☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
2019
☐ | Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 |
INCINC.
on which registeredYES Yes NO (§YES Yes NO Non-accelerated filer ☐
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Item 3. | 23 | |||||
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Item 1. | ||||||
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Item 1A. | 24 | |||||
Item | 24 | |||||
Item 6. | 25 | |||||
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Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenues | $ | 1,296,007 | $ | 1,229,591 | $ | 3,555,327 | $ | 3,377,610 | ||||||||
Cost of sales | 976,998 | 933,696 | 2,684,719 | 2,552,881 | ||||||||||||
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Gross profit | 319,009 | 295,895 | 870,608 | 824,729 | ||||||||||||
Selling, general and administrative expenses | 200,408 | 183,728 | 565,519 | 534,515 | ||||||||||||
Other income | 3,696 | 2,294 | 8,491 | 2,294 | ||||||||||||
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Operating income | 122,297 | 114,461 | 313,580 | 292,508 | ||||||||||||
Interest expense, net | 1,047 | 2,117 | 2,375 | 5,019 | ||||||||||||
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Income before income taxes | 121,250 | 112,344 | 311,205 | 287,489 | ||||||||||||
Income taxes | 24,364 | 32,325 | 63,678 | 82,855 | ||||||||||||
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Net income | 96,886 | 80,019 | 247,527 | 204,634 | ||||||||||||
Less: net income attributable tonon-controlling interest | 17,723 | 14,990 | 44,188 | 39,668 | ||||||||||||
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Net income attributable to Watsco, Inc. | $ | 79,163 | $ | 65,029 | $ | 203,339 | $ | 164,966 | ||||||||
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Earnings per share for Common and Class B common stock: | ||||||||||||||||
Basic | $ | 2.12 | $ | 1.82 | $ | 5.44 | $ | 4.62 | ||||||||
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Diluted | $ | 2.11 | $ | 1.82 | $ | 5.43 | $ | 4.62 | ||||||||
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Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues | $ | 1,371,854 | $ | 1,332,743 | $ | 2,303,132 | $ | 2,259,320 | ||||||||
Cost of sales | 1,043,870 | 1,011,977 | 1,741,388 | 1,707,721 | ||||||||||||
Gross profit | 327,984 | 320,766 | 561,744 | 551,599 | ||||||||||||
Selling, general and administrative expenses | 196,549 | 186,577 | 376,621 | 365,111 | ||||||||||||
Other income | 2,965 | 3,157 | 4,409 | 4,795 | ||||||||||||
Operating income | 134,400 | 137,346 | 189,532 | 191,283 | ||||||||||||
Interest expense, net | 1,212 | 763 | 1,988 | 1,328 | ||||||||||||
Income before income taxes | 133,188 | 136,583 | 187,544 | 189,955 | ||||||||||||
Income taxes | 25,278 | 28,319 | 35,830 | 39,314 | ||||||||||||
Net income | 107,910 | 108,264 | 151,714 | 150,641 | ||||||||||||
Less: net income attributable to non-controlling interest | 17,755 | 18,307 | 26,522 | 26,465 | ||||||||||||
Net income attributable to Watsco, Inc. | $ | 90,155 | $ | 89,957 | $ | 125,192 | $ | 124,176 | ||||||||
Earnings per share for Common and Class B common stock: | ||||||||||||||||
Basic | $ | 2.40 | $ | 2.41 | $ | 3.34 | $ | 3.33 | ||||||||
Diluted | $ | 2.40 | $ | 2.40 | $ | 3.34 | $ | 3.32 | ||||||||
Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net income | $ | 96,886 | $ | 80,019 | $ | 247,527 | $ | 204,634 | ||||||||
Other comprehensive income (loss), net of tax | ||||||||||||||||
Foreign currency translation adjustment | 4,269 | 9,385 | (7,422 | ) | 17,310 | |||||||||||
Unrealized gain (loss) on cash flow hedging instruments | 231 | (934 | ) | 762 | (1,021 | ) | ||||||||||
Reclassification of (gain) loss on cash flow hedging instruments into earnings | (915 | ) | 64 | (57 | ) | (797 | ) | |||||||||
Unrealized gain on equity securities | — | 13 | — | 16 | ||||||||||||
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Other comprehensive income (loss) | 3,585 | 8,528 | (6,717 | ) | 15,508 | |||||||||||
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Comprehensive income | 100,471 | 88,547 | 240,810 | 220,142 | ||||||||||||
Less: comprehensive income attributable tonon-controlling interest | 19,006 | 18,201 | 41,708 | 45,518 | ||||||||||||
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Comprehensive income attributable to Watsco, Inc. | $ | 81,465 | $ | 70,346 | $ | 199,102 | $ | 174,624 | ||||||||
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Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net income | $ | 107,910 | $ | 108,264 | $ | 151,714 | $ | 150,641 | ||||||||
Other comprehensive income (loss), net of tax | ||||||||||||||||
Foreign currency translation adjustment | 5,297 | (5,046 | ) | 10,302 | (11,691 | ) | ||||||||||
Unrealized (loss) gain on cash flow hedging instruments | (517 | ) | 380 | (1,053 | ) | 531 | ||||||||||
Reclassification of (gain) loss on cash flow hedging instruments into earnings | (128 | ) | 105 | (402 | ) | 858 | ||||||||||
Other comprehensive income (loss) | 4,652 | (4,561 | ) | 8,847 | (10,302 | ) | ||||||||||
Comprehensive income | 112,562 | 103,703 | 160,561 | 140,339 | ||||||||||||
Less: comprehensive income attributable to non-controlling interest | 19,368 | 16,636 | 29,547 | 22,702 | ||||||||||||
Comprehensive income attributable to Watsco, Inc. | $ | 93,194 | $ | 87,067 | $ | 131,014 | $ | 117,637 | ||||||||
September 30, 2018 | December 31, 2017 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 67,612 | $ | 80,496 | ||||
Accounts receivable, net | 602,753 | 478,133 | ||||||
Inventories | 810,869 | 761,314 | ||||||
Other current assets | 20,611 | 17,454 | ||||||
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Total current assets | 1,501,845 | 1,337,397 | ||||||
Property and equipment, net | 91,275 | 91,198 | ||||||
Goodwill | 397,451 | 382,729 | ||||||
Intangible assets, net | 153,446 | 161,065 | ||||||
Other assets | 86,731 | 74,488 | ||||||
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$ | 2,230,748 | $ | 2,046,877 | |||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of other long-term obligations | $ | 178 | $ | 244 | ||||
Borrowings under revolving credit agreement (Note 5) | 116,400 | — | ||||||
Accounts payable | 234,482 | 230,476 | ||||||
Accrued expenses and other current liabilities | 157,761 | 185,757 | ||||||
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Total current liabilities | 508,821 | 416,477 | ||||||
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Long-term obligations: | ||||||||
Borrowings under revolving credit agreement (Note 5) | — | 21,800 | ||||||
Other long-term obligations, net of current portion | 169 | 285 | ||||||
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Total long-term obligations | 169 | 22,085 | ||||||
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Deferred income taxes and other liabilities | 61,208 | 57,338 | ||||||
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Commitments and contingencies | ||||||||
Watsco, Inc. shareholders’ equity: | ||||||||
Common stock, $0.50 par value | 18,464 | 18,412 | ||||||
Class B common stock, $0.50 par value | 2,684 | 2,638 | ||||||
Preferred stock, $0.50 par value | — | — | ||||||
Paid-in capital | 829,050 | 804,008 | ||||||
Accumulated other comprehensive loss, net of tax | (38,157 | ) | (34,221 | ) | ||||
Retained earnings | 642,643 | 594,556 | ||||||
Treasury stock, at cost | (87,440 | ) | (87,440 | ) | ||||
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Total Watsco, Inc. shareholders’ equity | 1,367,244 | 1,297,953 | ||||||
Non-controlling interest | 293,306 | 253,024 | ||||||
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Total shareholders’ equity | 1,660,550 | 1,550,977 | ||||||
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$ | 2,230,748 | $ | 2,046,877 | |||||
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June 30, 2019 | December 31, 2018 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 55,915 | $ | 82,894 | ||||
Accounts receivable, net | 655,418 | 501,908 | ||||||
Inventories | 967,394 | 837,129 | ||||||
Other current assets | 16,367 | 19,875 | ||||||
Total current assets | 1,695,094 | 1,441,806 | ||||||
Property and equipment, net | 95,586 | 91,046 | ||||||
Operating lease right-of-use assets | 190,530 | — | ||||||
Goodwill | 398,575 | 391,998 | ||||||
Intangible assets, net | 155,120 | 147,851 | ||||||
Other assets | 97,529 | 88,332 | ||||||
$ | 2,632,434 | $ | 2,161,033 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of long-term obligations | $ | 60,784 | $ | 246 | ||||
Accounts payable | 356,062 | 200,229 | ||||||
Accrued expenses and other current liabilities | 163,672 | 157,091 | ||||||
Total current liabilities | 580,518 | 357,566 | ||||||
Long-term obligations: | ||||||||
Borrowings under revolving credit agreement | 219,600 | 135,200 | ||||||
Operating lease liabilities, net of current portion | 129,636 | — | ||||||
Other long-term obligations, net of current portion | 1,712 | 552 | ||||||
Total long-term obligations | 350,948 | 135,752 | ||||||
Deferred income taxes and other liabilities | 67,606 | 66,002 | ||||||
Commitments and contingencies | ||||||||
Watsco, Inc. shareholders’ equity: | ||||||||
Common stock, $0.50 par value | 18,531 | 18,476 | ||||||
Class B common stock, $0.50 par value | 2,735 | 2,691 | ||||||
Preferred stock, $0.50 par value | — | — | ||||||
Paid-in capital | 828,932 | 832,121 | ||||||
Accumulated other comprehensive loss, net of tax | (40,146 | ) | (45,968 | ) | ||||
Retained earnings | 632,983 | 627,969 | ||||||
Treasury stock, at cost | (87,440 | ) | (87,440 | ) | ||||
Total Watsco, Inc. shareholders’ equity | 1,355,595 | 1,347,849 | ||||||
Non-controlling interest | 277,767 | 253,864 | ||||||
Total shareholders’ equity | 1,633,362 | 1,601,713 | ||||||
$ | 2,632,434 | $ | 2,161,033 | |||||
(In thousands)
Nine Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 247,527 | $ | 204,634 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 16,500 | 16,509 | ||||||
Share-based compensation | 11,769 | 9,599 | ||||||
Deferred income tax provision | 3,925 | 4,101 | ||||||
Non-cash contribution to 401(k) plan | 2,945 | 2,428 | ||||||
Other income from investment in unconsolidated entity | (8,491 | ) | (2,294 | ) | ||||
Other, net | 927 | 103 | ||||||
Changes in operating assets and liabilities, net of effects of acquisition: | ||||||||
Accounts receivable | (126,181 | ) | (89,394 | ) | ||||
Inventories | (50,566 | ) | (97,685 | ) | ||||
Accounts payable and other liabilities | (23,286 | ) | 141,885 | |||||
Other, net | (5,004 | ) | (507 | ) | ||||
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Net cash provided by operating activities | 70,065 | 189,379 | ||||||
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Cash flows from investing activities: | ||||||||
Capital expenditures | (12,897 | ) | (13,829 | ) | ||||
Business acquisition, net of cash acquired | (5,828 | ) | — | |||||
Investment in unconsolidated entity | (3,760 | ) | (63,600 | ) | ||||
Proceeds from sale of property and equipment | 143 | 139 | ||||||
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Net cash used in investing activities | (22,342 | ) | (77,290 | ) | ||||
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Cash flows from financing activities: | ||||||||
Dividends on Common and Class B common stock | (154,951 | ) | (119,468 | ) | ||||
Repurchases of common stock to satisfy employee withholding tax obligations | (3,782 | ) | (4,674 | ) | ||||
Distributions tonon-controlling interest | (2,178 | ) | (6,799 | ) | ||||
Net (repayments) proceeds of other long-term obligations | (182 | ) | 41 | |||||
Purchase of additional ownership fromnon-controlling interest | — | (42,688 | ) | |||||
Net proceeds from the sale of Common stock | — | 5,391 | ||||||
Proceeds fromnon-controlling interest for investment in unconsolidated entity | 752 | 12,720 | ||||||
Net proceeds from issuances of common stock | 5,979 | 3,115 | ||||||
Net proceeds under revolving credit agreement | 94,600 | 49,406 | ||||||
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Net cash used in financing activities | (59,762 | ) | (102,956 | ) | ||||
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Effect of foreign exchange rate changes on cash and cash equivalents | (845 | ) | 1,524 | |||||
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Net (decrease) increase in cash and cash equivalents | (12,884 | ) | 10,657 | |||||
Cash and cash equivalents at beginning of period | 80,496 | 56,010 | ||||||
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Cash and cash equivalents at end of period | $ | 67,612 | $ | 66,667 | ||||
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Supplemental cash flow information: | ||||||||
Common stock issued for Alert Labs Inc. | $ | 8,180 | — |
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, 2018 | 37,461,643 | $ | 21,167 | $ | 832,121 | $ | (45,968 | ) | $ | 627,969 | $ | (87,440 | ) | $ | 253,864 | $ | 1,601,713 | |||||||||||||||
Net income | 35,037 | 8,767 | 43,804 | |||||||||||||||||||||||||||||
Other comprehensive income | 2,783 | 1,412 | 4,195 | |||||||||||||||||||||||||||||
Issuances of non-vested restricted shares of common stock | 77,049 | 39 | (39 | ) | — | |||||||||||||||||||||||||||
Forfeitures of non-vested restricted shares of common stock | (5,000 | ) | (3 | ) | 3 | — | ||||||||||||||||||||||||||
Common stock contribution to 401(k) plan | 30,715 | 15 | 4,259 | 4,274 | ||||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan | 8,925 | 4 | 1,121 | 1,125 | ||||||||||||||||||||||||||||
Retirement of common stock | (2,985 | ) | (1 | ) | (427 | ) | (428 | ) | ||||||||||||||||||||||||
Share-based compensation | 4,537 | 4,537 | ||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $1.60 per share | (59,965 | ) | (59,965 | ) | ||||||||||||||||||||||||||||
Balance at March 31, 2019 | 37,570,347 | $ | 21,221 | $ | 841,575 | $ | (43,185 | ) | $ | 603,041 | $ | (87,440 | ) | $ | 264,043 | $ | 1,599,255 | |||||||||||||||
Net income | 90,155 | 17,755 | 107,910 | |||||||||||||||||||||||||||||
Other comprehensive income | 3,039 | 1,613 | 4,652 | |||||||||||||||||||||||||||||
Issuances of non-vested restricted shares of common stock | 26,354 | 13 | (13 | ) | — | |||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan | 15,807 | 9 | 1,942 | 1,951 | ||||||||||||||||||||||||||||
Retirement of common stock | (3,608 | ) | (2 | ) | (553 | ) | (555 | ) | ||||||||||||||||||||||||
Share-based compensation | 4,324 | 4,324 | ||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $1.60 per share | (60,213 | ) | (60,213 | ) | ||||||||||||||||||||||||||||
Common stock issued for Dunphey & Associates Supply Co., Inc. | 50,952 | 25 | 7,425 | 7,450 | ||||||||||||||||||||||||||||
Investment in unconsolidated entity | 988 | 988 | ||||||||||||||||||||||||||||||
Decrease in non-controlling interest in Carrier Enterprise II | (25,768 | ) | (6,632 | ) | (32,400 | ) | ||||||||||||||||||||||||||
Balance at June 30, 2019 | 37,659,852 | $ | 21,266 | $ | 828,932 | $ | (40,146 | ) | $ | 632,983 | $ | (87,440 | ) | $ | 277,767 | $ | 1,633,362 | |||||||||||||||
(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, 2017 | 37,228,715 | $ | 21,050 | $ | 804,008 | $ | (34,221 | ) | $ | 594,556 | $ | (87,440 | ) | $ | 253,024 | $ | 1,550,977 | |||||||||||||||
Cumulative-effect adjustment | 301 | (301 | ) | — | ||||||||||||||||||||||||||||
Net income | 34,219 | 8,158 | 42,377 | |||||||||||||||||||||||||||||
Other comprehensive loss | (3,649 | ) | (2,092 | ) | (5,741 | ) | ||||||||||||||||||||||||||
Issuances of non-vested restrictedshares of common stock | 91,609 | 46 | (46 | ) | — | |||||||||||||||||||||||||||
Forfeitures of non-vested restrictedshares of common stock | (3,000 | ) | (2 | ) | 2 | — | ||||||||||||||||||||||||||
Common stock contribution to 401(k) plan | 17,318 | 9 | 2,936 | 2,945 | ||||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan | 37,130 | 19 | 4,322 | 4,341 | ||||||||||||||||||||||||||||
Retirement of common stock | (5,041 | ) | (3 | ) | (911 | ) | (914 | ) | ||||||||||||||||||||||||
Share-based compensation | 4,400 | 4,400 | ||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $1.25 per share | (46,581 | ) | (46,581 | ) | ||||||||||||||||||||||||||||
Distributions to non-controlling interest | (2,178 | ) | (2,178 | ) | ||||||||||||||||||||||||||||
Balance at March 31, 2018 | 37,366,731 | $ | 21,119 | $ | 814,711 | $ | (37,569 | ) | $ | 581,893 | $ | (87,440 | ) | $ | 256,912 | $ | 1,549,626 | |||||||||||||||
Net income | 89,957 | 18,307 | 108,264 | |||||||||||||||||||||||||||||
Other comprehensive loss | (2,890 | ) | (1,671 | ) | (4,561 | ) | ||||||||||||||||||||||||||
Issuances of non-vested restricted shares of common stock | 8,500 | 4 | (4 | ) | — | |||||||||||||||||||||||||||
Forfeitures of non-vested restricted shares of common stock | (5,000 | ) | (2 | ) | 2 | — | ||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan | 11,935 | 6 | 1,595 | 1,601 | ||||||||||||||||||||||||||||
Retirement of common stock | (14,534 | ) | (7 | ) | (2,492 | ) | (2,499 | ) | ||||||||||||||||||||||||
Share-based compensation | 3,747 | 3,747 | ||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $1.45 per share | (54,184 | ) | (54,184 | ) | ||||||||||||||||||||||||||||
Balance at June 30, 2018 | 37,367,632 | $ | 21,120 | $ | 817,559 | $ | (40,459 | ) | $ | 617,666 | $ | (87,440 | ) | $ | 273,548 | $ | 1,601,994 | |||||||||||||||
6
Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 151,714 | $ | 150,641 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 11,656 | 11,027 | ||||||
Share-based compensation | 8,174 | 7,336 | ||||||
Deferred income tax provision | 1,156 | 1,569 | ||||||
Other income from investment in unconsolidated entity | (4,409 | ) | (4,795 | ) | ||||
Other, net | 5,644 | 3,260 | ||||||
Changes in operating assets and liabilities, net of effects of acquisition: | ||||||||
Accounts receivable | (146,441 | ) | (183,105 | ) | ||||
Inventories | (117,591 | ) | (113,831 | ) | ||||
Accounts payable and other liabilities | 161,685 | 107,908 | ||||||
Other, net | (3,141 | ) | 734 | |||||
Net cash provided by (used in) operating activities | 68,447 | (19,256 | ) | |||||
Cash flows from investing activities: | ||||||||
Business acquisition, net of cash acquired | (16,761 | ) | — | |||||
Capital expenditures | (9,197 | ) | (8,824 | ) | ||||
Investment in unconsolidated entity | (4,940 | ) | — | |||||
Proceeds from sale of property and equipment | 92 | 86 | ||||||
Net cash used in investing activities | (30,806 | ) | (8,738 | ) | ||||
Cash flows from financing activities: | ||||||||
Dividends on Common and Class B common stock | (120,178 | ) | (100,765 | ) | ||||
Purchase of additional ownership from non-controlling interest | (32,400 | ) | — | |||||
Repurchases of common stock to satisfy employee withholding tax obligations | (983 | ) | (2,213 | ) | ||||
Net repayments of long-term obligations | (230 | ) | (121 | ) | ||||
Distributions to non-controlling interest | — | (2,178 | ) | |||||
Proceeds from short-term borrowings | — | 1,510 | ||||||
Proceeds from non-controlling interest for investment in unconsolidated entity | 988 | — | ||||||
Net proceeds from issuances of common stock | 3,076 | 4,741 | ||||||
Net proceeds under revolving credit agreement | 84,400 | 119,800 | ||||||
Net cash (used in) provided by financing activities | (65,327 | ) | 20,774 | |||||
Effect of foreign exchange rate changes on cash and cash equivalents | 707 | (1,276 | ) | |||||
Net decrease in cash and cash equivalents | (26,979 | ) | (8,496 | ) | ||||
Cash and cash equivalents at beginning of period | 82,894 | 80,496 | ||||||
Cash and cash equivalents at end of period | $ | 55,915 | $ | 72,000 | ||||
Supplemental cash flow information: | ||||||||
Common stock issued for Dunphey & Associates Supply Co., Inc. | $ | 7,450 | — |
September
2019
1. | BASIS OF PRESENTATION |
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 2018 presentation. These reclassifications had no effect on net income or earnings per share as previously reported.
Revenue Recognition
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Financial Instruments
In 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 changes in the fair value of equity 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 previously held unrealized losses of $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 conditions 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 classification of the award (as equity or 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 periods beginning after December 15, 2017. The adoption of this guidance 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 the use of a modified retrospective approach to apply the standard at the beginning of the earliest period presented in the financial statements. In July 2018, the FASB issued updated guidance was issued whichthat provides an additional transition method of adoption that allows entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. We will adoptThe adoption of this standard and its related amendments (collectively, the guidance“New Lease Standard”) on January 1, 2019 using thisdid not result in the recognition of a cumulative adjustment to opening retained earnings under the 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 expect the adoption of this guidance tonor did it have a material impact on our consolidated balance sheets due to the recognition ofright-of-use assets and lease liabilities. However, we do not expect a materialsignificant impact on 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 inincome or cash flows. See Note 16 to our audited consolidated financial statements contained in our Annual Report on Form10-K for the year ended December 31, 2017.
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Revenue Recognition
Revenue primarily consists of sales of air conditioning, heating
Revenue is recognized when control transfersbalance sheet. Finance leases are not considered significant to our customers when picked upconsolidated balance sheet or via shipmentconsolidated statement of products or deliveryincome. Finance lease ROU assets at June 30, 2019 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$2,759 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 expensesproperty and other current liabilitiesequipment, net in our condensed consolidated unaudited balance sheet.
Sales Incentives
We estimate sales incentives expected Finance lease liabilities at June 30, 2019 of $2,852 are included in current portion of long-term obligations and other long-term obligations, net of current portion in our condensed consolidated unaudited balance sheet.
Quarter ended June 30, 2019 | Six months��ended June 30, 2019 | |||||||
Lease cost | $ | 17,984 | $ | 35,760 | ||||
Short-term lease cost | 2,433 | 4,609 | ||||||
Variable lease cost | 109 | 315 | ||||||
Sublease income | (32 | ) | (81 | ) | ||||
Total operating lease cost | $ | 20,494 | $ | 40,603 | ||||
June 30, | 2019 | |||
ROU assets | $ | 190,530 | ||
Current portion of long-term obligations | $ | 59,644 | ||
Operating lease liabilities | 129,636 | |||
Total operating lease liabilities | $ | 189,280 | ||
Weighted Average Remaining Lease Term (in years) | 3.7 years | |||
Weighted Average Discount Rate | 4.53 | % |
Six Months Ended June 30, | 2019 | |||
Operating cash flows for the measurement of operating lease liabilities | $ | 35,544 | ||
Operating lease right-of-use assets obtained in exchange for operating lease obligations | $ | 222,332 |
Remainder of 2019 | $ | 35,321 | ||
2020 | 60,667 | |||
2021 | 47,995 | |||
2022 | 33,232 | |||
2023 | 19,039 | |||
Thereafter | 9,921 | |||
Total lease payments | 206,175 | |||
Less imputed interest | 16,895 | |||
Total lease liability | $ | 189,280 | ||
undiscounted basis were approximately $219,300 at December 31, 2018 under
3. | REVENUES |
Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017(1) | 2018 | 2017(1) | |||||||||||||
Primary Geographical Regions: | ||||||||||||||||
United States | $ | 1,176,087 | $ | 1,114,162 | $ | 3,233,731 | $ | 3,064,181 | ||||||||
Canada | 87,251 | 76,408 | 218,730 | 199,788 | ||||||||||||
Mexico | 32,669 | 39,021 | 102,866 | 113,641 | ||||||||||||
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$ | 1,296,007 | $ | 1,229,591 | $ | 3,555,327 | $ | 3,377,610 | |||||||||
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Major Product Lines: | ||||||||||||||||
HVAC equipment | 68 | % | 68 | % | 68 | % | 67 | % | ||||||||
Other HVAC products | 28 | % | 27 | % | 28 | % | 28 | % | ||||||||
Commercial refrigeration products | 4 | % | 5 | % | 4 | % | 5 | % | ||||||||
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100 | % | 100 | % | 100 | % | 100 | % | |||||||||
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Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Primary Geographical Regions: | ||||||||||||||||
United States | $ | 1,219,208 | $ | 1,181,461 | $ | 2,025,719 | $ | 1,990,962 | ||||||||
Canada | 77,751 | 79,119 | 137,007 | 131,479 | ||||||||||||
Latin America and the Caribbean | 74,895 | 72,163 | 140,406 | 136,879 | ||||||||||||
$ | 1,371,854 | $ | 1,332,743 | $ | 2,303,132 | $ | 2,259,320 | |||||||||
Major Product Lines: | ||||||||||||||||
HVAC equipment | 69 | % | 68 | % | 68 | % | 67 | % | ||||||||
Other HVAC products | 28 | % | 28 | % | 28 | % | 29 | % | ||||||||
Commercial refrigeration products | 3 | % | 4 | % | 4 | % | 4 | % | ||||||||
100 | % | 100 | % | 100 | % | 100 | % | |||||||||
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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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EARNINGS PER SHARE |
Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Basic Earnings per Share: | ||||||||||||||||
Net income attributable to Watsco, Inc. shareholders | $ | 79,163 | $ | 65,029 | $ | 203,339 | $ | 164,966 | ||||||||
Less: distributed and undistributed earnings allocated tonon-vested restricted common stock | 6,451 | 5,470 | 16,600 | 13,844 | ||||||||||||
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Earnings allocated to Watsco, Inc. shareholders | $ | 72,712 | $ | 59,559 | $ | 186,739 | $ | 151,122 | ||||||||
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Weighted-average common shares outstanding - Basic | 34,339,859 | 32,712,151 | 34,301,672 | 32,679,334 | ||||||||||||
Basic earnings per share for Common and Class B common stock | $ | 2.12 | $ | 1.82 | $ | 5.44 | $ | 4.62 | ||||||||
Allocation of earnings for Basic: | ||||||||||||||||
Common stock | $ | 67,201 | $ | 54,627 | $ | 172,571 | $ | 138,594 | ||||||||
Class B common stock | 5,511 | 4,932 | 14,168 | 12,528 | ||||||||||||
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$ | 72,712 | $ | 59,559 | $ | 186,739 | $ | 151,122 | |||||||||
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Diluted Earnings per Share: | ||||||||||||||||
Net income attributable to Watsco, Inc. shareholders | $ | 79,163 | $ | 65,029 | $ | 203,339 | $ | 164,966 | ||||||||
Less: distributed and undistributed earnings allocated tonon-vested restricted common stock | 6,448 | 5,468 | 16,593 | 13,840 | ||||||||||||
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Earnings allocated to Watsco, Inc. shareholders | $ | 72,715 | $ | 59,561 | $ | 186,746 | $ | 151,126 | ||||||||
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Weighted-average common shares outstanding - Basic | 34,339,859 | 32,712,151 | 34,301,672 | 32,679,334 | ||||||||||||
Effect of dilutive stock options | 59,530 | 34,215 | 64,850 | 32,516 | ||||||||||||
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Weighted-average common shares outstanding - Diluted | 34,399,389 | 32,746,366 | 34,366,522 | 32,711,850 | ||||||||||||
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Diluted earnings per share for Common and Class B common stock | $ | 2.11 | $ | 1.82 | $ | 5.43 | $ | 4.62 | ||||||||
Anti-dilutive stock options not included above | 79,316 | 12,571 | 39,751 | 33,156 |
Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Basic Earnings per Share: | ||||||||||||||||
Net income attributable to Watsco, Inc. shareholders | $ | 90,155 | $ | 89,957 | $ | 125,192 | $ | 124,176 | ||||||||
Less: distributed and undistributed earnings allocated to non-vested restricted common stock | 7,512 | 7,379 | 10,355 | 10,147 | ||||||||||||
Earnings allocated to Watsco, Inc. shareholders | $ | 82,643 | $ | 82,578 | $ | 114,837 | $ | 114,029 | ||||||||
Weighted-average common shares outstanding - Basic | 34,435,099 | 34,309,885 | 34,411,738 | 34,282,261 | ||||||||||||
Basic earnings per share for Common and Class B common stock | $ | 2.40 | $ | 2.41 | $ | 3.34 | $ | 3.33 | ||||||||
Allocation of earnings for Basic: | ||||||||||||||||
Common stock | $ | 76,456 | $ | 76,321 | $ | 106,234 | $ | 105,383 | ||||||||
Class B common stock | 6,187 | 6,257 | 8,603 | 8,646 | ||||||||||||
$ | 82,643 | $ | 82,578 | $ | 114,837 | $ | 114,029 | |||||||||
Diluted Earnings per Share: | ||||||||||||||||
Net income attributable to Watsco, Inc. shareholders | $ | 90,155 | $ | 89,957 | $ | 125,192 | $ | 124,176 | ||||||||
Less: distributed and undistributed earnings allocated to non-vested restricted common stock | 7,511 | 7,374 | 10,354 | 10,144 | ||||||||||||
Earnings allocated to Watsco, Inc. shareholders | $ | 82,644 | $ | 82,583 | $ | 114,838 | $ | 114,032 | ||||||||
Weighted-average common shares outstanding - Basic | 34,435,099 | 34,309,885 | 34,411,738 | 34,282,261 | ||||||||||||
Effect of dilutive stock options | 27,861 | 69,310 | 21,210 | 67,554 | ||||||||||||
Weighted-average common shares outstanding - Diluted | 34,462,960 | 34,379,195 | 34,432,948 | 34,349,815 | ||||||||||||
Diluted earnings per share for Common and Class B common stock | $ | 2.40 | $ | 2.40 | $ | 3.34 | $ | 3.32 | ||||||||
Anti-dilutive stock options not included above | 174,457 | 40,797 | 213,270 | 24,044 |
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OTHER COMPREHENSIVE INCOME (LOSS) |
Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Foreign currency translation adjustment | $ | 4,269 | $ | 9,385 | $ | (7,422 | ) | $ | 17,310 | |||||||
Unrealized gain (loss) on cash flow hedging instruments | 316 | (1,280 | ) | 1,043 | (1,399 | ) | ||||||||||
Income tax (expense) benefit | (85 | ) | 346 | (281 | ) | 378 | ||||||||||
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Unrealized gain (loss) on cash flow hedging instruments, net of tax | 231 | (934 | ) | 762 | (1,021 | ) | ||||||||||
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Reclassification of (gain) loss on cash flow hedging instruments into earnings | (1,253 | ) | 88 | (78 | ) | (1,092 | ) | |||||||||
Income tax expense (benefit) | 338 | (24 | ) | 21 | 295 | |||||||||||
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Reclassification of (gain) loss on cash flow hedging instruments into earnings, net of tax | (915 | ) | 64 | (57 | ) | (797 | ) | |||||||||
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Unrealized gain on equity securities | — | 20 | — | 25 | ||||||||||||
Income tax expense | — | (7 | ) | — | (9 | ) | ||||||||||
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Unrealized gain on equity securities, net of tax | — | 13 | — | 16 | ||||||||||||
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Other comprehensive income (loss) | $ | 3,585 | $ | 8,528 | $ | (6,717 | ) | $ | 15,508 | |||||||
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Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Foreign currency translation adjustment | $ | 5,297 | $ | (5,046 | ) | $ | 10,302 | $ | (11,691 | ) | ||||||
Unrealized (loss) gainon cash flow hedging instruments | (709 | ) | 520 | (1,444 | ) | 727 | ||||||||||
Income tax benefit (expense) | 192 | (140 | ) | 391 | (196 | ) | ||||||||||
Unrealized (loss) gain on cash flow hedging instruments, net of tax | (517 | ) | 380 | (1,053 | ) | 531 | ||||||||||
Reclassification of (gain) losson cash flow hedging instruments into earnings | (176 | ) | 144 | (551 | ) | 1,175 | ||||||||||
Income tax expense (benefit) | 48 | (39 | ) | 149 | (317 | ) | ||||||||||
Reclassification of (gain) losson cash flow hedging instruments into earnings, net of tax | (128 | ) | 105 | (402 | ) | 858 | ||||||||||
Other comprehensive income (loss) | $ | 4,652 | $ | (4,561 | ) | $ | 8,847 | $ | (10,302 | ) | ||||||
Nine Months Ended September 30, | 2018 | 2017 | ||||||
Foreign currency translation adjustment: | ||||||||
Beginning balance | $ | (33,499 | ) | $ | (43,459 | ) | ||
Current period other comprehensive (loss) income | (4,660 | ) | 10,733 | |||||
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Ending balance | (38,159 | ) | (32,726 | ) | ||||
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Cash flow hedging instruments: | ||||||||
Beginning balance | (421 | ) | 215 | |||||
Current period other comprehensive income (loss) | 457 | (613 | ) | |||||
Less reclassification adjustment | (34 | ) | (478 | ) | ||||
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Ending balance | 2 | (876 | ) | |||||
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Equity securities: | ||||||||
Beginning balance | (301 | ) | (286 | ) | ||||
Cumulative-effect adjustment to retained earnings | 301 | — | ||||||
Current period other comprehensive income | — | 16 | ||||||
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Ending balance | — | (270 | ) | |||||
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Accumulated other comprehensive loss, net of tax | $ | (38,157 | ) | $ | (33,872 | ) | ||
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We maintain an unsecured, syndicated revolving credit agreement, which 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. Effective February 5, 2018, we decreased the borrowing capacity under this revolving credit agreement from $600,000 to $300,000. At September 30, 2018 and December 31, 2017, $116,400 and $21,800, respectively, were outstanding under the revolving credit agreement. The credit agreement matures on July 1, 2019 and, accordingly,
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Six Months Ended June 30, | 2019 | 2018 | ||||||
Foreign currency translation adjustment: | ||||||||
Beginning balance | $ | (46,604 | ) | $ | (33,499 | ) | ||
Current period other comprehensive income (loss) | 6,695 | (7,373 | ) | |||||
Ending balance | (39,909 | ) | (40,872 | ) | ||||
Cash flow hedging instruments: | ||||||||
Beginning balance | 636 | (421 | ) | |||||
Current period other comprehensive (loss) income | (631 | ) | 319 | |||||
Reclassification adjustment | (242 | ) | 515 | |||||
Ending balance | (237 | ) | 413 | |||||
Equity securities: | ||||||||
Beginning balance | — | (301 | ) | |||||
Cumulative-effect adjustment to retained earnings | — | 301 | ||||||
Ending balance | — | — | ||||||
Accumulated other comprehensive loss, net of tax | $ | (40,146 | ) | $ | (40,459 | ) | ||
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, 2018.
6. | PURCHASE OF |
On February 13, 2017,
7. | INVESTMENT IN UNCONSOLIDATED ENTITY |
8. | ACQUISITION |
$7,450.
9. | DERIVATIVES |
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Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Gain (loss) recorded in accumulated other comprehensive loss | $ | 316 | $ | (1,280 | ) | $ | 1,043 | $ | (1,399 | ) | ||||||
(Gain) loss reclassified from accumulated other comprehensive loss into earnings | $ | (1,253 | ) | $ | 88 | $ | (78 | ) | $ | (1,092 | ) |
Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(Loss) gain recorded in accumulated other comprehensive loss | $ | (709 | ) | $ | 520 | $ | (1,444 | ) | $ | 727 | ||||||
(Gain) loss reclassified from accumulated other comprehensive loss into earnings | $ | (176 | ) | $ | 144 | $ | (551 | ) | $ | 1,175 |
Asset Derivatives | Liability Derivatives | |||||||||||||||
September 30, 2018 | December 31, 2017 | September 30, 2018 | December 31, 2017 | |||||||||||||
Derivatives designated as hedging instruments | $ | 123 | $ | 70 | $ | 334 | $ | 773 | ||||||||
Derivatives not designated as hedging instruments | — | 180 | 74 | 184 | ||||||||||||
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Total derivative instruments | $ | 123 | $ | 250 | $ | 408 | $ | 957 | ||||||||
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Asset Derivatives | Liability Derivatives | |||||||||||||||
June 30, 2019 | December 31, 2018 | June 30, 2019 | December 31, 2018 | |||||||||||||
Derivatives designated as hedging instruments | $ | 11 | $ | 1,262 | $ | 851 | $ | 3 | ||||||||
Derivatives not designated as hedging instruments | — | 58 | 164 | 11 | ||||||||||||
Total derivative instruments | $ | 11 | $ | 1,320 | $ | 1,015 | $ | 14 | ||||||||
10. | FAIR VALUE MEASUREMENTS |
Total | Fair Value Measurements at September 30, 2018 Using | |||||||||||||||||
Balance Sheet Location | Level 1 | Level 2 | Level 3 | |||||||||||||||
Assets: | ||||||||||||||||||
Derivative financial instruments | Other current assets | $ | 123 | $ | — | $ | 123 | $ | — | |||||||||
Equity securities | Other assets | $ | 372 | $ | 372 | $ | — | $ | — | |||||||||
Liabilities: | ||||||||||||||||||
Derivative financial instruments | Accrued expenses and other current liabilities | $ | 408 | $ | — | $ | 408 | $ | — | |||||||||
Total | Fair Value Measurements at December 31, 2017 Using | |||||||||||||||||
Balance Sheet Location | Level 1 | Level 2 | Level 3 | |||||||||||||||
Assets: | ||||||||||||||||||
Derivative financial instruments | Other current assets | $ | 250 | $ | — | $ | 250 | $ | — | |||||||||
Equity securities | Other assets | $ | 332 | $ | 332 | $ | — | $ | — | |||||||||
Liabilities: | ||||||||||||||||||
Derivative financial instruments | Accrued expenses and other current liabilities | $ | 957 | $ | — | $ | 957 | $ | — |
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Total | Fair Value Measurements at June 30, 2019 Using | |||||||||||||||||
Balance Sheet Location | Level 1 | Level 2 | Level 3 | |||||||||||||||
Assets: | ||||||||||||||||||
Derivative financial instruments | Other current assets | $ | 11 | $ | — | $ | 11 | $ | — | |||||||||
Equity securities | Other assets | $ | 310 | $ | 310 | $ | — | $ | — | |||||||||
Liabilities: | ||||||||||||||||||
Derivative financial instruments | Accrued expenses and other current liabilities | $ | 1,015 | $ | — | $ | 1,015 | $ | — |
Total | Fair Value Measurements at December 31, 2018 Using | |||||||||||||||||
Balance Sheet Location | Level 1 | Level 2 | Level 3 | |||||||||||||||
Assets: | ||||||||||||||||||
Derivative financial instruments | Other current assets | $ | 1,320 | $ | — | $ | 1,320 | $ | — | |||||||||
Equity securities | Other assets | $ | 279 | $ | 279 | $ | — | $ | — | |||||||||
Liabilities: | ||||||||||||||||||
Derivative financial instruments | Accrued expenses and other current liabilities | $ | 14 | $ | — | $ | 14 | $ | — |
11. | SHAREHOLDERS’ EQUITY |
At-the-Market Offering Program
On August 23, 2017, we entered into a sales agreement with Robert W. Baird & Co. Inc., which enabled the Company to issue and sell shares of Common stock in one or more negotiated 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 $250,000 (the “ATM Program”). The offer and sale of our Common stock pursuant to the ATM Program was registered under the Securities Act pursuant to our automatically effective shelf registration statement on FormS-3 (FileNo. 333-207831).
During the quarter and nine months ended September 30, 2017, we sold 35,000 shares of Common stock under the ATM Program for net proceeds of $5,391. Direct costs of $285 incurred in connection with the offering were charged against the proceeds from the sale of Common stock and reflected 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.
During the quarters and nine months ended September 30, 2018 and 2017, 8,830, 12,354, 21,754 and 32,4542019, 3,608 shares of Common and Class B common stock respectively, with an aggregate fair market valuesvalue of $1,562, $1,893, $3,775$555, and $4,664,6,593 shares of Common and Class B common stock with an aggregate fair market value of $983, respectively, were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of
During the quarter and six months ended June 30, 2018,
During the quarters and nine months ended September 30, 2018 and 2017, 8,600, 9,084, 53,184 and 25,084 stock options, respectively, were exercised for Common stock.
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401(k) Plan
During the nine months ended September 30, 2018 and 2017, we issued 17,318 and 16,389$760, respectively, for shares of Common stock respectively, toissued under our profit sharing retirement plan, representing the Commonemployee stock discretionary matching contributions of $2,945 and $2,428, respectively.
Non-controlling Interest
As 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 Carrier Enterprise III. Carrier owns the remainingnon-controlling interests in such joint ventures. The following table reconciles shareholders’ equity attributable to Carrier’snon-controlling interests:
Non-controlling interest at December 31, 2017 | $ | 253,024 | ||
Net income attributable tonon-controlling interest | 44,188 | |||
Foreign currency translation adjustment | (2,762 | ) | ||
Distributions tonon-controlling interest | (2,178 | ) | ||
Investment in unconsolidated entity | 752 | |||
Gain recorded in accumulated other comprehensive loss | 305 | |||
Gain reclassified from accumulated other comprehensive loss into earnings | (23 | ) | ||
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Non-controlling interest at September 30, 2018 | $ | 293,306 | ||
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12. | COMMITMENTS AND CONTINGENCIES |
13. | RELATED PARTY TRANSACTIONS |
A member
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On October 23, 2018,2019.
14. | SUBSEQUENT EVENT |
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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 Form2017.
2018.
conditions.
a 20%
stand-alone-subsidiaries.
172018.
Recent
Standards
Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of sales | 75.4 | 75.9 | 75.5 | 75.6 | ||||||||||||
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Gross profit | 24.6 | 24.1 | 24.5 | 24.4 | ||||||||||||
Selling, general and administrative expenses | 15.5 | 14.9 | 15.9 | 15.8 | ||||||||||||
Other income | 0.3 | 0.2 | 0.2 | 0.1 | ||||||||||||
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Operating income | 9.4 | 9.3 | 8.8 | 8.7 | ||||||||||||
Interest expense, net | 0.1 | 0.2 | 0.1 | 0.1 | ||||||||||||
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Income before income taxes | 9.4 | 9.1 | 8.8 | 8.5 | ||||||||||||
Income taxes | 1.9 | 2.6 | 1.8 | 2.5 | ||||||||||||
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Net income | 7.5 | 6.5 | 7.0 | 6.1 | ||||||||||||
Less: net income attributable tonon-controlling interest | 1.4 | 1.2 | 1.2 | 1.2 | ||||||||||||
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Net income attributable to Watsco, Inc. | 6.1 | % | 5.3 | % | 5.7 | % | 4.9 | % | ||||||||
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2018:
Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of sales | 76.1 | 75.9 | 75.6 | 75.6 | ||||||||||||
Gross profit | 23.9 | 24.1 | 24.4 | 24.4 | ||||||||||||
Selling, general and administrative expenses | 14.3 | 14.0 | 16.4 | 16.2 | ||||||||||||
Other income | 0.2 | 0.2 | 0.2 | 0.2 | ||||||||||||
Operating income | 9.8 | 10.3 | 8.2 | 8.5 | ||||||||||||
Interest expense, net | 0.1 | 0.1 | 0.1 | 0.1 | ||||||||||||
Income before income taxes | 9.7 | 10.2 | 8.1 | 8.4 | ||||||||||||
Income taxes | 1.8 | 2.1 | 1.6 | 1.7 | ||||||||||||
Net income | 7.9 | 8.1 | 6.6 | 6.7 | ||||||||||||
Less: net income attributable to non-controlling interest | 1.3 | 1.4 | 1.2 | 1.2 | ||||||||||||
Net income attributable to Watsco, Inc. | 6.6 | % | 6.7 | % | 5.4 | % | 5.5 | % | ||||||||
Homans effective May 31, 2019.
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Number of Locations | ||||
June 30, 2018 | 568 | |||
Opened | 4 | |||
Acquired | 3 | |||
Closed | (4 | ) | ||
December 31, 2018 | 571 | |||
Opened | 11 | |||
Acquired | 7 | |||
Closed | (4 | ) | ||
June 30, 2019 | 585 | |||
Third
2018
18prices, and demand for the replacement of 25
equipment, which generates a lower gross profit margin than
excess of 2018 for ongoing technology initiatives.
Net interest
2018.
same period in 2018.
Nine Months Ended September 30, 2018
First Half of 2018
prices, resulting in a 3% increase in the average selling price.
2018.
19excess of 25
2018. same period in 2018.$8.5$4.4 million and $2.3$4.8 million for the nine months ended September 30,first half of 2019 and 2018, and 2017, respectively, representsrepresented our share of the net income of RSI.Net interestnine months ended September 30, 2018 decreased $2.6first half of 2019 increased $0.7 million, or 53%50%, primarily as a result of a decreasean increase in average outstanding borrowings partially offset byand a higher effective interest rate for the 20182019 period, in each case under our revolving credit facility, as compared to the same period in 2017.$63.7$35.8 million for the nine months ended September 30, 2018first half of 2019, as compared to $82.9$39.3 million for the nine months ended September 30, 2017first half of 2018 and arerepresent a composite of the income taxes attributable to our wholly owned operations and income taxes attributable to the Carrier joint ventures, which are primarily taxed as partnerships for income tax purposes.purposes; therefore, Carrier is responsible for its proportionate share of income taxes attributable to its share of earnings. The effective income tax rates attributable to us were 23.6%22.0% and 33.0%23.8% for the nine months ended September 30,first half of 2019 and 2018, and September 30, 2017, respectively. The decrease was primarily due to lower estimated foreign withholding taxes in the reductionfirst half of 2019 as compared to the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018 as a result of the Tax Cuts and Jobs Act of 2017.nine months ended September 30, 2018first half of 2019 increased $38.4$1.0 million, or 23%1%, compared to the same period in 2017.2018. The increase was primarily driven by higher revenues and othergross profit, and a reduction in income expanded profit margins, lowertaxes, partially offset by higher selling, general and administrative expenses and interest expense net, and lower income taxes as discussed above.
subsidiaries without legal or other restrictions. proceeds from the issuance and sale of our Common stock.SeptemberJune 30, 2018,2019, we had $67.6$55.9 million of cash and cash equivalents, of which $57.4$37.7 million was held by foreign subsidiaries. The repatriation of cash balances from our foreign subsidiaries could have adverse tax consequencesimpacts or be subject to capital controls; however, these balances are generally available without legal restrictions to fund the ordinary business operations of our foreign subsidiaries. While we have the intent and current ability to refinance our revolving credit agreement on similar terms and subject to similar conditions on a long-term basis prior to its maturity in 2019, there is no assurance that we will be able to refinance with the same terms and conditions.20 of 25
Inventory is also higher as a result of new locations opened and acquired, as well as additional inventory received in anticipation of the transition to new energy conservation standards for residential furnace fans that became effective on July 3, 2019. These increases were partially offset by the timing of accounts payable and accrued liabilities as well as the current portion of lease liabilities recognized as current liabilities as a result of the adoption of the New Lease Standard on January 1, 2019.
2018 | 2017 | Change | ||||||||||
Cash flows provided by operating activities | $ | 70.1 | $ | 189.4 | $ | (119.3 | ) | |||||
Cash flows used in investing activities | $ | (22.3 | ) | $ | (77.3 | ) | $ | 55.0 | ||||
Cash flows used in financing activities | $ | (59.8 | ) | $ | (103.0 | ) | $ | 43.2 |
2019 | 2018 | Change | ||||||||||
Cash flows provided by (used in) operating activities | $ | 68.4 | $ | (19.3 | ) | $ | 87.7 | |||||
Cash flows used in investing activities | $ | (30.8 | ) | $ | (8.7 | ) | $ | (22.1 | ) | |||
Cash flows (used in) provided by financing activities | $ | (65.3 | ) | $ | 20.8 | $ | (86.1 | ) |
2019 versus 2018.
2019.
2019.
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 SeptemberJune 30, 2018.
2019.
On February 13, 2017,
21the purchase operates as a stand-alone subsidiary of 25
At-the-Market Offering Program
In August 2017, we entered into a sales agreement with Robert W. Baird & Co. Inc., which enabled the Company to issue and sell shares of Common stock in one or more negotiated 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 $250.0 million (the “ATM Program”). The offer and sale of our Common stock pursuant to the ATM Program was registered under the Securities Act pursuant to our automatically effective shelf registration statement on FormS-3 (FileNo. 333-207831).
During the quarter and nine months ended September 30, 2017, we sold 35,000 shares of Common stock under the ATM Program for net proceeds of $5.4 million. Direct costs of $0.3 million incurred in connection with the offering were charged against the proceeds from the sale of Common stock and reflected as a reduction ofpaid-in capital. At September 30, 2017, $244.6 million 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.
prospects.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ITEM 4. | CONTROLS AND PROCEDURES |
In accordance with the rules and regulations of the SEC, we have not yet assessed the internal control over financial reporting of Dunphey & Associates Supply Co., Inc. (“DASCO”), which represented approximately 1% of our total consolidated assets at June 30, 2019 and approximately 1% of our consolidated revenues for the six months ended June 30, 2019. From the acquisition date of April 2, 2019, the processes and systems of DASCO did not impact the internal controls over financial reporting for our other consolidated subsidiaries.
ITEM 1. | LEGAL PROCEEDINGS |
ITEM 1A. | RISK FACTORS |
232018.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
ITEM 6. | EXHIBITS |
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31.1 # | ||||
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31.2 # | ||||
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31.3 # | ||||
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32.1 + | ||||
101.INS # | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document. | |||
101.SCH # | Inline XBRL Taxonomy Extension Schema Document. | |||
101.CAL # | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||
101.DEF # | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |||
101.LAB # | Inline XBRL Taxonomy Extension Label Linkbase Document. | |||
101.PRE # | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
# | filed herewith. |
+ | furnished herewith. |
24
WATSCO, INC. | ||||||
(Registrant) | ||||||
Date: | By: | /s/ Ana M. Menendez | ||||
Ana M. Menendez | ||||||
Chief Financial Officer (on behalf of the Registrant and as Principal Financial Officer) |
25