Watsco(WSO) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS 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 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 | $0.28 | 5.1% | Condensed Consolidated Unaudited Statements of Comprehensive Income This section presents the condensed consolidated unaudited statements of comprehensive income for the quarter and nine months ended September 30, 2020 and 2019 Quarter Ended September 30, 2020 vs 2019 (in thousands): | Metric | 2020 | 2019 | Change ($) | 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 | $6,774 | 3.2% | Condensed Consolidated Balance Sheets This section details the condensed consolidated balance sheets as of September 30, 2020, and December 31, 2019 As of September 30, 2020 vs December 31, 2019 (in thousands): | Metric | Sep 30, 2020 | Dec 31, 2019 | Change ($) | 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] - 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] Condensed Consolidated Unaudited Statements of Shareholders' Equity 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] - Key changes include net income contributions, other comprehensive income/loss, share-based compensation, and cash dividends declared and paid[18][20][21] - 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 $180.5 million in the prior year[18][23] Condensed Consolidated Unaudited Statements of Cash Flows This section presents the condensed consolidated unaudited statements of cash flows for the nine months ended September 30, 2020 and 2019 Nine Months Ended September 30, 2020 vs 2019 (in thousands): | Cash Flow Activity | 2020 | 2019 | Change ($) | | :-------------------------------- | :------- | :------- | :--------- | | 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][115] - Investing activities used less cash in 2020 due to fewer business acquisitions and ownership interest purchases compared to 2019[23][116] - Financing activities used more cash in 2020, mainly due to net repayments under the revolving credit agreement and increased dividend payments[23][117] Notes to Condensed Consolidated Unaudited Financial Statements This section provides detailed notes to the condensed consolidated unaudited financial statements, explaining accounting policies and specific financial items 1. BASIS OF PRESENTATION 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] - 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][27] - Sales are seasonal, with residential AC demand highest in Q2/Q3 and heating equipment in Q4, and profitability is influenced by weather patterns[28] - 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] - Recently adopted accounting standards for credit losses and goodwill impairment did not have a material impact on the consolidated financial statements[32][33] 2. REVENUES 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 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] 4. OTHER COMPREHENSIVE INCOME (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] 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 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] 6. INVESTMENT IN UNCONSOLIDATED ENTITY 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] - 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] - 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] 7. ACQUISITIONS 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] - 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][44] - 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] 8. DEBT 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] - 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] - The company believes it was in compliance with all financial covenants at September 30, 2020[49] 9. DERIVATIVES 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][51][53] - 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][52] - 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][54] 10. FAIR VALUE MEASUREMENTS 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][58] 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 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] - 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][62] - Cash received from stock option exercises was $6.573 million for Q3 2020 and $11.978 million for 9M 2020[61] 12. COMMITMENTS AND CONTINGENCIES 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] - 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] 13. RELATED PARTY TRANSACTIONS 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] - Sales to Carrier and its affiliates were approximately $27.0 million for Q3 2020 and $82.0 million for 9M 2020[67] - Approximately $106.0 million was payable to Carrier and its affiliates at September 30, 2020[67] - 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] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on Watsco's financial performance, condition, and outlook, including operational analysis and liquidity Forward-Looking Statements 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] - 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][76] Company Overview 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] - 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] - 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] Impact of the COVID-19 Pandemic 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] - 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][79] - 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] Joint Ventures with Carrier Global Corporation 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] - 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][83][84] - 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][83] Critical Accounting Policies 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] - 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] New Accounting Standards 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] Results of Operations 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 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] - Gross profit margin improved by 30 basis points to 24.3%, primarily due to higher realized gross margins for residential HVAC equipment[94] - 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] - 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] Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 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] - 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] - 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] - 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] Liquidity and Capital Resources This section discusses Watsco's sources and uses of cash, working capital, debt, and capital allocation strategies Sources and Uses of Cash 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] - 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] - The company believes current funds are sufficient for foreseeable liquidity needs, but disruptions in credit markets or LIBOR transition could impact borrowing costs[111][112] Working Capital 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] - 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] Cash Flows 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][116][117] Revolving Credit Agreement 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] - 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] Purchase of Additional Ownership Interest from Joint Venture 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] Investment in Unconsolidated Entity 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] - 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] 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][124][125] - The company continually evaluates potential acquisitions and believes its financial position supports additional debt or equity financing if needed[126] Common Stock Dividends 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] - A quarterly cash dividend of $1.775 per share was declared on October 1, 2020, paid on October 30, 2020[127] - Future dividends are at the Board's discretion, based on cash flow, profitability, financial condition, and prospects[127] Company Share Repurchase Program 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] - As of September 30, 2020, 1,129,087 shares remained authorized for repurchase under the program[128] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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] ITEM 4. CONTROLS AND PROCEDURES 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] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2020[132] - 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] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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] ITEM 1A. RISK FACTORS 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] - 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][138] - The duration and scope of the pandemic are unpredictable, and its negative financial impact could be material and prolonged[139] ITEM 6. EXHIBITS 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] - Contains XBRL Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, and Presentation Linkbase Documents (Exhibits 101.INS to 101.PRE)[140] SIGNATURE 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]