UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

For the Quarterly Period Ended September 30, 20172018

or

For the Transition Period From    to    

Commission file number1-5581

I.R.S. Employer Identification Number59-0778222

WATSCO, INC.

(a Florida Corporation)

2665 South Bayshore Drive, Suite 901

Miami, Florida 33133

Telephone:(305) 714-4100

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ☒    NO  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationRegulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ☒    NO  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company,” and “emerging growth company” in RuleRule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in RuleRule 12b-2 of the Exchange Act).    YES  ☐    NO  ☒

The number of shares of each class of our common stock outstanding as of November 3, 20175, 2018 was (i) 30,513,74432,118,302 shares of Common stock, $0.50 par value per share, excluding 6,287,6504,823,988 treasury shares, and (ii) 5,228,3955,309,088 shares of Class B common stock, $0.50 par value per share, excluding 48,263 treasury shares.

WATSCO, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM10-Q

TABLE OF CONTENTS

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PARTI. FINANCIAL INFORMATION

WATSCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF INCOME

(In thousands, except per share data)

See accompanying notes to condensed consolidated unaudited financial statements.

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WATSCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

See accompanying notes to condensed consolidated unaudited financial statements.

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WATSCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

See accompanying notes to condensed consolidated unaudited financial statements.

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WATSCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS

(In thousands)

See accompanying notes to condensed consolidated unaudited financial statements.

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WATSCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

September 30, 20172018

(In thousands, except share and per share data)

Basis of Consolidation

Watsco, Inc. (collectively with its subsidiaries, “Watsco,” “we,” “us” or “our”) was incorporated in Florida in 1956 and is the largest distributor of air conditioning, heating and refrigeration equipment and related parts and supplies (“HVAC/R”) in the HVAC/R distribution industry in North America. The accompanying September 30, 20172018 interim condensed consolidated unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, but we believe the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation have been included in the condensed consolidated unaudited financial statements included herein. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 20162017 Annual Report on FormForm 10-K.

The condensed consolidated unaudited financial statements contained in this report include the accounts of Watsco, all of its wholly owned subsidiaries and the accounts of three joint ventures with Carrier Corporation (“Carrier”), in each of which Watsco maintains a controlling interest. All significant intercompany balances and transactions have been eliminated in consolidation.

The results of operations for the quarter and nine months ended September 30, 20172018 are not necessarily indicative of the results to be expected for the year ending December 31, 2017.2018. Sales of residential central air conditioners, heating equipment, and parts and supplies are seasonal. Furthermore, results of operations can be impacted favorably or unfavorably based on weather patterns, primarily 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 fourth quarter. Demand related to the new construction market is fairly consistent duringgenerally evenly distributed throughout the year, subject to weather and economic conditions, including their effect on the number of housing completions.

Equity Method Investments

Investments in which we have the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in other assets in our consolidated balance sheets. Under this method of accounting, our proportionate share of the net income or loss of the investee is included in other income in our consolidated statements of income. The excess, if any, of the carrying amount of our investment over our ownership percentage in the underlying net assets of the investee is attributed to certain fair value adjustments with the remaining portion recognized as goodwill.

Reclassifications

Certain reclassifications of prior year amounts have been made to conform to the 20172018 presentation. These reclassifications had no effect on net income or earnings per share as previously reported.

Use of Estimates

The preparation of condensed consolidated unaudited financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated unaudited financial statements and the reported amounts of revenues and expenses for the reporting period. Significant estimates include valuation reserves for accounts receivable, inventories and income taxes, reserves related to self-insurance programs and the valuation of goodwill and indefinite lived intangible assets. While we believe that these estimates are reasonable, actual results could differ from such estimates.

NewRecently Adopted Accounting Standards

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued a standard on revenue recognition that provides a single, comprehensive revenue recognition model for all contracts with customers. The standard is principle-based and provides a five-step model to determine the measurement of revenue and timing of when it is recognized. ThisIn 2015 and 2016, the FASB issued several updates to this standard. The adoption of this standard may be applied using eitherand its related amendments (collectively, the “New Revenue Standard”) on January 1, 2018 did not result in the recognition of the following transition methods: (i) a full retrospective approach reflectingcumulative adjustment to opening retained earnings under the application of the standard in each prior reporting period with the option to elect certain practical expedients or (ii) a modified retrospective approach, with the cumulative effect of initially adopting the standard recognized at the date of adoption, which requires additional footnote disclosures. This standard is effective for our interim and annual reporting periods beginningnor did it have a significant impact on January 1, 2018.

Based on our initial assessment, we expect similar performance obligations to result under this guidance as compared with deliverables and separate units of accounting currently identified. As a result, we expect the timing of our revenue recognition to generally remain the same. We continue to evaluate the impact the standard has on our determination of whether we act as principal or agent in certain vendor arrangements, representing less than 3% of our consolidated revenues, as well as analyze certain customer incentives. While we have not yet completed our evaluation process, at this time we have not identified any material impacts to our consolidated net income, balance sheet or cash flows.

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Measurement of InventoryFinancial Instruments

In July 2015,January 2016, the FASB issued guidance related to certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Most prominent among the changes to the standard is the requirement that simplifieschanges in the measurementfair value of inventory by replacingequity investments, with certain exceptions, be recognized through net income rather than other comprehensive income. This guidance must be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings and became effective for interim and annual periods beginning after December 15, 2017. The adoption of this guidance did not have a material impact on our consolidated financial statements. A cumulative-effect adjustment captured the lowerpreviously held unrealized losses of cost$301 related to our equity securities carried at fair value. See Note 4.

Stock Compensation

In May 2017, the FASB issued guidance to clarify when to account for a change to the terms or market test withconditions of a lowershare-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions or the classification of cost and net realizable value test. The guidance applies to all inventory that is measured usingfirst-in,first-outthe award (as equity or average cost methods.liability) changes as a result of the change in terms or conditions. This guidance must be applied prospectively and became effective for interim and annual reporting periods beginning after December 15, 2016.2017. The adoption of this guidance did not have an impact on our consolidated financial statements.

Classification of Deferred Taxes

In November 2015, the FASB issued guidance that requires deferred tax assets and liabilities to be classified as noncurrent in a classified balance sheet. This guidance may be applied either prospectively or retrospectively and became effective for interim and annual reporting periods beginning after December 15, 2016. The adoption of this guidance on January 1, 2017 using the prospective approach did not have a material impact on our consolidated financial statements.

Derivatives and Hedging

In August 2017, the FASB issued guidance to simplify the accounting for hedging derivatives. This guidance is effective prospectively and is effective for interim and annual periods beginning after December 15, 2018 with early adoption permitted. We elected to adopt this guidance during the quarter ended June 30, 2018, which did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Standards Not Yet Adopted

Leases

In February 2016, the FASB issued guidance on accounting for leases, which requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The guidance requires enhanced disclosures regarding the amount, timing and uncertaintyuse of cash flows arising from leases. This guidance will be applied using a modified retrospective approach to apply the standard at the beginning of the earliest period presented in the financial statements. In July 2018, updated guidance was issued which provides an additional transition method of adoption that allows entities to initially apply the standard at the adoption date and is effective for interim and annual periods beginning after December 15, 2018 with early adoption permitted.recognize a cumulative-effect adjustment to the opening balance of retained earnings. We will adopt thisthe guidance on January 1, 2019. While2019 using this additional transition method and recognize a cumulative-effect adjustment to the opening balance of retained earnings.

Based on our preliminary assessment of our lease portfolio, we are still evaluatingexpect the impactadoption of adopting this guidance to have a material impact on our consolidated financial statements, includingbalance sheets due to the option to elect certain practical expedients, we expect that, upon adoption, therecognition ofright-of-use assets and lease liabilities recorded could be material to our consolidated balance sheets.liabilities. However, we do not expect a material impact toon our consolidated statements of income. We are in the process of collecting data and designing processes and controls to account for our leases in accordance with the new guidance. Our current minimum lease commitments are disclosed in Note 16 to our audited consolidated financial statements contained in our Annual Report on Form10-K for the year ended December 31, 2017.

Intangibles—Goodwill and Other

In January 2017, the FASB issued guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this updated standard, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity also should consider income tax effects from anytax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if any. This guidance is effective prospectively and is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted. We do not expect the adoption of this guidance to have a material impact toon our consolidated financial statements.

Stock Compensation

Adoption of New Revenue Standard

In May 2017,We adopted the FASB issued guidanceNew Revenue Standard on January 1, 2018 using the modified retrospective approach. The New Revenue Standard did not have an impact on the amount or timing of our revenue recognition; however, certain payments to clarify whencustomers were reclassified from expenses to account for a changereduction from revenues, resulting in an immaterial impact to the terms or conditionsindividual financial statement line items of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions or the classificationour condensed consolidated unaudited statements of the award (as equity or liability) changes as a result of the change in terms or conditions. This guidance is effective prospectively and is effectiveincome. Results for interim and annualreporting periods beginning on and after December 15, 2017 with early adoption permitted. We doJanuary 1, 2018 are presented under the New Revenue Standard, while prior period results have not expect the adoption of this guidancebeen adjusted and continue to have a material impact to our consolidated financial statements.

Derivatives and Hedging

In August 2017, the FASB issued guidance to simplifybe reported under the accounting standards in effect for hedging derivatives. This guidance is effective prospectively and is effective for interim and annual periods beginning after December 15, 2018 with early adoption permitted. We do not expect the adoption of this guidance to have a material impact to our consolidated financial statements.

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Revenue Recognition

Revenue primarily consists of sales of air conditioning, heating and refrigeration equipment and related parts and supplies. We generate our revenue primarily from the sale of finished products to customers; therefore, the significant majority of our contracts are short-term in nature and have only a single performance obligation to deliver products; therefore, we satisfy our performance obligation under such contracts when we transfer control of the product to the customer. Some contracts contain a combination of product sales and services, the latter of which is distinct and accounted for as a separate performance obligation. We satisfy our performance obligations for services when we render the services within the agreed-upon service period. Total service revenue is not material and accounted for less than 1% of our consolidated revenues for both the quarter and nine months ended September 30, 2018.

Revenue is recognized when control transfers to our customers when picked up or via shipment of products or delivery of services. We measure revenue as the amount of consideration we expect to be entitled to receive in exchange for those goods or services, net of any variable considerations (e.g., rights to return product, sales incentives, others) and any taxes collected from customers and subsequently remitted to governmental authorities. Revenue for shipping and handling charges is recognized when products are delivered to the customer.

Product Returns

We estimate product returns based on historical experience and record them on a gross basis. Substantially all customer returns relate to products that are returned under manufacturers’ warranty obligations. Accrued sales returns of $14,702 at September 30, 2018 were included in accrued expenses and other current liabilities in our condensed consolidated unaudited balance sheet.

Sales Incentives

We estimate sales incentives expected to be paid over the term of the program based on the most likely amounts. Sales incentives are accounted for as a reduction in the transaction price and are generally paid on an annual basis.

Disaggregation of Revenues

The following table presents our revenues disaggregated by primary geographical regions and major product lines within our single reporting segment:

Practical Expedients

We generally expense sales commissions when incurred because the amortization period is one year or less. These costs are recorded within selling, general and administrative expenses. We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

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The following table presents the calculation of basic and diluted earnings per share for our Common and Class B common stock:

Diluted earnings per share for our Common stock assumes the conversion of all of our Class B common stock into Common stock as of the beginning of the fiscal year; therefore, no allocation of earnings to Class B common stock is required. At September 30, 20172018 and 2016,2017, our outstanding Class B common stock was convertible into 2,709,1942,602,528 and 2,716,3202,709,194 shares of our Common stock, respectively.

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Other comprehensive income (loss) consists of the foreign currency translation adjustment associated with our Canadian operations’ use of the Canadian dollar as its functional currency and changes in the unrealized gains (losses) gains on cash flow hedging instruments andavailable-for-sale equity securities. The tax effects allocated to each component of other comprehensive income (loss) were as follows:

The changes in each component of accumulated other comprehensive loss, net of tax, were as follows:

We maintain an unsecured, syndicated revolving credit agreement, that provides for borrowings of up to $600,000. Borrowings are usedwhich we use to fund 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. TheEffective February 5, 2018, we decreased the borrowing capacity under this revolving credit agreement matures on July 1, 2019. Included in the credit facility are a $90,000 swingline subfacility, a letter of credit subfacility and a $75,000 multicurrency borrowing sublimit. On January 24, 2017, we entered into an amendmentfrom $600,000 to this credit agreement, which reduced the letter of credit subfacility from $50,000 to $10,000 and modified certain definitions.

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$300,000. At September 30, 20172018 and December 31, 2016, $284,7002017, $116,400 and $235,294,$21,800, respectively, were outstanding under the revolving credit agreement. The credit agreement matures on July 1, 2019 and, accordingly,

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borrowings outstanding under the credit agreement are classified as current liabilities in our condensed consolidated unaudited balance sheet at September 30, 2018. We believe that we will refinance the credit agreement at or prior to its maturity on similar terms and subject to similar conditions.

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 September 30, 2017.2018.

In 2011,On February 13, 2017, we formed a joint venture with Carrier Corporation (“Carrier”),purchased an additional 10% ownership interest in Carrier Enterprise Northeast LLC, which we refer to as Carrier Enterprise II.II, for cash consideration of $42,688, which increased our controlling interest from 70% to 80%. Carrier Enterprise II was formed in 2011 as a joint venture with Carrier. Carrier Enterprise II had sales of approximately $500,000 in 2016$545,000 for the year ended December 31, 2017 from 4140 locations in the northeastern United States and 1214 locations in Mexico. We initially owned a 60% controlling interest in Carrier Enterprise II. On November 29, 2016, we purchased an additional 10% ownership interest for cash consideration of $42,909, and, on February 13, 2017, we purchased an additional 10% ownership interest for cash consideration of $42,688, which together increased our controlling interest in Carrier Enterprise II to 80%.

On June 21, 2017, our first joint venture with Carrier, Carrier Enterprise, LLC, which we refer to as Carrier Enterprise I, acquired an approximately 35% ownership interest in Russell Sigler, Inc. (“RSI”), an HVAC distributor with annual2017 sales of approximately $650,000$680,000, operating from 30 locations in the Western U.S. We have an 80% controlling interest in Carrier Enterprise I, and Carrier has a 20%non-controlling interest. Carrier Enterprise I acquired its ownership interest in RSI for cash consideration of $63,600, of which we contributed $50,880, and Carrier contributed $12,720. Effective June 29, 2018, Carrier Enterprise I entered intoacquired an additional 1.4% ownership interest in RSI, which increased Carrier Enterprise I’s ownership interest in RSI to 36.3%. Total cash consideration of $3,760 was paid on July 5, 2018, of which we contributed $3,008 and Carrier contributed $752. Carrier Enterprise I is a party to a shareholders agreement (the “Shareholders Agreement”) with RSI and RSI’s otherits shareholders. Pursuant to the Shareholders Agreement, RSI’s 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 either book value or a multiple of EBIT, the latter of which Carrier Enterprise I used to calculate the price paid for its investment in RSI. RSI’s 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 RSI’s shareholders the remaining outstanding shares of RSI common stock. Additionally, Carrier Enterprise I has the right to appoint two of RSI’s six board members. Given Carrier Enterprise I’s 35% voting equity36.3% ownership interest in RSI and its right to appoint two out of RSI’s six board members, this investment in RSI is accounted for under the equity method.

On August 23, 2018, one of our wholly owned subsidiaries acquired Alert Labs Inc., a technology company based in Ontario, Canada for cash consideration of $5,889 and the issuance of 47,103 shares of Common stock, having a fair value of $8,180.

The results of operations of the acquisition have been included in the consolidated financial statements from the date of acquisition. The pro forma effect of the acquisition was not deemed significant to the consolidated financial statements.

We enter into foreign currency forward and option contracts to offset the earnings impact that foreign exchange rate fluctuations would otherwise have on certain monetary liabilities that are denominated in nonfunctional currencies.

Cash Flow Hedging Instruments

We enter into foreign currency forward contracts that are designated as cash flow hedges. The settlement of these derivatives results in reclassifications from accumulated other comprehensive loss to earnings for the period in which the settlement of these instruments occurs. The maximum period for which we hedge our cash flow using these instruments is 12 months. Accordingly, at September 30, 2017,2018, all of our open foreign currency forward contracts had maturities of one year or less. The total notional value of our foreign currency exchange contracts designated as cash flow hedges at September 30, 20172018 was $29,200,$36,800, and such contracts have varying terms expiring through June 2018.2019.

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The impact from foreign exchange derivative instruments designated as cash flow hedges was as follows:

At September 30, 2017,2018, we expected an estimated $2,001$3pre-tax lossgain to be reclassified into earnings to reflect the fixed prices obtained from foreign exchange hedging within the next 12 months.

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Derivatives Not Designated as Hedging Instruments

We have also entered into foreign currency forward and option contracts that are either not designated as hedges or did not qualify for hedge accounting. These derivative instruments were effective economic hedges for all of the periods presented. The fair value gains and losses on these contracts are recognized in earnings as a component of selling, general and administrative expenses. The total notional value of our foreign currency exchange contracts not designated as hedging instruments at September 30, 20172018 was $7,900,$12,000, and such contracts have varying terms expiring through November 2017.2018.

We recognized a (loss) gainlosses of $(108), $(502), $(299) and $75$(912) from foreign currency forward and option contracts not designated as hedging instruments in our condensed consolidated unaudited statements of income for the quarters ended September 30, 2017 and 2016, respectively. We recognized losses of $912 and $389 from foreign currency forward contracts not designated as hedging instruments in our condensed consolidated unaudited statements of income for the nine months ended September 30, 20172018 and 2016,2017, respectively.

The following table summarizes the fair value of derivative instruments, which consist solely of foreign currency forwardexchange contracts, included in other current assets and accrued expenses and other current liabilities in our condensed consolidated unaudited balance sheets. See Note 8.10.

The following tables present our assets and liabilities carried at fair value that are measured on a recurring basis:

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The following is a description of the valuation techniques used for these assets and liabilities, as well as the level of input used to measure fair value:

Available-for-saleEquity securities – the investments are exchange-traded equity securities. Fair values for these investments are based on closing stock prices from active markets and are therefore classified within Level 1 of the fair value hierarchy.

Derivative financial instruments – these derivatives are foreign currency forward and option contracts. See Note 7.9. Fair value is based on observable market inputs, such as forward rates in active markets; therefore, we classify these derivatives within Level 2 of the valuation hierarchy.

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There were no transfers in or out of Level 1 and Level 2 during the nine months ended September 30, 2017.2018.

At-the-Market Offering Program

On August 23, 2017, we entered into a sales agreement with Robert W. Baird & Co. Inc. (the “Agent”), which we referenabled the Company to as the Sales Agreement, pursuant to which we may issue and sell shares of our Common stock from time to time, having a maximum aggregate offering price of up to $250,000 through the Agent. Sales, if any, may be made 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 1933.1933, as amended (the “Securities Act”), for a maximum aggregate offering amount of up to $250,000 (the “ATM Program”). The offeringoffer and sale of shares in accordance withour Common stock pursuant to the Sales Agreement has beenATM Program was registered under the Securities Act pursuant to our automatically effective shelf registration statement on FormForm S-3 (FileNo. 333-207831).

We intend to use the net proceeds, if any, from the sale of shares pursuant to the Sales Agreement for general corporate purposes, which may include, without limitation, the acquisition of complementary businesses, the repayment of outstanding indebtedness, capital expenditures and working capital. The Sales Agreement contains customary representations, warranties and covenants. We believe we were in compliance with all covenants at September 30, 2017.

During the quarter and nine months ended September 30, 2017, we sold 35,000 shares of Common stock under the Sales AgreementATM Program for net proceeds of $5,391, after $49 of compensation paid to the Agent.$5,391. Direct costs of $285 incurred in connection with the offering were charged against the proceeds from the sale of Common stock and were accounted forreflected as a reduction ofpaid-in capital. At September 30, 2017, $244,560 remained available for sale under the Sales Agreement. As of December 31, 2017, we had completed the offering of shares under the ATM Program. The net proceeds were primarily used to repay outstanding debt and for general corporate purposes.

Common Stock Dividends

We paid cash dividends of $1.45, $1.25, $0.85,$4.15 and $3.35 and $2.55 per share of both Common stock and Class B common stock during the quarters and nine months ended September 30, 20172018 and 2016,2017, respectively.

Non-Vested Restricted Stock

During the quarters ended September 30, 2017 and 2016, we granted 9,000 and 23,803 shares ofnon-vested restricted stock, respectively. During the nine months ended September 30, 20172018 and 2016,2017, we granted 164,89910,000, 9,000, 110,109 and 135,981164,899 shares ofnon-vested restricted stock, respectively.

During the quarter ended September 30, 2017, 12,354 shares of Common stock with an aggregate fair market value of $1,893 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting ofnon-vested restricted stock. During thequarters and nine months ended September 30, 2018 and 2017, 8,830, 12,354, 21,754 and 32,454 shares of Common stock, respectively, with an aggregate fair market valuevalues of $1,562, $1,893, $3,775 and $4,664, were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting ofnon-vested restricted stock. These shares were retired upon delivery. During the quarter ended September 30, 2016, an aggregate of 2,936 shares of Common stock with an aggregate fair market value of $419 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting ofnon-vested restricted stock. During the nine months ended September 30, 2016, an aggregate of 30,413 shares of Common and Class B common stock with an aggregate fair market value of $3,967respectively, were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting ofnon-vested restricted stock. These shares were retired upon delivery.

Exercise of Stock Options

During the quarters ended September 30, 2017 and 2016, 9,084 and 23,584 stock options, respectively, were exercised for Common stock. During the nine months ended September 30, 2018 and 2017, 8,600, 9,084, 53,184 and 2016, 25,084 and 58,084 stock options, respectively, were exercised for Common stock. Cash received from common stock issued as a result of stock options exercised during the quarters and nine months ended September 30, 2018 and 2017, was $856, $801, $4,837 and 2016, was $801, $1,834, $2,111, and $4,092, respectively.

During the quarter and nine months ended September 30, 2018, 376 shares of Common stock with an aggregate fair market value of $69 and 7,027 shares of Common stock with an aggregate fair market value of $1,269, respectively, were withheld as payment in lieu of cash for stock option exercises and related tax withholdings. During the quarter and nine months ended September 30, 2017, 350 shares of Common stock with an aggregate fair market value of $53 were withheld as payment in lieu of cash for stock option exercises and related tax withholdings. During the quarter and nine months ended September 30, 2016, 348 shares of Common stock with an aggregate fair market value of $51 were withheld as payment in lieu of cash for stock option exercises and related tax withholdings. These shares were retired upon delivery.

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Employee Stock Purchase Plan

During the quarters and nine months ended September 30, 2018 and 2017, 2,235, 2,718, 6,716 and 2016, 2,718 and 2,0846,977 shares of Common stock, respectively, were issued under our employee stock purchase plan for which we received net proceeds of $382, $402, $1,142 and $286,$1,004, respectively. During the nine months ended September 30, 2017 and 2016, 6,977 and 6,915 shares

14 of Common stock were issued under our employee stock purchase plan for which we received net proceeds of $1,004 and $870, respectively.25

401(k) Plan

During the nine months ended September 30, 20172018 and 2016,2017, we issued 16,38917,318 and 20,04516,389 shares of Common stock, respectively, to our profit sharing retirement plan, representing the Common stock discretionary matching contributioncontributions of $2,428$2,945 and $2,348,$2,428, respectively.

Non-controlling Interest

Of ourAs described under the heading “Joint Ventures with Carrier Corporation” in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operation” contained in this Quarterly Report on Form10-Q, we maintain three joint ventures with Carrier that we describe as Carrier Enterprise I, Carrier Enterprise II and Carrier Enterprise III. We have an 80% controlling interest in Carrier Enterprise I and Carrier Enterprise II and a 60% controlling interest in one and an 80% controlling interest in each ofCarrier Enterprise III. Carrier owns the other two, while Carrier has either a 40% or 20%remainingnon-controlling interestinterests in such joint ventures, as applicable.ventures. The following table reconciles shareholders’ equity attributable to Carrier’snon-controlling interest:interests:

Litigation, Claims and Assessments

In December 2015, a purported Watsco shareholder, Nelson Gaskins (the “Plaintiff”), filed a derivative lawsuit in the U.S. District Court for the Southern District of Florida (the “Court”) against Watsco’s Board of Directors. The Company was a nominal defendant. The lawsuit alleged breach of fiduciary duties regarding CEO incentive compensation and sought to recover alleged excessive incentive compensation and unspecified damages. The Court dismissed this action, and the Plaintiff filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit (the “Appellate Court”). In May 2017, the Appellate Court dismissed the Plaintiff’s appeal and the action with prejudice. Neither the Plaintiff nor the Plaintiff’s lawyers received any payment from, or on behalf of, Watsco or its Directors in connection with this lawsuit and the related appeal.

We are involved in litigation incidental to the operation of our business. We vigorously defend all matters in which we or our subsidiaries are named defendants and, for insurable losses, maintain significant levels of insurance to protect against adverse judgments, claims or assessments that may affect us. Although the adequacy of existing insurance coverage and the outcome of any legal proceedings cannot be predicted with certainty, based on the current information available, we do not believe the ultimate liability associated with any known claims or litigation will have a material adverse effect on our financial condition or results of operations.

Self-Insurance

Self-insurance reserves are maintained relative to company-wide casualty insurance and health benefit programs. The level of exposure from catastrophic events is limited by the purchase of stop-loss and aggregate liability reinsurance coverage. When estimating the self-insurance liabilities and related reserves, management considers a number of factors, which include historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries. Management reviews its assumptions with its independent third-party actuaries to evaluate whether the self-insurance reserves are adequate. If actual claims or adverse development of loss reserves occur and exceed these estimates, additional reserves may be required. Reserves in the amounts of $2,757$2,562 and $2,951$2,344 at September 30, 20172018 and December 31, 2016,2017, respectively, were established related to such programs and are included in accrued expenses and other current liabilities in our condensed consolidated unaudited balance sheets.

Purchases from Carrier and its affiliates comprised 64%, 62%, 63% and 62% of all inventory purchases made during both the quarters and nine months ended September 30, 2018 and 2017, and 2016. Purchases from Carrier and its affiliates comprised 62% of all inventory purchases made during both the nine months

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ended September 30, 2017 and 2016.respectively. At September 30, 20172018 and December 31, 2016,2017, approximately $134,000$93,000 and $63,000,$75,000, respectively, was payable to Carrier and its affiliates, net of receivables. Our joint ventures with Carrier also sell HVAC products to Carrier and its affiliates. Revenues in our condensed consolidated unaudited statements of income for the quarters and nine months ended September 30, 20172018 and 20162017 included approximately $28,000, $19,000, $17,000,$65,000 and $51,000, and $46,000, respectively, of sales to Carrier and its affiliates. We believe these transactions are conducted on terms equivalent to anarm’s-length basis in the ordinary course of business.

A member of our Board of Directors is the Chairman and Chief Executive Officer of Moss & Associates LLC, which serveswho served as general contractor for the remodeling of our Miami headquarters.headquarters, which was completed in 2018. We paid Moss & Associates LLC $0, $58, $124 and $702 for construction services performed during the quarterquarters and nine months ended September 30, 2018 and 2017, respectively, and $180no amount was payable at September 30, 2017.2018.

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A member of our Board of Directors is the Senior Chairman of Greenberg Traurig, P.A., which serves as our principal outside counsel for compliance and receives customary fees foracquisition-related legal services. During the quarterquarters and nine months ended September 30, 2018 and 2017, we paid this firm $0, $71, $18 and $291 respectively, for services performed, respectively, and $67$113 was payable at September 30, 2017.2018.