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 |
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
☒ | Accelerated filer | ☐ | ||||
Non-accelerated filer |
☐ | Smaller reporting company | ||||
Emerging growth company |
Page No. |
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Item 1. |
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3 |
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6 |
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8 |
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9 |
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Item 2. |
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Item 3. |
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Item 4. |
25 |
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Item 1. |
26 |
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Item 1A. |
26 |
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Item 6. |
26 |
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27 |
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EXHIBITS |
Quarter Ended September 30, |
Nine Months Ended September 30, |
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2022 |
2021 |
2022 |
2021 |
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Revenues |
$ |
$ | $ |
$ | ||||||||||||
Cost of sales |
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Gross profit |
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Selling, general and administrative expenses |
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Other income |
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Operating income |
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Interest expense, net |
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Income before income taxes |
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Income taxes |
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Net income |
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Less: net income attributable to non-controlling interest |
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Net income attributable to Watsco, Inc. |
$ |
$ | $ |
$ | ||||||||||||
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Earnings per share for Common and Class B common stock: |
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Basic |
$ |
$ | $ |
$ | ||||||||||||
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Diluted |
$ |
$ | $ |
$ | ||||||||||||
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Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Net income |
$ |
$ | $ |
$ | ||||||||||||
Other comprehensive loss, net of tax |
||||||||||||||||
Foreign currency translation adjustment |
( |
) |
( |
) | ( |
) |
( |
) | ||||||||
Unrealized gain on cash flow hedging instruments |
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Reclassification of loss on cash flow hedging instruments into earnings |
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Other comprehensive loss |
( |
) |
( |
) | ( |
) |
( |
) | ||||||||
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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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September 30, 2022 |
December 31, 2021 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ |
$ | ||||||
Accounts receivable, net |
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Inventories, net |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use |
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Goodwill |
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Intangible assets, net |
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Investment in unconsolidated entity |
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Other assets |
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$ |
$ | |||||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
||||||||
Current portion of long-term obligations |
$ |
$ | ||||||
Accounts payable |
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Accrued expenses and other current liabilities |
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Total current liabilities |
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Long-term obligations: |
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Borrowings under revolving credit agreement |
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Operating lease liabilities, net of current portion |
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Finance lease liabilities, net of current portion |
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Total long-term obligations |
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Deferred income taxes and other liabilities |
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Commitments and contingencies |
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Watsco, Inc. shareholders’ equity: |
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Common stock, $ |
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Class B common stock, $ |
||||||||
Preferred stock, $ |
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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 |
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Non-controlling interest |
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Total shareholders’ equity |
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$ |
$ | |||||||
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(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 non-vested restricted shares of common stock |
( |
) | — | |||||||||||||||||||||||||||||
Common stock contribution to 401(k) plan |
||||||||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan |
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Share-based compensation |
||||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $ |
( |
) | ( |
) | ||||||||||||||||||||||||||||
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Balance at March 31, 2022 |
( |
) |
( |
) |
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Net income |
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Other comprehensive (loss) |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
Issuances of non-vested restricted shares of common stock |
( |
) | — | |||||||||||||||||||||||||||||
Forfeitures of non-vested restrictedshares 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, $ |
( |
) | ( |
) | ||||||||||||||||||||||||||||
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Balance at June 30, 2022 |
( |
) |
( |
) |
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Net income |
||||||||||||||||||||||||||||||||
Other comprehensive (loss) |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
Issuances of non-vested restricted shares of common stock |
( |
) | — | |||||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan |
||||||||||||||||||||||||||||||||
Retirement of common stock |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||
Share-based compensation |
||||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $ |
( |
) | ( |
) | ||||||||||||||||||||||||||||
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|||||||||||||||||
Balance at September 30, 2022 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||||
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(In thousands, except share and per share data) |
Common Stock, Class B Common Stock and Preferred Stock Shares |
Common Stock, Class B Common Stock and Preferred Stock Amount |
Paid-In Capital |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Treasury Stock |
Non-controlling Interest |
Total |
||||||||||||||||||||||||
Balance at December 31, 2020 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||||
Net income |
||||||||||||||||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||||||||||
Issuances of non-vested restricted shares of common stoc k |
( |
) | — | |||||||||||||||||||||||||||||
Forfeitures of non-vested restricted shares of common stock |
( |
) | ( |
) | — | |||||||||||||||||||||||||||
Common stock contribution to 401(k) plan |
||||||||||||||||||||||||||||||||
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, $ |
( |
) | ( |
) | ||||||||||||||||||||||||||||
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Balance at March 31, 2021 |
( |
) |
( |
) |
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Net income |
||||||||||||||||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||||||||||
Issuances of non-vested restricted shares of common stock |
( |
) | — | |||||||||||||||||||||||||||||
Forfeitures of non-vested restricted shares of common stock |
( |
) | ( |
) | — | |||||||||||||||||||||||||||
Stock issuances from exercise of options and employee stock purchase plan |
||||||||||||||||||||||||||||||||
Retirement of common stock |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||
Share-based compensation |
||||||||||||||||||||||||||||||||
Common stock issued for Acme Refrigeration of Baton Rouge LLC |
||||||||||||||||||||||||||||||||
Investment in TEC Distribution LLC |
||||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $ |
( |
) | ( |
) | ||||||||||||||||||||||||||||
|
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|
|||||||||||||||||
Balance at June 30, 2021 |
( |
) |
( |
) |
||||||||||||||||||||||||||||
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|
|||||||||||||||||
Net income |
||||||||||||||||||||||||||||||||
Other comprehensive (loss) |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
Issuances of non-vested restricted shares of common stock |
( |
) | — | |||||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan |
||||||||||||||||||||||||||||||||
Retirement of common stock |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||
Share-based compensation |
||||||||||||||||||||||||||||||||
Common stock issued for Makdad Industrial Supply Co., Inc. |
||||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $ |
( |
) | ( |
) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance at September 30, 2021 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||||
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|
|
|
Nine Months Ended September 30, |
||||||||
2022 |
2021 |
|||||||
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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|
|||||
Net cash provided by operating activities |
||||||||
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|||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
( |
) |
( |
) | ||||
Business acquisitions, net of cash acquired |
( |
) |
( |
) | ||||
Proceeds from sale of equity securities |
||||||||
Proceeds from sale of property and equipment |
||||||||
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|
|||||
Net cash used in investing activities |
( |
) |
( |
) | ||||
|
|
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|
|||||
Cash flows from financing activities: |
||||||||
Dividends on Common and Class B common stock |
( |
) |
( |
) | ||||
Net (repayments) proceeds under revolving credit agreement |
( |
) |
||||||
Repurchases of common stock to satisfy employee withholding tax obligations |
( |
) |
( |
) | ||||
Net repayments of finance lease liabilities |
( |
) |
( |
) | ||||
Payment of fees related to revolving credit agreement |
( |
) | ||||||
Proceeds from non-controlling interest for investment in TEC Distribution LLC |
||||||||
Net proceeds from issuances of common stoc k |
||||||||
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|
|||||
Net cash used in financing activities |
( |
) |
( |
) | ||||
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|
|||||
Effect of foreign exchange rate changes on cash and cash equivalents |
( |
) |
( |
) | ||||
|
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|
|||||
Net increase (decrease) in cash and cash equivalents |
( |
) | ||||||
Cash and cash equivalents at beginning of period |
||||||||
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|
|||||
Cash and cash equivalents at end of period |
$ |
$ | ||||||
|
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|
|||||
Supplemental cash flow information: |
||||||||
Common stock issued for Acme Refrigeration of Baton Rouge LLC |
— |
$ |
||||||
Common stock issued for Makdad Industrial Supply Co., Inc. |
— |
$ |
1. |
BASIS OF PRESENTATION |
2. |
REVENUES |
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
Primary Geographical Regions: |
||||||||||||||||
United States |
$ |
$ | $ |
$ | ||||||||||||
Canada |
||||||||||||||||
Latin America and the Caribbean |
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$ |
$ | $ |
$ | |||||||||||||
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Major Product Lines: |
||||||||||||||||
HVAC equipment |
% |
% | % |
% | ||||||||||||
Other HVAC products |
% |
% | % |
% | ||||||||||||
Commercial refrigeration products |
% |
% | % |
% | ||||||||||||
|
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|
|||||||||
% |
% | % |
% | |||||||||||||
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|
3. |
EARNINGS PER SHARE |
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
Basic Earnings per Share: |
||||||||||||||||
Net income attributable to Watsco, Inc. shareholders |
$ |
$ | $ |
$ | ||||||||||||
Less: distributed and undistributed earnings allocated to non-vested restricted common stock |
||||||||||||||||
|
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|
|
|
|
|
|
|||||||||
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 |
||||||||||||||||
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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 non-vested restricted common stock |
||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings allocated to Watsco, Inc. shareholders |
$ |
$ | $ |
$ | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted-average common shares outstanding - Basic |
||||||||||||||||
Effect of dilutive stock options |
||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted-average common shares outstanding - Diluted |
||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted earnings per share for Common and Class B common stock |
$ |
$ | $ |
$ |
||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive stock options not included above |
4. |
OTHER COMPREHENSIVE LOSS |
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
Foreign currency translation adjustment |
$ |
( |
) |
$ | ( |
) | $ |
( |
) |
$ | ( |
) | ||||
Unrealized gain on cash flow hedging instruments |
||||||||||||||||
Income tax expense |
( |
) | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Unrealized gain on cash flow hedging instruments, net of tax |
||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Reclassification of loss on cash flow hedging instruments into earnings |
||||||||||||||||
Income tax benefit |
( |
) | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Reclassification of loss on cash flow hedging instruments into earnings, net of tax |
||||||||||||||||
|
|
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|
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|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
$ |
( |
) |
$ | ( |
) | $ |
( |
) |
$ | ( |
) | ||||
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
2022 |
2021 |
||||||
Foreign currency translation adjustment: |
||||||||
Beginning balance |
$ |
( |
) |
$ | ( |
) | ||
Current period other comprehensive loss |
( |
) |
( |
) | ||||
|
|
|
|
|||||
Ending balance |
( |
) |
( |
) | ||||
|
|
|
|
|||||
Cash flow hedging instruments: |
||||||||
Beginning balance |
( |
) | ||||||
Current period other comprehensive income |
||||||||
Reclassification adjustment |
||||||||
|
|
|
|
|||||
Ending balance |
||||||||
|
|
|
|
|||||
Accumulated other comprehensive loss, net of tax |
$ |
( |
) |
$ | ( |
) | ||
|
|
|
|
5. |
ACQUISITIONS |
Accounts receivable |
$ | |||
Inventories |
||||
Other current assets |
||||
Property and equipment |
||||
Operating lease ROU assets |
||||
Goodwill |
||||
Intangibles |
||||
Accounts payable |
( |
) | ||
Accrued expenses and other current liabilities |
( |
) | ||
Operating lease liabilities, net of current portion |
( |
) | ||
Total |
$ | |||
6. |
DERIVATIVES |
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
G ain recorded in accumulated other comprehensive loss |
$ | $ | $ |
$ | ||||||||||||
L oss reclassified from accumulated other comprehensive loss into earnings |
$ | $ | $ |
$ |
Asset Derivatives |
Liability Derivatives |
|||||||||||||||
September 30, 2022 |
December 31, 2021 |
September 30, 2022 |
December 31, 2021 |
|||||||||||||
Derivatives designated as hedging instruments |
$ | $ | $ | $ | ||||||||||||
Derivatives not designated as hedging instruments |
||||||||||||||||
Total derivative instruments |
$ | $ | $ |
$ | ||||||||||||
7. |
FAIR VALUE MEASUREMENTS |
Total |
Fair Value Measurements at September 30, 2022 Using |
|||||||||||||||||
Balance Sheet Location |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||||
Assets: |
||||||||||||||||||
Equity securities |
Other assets | $ |
$ |
— |
— |
|||||||||||||
Private equities |
Other assets | $ |
— |
— |
$ |
|||||||||||||
Liabilities: |
||||||||||||||||||
Derivative financial instruments |
Accrued expenses and other current liabilities | $ |
— |
$ |
— |
Total |
Fair Value Measurements at December 31, 2021 Using |
|||||||||||||||||
Balance Sheet Location |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||||
Assets: |
||||||||||||||||||
Equity securities |
Other assets | $ | $ | — | — | |||||||||||||
Private equities |
Other assets | $ | — | — | $ | |||||||||||||
Liabilities: |
||||||||||||||||||
Derivative financial instruments |
Accrued expenses and other current liabilities | $ | — | $ | — |
8. |
SHAREHOLDERS’ EQUITY |
9. |
COMMITMENTS AND CONTINGENCIES |
10. |
RELATED PARTY TRANSACTIONS |
11. |
SUBSEQUENT EVENTS |
• | 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; |
• | fluctuations in certain commodity costs; |
• | consumer spending; |
• | consumer debt levels; |
• | the continued impact of the COVID-19 pandemic; |
• | 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. |
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Revenues |
100.0 |
% |
100.0 | % | 100.0 |
% |
100.0 | % | ||||||||
Cost of sales |
72.9 |
72.9 | 72.0 |
73.7 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
27.1 |
27.1 | 28.0 |
26.3 | ||||||||||||
Selling, general and administrative expenses |
15.8 |
15.8 | 16.2 |
16.1 | ||||||||||||
Other income |
0.3 |
0.3 | 0.3 |
0.3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income |
11.6 |
11.6 | 12.2 |
10.6 | ||||||||||||
Interest expense, net |
0.0 |
0.0 | 0.0 |
0.0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
11.6 |
11.6 | 12.2 |
10.6 | ||||||||||||
Income taxes |
2.4 |
2.3 | 2.6 |
2.1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
9.1 |
9.2 | 9.6 |
8.5 | ||||||||||||
Less: net income attributable to non-controlling interest |
1.4 |
1.3 | 1.5 |
1.3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income attributable to Watsco, Inc. |
7.7 |
% |
7.9 | % | 8.1 |
% |
7.1 | % | ||||||||
|
|
|
|
|
|
|
|
Number of Locations |
||||
September 30, 2021 |
673 | |||
Opened |
4 | |||
Closed |
(6 | ) | ||
|
|
|||
December 31, 2021 |
671 | |||
Opened |
10 | |||
Closed |
(6 | ) | ||
|
|
|||
September 30, 2022 |
675 |
|||
|
|
• | cash needed to fund our business (primarily working capital requirements); |
• | borrowing capacity under our revolving credit facility; |
• | 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. |
2022 | 2021 | Change | ||||||||||
Cash flows provided by operating activities |
$ |
358.9 |
$ | 319.7 | $ | 39.2 | ||||||
Cash flows used in investing activities |
$ |
(26.4 |
) |
$ | (140.1 | ) | $ | 113.7 | ||||
Cash flows used in financing activities |
$ |
(315.5 |
) |
$ | (187.9 | ) | $ | (127.6 | ) |
# | filed herewith. |
+ | furnished herewith. |
WATSCO, INC. | ||||||
(Registrant) | ||||||
Date: November 3, 2022 | By: | /s/ Ana M. Menendez | ||||
Ana M. Menendez | ||||||
Chief Financial Officer (on behalf of the Registrant and as Principal Financial Officer) |