Table of Contents
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM
10-Q
 
 
☒
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Perio
d
Period Ended June 30, 20222023
or
 
☐
Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period From
    
    
    
    
to
    
    
    
    
Commission file number
1-5581
I.R.S. Employer Identification Number
59-0778222

WATSCO, INC.
(a Florida
Corporation)
 
 

WATSCO, INC.
(Exact name of registrant as specified in its charter)
FLORIDA
59-0778222
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

2665 South Bayshore Drive, Suite 901
Miami, FloridaFL 33133
Telephone:
(Address of principal executive offices, including zip code)
(305) 714-4100
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading

Symbol(s)
 
Name of each exchange

on which registered
Common stock, $0.50 par value
 
WSO
 
New York Stock Exchange
Class B common stock, $0.50 par value
 
WSOB
 
New York Stock Exchange
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
Large accelerated filer ☒  Accelerated filer ☐
    
Non-accelerated
filer		 ☐  Smaller reporting company ☐
    
     Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).     Yes  ☐
    No  ☒
The registrant’s common stock outstanding as of August 1, 20222023 comprised (i) 33,206,88033,537,550 shares of Common stock, $0.50 par value per share, excluding 4,823,9884,778,988 treasury shares and (ii) 5,785,4095,529,187 shares of Class B common stock, $0.50 par value per share, excluding 48,263 treasury
shares.
 
 
 
Table of Contents
WATSCO, INC. AND SUBSIDIARIES
 
QUARTERLY REPORT ON FORM
10-Q
TABLE OF CONTENTS
 
   Page No. 
PART I. FINANCIAL INFORMATION
  
Item 1.
  
Condensed Consolidated Unaudited Financial Statements
  
Condensed Consolidated Unaudited Statements of Income – Quarters and Six Months Ended June 30, 20222023 and 20212022
   3 
Condensed Consolidated Unaudited Statements of Comprehensive Income – Quarters and Six Months Ended June 30, 20222023 and 20212022
   4 
Condensed Consolidated Unaudited Balance Sheets – June 30, 20222023 and December 31, 20212022
   5 
Condensed Consolidated Unaudited Statements of Shareholders’ Equity – Quarters and Six Months Ended June 30, 20222023 and 20212022
   6 
Condensed Consolidated Unaudited Statements of Cash Flows – Six Months Ended June 30, 20222023 and 20212022
   8 
Notes to Condensed Consolidated Unaudited Financial Statements
   9 
Item 2.
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   15 
Item 3.
  
Quantitative and Qualitative Disclosures about Market Risk
   2324 
Item 4.
  
Controls and Procedures
   2324 
PART II. OTHER INFORMATION
  
Item 1.
  
Legal Proceedings
23
Item 1A.
Risk Factors
23
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
23
Item 6.
Exhibits
   24 
Item 1A.
Risk Factors
24
Item 5.
SIGNATUREOther Information
24
Item 6.
Exhibits
   25 
SIGNATURE
26
EXHIBITS
  
 
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Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1.
ITEM 1. CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF INCOME
(In thousands, except per share data)
 
   Quarter Ended
June 30,		   Six Months Ended
June 30,		 
   2022   2021   2022   2021 
Revenues
  
$
2,133,755
 
  $1,849,640   
$
3,657,325
 
  $2,985,758 
Cost of sales
  
 
1,538,222
 
   1,371,699   
 
2,611,434
 
   2,212,996 
   
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
  
 
595,533
 
   477,941   
 
1,045,891
 
   772,762 
Selling, general and administrative expenses
  
 
314,753
 
   266,697   
 
598,107
 
   484,309 
Other income
  
 
6,317
 
   5,539   
 
10,362
 
   10,210 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating income
  
 
287,097
 
   216,783   
 
458,146
 
   298,663 
Interest expense, net
  
 
1,110
 
   448   
 
1,668
 
   536 
   
 
 
   
 
 
   
 
 
   
 
 
 
Income before income taxes
  
 
285,987
 
   216,335   
 
456,478
 
   298,127 
Income taxes
  
 
60,481
 
   44,202   
 
96,082
 
   59,867 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net income
  
 
225,506
 
   172,133   
 
360,396
 
   238,260 
Less: net income attributable to
non-controlling
interest
  
 
32,949
 
   28,031   
 
54,541
 
   39,066 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net income attributable to Watsco, Inc.
  
$
192,557
 
  $144,102   
$
305,855
 
  $199,194 
   
 
 
   
 
 
   
 
 
   
 
 
 
Earnings per share for Common and Class B common stock:
                    
Basic
  
$
4.94
 
  $3.73   
$
7.86
 
  $5.16 
   
 
 
   
 
 
   
 
 
   
 
 
 
Diluted
  
$
4.93
 
  $3.71   
$
7.83
 
  $5.13 
   
 
 
   
 
 
   
 
 
   
 
 
 
   Quarter Ended
June 30,		   Six Months Ended
June 30,		 
   2023   2022   2023   2022 
Revenues  
$
2,003,084
 
  $2,133,755   
$
3,553,725
 
  $3,657,325 
Cost of sales  
 
1,440,462
 
   1,538,222   
 
2,542,946
 
   2,611,434 
                     
Gross profit  
 
562,622
 
   595,533   
 
1,010,779
 
   1,045,891 
Selling, general and administrative expenses  
 
304,155
 
   314,753   
 
591,212
 
   598,107 
Other income  
 
7,238
 
   6,317   
 
10,878
 
   10,362 
                     
Operating income  
 
265,705
 
   287,097   
 
430,445
 
   458,146 
Interest expense, net  
 
3,415
 
   1,110   
 
4,030
 
   1,668 
                     
Income before income taxes  
 
262,290
 
   285,987   
 
426,415
 
   456,478 
Income taxes  
 
56,887
 
   60,481   
 
90,641
 
   96,082 
                     
Net income  
 
205,403
 
   225,506   
 
335,774
 
   360,396 
Less: net income attributable to
non-controlling
interest
  
 
32,639
 
   32,949   
 
52,937
 
   54,541 
                     
Net income attributable to Watsco, Inc.  
$
172,764
 
  $192,557   
$
282,837
 
  $305,855 
                     
Earnings per share for Common and Class B common stock:                    
Basic  
$
4.43
 
  $4.94   
$
7.27
 
  $7.86 
                     
Diluted  
$
4.42
 
  $4.93   
$
7.25
 
  $7.83 
                     
See accompanying notes to condensed consolidated unaudited financial statements.
3 of 25
Table of Contents
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 
   Quarter Ended
June 30,		  Six Months Ended
June 30,		 
   2022  2021  2022  2021 
Net income
  
$
225,506
 
 $172,133  
$
360,396
 
 $238,260 
Other comprehensive (loss) income, net of tax
                 
Foreign currency translation adjustment
  
 
(9,381
) 
  4,016  
 
(5,000
) 
  7,473 
Unrealized (loss) gain on cash flow hedging instruments
  
 
—  
 
  (6)  
 
—  
 
  70 
Reclassification of (gain) loss on cash flow hedging

instruments into earnings
  
 
—  
 
  (22)  
 
—  
 
  221 
   
 
 
  
 
 
  
 
 
  
 
 
 
Other comprehensive (loss) income
  
 
(9,381
) 
  3,988  
 
(5,000
) 
  7,764 
   
 
 
  
 
 
  
 
 
  
 
 
 
Comprehensive income
  
 
216,125
 
  176,121  
 
355,396
 
  246,024 
Less: comprehensive income attributable to
non-controlling
interest
  
 
29,833
 
  29,370  
 
52,871
 
  41,707 
   
 
 
  
 
 
  
 
 
  
 
 
 
Comprehensive income attributable to Watsco, Inc.
  
$
186,292
 
 $146,751  
$
302,525
 
 $204,317 
   
 
 
  
 
 
  
 
 
  
 
 
 
   Quarter Ended
June 30,		  Six Months Ended
June 30,		 
   2023   2022  2023   2022 
Net income  
$
205,403
 
  $225,506  
$
335,774
 
  $360,396 
Other comprehensive income (loss), net of tax Foreign currency translation adjustment  
 
7,115
 
   (9,381)  
 
7,375
 
   (5,000) 
                    
Other comprehensive income (loss)  
 
7,115
 
   (9,381)  
 
7,375
 
   (5,000) 
                    
Comprehensive income  
 
212,518
 
   216,125  
 
343,149
 
   355,396 
Less: comprehensive income attributable to
non-controlling
interest
  
 
34,974
 
   29,833  
 
55,362
 
   52,871 
                    
Comprehensive income attributable to Watsco, Inc.  
$
177,544
 
  $186,292  
$
287,787
 
  $302,525 
                    
See accompanying notes to condensed consolidated unaudited financial statements.
4 of 25
Table of Contents
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(In thousands, except per share data)
   June 30,
2023		  December 31,
2022		 
ASSETS
         
Current assets:         
Cash and cash equivalents  
$
162,526
 
 $147,505 
Accounts receivable, net  
 
990,663
 
  747,110 
Inventories, net  
 
1,689,309
 
  1,370,173 
Other current assets  
 
40,070
 
  33,951 
          
Total current assets  
 
2,882,568
 
  2,298,739 
Property and equipment, net  
 
128,065
 
  125,424 
Operating lease
right-of-use
assets
  
 
334,376
 
  317,314 
Goodwill  
 
431,592
 
  430,711 
Intangible assets, net  
 
175,766
 
  175,191 
Investment in unconsolidated entity  
 
141,082
 
  132,802 
Other assets  
 
9,562
 
  8,033 
          
   
$
4,103,011
 
 $3,488,214 
          
LIABILITIES AND SHAREHOLDERS’ EQUITY
         
Current liabilities:         
Current portion of long-term obligations  
$
93,099
 
 $90,597 
Borrowings under revolving credit agreement  
 
—  
 
  56,400 
Accounts payable  
 
602,462
 
  456,128 
Accrued expenses and other current liabilities  
 
260,438
 
  303,397 
          
Total current liabilities  
 
955,999
 
  906,522 
          
Long-term obligations:         
Borrowings under revolving credit agreement  
 
342,900
 
  —   
Operating lease liabilities, net of current portion  
 
247,928
 
  232,144 
Finance lease liabilities, net of current portion  
 
10,975
 
  11,388 
          
Total long-term obligations  
 
601,803
 
  243,532 
          
Deferred income taxes and other liabilities  
 
93,159
 
  89,882 
          
Commitments and contingencies       
Watsco, Inc. shareholders’ equity:         
Common stock, $0.50 par value  
 
19,155
 
  19,054 
Class B common stock, $0.50 par value  
 
2,791
 
  2,757 
Preferred stock, $0.50 par value  
 
—  
 
  —   
Paid-in
capital
  
 
1,023,147
 
  973,060 
Accumulated other comprehensive loss, net of tax  
 
(42,760
) 
  (47,710) 
Retained earnings  
 
1,121,944
 
  1,029,516 
Treasury stock, at cost  
 
(86,630
) 
  (87,440) 
          
Total Watsco, Inc. shareholders’ equity  
 
2,037,647
 
  1,889,237 
Non-controlling
interest
  
 
414,403
 
  359,041 
          
Total shareholders’ equity  
 
2,452,050
 
  2,248,278 
          
   
$
4,103,011
 
 $3,488,214 
          
See accompanying notes to condensed consolidated unaudited financial statements.
5
Table of Contents
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF SHAREHOLDERS’ EQUITY
 
   June 30,
2022		  December 31,
2021		 
ASSETS
         
Current assets:
         
Cash and cash equivalents
  
$
129,049
 
 $118,268 
Accounts receivable, net
  
 
983,033
 
  698,456 
Inventories, net
  
 
1,480,519
 
  1,115,469 
Other current assets
  
 
31,330
 
  29,207 
   
 
 
  
 
 
 
Total current assets
  
 
2,623,931
 
  1,961,400 
Property and equipment, net
  
 
119,525
 
  111,019 
Operating lease
right-of-use
assets
  
 
298,223
 
  268,528 
Goodwill
  
 
432,777
 
  434,019 
Intangible assets, net
  
 
183,133
 
  186,896 
Investment in unconsolidated entity
  
 
122,831
 
  114,808 
Other assets
  
 
8,172
 
  9,191 
   
 
 
  
 
 
 
   
$
3,788,592
 
 $3,085,861 
   
 
 
  
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
         
Current liabilities:
         
Current portion of long-term obligations
  
$
88,600
 
 $84,501 
Accounts payable
  
 
625,962
 
  364,185 
Accrued expenses and other current liabilities
  
 
346,781
 
  278,036 
   
 
 
  
 
 
 
Total current liabilities
  
 
1,061,343
 
  726,722 
   
 
 
  
 
 
 
Long-term obligations:
         
Borrowings under revolving credit agreement
  
 
203,600
 
  89,000 
Operating lease liabilities, net of current portion
  
 
213,344
 
  187,024 
Finance lease liabilities, net of current portion
  
 
10,204
 
  9,189 
   
 
 
  
 
 
 
Total long-term obligations
  
 
427,148
 
  285,213 
   
 
 
  
 
 
 
Deferred income taxes and other liabilities
  
 
80,326
 
  76,511 
   
 
 
  
 
 
 
Commitments and contingencies
   0    0  
Watsco, Inc. shareholders’ equity:
         
Common stock, $0.50 par value
  
 
19,007
 
  18,941 
Class B common stock, $0.50 par value
  
 
2,918
 
  2,895 
Preferred stock, $0.50 par value
  
 
—  
 
  —   
Paid-in
capital
  
 
1,032,291
 
  1,003,932 
Accumulated other comprehensive loss, net of tax
  
 
(37,506
) 
  (34,176) 
Retained earnings
  
 
905,167
 
  760,796 
Treasury stock, at cost
  
 
(87,440
) 
  (87,440) 
   
 
 
  
 
 
 
Total Watsco, Inc. shareholders’ equity
  
 
1,834,437
 
  1,664,948 
Non-controlling
interest
  
 
385,338
 
  332,467 
   
 
 
  
 
 
 
Total shareholders’ equity
  
 
2,219,775
 
  1,997,415 
   
 
 
  
 
 
 
   
$
3,788,592
 
 $3,085,861 
   
 
 
  
 
 
 
(In thousands, except share and per
share data)
 
Common Stock,
Class B

Common Stock
and Preferred
Stock Shares
  
Common Stock,
Class B
Common Stock
and Preferred
Stock Amount
  
Paid-In

Capital
  
Accumulated

Other

Comprehensive

Loss
  
Retained

Earnings
  
Treasury

Stock
  
Non-

controlling
Interest
  
Total
 
Balance at December 31, 2022
 
 
38,749,887
 
 
$
21,811
 
 
$
973,060
 
 
$
(47,710
) 
 
$
1,029,516
 
 
$
(87,440
) 
 
$
359,041
 
 
$
2,248,278
 
Net income
                  
110,073
       
20,298
   
130,371
 
Other comprehensive income
              
170
           
90
   
260
 
Issuances of restricted shares of common
stock
  
116,510
   58   (58)                   —   
Forfeitures of restricted shares of common
stock
  (2,000)   (1)   1                   —   
Common stock contribution to 401(k) plan
  35,533   18   8,844                   8,862 
Stock issuances from exercise of stock
options and employee stock purchase
plan
  
75,186
   
38
   
12,947
                   
12,985
 
Issuance of Class B common stock
  632   
—
  
   200                   
200
 
Retirement of common stock
  
(21,702
)   
(11
)   
(6,441
)                   
(6,452
) 
Share-based compensation
          
8,763
                   
8,763
 
Cash dividends declared and paid on
Common and Class B common stock,
$
2.45
per share
                  
(94,970
) 
          (94,970) 
                                 
Balance at March 31, 2023
 
 
38,954,046
 
 
 
21,913
 
 
 
997,316
 
 
 
(47,540
) 
 
 
1,044,619
 
 
 
(87,440
) 
 
 
379,429
 
 
 
2,308,297
 
                                 
Net income
                  
172,764
       
32,639
   
205,403
 
Other comprehensive income
              
4,780
           
2,335
   
7,115
 
Issuances of restricted shares of common
stock
  
38,000
   
19
   
(19
) 
                  
—  
 
Forfeitures of restricted shares of common
stock
  
(467
) 
  
—
  
   
—
  
                   
—  
 
Stock issuances from exercise of stock

options and employee stock purchase
plan
  
30,794
   
15
   
5,622
                   
5,637
 
Retirement of common stock
  
(1,737
) 
  
(1
) 
  
(594
) 
                  
(595
) 
Share-based compensation
          
6,828
                   
6,828
 
Net proceeds from the sale of Common
stock
  
45,000
       
13,994
           
810
       
14,804
 
Cash dividends declared and paid on
Common and Class B common stock,
$
2.45
per share
                  
(95,439
) 
          
(95,439
) 
                                 
Balance at June 30, 2023
 
 
39,065,636
 
 
$
21,946
 
 
$
1,023,147
 
 
$
(42,760
) 
 
$
1,121,944
 
 
$
(86,630
) 
 
$
414,403
 
 
$
2,452,050
 
                                 
Continued on next page.
6
Table of Contents
(In thousands, except share and per
share data)
 
Common Stock,
Class B

Common Stock
and Preferred
Stock Shares
  
Common Stock,
Class B
Common Stock
and Preferred
Stock Amount
  
Paid-In

Capital
  
Accumulated

Other

Comprehensive

Loss
  
Retained

Earnings
  
Treasury

Stock
  
Non-

controlling
Interest
  
Total
 
Balance at December 31, 2021
 
 
38,799,632
 
 
$
21,836
 
 
$
1,003,932
 
 
$
(34,176
) 
 
$
760,796
 
 
$
(87,440
) 
 
$
332,467
 
 
$
1,997,415
 
Net income
                  113,298       21,592   134,890 
Other comprehensive income
              2,935           1,446   4,381 
Issuances of restricted shares of common stock
  105,882   53   (53)                   —   
Common stock contribution to 401(k) plan
  21,532   11   6,726                   6,737 
Stock issuances from exercise of stock options and employee stock purchase plan
  24,850   12   4,408                   4,420 
Share-based compensation
          8,667                   8,667 
Cash dividends declared and paid on Common and Class B common stock,
$
1.95
per share
                  (75,795)           (75,795) 
                                 
Balance at March 31, 2022
 
 
38,951,896
 
 
 
21,912
 
 
 
1,023,680
 
 
 
(31,241
) 
 
 
798,299
 
 
 
(87,440
) 
 
 
355,505
 
 
 
2,080,715
 
                                 
Net income
                  192,557       32,949   225,506 
Other comprehensive (loss)
              (6,265)           (3,116)   (9,381) 
Issuances of restricted shares of common stock
  21,177   11   (11)                   —   
Forfeitures of restricted shares of common stock
  (10,000)   (5)   5                   —   
Common stock contribution to 401(k) plan
  28   
—
  
   9                   9 
Stock issuances from exercise of stock options and employee stock purchase plan
  21,939   11   3,796                   3,807 
Retirement of common stock
  (8,181)   (4)   (2,175)                   (2,179) 
Share-based compensation
          6,987                   6,987 
Cash dividends declared and paid on
Common and Class B common stock,
$
2.20
per share
                  (85,689)           (85,689) 
                                 
Balance at June 30, 2022
 
 
38,976,859
 
 
$
21,925
 
 
$
1,032,291
 
 
$
(37,506
) 
 
$
905,167
 
 
$
(87,440
) 
 
$
385,338
 
 
$
2,219,775
 
                                 
See accompanying notes to condensed consolidated unaudited financial statements.
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Table of Contents
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OOF CASH FLOWS
F
 SHAREHOLDERS’ EQUITY
(In thousands)
 
(In thousands, except share and per share
data)
 
Common Stock,
Class B
Common Stock
and Preferred
Stock Shares
  
Common Stock,
Class B
Common Stock
and Preferred
Stock Amount
  
Paid-In

Capital
  
Accumulated
Other
Comprehensive
Loss
  
Retained
Earnings
  
Treasury
Stock
  
Non-
 
controlling

Interest
  
Total
 
Balance at December 31, 2021
  
 
38,799,632
 
 
$
21,836
 
 
$
1,003,932
 
 
$
(34,176
) 
 
$
760,796
 
 
$
(87,440
) 
 
$
332,467
 
 
$
1,997,415
 
Net income
                   113,298       21,592   134,890 
Other comprehensive income
               2,935           1,446   4,381 
Issuances of
non-vested
restricted shares of common stock
   105,882   53   (53)                   —   
Common stock contribution to 401(k) plan
   21,532   11   6,726                   6,737 
Stock issuances from exercise of stock options and employee stock purchase plan
   24,850   12   4,408                   4,420 
Share-based compensation
           8,667                   8,667 
Cash dividends declared and paid on Common and Class B common stock, $1.95 per share
                   (75,795)           (75,795) 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at March 31, 2022
  
 
38,951,896
 
 
 
21,912
 
 
 
1,023,680
 
 
 
(31,241
) 
 
 
798,299
 
 
 
(87,440
) 
 
 
355,505
 
 
 
2,080,715
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income
                   192,557       32,949   225,506 
Other comprehensive (loss)
               (6,265)           (3,116)   (9,381) 
Issuances of
non-vested
restricted shares of common stock
   21,177   11   (11)                   —   
Forfeitures of
non-vested
restricted shares of common stock
   (10,000)   (5)   5                   —   
Common stock contribution to 401(k) plan
   28   —     9                   9 
Stock issuances from exercise of stock options and employee stock purchase plan
   21,939   11   3,796                   3,807 
Retirement of common stock
   (8,181)   (4)   (2,175)                   (2,179) 
Share-based compensation
           6,987                   6,987 
Cash dividends declared and paid on Common and Class B common stock, $2.20 per share
                   (85,689)           (85,689) 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at June 30, 2022
  
 
38,976,859
 
 
$
21,925
 
 
$
1,032,291
 
 
$
(37,506
) 
 
$
905,167
 
 
$
(87,440
) 
 
$
385,338
 
 
$
2,219,775
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Continued on next page.
6 of 25
Table of Contents
(
In thousands, except share and per share
data)
  
Common Stock,
Class B

Common Stock
and Preferred
Stock Shares
  
Common Stock,
Class B
Common Stock
and Preferred
Stock Amount
  
Paid-In

Capital
  
Accumulated

Other

Comprehensive

Loss
  
Retained

Earnings
  
Treasury

Stock
  

Non-
 
controlling

Interest
   
Total
 
Balance at December 31, 2020
  
 
38,521,694
 
 
$
21,697
 
 
$
950,915
 
 
$
(34,867
) 
 
$
636,373
 
 
$
(87,440
) 
 
$
293,083
 
  
$
1,779,761
 
Net income
                   55,092       11,035    66,127 
Other comprehensive income
               2,474           1,302    3,776 
Issuances of
non-vested
restricted shares of common stock
   121,934   61   (61)                    —   
Forfeitures of
non-vested
restricted shares of common stock
   (43,000)   (21)   21                    —   
Common stock contribution to 401(k) plan
   22,752   11   5,143                    5,154 
Stock issuances from exercise of stock options and employee stock purchase plan
   24,735   12   3,862                    3,874 
Share-based compensation
           6,656                    6,656 
Cash dividends declared and paid on Common and Class B common stock, $1.775 per share
                   (68,521)            (68,521) 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
   
 
 
 
Balance at March 31, 2021
  
 
38,648,115
 
 
 
21,760
 
 
 
966,536
 
 
 
(32,393
) 
 
 
622,944
 
 
 
(87,440
) 
 
 
305,420
 
  
 
1,796,827
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
   
 
 
 
Net income
                   144,102       28,031    172,133 
Other comprehensive income
               2,649           1,339    3,988 
Issuances of
non-vested
restricted shares of common stock
   44,881   22   (22)                    —   
Forfeitures of
non-vested
restricted shares of common stock
   (7,589)   (4)   4                    —   
Stock issuances from exercise of stock options and employee stock purchase plan
   34,311   18   5,658                    5,676 
Retirement of common stock
   (2,965)   (1)   (862)                    (863) 
Share-based compensation
           5,569                    5,569 
Common stock issued for Acme Refrigeration of Baton Rouge LLC
   8,492   4   2,547                    2,551 
Investment in TEC Distribution LLC
                           21,040    21,040 
Cash dividends declared and paid on Common and Class B common stock, $1.95 per share
                   (75,388)            (75,388) 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
   
 
 
 
Balance at June 30, 2021
  
 
38,725,245
 
 
$
21,799
 
 
$
979,430
 
 
$
(29,744
) 
 
$
691,658
 
 
$
(87,440
) 
 
$
355,830
 
  
$
1,931,533
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
   
 
 
 
   Six Months Ended
June 30,		 
   2023  2022 
Cash flows from operating activities:         
Net income  
$
335,774
 
 
$
360,396
 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:         
Depreciation and amortization  
 
16,615
 
 
 
15,376
 
Share-based compensation  
 
13,529
 
 
 
14,961
 
Provision for doubtful accounts  
 
1,405
 
 
 
4,139
 
Deferred income tax provision  
 
3,442
 
 
 
4,098
 
Other income from investment in unconsolidated entity  
 
(10,878
) 
 
 
(10,362
) 
Other, net  
 
8,381
 
 
 
6,853
 
Changes in operating assets and liabilities, net of effects of acquisitions:         
Accounts receivable, net  
 
(243,440
) 
 
 
(289,478
) 
Inventories, net  
 
(313,634
) 
 
 
(366,359
) 
Accounts payable and other liabilities  
 
103,442
 
 
 
332,217
 
Other, net  
 
(3,815
) 
 
 
1,231
 
          
Net cash (used in) provided by operating activities  
 
(89,179
) 
 
 
73,072
 
          
Cash flows from investing activities:         
Capital expenditures  
 
(15,831
) 
 
 
(18,952
) 
Business acquisitions, net of cash acquired  
 
(2,989
) 
 
 
(47
) 
Proceeds from sale of property and equipment  
 
1,232
 
 
 
111
 
          
Net cash used in investing activities  
 
(17,588
) 
 
 
(18,888
) 
          
Cash flows from financing activities:         
Net proceeds under current revolving credit agreement  
 
342,900
 
  —   
Net proceeds from the sale of Common stock  
 
15,179
 
  —   
Net proceeds from issuances of Common stock under employee-related plans  
 
13,827
 
 
 
8,228
 
Payment of fees related to revolving credit agreement  
 
(580
) 
  —
  
 
Net repayments of finance lease liabilities  
 
(1,795
) 
 
 
(1,437
) 
Repurchases of common stock to satisfy employee withholding tax obligations  
 
(2,254
) 
 
 
(2,179
) 
Net (repayments) proceeds under prior revolving credit agreement  
 
(56,400
) 
 
 
114,600
 
Dividends on Common and Class B common stock  
 
(190,409
) 
 
 
(161,484
) 
          
Net cash provided by (used in) financing activities  
 
120,468
 
 
 
(42,272
) 
          
Effect of foreign exchange rate changes on cash and cash equivalents  
 
1,320
 
 
 
(1,131
) 
          
Net increase in cash and cash equivalents  
 
15,021
 
 
 
10,781
 
Cash and cash equivalents at beginning of period  
 
147,505
 
 
 
118,268
 
          
Cash and cash equivalents at end of period  
$
162,526
 
 
$
129,049
 
          
See accompanying notes to condensed consolidated unaudited financial statements.
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Table of Contents
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITE
D
 STATEMENTS OF CASH FLOWS
(In thousands)
   Six Months Ended
June 30,		 
   2022  2021 
Cash flows from operating activities:
   
Net income
  
$
360,396
 
 $238,260 
Adjustments to reconcile net income to net cash provided by operating activities:
         
Depreciation and amortization
  
 
15,376
 
  13,877 
Share-based compensation
  
 
14,961
 
  12,351 
Provision for doubtful accounts
  
 
4,139
 
  465 
Deferred income tax provision
  
 
4,098
 
  2,115 
Other income from investment in unconsolidated entity
  
 
(10,362
) 
  (10,210) 
Other, net
  
 
6,853
 
  5,685 
Changes in operating assets and liabilities, net of effects of acquisitions:
         
Accounts receivable, net
  
 
(289,478
) 
  (283,077) 
Inventories, net
  
 
(366,359
) 
  (173,539) 
Accounts payable and other liabilities
  
 
332,217
 
  282,852 
Other, net
  
 
1,231
 
  (6,897) 
   
 
 
  
 
 
 
Net cash provided by operating activities
  
 
73,072
 
  81,882 
   
 
 
  
 
 
 
Cash flows from investing activities:
         
Capital expenditures
  
 
(18,952
) 
  (11,008) 
Business acquisitions, net of cash acquired
  
 
(47
) 
  (126,549) 
Proceeds from sale of equity securities
  
 
—  
 
  5,993 
Proceeds from sale of property and equipment
  
 
111
 
  100 
   
 
 
  
 
 
 
Net cash used in investing activities
  
 
(18,888
) 
  (131,464) 
   
 
 
  
 
 
 
Cash flows from financing activities:
         
Dividends on Common and Class B common stock
  
 
(161,484
) 
  (143,909) 
Repurchases of common stock to satisfy employee withholding tax obligations
  
 
(2,179
) 
  —   
Net repayments of finance lease liabilities
  
 
(1,437
) 
  (966) 
Proceeds from
non-controlling
interest for investment in TEC Distribution LLC
  
 
—  
 
  21,040 
Net proceeds from issuances of common stock
  
 
8,228
 
  8,687 
Net proceeds under revolving credit agreement
  
 
114,600
 
  114,167 
   
 
 
  
 
 
 
Net cash used in financing activities
  
 
(42,272
) 
  (981) 
   
 
 
  
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
  
 
(1,131
) 
  1,283 
   
 
 
  
 
 
 
Net increase (decrease) in cash and cash equivalents
  
 
10,781
 
  (49,280) 
Cash and cash equivalents at beginning of period
  
 
118,268
 
  146,067 
   
 
 
  
 
 
 
Cash and cash equivalents at end of period
  
$
129,049
 
 $96,787 
   
 
 
  
 
 
 
Supplemental cash flow information:
         
Common stock issued for Acme Refrigeration of Baton Rouge LLC
   —    
$
2,551
 
See accompanying notes to condensed consolidated unaudited financial statements.
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Table of Contents
WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
June 30, 20222023
(In thousands, except share and per share data)
1. BASIS OF PRESENTATION
1.
BASIS OF PRESENTATION
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 June 30, 20222023 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 20212022 Annual Report on Form
10-K.
The condensed consolidated unaudited financial statements include the accounts of Watsco, all of its wholly owned subsidiaries, the accounts of 4 four
joint ventures with Carrier Global Corporation, which we refer to as Carrier, in which we have a controlling interest, the accounts of Carrier InterAmerica Corporation, ofin which we have an 80% controlling interest, and Carrier has a 20%
non-controlling
interest, and our 38.1% investment in Russell Sigler, Inc., which is accounted for under the equity method of accounting. All significant intercompany balances and transactions have been eliminated in consolidation.
The results of operations for the quarter and six months ended June 30, 20222023 are not necessarily indicative of the results to be expected for the year ending December 31, 2022.2023. Sales of residential central air conditioners, heating equipment, and parts and supplies are seasonal. Furthermore, profitability can be impacted favorably or unfavorably based on weather patterns, particularly during the Summer and Winter selling seasons. Demand related to the residential central air conditioning replacement market is typically highest in the second and third quarters, and demand for heating equipment is usually highest in the first and fourth quarters. Demand related to the new construction sectors throughout most of the markets we serve tends to be fairly evenly distributed throughout the year and depends largely on housing completions and related weather and economic conditions.
Equity Method Investments
Investments in which we have the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in investment in unconsolidated entity in our condensed consolidated unaudited balance sheets. Under this method of accounting, our proportionate share of the net income or loss of the investee is included in other income in our condensed consolidated unaudited statements of income. The excess, if any, of the carrying amount of our investment over our ownership percentage in the underlying net assets of the investee is attributed to certain fair value adjustments with the remaining portion recognized as goodwill.
Use of Estimates
The preparation of condensed consolidated unaudited financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated unaudited financial statements and the reported amounts of revenues and expenses for the reporting period. Significant estimates include valuation reserves for accounts receivable, net realizable value adjustments to inventories, income taxes, reserves related to loss contingencies and the valuation of goodwill, indefinite-lived intangible assets, and long-lived assets. While we believe that these estimates are reasonable, actual results could differ from such estimates.
Impact of
COVID-199
Pandemic
Since
COVID-19
was declared a pandemic in March 2020, it has impacted our operations and the operations of our customers and suppliers. Although we learned to navigate
COVID-19
while maintaining our operations in all material respects, the pandemic continued to impact our business and operating results throughout 2020 and into 2021. However, as economic activity has been recovering and the effects of the pandemic have continued to lessen, the impact of the pandemic on our business has been more reflective of greater economic and marketplace dynamics, which include supply chain disruptions and labor shortages, rather than pandemic-related issues such as quarantines, location closures, mandated restrictions, employee illnesses, and travel restrictions. The extent to which the
COVID-19
pandemic impacts our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, potential subsequent waves of
COVID-19
infection or potential new variants, the effectiveness and adoption of
COVID-19
vaccines and therapeutics, the ultimate duration and scope of the pandemic, its impact on our employees, customers and suppliers, the broader implications of the macro-economic recovery on our business, and the extent to which normal economic and operating conditions are impacted. Therefore, we cannot reasonably estimate the future impact of the
COVID-19
pandemic at this time.
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2. REVENUES
Disaggregation of Revenues
The following table presents our revenues disaggregated by primary geographical regions and major product lines within our single reporting segment:
 
  Quarter Ended
June 30,		   Six Months Ended
June 30,		   Quarter Ended
June 30,		 Six Months Ended
June 30,		 
  2022   2021   2022 2021   2023 2022 2023 2022 
Primary Geographical Regions:
              
United States
  
$
1,934,435
 
  $1,665,253   
$
3,305,775
 
 $2,676,519   
$
1,799,031
 
 $1,934,435  
$
3,194,035
 
 $3,305,775 
Canada
  
 
113,159
 
   113,880   
 
202,582
 
  188,372   
 
107,360
 
 113,159  
 
188,623
 
 202,582 
Latin America and the Caribbean
  
 
86,161
 
   70,507   
 
148,968
 
  120,867   
 
96,693
 
 86,161  
 
171,067
 
 148,968 
  
 
   
 
   
 
  
 
              
  
$
2,133,755
 
  $1,849,640   
$
3,657,325
 
 $2,985,758   
$
2,003,084
 
 $2,133,755  
$
3,553,725
 
 $3,657,325 
  
 
   
 
   
 
  
 
              
Major Product Lines:
              
HVAC equipment
  
 
70
% 
   71%   
 
69
% 
  69%   
 
69
% 
 70%  
 
69
% 
 69% 
Other HVAC products
  
 
26
% 
   26%   
 
28
% 
  28%   
 
27
% 
 26%  
 
27
% 
 28% 
Commercial refrigeration products
  
 
4
% 
   3%   
 
3
% 
  3%   
 
4
% 
 4%  
 
4
% 
 3% 
  
 
   
 
   
 
  
 
              
  
 
100
% 
   100%   
 
100
% 
  100%   
 
100
% 
 100%  
 
100
% 
 100% 
  
 
   
 
   
 
  
 
              
3. EARNINGS PER SHARE
3.
EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings per share for our Common and Class B common stock:
   Quarter Ended
June 30,		   Six Months Ended
June 30,		 
   2023   2022   2023   2022 
Basic Earnings per Share:
                    
Net income attributable to Watsco, Inc. shareholders  
$
172,764
 
  $192,557   
$
282,837
 
  $305,855 
Less: distributed and undistributed earnings allocated to
restricted common stock		  
 
11,933
 
   17,600    19,341    27,902 
                     
Earnings allocated to Watsco, Inc. shareholders  
$
160,831
 
  $174,957   
$
263,496
 
  $277,953 
                     
  
 
 
 
     
 
 
 
    
Weighted-average common shares outstanding—Basic  
 
36,304,824
 
   35,403,171   
 
36,249,021
 
   35,376,223 
Basic earnings per share for Common and Class B common
stock		  
$
4.43
 
  $4.94   
$
7.27
 
  $7.86 
Allocation of earnings for Basic:                    
Common stock  
$
146,511
 
  $162,229   
$
239,999
 
  $257,716 
Class B common stock   14,320    12,728    23,497    20,237 
    
 
                
   
$
160,831
 
  $174,957   
$
263,496
 
  $277,953 
                     
Diluted Earnings per Share:
                    
Net income attributable to Watsco, Inc. shareholders  
$
172,764
 
  $192,557   
$
282,837
 
  $305,855 
Less: distributed and undistributed earnings allocated to
restricted common stock		  
 
11,916
 
   17,570    19,322    27,856 
                     
Earnings allocated to Watsco, Inc. shareholders  
$
160,848
 
  $174,987   
$
263,515
 
  $277,999 
                     
                 
Weighted-average common shares outstanding—Basic  
 
36,304,824
 
   35,403,171   
 
36,249,021
 
   35,376,223 
Effect of dilutive stock options  
 
125,113
 
   117,992    117,216    136,595 
                     
Weighted-average common shares outstanding—Diluted  
 
36,429,937
 
   35,521,163    36,366,237    35,512,818 
                     
Diluted earnings per share for Common and Class B common
stock		  
$
4.42
 
  $4.93   
$
7.25
 
  $7.83 
  
 
 
 
     
 
 
 
    
Anti-dilutive stock options not included above  
 
24,328
 
   185,872   
 
79,271
 
   167,441 
10
   Quarter Ended
June 30,		   Six Months Ended
June 30,		 
   2022   2021   2022   2021 
Basic Earnings per Share:
                    
Net income attributable to Watsco, Inc. shareholders
  
$
192,557
 
  $144,102   
$
305,855
 
  $199,194 
Less: distributed and undistributed earnings allocated to
non-vested
restricted common stock
  
 
17,600
 
   12,779   
 
27,902
 
   17,618 
   
 
 
   
 
 
   
 
 
   
 
 
 
Earnings allocated to Watsco, Inc. shareholders
  
$
174,957
 
  $131,323   
$
277,953
 
  $181,576 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding - Basic
  
 
35,403,171
 
   35,228,061   
 
35,376,223
 
   35,203,925 
Basic earnings per share for Common and Class B common stock
  
$
4.94
 
  $3.73   
$
7.86
 
  $5.16 
Allocation of earnings for Basic:
                    
Common stock
  
$
162,229
 
  $121,745   
$
257,716
 
  $168,324 
Class B common stock
  
 
12,728
 
   9,578   
 
20,237
 
   13,252 
   
 
 
   
 
 
   
 
 
   
 
 
 
   
$
174,957
 
  $131,323   
$
277,953
 
  $181,576 
   
 
 
   
 
 
   
 
 
   
 
 
 
Diluted Earnings per Share:
                    
Net income attributable to Watsco, Inc. shareholders
  
$
192,557
 
  $144,102   
$
305,855
 
  $199,194 
Less: distributed and undistributed earnings allocated to
non-vested
restricted common stock
  
 
17,570
 
   12,748   
 
27,856
 
   17,596 
   
 
 
   
 
 
   
 
 
   
 
 
 
Earnings allocated to Watsco, Inc. shareholders
  
$
174,987
 
  $131,354   
$
277,999
 
  $181,598 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding - Basic
  
 
35,403,171
 
   35,228,061   
 
35,376,223
 
   35,203,925 
Effect of dilutive stock options
  
 
117,992
 
   199,657   
 
136,595
 
   175,121 
   
 
 
   
 
 
   
 
 
   
 
 
 
Weighted-average common shares outstanding - Diluted
  
 
35,521,163
 
   35,427,718   
 
35,512,818
 
   35,379,046 
   
 
 
   
 
 
   
 
 
   
 
 
 
Diluted earnings per share for Common and Class B
common stock		  
$
4.93
 
  $3.71   
$
7.83
 
  $5.13 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Anti-dilutive stock options not included above
  
 
185,872
 
   10,907   
 
167,441
 
   7,144 
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Table of Contents
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 June 30, 20222023 and 2021,2022, our outstanding Class B common stock was convertible into 2,575,6043,232,419 and 2,569,2362,575,604 shares of our Common stock, respectively.
4. OTHER COMPREHENSIVE INCOME (LOSS)
4.
OTHER COMPREHENSIVE (LOSS) INCOME
Other comprehensive income (loss) income consists of the foreign currency translation adjustment associated with our Canadian operations’ use of the Canadian dollar as their functional currency and changes in the unrealized (losses) gains on cash flow hedging instruments. The tax effects allocated to each component of other comprehensive (loss) income were as follows:currency.
   Quarter Ended
June 30,		   Six Months Ended
June 30,		 
   2022   2021   2022   2021 
Foreign currency translation adjustment
  
$
(9,381
) 
  $4,016   
$
(5,000
) 
  $7,473 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized (loss) gain on cash flow hedging instruments
   —      (6)    —      97 
Income tax expense
   —      —      —      (27) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Unrealized (loss) gain on cash flow hedging instruments, net of tax
   —      (6)    —      70 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reclassification of (gain) loss on cash flow hedging instruments into earnings
   —      (28)    —      305 
Income tax expense (benefit)
   —      6    —      (84) 
   
 
 
   
 
 
   
 
 
   
 
 
 
Reclassification of (gain) loss on cash flow hedging instruments into earnings, net of tax
   —      (22)    —      221 
   
 
 
   
 
 
   
 
 
   
 
 
 
Other comprehensive (loss) income
  
$
(9,381
) 
  $3,988   
$
(5,000
) 
  $7,764 
   
 
 
   
 
 
   
 
 
   
 
 
 
The changeschange in each component of accumulated other comprehensive loss, net of tax, werewas as follows:
 
Six Months Ended June 30,
  2022   2021   2023   2022 
Foreign currency translation adjustment:
            
Beginning balance
  
$
(34,176
)
  $(34,694)  
$
(47,710
)
  $(34,176)
Current period other comprehensive (loss) income
  
 
(3,330
) 
   4,948 
Current period other comprehensive income (loss)  
 
4,950
    (3,330) 
  
 
   
 
         
Ending balance
  
 
(37,506
) 
   (29,746)   
$
 
(42,760
) 
  $(37,506) 
  
 
   
 
         
Cash flow hedging instruments:
      
Beginning balance
   —      (173) 
Current period other comprehensive income
   —      43 
Reclassification adjustment
   —      132 
  
 
   
 
 
Ending balance
   —      2 
  
 
   
 
 
Accumulated other comprehensive loss, net of tax
  
$
(37,506
)
  $(29,744)
  
 
   
 
 
5. ACQUISITION
5.
ACQUISITIONS
Makdad IndustrialCapitol District Supply Co., Inc.
On August 20, 2021,March 3, 2023, one of our wholly owned subsidiaries acquired Makdad IndustrialCapitol District Supply Co., Inc., a distributor of air conditioning and heating products with annual sales of approximately $13,000, operating from 6three locations in Pennsylvania.New York. Consideration for the purchase consisted of $3,164$1,282 in cash, and the issuance of 3,627 shares of Common stock having a fair value of $997, net of cash acquired of $204. The purchase price resulted in the recognition of $1,041 in goodwill$144, and intangibles. The fair value of the identified intangible assets was $596 and consisted of $423 in trade names and distribution rights, and $173 in customer relationships to be amortized over an
18-year
period. The tax basis of such goodwill is deductible for income tax purposes over 15 years.
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Acme Refrigeration of Baton Rouge LLC
On May 7, 2021, we acquired certain assets and assumed certain liabilities of Acme Refrigeration of Baton Rouge LLC, a distributor of air conditioning, heating, and refrigeration products, operating from 18 locations in Louisiana and Mississippi, for $22,855 less certain average revolving indebtedness. We formed a new, wholly owned subsidiary, Acme Refrigeration LLC, which operates this business. Consideration for the purchase consisted of $18,051 in cash, 8,492 shares of Common stock having a fair value of $2,551, and $3,141 for repayment of indebtedness, net of cash acquired of $1,340. The purchase price resulted in the recognition of $3,710 in goodwill and intangibles. The fair value of the identified intangible assets was $2,124 and consisted of $1,508 in trade names and distribution rights, and $616 in customer relationships to be amortized over an
18-year
period. The tax basis of such goodwill is deductible for income tax purposes over 15 years.
Temperature Equipment Corporation
On April 9, 2021, we acquired certain assets and assumed certain liabilities comprising the HVAC distribution business of Temperature Equipment Corporation, an HVAC distributor operating from 32 locations in Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri and Wisconsin. We formed a new, stand-alone joint venture with Carrier, TEC Distribution LLC (“TEC”), that operates this business. We have an 80% controlling interest in TEC, and Carrier has a 20%
non-controlling
interest. Consideration for the purchase was paid in cash, consisting of $105,200 paid to Temperature Equipment Corporation (Carrier contributed $21,040 and we contributed $84,160) and $1,497$1,851 for repayment of indebtedness.
The purchase price resulted in the recognition of $38,624 in goodwill and intangibles. The fair value of the identified intangible assets was $19,900 and consisted of $15,700 in trade names and distribution rights, and $4,200 in customer relationships to be amortized over an
18-year
period. The tax basis of such goodwill is deductible for income tax purposes over 15 years.
The table below presents the allocation of the total consideration to tangible and intangible assets acquired and liabilities assumed from the acquisition of our 80% controlling interest in TEC based on their respective fair values as of April 9, 2021:
Accounts receivable
  $33,315 
Inventories
   71,325 
Other current assets
   962 
Property and equipment
   2,590 
Operating lease ROU assets
   53,829 
Goodwill
   18,724 
Intangibles
   19,900 
Accounts payable
   (25,393) 
Accrued expenses and other current liabilities
   (20,509) 
Operating lease liabilities, net of current portion
   (48,046) 
   
 
 
 
Total
  $ 106,697 
   
 
 
 
The results of operations of these acquisitionsthis acquisition have been included in the condensed consolidated unaudited financial statements from their respective datesits date of acquisition. The pro forma effect of these acquisitionsthis acquisition was not deemed significant to the condensed consolidated unaudited financial statements.
6. DEBT
On March 16, 2023, we entered into an unsecured, five-year $600,000 syndicated multicurrency revolving credit agreement, which replaced in its entirety our prior five-year $560,000 unsecured revolving credit agreement that was nearing maturity. Proceeds from the new facility were used to repay the $235,500 outstanding under the prior facility. Additional proceeds may be used for, among other things, funding seasonal working capital needs and other general corporate purposes, including acquisitions, dividends (if and as declared by our Board of Directors), capital expenditures, stock repurchases, and issuances of letters of credit. The revolving credit facility has a seasonal component from October 1 to March 31, during which the borrowing capacity may be reduced to $500,000 at our discretion (which effectively reduces fees payable in respect of the unused portion of the commitment). Included in the revolving credit facility are a $125,000 swingline loan sublimit, a $10,000 letter of credit sublimit, a $75,000 alternative currency borrowing sublimit, and an $10,000 Mexican borrowing subfacility. The credit agreement matures on March 16, 2028.
Borrowings under the revolving credit facility bear interest at either Term Secured Overnight Financing Rate (“SOFR”) or Daily Simple SOFR-based rates plus 0.10%, plus a spread which ranges from 100.0 to 137.5 basis-points (Term SOFR and Daily Simple SOFR plus 100.0 basis-points at June 30, 2023), depending on our ratio of total debt to EBITDA, or on rates based on the highest of the Federal Funds Effective Rate plus 0.5%, the Prime Rate or Term SOFR plus 1.0%, in each case plus a spread which ranges from 0 to 50.0 basis-points (0 basis-points at June 30, 2023), depending on our ratio of total debt to EBITDA. We pay a variable commitment fee on the unused portion of the commitment under the revolving credit agreement, ranging from 12.5 to 27.5 basis-points (12.5 basis-points at June 30, 2023). We paid fees of $580 in connection with entering into the revolving credit agreement, which are being amortized ratably through the maturity of the facility in March 2028.
At June 30, 2023, $342,900 was outstanding under the revolving credit agreement. The revolving credit agreement contains customary affirmative and negative covenants, including financial covenants with respect to consolidated leverage and interest coverage ratios, and other customary restrictions. We believe we were in compliance with all covenants at June 30, 2023.
7. DERIVATIVES
6.
DERIVATIVES
We enter into foreign currency forward an
d
and option contracts intended 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 Instruments11
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. At June 30, 2022, no foreign currency forward contracts were designated as cash flow hedges.
The impact from foreign exchange derivative instruments designated as cash flow hedges was as follows:
   Quarter Ended
June 30,		   Six Months Ended
June 30,		 
   2022   2021   2022   2021 
(Loss) gain recorded in accumulated other comprehensive loss
   —     $(6)    —     $97 
(Gain) loss reclassified from accumulated other comprehensive loss into earnings
   —     $(28)    —     $305 
At June 30, 2022, 0
pre-tax
gain (loss) was expected to be reclassified into earnings related to 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. We had only one foreign currency exchange contract not designated as a hedging instrument at June 30, 2022, theThe total notional value of whichour foreign currency exchange contracts not designated as hedging instruments at June 30, 2023 was $7,800,$18,800, and such contract subsequentlycontracts expired in July 2022.2023.
We recognized losses of $52$1,658 and $211$52 from foreign currency forward and option contracts not designated as hedging instruments in our condensed consolidated unaudited statements of income for the quarters ended June 30, 20222023 and 2021,2022, respectively. We recognized losses of $375$2,052 and $184$375 from foreign currency forward and option contracts not designated as hedging instruments in our condensed consolidated unaudited statements of income for the six months ended June 30, 2023 and 2022, and 2021, respectively.
The following table summarizes the fair value of derivative instruments, which consist solely of foreign exchange contracts, included in other current assets and accrued expenses and other current liabilities in our condensed consolidated unaudited balance sheets. See Note 7.8.
   
Asset Derivatives
   
Liability Derivatives
 
   
June 30, 2023
   
December 31, 2022
   
June 30, 2023
   
December 31, 2022
 
Derivatives designated as hedging instruments  
$
—  
 
  $—     
$
—  
 
  $—   
Derivatives not designated as hedging instruments  
 
9
 
   —     
 
—  
 
   —   
                     
Total derivative instruments  
$
9
 
  $—     
$
—  
 
  $—   
                     
8. FAIR VALUE MEASUREMENTS
   
Asset Derivatives
   
Liability Derivatives
 
   
June 30, 2022
   
December 31, 2021
   
June 30, 2022
   
December 31, 2021
 
Derivatives designated as hedging instruments
  
$
—  
 
  $—     
$
—     $—   
Derivatives not designated as hedging instruments
  
 
12
 
   —      —      5 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total derivative instruments
  
$
12
 
  $—     
$
—     $5 
   
 
 
   
 
 
   
 
 
   
 
 
 
7.
FAIR VALUE MEASUREMENTS
The following tables present our assets and liabilities carried at fair value that are measured on a recurring basis:

            
            
            
            
            
          
        Fair Value Measurements        

at June 30, 2022 Using
 
   
Balance Sheet Location
  
Total
   
Level 1
   
Level 2
   
Level 3
 
            
            
            
            
            
Assets:
                       
Derivative financial instruments
  Other current assets  
$
12
 
  
 
—  
 
  
$
12
 
  
 
—  
 
Equity securities
  Other assets  
$
650
 
  
$
650
 
  
 
—  
 
  
 
—  
 
Private equities
  Other assets  
$
1,000
 
  
 
—  
 
  
 
—  
 
  
$
1,000
 
 
            
            
            
            
            
      
Total
   
        Fair Value Measurements        

at December 31, 2021 Using
 
   
Balance Sheet Location
  
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
Equity securities
  Other assets  $1,790   $1,790    —      —   
Private equities
  Other assets  $1,000    —      —     $1,000 
Liabilities:
                       
Derivative financial instruments
  Accrued expenses and other current liabilities  $5    —     $5    —   
       
Total
   
Fair Value Measurements

at June 30, 2023 Using
 
  
Balance Sheet Location
   
Level 1
   
Level 2
   
Level 3
 
Assets:                         
Derivative financial instruments   Other current assets   
$
9
 
  
 
—  
 
  
$
9
 
  
 
—  
 
Equity securities   Other assets   
$
779
 
  
$
779
 
  
 
—  
 
  
 
—  
 
Private equities   Other assets   
$
1,000
 
  
 
—  
 
  
 
—  
 
  
$
1,000
 
    
       Total   Fair Value Measurements
at December 31, 2022 Using		 
  Balance Sheet Location   Level 1   Level 2   Level 3 
Assets:                         
Equity securities   Other assets   $678   $678    —      —   
Private equities   Other assets   $1,000    —      —     $1,000 
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:
Derivative financial instruments
– these derivatives are foreign currency forward and option contracts. See Note 7. 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.
Equity securities
– these 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.
Private equities
– other investment in which fair value inputs are unobservable.
Derivative financial instruments
– these derivativesunobservable and are foreign currency forward and option contracts. See Note 6. Fair value is based on observable market inputs, such as forward rates in active markets; therefore we classify these derivativesclassified within Level 23 of the valuationfair value hierarchy.
1
During the six months ended June 30, 2021, we recognized a realized gain
2
of $
3,815
recorded in our condensed consolidated unaudited statement of income attributable to the sale of certain equity securities.
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8.
9. SHAREHOLDERS’ EQUITY
At-the-Market
Offering Program
On August 6, 2021,February 25, 2022, we entered into aan amended and restated sales agreement with Robert W. Baird & Co. Inc. (“Baird”),and Goldman Sachs & Co. LLC, which enables the Company to issue and sell shares of Common stock in one or more negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), for a maximum aggregate offering amount of up to $300,000 (the “ATM Program”). The offer and sale of our Common stock pursuant to the ATM Program has been registered under the Securities Act pursuant to our automatically effective shelf registration statement on Form
S-3
(File
No. 333-260758).
On February 25, 2022, we entered into an amended
During the quarter and restated sales agreement, together with Baird and Goldman Sachs & Co. LLC (“GS”), for the purpose of adding GS as an additional sales agent and making necessary conforming changes. The amended and restated sales agreement otherwise retains all material terms of the original sales agreement.
As ofsix months ended June 30, 2022, 02023, we
 issued and
sold 45,000 shares of Common stock had been soldunder the ATM Program for net proceeds of $15,179. Direct costs of $375 incurred in connection with the offering were charged against the proceeds from the sale of Common stock and reflected as a reduction of
paid-in
capital. At June 30, 2023, $284,745 remained available for sale under the ATM Program.
Common Stock Dividends
We paid cash dividends of $2.45, $2.20, $1.95,$4.90, and $4.15 and $3.725 per share ofon both Common stock and Class B common stock during the quarters and six months ended June 30, 2023 and 2022, and 2021, respectively.
Non-Vested
Restricted Stock
During the six months ended June 30, 2023, a total of 6,047 shares of Common and Class B common stock with an aggregate fair market value of $1,664 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of restricted stock. These shares were retired upon delivery. During the quarter and six months ended June 30, 2022, 8,181 shares of Class B common stock with an aggregate fair market value of $2,179 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of
non-vested
restricted stock. These shares were retired upon delivery. There were no shares of
non-vested
restricted stock that vested during the quarter and six months ended June 30, 2021.
Exercise of Stock Options
Cash received from Common stock issued as a resultthe exercise of stock options exercised during the quarters and six months ended June 30, 2023 and 2022, was $4,526, $3,267, $12,694, and 2021, was $3,267, $4,377, $7,222, and $7,846, respectively.
During the quarter and six months ended June 30, 2021, 2,9652023, 1,737 shares of Common stock with an aggregate fair market value of $863$595, and 17,392 shares of Common stock with an aggregate fair market value of $5,383, respectively, were withheld as payment in lieu of cash for stock option exercises. These shares were retired upon delivery.
Employee Stock Purchase Plan
During the quarters ended June 30, 20222023 and 2021,2022, we received net proceeds of $541$554 and $436,$541, respectively, for shares of our Common stock purchased under our employee stock purchase plan. During the six months ended June 30, 20222023 and 2021,2022, we received net proceeds of $1,006$1,133 and $841,$1,006, respectively, for shares of our Common stock purchased under our employee stock purchase plan.
10. COMMITMENTS AND CONTINGENCIES
9.
COMMITMENTS AND CONTINGENCIES
Litigation, Claims, and Assessments
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 ofseveral 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 $10,456$10,961 and $7,253$12,256 at June 30, 20222023 and December 31, 2021,2022, respectively, were established related to such programs and are included in accrued expenses and other current liabilities in our condensed consolidated unaudited balance sheets.
 
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11. RELATED PARTY TRANSACTIONS
10.
RELATED PARTY TRANSACTIONS
P
Purchasesurchases from Carrier and its affiliates comprised 60%66% and 72%60% of all inventory purchases made during the
th
e quarters ended June 30, 20222023 and 2021,2022, respectively. Purchases from Carrier and its affiliates comprised 58%65% and 67%58% of all inventory purchases made during the six months ended June 30, 20222023 and 2021,2022, respectively. At June 30, 20222023 and December 31, 2021,2022, approximately $178,000$214,000 and $90,000,$88,000, respectively, was payable to Carrier and its affiliates, net of receivables. We also sell HVAC products to Carrier and its affiliates. Revenues in our condensed consolidated unaudited statements of income for the quarters and six months ended June 30, 20222023 and 20212022 included approximately $32,000, $29,000, $33,000,$54,000, and $50,000, and $56,000, respectively, of sales to Carrier and its affiliates. We believe these transactions are conducted on terms equivalent to an
arm’s-length
basis in the ordinary course of business.
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 acquisition-related legal services. During the quarters and six months ended June 30, 2023 and 2022, and 2021, fees to this firm for services performed were $58, $97, $32,$71 and $129, respectively, and $98, respectively. At$25 and $1 was payable at June 30, 20222023 and December 31, 2021, $6 and $34, respectively, was payable to this firm.2022, respectively.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form
10-Q
contains or incorporates by reference statements that are not historical in nature and that are intended to be, and are hereby identified as, “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Statements which are not historical in nature, including the words “anticipate,” “estimate,” “could,” “should,” “may,” “plan,” “seek,” “expect,” “believe,” “intend,” “target,” “will,” “project,” “focused,” “outlook,” “goal,” “designed,” and variations of these words and negatives thereof and similar expressions are intended to identify forward-looking statements, including statements regarding, among others, (i) economic conditions, (ii) business and acquisition strategies, (iii) potential acquisitions and/or joint ventures and investments in unconsolidated entities, (iv) financing plans, and (v) industry, demographic and other trends affecting our financial condition or results of operations. These forward-looking statements are based on management’s current expectations, are not guarantees of future performance and are subject to a number of risks, uncertainties, and changes in circumstances, certain of which are beyond our control. Actual results could differ materially from these forward-looking statements as a result of several factors, including, but not limited
to:
 
general economic conditions, both in the United States and in the international markets we serve;
 
competitive factors within the HVAC/R industry;
 
effects of supplier concentration;
concentration, including conditions that impact the supply chain;
 
fluctuations in certain commodity costs;
 
consumer spending;
 
consumer debt levels;
the resurgence of the
COVID-19
pandemic;
 
the continued impact of the
COVID-19
pandemic;
new housing starts and completions;
 
capital spending in the commercial construction market;
 
access to liquidity needed for operations;
 
seasonal nature of product sales;
 
weather patterns and conditions;
 
insurance coverage risks;
 
federal, state, and local regulations impacting our industry and products;
 
prevailing interest rates;
the effect of inflation;
 
foreign currency exchange rate fluctuations;
 
international risk;
 
cybersecurity risk; and
 
the continued viability of our business strategy.
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Table of Contents
We believe these forward-looking statements are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on current expectations. For additional information regarding important factors that may affect our operations and could cause actual results to vary materially from those anticipated in the forward-looking statements, please see “Economic and Marketplace Dynamics” in the discussion below, under Impact of
COVID-19
Pandemic and Item 1A “Risk Factors” of our Annual Report on Form
10-K
for the year ended December 31, 2021,2022, as well as the other documents and reports that we file with the SEC. Forward-looking statements speak only as of the date the statements were made. We assume no obligation to update forward-looking information or the discussion of such risks and uncertainties to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information, except as required by applicable law. We qualify any and all of our forward-looking statements by these cautionary factors.
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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 Form
10-Q.
In addition, reference should be made to our audited consolidated financial statements and notes thereto, and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form
10-K
for the year ended December 31, 2021.2022.
Company Overview
Watsco, Inc. was incorporated in Florida in 1956, and, together with its subsidiaries (collectively, “Watsco,” or “we,” “us,” or “our”) is the largest distributor of air conditioning, heating, and refrigeration equipment, and related parts and supplies (“HVAC/R”) in the HVAC/R distribution industry in North America. At June 30, 2022,2023, we operated from 673 locations in 42 U.S. States, Canada, Mexico, and Puerto Rico with additional market coverage on an export basis to portions of Latin America and the Caribbean.
Revenues primarily consist of sales of air conditioning, heating, and refrigeration equipment, and related parts and supplies. Selling, general and administrative expenses primarily consist of selling expenses, the largest components of which are salaries, commissions, and marketing expenses that are variable and correlate to changes in sales. Other significant selling, general and administrative expenses relate to the operation of warehouse facilities, including a fleet of trucks and forklifts, and facility rent, a majority of which we operate under
non-cancelable
operating leases.
Sales of residential central air conditioners, heating equipment, and parts and supplies are seasonal. Furthermore, profitability can be impacted favorably or unfavorably based on weather patterns, particularly during the Summer and Winter selling seasons. Demand related to the residential central air conditioning replacement market is typically highest in the second and third quarters, and demand for heating equipment is usually highest in the first and fourth quarters. Demand related to the new construction sectors throughout most of the markets we serve tends to be fairly evenly distributed throughout the year and depends largely on housing completions and related weather and economic conditions.
Impact of the
COVID-19
Pandemic
The
COVID-19
pandemic has had widespread, rapidly-evolving and unpredictable impacts on financial markets and business practices. As conditions have continued to improve, governments and organizations have responded by adjusting their restrictions and guidelines accordingly. Although we have learned to navigate
COVID-19
while maintaining our operations in all material respects, our focus remains on promoting employee health and safety, serving our customers and ensuring business continuity.
As economic activity has been recovering and the effects of the pandemic have continued to lessen, the impact of the pandemic on our business has been more reflective of greater economic and marketplace dynamics rather than pandemic-related issues, such as location closures, mandated restrictions and employee illness. Certain of our manufacturers and suppliers continue to experience some level of supply chain disruptions caused by component availability, labor shortages, transportation delays, and other logistical challenges, resulting in longer lead times and constrained availability of HVAC/R products. These supply chain disruptions impacted our ability to fulfill contractor demand at various points during the first half of 2022. Despite these disruptions, we experienced growth in sales of residential units during the first half of 2022. We intend to continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders.
Climate Change and Reductions in CO
2
e Emissions
We believe that our business plays an important and significant role in the drive to lower CO
2
e emissions. According to the United States Department of Energy, heating and air conditioning accounts for roughly half of household energy consumption in the United States. As such, replacing older, less efficient HVAC systems with higher efficiency systems is one of the most meaningful steps homeowners can take to reduce their electricity costs and carbon footprint.footprints.
The overwhelming majority of new HVAC systems that we sell replace systems that likely operate below current minimum efficiency standards in the United States and may use more harmful refrigerants that have been, or are being,
phased-out. As
consumers replace HVAC systems with new, higher-efficiency systems, homeowners will consume less energy, save costs, and reduce their carbon footprint.footprints.
The sale of high-efficiency systems has long been a focus of ours, and we have invested in tools and technology intended to capture an increasingly richer sales mix over time. In addition, regulatory mandates will likely periodically increase the required minimum Seasonal Energy Efficiency Ratio rating, referred to as SEER, thus providing a catalyst for greater sales of higher-efficiency systems. Recently enacted regulations will increaseincreased the current minimum SEER beginning in 2023 (in general terms,(generally, to 14 SEER from 13 SEER in the Northern U.S. and to 15 SEER from 14 SEER for the Southern U.S.).
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We offer a broad variety of systems that operate above the minimum SEER standards, ranging from base-level efficiency to systems that exceed 20 SEER. Our sales of higher-efficiency residential HVAC systems (those above base-level efficiency) grew 22% organically during the first half of 2022, outpacing the overall growth rate of 20% for residential HVAC equipment in the United States. Based on estimates validated by independent sources, we averted an estimated 12.917.4 million metric tons of CO
2
e emissions during the periodfrom January 1, 2020 to June 30, 20222023 through the sale of replacement residential HVAC systems at higher-efficiency standards.
Federal Tax Credits and State Incentives
Joint Ventures with Carrier Global Corporation
Demand for higher-efficiency products, such as variable-speed systems and heat pumps, is expected to increase due to the passage of the U.S. Inflation Reduction Act of 2022 (the “IRA”) in August 2022. This legislation is intended, in part, to promote the replacement of existing systems in favor of high-efficiency heat pump systems that reduce greenhouse gas emissions, as compared to older systems, and thereby combat climate change. Programs under the IRA include enhanced tax credits for homeowners who install qualifying HVAC equipment and tax deductions for owners of commercial buildings that are upgraded to achieve defined energy
16
In 2009, we formed a joint venture with Carrier, which we refer
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savings. The IRA also sets aside $4.3 billion for state-administered consumer rebate programs designed to promote energy savings for low and medium-income households, including HVAC systems. Further details, including qualifying products, specific programs, and other regulatory requirements contemplated by the IRA are being determined and are expected to be launched during 2023.
Economic and Marketplace Dynamics
The global economic recovery from the
COVID-19
pandemic has included challenges such as Carrier Enterprise I,
inflationary
pressure and supply chain disruptions. Certain of our manufacturers and suppliers continue to experience some level of supply chain disruptions caused by reduced component availability, labor shortages, transportation delays, and other logistical challenges, resulting in which Carrier contributed company-owned locationslonger lead times and constrained availability of HVAC/R products. These challenges were exacerbated by the regulatory transition to higher SEER products that became effective in 2023. Revenues for the Sun Belt statesfirst half of 2023 reflected temporary production and Puerto Rico,availability delays by one of our primary OEM partners. We estimate that revenues were negatively impacted by approximately 4% both during the quarter and its export divisionsix months ended June 30, 2023, in Miami, Florida,each case due to constrained availability of inventory. Our OEMs are working to improve their supply chains and we contributed certain locations that distributed Carrier products. product availability in order to help us meet our customers’ needs.
We have an 80% controlling interest in Carrier Enterprise I, and Carrier has a 20%
non-controlling
interest. The export division, Carrier InterAmerica Corporation, redomesticated fromcannot estimate the U.S. Virgin Islands to Delaware effective December 31, 2019, following which Carrier InterAmerica Corporation became a separate operating entity in which we have an 80% controlling interest and Carrier has a 20%
non-controlling
interest. On August 1, 2019, Carrier Enterprise I acquired substantially allfuture impact of the HVAC assets and assumed certain of the liabilities of Peirce-Phelps, Inc., an HVAC distributor operating in Pennsylvania, New Jersey, and Delaware.
In 2011, we formed a second joint venture with Carrier, which we refer to as Carrier Enterprise II, in which Carrier contributed company-owned locations in the Northeast U.S., and we contributed certain locations operating as Homans Associates LLC (“Homans”), a Watsco subsidiary, in the Northeast U.S. Subsequently, Carrier Enterprise II purchased Carrier’s distribution operations in Mexico. We have an 80% controlling interest in Carrier Enterprise II, and Carrier has a 20%
non-controlling
interest. Effective May 31, 2019, we repurchased the 20% ownership interest in Homans from Carrier Enterprise II, following which we own 100% of Homans. Homans previously operated as a division of Carrier Enterprise II and subsequentsupply chain disruptions to the purchase operates as a wholly owned subsidiaryextent that these disruptions become more pronounced than current conditions. We continue to take proactive steps to limit the impact of these disruptions and are working closely with our suppliers to ensure the Company.
In 2012,availability of products. Also, we formed a third joint venture with Carrier, which we refercontinue to as Carrier Enterprise III. Carrier contributed 35 of its company-owned locations in Canada to Carrier Enterprise III. We have a 60% controlling interest in Carrier Enterprise III,actively monitor the situation and Carrier has a 40%
non-controlling
interest.
On April 9, 2021, we acquired certain assets and assumed certain liabilities comprising the HVAC distribution business of Temperature Equipment Corporation, an HVAC distributor operating from 32 locations in Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri and Wisconsin. We formed a new, stand-alone joint venture with Carrier, TEC Distribution LLC (“TEC”),may take further actions that operates thisalter our business. We have an 80% controlling interest in TEC, and Carrier has a 20%
non-controlling
interest.
Critical Accounting Estimates
Management’s discussion and analysis of financial condition and results of operations is based upon the condensed consolidated unaudited financial statements included in this Quarterly Report on Form
10-Q,
which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these condensed consolidated unaudited financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated unaudited financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. At least quarterly, management reevaluates its judgments and estimates, which are based on historical experience, current trends, and various other assumptions that are believed to be reasonable under the circumstances.
Our critical accounting estimates are included in our 2021 Annual Report on Form
10-K
for the year ended December 31, 2022, as filed with the SEC on February 25, 2022.24, 2023. We believe that there have been no significant changes during the quarter ended June 30, 20222023 to the critical accounting estimates disclosed in our Annual Report on Form
10-K
for the year ended December 31, 2021.2022.
 
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Results of Operations
The following table summarizes information derived from our condensed consolidated unaudited statements of income, expressed as a percentage of revenues, for the quarters and six months ended June 30, 20222023 and 2021:2022:
 
  Quarter
Ended June 30,		 Six Months
Ended June 30,		   Quarter
Ended June 30,		 Six Months
Ended June 30,		 
  2022 2021 2022 2021   2023 2022 2023 2022 
Revenues
  
 
100.0
% 
 100.0%  
 
100.0
% 
 100.0%   
 
100.0
% 
 100.0%  
 
100.0
% 
 100.0% 
Cost of sales
  
 
72.1
 
 74.2  
 
71.4
 
 74.1   
 
71.9
 
 72.1  
 
71.6
 
 71.4 
  
 
  
 
  
 
  
 
   
 
  
 
  
 
  
 
 
Gross profit
  
 
27.9
 
 25.8  
 
28.6
 
 25.9   
 
28.1
 
 27.9  
 
28.4
 
 28.6 
Selling, general and administrative expenses
  
 
14.8
 
 14.4  
 
16.4
 
 16.2   
 
15.2
 
 14.8  
 
16.6
 
 16.4 
Other income
  
 
0.3
 
 0.3  
 
0.3
 
 0.3   
 
0.4
 
 0.3  
 
0.3
 
 0.3 
  
 
  
 
  
 
  
 
   
 
  
 
  
 
  
 
 
Operating income
  
 
13.5
 
 11.7  
 
12.5
 
 10.0   
 
13.3
 
 13.5  
 
12.1
 
 12.5 
Interest expense, net
  
 
0.1
 
 0.0  
 
0.0
 
 0.0   
 
0.2
 
 0.1  
 
0.1
 
 0.0 
  
 
  
 
  
 
  
 
   
 
  
 
  
 
  
 
 
Income before income taxes
  
 
13.4
 
 11.7  
 
12.5
 
 10.0   
 
13.1
 
 13.4  
 
12.0
 
 12.5 
Income taxes
  
 
2.8
 
 2.4  
 
2.6
 
 2.0   
 
2.8
 
 2.8  
 
2.6
 
 2.6 
  
 
  
 
  
 
  
 
   
 
  
 
  
 
  
 
 
Net income
  
 
10.6
 
 9.3  
 
9.9
 
 8.0   
 
10.3
 
 10.6  
 
9.4
 
 9.9 
Less: net income attributable to
non-controlling
interest
  
 
1.5
 
 1.5  
 
1.5
 
 1.3   
 
1.6
 
 1.5  
 
1.5
 
 1.5 
  
 
  
 
  
 
  
 
   
 
  
 
  
 
  
 
 
Net income attributable to Watsco, Inc.
  
 
9.0
% 
 7.8%  
 
8.4
% 
 6.7%   
 
8.6
% 
 9.0%  
 
8.0
% 
 8.4% 
  
 
  
 
  
 
  
 
   
 
  
 
  
 
  
 
 
Note: Due to rounding, percentages may not add up tototal 100.
The following narratives reflect our acquisitionsacquisition of Makdad IndustrialCapitol District Supply Co., Inc. (“MIS”Capitol”) in August 2021, Acme Refrigeration of Baton Rouge LLC (“ACME”) in May 2021, and Temperature Equipment Corporation in April 2021.March 2023. We did not acquire any businesses during the quarter ended June 30, 2023 or the quarter or six months ended June 30, 2022.
In the following narratives, computations and other information referring to “same-store basis” exclude the effects of locations closed, acquired, or locations opened, in each case during the immediately preceding 12 months, unless such locations are within close geographical proximity to existing locations. At June 30, 2023 and 2022, four and 2021, nine and one locations, respectively, that we opened during the immediately preceding 12 months were near existing locations and were therefore included in “same-store basis” information.
The table below summarizes the changes in our locations for the 12 months ended June 30, 2022:2023:
 
   
Number of

Locations
 
June 30, 20212022
   655673 
Opened
   164
Closed
(4) 
December 31, 2022
673
Opened
3 
Acquired
   63 
Closed
   (6) 
December 31, 2021
671
Opened
7
Closed
(5) 
  
 
 
 
June 30, 20222023
  
 
673
 
  
 
 
 
Second Quarter of 20222023 Compared to Second Quarter of 2021
Revenues2022
Revenues
   
Quarters Ended June 30,
         
(in millions)
  2023   2022   Change 
Revenues
  
$
2,003.1
 
  $2,133.8   $(130.7)    (6%) 
The decrease in revenues for the second quarter of 2022 increased $284.12023 included $2.4 million or 15%, as compared to the second quarter of 2021, including $11.2from locations closed, offset by $3.6 million attributable to the new locations acquired and $14.3$3.1 million from other locations opened during the preceding 12 months, offsetmonths.
   
Quarters Ended June 30,
         
(in millions)
  2023   2022   Change 
Same-store sales
  
$
1,996.3
 
  $2,131.3   $(135.0)    (6%) 
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The following table presents our revenues, as a percentage of sales, by $5.2 millionmajor product lines and the related percentage change in revenues from locations closed. Sales of the prior period:
   % of Sales  % Change 
   2023  2022  2023  2022 
HVAC equipment
  
 
69
% 
  70%  
 
(8
%) 
  19% 
Other HVAC products
  
 
27
% 
  26%  
 
(7
%) 
  23% 
Commercial refrigeration products
  
 
4
% 
  4%  
 
1
% 
  26% 
HVAC equipment (70%sales reflect a 12% decrease in residential products, which is composed of sales) increased 19%, sales ofunitary compressor-bearing systems, furnaces, and other HVAC products (26% of sales) increased 23%indoor components, (13% decrease in U.S. markets and a 2% decrease in international markets) and an 18% increase in sales of commercial refrigeration products (4%HVAC equipment (17% increase in U.S. markets and a 22% increase in international markets). Domestic sales of sales) increased 26%. Onunitary compressor-bearing systems declined 12%, reflecting a same-store basis, revenues increased $263.8 million, or 14%,21% decrease in units and a 9% increase in average selling price.
Gross Profit
   Quarters Ended June 30,        
(in millions)
  2023  2022  Change 
Gross profit
  
$
562.6
 
 $595.5  $(32.9)    (6%) 
Gross margin
  
 
28.1
% 
  27.9%    
Gross profit margin improved 20 basis-points primarily due to the timing of price increases in 2023 as compared to the same period in 2021, reflecting a 13% increase in sales of HVAC equipment (70% of sales), which included a 14% increase in sales of residential HVAC equipment (15% increase in U.S. markets) and a 5% increase in sales of commercial HVAC equipment, a 15% increase in sales of other HVAC products (26% of sales) and a 26% increase in sales of commercial refrigeration products (4% of sales). For HVAC equipment, the increase in revenues was primarily due to the realization of price increases and a higher mix of high-efficiency air conditioning and heating systems, which sell at higher unit prices, resulting in a 16% increase in the average selling price and a 1% decrease in volume, as well as higher sales of commercial HVAC equipment.2022.
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Gross Profit
Gross profit for the second quarter of 2022 increased $117.6 million, or 25%, as compared to the second quarter of 2021, primarily as a result of increased revenues. Gross profit margin for the quarter ended June 30, 2022 improved 210 basis-points to 27.9% versus 25.8% for the same period in 2021, primarily due to the benefits of our use of technologies designed to optimize pricing and margins, passing on price increases from our suppliers to our customers, and an improved sales mix of higher-efficiency HVAC systems.
Selling, General and Administrative Expenses
   Quarters Ended June 30,        
(in millions)
  2023  2022  Change 
Selling, general and administrative expenses
  
$
304.2
 
 $314.8  $(10.6)    (3%) 
Selling, general and administrative expenses as a percentage of revenues
  
 
15.2
% 
  14.8%    
Selling, general and administrative expenses for the second quarter of 2022 increased $48.1 million, or 18%, as compared to the second quarter of 2021,2023 decreased primarily due to increasedlower revenues. Selling, general and administrative expenses as a percent of revenues for the second quarter of 2022 increased to 14.8% versus 14.4% for the same period in 2021. On a same-store basis, selling, general and administrative expenses increased 17%decreased 4% as compared to the same period in 2021,2022, primarily due to increased higherdecreased variable selling costs driven by the increase in revenues, investments in headcount, and new locations opened in 2022.commensurate with decreased revenues.
Other Income
Other income of $6.3$7.2 million and $5.5$6.3 million for the second quarters of 2023 and 2022, and 2021, respectively, representedrepresents our share of the net income of Russell Sigler, Inc. (“RSI”), in which we have a 38.1% equity interest.
Interest Expense, Net
Interest expense, net for the second quarter of 20222023 increased $0.7$2.3 million, or 148%208%, primarily as a result of an increase in average outstanding borrowings anddue to a higher effective interest rate in each caseand higher average borrowings under our revolving credit facility for the 2023 period as compared to the same period in 2021.2022.
Income Taxes
   Quarters Ended June 30,        
(in millions)
  2023  2022  Change 
Income taxes
  
$
56.9
 
 $60.5  $(3.6)    (6%) 
Effective income tax rate
  
 
24.6
% 
  23.8%    
Income taxes increased to $60.5 million for the second quarter of 2022, as compared to $44.2 million for the second quarter of 2021, and represent a composite of the income taxes attributable to our wholly owned operations and income taxes attributable to theour joint ventures with Carrier joint ventures,Global Corporation (“Carrier”), which are primarily taxed as partnerships for income tax purposes; therefore, Carrier is responsible for its proportionate share of income taxes attributable to its share of earnings from these joint ventures. The increase in the effective income tax rates attributable to us were 23.8% and 23.4% for the quarters ended June 30, 2022 and 2021, respectively. The increaserate was primarily due to higher state income taxes proportionately higher income, and lower share-based compensation deductions in the second quarter of 20222023 as compared to the same period in 2021.2022.
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Net Income Attributable to Watsco, Inc.
Net income attributable to Watsco, Inc. for the quarter ended June 30, 2022 increased $48.52023 decreased $19.8 million, or 34%10%, compared to the same period in 2021.2022. The increasedecrease was primarily driven by higherlower revenues and expandedgross profit margins,and higher interest expense, net, partially offset by higherlower selling, general and administrative expenses, higher other income, taxes, and an increase in the netlower income attributable to the
non-controllingtaxes.
interest.
First Half of 20222023 Compared to First Half of 2021
Revenues2022
Revenues
   Six Months Ended June 30,         
(in millions)
  2023   2022   Change 
Revenues
  
$
3,553.7
 
  $3,657.3   $(103.6)    (3%) 
The decrease in revenues for the first half of 2022 increased $671.62023 included $4.0 million or 22%, as compared to the first half of 2021, including $102.1from locations closed, offset by $4.7 million attributable to the new locations acquired and $23.9$6.3 million from other locations opened during the preceding 12 months, offsetmonths.
   Six Months Ended June 30,         
(in millions)
  2023   2022   Change 
Same-store sales
  
$
3,542.7
 
  $3,653.3   $(110.6)    (3%) 
The following table presents our revenues, as a percentage of sales, by $7.3 millionmajor product lines and the related percentage change in revenues from locations closed. Sales of the prior period:
   % of Sales  % Change 
   2023  2022  2023  2022 
HVAC equipment
  
 
69
% 
  69%  
 
(4
%) 
  24% 
Other HVAC products
  
 
27
% 
  28%  
 
(5
%) 
  27% 
Commercial refrigeration products
  
 
4
% 
  3%  
 
6
% 
  30% 
HVAC equipment (69%sales reflect a 9% decrease in residential products, which is composed of sales) increased 24%, sales ofunitary compressor-bearing systems, furnaces, and other HVAC products (28% of sales) increased 27%,indoor components, (9% decrease in U.S. markets and a 4% decrease in international markets) and a 21% increase in sales of commercial refrigeration products (3%HVAC equipment (21% increase in U.S. markets and a 21% increase in international markets). Domestic sales of sales) increased 30%. Onunitary compressor-bearing systems declined 7%, reflecting a same-store basis, revenues increased $552.9 million, or 19%,16% decrease in units and a 9% increase in average selling price.
Gross Profit
   Six Months Ended June 30,        
(in millions)
  2023  2022  Change 
Gross profit
  
$
1,010.8
 
 $1,045.9  $(35.1)    (3%) 
Gross margin
  
 
28.4
% 
  28.6%    
Gross profit margin declined 20 basis-points primarily due to less beneficial pricing actions taken by our HVAC equipment suppliers in 2023 as compared to the same period in 2021, reflecting an 18% increase in sales of HVAC equipment (69% of sales), which included a 19% increase in sales of residential HVAC equipment (20% increase in U.S. markets) and a 15% increase in sales of commercial HVAC equipment, a 19% increase in sales of other HVAC products (27% of sales) and a 30% increase in commercial refrigeration products (4% of sales). For HVAC equipment, the increase in revenues was primarily due to the realization of price increases and a higher mix of high-efficiency air conditioning and heating systems, which sell at higher unit prices, resulting in a 17% increase in the average selling price and a 3% increase in volume, as well as higher sales of commercial HVAC equipment.2022.
Gross Profit
Gross profit for the first half of 2022 increased $273.1 million, or 35%, as compared to the first half of 2021, primarily as a result of increased revenues. Gross profit margin for the six months ended June 30, 2022 improved 270 basis-points to 28.6% versus 25.9% for the same period in 2021, primarily due to the benefits of our use of technologies designed to optimize pricing and margins, passing on price increases from our suppliers to our customers, and an improved sales mix of higher-efficiency HVAC systems.
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Selling, General and Administrative Expenses
   Six Months Ended June 30,        
(in millions)
  2023  2022  Change 
Selling, general and administrative expenses
  
$
591.2
 
 $598.1  $(6.9)    (1%) 
Selling, general and administrative expenses as a percentage of revenues
  
 
16.6
% 
  16.4%    
Selling, general and administrative expenses for the first half of 2022 increased $113.8 million, or 23%, as compared to the first half of 2021,2023 decreased primarily due to increased revenues from existing and newly acquired locations. Selling, general and administrative expenses as a percentagelower variable costs commensurate with the decline in revenues.
20
Table of revenues for the six months ended June 30, 2022 increased to 16.4% versus 16.2% for the same period in 2021. On a same-store basis, selling, general and administrative expenses increased 18% as compared to the same period in 2021, primarily due to increased higher variable selling costs driven by the increase in revenues, investments in headcount, and new locations opened in 2022.Contents
Other Income
Other income of $10.4$10.9 million and $10.2$10.4 million for the first half of 2023 and 2022, and 2021, respectively, representedrepresents our share of the net income of RSI, in which we have a 38.1% equity interest.
Interest Expense, Net
Interest expense, net for the first half of 20222023 increased $1.1$2.4 million, or 211%142%, primarily asdue to a result of an increase inhigher effective interest rate, partially offset by lower average outstanding borrowings, in each case under our revolving credit facility, for the 2023 period as compared to the same period in 2021.2022.
Income Taxes
   Six Months Ended June 30,        
(in millions)
  2023  2022  Change 
Income taxes
  
$
90.6
 
 $96.1  $(5.5)    (6%) 
Effective income tax rate
  
 
24.1
% 
  23.8%    
Income taxes increased to $96.1 million for the first half of 2022, as compared to $59.9 million for the first half of 2021 and represent a composite of the income taxes attributable to our wholly owned operations and income taxes attributable to theour joint ventures with Carrier joint ventures,Global Corporation (“Carrier”), which are primarily taxed as partnerships for income tax purposes; therefore, Carrier is responsible for its proportionate share of income taxes attributable to its share of earnings from these joint ventures. The increase in the effective income tax rates attributable to us were 23.8% and 23.0% for the first half of 2022 and 2021, respectively. The increaserate was primarily due to higher state income taxes proportionatelypartially offset by higher income, and lower share-based compensation deductions in 20222023 as compared to 2021.the same period in 2022.
Net Income Attributable to Watsco, Inc.
Net income attributable to Watsco, Inc. for the first half of 2022 increased $106.72023 decreased $23.0 million, or 54%8%, compared to the same period in 2021.2022. The increasedecrease was primarily driven by higherlower revenues and expandedgross profit margins,and higher interest expense, net, partially offset by higherlower selling, general and administrative expenses, higher other income, taxes, and an increase in the netlower income attributable to the
non-controllingtaxes.
interest.
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to execute our business strategy and fund operating and investing activities, taking into consideration the seasonal demand for HVAC/R products, which peaks in the months of May through August. Significant factors that could affect our liquidity include the following:
 
cash needed to fund our business (primarily working capital requirements);
 
borrowing capacity under our revolving credit facility;
 
the ability to attract long-term capital with satisfactory terms;
 
acquisitions, including joint ventures and investments in unconsolidated entities;
 
dividend payments;
 
capital expenditures; and
 
the timing and extent of common stock repurchases.
Sources and Uses of Cash
We rely on cash flows from operations and borrowing capacity under our revolving credit agreement to fund seasonal working capital needs and for other general corporate purposes in the short-term and the long-term, including dividend payments (if and as declared by our Board of Directors), capital expenditures, business acquisitions, and development of our long-term operating and technology strategies. Additionally, we may also generate cash through the issuance and sale of our Common stock.
As of June 30, 2022,2023, we had $129.0$162.5 million of cash and cash equivalents, of which $99.3$116.2 million was held by foreign subsidiaries. The repatriation of cash balances from our foreign subsidiaries could have adverse tax impacts or be subject to capital controls; however, these balances are generally available to fund the ordinary business operations of our foreign subsidiaries without legal restrictions.
We believe that our operating cash flows, cash on hand, funds available for borrowing under our revolving credit agreement, and funds available from sales of our Common stock under our
at-the-market
offering program, ATM Program (as defined below), each of which is described below, will be sufficient to meet our liquidity needs for the foreseeable future. However, there can be no assurance that our current sources of available funds will be sufficient to meet our cash requirements.
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Our access to funds under our revolving credit agreement depends on the ability of the syndicate banks to meet their respective funding commitments. Disruptions in the credit and capital markets could adversely affect our ability to draw on our revolving credit agreement and may also adversely affect the determination of interest rates, particularly rates based on LIBOR,the Secured Overnight
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Financing Rate (“SOFR”), which is one of the base rates under our revolving credit agreement. On March 5, 2021, the United Kingdom Financial Conduct Authority,SOFR has limited historical data and is a secured lending rate, which regulates LIBOR, confirmed that LIBOR will either ceasecould give rise to be provided by any administrator or will no longer be representative after June 30, 2023 for USD LIBOR reference rates. Our revolving credit agreement provides that it may be amended to replace LIBOR with an alternate benchmark rate. The impact of such an amendment cannot be entirely predicted but could result in an increaseuncertainties and volatility in the cost of our debt.benchmark rates. Additionally, disruptions in the credit and capital markets could also result in increased borrowing costs and/or reduced borrowing capacity under our revolving credit agreement.
Working Capital
Working capital increased to $1,562.6$1,926.6 million at June 30, 20222023 from $1,234.7$1,392.2 million at December 31, 2021, primarily2022, due to: (i) higher inventory balances driven by the seasonal
ramp-up
in inventories in connection with our selling season, new inventory requirements pertaining to the transition to higher minimum efficiency levels for residential HVAC systems that went into effect on January 1, 2023, greater inventory carry as a consequence of inventory in support of stronger business conditions, as well as deeper inventory stocking due tovarious supply chain disruptions, and increased cost of inventory due to inflation, andinflation; (ii) higher accounts receivable due to the seasonality of our business; and (iii) the classification of borrowings under our revolving credit agreement as long-term at June 30, 2023, which were offset by an increase in accounts payable consistent with overall increased sales. These increases were partially offset by the timing of accounts payable and accrued liabilities.
change in inventory.
Cash Flows
The following table summarizes our cash flow activity for the six months ended June 30, 20222023 and 20212022 (in millions):
 
   
2022
   
2021
   
Change
 
Cash flows provided by operating activities
  
$
73.1
 
  $81.9   $(8.8) 
Cash flows used in investing activities
  
$
(18.9
) 
  $(131.5)   $112.6 
Cash flows used in financing activities
  
$
(42.3
) 
  $(1.0)   $(41.3) 
   
2023
   
2022
   
Change
 
Cash flows (used in) provided by operating activities
  
$
(89.2
) 
  $73.1   $(162.3) 
Cash flows used in investing activities
  
$
(17.6
) 
  $(18.9)   $1.3 
Cash flows provided by (used in) financing activities
  
$
120.5
 
  $(42.3)   $162.8 
The individual items contributing to cash flow changes for the periods presented are detailed in the condensed consolidated unaudited statements of cash flows contained in this Quarterly Report on Form
10-Q.
Operating Activities
The decrease in net cash provided by operating activities was primarily due to increases in the level of inventory, partially offset by an increase in net income due to strong business conditions and timing of vendor payments and lower net income in 20222023 as compared to 2021.2022, partially offset by the timing of collections and inventory purchases.
Investing Activities
Net cash used in investing activities was lower in 2022 primarily due to lower capital expenditures and higher proceeds from the sale of property and equipment partially offset by cash consideration paid for businesses acquiredour acquisition of Capitol in 2021.2023.
Financing Activities
The increase in net
Net cash used inprovided by financing activities wasincreased primarily attributabledue to $21.0 million inhigher borrowings under our revolving credit agreement and proceeds from the
non-controlling
interest sale of Common stock used for its contribution to the acquisition of TEC in 2021 andrepayments under our revolving credit agreement, partially offset by an increase in dividends paid in 2022.2023.
Revolving Credit Agreement
We maintainOn March 16, 2023, we entered into an unsecured, $560.0five-year $600.0 million syndicated multicurrency revolving credit agreement, which we usereplaced in its entirety our prior five-year $560.0 million unsecured revolving credit agreement that was nearing maturity. Proceeds from the new facility were used to fundrepay the $235.5 million outstanding under the prior facility. Additional proceeds may be used for, among other things, funding seasonal working capital needs and for other general corporate purposes, including acquisitions, dividends (if and as declared by our Board of Directors), capital expenditures, stock repurchases, and issuances of letters of credit. The revolving credit facility has a seasonal component from October 1 to March 31, during which the borrowing capacity may be reduced to $460.0$500.0 million at our discretion (which effectively reduces fees payable in respect of the unused portion of the commitment), and we effected this reduction in 2021.. Included in the revolving credit facility are a $100.0$125.0 million swingline subfacility,loan sublimit, a $10.0 million letter of credit subfacility,sublimit, a $75.0 million alternative currency borrowing sublimit, and an $8.0$10.0 million Mexican borrowing sublimit.subfacility. The credit agreement matures on December 5, 2023.March 16, 2028.
Borrowings under the revolving credit facility bear interest at either Term SOFR or Daily Simple SOFR-based rates plus 0.10%, plus a spread which ranges from 100.0 to 137.5 basis-points (Term SOFR and Daily Simple SOFR plus 100.0 basis-points at June 30, 2023), depending on our ratio of total debt to EBITDA, or on rates based on the highest of the Federal Funds Effective Rate plus 0.5%, the Prime Rate or Term SOFR plus 1.0%, in each case plus a spread which ranges from 0 to 50.0 basis-points (0 basis-points at June 30, 2023), depending on our ratio of total debt to EBITDA. We pay a variable commitment fee on the unused portion of the commitment under the revolving credit agreement, ranging from 12.5 to 27.5 basis-points (12.5 basis-points at June 30, 2023). We paid fees of $0.6 million in connection with entering into the revolving credit agreement, which are being amortized ratably through the maturity of the facility in March 2028.
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At June 30, 2022 and December 31, 2021, $203.62023, $342.9 million and $89.0 million, respectively, werewas outstanding under the revolving credit agreement. The revolving credit agreement contains customary affirmative and negative covenants, including financial covenants with respect to consolidated leverage and interest coverage ratios, and other customary restrictions. We believe we were in compliance with all covenants at June 30, 2022.    2023.
At-the-Market
Offering Program
On August 6, 2021,February 25, 2022, we entered into aan amended and restated sales agreement with Robert W. Baird & Co. Inc. (“Baird”),and Goldman Sachs & Co. LLC, which enables the Company to issue and sell shares of Common stock in one or more negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), for a maximum aggregate offering amount of up to $300.0 million (the “ATM Program”). The offer and sale of our Common stock pursuant to the ATM Program has been registered under the Securities Act pursuant to our automatically effective shelf registration statement on Form
S-3
(File
No. 333-260758).
On February 25, 2022, we entered into an amended
During the quarter and restated sales agreement, together with Baird and Goldman Sachs & Co. LLC (“GS”), for the purpose of adding GS as an additional sales agent and making necessary conforming changes. The amended and restated sales agreement otherwise retains all material terms of the original sales agreement.
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As ofsix months ended June 30, 2022, no2023, we issued and sold 45,000 shares of Common stock had been soldunder the ATM Program for net proceeds of $15.2 million. Direct costs of $0.4 million incurred in connection with the offering were charged against the proceeds from the sale of Common stock and reflected as a reduction of
paid-in
capital. At June 30, 2023, $284.7 million remained available for sale under the ATM Program.
Contractual Obligations
On October 15, 2022, 975,622 shares of Class B restricted stock held by our Chief Executive Officer (“CEO”) will vest. The CEO may elect to satisfy the tax withholding obligations in connection with the vesting of the restricted stock either by the Company’s withholding of shares otherwise deliverable to the CEO, or in cash, or any combination of the two. If the CEO elects to satisfy his tax withholding obligation through the Company’s withholding of shares, then we will satisfy the withholding tax obligations in cash. Based on the closing price of Watsco’s Class B common stock and withholding tax rates in effect at June 30, 2022, the estimated withholding tax obligation would have been approximately $94.0 million had the shares vested on June 30, 2022. We intend to satisfy any such withholding obligations using cash on hand or borrowing availability under our revolving credit agreement described above.
Investment in Unconsolidated Entity
Carrier Enterprise I, one of our joint ventures with Carrier, in which we have an 80% controlling interest, has a 38.1% ownership interest in RSI, an HVAC distributor operating from 3534 locations in the Western U.S. Our proportionate share of the net income of RSI is included in other income in our condensed consolidated unaudited statements of income.
Carrier Enterprise I is a party to a shareholders’ agreement (the “Shareholders’ Agreement”) with RSI and its shareholders.shareholders, consisting of five Sigler second generation family siblings and their affiliates, who collectively own 55.8% of RSI (the “RSI Majority Holders”) and certain next-generation Sigler family members and an employee, who collectively own 3.1% of RSI (the “RSI Minority Holders” and, together with the RSI Majority Holders, the “RSI Shareholders”). Pursuant to the Shareholders’ Agreement, RSI’s shareholdersthe RSI Shareholders have the right to sell, and Carrier Enterprise I has the obligation to purchase, their respective shares of RSI for a purchase price determined based on eitherthe higher of book value or a multiple of EBIT, the latter of which Carrier Enterprise I used to calculate the price paid for its 38.1% investment held in RSI. RSI’s shareholdersThe RSI Shareholders may transfer their respective shares of RSI common stock only to members of the Sigler family or to Carrier Enterprise I, and, at any time from and after the date on which Carrier Enterprise I owns 85% or more of RSI’s outstanding common stock, it has the right, but not the obligation, to purchase from RSI’s shareholdersthe RSI Shareholders the remaining outstanding shares of RSI common stock. At June 30, 2022,2023, using the estimatedcriteria set forth in the Shareholders’ Agreement, the valuation of the RSI Shareholders’ RSI common stock was approximately $374.0 million. In July 2023, the Company, Carrier Enterprise I and the RSI Majority Holders entered into an agreement that (1) provides Carrier Enterprise I the discretion, but not the obligation, to fund up to 80% of any purchase amount wefrom the RSI Majority Holders of their RSI shares, as required under the Shareholders’ Agreement, using Watsco Common stock, (2) provides that any such Watsco common stock actually issued would be contingently liablevalued based on the average volume-weighted average price of the Watsco Common stock for was approximately $306.0 million.the ten trading days immediately preceding the payment date for the applicable RSI shares and (3) limits the amount of RSI shares that may be collectively sold by the RSI Majority Holders to Carrier Enterprise I under the Shareholders’ Agreement to $125.0 million during any rolling 12-month period. We believe that our operating cash flows, cash on hand, and funds available for borrowing under our revolving credit agreement, or use of the ATM Program would be sufficient to purchase any additional ownership interests in RSI.
RSI
.
Acquisitions
On August 20, 2021,March 3, 2023, one of our wholly owned subsidiaries acquired MIS,Capitol, a distributor of air conditioning and heating products with annual sales of approximately $13.0 million, operating from sixthree locations in Pennsylvania.New York. Consideration for the purchase consisted of $3.2$1.3 million in cash, and the issuance of 3,627 shares of Common stock having a fair value of $1.0 million, net of cash acquired of $0.2 million.
On May 7, 2021, we acquired certain assets and assumed certain liabilities of ACME, a distributor of air conditioning, heating, and refrigeration products, operating from 18 locations in Louisiana and Mississippi, for $22.9 million less certain average revolving indebtedness. Consideration for the purchase consisted of $18.1 million in cash, 8,492 shares of Common stock having a fair value of $2.6$0.1 million, and $3.1 million repayment of indebtedness, net of cash acquired of $1.3 million.
On April 9, 2021, we acquired certain assets and assumed certain liabilities comprising the HVAC distribution business of Temperature Equipment Corporation, an HVAC distributor operating from 32 locations in Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri and Wisconsin. We formed a new, stand-alone joint venture with Carrier, TEC, which operates this business. We have an 80% controlling interest in TEC, and Carrier has a 20%
non-controlling
interest. Consideration for the purchase was paid in cash, consisting of $105.2 million paid to Temperature Equipment Corporation (Carrier contributed $21.0 million and we contributed $84.2 million) and $1.5$1.8 million for repayment of indebtedness.
We continually evaluate potential acquisitions and/or joint ventures and investments in unconsolidated entities. We routinely hold discussions with several acquisition candidates. Should suitable acquisition opportunities arise that would require additional financing, we believe our financial position and earnings history provide a sufficient basis for us to either obtain additional debt financing at competitive rates and on reasonable terms or raise capital through the issuance of equity securities.
Common Stock Dividends
We paid cash dividends of $4.15$4.90 and $3.725$4.15 per share of Common stock and Class B common stock during the six months ended June 30, 20222023 and 2021,2022, respectively. On July 1, 2022,3, 2023, our Board of Directors declared a regular quarterly cash dividend of $2.20$2.45 per share of both Common and Class B common stock that was paid on July 29, 202231, 2023 to shareholders of record as of July 15, 2022.17, 2023. Future dividends and/orand changes in dividend rates are at the sole discretion of the Board of Directors and depend upon factors including, but not limited to, cash flow generated by operations, profitability, financial condition, cash requirements, and future prospects.
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Company Share Repurchase Program
In September 1999, our Board of Directors authorized the repurchase, at management’s discretion, of up to 7,500,000 shares of common stock in the open market or via private transactions. Shares repurchased under the program are accounted for using the cost method and result in a reduction of shareholders’ equity. We last repurchased shares under this plan in 2008. In aggregate, 6,370,913 shares of Common and Class B common stock have been repurchased at a cost of $114.4 million since the inception of the program. At June 30, 2022,2023, there were 1,129,087 shares remaining authorized for repurchase under the program. The IRA includes, among other provisions, a 1% excise tax on stock repurchases effective January 1, 2023. In considering any further stock repurchases under our repurchase program, we intend to evaluate the impact of the IRA’s 1% excise tax.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the information regarding market risk provided in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form
10-K
for the year ended December 31, 2021.2022.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule
13a-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are, among other things, designed to ensure that information required to be disclosed by us under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer (“CEO”), Executive Vice President (“EVP”) and Chief Financial Officer (“CFO”), to allow for timely decisions regarding required disclosure and appropriate SEC filings.
Our management, with the participation of our CEO, EVP and CFO, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, and, based on that evaluation, our CEO, EVP and CFO concluded that our disclosure controls and procedures were effective, at a reasonable assurance level, at and as of such date.
Changes in Internal Control over Financial Reporting
We are continuously seeking to improve the efficiency and effectiveness of our operations and of our internal controls. This results in refinements to processes throughout the Company. However, there were no changes in internal controls over financial reporting (as such term is defined in Rules
13a-15(f)
and
15d-15(f)
under the Exchange Act) during the quarter ended June 30, 20222023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information with respect to this item may be found in Note 910 to our condensed consolidated unaudited financial statements contained in this Quarterly Report on Form
10-Q
under the caption “Litigation, Claims, and Assessments,” which information is incorporated by reference in this Item 1 of Part II of this Quarterly Report on Form
10-Q.
ITEM 1A. RISK FACTORS
Information about risk factors for the quarter ended June 30, 20222023 does not differ materially from that set forth in Part I, Item 1A of our Annual Report on Form
10-K
for the year ended December 31, 2021.2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS5. OTHER INFORMATION
During the quarter ended June 30, 2023,
Recent Sales none
of Unregistered Securitiesour officers or directors adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule
10b5-1(c)
under the Exchange Act or any
“non-Rule
10b5-1
trading arrangement”, as defined in Item 408 of Regulation
S-K.
On April 12, 2022, we issued 28As previously reported, Carrier Enterprise I is a party to a shareholders’ agreement (the “Shareholders’ Agreement”) with RSI and its shareholders, consisting of five Sigler second generation family siblings and their affiliates, who collectively own 55.8% of RSI (the “RSI Majority Holders”) and certain next-generation Sigler family members and an employee, who collectively own 3.1% of RSI (the “RSI Minority Holders” and, together with the RSI Majority Holders, the “RSI Shareholders”). Pursuant to the Shareholders’ Agreement, the RSI Shareholders have the right to sell, and Carrier Enterprise I has the obligation to purchase, their respective shares of ourRSI for a purchase price determined based on the higher of book value or a multiple of EBIT, the latter of which Carrier Enterprise I used to calculate the price for its 38.1% investment held in RSI. At June 30, 2023, using the criteria set forth in the Shareholders’ Agreement, the valuation of the
RSI
Shareholders’ RSI common stock was approximately $374.0 million.
On July 28, 2023, the Company, Carrier Enterprise I and the RSI Majority Holders entered into an agreement that (1) provides Carrier Enterprise I the discretion, but not the obligation, to fund up to 80% of any purchase from the RSI Majority Holders of their RSI common stock, as required under the Shareholders’ Agreement, using Watsco Common stock (the “Offered Shares”), (2) provides that any Offered Shares actually issued would be valued based on the average volume-weighted average price of the Company’s Common stock for the ten trading days immediately preceding the payment date for the applicable RSI shares and (3) limits the amount of RSI shares that may be collectively sold by the RSI Majority Holders to our Profit Sharing Retirement Plan & Trust (the “Plan”) representing an additional employer matchCarrier Enterprise I under the Plan forShareholders’ Agreement to $125.0 million during any rolling 12-month period. The Company has not issued or sold any Offered Shares, and there is no assurance that the plan year ended December 31, 2021, without registration. This issuance was exemptCompany will issue and sell any Offered Shares, nor is the number of Offered Shares that may be issued and sold currently determinable.
The Offered Shares that may be issued to the RSI Majority Holders were offered in reliance on an exemption from registration underprovided by Section 4(a)(2) of the Securities Act of 1933, as amended pursuant(the “Securities Act”), and Rule 506 of Regulation D promulgated thereunder. The Company relied on this exemption from registration based in part on representations made by the RSI Majority Holders, including that each RSI Majority Holder is an “accredited investor”, as defined in Rule 501(a) promulgated under the Securities Act.
Additionally, on July 28, 2023, the Company entered into an agreement to Section 3(a)(2) thereof. The Plan is a profit sharing retirement plan that is qualified under Section 401 of the Internal Revenue Code of 1986, as amended. The assets of the Plan are held in a single trust fund for the benefit of our employees, and the Plan does not hold assets for the benefit of the employees of any other employer. All of the contributions to the Plan from our employees have been invested in assets other than our Common stock. We have contributedacquire all of the assets of an HVAC distribution company, pursuant to which, at closing, the Company would pay $95.0 million, subject to adjustment, to the seller in the form of the Company’s Common stock held(the “Purchase Shares”). Based on the closing price of the Company’s Common stock of $359.50 per share, as reported by the Plan as a discretionary matching contribution, which, atNew York Stock Exchange on August 2, 2023, the timeCompany would issue approximately 264,256 Purchase Shares. Consummation of contribution, was lowerthis transaction is subject to conditions outside of the Company’s and the seller’s control, and no closing date has been established, nor will the precise number of Purchase Shares be determined until, and subject to, the closing of such transaction. The Purchase Shares that may be issued to the seller were offered in value thanreliance on an exemption from registration provided by Section 4(a)(2) of the employee contributionsSecurities Act and Rule 506 of Regulation D promulgated thereunder. The Company relied on this exemption from registration based in part on representations made by the seller, including that the contribution matched.seller is an “accredited investor”, as defined in Rule 501(a) promulgated under the Securities Act.
The offer and sale of the securities described in this Item 5 have not been registered under the Securities Act or any state securities laws. The securities may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. This Quarterly Report is not an offer to sell or the solicitation of an offer to buy the securities described herein.
 
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ITEM 6. EXHIBITS
 
31.1 #  Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a- 15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 #  Certification of Executive Vice President pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.3 #  Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a- 15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 +  Certification of Chief Executive Officer, Executive Vice President, and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
101.INS #  Inline 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.
104  The cover page from the Company’s Quarterly Report on Form
10-Q
for the quarter ended June 30, 2022,2023, formatted in Inline XBRL.
 
#
filed herewith.
+
furnished herewith.
 
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SIGNATURE
Pursuant to the requirements of the Securities
Secu
rities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  WATSCO, INC.
  (Registrant)
Date: August 4, 20223, 2023  By: 
/s/ Ana M. Menendez
   Ana M. Menendez
   Chief Financial Officer (on behalf of the Registrant and as Principal Financial Officer)
 
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