Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 For the Fiscal Year Ended December 31, 2021 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 WATSCO, INC. 2665 South Bayshore Drive, Suite 901 Miami, FL 33133 (Address of principal executive offices, including zi ...

Financial Data and Key Metrics Changes - In Q4 2021, earnings per share increased by 77% to a record $2.02, while sales grew by 31% to a record $1.5 billion. Operating income rose by 76% to a record $123 million, with operating margins expanding by 210 basis points to 8.1% [6] - For the full year 2021, earnings per share increased by 54% to a record $10.78, with sales growing by 24% to a record $6.3 billion. Operating income increased by $227 million or 57% to a record $629 million, and operating margins reached 10%, a 210 basis points increase from the previous year [7][8] Business Line Data and Key Metrics Changes - The company reported a 22% growth in HVAC equipment, with unit growth in the quarter and for the year both at 9% [40] - Non-equipment business also performed well, contributing to overall margin improvement [25] Market Data and Key Metrics Changes - The company noted that its sales of more efficient systems helped avoid 10.1 million metric tons of CO2 emissions over two years, equivalent to taking 2.2 million cars off the road [12] - The company highlighted a strong demand for high-efficiency systems, which are expected to grow due to regulatory changes mandating higher efficiency standards [13][75] Company Strategy and Development Direction - Watsco aims to build scale in the fragmented $50 billion North American market and is actively seeking acquisitions to sustain family business cultures while providing technology [9] - The company is investing in technology to enhance contractor customer experience, with e-commerce sales approaching $2 billion annually [14] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the strong balance sheet and the ability to invest in growth opportunities, while also emphasizing the importance of addressing climate change through high-efficiency HVAC systems [10][11] - The management team indicated that they expect a normal year in 2022, with existing home sales and a trend towards heat pump growth supporting this outlook [43] Other Important Information - The company announced a 13% increase in its dividend to an annual rate of $8.80 per share, reflecting strong performance and confidence in future growth [8] - Management discussed the impact of regulatory changes on the HVAC industry, including new refrigerant regulations aimed at reducing CO2 emissions [13][75] Q&A Session Summary Question: Can you unpack the record gross margin? - Management explained that higher sales mix of efficiency products and effective pricing strategies contributed to the gross margin increase [21][25] Question: What initiatives are in place with OEMs for 2022? - Management highlighted ongoing communication and collaboration with OEMs, focusing on inventory analysis and marketing programs [31][32] Question: What is the outlook for pricing in 2022? - Management indicated that they expect continued price increases due to regulatory changes and ongoing inflationary pressures [38][39] Question: How are inventories being managed? - Management noted that inventories grew sequentially due to inflation and a need to align with market demand, emphasizing a long-term perspective [49][50] Question: What is the growth outlook for high-efficiency systems? - Management stated that high-efficiency systems are a focus area, with expectations for increased sales driven by regulatory changes and technology adoption [126][127]

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 Period Ended September 30, 2021 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) 2665 South Bayshore Drive, S ...

Watsco, Inc. (NYSE:WSO) Q3 2021 Earnings Conference Call October 20, 2021 10:00 AM ET Company Participants Albert Nahmad - CEO Paul Johnston - EVP Barry Logan - Executive VP of Planning & Strategy and Secretary Aaron Nahmad - President & Director Conference Call Participants Tommy Moll - Stephens Steve Volkmann - Jefferies Jeff Hammond - KeyBanc Capital Markets David Manthey - Baird Jeff Sprague - Vertical Research Chris Dankert - Loop Capital Ryan Merkel - William Blair Steve Tusa - JPMorgan Josh Pokrzywin ...

PART I. FINANCIAL INFORMATION [Item 1. Condensed Consolidated Unaudited Financial Statements](index=3&type=section&id=Item%201.%20Condensed%20Consolidated%20Unaudited%20Financial%20Statements) This section presents Watsco, Inc.'s unaudited condensed consolidated financial statements and related notes for the quarters and six months ended June 30, 2021 and 2020 [Condensed Consolidated Unaudited Statements of Income](index=4&type=section&id=Condensed%20Consolidated%20Unaudited%20Statements%20of%20Income) Watsco reported significant revenue and net income growth for both the second quarter and the first half of 2021 compared to the prior year Condensed Consolidated Unaudited Statements of Income (in thousands) | Metric (in thousands) | Q2 2021 | Q2 2020 | Change (%) | H1 2021 | H1 2020 | Change (%) | | :-------------------- | :------ | :------ | :--------- | :------ | :------ | :--------- | | Revenues | $1,849,640 | $1,355,385 | 36.5% | $2,985,758 | $2,363,541 | 26.3% | | Gross profit | $477,941 | $319,199 | 49.7% | $772,762 | $566,814 | 36.3% | | Operating income | $216,783 | $129,249 | 67.7% | $298,663 | $174,492 | 71.2% | | Net income attributable to Watsco, Inc. | $144,102 | $86,578 | 66.4% | $199,194 | $117,080 | 70.1% | | Basic EPS | $3.73 | $2.26 | 65.0% | $5.16 | $3.03 | 70.3% | | Diluted EPS | $3.71 | $2.26 | 64.2% | $5.13 | $3.02 | 69.9% | [Condensed Consolidated Unaudited Statements of Comprehensive Income](index=5&type=section&id=Condensed%20Consolidated%20Unaudited%20Statements%20of%20Comprehensive%20Income) Comprehensive income attributable to Watsco, Inc. increased significantly for both the second quarter and the first half of 2021, primarily driven by higher net income Condensed Consolidated Unaudited Statements of Comprehensive Income (in thousands) | Metric (in thousands) | Q2 2021 | Q2 2020 | Change (%) | H1 2021 | H1 2020 | Change (%) | | :-------------------- | :------ | :------ | :--------- | :------ | :------ | :--------- | | Net income | $172,133 | $104,242 | 65.1% | $238,260 | $140,489 | 69.6% | | Other comprehensive income (loss) | $3,988 | $8,356 | -52.3% | $7,764 | $(10,924) | N/A | | Comprehensive income attributable to Watsco, Inc. | $146,751 | $92,099 | 59.3% | $204,317 | $109,862 | 86.0% | [Condensed Consolidated Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of June 30, 2021, Watsco's total assets and liabilities increased, primarily due to higher accounts receivable, inventories, and borrowings, while shareholders' equity also grew Condensed Consolidated Balance Sheets (in thousands) | Metric (in thousands) | June 30, 2021 | December 31, 2020 | Change (%) | | :-------------------- | :------------ | :---------------- | :--------- | | Cash and cash equivalents | $96,787 | $146,067 | -33.7% | | Accounts receivable, net | $857,864 | $535,288 | 60.2% | | Inventories, net | $1,044,608 | $781,299 | 33.7% | | Total current assets | $2,022,062 | $1,484,445 | 36.2% | | Total assets | $3,131,684 | $2,484,347 | 26.1% | | Total current liabilities | $815,264 | $487,145 | 67.3% | | Borrowings under revolving credit agreement | $114,167 | $— | N/A | | Total long-term obligations | $305,257 | $144,338 | 111.5% | | Total shareholders' equity | $1,931,533 | $1,779,761 | 8.5% | [Condensed Consolidated Unaudited Statements of Shareholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Unaudited%20Statements%20of%20Shareholders'%20Equity) Shareholders' equity increased from December 31, 2020, to June 30, 2021, driven by net income and non-controlling interests, partially offset by dividends Condensed Consolidated Unaudited Statements of Shareholders' Equity (in thousands) | Metric (in thousands) | December 31, 2020 | June 30, 2021 | | :-------------------- | :---------------- | :------------ | | Total Shareholders' Equity | $1,779,761 | $1,931,533 | | Net income (H1 2021) | N/A | $199,194 | | Cash dividends declared and paid (H1 2021) | N/A | $(143,909) | | Investment in TEC Distribution LLC (non-controlling interest) | N/A | $21,040 | [Condensed Consolidated Unaudited Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Unaudited%20Statements%20of%20Cash%20Flows) Net cash provided by operating activities decreased significantly for H1 2021, while cash used in investing activities increased due to acquisitions, and financing activities saw a reduced outflow Condensed Consolidated Unaudited Statements of Cash Flows (in thousands) | Metric (in thousands) | H1 2021 | H1 2020 | Change (H1 2021 vs H1 2020) | | :-------------------- | :------ | :------ | :-------------------------- | | Net cash provided by operating activities | $81,882 | $261,255 | $(179,373) | | Net cash used in investing activities | $(131,464) | $(7,982) | $(123,482) | | Net cash used in financing activities | $(981) | $(247,299) | $246,318 | | Net (decrease) increase in cash and cash equivalents | $(49,280) | $5,119 | $(54,399) | | Cash and cash equivalents at end of period | $96,787 | $79,573 | $17,214 | [Notes to Condensed Consolidated Unaudited Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Unaudited%20Financial%20Statements) These notes provide essential context to the financial statements, detailing Watsco's business, consolidation practices, seasonal sales, COVID-19 impacts, revenue disaggregation, recent acquisitions, and related party transactions - Watsco is the largest distributor of air conditioning, heating, and refrigeration equipment and related parts and supplies (HVAC/R) in North America[26](index=26&type=chunk) - Sales of residential central air conditioners, heating equipment, and parts and supplies are seasonal, with demand for AC highest in **Q2/Q3** and heating equipment in **Q1/Q4**[28](index=28&type=chunk) - The impact of COVID-19 has shifted from direct pandemic-related issues (closures, illness) to broader economic and marketplace dynamics, including supply chain disruptions and labor shortages[31](index=31&type=chunk) Revenue Disaggregation (in thousands) | Revenue Disaggregation | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--------------------- | :------ | :------ | :------ | :------ | | **Primary Geographical Regions:** | | | | | | United States | $1,665,253 | $1,226,649 | $2,676,519 | $2,126,193 | | Canada | $113,880 | $71,917 | $188,372 | $127,258 | | Latin America and the Caribbean | $70,507 | $56,819 | $120,867 | $110,090 | | **Major Product Lines (% of total):** | | | | | | HVAC equipment | 71% | 71% | 69% | 69% | | Other HVAC products | 26% | 26% | 28% | 28% | | Commercial refrigeration products | 3% | 3% | 3% | 3% | - On May 7, 2021, Watsco acquired Acme Refrigeration of Baton Rouge LLC for **$22.855 million** (net purchase price of **$18.051 million** cash, **8,492 shares** of Common stock, and **$3.141 million** repayment of indebtedness)[36](index=36&type=chunk) - On April 9, 2021, Watsco acquired the HVAC distribution business of Temperature Equipment Corporation, forming a new joint venture (TEC Distribution LLC) with Carrier, with Watsco holding an **80% controlling interest** and the purchase consideration being **$105.2 million** cash[38](index=38&type=chunk) - Purchases from Carrier and its affiliates comprised **72%** and **67%** of all inventory purchases during Q2 and H1 2021, respectively, indicating a significant related party relationship[58](index=58&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=16&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Watsco's strong financial performance in Q2 and H1 2021, driven by demand and acquisitions, while addressing COVID-19 impacts, liquidity, and capital resources [Company Overview](index=16&type=section&id=Company%20Overview) Watsco, North America's largest HVAC/R distributor, operates 655 locations, with revenues primarily from equipment sales and a seasonal demand pattern - Watsco operates from **655 locations** in 42 U.S. states, Canada, Mexico, and Puerto Rico as of June 30, 2021[63](index=63&type=chunk) - Revenues primarily consist of sales of air conditioning, heating, and refrigeration equipment, and related parts and supplies[64](index=64&type=chunk) - Sales are seasonal, with residential AC demand highest in **Q2** and **Q3**, and heating equipment demand highest in **Q1** and **Q4**[65](index=65&type=chunk) [Impact of the COVID-19 Pandemic](index=17&type=section&id=Impact%20of%20the%20COVID-19%20Pandemic) Watsco's essential operations continued during COVID-19, with impacts shifting from direct disruptions to supply chain and labor issues, while austerity measures eased in 2021 - Watsco's employees' work is considered essential, allowing operations to continue with modifications during the pandemic[66](index=66&type=chunk) - The pandemic's impact shifted from location closures and employee illness to supply chain disruptions and labor shortages in 2021[70](index=70&type=chunk) - The company implemented austerity measures in 2020, which have since eased as economic conditions recovered[69](index=69&type=chunk)[70](index=70&type=chunk) [Joint Ventures with Carrier Global Corporation](index=17&type=section&id=Joint%20Ventures%20with%20Carrier%20Global%20Corporation) Watsco maintains several joint ventures with Carrier Global Corporation, including the recently formed TEC Distribution LLC in April 2021, primarily holding controlling interests - Watsco has an **80% controlling interest** in Carrier Enterprise I, formed in 2009, which includes Carrier InterAmerica Corporation[72](index=72&type=chunk) - Watsco holds an **80% controlling interest** in Carrier Enterprise II, formed in 2011, which includes operations in the Northeast U.S. and Mexico[74](index=74&type=chunk) - A new joint venture, TEC Distribution LLC, was formed with Carrier in April 2021, with Watsco holding an **80% controlling interest**, to operate the acquired Temperature Equipment Corporation business[76](index=76&type=chunk) [Critical Accounting Policies](index=18&type=section&id=Critical%20Accounting%20Policies) No significant changes to critical accounting policies were reported for the quarter ended June 30, 2021, compared to the 2020 Annual Report on Form 10-K - No significant changes to critical accounting policies were reported for the quarter ended June 30, 2021, compared to the 2020 Annual Report on Form 10-K[78](index=78&type=chunk) [Results of Operations](index=18&type=section&id=Results%20of%20Operations) Watsco achieved robust financial performance in Q2 and H1 2021, with significant revenue and net income growth driven by strong demand, price increases, and improved gross profit margins Results of Operations (% of Revenues) | Metric (% of Revenues) | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--------------------- | :------ | :------ | :------ | :------ | | Revenues | 100.0% | 100.0% | 100.0% | 100.0% | | Cost of sales | 74.2% | 76.4% | 74.1% | 76.0% | | Gross profit | 25.8% | 23.6% | 25.9% | 24.0% | | Selling, general and administrative expenses | 14.4% | 14.3% | 16.2% | 16.8% | | Operating income | 11.7% | 9.5% | 10.0% | 7.4% | | Net income attributable to Watsco, Inc. | 7.8% | 6.4% | 6.7% | 5.0% | - Revenues for Q2 2021 increased by **$494.3 million** (**36%**), with **$104.8 million** from new acquisitions, resulting in a **29%** increase in same-store revenues[83](index=83&type=chunk) - Q2 2021 gross profit margin improved by **220 basis-points** to **25.8%** (vs **23.6%** in Q2 2020), primarily due to pricing and mix for HVAC equipment[84](index=84&type=chunk) - H1 2021 revenues increased by **$622.2 million** (**26%**), with **$104.8 million** from new acquisitions, resulting in a **22%** increase in same-store revenues[91](index=91&type=chunk) - H1 2021 gross profit margin improved by **190 basis-points** to **25.9%** (vs **24.0%** in H1 2020), due to pricing and mix for HVAC equipment[92](index=92&type=chunk) - Net income attributable to Watsco, Inc. for Q2 2021 increased by **$57.5 million** (**66%**) and for H1 2021 increased by **$82.1 million** (**70%**) compared to the same periods in 2020[90](index=90&type=chunk)[97](index=97&type=chunk) [Liquidity and Capital Resources](index=21&type=section&id=Liquidity%20and%20Capital%20Resources) Watsco's liquidity is supported by operating cash flows and a revolving credit agreement, funding working capital, dividends, and acquisitions, while managing a contingent liability for a potential ownership purchase - Watsco's liquidity is primarily supported by operating cash flows and borrowing capacity under its revolving credit agreement[98](index=98&type=chunk) - As of June 30, 2021, cash and cash equivalents totaled **$96.8 million**, with **$80.6 million** held by foreign subsidiaries[99](index=99&type=chunk) - Working capital increased to **$1,206.8 million** at June 30, 2021, with **$105.2 million** attributable to 2021 acquisitions[102](index=102&type=chunk) - Net cash provided by operating activities decreased by **$179.4 million** to **$81.9 million** for H1 2021, primarily due to higher accounts receivable and inventory[103](index=103&type=chunk)[104](index=104&type=chunk) - Net cash used in investing activities increased by **$123.5 million** to **$131.5 million** for H1 2021, mainly due to the ACME and TEC acquisitions[103](index=103&type=chunk)[105](index=105&type=chunk) - As of June 30, 2021, **$114.2 million** was outstanding under the **$560.0 million** revolving credit agreement, which matures on December 5, 2023[107](index=107&type=chunk) - Watsco has a contingent liability of approximately **$299.0 million** for the potential purchase of additional ownership interests in Russell Sigler, Inc. (RSI)[110](index=110&type=chunk) - Cash dividends of **$3.725 per share** were paid during H1 2021, an increase from **$3.375 per share** in H1 2020[115](index=115&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=23&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) No material changes to market risk disclosures were reported compared to the company's 2020 Annual Report on Form 10-K - No material changes to market risk information were reported compared to the 2020 Annual Report on Form 10-K[117](index=117&type=chunk) [Item 4. Controls and Procedures](index=23&type=section&id=Item%204.%20Controls%20and%20Procedures) Watsco's disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal controls, though recent acquisitions' controls remain unassessed - Disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of June 30, 2021[119](index=119&type=chunk) - No material changes in internal controls over financial reporting occurred during the quarter ended June 30, 2021[120](index=120&type=chunk) - Internal controls over financial reporting for recent acquisitions, ACME and TEC (representing approximately **8%** of total consolidated assets and approximately **4%** of Q2 2021 consolidated revenues), have not yet been assessed[121](index=121&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=23&type=section&id=Item%201.%20Legal%20Proceedings) Information regarding legal proceedings is incorporated by reference from Note 9 to the condensed consolidated unaudited financial statements - Information on legal proceedings is referenced from Note 9 of the financial statements[122](index=122&type=chunk) [Item 1A. Risk Factors](index=23&type=section&id=Item%201A.%20Risk%20Factors) No material changes to the risk factors were reported compared to the company's 2020 Annual Report on Form 10-K - No material changes to risk factors were reported compared to the 2020 Annual Report on Form 10-K[123](index=123&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=23&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) On May 7, 2021, Watsco issued 8,492 shares of unregistered Common stock for the acquisition of Acme Refrigeration, exempt from registration under Section 4(a)(2) of the Securities Act - **8,492 shares** of unregistered Common stock were issued on May 7, 2021, for the acquisition of ACME, exempt from registration under Section 4(a)(2) of the Securities Act[124](index=124&type=chunk) [Item 6. Exhibits](index=24&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications from key executives and Inline XBRL documents - Exhibits include certifications from the CEO, EVP, and CFO (Sections 302 and 906 of Sarbanes-Oxley Act) and Inline XBRL documents[126](index=126&type=chunk) SIGNATURE [SIGNATURE](index=25&type=section&id=SIGNATURE) The report was duly signed on August 5, 2021, by Ana M. Menendez, Chief Financial Officer of Watsco, Inc - The report was signed by Ana M. Menendez, Chief Financial Officer, on August 5, 2021[128](index=128&type=chunk)

Financial Data and Key Metrics Changes - Earnings per share increased by 64% to a record $3.71, with net income rising by 66% [6] - Sales grew by 36% or nearly $500 million to a record $1.850 billion for the quarter [7] - Gross profits increased by 50%, with gross margin expanding by 220 basis points [7] - Operating income rose by $88 million or 68% to $217 million, with operating margins expanding by 220 basis points to a record 11.7% [7] Business Line Data and Key Metrics Changes - The company added two new companies, TEC and Acme, which performed well and are now integral to Watsco [7] - Growth rates among active users of the company's technologies outpaced non-users, indicating a positive trend in customer engagement [9] - The number of digital sales presentations made by contractor customers increased by 84%, contributing to over $200 million in sales during the quarter [10] Market Data and Key Metrics Changes - The North American market is valued at $50 billion, and the company aims to find more companies to join its portfolio [8] - The company noted that high-efficiency systems are being sold at a greater rate, contributing positively to gross margins [17] Company Strategy and Development Direction - The company is focused on long-term growth and aims to leverage its industry-leading technologies to gain market share [8][12] - There is an emphasis on selling higher-margin parts and supplies, which are expected to contribute to overall profitability [23] - The company is committed to investing in technology to enhance customer relationships and improve sales processes [60] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the sustainability of gross margins, attributing improvements to pricing strategies and high-efficiency system sales [19][20] - The company is aware of supply chain challenges but believes that demand will eventually catch up with supply [40] - Management highlighted the importance of financing options for customers to mitigate the impact of price increases [32][37] Other Important Information - The company maintains a strong balance sheet with minimal debt, providing capacity for growth through acquisitions [12] - E-commerce sales are a significant contributor, with a run rate of about $1.8 billion for the last 12 months [80] Q&A Session Summary Question: What is driving the exceptional gross margins? - Management indicated that high-efficiency systems and optimized pricing strategies are key factors [17][19] Question: Are there signs of demand disruption due to price increases? - Management noted no significant pushback from consumers, attributing this to the nature of HVAC purchases [33][34] Question: How is the company managing supply chain pressures? - The company utilizes advanced technology for inventory management and maintains close communication with OEMs to mitigate supply issues [48] Question: What is the outlook for financing as a growth pillar? - Management sees financing as a significant growth opportunity but has not yet defined its full potential [88][90] Question: How does the company view the competitive landscape for M&A? - Management believes that the current environment may encourage some independent distributors to consider selling, but emotional factors play a significant role in such decisions [92][96]

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) Details Watsco's unaudited financial statements, management's analysis, market risks, and internal controls for Q1 2021 [Item 1. Condensed Consolidated Unaudited Financial Statements](index=3&type=section&id=Item%201.%20Condensed%20Consolidated%20Unaudited%20Financial%20Statements) Presents Watsco's unaudited Q1 2021 financial statements, including income, comprehensive income, balance sheets, equity, and cash flows, with notes highlighting significant growth [Condensed Consolidated Unaudited Statements of Income](index=4&type=section&id=Condensed%20Consolidated%20Unaudited%20Statements%20of%20Income) Details Watsco's Q1 2021 income statement, showing significant year-over-year growth in revenues, gross profit, operating income, and net income | Metric | Q1 2021 (thousands) | Q1 2020 (thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Revenues | $1,136,118 | $1,008,156 | +12.7% | | Cost of sales | 841,297 | 760,541 | +10.6% | | Gross profit | 294,821 | 247,615 | +19.1% | | Operating income | 81,880 | 45,243 | +81.0% | | Net income attributable to Watsco, Inc. | $55,092 | $30,502 | +80.6% | | Basic and Diluted EPS | $1.39 | $0.72 | +93.1% | [Condensed Consolidated Unaudited Statements of Comprehensive Income](index=5&type=section&id=Condensed%20Consolidated%20Unaudited%20Statements%20of%20Comprehensive%20Income) Presents Watsco's Q1 2021 comprehensive income, highlighting the positive impact of foreign currency translation adjustments on overall results | Metric | Q1 2021 (thousands) | Q1 2020 (thousands) | | :--- | :--- | :--- | | Net income | $66,127 | $36,247 | | Other comprehensive income (loss) | 3,776 | (19,280) | | Comprehensive income | 69,903 | 16,967 | | Comprehensive income attributable to Watsco, Inc. | $57,566 | $17,763 | - Foreign currency translation adjustment significantly improved from a loss of **$(21,929) thousand** in Q1 2020 to a gain of **$3,457 thousand** in Q1 2021, contributing to the increase in comprehensive income[17](index=17&type=chunk) [Condensed Consolidated Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Outlines Watsco's financial position as of March 31, 2021, showing changes in assets, liabilities, and equity compared to year-end 2020 | Metric | March 31, 2021 (thousands) | December 31, 2020 (thousands) | Change (thousands) | | :--- | :--- | :--- | :--- | | Total current assets | $1,695,355 | $1,484,445 | +$210,910 | | Total assets | $2,692,264 | $2,484,347 | +$207,917 | | Total current liabilities | $630,820 | $487,145 | +$143,675 | | Total shareholders' equity | $1,796,827 | $1,779,761 | +$17,066 | | Cash and cash equivalents | $93,875 | $146,067 | -$52,192 | | Inventories, net | $986,648 | $781,299 | +$205,349 | [Condensed Consolidated Unaudited Statements of Shareholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Unaudited%20Statements%20of%20Shareholders%27%20Equity) Details changes in Watsco's shareholders' equity during Q1 2021, driven by net income, other comprehensive income, and cash dividends - Total shareholders' equity increased from **$1,779,761 thousand** at December 31, 2020, to **$1,796,827 thousand** at March 31, 2021, primarily due to net income and other comprehensive income, partially offset by cash dividends[22](index=22&type=chunk) - Cash dividends declared and paid on Common and Class B common stock were **$1.775 per share** in Q1 2021, up from **$1.60 per share** in Q1 2020[22](index=22&type=chunk)[24](index=24&type=chunk) [Condensed Consolidated Unaudited Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Unaudited%20Statements%20of%20Cash%20Flows) Presents Watsco's Q1 2021 cash flow activities, highlighting a significant increase in cash used in operations due to inventory build-up | Cash Flow Activity | Q1 2021 (thousands) | Q1 2020 (thousands) | Change (thousands) | | :--- | :--- | :--- | :--- | | Operating activities | $(37,745) | $41,859 | $(79,604) | | Investing activities | $1,221 | $(3,849) | +$5,070 | | Financing activities | $(16,250) | $(59,388) | +$43,138 | | Net decrease in cash and cash equivalents | $(52,192) | $(23,218) | $(28,974) | | Cash and cash equivalents at end of period | $93,875 | $51,236 | +$42,639 | - Net cash used in operating activities increased significantly in Q1 2021 to **$(37.7) million** from **$41.9 million** provided in Q1 2020, primarily due to a substantial increase in inventory levels[27](index=27&type=chunk)[90](index=90&type=chunk) [Notes to Condensed Consolidated Unaudited Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Unaudited%20Financial%20Statements) Provides detailed explanations and disclosures supporting Watsco's condensed consolidated unaudited financial statements for Q1 2021 [Note 1. Basis of Presentation](index=10&type=section&id=Note%201.%20Basis%20of%20Presentation) Describes Watsco's business, financial statement preparation, seasonality, and the ongoing impact of the COVID-19 pandemic - Watsco, Inc. is the largest distributor of HVAC/R equipment and supplies in North America, incorporated in Florida in 1956[30](index=30&type=chunk) - The financial statements are condensed, unaudited, and prepared in accordance with U.S. GAAP, consolidating wholly-owned subsidiaries and three joint ventures with Carrier Global Corporation, and accounting for a **38.1% investment** in Russell Sigler, Inc. under the equity method[30](index=30&type=chunk)[31](index=31&type=chunk) - Sales are seasonal, with residential AC demand highest in Q2/Q3 and heating equipment demand highest in Q1/Q4, making results for the quarter not necessarily indicative of the full year[32](index=32&type=chunk) - The COVID-19 pandemic has impacted operations and its future impact remains uncertain, depending on the pandemic's duration, severity, and economic conditions[35](index=35&type=chunk) [Note 2. Revenues](index=11&type=section&id=Note%202.%20Revenues) Breaks down Watsco's Q1 2021 revenues by geographical region and major product lines, showing growth in the United States and Canada | Revenue Source | Q1 2021 (thousands) | Q1 2020 (thousands) | | :--- | :--- | :--- | | **Primary Geographical Regions:** | | | | United States | $1,011,266 | $899,545 | | Canada | 74,492 | 55,341 | | Latin America and the Caribbean | 50,360 | 53,270 | | **Major Product Lines:** | | | | HVAC equipment | 67% | 66% | | Other HVAC products | 29% | 30% | | Commercial refrigeration products | 4% | 4% | [Note 3. Earnings Per Share](index=11&type=section&id=Note%203.%20Earnings%20Per%20Share) Details Watsco's basic and diluted earnings per share for Q1 2021 and Q1 2020, along with weighted-average common shares outstanding | Metric | Q1 2021 | Q1 2020 | | :--- | :--- | | Basic earnings per share | $1.39 | $0.72 | | Diluted earnings per share | $1.39 | $0.72 | | Weighted-average common shares outstanding – Basic | 35,179,521 | 34,995,048 | | Weighted-average common shares outstanding – Diluted | 35,329,833 | 35,023,989 | [Note 4. Other Comprehensive Income (Loss)](index=12&type=section&id=Note%204.%20Other%20Comprehensive%20Income%20%28Loss%29) Analyzes components of Watsco's other comprehensive income (loss) for Q1 2021, highlighting the impact of foreign currency translation adjustments | Component | Q1 2021 (thousands) | Q1 2020 (thousands) | | :--- | :--- | :--- | | Foreign currency translation adjustment | $3,457 | $(21,929) | | Unrealized gain on cash flow hedging instruments, net of tax | 76 | 2,534 | | Reclassification of loss on cash flow hedging instruments into earnings, net of tax | 243 | 115 | | Total Other comprehensive income (loss) | $3,776 | $(19,280) | - Accumulated other comprehensive loss, net of tax, improved from **$(51,789) thousand** at March 31, 2020, to **$(32,393) thousand** at March 31, 2021, primarily due to a positive foreign currency translation adjustment[39](index=39&type=chunk) [Note 5. Derivatives](index=12&type=section&id=Note%205.%20Derivatives) Explains Watsco's use of foreign currency derivatives for hedging and their impact on comprehensive income and earnings - The company uses foreign currency forward and option contracts to offset foreign exchange rate fluctuations, with some designated as cash flow hedges and others not[40](index=40&type=chunk)[41](index=41&type=chunk)[43](index=43&type=chunk) | Derivative Impact | Q1 2021 (thousands) | Q1 2020 (thousands) | | :--- | :--- | :--- | | Gain recorded in accumulated other comprehensive loss (cash flow hedges) | $103 | $3,473 | | Loss reclassified from accumulated other comprehensive loss into earnings (cash flow hedges) | $333 | $157 | | Gains from derivatives not designated as hedging instruments | $27 | $829 | [Note 6. Fair Value Measurements](index=13&type=section&id=Note%206.%20Fair%20Value%20Measurements) Presents fair value measurements for Watsco's equity securities and derivative financial instruments, categorized by valuation levels | Asset/Liability | Balance Sheet Location | March 31, 2021 (Total) | December 31, 2020 (Total) | Valuation Level | | :--- | :--- | :--- | :--- | :--- | | Equity securities | Other assets | $1,412 | $6,065 | Level 1 | | Derivative financial instruments | Accrued expenses and other current liabilities | $5 | $101 | Level 2 | - Equity securities are valued using Level 1 inputs (closing stock prices from active markets), while derivative financial instruments (foreign currency contracts) are valued using Level 2 inputs (observable market inputs like forward rates)[46](index=46&type=chunk)[47](index=47&type=chunk) [Note 7. Shareholders' Equity](index=14&type=section&id=Note%207.%20Shareholders%27%20Equity) Details activities impacting Watsco's shareholders' equity, including cash dividends and proceeds from stock option exercises and employee stock plans - Cash dividends of **$1.775 per share** were paid in Q1 2021, an increase from **$1.60 per share** in Q1 2020[48](index=48&type=chunk) | Activity | Q1 2021 (thousands) | Q1 2020 (thousands) | | :--- | :--- | :--- | | Cash received from stock option exercise | $3,469 | $2,188 | | Net proceeds from employee stock purchase plan | $405 | $353 | [Note 8. Commitments and Contingencies](index=14&type=section&id=Note%208.%20Commitments%20and%20Contingencies) Addresses Watsco's involvement in litigation and self-insurance reserves, noting no expected material adverse effects on financial condition - The company is involved in incidental litigation but does not believe the ultimate liability will materially adversely affect financial condition or results, maintaining significant insurance coverage[52](index=52&type=chunk) - Self-insurance reserves for casualty and health benefit programs were **$6,453 thousand** at March 31, 2021, up from **$5,404 thousand** at December 31, 2020[53](index=53&type=chunk) [Note 9. Related Party Transactions](index=14&type=section&id=Note%209.%20Related%20Party%20Transactions) Outlines Watsco's transactions with related parties, including significant purchases from and payables to Carrier and its affiliates - Purchases from Carrier and its affiliates comprised **61%** of all inventory purchases in Q1 2021 (up from **57%** in Q1 2020), with approximately **$140 million** payable to them at March 31, 2021[54](index=54&type=chunk) - Sales to Carrier and its affiliates were approximately **$23 million** in Q1 2021, consistent with **$22 million** in Q1 2020[54](index=54&type=chunk) - Fees paid to Greenberg Traurig, P.A., where a board member is Senior Chairman, were **$66 thousand** in Q1 2021 for legal services[55](index=55&type=chunk) [Note 10. Subsequent Event](index=15&type=section&id=Note%2010.%20Subsequent%20Event) Describes Watsco's acquisition of Temperature Equipment Corporation's HVAC distribution business and the formation of a new joint venture with Carrier - On April 9, 2021, Watsco acquired the HVAC distribution business of Temperature Equipment Corporation (TEC), forming a new joint venture with Carrier, TEC Distribution LLC, with Watsco holding an **80% controlling interest**[56](index=56&type=chunk) - The acquisition consideration was **$105.2 million** in cash, with Watsco contributing **$84.16 million** and Carrier contributing **$21.04 million**, plus **$1.5 million** for debt repayment[56](index=56&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=15&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management's analysis of Watsco's Q1 2021 financial performance, condition, and operations, covering revenue growth, COVID-19 impact, joint ventures, and liquidity [Forward-Looking Statements](index=15&type=section&id=Forward-Looking%20Statements) Highlights that the report contains forward-looking statements subject to various risks and uncertainties, including economic and market factors - The report contains forward-looking statements regarding economic conditions, business strategies, potential acquisitions, financing plans, and industry trends, which are subject to risks and uncertainties[57](index=57&type=chunk) - Key risk factors include general economic conditions, competitive factors, supplier concentration, commodity costs, consumer spending, COVID-19 impact, housing market, interest rates, and foreign currency fluctuations[58](index=58&type=chunk) [Company Overview](index=16&type=section&id=Company%20Overview) Provides an overview of Watsco's position as North America's largest HVAC/R distributor, its revenue sources, expense structure, and business seasonality - Watsco, Inc. is North America's largest distributor of HVAC/R equipment and supplies, operating from **601 locations** across **38 U.S. States**, Canada, Mexico, and Puerto Rico as of March 31, 2021[60](index=60&type=chunk) - Revenues are primarily from HVAC/R sales, with selling, general, and administrative expenses largely consisting of salaries, commissions, marketing, and warehouse operating costs[61](index=61&type=chunk) - Sales are seasonal, with residential AC demand peaking in Q2/Q3 and heating equipment in Q1/Q4, influenced by weather and economic conditions[62](index=62&type=chunk) [Impact of the COVID-19 Pandemic](index=16&type=section&id=Impact%20of%20the%20COVID-19%20Pandemic) Discusses the ongoing impact of the COVID-19 pandemic on Watsco's operations, implemented safeguards, cost reduction measures, and strong financial position - Watsco's operations were deemed essential, allowing continued operation with modifications despite short-term closures and diminished capacity in early 2020, and ongoing impacts in Q1 2021[63](index=63&type=chunk) - The company implemented safeguards for employees and customers, including social distancing, PPE, and contactless services, with all locations operating effectively as of the filing date[64](index=64&type=chunk) - Cost reduction measures were implemented, including compensation reductions and curtailing discretionary spending, which have eased as restrictions lift[65](index=65&type=chunk) - Watsco maintains a strong balance sheet with **$93.9 million** in cash, **$48.9 million** in borrowings under its credit facility, and **$1.8 billion** in shareholders' equity as of March 31, 2021, positioning it well to navigate pandemic impacts[66](index=66&type=chunk) [Joint Ventures with Carrier Global Corporation ("Carrier")](index=17&type=section&id=Joint%20Ventures%20with%20Carrier%20Global%20Corporation%20%28%22Carrier%22%29) Details Watsco's existing and newly formed joint ventures with Carrier Global Corporation, outlining their controlling interests - Watsco has three main joint ventures with Carrier: Carrier Enterprise I (**80% controlling interest**, formed 2009), Carrier Enterprise II (**80% controlling interest**, formed 2011), and Carrier Enterprise III (**60% controlling interest**, formed 2012)[68](index=68&type=chunk)[69](index=69&type=chunk)[70](index=70&type=chunk) - A new joint venture, TEC Distribution LLC, was formed on April 9, 2021, to operate the acquired HVAC distribution business of Temperature Equipment Corporation, with Watsco holding an **80% controlling interest**[71](index=71&type=chunk) [Critical Accounting Policies](index=17&type=section&id=Critical%20Accounting%20Policies) States that management's discussion relies on U.S. GAAP financial statements and confirms no significant changes to critical accounting policies in Q1 2021 - Management's discussion relies on condensed consolidated unaudited financial statements prepared under U.S. GAAP, requiring estimates and assumptions that are reevaluated quarterly[72](index=72&type=chunk) - No significant changes to critical accounting policies were reported for Q1 2021 compared to the 2020 Annual Report on Form 10-K[73](index=73&type=chunk) [Results of Operations](index=18&type=section&id=Results%20of%20Operations) Analyzes Watsco's Q1 2021 operational performance, including revenues, gross profit, expenses, and net income, highlighting key drivers of change [Revenues](index=18&type=section&id=Revenues_MD%26A) Examines Watsco's Q1 2021 revenue growth, driven by increased HVAC equipment sales volume and average selling prices | Metric | Q1 2021 | Q1 2020 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $1,136.1 million | $1,008.2 million | +13% | | HVAC equipment sales | +14% | | | | Residential HVAC equipment sales | +18% | | | | Other HVAC products sales | +11% | | | | Commercial refrigeration products sales | +10% | | | - Same-store revenues increased by **13%** compared to Q1 2020, driven by a **16% increase** in HVAC equipment volume and a **2% increase** in average selling price, reflecting demand for residential HVAC and high-efficiency systems[77](index=77&type=chunk) [Gross Profit](index=18&type=section&id=Gross%20Profit_MD%26A) Analyzes Watsco's Q1 2021 gross profit and margin improvement, primarily due to increased revenues and favorable pricing and product mix | Metric | Q1 2021 | Q1 2020 | Change | | :--- | :--- | :--- | :--- | | Gross profit | $294.8 million | $247.6 million | +19% | | Gross profit margin | 25.9% | 24.6% | +130 basis-points | - The increase in gross profit and margin was primarily due to increased revenues and the positive impact of pricing and product mix for HVAC equipment[78](index=78&type=chunk) [Selling, General and Administrative Expenses](index=18&type=section&id=Selling%2C%20General%20and%20Administrative%20Expenses_MD%26A) Reviews Watsco's Q1 2021 SG&A expenses, noting a decrease as a percentage of revenues due to leverage on fixed costs and cost reduction efforts | Metric | Q1 2021 | Q1 2020 | Change | | :--- | :--- | :--- | :--- | | SG&A expenses | $217.6 million | $203.4 million | +7% | | SG&A as % of revenues | 19.2% | 20.2% | -100 basis-points | - The decrease in SG&A as a percentage of revenues was primarily due to increased leverage on fixed costs from higher revenues and cost reduction efforts in response to the pandemic[79](index=79&type=chunk) [Other Income](index=19&type=section&id=Other%20Income_MD%26A) Highlights the significant increase in Watsco's Q1 2021 other income, primarily from its share of net income from Russell Sigler, Inc | Metric | Q1 2021 | Q1 2020 | Change | | :--- | :--- | :--- | :--- | | Other income | $4.7 million | $1.0 million | +370% | - Other income represents Watsco's share of net income from Russell Sigler, Inc. (RSI), showing a significant increase[80](index=80&type=chunk) [Interest Expense, Net](index=19&type=section&id=Interest%20Expense%2C%20Net_MD%26A) Examines the substantial decrease in Watsco's Q1 2021 net interest expense, attributed to lower borrowings and reduced effective interest rates | Metric | Q1 2021 | Q1 2020 | Change | | :--- | :--- | :--- | :--- | | Interest expense, net | $0.088 million | $0.790 million | -89% | - The substantial decrease in net interest expense was due to lower average outstanding borrowings and a reduced effective interest rate under the revolving credit facility[81](index=81&type=chunk) [Income Taxes](index=19&type=section&id=Income%20Taxes_MD%26A) Analyzes Watsco's Q1 2021 income taxes and effective tax rate, noting an increase primarily due to higher state income taxes | Metric | Q1 2021 | Q1 2020 | Change | | :--- | :--- | :--- | :--- | | Income taxes | $15.7 million | $8.2 million | +91.5% | | Effective income tax rate | 22.0% | 21.0% | +100 basis-points | - The increase in income taxes and effective tax rate was primarily due to higher state income taxes in 2021[82](index=82&type=chunk) [Net Income Attributable to Watsco, Inc.](index=19&type=section&id=Net%20Income%20Attributable%20to%20Watsco%2C%20Inc._MD%26A) Summarizes the significant increase in Watsco's Q1 2021 net income, driven by higher revenues, improved gross profit, and reduced expenses | Metric | Q1 2021 | Q1 2020 | Change | | :--- | :--- | :--- | :--- | | Net income attributable to Watsco, Inc. | $55.1 million | $30.5 million | +81% | - The significant increase was primarily driven by higher revenues, improved gross profit, increased other income, and reduced net interest expense[83](index=83&type=chunk) [Liquidity and Capital Resources](index=19&type=section&id=Liquidity%20and%20Capital%20Resources) Discusses Watsco's liquidity and capital resources, including funding sources, cash position, working capital, and credit facilities [Sources and Uses of Cash](index=19&type=section&id=Sources%20and%20Uses%20of%20Cash) Outlines Watsco's primary sources and uses of cash, including operating cash flows, credit facilities, and funding for dividends and acquisitions - Watsco relies on operating cash flows and its revolving credit agreement to fund seasonal working capital needs and for other general corporate purposes, including dividend payments, capital expenditures, business acquisitions, and strategic investments[84](index=84&type=chunk) - As of March 31, 2021, the company had **$93.9 million** in cash and cash equivalents, with **$78.7 million** held by foreign subsidiaries, generally available to fund the ordinary business operations of its foreign subsidiaries[85](index=85&type=chunk) - The company believes its operating cash flows, cash on hand, and available funds under its revolving credit agreement are sufficient to meet liquidity needs in the foreseeable future, but acknowledges potential impacts from credit market disruptions or LIBOR reform[86](index=86&type=chunk)[87](index=87&type=chunk) [Working Capital](index=20&type=section&id=Working%20Capital) Analyzes Watsco's Q1 2021 working capital increase, primarily driven by higher inventory levels reflecting business seasonality | Metric | March 31, 2021 (millions) | December 31, 2020 (millions) | Change (millions) | | :--- | :--- | :--- | :--- | | Working capital | $1,064.5 | $997.3 | +$67.2 | - The increase in working capital was primarily due to higher levels of inventories, reflecting the seasonality of the business[88](index=88&type=chunk) [Cash Flows](index=20&type=section&id=Cash%20Flows_MD%26A) Details Watsco's Q1 2021 cash flow activities from operations, investing, and financing, highlighting changes and their primary drivers | Cash Flow Activity | Q1 2021 (millions) | Q1 2020 (millions) | Change (millions) | | :--- | :--- | :--- | :--- | | Operating activities | $(37.7) | $41.9 | $(79.6) | | Investing activities | $1.2 | $(3.8) | $5.0 | | Financing activities | $(16.3) | $(59.4) | $43.1 | - Net cash used in operating activities increased primarily due to increases in the level of inventory in 2021 as compared to 2020[90](index=90&type=chunk) - Net cash provided by investing activities was primarily due to proceeds from the sale of equity securities, partially offset by higher capital expenditures in 2021[91](index=91&type=chunk) - The decrease in net cash used in financing activities was primarily attributable to higher borrowings partially offset by an increase in dividends paid in 2021[92](index=92&type=chunk) [Revolving Credit Agreement](index=20&type=section&id=Revolving%20Credit%20Agreement) Describes Watsco's unsecured revolving credit agreement, outstanding borrowings, and compliance with financial covenants - Watsco maintains an unsecured, syndicated multicurrency revolving credit agreement with an aggregate borrowing capacity of **$560.0 million** (increased from **$500.0 million** on April 10, 2020), maturing December 5, 2023[93](index=93&type=chunk) - As of March 31, 2021, **$48.9 million** was outstanding under the agreement, compared to no outstanding balance at December 31, 2020[94](index=94&type=chunk) - The company was in compliance with all financial covenants (consolidated leverage and interest coverage ratios) at March 31, 2021[94](index=94&type=chunk) [Investment in Unconsolidated Entity](index=20&type=section&id=Investment%20in%20Unconsolidated%20Entity) Details Watsco's indirect investment in Russell Sigler, Inc. and the associated contingent liability for potential future share purchases - Carrier Enterprise I holds a **38.1% ownership interest** in Russell Sigler, Inc. (RSI), an HVAC distributor[95](index=95&type=chunk) - Watsco has a contingent liability of approximately **$222.0 million** at March 31, 2021, to purchase remaining RSI shares if Carrier Enterprise I owns **85% or more**, or if RSI shareholders exercise their right to sell[96](index=96&type=chunk) [Acquisitions](index=21&type=section&id=Acquisitions_MD%26A) Reports on Watsco's recent acquisition of Temperature Equipment Corporation's HVAC business and its ongoing strategy for potential future acquisitions - On April 9, 2021, Watsco acquired the HVAC distribution business of Temperature Equipment Corporation (TEC) for **$105.2 million** in cash, forming a new **80%-controlled** joint venture with Carrier[98](index=98&type=chunk) - The company continuously evaluates potential acquisitions and believes its financial position supports additional debt or equity financing for suitable opportunities[99](index=99&type=chunk) [Common Stock Dividends](index=21&type=section&id=Common%20Stock%20Dividends_MD%26A) Details Watsco's cash dividends paid in Q1 2021 and the subsequent dividend declared, reflecting an increase year-over-year - Cash dividends of **$1.775 per share** were paid in Q1 2021, up from **$1.60 per share** in Q1 2020[100](index=100&type=chunk) - A quarterly cash dividend of **$1.95 per share** was declared on April 1, 2021, paid on April 30, 2021[100](index=100&type=chunk) [Company Share Repurchase Program](index=21&type=section&id=Company%20Share%20Repurchase%20Program) Outlines Watsco's share repurchase program, including shares repurchased to date and remaining authorized shares - The Board authorized a repurchase program for up to **7,500,000 shares** in September 1999; **6,370,913 shares** have been repurchased at a cost of **$114.4 million** since inception[101](index=101&type=chunk) - As of March 31, 2021, **1,129,087 shares** remained authorized for repurchase under the program, with no repurchases since 2008[101](index=101&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=21&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) No material changes to market risk disclosures were reported for Q1 2021 compared to the 2020 Annual Report on Form 10-K - No material changes to market risk information were reported for the quarter ended March 31, 2021, compared to the 2020 Annual Report on Form 10-K[102](index=102&type=chunk) [Item 4. Controls and Procedures](index=21&type=section&id=Item%204.%20Controls%20and%20Procedures) Management evaluated and deemed disclosure controls and procedures effective as of March 31, 2021, with no material changes in internal control over financial reporting - Disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of March 31, 2021, by management, including the CEO, EVP, and CFO[103](index=103&type=chunk)[104](index=104&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2021[105](index=105&type=chunk) [PART II. OTHER INFORMATION](index=22&type=section&id=PART%20II.%20OTHER%20INFORMATION) Presents other information for Watsco, Inc., including legal proceedings, risk factors, equity security sales, and required exhibits [Item 1. Legal Proceedings](index=22&type=section&id=Item%201.%20Legal%20Proceedings) Information on legal proceedings is incorporated from Note 8, indicating incidental litigation with no expected material adverse effect on financial condition or results - Information on legal proceedings is incorporated from Note 8, indicating involvement in incidental litigation with no expected material adverse effect on financial condition or results of operations[107](index=107&type=chunk)[52](index=52&type=chunk) [Item 1A. Risk Factors](index=22&type=section&id=Item%201A.%20Risk%20Factors) Risk factors for Q1 2021 are consistent with those outlined in the 2020 Annual Report on Form 10-K, with no material changes - Risk factors for Q1 2021 are consistent with those outlined in the 2020 Annual Report on Form 10-K, with no material changes[108](index=108&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=22&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) On March 10, 2021, 22,752 shares of Common stock were issued to the Profit Sharing Retirement Plan & Trust as an employer match for the 2020 plan year, exempt from registration - On March 10, 2021, **22,752 shares** of Common stock were issued to the Profit Sharing Retirement Plan & Trust as an employer match for the 2020 plan year, exempt from registration under Section 3(a)(2) of the Securities Act of 1933[109](index=109&type=chunk) [Item 6. Exhibits](index=23&type=section&id=Item%206.%20Exhibits) Exhibits include employment agreements, certifications from the CEO, EVP, and CFO, and various Inline XBRL documents, ensuring compliance - Exhibits include the Twenty-second Amendment dated January 1, 2021, to the Employment Agreement with Albert H. Nahmad, certifications from the CEO, EVP, and CFO (pursuant to Sarbanes-Oxley Act sections 302 and 906), and various Inline XBRL documents[112](index=112&type=chunk) [SIGNATURE](index=24&type=section&id=SIGNATURE) Confirms the official signing of the report by the Chief Financial Officer on May 6, 2021, as required by the Securities Exchange Act of 1934 - The report was signed by Ana M. Menendez, Chief Financial Officer, on May 6, 2021, as required by the Securities Exchange Act of 1934[114](index=114&type=chunk)

Financial Data and Key Metrics Changes - Watsco achieved record first quarter results with earnings per share growing 93% to a record $1.39 per share [5] - Records were set for sales, gross profits, gross margin, operating income, operating margin, net income, and earnings per share [5] - The balance sheet remains in pristine condition with only a small amount of debt [8] Business Line Data and Key Metrics Changes - Double-digit sales growth was achieved in equipment, non-equipment, and commercial refrigeration [5] - Residential equipment sales increased 18% in the quarter, while commercial equipment sales stabilized and are trending positively [6] - Over the last 12 months, residential equipment sales in U.S. markets have increased 15% [6] Market Data and Key Metrics Changes - Growth rates during the quarter were similar for U.S. markets and international markets as a whole [5] - Active technology users continue to outpace growth rates of non-users, with lower customer attrition among active technology users [7] Company Strategy and Development Direction - Watsco is focused on technology adoption to gain new customer acquisition and increase market share [6] - The company is actively seeking acquisitions like Temperature Equipment Corporation (TEC) to expand its presence, particularly in the Midwest [8] - A 10% dividend increase was announced, marking the 47th consecutive year of paying dividends [9] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in strong business performance for 2021, expecting it to be another record year [6] - The company noted that the contractor's confidence is critical for driving sales, and the current credit environment is favorable [35] - Management emphasized a long-term focus on separating from competition through technology investments [16] Other Important Information - The acquisition of TEC adds 32 locations and approximately $300 million in revenue [8] - The company is seeing a shift in consumer behavior towards energy-efficient products, with a growing appetite for high-efficiency systems [31][35] Q&A Session Summary Question: What should be focused on this selling season? - Management highlighted that Watsco has seen double-digit growth in equipment sales over the last 12 months, indicating continuity in performance [14][15] Question: What drove the increase in gross margins? - The gross margin improvement is attributed to a progression over the last year, with increased performance-based pay for salespeople contributing to the margin [22][23] Question: What is the status of inventory and pricing? - Management noted that while there has been an increase in inventory among distributors, their own inventory management has been effective, and they do not see significant issues with supply [19][85] Question: What is the outlook for the commercial market? - There is a definite uptick in demand for commercial rooftop units, influenced by government incentives for retrofitting HVAC systems in schools [62][66] Question: What is the penetration of the OnCall Air technology? - The penetration of the OnCall Air technology is still in single digits, but growth rates are almost triple digits, indicating significant potential for expansion [48][51] Question: What is the strategy behind the TEC acquisition? - The acquisition was driven by a long-standing relationship and a shared interest in technology, with plans for further growth in the Midwest [69][71]

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 For the Fiscal Year Ended December 31, 2020 or (I.R.S. Employer Identification No.) 2665 South Bayshore Drive, Suite 901 Miami, FL 33133 (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 ...

PART I. FINANCIAL INFORMATION [ITEM 1. CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS](index=3&type=section&id=ITEM%201.%20CONDENSED%20CONSOLIDATED%20UNAUDITED%20FINANCIAL%20STATEMENTS) This section presents Watsco, Inc.'s unaudited condensed consolidated financial statements and related notes for the quarter and nine months ended September 30, 2020 and 2019 [Condensed Consolidated Unaudited Statements of Income](index=3&type=section&id=Condensed%20Consolidated%20Unaudited%20Statements%20of%20Income) This section provides the condensed consolidated unaudited statements of income for the quarter and nine months ended September 30, 2020 and 2019 **Quarter Ended September 30, 2020 vs 2019 (in thousands):** | Metric | 2020 | 2019 | Change ($) | Change (%) | | :-------------------------------- | :------- | :------- | :--------- | :--------- | | Revenues | $1,536,671 | $1,394,915 | $141,756 | 10.2% | | Gross profit | $373,763 | $334,691 | $39,072 | 11.7% | | Operating income | $156,781 | $125,319 | $31,462 | 25.1% | | Net income attributable to Watsco, Inc. | $106,489 | $83,480 | $23,009 | 27.6% | | Basic EPS | $2.77 | $2.20 | $0.57 | 25.9% | | Diluted EPS | $2.76 | $2.20 | $0.56 | 25.5% | **Nine Months Ended September 30, 2020 vs 2019 (in thousands):** | Metric | 2020 | 2019 | Change ($) | Change (%) | | :-------------------------------- | :------- | :------- | :--------- | :--------- | | Revenues | $3,900,212 | $3,698,047 | $202,165 | 5.5% | | Gross profit | $940,577 | $896,435 | $44,142 | 4.9% | | Operating income | $331,273 | $314,851 | $16,422 | 5.2% | | Net income attributable to Watsco, Inc. | $223,569 | $208,672 | $14,897 | 7.1% | | Basic EPS | $5.83 | $5.54 | $0.29 | 5.2% | | Diluted EPS | $5.82 | $5.54 | $0.28 | 5.1% | [Condensed Consolidated Unaudited Statements of Comprehensive Income](index=4&type=section&id=Condensed%20Consolidated%20Unaudited%20Statements%20of%20Comprehensive%20Income) This section presents the condensed consolidated unaudited statements of comprehensive income for the quarter and nine months ended September 30, 2020 and 2019 **Quarter Ended September 30, 2020 vs 2019 (in thousands):** | Metric | 2020 | 2019 | Change ($) | Change (%) | | :-------------------------------- | :------- | :------- | :--------- | :--------- | | Net income | $126,206 | $99,655 | $26,551 | 26.6% | | Other comprehensive income (loss) | $4,589 | $(2,923) | $7,512 | -257.0% | | Comprehensive income attributable to Watsco, Inc. | $109,512 | $81,586 | $27,926 | 34.2% | **Nine Months Ended September 30, 2020 vs 2019 (in thousands):** | Metric | 2020 | 2019 | Change ($) | Change (%) | | :-------------------------------- | :------- | :------- | :--------- | :--------- | | Net income | $266,695 | $251,369 | $15,326 | 6.1% | | Other comprehensive income (loss) | $(6,335) | $5,924 | $(12,259) | -206.9% | | Comprehensive income attributable to Watsco, Inc. | $219,374 | $212,600 | $6,774 | 3.2% | [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section details the condensed consolidated balance sheets as of September 30, 2020, and December 31, 2019 **As of September 30, 2020 vs December 31, 2019 (in thousands):** | Metric | Sep 30, 2020 | Dec 31, 2019 | Change ($) | Change (%) | | :-------------------------------- | :----------- | :----------- | :--------- | :--------- | | Total current assets | $1,644,119 | $1,546,730 | $97,389 | 6.3% | | Total assets | $2,647,685 | $2,556,161 | $91,524 | 3.6% | | Total current liabilities | $609,498 | $461,717 | $147,781 | 32.0% | | Total long-term obligations | $153,312 | $311,980 | $(158,668) | -50.9% | | Total shareholders' equity | $1,809,938 | $1,714,767 | $95,171 | 5.5% | - Cash and cash equivalents increased to **$92.6 million** at September 30, 2020, from **$74.5 million** at December 31, 2019, with accounts receivable increasing significantly while inventories decreased[16](index=16&type=chunk) - Borrowings under the revolving credit agreement decreased substantially from **$155.7 million** at December 31, 2019, to **$0.7 million** at September 30, 2020[16](index=16&type=chunk) [Condensed Consolidated Unaudited Statements of Shareholders' Equity](index=6&type=section&id=Condensed%20Consolidated%20Unaudited%20Statements%20of%20Shareholders'%20Equity) This section outlines the condensed consolidated unaudited statements of shareholders' equity for the nine months ended September 30, 2020 and 2019 - Total shareholders' equity increased from **$1.715 billion** at December 31, 2019, to **$1.810 billion** at September 30, 2020[18](index=18&type=chunk) - Key changes include net income contributions, other comprehensive income/loss, share-based compensation, and cash dividends declared and paid[18](index=18&type=chunk)[20](index=20&type=chunk)[21](index=21&type=chunk) - Cash dividends declared and paid on Common and Class B common stock totaled **$197.5 million** for the nine months ended September 30, 2020, compared to **$180.5 million** in the prior year[18](index=18&type=chunk)[23](index=23&type=chunk) [Condensed Consolidated Unaudited Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Unaudited%20Statements%20of%20Cash%20Flows) This section presents the condensed consolidated unaudited statements of cash flows for the nine months ended September 30, 2020 and 2019 **Nine Months Ended September 30, 2020 vs 2019 (in thousands):** | Cash Flow Activity | 2020 | 2019 | Change ($) | | :-------------------------------- | :------- | :------- | :--------- | | Net cash provided by operating activities | $372,778 | $197,531 | $175,247 | | Net cash used in investing activities | $(11,547) | $(64,995) | $53,448 | | Net cash used in financing activities | $(342,770) | $(155,734) | $(187,036) | | Net increase (decrease) in cash and cash equivalents | $18,146 | $(22,744) | $40,890 | | Cash and cash equivalents at end of period | $92,600 | $60,150 | $32,450 | - The significant increase in operating cash flow in 2020 was primarily due to a reduction in inventory levels and timing of payments for accrued expenses[23](index=23&type=chunk)[115](index=115&type=chunk) - Investing activities used less cash in 2020 due to fewer business acquisitions and ownership interest purchases compared to 2019[23](index=23&type=chunk)[116](index=116&type=chunk) - Financing activities used more cash in 2020, mainly due to net repayments under the revolving credit agreement and increased dividend payments[23](index=23&type=chunk)[117](index=117&type=chunk) [Notes to Condensed Consolidated Unaudited Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Unaudited%20Financial%20Statements) This section provides detailed notes to the condensed consolidated unaudited financial statements, explaining accounting policies and specific financial items [1. BASIS OF PRESENTATION](index=9&type=section&id=1.%20BASIS%20OF%20PRESENTATION) This note describes the company's business, financial statement preparation, seasonality, COVID-19 impact, and recently adopted accounting standards - Watsco is the largest distributor of HVAC/R equipment in North America, incorporated in Florida in 1956[26](index=26&type=chunk) - The financial statements are condensed and unaudited, prepared in accordance with SEC rules, and include wholly-owned subsidiaries and three joint ventures with Carrier where Watsco holds a controlling interest[26](index=26&type=chunk)[27](index=27&type=chunk) - Sales are seasonal, with residential AC demand highest in Q2/Q3 and heating equipment in Q4, and profitability is influenced by weather patterns[28](index=28&type=chunk) - The COVID-19 pandemic's full impact is uncertain, affecting operations through quarantines, closures, and restrictions, and the company cannot reasonably estimate the future financial impact[30](index=30&type=chunk) - Recently adopted accounting standards for credit losses and goodwill impairment did not have a material impact on the consolidated financial statements[32](index=32&type=chunk)[33](index=33&type=chunk) [2. REVENUES](index=10&type=section&id=2.%20REVENUES) This note disaggregates revenues by primary geographical regions and major product lines for the reported periods **Revenues Disaggregated by Primary Geographical Regions (in thousands):** | Region | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 | | :-------------------------- | :-------- | :-------- | :-------- | :-------- | | United States | $1,391,340 | $1,232,564 | $3,517,533 | $3,258,283 | | Canada | $91,429 | $85,422 | $218,687 | $222,429 | | Latin America and the Caribbean | $53,902 | $76,929 | $163,992 | $217,335 | | **Total Revenues** | **$1,536,671** | **$1,394,915** | **$3,900,212** | **$3,698,047** | **Revenues Disaggregated by Major Product Lines (as % of total):** | Product Line | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 | | :-------------------------- | :------ | :------ | :------ | :------ | | HVAC equipment | 70% | 68% | 70% | 68% | | Other HVAC products | 27% | 29% | 27% | 28% | | Commercial refrigeration products | 3% | 3% | 3% | 4% | | **Total** | **100%** | **100%** | **100%** | **100%** | [3. EARNINGS PER SHARE](index=11&type=section&id=3.%20EARNINGS%20PER%20SHARE) This note details the calculation of basic and diluted earnings per share for Watsco, Inc. shareholders **Basic Earnings per Share (EPS):** | Period | Net Income Attributable to Watsco, Inc. Shareholders (in thousands) | Weighted-Average Common Shares Outstanding - Basic | Basic EPS | | :-------------------------- | :------------------------------------------------- | :----------------------------------------------- | :-------- | | Q3 2020 | $106,489 | 35,099,871 | $2.77 | | Q3 2019 | $83,480 | 34,755,627 | $2.20 | | 9M 2020 | $223,569 | 35,046,156 | $5.83 | | 9M 2019 | $208,672 | 34,544,425 | $5.54 | **Diluted Earnings per Share (EPS):** | Period | Net Income Attributable to Watsco, Inc. Shareholders (in thousands) | Weighted-Average Common Shares Outstanding - Diluted | Diluted EPS | | :-------------------------- | :------------------------------------------------- | :------------------------------------------------- | :---------- | | Q3 2020 | $106,489 | 35,237,022 | $2.76 | | Q3 2019 | $83,480 | 34,788,955 | $2.20 | | 9M 2020 | $223,569 | 35,109,043 | $5.82 | | 9M 2019 | $208,672 | 34,569,719 | $5.54 | - Diluted EPS for Common stock assumes conversion of all Class B common stock[35](index=35&type=chunk) [4. OTHER COMPREHENSIVE INCOME (LOSS)](index=12&type=section&id=4.%20OTHER%20COMPREHENSIVE%20INCOME%20(LOSS)) This note explains the components of other comprehensive income (loss), including foreign currency adjustments and hedging instrument changes - Other comprehensive income (loss) primarily consists of foreign currency translation adjustments from Canadian operations and changes in unrealized gains/losses on cash flow hedging instruments[37](index=37&type=chunk) **Other Comprehensive Income (Loss) (in thousands):** | Component | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 | | :------------------------------------------------- | :------- | :------- | :------- | :------- | | Foreign currency translation adjustment | $5,514 | $(3,038) | $(6,592) | $7,264 | | Unrealized (loss) gain on cash flow hedging instruments, net of tax | $(416) | $255 | $948 | $(798) | | Reclassification of gain on cash flow hedging instruments into earnings, net of tax | $(509) | $(140) | $(691) | $(542) | | **Total Other Comprehensive Income (Loss)** | **$4,589** | **$(2,923)** | **$(6,335)** | **$5,924** | [5. PURCHASE OF OWNERSHIP INTEREST FROM JOINT VENTURE](index=12&type=section&id=5.%20PURCHASE%20OF%20OWNERSHIP%20INTEREST%20FROM%20JOINT%20VENTURE) This note describes Watsco's purchase of an additional ownership interest in Homans Associates II LLC from Carrier Enterprise II - Effective May 31, 2019, Watsco purchased an additional **20% ownership interest** in Homans Associates II LLC from Carrier Enterprise II for **$32.4 million** cash, increasing its ownership to **100%**[38](index=38&type=chunk) [6. INVESTMENT IN UNCONSOLIDATED ENTITY](index=12&type=section&id=6.%20INVESTMENT%20IN%20UNCONSOLIDATED%20ENTITY) This note details Carrier Enterprise I's investment in Russell Sigler, Inc. and the accounting treatment under the equity method - Carrier Enterprise I (Watsco's joint venture with Carrier) acquired a **34.9% ownership** in Russell Sigler, Inc. (RSI) in June 2017, increasing to **38.1%** by April 2019 through additional purchases totaling **$4.94 million** in 2019[39](index=39&type=chunk) - The investment in RSI is accounted for under the equity method due to Carrier Enterprise I's **38.1% equity interest** and right to appoint two of RSI's six board members[41](index=41&type=chunk) - RSI's shareholders have the right to sell their shares to Carrier Enterprise I, and Carrier Enterprise I has the right to purchase remaining shares if its ownership reaches **85% or more**[41](index=41&type=chunk) [7. ACQUISITIONS](index=13&type=section&id=7.%20ACQUISITIONS) This note provides information on business acquisitions completed by Watsco and its joint venture during 2019 - In November 2019, Watsco acquired N&S Supply of Fishkill, Inc. for **$12.0 million** cash and **22,435 shares** of common stock, recognizing **$2.6 million** in goodwill[42](index=42&type=chunk) - In August 2019, Carrier Enterprise I acquired Peirce-Phelps, Inc. (PPI) for **$10.0 million** cash, **372,543 shares** of common stock (**$58.3 million** fair value), and assumed indebtedness, resulting in **$28.9 million** in goodwill and intangibles, with identified intangibles valued at **$19.0 million**[43](index=43&type=chunk)[44](index=44&type=chunk) - In April 2019, Watsco acquired Dunphey & Associates Supply Co., Inc. (DASCO) for **$16.8 million** cash and **50,952 shares** of common stock (**$6.9 million** fair value), recognizing **$9.0 million** in goodwill and intangibles[46](index=46&type=chunk) [8. DEBT](index=14&type=section&id=8.%20DEBT) This note describes Watsco's revolving credit agreement, outstanding borrowings, and compliance with financial covenants - Watsco maintains an unsecured, syndicated multicurrency revolving credit agreement, which was increased from **$500.0 million** to **$560.0 million** on April 10, 2020, and matures on December 5, 2023[48](index=48&type=chunk) - Outstanding borrowings under the revolving credit agreement significantly decreased from **$155.7 million** at December 31, 2019, to **$0.7 million** at September 30, 2020[49](index=49&type=chunk) - The company believes it was in compliance with all financial covenants at September 30, 2020[49](index=49&type=chunk) [9. DERIVATIVES](index=14&type=section&id=9.%20DERIVATIVES) This note explains Watsco's use of foreign currency derivative contracts for hedging and their impact on financial results - Watsco uses foreign currency forward and option contracts to offset foreign exchange rate fluctuations, with some designated as cash flow hedges and others not[50](index=50&type=chunk)[51](index=51&type=chunk)[53](index=53&type=chunk) - The total notional value of cash flow hedges was **$11.0 million** at September 30, 2020, with maturities of one year or less, and an estimated **$0.7 million** pre-tax loss is expected to be reclassified into earnings within the next 12 months[51](index=51&type=chunk)[52](index=52&type=chunk) - Derivatives not designated as hedges had a total notional value of **$4.6 million** at September 30, 2020, and resulted in a **$(0.5) million loss** for Q3 2020 and a **$0.1 million gain** for 9M 2020[53](index=53&type=chunk)[54](index=54&type=chunk) [10. FAIR VALUE MEASUREMENTS](index=15&type=section&id=10.%20FAIR%20VALUE%20MEASUREMENTS) This note provides fair value measurements for financial instruments, categorized by valuation input levels - Equity securities are classified as Level 1 (based on active market prices), while derivative financial instruments (foreign currency forward and option contracts) are classified as Level 2 (based on observable market inputs)[57](index=57&type=chunk)[58](index=58&type=chunk) **Fair Value Measurements at September 30, 2020 (in thousands):** | Item | Balance Sheet Location | Total | Level 1 | Level 2 | Level 3 | | :-------------------------- | :-------------------------------- | :---- | :------ | :------ | :------ | | Asset Derivatives | Other current assets | $6 | $— | $6 | $— | | Equity securities | Other assets | $442 | $442 | $— | $— | | Liability Derivatives | Accrued expenses and other current liabilities | $394 | $— | $394 | $— | [11. SHAREHOLDERS' EQUITY](index=15&type=section&id=11.%20SHAREHOLDERS'%20EQUITY) This note details cash dividends, share-based compensation, and stock option exercises impacting shareholders' equity - Cash dividends of **$1.775 per share** were paid for Q3 2020 and **$5.15 per share** for the nine months ended September 30, 2020, for both Common and Class B common stock[59](index=59&type=chunk) - Shares were withheld to satisfy tax withholding obligations for non-vested restricted stock (**5,361 shares** for Q3 2020, **11,693 shares** for 9M 2020) and stock option exercises (**6,582 shares** for Q3 2020, **11,455 shares** for 9M 2020)[60](index=60&type=chunk)[62](index=62&type=chunk) - Cash received from stock option exercises was **$6.573 million** for Q3 2020 and **$11.978 million** for 9M 2020[61](index=61&type=chunk) [12. COMMITMENTS AND CONTINGENCIES](index=16&type=section&id=12.%20COMMITMENTS%20AND%20CONTINGENCIES) This note discusses legal proceedings and self-insurance reserves, assessing their potential financial impact - Watsco is involved in incidental litigation but does not believe the ultimate liability will have a material adverse effect on its financial condition or results of operations[65](index=65&type=chunk) - Self-insurance reserves for casualty and health benefit programs were **$5.2 million** at September 30, 2020, an increase from **$3.1 million** at December 31, 2019[66](index=66&type=chunk) [13. RELATED PARTY TRANSACTIONS](index=16&type=section&id=13.%20RELATED%20PARTY%20TRANSACTIONS) This note discloses significant transactions with Carrier and its affiliates, including purchases, sales, and payables - Purchases from Carrier and its affiliates comprised **65% of inventory purchases** for Q3 2020 and **62%** for 9M 2020[67](index=67&type=chunk) - Sales to Carrier and its affiliates were approximately **$27.0 million** for Q3 2020 and **$82.0 million** for 9M 2020[67](index=67&type=chunk) - Approximately **$106.0 million** was payable to Carrier and its affiliates at September 30, 2020[67](index=67&type=chunk) - Legal fees paid to Greenberg Traurig, P.A., where a board member is Senior Chairman, were **$0.03 million** for Q3 2020 and 9M 2020[68](index=68&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=16&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section provides management's perspective on Watsco's financial performance, condition, and outlook, including operational analysis and liquidity [Forward-Looking Statements](index=16&type=section&id=Forward-Looking%20Statements) This section highlights that the report contains forward-looking statements subject to various risks and uncertainties - The report contains forward-looking statements regarding economic conditions, business strategies, acquisitions, financing plans, and industry trends, which are subject to risks and uncertainties[69](index=69&type=chunk) - Key risk factors include general economic conditions, competitive factors, commodity costs, consumer spending, new housing starts, COVID-19 impact, liquidity access, seasonality, weather patterns, and cybersecurity[70](index=70&type=chunk)[76](index=76&type=chunk) [Company Overview](index=17&type=section&id=Company%20Overview) This section provides an overview of Watsco's business as a leading HVAC/R distributor, its operations, and revenue seasonality - Watsco is the largest distributor of HVAC/R equipment and related parts/supplies in North America, operating from **603 locations** across **38 U.S. States, Canada, Mexico, and Puerto Rico** as of September 30, 2020[73](index=73&type=chunk) - Revenues primarily come from sales of HVAC/R equipment and supplies, with selling, general, and administrative expenses largely variable with sales and including warehouse operations and facility rent[74](index=74&type=chunk) - Sales are seasonal, with residential AC replacement demand peaking in Q2/Q3 and heating equipment demand in Q4, influenced by weather and economic conditions[75](index=75&type=chunk) [Impact of the COVID-19 Pandemic](index=18&type=section&id=Impact%20of%20the%20COVID-19%20Pandemic) This section discusses the operational adjustments, cost reduction measures, and uncertain financial impact of the COVID-19 pandemic - Watsco's operations were deemed essential, allowing continued operation with modifications like contactless sales, though some locations experienced short-term closures or diminished capacity in Q2 2020, with restrictions resuming in certain markets in Q3[77](index=77&type=chunk) - The company implemented cost reduction plans, including compensation reductions, rent abatement, and curtailing discretionary spending, while maintaining a strong balance sheet with **$92.6 million** cash and low debt[78](index=78&type=chunk)[79](index=79&type=chunk) - The full financial impact of the pandemic remains highly uncertain and cannot be reasonably estimated, depending on its duration, scope, and effect on employees, customers, and suppliers[80](index=80&type=chunk) [Joint Ventures with Carrier Global Corporation](index=18&type=section&id=Joint%20Ventures%20with%20Carrier%20Global%20Corporation) This section describes Watsco's three joint ventures with Carrier Global Corporation and recent ownership changes - Carrier Corporation spun off into Carrier Global Corporation on April 3, 2020[81](index=81&type=chunk) - Watsco has three joint ventures with Carrier: Carrier Enterprise I (**80% controlling interest**, **95 locations** in Sun Belt states, Puerto Rico, and export division), Carrier Enterprise II (**80% controlling interest**, Northeast U.S. and Mexico operations), and Carrier Enterprise III (**60% controlling interest**, **35 locations** in Canada)[82](index=82&type=chunk)[83](index=83&type=chunk)[84](index=84&type=chunk) - Carrier Enterprise I acquired Peirce-Phelps, Inc. in August 2019, and Watsco purchased an additional **20% ownership** in Homans Associates II LLC from Carrier Enterprise II in May 2019, making Homans a wholly-owned subsidiary[82](index=82&type=chunk)[83](index=83&type=chunk) [Critical Accounting Policies](index=19&type=section&id=Critical%20Accounting%20Policies) This section confirms that no significant changes were made to critical accounting policies during the quarter - Management's discussion relies on condensed consolidated unaudited financial statements prepared in accordance with U.S. GAAP, requiring estimates and assumptions[85](index=85&type=chunk) - No significant changes to critical accounting policies were identified during the quarter ended September 30, 2020, compared to those disclosed in the 2019 Annual Report on Form 10-K[86](index=86&type=chunk) [New Accounting Standards](index=19&type=section&id=New%20Accounting%20Standards) This section refers to Note 1 for details on recently adopted accounting standards - Refer to Note 1 of the condensed consolidated unaudited financial statements for a discussion of recently adopted accounting standards[87](index=87&type=chunk) [Results of Operations](index=19&type=section&id=Results%20of%20Operations) This section analyzes Watsco's financial performance for the third quarter and nine months ended September 30, 2020, compared to prior periods [Third Quarter of 2020 Compared to Third Quarter of 2019](index=20&type=section&id=Third%20Quarter%20of%202020%20Compared%20to%20Third%20Quarter%20of%202019) This section analyzes the financial results for the third quarter of 2020 compared to the same period in 2019 **Key Financial Metrics (Q3 2020 vs Q3 2019):** | Metric | 2020 (%) | 2019 (%) | Change (bps) | | :-------------------------------- | :------- | :------- | :----------- | | Revenues | 100.0% | 100.0% | 0 | | Cost of sales | 75.7% | 76.0% | -30 | | Gross profit | 24.3% | 24.0% | 30 | | Selling, general and administrative expenses | 14.4% | 15.3% | -90 | | Operating income | 10.2% | 9.0% | 120 | | Net income attributable to Watsco, Inc. | 6.9% | 6.0% | 90 | - Revenues increased by **10%** to **$1.537 billion**, driven by a **12% increase** in HVAC equipment sales (**70% of sales**), with same-store revenues up **8%**, residential HVAC equipment up **17%** (**18% volume, 1% price**), and commercial HVAC equipment down **17%** due to pandemic disruption[93](index=93&type=chunk) - Gross profit margin improved by **30 basis points** to **24.3%**, primarily due to higher realized gross margins for residential HVAC equipment[94](index=94&type=chunk) - Selling, general and administrative expenses as a percentage of revenues decreased to **14.4%** from **15.3%**, remaining flat on a same-store basis due to operating efficiency improvements and cost reductions in response to the pandemic[95](index=95&type=chunk) - Net income attributable to Watsco, Inc. increased by **28%** to **$106.5 million**, driven by higher revenues, gross profit, and reduced SG&A as a percentage of revenues[100](index=100&type=chunk) [Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019](index=21&type=section&id=Nine%20Months%20Ended%20September%2030%2C%202020%20Compared%20to%20Nine%20Months%20Ended%20September%2030%2C%202019) This section analyzes the financial results for the nine months ended September 30, 2020, compared to the same period in 2019 **Key Financial Metrics (9M 2020 vs 9M 2019):** | Metric | 2020 (%) | 2019 (%) | Change (bps) | | :-------------------------------- | :------- | :------- | :----------- | | Revenues | 100.0% | 100.0% | 0 | | Cost of sales | 75.9% | 75.8% | 10 | | Gross profit | 24.1% | 24.2% | -10 | | Selling, general and administrative expenses | 15.9% | 15.9% | 0 | | Operating income | 8.5% | 8.5% | 0 | | Net income attributable to Watsco, Inc. | 5.7% | 5.6% | 10 | - Revenues increased by **5%** to **$3.900 billion**, with same-store revenues up **1%**, HVAC equipment sales (**70% of sales**) increased **7%**, driven by an **8% volume increase** in residential HVAC equipment (flat price), partially offset by a **15% decrease** in commercial HVAC equipment[101](index=101&type=chunk) - Gross profit margin declined by **10 basis points** to **24.1%**, primarily due to a shift in sales mix towards lower-margin HVAC equipment[102](index=102&type=chunk) - Selling, general and administrative expenses as a percentage of revenues remained consistent at **15.9%**, decreasing **1%** on a same-store basis due to operating efficiencies and cost reductions[103](index=103&type=chunk) - Net income attributable to Watsco, Inc. increased by **7%** to **$223.6 million**, primarily due to higher revenues, gross profit, and lower interest expense[108](index=108&type=chunk) [Liquidity and Capital Resources](index=22&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses Watsco's sources and uses of cash, working capital, debt, and capital allocation strategies [Sources and Uses of Cash](index=22&type=section&id=Sources%20and%20Uses%20of%20Cash) This section outlines how Watsco funds its operations, investments, and shareholder distributions - Watsco relies on operating cash flows and its revolving credit agreement to fund working capital, dividends, capital expenditures, acquisitions, and strategic initiatives[109](index=109&type=chunk) - As of September 30, 2020, the company had **$92.6 million** in cash and cash equivalents, with **$64.7 million** held by foreign subsidiaries, generally available for foreign operations[110](index=110&type=chunk) - The company believes current funds are sufficient for foreseeable liquidity needs, but disruptions in credit markets or LIBOR transition could impact borrowing costs[111](index=111&type=chunk)[112](index=112&type=chunk) [Working Capital](index=22&type=section&id=Working%20Capital) This section analyzes changes in working capital, including inventory, accounts payable, and accounts receivable - Working capital decreased from **$1.085 billion** at December 31, 2019, to **$1.035 billion** at September 30, 2020[113](index=113&type=chunk) - This decrease was due to lower inventory levels (from optimization and supply chain disruptions), higher accounts payable, and accrued expenses, partially offset by higher accounts receivable due to seasonality[113](index=113&type=chunk) [Cash Flows](index=22&type=section&id=Cash%20Flows) This section details cash flows from operating, investing, and financing activities for the nine-month periods **Cash Flow Activity (9M 2020 vs 9M 2019, in millions):** | Activity | 2020 | 2019 | Change | | :-------------------------------- | :----- | :----- | :----- | | Operating activities | $372.8 | $197.5 | $175.3 | | Investing activities | $(11.5) | $(65.0) | $53.5 | | Financing activities | $(342.8) | $(155.7) | $(187.1) | - Operating cash flow increased significantly due to reduced inventory and timing of liability payments, investing cash flow decreased due to fewer acquisitions in 2020, and financing cash flow increased due to net repayments of the revolving credit agreement and higher dividends[115](index=115&type=chunk)[116](index=116&type=chunk)[117](index=117&type=chunk) [Revolving Credit Agreement](index=23&type=section&id=Revolving%20Credit%20Agreement) This section describes the company's revolving credit facility, its capacity, outstanding borrowings, and covenant compliance - The revolving credit agreement's borrowing capacity was increased to **$560.0 million** on April 10, 2020, maturing on December 5, 2023[118](index=118&type=chunk) - Outstanding borrowings decreased from **$155.7 million** at December 31, 2019, to **$0.7 million** at September 30, 2020, and the company was in compliance with all covenants[119](index=119&type=chunk) [Purchase of Additional Ownership Interest from Joint Venture](index=23&type=section&id=Purchase%20of%20Additional%20Ownership%20Interest%20from%20Joint%20Venture) This section details the acquisition of an additional 20% ownership in Homans Associates II LLC - On May 31, 2019, Watsco acquired an additional **20% ownership** in Homans from Carrier Enterprise II for **$32.4 million** cash, making Homans a wholly-owned subsidiary[120](index=120&type=chunk) [Investment in Unconsolidated Entity](index=23&type=section&id=Investment%20in%20Unconsolidated%20Entity) This section discusses Carrier Enterprise I's investment in Russell Sigler, Inc. and related contingent purchase obligations - Carrier Enterprise I increased its ownership in Russell Sigler, Inc. (RSI) to **38.1%** by April 2019 through cash contributions from Watsco and Carrier[121](index=121&type=chunk) - RSI shareholders have a right to sell, and Carrier Enterprise I has an obligation to purchase, their shares, with the estimated contingent purchase amount for Watsco approximately **$183.0 million** at September 30, 2020[122](index=122&type=chunk) [Acquisitions](index=23&type=section&id=Acquisitions) This section summarizes business acquisitions completed in 2019 and the company's ongoing acquisition strategy - Watsco completed three acquisitions in 2019: N&S Supply of Fishkill, Inc. (November 2019), Peirce-Phelps, Inc. (August 2019, via Carrier Enterprise I), and Dunphey & Associates Supply Co., Inc. (April 2019)[123](index=123&type=chunk)[124](index=124&type=chunk)[125](index=125&type=chunk) - The company continually evaluates potential acquisitions and believes its financial position supports additional debt or equity financing if needed[126](index=126&type=chunk) [Common Stock Dividends](index=24&type=section&id=Common%20Stock%20Dividends) This section provides information on cash dividends declared and paid on common stock - Cash dividends of **$5.15 per share** were paid for the nine months ended September 30, 2020, an increase from **$4.80 per share** in 2019[127](index=127&type=chunk) - A quarterly cash dividend of **$1.775 per share** was declared on October 1, 2020, paid on October 30, 2020[127](index=127&type=chunk) - Future dividends are at the Board's discretion, based on cash flow, profitability, financial condition, and prospects[127](index=127&type=chunk) [Company Share Repurchase Program](index=24&type=section&id=Company%20Share%20Repurchase%20Program) This section outlines the authorized share repurchase program and remaining shares available for repurchase - The Board authorized repurchases of up to **7,500,000 shares** in September 1999, with the last repurchase under this plan occurring in 2008[128](index=128&type=chunk) - As of September 30, 2020, **1,129,087 shares** remained authorized for repurchase under the program[128](index=128&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=24&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) This section states no material changes to market risk disclosures from the 2019 Annual Report on Form 10-K - No material changes to market risk information compared to the 2019 Annual Report on Form 10-K[129](index=129&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=24&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) This section confirms the effectiveness of disclosure controls and procedures and reports no material changes in internal control over financial reporting - Management, including the CEO, EVP, and CFO, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2020[131](index=131&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2020[132](index=132&type=chunk) - Internal controls over financial reporting for N&S, PPI, and DASCO (representing approximately **7% of total consolidated assets** and **6% of Q3 2020 revenues**) have not yet been assessed[133](index=133&type=chunk) PART II. OTHER INFORMATION [ITEM 1. LEGAL PROCEEDINGS](index=25&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) This section refers to Note 12 for information regarding legal proceedings, claims, and assessments - Information on legal proceedings is incorporated by reference from Note 12 of the financial statements[135](index=135&type=chunk) [ITEM 1A. RISK FACTORS](index=25&type=section&id=ITEM%201A.%20RISK%20FACTORS) This section highlights risk factors, particularly those related to the COVID-19 pandemic, consistent with the 2019 Annual Report - Risk factors are largely consistent with the 2019 Annual Report on Form 10-K, with specific updates regarding the COVID-19 pandemic[136](index=136&type=chunk) - The COVID-19 pandemic could adversely affect business operations, financial liquidity, and results due to mandatory closures, work-from-home orders, supply chain disruptions, employee illness, and shifts in consumer demand (e.g., repair over replacement, value-oriented equipment)[137](index=137&type=chunk)[138](index=138&type=chunk) - The duration and scope of the pandemic are unpredictable, and its negative financial impact could be material and prolonged[139](index=139&type=chunk) [ITEM 6. EXHIBITS](index=26&type=section&id=ITEM%206.%20EXHIBITS) This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications from the CEO, EVP, and CFO, as well as XBRL-related documents - Includes certifications from the Chief Executive Officer, Executive Vice President, and Chief Financial Officer (Exhibits 31.1, 31.2, 31.3, 32.1)[140](index=140&type=chunk) - Contains XBRL Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, and Presentation Linkbase Documents (Exhibits 101.INS to 101.PRE)[140](index=140&type=chunk) SIGNATURE [SIGNATURE](index=27&type=section&id=SIGNATURE) This section contains the signature of Watsco, Inc.'s Chief Financial Officer, certifying the report filing - The report was signed on November 5, 2020, by Ana M. Menendez, Chief Financial Officer of Watsco, Inc[143](index=143&type=chunk)