitary compressor-bearing systems represent “ducted” systems produced by a variety of OEMs. Sales of ducted residential compressor-bearing systems increased 4% during the first half of 2024, reflecting a 1% increase in unit volume and a 3% increase in average selling price. Domestic sales of residential unitary compressor-bearing systems increased 3%, reflecting a 2% increase in units and a 1% increase in average selling price.
Gross Profit
| Six Months Ended June 30, | ||||||||||||||||
| (in millions) | 2024 | 2023 | Change | |||||||||||||
| Gross profit |
$ | 1,010.4 | $ | 1,010.8 | $ | (0.4 | ) | 0 | % | |||||||
| Gross margin |
27.3 | % | 28.4 | % | ||||||||||||
Gross profit margin declined 110 basis-points primarily due to the impact of pricing and sales mix for HVAC equipment in 2024 as compared to the same period in 2023.
Selling, General and Administrative Expenses
| Six Months Ended June 30, | ||||||||||||||||
| (in millions) | 2024 | 2023 | Change | |||||||||||||
| Selling, general and administrative expenses |
$ | 628.6 | $ | 591.2 | $ | 37.4 | 6 | % | ||||||||
| Selling, general and administrative expenses as a percentage of revenues |
17.0 | % | 16.6 | % | ||||||||||||
Selling, general and administrative expenses for the first half of 2024 increased primarily due to newly acquired locations. On a same store basis, selling, general and administrative expenses increased 3% as compared to the same period in 2023 and, as a percentage of sales increased to 16.9% versus 16.6% in 2023, primarily due to increases in fixed costs and $5.3 million in nonrecurring items.
Other Income
Other income of $13.5 million and $10.9 million for the first half of 2024 and 2023, respectively, represents our share of the net income of RSI, in which we have a 38.4% equity interest.
Interest Income, Net
Interest income, net for the first half of 2024 increased $11.4 million, or 283%, primarily due to interest earned on cash and short-term investments and lower average borrowings under our revolving credit facility for the 2024 period as compared to the same period in 2023.
Income Taxes
| Six Months Ended June 30, | ||||||||||||||||
| (in millions) | 2024 | 2023 | Change | |||||||||||||
| Income taxes |
$ | 83.8 | $ | 90.6 | $ | (6.8 | ) | (8 | %) | |||||||
| Effective income tax rate |
23.5 | % | 24.1 | % | ||||||||||||
Income taxes represent a composite of the income taxes attributable to our wholly owned operations and income taxes attributable to our joint ventures with Carrier, which are primarily taxed as partnerships for income tax purposes; therefore, Carrier is responsible for its proportionate share of income taxes attributable to its share of earnings from these joint ventures. The decrease in the effective income tax rate was primarily due to higher share-based compensation deductions combined with lower earnings in 2024 as compared to the same period in 2023.
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Net Income Attributable to Watsco, Inc.
Net income attributable to Watsco, Inc. for the first half of 2024 decreased $14.4 million, or 5%, compared to the same period in 2023. The decrease was primarily driven by higher selling, general and administrative expenses, partially offset by higher interest income, a reduction in income taxes, and a decrease in net income attributable to the non-controlling interest.
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to execute our business strategy and fund operating and investing activities, taking into consideration the seasonal demand for HVAC/R products, which peaks in the months of May through August. Significant factors that could affect our liquidity include the following:
| • | cash needed to fund our business (primarily working capital requirements); |
| • | borrowing capacity under our revolving credit facility; |
| • | the timing and extent of sales of Common stock under our at-the-market offering program; |
| • | the ability to attract long-term capital with satisfactory terms; |
| • | acquisitions, including joint ventures and investments in unconsolidated entities; |
| • | dividend payments; |
| • | capital expenditures; and |
| • | the timing and extent of common stock repurchases. |
Sources and Uses of Cash
We rely on cash flows from operations and borrowing capacity under our revolving credit agreement to fund seasonal working capital needs and for other general corporate purposes in the short-term and the long-term, including dividend payments (if and as declared by our Board of Directors), capital expenditures, business acquisitions, and development of our long-term operating and technology strategies. Additionally, we may also generate cash through the issuance and sale of our Common stock.
We believe that the combination of our operating cash flows, cash on hand, short-term cash investments, available borrowings under our revolving credit agreement, and funds available from sales of our Common stock under our 2024 ATM Program, each of which is described below, will be sufficient to meet our liquidity needs for the foreseeable future. However, there can be no assurance that our current sources of available funds will be sufficient to meet our cash requirements.
As of June 30, 2024, we had $224.9 million of cash and cash equivalents, of which $95.0 million was held by foreign subsidiaries. The repatriation of cash balances from our foreign subsidiaries could have adverse tax impacts or be subject to capital controls; however, these balances are generally available to fund the ordinary business operations of our foreign subsidiaries without legal restrictions. We also had $200.0 million of short-term cash investments consisting of a certificate of deposit that matures in September 2024.
Our access to funds under our revolving credit agreement depends on the ability of the syndicate banks to meet their respective funding commitments. Disruptions in the credit and capital markets could adversely affect our ability to draw on our revolving credit agreement and may also adversely affect the determination of interest rates, particularly rates based on the Secured Overnight Financing Rate (“SOFR”), which is one of the base rates under our revolving credit agreement. SOFR has limited historical data and is a secured lending rate, whereas our revolving credit agreement is unsecured and had primarily used LIBOR, an unsecured lending rate, as a base rate prior to the discontinuation of LIBOR in 2023. The use of SOFR as a base rate under our revolving credit agreement could give rise to uncertainties and volatility in the benchmark rates. Additionally, disruptions in the credit and capital markets could also result in increased borrowing costs or reduced borrowing capacity under our revolving credit agreement.
Working Capital
Working capital increased to $2,089.2 million at June 30, 2024 from $1,679.9 million at December 31, 2023 due to: (i) higher inventory balances driven by the seasonal ramp-up in inventories in connection with our selling season; (ii) higher accounts receivable consistent with the seasonal increase in sales; and (iii) $200.0 million of short-term cash investments, which were offset by an increase in accounts payable consistent with the change in inventory.
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Cash Flows
The following table summarizes our cash flow activity for the six months ended June 30, 2024 and 2023 (in millions):
| 2024 | 2023 | Change | ||||||||||
| Cash flows provided by (used in) operating activities |
$ | 161.4 | $ | (89.2 | ) | $ | 250.6 | |||||
| Cash flows used in investing activities |
$ | (217.3 | ) | $ | (17.6 | ) | $ | (199.7 | ) | |||
| Cash flows provided by financing activities |
$ | 73.8 | $ | 120.5 | $ | (46.7 | ) | |||||
The individual items contributing to cash flow changes for the periods presented are detailed in the condensed consolidated unaudited statements of cash flows contained in this Quarterly Report on Form 10-Q.
Operating Activities
Net cash provided by operating activities in 2024 as compared to 2023 was higher primarily due to the timing of vendor payments and a lower increase in inventory.
Investing Activities
Net cash used in investing activities increased primarily due to the purchase of $200.0 million of short-term cash investments in 2024.
Financing Activities
Net cash provided by financing activities decreased primarily due to repayments under our revolving credit agreement and an increase in dividends paid in 2024, partially offset by higher net proceeds from the sale of Common stock under our 2021 ATM Program (as defined below), a portion of which was used for short-term cash investments.
Revolving Credit Agreement
We maintain an unsecured, five-year $600.0 million syndicated multicurrency revolving credit agreement, which may be used for, among other things, funding seasonal working capital needs and for other general corporate purposes, including acquisitions, dividends (if and as declared by our Board of Directors), capital expenditures, stock repurchases, and issuances of letters of credit. The revolving credit facility has a seasonal component from October 1 to March 31, during which the borrowing capacity may be reduced to $500.0 million at our discretion (which effectively reduces fees payable in respect of the unused portion of the commitment). Included in the revolving credit facility are a $125.0 million swingline loan sublimit, a $10.0 million letter of credit sublimit, a $75.0 million alternative currency borrowing sublimit, and an $10.0 million Mexican borrowing subfacility. The revolving credit agreement matures on March 16, 2028.
At June 30, 2024, there was no outstanding balance under the revolving credit agreement. At December 31, 2023, $15.4 million was outstanding under the revolving credit agreement. The revolving credit agreement contains customary affirmative and negative covenants, including financial covenants with respect to consolidated leverage and interest coverage ratios, and other customary restrictions. We believe we were in compliance with all covenants at June 30, 2024.
At-the-Market Offering Program
On August 6, 2021, we executed a sales agreement with Robert W. Baird & Co. Inc. (“Baird”), which enabled 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 $300.0 million (the “2021 ATM Program”).
During the quarter ended March 31, 2024, we issued and sold 712,000 shares of Common stock under the 2021 ATM Program for net proceeds of $281.8 million. We used the proceeds to pay off outstanding debt under our revolving credit agreement and purchased short-term cash investments with the remainder. In aggregate, $298.5 million of Common stock was sold under the 2021 ATM Program.
On May 3, 2024, we executed an amended and restated sales agreement with Baird (the “2024 ATM Program”), which enables the further issuance of up to $400.0 million of Common stock. At June 30, 2024, $400.0 million was available for sale under the 2024 ATM Program. The offer and sale of shares under the 2024 ATM Program were registered under the Securities Act pursuant to our automatically effective shelf registration statement on Form S-3 (File No. 333-260758).
Investment in Unconsolidated Entity
Carrier Enterprise I, one of our joint ventures with Carrier, in which we have an 80% controlling interest, has a 38.4% ownership interest in RSI, an HVAC distributor operating from 34 locations in the Western U.S. Our proportionate share of the net income of RSI is included in other income in our condensed consolidated unaudited statements of income.
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Carrier Enterprise I is a party to a shareholders’ agreement (the “Shareholders’ Agreement”) with RSI and its shareholders, consisting of five Sigler second generation family siblings and their affiliates, who collectively own 55.4% of RSI (the “RSI Majority Holders”) and certain next-generation Sigler family members and an employee, who collectively own 6.2% of RSI (the “RSI Minority Holders” and, together with the RSI Majority Holders, the “RSI Shareholders”). Pursuant to the Shareholders’ Agreement, the RSI Shareholders have the right to sell, and Carrier Enterprise I has the obligation to purchase, their respective shares of RSI for a purchase price determined based on the higher of book value or a multiple of EBIT, the latter of which Carrier Enterprise I used to calculate the price for its 38.4% investment held in RSI. The RSI Shareholders may transfer their respective shares of RSI common stock only to members of the Sigler family or to Carrier Enterprise I, and, at any time from and after the date on which Carrier Enterprise I owns 85% or more of RSI’s outstanding common stock, it has the right, but not the obligation, to purchase from the RSI Shareholders the remaining outstanding shares of RSI common stock. At June 30, 2024, using the criteria set forth in the Shareholders’ Agreement, the valuation of the RSI Shareholders’ RSI common stock was approximately $457.0 million.
On July 28, 2023, Watsco, Carrier Enterprise I, and the RSI Majority Holders entered into an agreement that (1) provides Carrier Enterprise I the discretion, but not the obligation, to fund up to 80% of any purchase from the RSI Majority Holders of their RSI common stock, as required under the Shareholders’ Agreement, using Watsco Common stock (the “Offered Shares”), (2) provides that any Offered Shares actually issued would be valued based on the average volume-weighted average price of Watsco’s Common stock for the ten trading days immediately preceding the payment date for the applicable RSI shares, and (3) limits the amount of RSI shares that may be collectively sold by the RSI Majority Holders to Carrier Enterprise I under the Shareholders’ Agreement to $125.0 million during any rolling 12-month period. We have not issued or sold any Offered Shares, and there is no assurance that we will issue and sell any Offered Shares, nor is the number of Offered Shares that may be issued and sold currently determinable.
We believe that our operating cash flows, cash on hand, short-term cash investments or funds available for borrowing under our revolving credit agreement, or use of the 2024 ATM Program would be sufficient to purchase any additional ownership interests in RSI for cash pursuant to the agreement described in the preceding paragraph.
Acquisitions
On February 1, 2024, one of our wholly owned subsidiaries acquired CSI, a distributor of HVAC products with annual sales of approximately $13.0 million, operating from two locations in Kentucky and Ohio. Consideration for the purchase consisted of $6.0 million in cash, 1,904 shares of Common stock having a fair value of $0.8 million, and $0.6 million for repayment of indebtedness, net of cash acquired of $1.4 million.
On September 1, 2023, we acquired substantially all the assets and assumed certain of the liabilities of GWS, a plumbing and HVAC distributor with annual sales of approximately $180.0 million, operating from 16 locations in South Carolina and North Carolina. Consideration for the net purchase price consisted of $4.0 million in cash, net of cash acquired of $3.1 million, and 280,215 shares of Common stock having a fair value of $101.6 million, net of a discount for lack of marketability.
On March 3, 2023, one of our wholly owned subsidiaries acquired Capitol, a distributor of plumbing and air conditioning and heating products with annual sales of approximately $13.0 million, operating from three locations in New York. Consideration for the purchase consisted of $1.2 million in cash, net of cash acquired of $0.1 million, and $1.9 million for repayment of indebtedness.
We continually evaluate potential acquisitions and/or joint ventures and investments in unconsolidated entities. We routinely hold discussions with several acquisition candidates. Should suitable acquisition opportunities arise that would require additional financing, we believe our financial position and earnings history provide a sufficient basis for us to either obtain additional debt financing at competitive rates and on reasonable terms or raise capital through the issuance of equity securities.
Common Stock Dividends
We paid cash dividends of $5.15 and $4.90 per share on both Common and Class B common stock during the six months ended June 30, 2024 and 2023, respectively. On July 1, 2024, our Board of Directors declared a regular quarterly cash dividend of $2.70 per share on both Common and Class B common stock that was paid on July 31, 2024 to shareholders of record as of July 16, 2024. Future dividends and/or changes in dividend rates are at the sole discretion of the Board of Directors and depend upon factors including, but not limited to, cash flow generated by operations, profitability, financial condition, cash requirements, prospects, and other factors deemed relevant by our Board of Directors.
Dividend Reinvestment Plan
On March 29, 2024, we implemented the Watsco, Inc. Dividend Reinvestment Plan (the “Plan”), under which existing shareholders may, in accordance with the Plan, acquire shares of Common stock or Class B common stock, as applicable (collectively “common stock”), by reinvesting all or a portion of the cash dividends paid on such shareholders’ shares of common stock. The Plan has been registered under the Securities Act pursuant to our automatically effective shelf registration statement on Form S-3 (File No. 333-260758).
During the quarter and six months ended June 30, 2024, we issued four shares of Common stock under the Plan.
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Company Share Repurchase Program
In September 1999, our Board of Directors authorized the repurchase, at management’s discretion, of up to 7,500,000 shares of common stock in the open market or via private transactions. Shares repurchased under the program are accounted for using the cost method and result in a reduction of shareholders’ equity. We last repurchased shares under this plan in 2008. In aggregate, 6,370,913 shares of Common and Class B common stock have been repurchased at a cost of $114.4 million since the inception of the program. At June 30, 2024, there were 1,129,087 shares remaining authorized for repurchase under the program. In considering any further stock repurchases under our repurchase program, we intend to evaluate the impact of the 1% excise tax on stock repurchases that became effective on January 1, 2023.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the information regarding market risk provided in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the year ended December 31, 2023.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are, among other things, designed to ensure that information required to be disclosed by us under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer (“CEO”), Executive Vice President (“EVP”), and Chief Financial Officer (“CFO”), to allow for timely decisions regarding required disclosure and appropriate SEC filings.
Our management, with the participation of our CEO, EVP and CFO, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, and, based on that evaluation, our CEO, EVP and CFO concluded that our disclosure controls and procedures were effective, at a reasonable assurance level, at and as of such date.
Changes in Internal Control over Financial Reporting
We continuously seek to improve the efficiency and effectiveness of our internal controls. This results in refinements to processes throughout the Company. However, there were no changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
In accordance with the SEC’s guidance that an assessment of the internal controls of a recently acquired business may be omitted from the scope of management’s assessment of internal control over financial reporting in the year of acquisition, we have not yet assessed the internal control over financial reporting of GWS, which represented approximately 3% of our total consolidated assets at June 30, 2024 and approximately 3% of our total consolidated revenues for the quarter ended June 30, 2024. From the acquisition date of September 1, 2023 to June 30, 2024, the processes and systems of GWS did not impact the internal controls over financial reporting for our other consolidated subsidiaries.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information with respect to this item may be found in Note 9 to our condensed consolidated unaudited financial statements contained in this Quarterly Report on Form 10-Q under the caption “Litigation, Claims, and Assessments,” which information is incorporated by reference in this Item 1 of Part II of this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
Information about risk factors for the quarter ended June 30, 2024 does not differ materially from that set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
| Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Dollar Value that May Yet Be Purchased Under the Plans or Programs |
||||||||||||
| April 1, 2024 to April 30, 2024 |
— | $ | — | — | $ | — | ||||||||||
| May 1, 2024 to May 31, 2024 (1) |
1,706 | 445.15 | — | — | ||||||||||||
| June 1, 2024 to June 30, 2024 |
— | — | — | — | ||||||||||||
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| Total |
1,706 | $ | 445.15 | — | $ | — | ||||||||||
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| (1) | During the quarter ended June 30, 2024, we purchased an aggregate of 1,706 shares of our Class B common stock to satisfy the tax withholding obligations in connection with the vesting of restricted stock. |
ITEM 5. OTHER INFORMATION
During the quarter ended June 30, 2024, none of our officers or directors adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act or any “non-Rule 10b5-1 trading arrangement”, as defined in Item 408 of Regulation S-K.
ITEM 6. EXHIBITS
INDEX TO EXHIBITS
| # | filed herewith. |
| + | furnished herewith. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| WATSCO, INC. | ||||||
| (Registrant) | ||||||
| Date: August 2, 2024 | By: | /s/ Ana M. Menendez | ||||
| Ana M. Menendez | ||||||
| Chief Financial Officer (on behalf of the Registrant and as Principal Financial Officer) | ||||||
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Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Albert H. Nahmad, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Watsco, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 2, 2024
| /s/ Albert H. Nahmad |
| Albert H. Nahmad |
| Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Barry S. Logan, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Watsco, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 2, 2024
| /s/ Barry S. Logan |
| Barry S. Logan |
| Executive Vice President |
Exhibit 31.3
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ana M. Menendez, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Watsco, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 2, 2024
| /s/ Ana M. Menendez |
| Ana M. Menendez |
| Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Watsco, Inc. (“Watsco”) for the quarter and six months ended June 30, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Albert H. Nahmad, as Chief Executive Officer of Watsco, Barry S. Logan, as Executive Vice President of Watsco and Ana M. Menendez, as Chief Financial Officer of Watsco, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to our knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Watsco. |
| /s/ Albert H. Nahmad |
| Albert H. Nahmad |
| Chief Executive Officer |
| August 2, 2024 |
| /s/ Barry S. Logan |
| Barry S. Logan |
| Executive Vice President |
| August 2, 2024 |
| /s/ Ana M. Menendez |
| Ana M. Menendez |
| Chief Financial Officer |
| August 2, 2024 |
A signed original of this written statement required by Section 906 has been provided to Watsco and will be retained by Watsco and furnished to the Securities and Exchange Commission or its staff upon request.
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by Watsco for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.