Cover Page
Cover Page - shares | 3 Months Ended | |
Mar. 31, 2020 | May 04, 2020 | |
Document Information [Line Items] | ||
Document Type | 10-Q | |
Document Period End Date | Mar. 31, 2020 | |
Document Fiscal Year Focus | 2020 | |
Document Fiscal Period Focus | Q1 | |
Current Fiscal Year End Date | --12-31 | |
Amendment Flag | false | |
Entity Registrant Name | WATSCO INC | |
Entity Central Index Key | 0000105016 | |
Entity File Number | 1-5581 | |
Entity Incorporation, State or Country Code | FL | |
Document Quarterly Report | true | |
Document Transition Report | false | |
Entity Tax Identification Number | 59-0778222 | |
Entity Address, Address Line One | 2665 South Bayshore Drive | |
Entity Address, City or Town | Miami | |
Entity Address, Postal Zip Code | 33133 | |
Entity Address, Address Line Two | Suite 901 | |
Entity Address, State or Province | FL | |
City Area Code | 305 | |
Local Phone Number | 714-4100 | |
Entity Current Reporting Status | Yes | |
Entity Interactive Data Current | Yes | |
Entity Filer Category | Large Accelerated Filer | |
Entity Small Business | false | |
Entity Emerging Growth Company | false | |
Entity Shell Company | false | |
Common Stock [Member] | ||
Document Information [Line Items] | ||
Trading Symbol | WSO | |
Security Exchange Name | NYSE | |
Title of 12(b) Security | Common stock, $0.50 par value | |
Entity Common Stock, Shares Outstanding | 32,758,823 | |
Common Class B [Member] | ||
Document Information [Line Items] | ||
Trading Symbol | WSOB | |
Security Exchange Name | NYSE | |
Title of 12(b) Security | Class B common stock, $0.50 par value | |
Entity Common Stock, Shares Outstanding | 5,599,436 |
Condensed Consolidated Unaudite
Condensed Consolidated Unaudited Statements of Income - USD ($) $ in Thousands | 3 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Revenues | $ 1,008,156 | $ 931,278 |
Cost of sales | 760,541 | 697,518 |
Gross profit | 247,615 | 233,760 |
Selling, general and administrative expenses | 203,386 | 180,072 |
Other income | 1,014 | 1,444 |
Operating income | 45,243 | 55,132 |
Interest expense, net | 790 | 776 |
Income before income taxes | 44,453 | 54,356 |
Income taxes | 8,206 | 10,552 |
Net income | 36,247 | 43,804 |
Less: net income attributable to non-controlling interest | 5,745 | 8,767 |
Net income attributable to Watsco, Inc. | $ 30,502 | $ 35,037 |
Earnings per share for Common and Class B common stock: | ||
Basic and Diluted | $ 0.72 | $ 0.88 |
Condensed Consolidated Unaudi_2
Condensed Consolidated Unaudited Statements of Comprehensive Income - USD ($) $ in Thousands | 3 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Net income | $ 36,247 | $ 43,804 |
Other comprehensive (loss) income, net of tax | ||
Foreign currency translation adjustment | (21,929) | 5,005 |
Unrealized gain (loss) on cash flow hedging instruments arising during the period | 2,534 | (536) |
Reclassification of loss (gain) on cash flow hedging instruments into earnings | 115 | (274) |
Other comprehensive (loss) income | (19,280) | 4,195 |
Comprehensive income | 16,967 | 47,999 |
Less: comprehensive (loss) income attributable to non-controlling interest | (796) | 10,179 |
Comprehensive income attributable to Watsco, Inc. | $ 17,763 | $ 37,820 |
Condensed Consolidated Balance
Condensed Consolidated Balance Sheets - USD ($) $ in Thousands | Mar. 31, 2020 | Dec. 31, 2019 |
Current assets: | ||
Cash and cash equivalents | $ 51,236 | $ 74,454 |
Accounts receivable, net | 574,827 | 533,810 |
Inventories | 942,815 | 920,786 |
Other current assets | 21,501 | 17,680 |
Total current assets | 1,590,379 | 1,546,730 |
Property and equipment, net | 97,443 | 98,523 |
Operating lease right-of-use assets | 221,285 | 223,369 |
Goodwill | 406,998 | 411,217 |
Intangible assets, net | 160,736 | 172,004 |
Investment in unconsolidated entity | 95,847 | 94,833 |
Other assets | 9,141 | 9,485 |
Total assets | 2,581,829 | 2,556,161 |
Current liabilities: | ||
Current portion of lease liabilities | 69,344 | 69,421 |
Accounts payable | 311,586 | 239,666 |
Accrued expenses and other current liabilities | 139,544 | 152,630 |
Total current liabilities | 520,474 | 461,717 |
Long-term obligations: | ||
Borrowings under revolving credit agreement | 156,143 | 155,700 |
Operating lease liabilities, net of current portion | 152,065 | 154,271 |
Finance lease liabilities, net of current portion | 2,106 | 2,009 |
Total long-term obligations | 310,314 | 311,980 |
Deferred income taxes and other liabilities | 68,155 | 67,697 |
Commitments and contingencies | ||
Watsco, Inc. shareholders' equity: | ||
Preferred stock, $0.50 par value | 0 | 0 |
Paid-in capital | 920,190 | 907,877 |
Accumulated other comprehensive loss, net of tax | (51,789) | (39,050) |
Retained earnings | 601,771 | 632,507 |
Treasury stock, at cost | (87,440) | (87,440) |
Total Watsco, Inc. shareholders' equity | 1,404,342 | 1,435,427 |
Non-controlling interest | 278,544 | 279,340 |
Total shareholders' equity | 1,682,886 | 1,714,767 |
Total liabilities and shareholders' equity | 2,581,829 | 2,556,161 |
Common Stock | ||
Watsco, Inc. shareholders' equity: | ||
Common stock, $0.50 par value | 18,789 | 18,768 |
Class B Common Stock | ||
Watsco, Inc. shareholders' equity: | ||
Common stock, $0.50 par value | $ 2,821 | $ 2,765 |
Condensed Consolidated Balanc_2
Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares | Mar. 31, 2020 | Dec. 31, 2019 |
Preferred stock, par value | $ 0.50 | $ 0.50 |
Common Stock | ||
Common stock, par value | 0.50 | 0.50 |
Class B Common Stock | ||
Common stock, par value | $ 0.50 | $ 0.50 |
Condensed Consolidated Unaudi_3
Condensed Consolidated Unaudited Statements of Shareholders' Equity - USD ($) $ in Thousands | Total | Common Stock, Class B Common Stock and Preferred Stock | Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Treasury Stock | Non-controlling Interest |
Beginning balance at Dec. 31, 2018 | $ 1,601,713 | $ 21,167 | $ 832,121 | $ (45,968) | $ 627,969 | $ (87,440) | $ 253,864 |
Beginning balance (in shares) at Dec. 31, 2018 | 37,461,643 | ||||||
Net income | 43,804 | 35,037 | 8,767 | ||||
Other comprehensive income (loss) | 4,195 | 2,783 | 1,412 | ||||
Issuances of non-vested restricted shares of common stock | $ 39 | (39) | |||||
Issuances of non-vested restricted shares of common stock (in shares) | 77,049 | ||||||
Forfeitures of non-vested restricted shares of common stock | $ (3) | 3 | |||||
Forfeitures of non-vested restricted shares of common stock (in shares) | (5,000) | ||||||
Common stock contribution to 401(k) plan | 4,274 | $ 15 | 4,259 | ||||
Common stock contribution to 401(k) plan (in shares) | 30,715 | ||||||
Stock issuances from exercise of stock options and employee stock purchase plan | 1,125 | $ 4 | 1,121 | ||||
Stock issuances from exercise of stock options and employee stock purchase plan (in shares) | 8,925 | ||||||
Retirement of common stock | (428) | $ (1) | (427) | ||||
Retirement of common stock (in shares) | (2,985) | ||||||
Share-based compensation | 4,537 | 4,537 | |||||
Cash dividends declared and paid on Common and Class B common stock | (59,965) | (59,965) | |||||
Ending balance at Mar. 31, 2019 | 1,599,255 | $ 21,221 | 841,575 | (43,185) | 603,041 | (87,440) | 264,043 |
Ending balance (in shares) at Mar. 31, 2019 | 37,570,347 | ||||||
Beginning balance at Dec. 31, 2019 | 1,714,767 | $ 21,533 | 907,877 | (39,050) | 632,507 | (87,440) | 279,340 |
Beginning balance (in shares) at Dec. 31, 2019 | 38,194,056 | ||||||
Net income | 36,247 | 30,502 | 5,745 | ||||
Other comprehensive income (loss) | (19,280) | (12,739) | (6,541) | ||||
Issuances of non-vested restricted shares of common stock | $ 57 | (57) | |||||
Issuances of non-vested restricted shares of common stock (in shares) | 113,765 | ||||||
Common stock contribution to 401(k) plan | 4,543 | $ 13 | 4,530 | ||||
Common stock contribution to 401(k) plan (in shares) | 25,216 | ||||||
Stock issuances from exercise of stock options and employee stock purchase plan | 2,541 | $ 9 | 2,532 | ||||
Stock issuances from exercise of stock options and employee stock purchase plan (in shares) | 18,674 | ||||||
Retirement of common stock | (791) | $ (2) | (789) | ||||
Retirement of common stock (in shares) | (4,828) | ||||||
Share-based compensation | 6,097 | 6,097 | |||||
Cash dividends declared and paid on Common and Class B common stock | (61,238) | (61,238) | |||||
Ending balance at Mar. 31, 2020 | $ 1,682,886 | $ 21,610 | $ 920,190 | $ (51,789) | $ 601,771 | $ (87,440) | $ 278,544 |
Ending balance (in shares) at Mar. 31, 2020 | 38,346,883 |
Condensed Consolidated Unaudi_4
Condensed Consolidated Unaudited Statements of Shareholders' Equity (Parenthetical) - $ / shares | 3 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Cash dividends declared and paid, common stock | $ 1.60 | $ 1.60 |
Condensed Consolidated Unaudi_5
Condensed Consolidated Unaudited Statements of Cash Flows - USD ($) $ in Thousands | 3 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Cash flows from operating activities: | ||
Net income | $ 36,247 | $ 43,804 |
Adjustments to reconcile net income to net cash provided by operating activities: | ||
Depreciation and amortization | 6,479 | 5,768 |
Share-based compensation | 4,912 | 3,849 |
Non-cash contribution to 401(k) plan | 4,543 | 4,274 |
Provision for doubtful accounts | 2,005 | 1,406 |
Other income from investment in unconsolidated entity | (1,014) | (1,444) |
Other, net | 668 | (221) |
Changes in operating assets and liabilities: | ||
Accounts receivable | (46,534) | (2,329) |
Inventories | (27,280) | (55,560) |
Accounts payable and other liabilities | 66,049 | 55,350 |
Other, net | (4,216) | (1,961) |
Net cash provided by operating activities | 41,859 | 52,936 |
Cash flows from investing activities: | ||
Capital expenditures | (3,859) | (4,132) |
Proceeds from sale of property and equipment | 10 | 29 |
Net cash used in investing activities | (3,849) | (4,103) |
Cash flows from financing activities: | ||
Dividends on Common and Class B common stock | (61,238) | (59,965) |
Repurchases of common stock to satisfy employee withholding tax obligations | (791) | (428) |
Net repayments of long-term obligations | (343) | (230) |
Proceeds from short-term borrowings | 2,340 | |
Net proceeds under revolving credit agreement | 443 | 2,300 |
Net proceeds from issuances of common stock | 2,541 | 1,127 |
Net cash used in financing activities | (59,388) | (54,856) |
Effect of foreign exchange rate changes on cash and cash equivalents | (1,840) | 402 |
Net decrease in cash and cash equivalents | (23,218) | (5,621) |
Cash and cash equivalents at beginning of period | 74,454 | 82,894 |
Cash and cash equivalents at end of period | $ 51,236 | $ 77,273 |
BASIS OF PRESENTATION
BASIS OF PRESENTATION | 3 Months Ended |
Mar. 31, 2020 | |
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 March 31, 2020 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 2019 Annual Report on Form 10-K. The condensed consolidated unaudited financial statements contained in this report include the accounts of Watsco, all of its wholly owned subsidiaries and the accounts of three joint ventures with Carrier Global Corporation (“Carrier”), in each of which Watsco maintains a controlling interest. All significant intercompany balances and transactions have been eliminated in consolidation. The results of operations for the quarter ended March 31, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020. 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 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, valuation reserve s Impact of COVID-19 A novel strain of coronavirus, COVID-19, COVID-19 COVID-19 COVID-19 COVID-19 Recently Adopted Accounting Standards Financial Instruments—Credit Losses In June 2016, the Financial Accounting Standards Board (“FASB”) issued guidance that modifies the impairment model to utilize an expected loss methodology in place of the incurred loss methodology for financial instruments, including trade receivables, contract assets, long-term receivables and off-balance Intangibles—Goodwill and Other In January 2017, the FASB issued guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this updated standard, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity also should consider income tax effects from any tax-deductible |
REVENUES
REVENUES | 3 Months Ended |
Mar. 31, 2020 | |
REVENUES | 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: Quarters Ended March 31, 2020 2019 Primary Geographical Regions: United States $ 899,545 $ 806,511 Canada 55,341 59,256 Latin America and the Caribbean 53,270 65,511 $ 1,008,156 $ 931,278 Major Product Lines: HVAC equipment 66 % 67 % Other HVAC products 30 % 29 % Commercial refrigeration products 4 % 4 % 100 % 100 % |
EARNINGS PER SHARE
EARNINGS PER SHARE | 3 Months Ended |
Mar. 31, 2020 | |
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: Quarters Ended March 31, 2020 2019 Basic Earnings per Share: Net income attributable to Watsco, Inc. shareholders $ 30,502 $ 35,037 Less: distributed and undistributed earnings allocated to non-vested 5,233 4,924 Earnings allocated to Watsco, Inc. shareholders $ 25,269 $ 30,113 Weighted-average common shares outstanding – Basic 34,995,048 34,388,117 Basic earnings per share for Common and Class B common stock $ 0.72 $ 0.88 Allocation of earnings for Basic: Common stock $ 23,409 $ 27,856 Class B common stock 1,860 2,257 $ 25,269 $ 30,113 Diluted Earnings per Share: Net income attributable to Watsco, Inc. shareholders $ 30,502 $ 35,037 Less: distributed and undistributed earnings allocated to non-vested 5,233 4,924 Earnings allocated to Watsco, Inc. shareholders $ 25,269 $ 30,113 Weighted-average common shares outstanding – Basic 34,995,048 34,388,117 Effect of dilutive stock options 28,941 14,485 Weighted-average common shares outstanding – Diluted 35,023,989 34,402,602 Diluted earnings per share for Common and Class B common stock $ 0.72 $ 0.88 Anti-dilutive stock options not included above 164,130 322,584 Diluted earnings per share for our Common stock assumes the conversion of all of |
OTHER COMPREHENSIVE (LOSS) INCO
OTHER COMPREHENSIVE (LOSS) INCOME | 3 Months Ended |
Mar. 31, 2020 | |
OTHER COMPREHENSIVE (LOSS) INCOME | 4. OTHER COMPREHENSIVE (LOSS) INCOME Other comprehensive (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 gains (losses) on cash flow hedging instruments. The tax effects allocated to each component of other comprehensive (loss) income were as follows: Quarters Ended March 31, 2020 2019 Foreign currency translation adjustment $ (21,929 ) $ 5,005 Unrealized gain (loss) on cash flow hedging instruments 3,473 (735 ) Income tax (expense) benefit (939 ) 199 Unrealized gain (loss) on cash flow hedging instruments, net of tax 2,534 (536 ) Reclassification of loss (gain) on cash flow hedging instruments into earnings 157 (375 ) Income tax (benefit) expense (42 ) 101 Reclassification of loss (gain) on cash flow hedging instruments into earnings, net of tax 115 (274 ) Other comprehensive (loss) income $ (19,280 ) $ 4,195 The changes in each component of accumulated other comprehensive loss, net of tax, were as follows: Quarters Ended March 31, 2020 2019 Foreign currency translation adjustment: Beginning balance $ (38,599 ) $ (46,604 ) Current period other comprehensive (loss) income (14,328 ) 3,269 Ending balance (52,927 ) (43,335 ) Cash flow hedging instruments: Beginning balance (451 ) 636 Current period other comprehensive income 1,520 (322 ) Reclassification adjustment 69 (164 ) Ending balance 1,138 150 Accumulated other comprehensive loss, net of tax $ (51,789 ) $ (43,185 ) |
DERIVATIVES
DERIVATIVES | 3 Months Ended |
Mar. 31, 2020 | |
DERIVATIVES | 5 DERIVATIVES We enter into foreign currency forward and option contracts to offset the earnings impact that foreign exchange rate fluctuations would otherwise have on certain monetary liabilities that are denominated in nonfunctional currencies. Cash Flow Hedging Instruments We enter into foreign currency forward contracts that are designated as cash flow hedges. The settlement of these derivatives results in reclassifications from accumulated other comprehensive loss to earnings for the period in which the settlement of these instruments occurs. The maximum period for which we hedge our cash flow using these instruments is 12 months. Accordingly, at March 31, 2020, all of The impact from foreign exchange derivative instruments designated as cash flow hedges was as follows: Quarters Ended March 31, 2020 2019 Gain (loss) recorded in accumulated other comprehensive loss $ 3,473 $ (735 ) Loss (gain) reclassified from accumulated other comprehensive loss into earnings $ 157 $ (375 ) At March 31, 2020, we expected an estimated $2,597 pre-tax 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 the periods presented. The fair value gains and losses on these contracts are recognized in earnings as a component of selling, general and administrative expenses. The total notional value of our foreign currency exchange contracts not designated as hedging instruments at March 31, 2020 and such contracts subsequently expired during April 2020. We recognized a gain (loss) of $829 and $ ( ) 2020 2019 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 6 Asset Derivatives Liability Derivatives March 31, 2020 December 31, 2019 March 31, 2020 December 31, 2019 Derivatives designated as hedging instruments $ 2,604 $ — $ 56 $ 944 Derivatives not designated as hedging instruments 122 — 4 63 Total derivative instruments $ 2,726 $ — $ 60 $ 1,007 |
FAIR VALUE MEASUREMENTS
FAIR VALUE MEASUREMENTS | 3 Months Ended |
Mar. 31, 2020 | |
FAIR VALUE MEASUREMENTS | 6 FAIR VALUE MEASUREMENTS The following tables present our assets and liabilities carried at fair value that are measured on a recurring basis: Balance Sheet Location Total Fair Value Measurements Level 1 Level 2 Level 3 Assets: Derivative financial instruments Other current assets $ 2,726 $ — $ 2,726 $ — Equity securities Other assets $ 269 $ 269 $ — $ — Liabilities: Derivative financial instruments Accrued expenses and other current liabilities $ 60 $ — $ 60 $ — Balance Sheet Location Total Fair Value Measurements Level 1 Level 2 Level 3 Assets: Equity securities Other assets $ 402 $ 402 $ — $ — Liabilities: Derivative financial instruments Accrued expenses and other current liabilities $ 1,007 $ — $ 1,007 $ — 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: Equity securities Derivative financial instruments 5 |
SHAREHOLDERS' EQUITY
SHAREHOLDERS' EQUITY | 3 Months Ended |
Mar. 31, 2020 | |
SHAREHOLDERS' EQUITY | 7 SHAREHOLDERS’ EQUITY Common Stock Dividends We paid cash dividends of $1.60 per share of both Common stock and Class B common stock during both the quarters ended March 31, 2020 and 2019. Non-Vested During the quarter ended March 31, 2020, 4,828 shares of Common and Class B common stock with an aggregate fair market value of $791 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 ended March 31, 2019, 2,985 shares of Common and Class B common stock with an aggregate fair market value of $428 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. Exercise of Stock Options Cash received from the exercise of stock options during the quarters ended March 31, 2020 and 2019 was $2,188 and $717, respectively. Employee Stock Purchase Plan During the quarters ended March 31, 2020 and 2019, we received net proceeds of $353 and $410, respectively, for shares of our Common stock purchased under our employee stock purchase plan. |
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES | 3 Months Ended |
Mar. 31, 2020 | |
COMMITMENTS AND CONTINGENCIES | 8 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 of factors, which include historical claims experience, demographic factors, severity factors, and valuations provided by independent third-party actuaries. Management reviews its assumptions with its independent third-party actuaries to evaluate whether the self-insurance reserves are adequate. If actual claims or adverse development of loss reserves occur and exceed these estimates, additional reserves may be required. Reserves in the amounts of $3,809 and $3,062 at March 31, 2020 and December 31, 2019, respectively, were established related to such programs and are included in accrued expenses and other current liabilities in our condensed consolidated unaudited balance sheets. |
RELATED PARTY TRANSACTIONS
RELATED PARTY TRANSACTIONS | 3 Months Ended |
Mar. 31, 2020 | |
RELATED PARTY TRANSACTIONS | 9 RELATED PARTY TRANSACTIONS Purchases from Carrier and its affiliates comprised 57% and 61% of all inventory purchases made during the quarters ended March 31, 2020 and 2019, respectively. At March 31, 2020 and December 31, 2019, approximately $125,000 and $86,000, respectively, was payable to Carrier and its affiliates, net of receivables. Our joint ventures with Carrier also sell HVAC products to Carrier and its affiliates. Revenues in our condensed consolidated unaudited statements of income for the quarters ended March 31, 2020 and 2019 included approximately $22,000 and $21,000, respectively, of sales to Carrier and its affiliates. We believe these transactions are conducted on terms equivalent to an arm’s-length |
SUBSEQUENT EVENTS
SUBSEQUENT EVENTS | 3 Months Ended |
Mar. 31, 2020 | |
SUBSEQUENT EVENTS | 10. SUBSEQUENT EVENTS On April 3, 2020, United Technologies Corporation completed the spin-off On April 10, 2020, we increased the aggregate borrowing capacity of our unsecured syndicated multicurrency revolving credit agreement from $500,000 to $560,000. |
BASIS OF PRESENTATION (Policies
BASIS OF PRESENTATION (Policies) | 3 Months Ended |
Mar. 31, 2020 | |
Basis of Consolidation | 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 March 31, 2020 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 2019 Annual Report on Form 10-K. The condensed consolidated unaudited financial statements contained in this report include the accounts of Watsco, all of its wholly owned subsidiaries and the accounts of three joint ventures with Carrier Global Corporation (“Carrier”), in each of which Watsco maintains a controlling interest. All significant intercompany balances and transactions have been eliminated in consolidation. The results of operations for the quarter ended March 31, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020. 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 |
Use of Estimates | 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, valuation reserve s |
Impact of COVID-19 Pandemic | Impact of COVID-19 A novel strain of coronavirus, COVID-19, COVID-19 COVID-19 COVID-19 COVID-19 |
Recently Adopted Accounting Standards | Recently Adopted Accounting Standards Financial Instruments—Credit Losses In June 2016, the Financial Accounting Standards Board (“FASB”) issued guidance that modifies the impairment model to utilize an expected loss methodology in place of the incurred loss methodology for financial instruments, including trade receivables, contract assets, long-term receivables and off-balance Intangibles—Goodwill and Other In January 2017, the FASB issued guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this updated standard, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity also should consider income tax effects from any tax-deductible |
REVENUES (Tables)
REVENUES (Tables) | 3 Months Ended |
Mar. 31, 2020 | |
Summary of Disaggregated Revenue | The following table presents our revenues disaggregated by primary geographical regions and major product lines within our single reporting segment: Quarters Ended March 31, 2020 2019 Primary Geographical Regions: United States $ 899,545 $ 806,511 Canada 55,341 59,256 Latin America and the Caribbean 53,270 65,511 $ 1,008,156 $ 931,278 Major Product Lines: HVAC equipment 66 % 67 % Other HVAC products 30 % 29 % Commercial refrigeration products 4 % 4 % 100 % 100 % |
EARNINGS PER SHARE (Tables)
EARNINGS PER SHARE (Tables) | 3 Months Ended |
Mar. 31, 2020 | |
Schedule of Basic and Diluted Earnings Per Common Share | The following table presents the calculation of basic and diluted earnings per share for our Common and Class B common stock: Quarters Ended March 31, 2020 2019 Basic Earnings per Share: Net income attributable to Watsco, Inc. shareholders $ 30,502 $ 35,037 Less: distributed and undistributed earnings allocated to non-vested 5,233 4,924 Earnings allocated to Watsco, Inc. shareholders $ 25,269 $ 30,113 Weighted-average common shares outstanding – Basic 34,995,048 34,388,117 Basic earnings per share for Common and Class B common stock $ 0.72 $ 0.88 Allocation of earnings for Basic: Common stock $ 23,409 $ 27,856 Class B common stock 1,860 2,257 $ 25,269 $ 30,113 Diluted Earnings per Share: Net income attributable to Watsco, Inc. shareholders $ 30,502 $ 35,037 Less: distributed and undistributed earnings allocated to non-vested 5,233 4,924 Earnings allocated to Watsco, Inc. shareholders $ 25,269 $ 30,113 Weighted-average common shares outstanding – Basic 34,995,048 34,388,117 Effect of dilutive stock options 28,941 14,485 Weighted-average common shares outstanding – Diluted 35,023,989 34,402,602 Diluted earnings per share for Common and Class B common stock $ 0.72 $ 0.88 Anti-dilutive stock options not included above 164,130 322,584 |
OTHER COMPREHENSIVE (LOSS) IN_2
OTHER COMPREHENSIVE (LOSS) INCOME (Tables) | 3 Months Ended |
Mar. 31, 2020 | |
Schedule of Tax Effects Allocated to Each Component of Other Comprehensive Income (Loss) | The tax effects allocated to each component of other comprehensive (loss) income were as follows: Quarters Ended March 31, 2020 2019 Foreign currency translation adjustment $ (21,929 ) $ 5,005 Unrealized gain (loss) on cash flow hedging instruments 3,473 (735 ) Income tax (expense) benefit (939 ) 199 Unrealized gain (loss) on cash flow hedging instruments, net of tax 2,534 (536 ) Reclassification of loss (gain) on cash flow hedging instruments into earnings 157 (375 ) Income tax (benefit) expense (42 ) 101 Reclassification of loss (gain) on cash flow hedging instruments into earnings, net of tax 115 (274 ) Other comprehensive (loss) income $ (19,280 ) $ 4,195 |
Schedule of Accumulated Other Comprehensive Loss | The changes in each component of accumulated other comprehensive loss, net of tax, were as follows: Quarters Ended March 31, 2020 2019 Foreign currency translation adjustment: Beginning balance $ (38,599 ) $ (46,604 ) Current period other comprehensive (loss) income (14,328 ) 3,269 Ending balance (52,927 ) (43,335 ) Cash flow hedging instruments: Beginning balance (451 ) 636 Current period other comprehensive income 1,520 (322 ) Reclassification adjustment 69 (164 ) Ending balance 1,138 150 Accumulated other comprehensive loss, net of tax $ (51,789 ) $ (43,185 ) |
DERIVATIVES (Tables)
DERIVATIVES (Tables) | 3 Months Ended |
Mar. 31, 2020 | |
Impact from Foreign Exchange Derivative Instruments Designated as Cash Flow Hedges | The impact from foreign exchange derivative instruments designated as cash flow hedges was as follows: Quarters Ended March 31, 2020 2019 Gain (loss) recorded in accumulated other comprehensive loss $ 3,473 $ (735 ) Loss (gain) reclassified from accumulated other comprehensive loss into earnings $ 157 $ (375 ) |
Fair Value of Derivative Instruments and Location in the Balance Sheets | 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 6 Asset Derivatives Liability Derivatives March 31, 2020 December 31, 2019 March 31, 2020 December 31, 2019 Derivatives designated as hedging instruments $ 2,604 $ — $ 56 $ 944 Derivatives not designated as hedging instruments 122 — 4 63 Total derivative instruments $ 2,726 $ — $ 60 $ 1,007 |
FAIR VALUE MEASUREMENTS (Tables
FAIR VALUE MEASUREMENTS (Tables) | 3 Months Ended |
Mar. 31, 2020 | |
Assets and Liabilities Measured at Fair Value on Recurring Basis | The following tables present our assets and liabilities carried at fair value that are measured on a recurring basis: Balance Sheet Location Total Fair Value Measurements Level 1 Level 2 Level 3 Assets: Derivative financial instruments Other current assets $ 2,726 $ — $ 2,726 $ — Equity securities Other assets $ 269 $ 269 $ — $ — Liabilities: Derivative financial instruments Accrued expenses and other current liabilities $ 60 $ — $ 60 $ — Balance Sheet Location Total Fair Value Measurements Level 1 Level 2 Level 3 Assets: Equity securities Other assets $ 402 $ 402 $ — $ — Liabilities: Derivative financial instruments Accrued expenses and other current liabilities $ 1,007 $ — $ 1,007 $ — |
Summary of Disaggregated Revenu
Summary of Disaggregated Revenue (Detail) - USD ($) $ in Thousands | 3 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Disaggregation of Revenue [Line Items] | ||
Revenues from product lines, percentage | 100.00% | 100.00% |
Revenues | $ 1,008,156 | $ 931,278 |
United States | ||
Disaggregation of Revenue [Line Items] | ||
Revenues | 899,545 | 806,511 |
Canada | ||
Disaggregation of Revenue [Line Items] | ||
Revenues | 55,341 | 59,256 |
Latin America and Caribbean | ||
Disaggregation of Revenue [Line Items] | ||
Revenues | $ 53,270 | $ 65,511 |
HVAC Equipment | ||
Disaggregation of Revenue [Line Items] | ||
Revenues from product lines, percentage | 66.00% | 67.00% |
Other HVAC Products | ||
Disaggregation of Revenue [Line Items] | ||
Revenues from product lines, percentage | 30.00% | 29.00% |
Commercial Refrigeration Products | ||
Disaggregation of Revenue [Line Items] | ||
Revenues from product lines, percentage | 4.00% | 4.00% |
Schedule of Basic and Diluted E
Schedule of Basic and Diluted Earnings per Common Share (Detail) - USD ($) $ / shares in Units, $ in Thousands | 3 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Earnings Per Share, Basic, by Common Class, Including Two Class Method [Line Items] | ||
Net income attributable to Watsco, Inc. shareholders | $ 30,502 | $ 35,037 |
Less: distributed and undistributed earnings allocated to non-vested restricted common stock | 5,233 | 4,924 |
Earnings allocated to Watsco, Inc. shareholders - Basic | $ 25,269 | $ 30,113 |
Weighted-average common shares outstanding – Basic | 34,995,048 | 34,388,117 |
Basic earnings per share for Common and Class B common stock | $ 0.72 | $ 0.88 |
Net income attributable to Watsco, Inc. shareholders | $ 30,502 | $ 35,037 |
Less: distributed and undistributed earnings allocated to non-vested restricted common stock - Diluted | 5,233 | 4,924 |
Earnings allocated to Watsco, Inc. shareholders - Diluted | $ 25,269 | $ 30,113 |
Weighted-average common shares outstanding – Basic | 34,995,048 | 34,388,117 |
Effect of dilutive stock options | 28,941 | 14,485 |
Weighted-average common shares outstanding – Diluted | 35,023,989 | 34,402,602 |
Diluted earnings per share for Common and Class B common stock | $ 0.72 | $ 0.88 |
Anti-dilutive stock options not included above | 164,130 | 322,584 |
Common Stock | ||
Earnings Per Share, Basic, by Common Class, Including Two Class Method [Line Items] | ||
Earnings allocated to Watsco, Inc. shareholders - Basic | $ 23,409 | $ 27,856 |
Class B Common Stock | ||
Earnings Per Share, Basic, by Common Class, Including Two Class Method [Line Items] | ||
Earnings allocated to Watsco, Inc. shareholders - Basic | $ 1,860 | $ 2,257 |
Earnings Per Share - Additional
Earnings Per Share - Additional Information (Detail) - shares | Mar. 31, 2020 | Mar. 31, 2019 |
Earnings Per Share [Line Items] | ||
Class B common stock conversion, number of shares | 2,575,740 | 2,577,875 |
Schedule of Tax Effects Allocat
Schedule of Tax Effects Allocated to Each Component of Other Comprehensive Income (Loss) (Detail) - USD ($) $ in Thousands | 3 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Components Of Other Comprehensive Income Loss [Line Items] | ||
Foreign currency translation adjustment | $ (21,929) | $ 5,005 |
Unrealized gain (loss) on cash flow hedging instruments | 3,473 | (735) |
Income tax (expense) benefit | (939) | 199 |
Unrealized gain (loss) on cash flow hedging instruments, net of tax | 2,534 | (536) |
Reclassification of loss (gain) on cash flow hedging instruments into earnings | 157 | (375) |
Income tax (benefit) expense | (42) | 101 |
Reclassification of loss (gain) on cash flow hedging instruments into earnings, net of tax | 115 | (274) |
Other comprehensive (loss) income | $ (19,280) | $ 4,195 |
Schedule of Accumulated Other C
Schedule of Accumulated Other Comprehensive Loss (Detail) - USD ($) $ in Thousands | 3 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Accumulated Other Comprehensive Income (Loss) [Line Items] | ||
Beginning balance | $ (39,050) | |
Ending balance | (51,789) | $ (43,185) |
Foreign Currency Translation Adjustment | ||
Accumulated Other Comprehensive Income (Loss) [Line Items] | ||
Beginning balance | (38,599) | (46,604) |
Current period other comprehensive income (loss) | (14,328) | 3,269 |
Ending balance | (52,927) | (43,335) |
Cash Flow Hedging Instruments | ||
Accumulated Other Comprehensive Income (Loss) [Line Items] | ||
Beginning balance | (451) | 636 |
Current period other comprehensive income (loss) | 1,520 | (322) |
Reclassification adjustment | 69 | (164) |
Ending balance | $ 1,138 | $ 150 |
Impact from Foreign Exchange De
Impact from Foreign Exchange Derivative Instruments Designated as Cash Flow Hedges (Detail) - USD ($) $ in Thousands | 3 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Derivative Instruments, Gain (Loss) [Line Items] | ||
Gain (loss) recorded in accumulated other comprehensive loss | $ 3,473 | $ (735) |
Foreign Currency Forward Contracts | Cash Flow Hedge | ||
Derivative Instruments, Gain (Loss) [Line Items] | ||
Gain (loss) recorded in accumulated other comprehensive loss | 3,473 | (735) |
Loss (gain) reclassified from accumulated other comprehensive loss into earnings | $ 157 | $ (375) |
Fair Value of Derivative Instru
Fair Value of Derivative Instruments and Location in the Balance Sheets (Detail) - Foreign Exchange Forward And Option Contracts [Member] - USD ($) $ in Thousands | Mar. 31, 2020 | Dec. 31, 2019 |
Derivatives, Fair Value [Line Items] | ||
Derivative instruments, assets derivatives | $ 2,726 | |
Derivative instruments, liabilities derivatives | 60 | $ 1,007 |
Derivatives Designated as Hedging Instruments | ||
Derivatives, Fair Value [Line Items] | ||
Derivative instruments, assets derivatives | 2,604 | |
Derivative instruments, liabilities derivatives | 56 | 944 |
Not Designated as Hedging Instrument, Economic Hedge [Member] | ||
Derivatives, Fair Value [Line Items] | ||
Derivative instruments, assets derivatives | 122 | |
Derivative instruments, liabilities derivatives | $ 4 | $ 63 |
Derivatives - Additional Inform
Derivatives - Additional Information (Detail) - USD ($) | 3 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Foreign Currency Forward Contracts | Cash Flow Hedge | ||
Derivative Instruments and Hedging Activities Disclosures [Line Items] | ||
Notional value of derivatives | $ 48,200,000 | |
Contract maturity period | one year or less | |
Contract expiring terms | 2020-12 | |
Maximum length of time hedged in cash flow hedge | 12 months | |
Pre-tax gain to be reclassified into earnings within the next 12 months | $ 2,597,000 | |
Foreign Exchange Forward And Option Contracts [Member] | Not Designated as Hedging Instrument, Economic Hedge [Member] | ||
Derivative Instruments and Hedging Activities Disclosures [Line Items] | ||
Notional value of derivatives | $ 4,900,000 | |
Contract expiring terms | 2020-04 | |
(Loss) gain from foreign currency forward and option contracts not designated as hedging instruments | $ 829,000 | $ (113,000) |
Assets and Liabilities Carried
Assets and Liabilities Carried at Fair Value Measured on Recurring Basis (Detail) - USD ($) $ in Thousands | Mar. 31, 2020 | Dec. 31, 2019 |
Other Current Assets | ||
Assets: | ||
Derivative financial instruments | $ 2,726 | |
Other assets | ||
Assets: | ||
Equity securities | 269 | $ 402 |
Accrued expenses and other current liabilities | ||
Liabilities: | ||
Derivative financial instruments | 60 | 1,007 |
Fair Value Measurements, Level 1 | Other assets | ||
Assets: | ||
Equity securities | 269 | 402 |
Fair Value Measurements, Level 2 | Other Current Assets | ||
Assets: | ||
Derivative financial instruments | 2,726 | |
Fair Value Measurements, Level 2 | Accrued expenses and other current liabilities | ||
Liabilities: | ||
Derivative financial instruments | $ 60 | $ 1,007 |
Shareholders' Equity - Addition
Shareholders' Equity - Additional Information (Detail) - USD ($) $ / shares in Units, $ in Thousands | 3 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Stockholders Equity Note [Line Items] | ||
Shares withheld as payment for tax withholdings related to share based compensation, market value | $ 791 | $ 428 |
Common and Class B Common Stock | Non-Vested Restricted Stock | ||
Stockholders Equity Note [Line Items] | ||
Shares withheld as payment for tax withholdings related to share based compensation, market value | $ 791 | $ 428 |
Shares withheld as payment for tax withholdings related to share based compensation, shares | 4,828 | 2,985 |
Common Stock | Stock Option | ||
Stockholders Equity Note [Line Items] | ||
Net proceeds from the sale of Common stock | $ 2,188 | $ 717 |
Common Stock | Employee Stock Purchase Plan [Member] | ||
Stockholders Equity Note [Line Items] | ||
Net proceeds from shares purchased under ESPP | $ 353 | $ 410 |
Common Stock | Class B Common Stock | ||
Stockholders Equity Note [Line Items] | ||
Cash dividends paid per share of Common and Class B common stock | $ 1.60 | $ 1.60 |
Commitments and Contingencies -
Commitments and Contingencies - Additional Information (Detail) - USD ($) $ in Thousands | Mar. 31, 2020 | Dec. 31, 2019 |
Commitments and Contingencies Disclosure [Line Items] | ||
Self-insurance reserves | $ 3,809 | $ 3,062 |
Related Party Transactions - Ad
Related Party Transactions - Additional Information (Detail) - Carrier and Its Affiliates - Supplier Concentration Risk - USD ($) $ in Thousands | 3 Months Ended | ||
Mar. 31, 2020 | Mar. 31, 2019 | Dec. 31, 2019 | |
Related Party Transaction [Line Items] | |||
Amount payable to Carrier and its affiliates, net of receivables | $ 125,000 | $ 86,000 | |
Revenues from sales to Carrier and its affiliates | $ 22,000 | $ 21,000 | |
Cost of Goods, Total | |||
Related Party Transaction [Line Items] | |||
Percentage of purchases from key suppliers | 57.00% | 61.00% |
Subsequent Events - Additional
Subsequent Events - Additional Information (Detail) - Revolving Credit Facility [Member] - USD ($) $ in Thousands | Apr. 10, 2020 | Dec. 05, 2018 |
Subsequent Event [Line Items] | ||
Revolving credit agreement maximum borrowing capacity | $ 500,000 | |
Subsequent Event | ||
Subsequent Event [Line Items] | ||
Revolving credit agreement maximum borrowing capacity | $ 560,000 |