Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Title of each class |
Trading |
Name of each exchange | ||
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☒ |
Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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Page No. |
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Item 1. |
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3 |
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4 |
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5 |
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6 |
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8 |
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9 |
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Item 2. |
15 |
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Item 3. |
21 |
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Item 4. |
21 |
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Item 1. |
22 |
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Item 1A. |
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Item 2. |
22 |
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Item 6. |
23 |
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24 |
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EXHIBITS |
Quarters Ended March 31, |
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2020 |
2019 |
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Revenues |
$ |
$ | ||||||
Cost of sales |
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Gross profit |
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Selling, general and administrative expenses |
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Other income |
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Operating income |
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Interest expense, net |
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Income before income taxes |
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Income taxes |
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Net income |
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Less: net income attributable to non-controlling interest |
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Net income attributable to Watsco, Inc. |
$ |
$ | ||||||
Earnings per share for Common and Class B common stock: |
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Basic and Diluted |
$ |
$ | ||||||
Quarters Ended March 31, |
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2020 |
2019 |
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Net income |
$ |
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$ | |
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Other comprehensive (loss) income, net of tax |
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Foreign currency translation adjustment |
( |
) |
|
|||||
Unrealized gain (loss) on cash flow hedging instruments arising during the period |
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( |
) | |||||
Reclassification of loss (gain) on cash flow hedging instruments into earnings |
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( |
) | |||||
Other comprehensive (loss) income |
( |
) |
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|||||
Comprehensive income |
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||||||
Less: comprehensive (loss) income attributable to non-controlling interest |
( |
) |
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Comprehensive income attributable to Watsco, Inc. |
$ |
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$ | |
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March 31, 2020 |
December 31, 2019 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ |
$ | ||||||
Accounts receivable, net |
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Inventories |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use assets |
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Goodwill |
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Intangible assets, net |
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Investment in unconsolidated entity |
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Other assets |
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$ |
$ | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Current portion of lease liabilities |
$ |
$ | ||||||
Accounts payable |
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Accrued expenses and other current liabilities |
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Total current liabilities |
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Long-term obligations: |
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Borrowings under revolving credit agreement |
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Operating lease liabilities, net of current portion |
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Finance lease liabilities, net of current portion |
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Total long-term obligations |
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Deferred income taxes and other liabilities |
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Commitments and contingencies |
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Watsco, Inc. shareholders’ equity: |
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Common stock, $ |
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Class B common stock, $ |
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Preferred stock, $ |
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Paid-in capital |
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Accumulated other comprehensive loss, net of tax |
( |
) |
( |
) | ||||
Retained earnings |
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Treasury stock, at cost |
( |
) |
( |
) | ||||
Total Watsco, Inc. shareholders’ equity |
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Non-controlling interest |
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Total shareholders’ equity |
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$ |
$ | |||||||
(In thousands, except |
Common Stock, Class B Common Stock and Preferred Stock Shares |
Common Stock, Class B Common Stock and Preferred Stock Amount |
Paid-In Capital |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Treasury Stock |
Non-controlling Interest |
Total |
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Balance at December 31, 2019 |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
$ |
|
$ |
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Net income |
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Other comprehensive ( loss ) |
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( |
) | |
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( |
) | ( |
) | |||||||||||||||||||||
Issuances of non-vested restricted shares of common stock |
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( |
) | |
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— |
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Common stock contribution to 401(k) plan |
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Stock issuances from exercise of stock options and employee stock purchase plan |
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Retirement of common stock |
( |
) | ( |
) | ( |
) | |
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( |
) | ||||||||||||||||||||
Share-based compensation |
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Cash dividends declared and paid on Common and Class B common stock, $ |
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( |
) | |
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( |
) | ||||||||||||||||||||||
Balance at March 31, 2020 |
|
$ |
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$ |
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$ |
( |
) |
$ |
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$ |
( |
) |
$ |
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$ |
|
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(In thousands, except |
Common Stock, Class B Common Stock and Preferred Stock Shares |
Common Stock, Class B Common Stock and Preferred Stock Amount |
Paid-In Capital |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Treasury Stock |
Non-controlling Interest |
Total |
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Balance at December 31, 2018 |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
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$ |
( |
) |
$ |
|
$ |
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Net income |
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Other comprehensive income |
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Issuances of non-vested restricted shares of common stock |
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( |
) | — |
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Forfeitures of non-vested restricted shares of common stock |
( |
) | ( |
) | |
— |
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Common stock contribution to 401(k) plan |
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Stock issuances from exercise of stock options and employee stock purchase plan |
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Retirement of common stock |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||
Share-based compensation |
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Cash dividends declared and paid on Common and Class B common stock, $ |
( |
) | ( |
) | ||||||||||||||||||||||||||||
Balance at March 31, 2019 |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
$ |
|
$ |
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Quarters Ended March 31, |
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2020 |
2019 |
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Cash flows from operating activities: |
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Net income |
$ |
$ | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Share-based compensation |
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Non-cash contribution to 401(k) plan |
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Provision for doubtful accounts |
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Other income from investment in unconsolidated entity |
( |
) |
( |
) | ||||
Other, net |
( |
) | ||||||
Changes in operating assets and liabilities: |
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Accounts receivable |
( |
) |
( |
) | ||||
Inventories |
( |
) |
( |
) | ||||
Accounts payable and other liabilities |
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Other, net |
( |
) |
( |
) | ||||
Net cash provided by operating activities |
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Cash flows from investing activities: |
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Capital expenditures |
( |
) |
( |
) | ||||
Proceeds from sale of property and equipment |
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Net cash used in investing activities |
( |
) |
( |
) | ||||
Cash flows from financing activities: |
||||||||
Dividends on Common and Class B common stock |
( |
) |
( |
) | ||||
Repurchases of common stock to satisfy employee withholding tax obligations |
( |
) |
( |
) | ||||
Net repayments of long-term obligations |
( |
) |
( |
) | ||||
Proceeds from short-term borrowings |
— |
|||||||
Net proceeds under revolving credit agreement |
||||||||
Net proceeds from issuances of common stock |
||||||||
Net cash used in financing activities |
( |
) |
( |
) | ||||
Effect of foreign exchange rate changes on cash and cash equivalents |
( |
) |
||||||
Net decrease in cash and cash equivalents |
( |
) |
( |
) | ||||
Cash and cash equivalents at beginning of period |
||||||||
Cash and cash equivalents at end of period |
$ |
$ | ||||||
1. |
BASIS OF PRESENTATION |
2 . |
REVENUES |
Quarters Ended March 31, |
2020 |
2019 |
||||||
Primary Geographical Regions: |
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United States |
$ |
|
$ | |
||||
Canada |
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Latin America and the Caribbean |
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$ |
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$ | |
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Major Product Lines: |
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HVAC equipment |
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% |
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% | ||||
Other HVAC products |
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% |
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% | ||||
Commercial refrigeration products |
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% |
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% | ||||
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% |
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% | |||||
3 . |
EARNINGS PER SHARE |
Quarters Ended March 31, |
2020 |
2019 |
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Basic Earnings per Share: |
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Net income attributable to Watsco, Inc. shareholders |
$ |
|
$ | |
||||
Less: distributed and undistributed earnings allocated to non-vested restricted common stock |
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Earnings allocated to Watsco, Inc. shareholders |
$ |
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$ | |
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Weighted-average common shares outstanding – Basic |
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Basic earnings per share for Common and Class B common stock |
$ |
|
$ | |
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Allocation of earnings for Basic: |
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Common stock |
$ |
|
$ | |
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Class B common stock |
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$ |
|
$ | |
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Diluted Earnings per Share: |
||||||||
Net income attributable to Watsco, Inc. shareholders |
$ |
|
$ | |
||||
Less: distributed and undistributed earnings allocated to non-vested restricted common stock |
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|
||||||
Earnings allocated to Watsco, Inc. shareholders |
$ |
|
$ | |
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Weighted-average common shares outstanding – Basic |
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Effect of dilutive stock options |
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Weighted-average common shares outstanding – Diluted |
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|
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Diluted earnings per share for Common and Class B common stock |
$ |
|
$ | |
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|
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|
|
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|
|
Anti-dilutive stock options not included above |
|
|
4. |
OTHER COMPREHENSIVE (LOSS) INCOME |
Quarters Ended March 31, |
2020 |
2019 |
||||||
Foreign currency translation adjustment |
$ |
( |
) |
$ | |
|||
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on cash flow hedging instruments |
|
( |
) | |||||
Income tax (expense) benefit |
( |
) |
|
|||||
Unrealized gain (loss) on cash flow hedging instruments, net of tax |
|
( |
) | |||||
|
|
|
|
|
|
|
|
|
Reclassification of loss (gain) on cash flow hedging instruments into earnings |
|
( |
) | |||||
Income tax (benefit) expense |
( |
) |
|
|||||
Reclassification of loss (gain) on cash flow hedging instruments into earnings, net of tax |
|
( |
) | |||||
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income |
$ |
( |
) |
$ | |
|||
Quarters Ended March 31, |
2020 |
2019 |
||||||
Foreign currency translation adjustment: |
||||||||
Beginning balance |
$ |
( |
) |
$ | ( |
) | ||
Current period other comprehensive (loss) income |
( |
) |
|
|||||
Ending balance |
( |
) |
( |
) | ||||
Cash flow hedging instruments: |
||||||||
Beginning balance |
( |
) |
|
|||||
Current period other comprehensive income (loss) |
|
( |
) | |||||
Reclassification adjustment |
|
( |
) | |||||
Ending balance |
|
|
||||||
Accumulated other comprehensive loss, net of tax |
$ |
( |
) |
$ | ( |
) | ||
5 . |
DERIVATIVES |
Quarters Ended March 31, |
2020 |
2019 |
||||||
Gain (loss) recorded in accumulated other comprehensive loss |
$ |
|
$ | ( |
) | |||
Loss (gain) reclassified from accumulated other comprehensive loss into earnings |
$ |
|
$ | ( |
) |
Asset Derivatives |
Liability Derivatives |
|||||||||||||||
March 31, 2020 |
December 31, 2019 |
March 31, 2020 |
December 31, 2019 |
|||||||||||||
Derivatives designated as hedging instruments |
$ |
|
$ | — |
$ |
|
$ | |
||||||||
Derivatives not designated as hedging instruments |
|
— |
|
|
||||||||||||
Total derivative instruments |
$ |
|
$ | — |
$ |
|
$ | |
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6 . |
FAIR VALUE MEASUREMENTS |
Balance Sheet Location |
Total |
Fair Value Measurements at March 31, 2020 Using |
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Level 1 |
Level 2 |
Level 3 |
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Assets: |
||||||||||||||||||||
Derivative financial instruments |
Other current assets |
$ |
|
$ |
— |
$ |
|
$ |
— |
|||||||||||
Equity securities |
Other assets |
$ |
|
$ |
|
$ |
— |
$ |
— |
|||||||||||
Liabilities: |
||||||||||||||||||||
Derivative financial instruments |
Accrued expenses and other current liabilities |
$ |
|
$ |
— |
$ |
|
$ |
— |
Balance Sheet Location |
Total |
Fair Value Measurements at December 31, 2019 Using |
||||||||||||||||||
Level 1 |
Level 2 |
Level 3 |
||||||||||||||||||
Assets: |
||||||||||||||||||||
Equity securities |
Other assets |
$ | |
$ | |
$ | — |
$ | — |
|||||||||||
Liabilities: |
||||||||||||||||||||
Derivative financial instruments |
Accrued expenses and other current liabilities |
$ | |
$ | — |
$ | |
$ | — |
7 . |
SHAREHOLDERS’ EQUITY |
8 . |
COMMITMENTS AND CONTINGENCIES |
9 . |
RELATED PARTY TRANSACTIONS |
10. |
SUBSEQUENT EVENTS |
• | general economic conditions, both in the United States and in the international markets we serve; |
• | competitive factors within the HVAC/R industry; |
• | effects of supplier concentration; |
• | fluctuations in certain commodity costs; |
• | consumer spending; |
• | consumer debt levels; |
• | the impact of COVID-19 pandemic; |
• | new housing starts and completions; |
• | capital spending in the commercial construction market; |
• | access to liquidity needed for operations; |
• | seasonal nature of product sales; |
• | weather patterns and conditions; |
• | insurance coverage risks; |
• | federal, state, and local regulations impacting our industry and products; |
• | prevailing interest rates; |
• | foreign currency exchange rate fluctuations; |
• | international risk; |
• | cybersecurity risk; and |
• | the continued viability of our business strategy. |
2020 |
2019 |
|||||||
Revenues |
100.0 |
% |
100.0 |
% | ||||
Cost of sales |
75.4 |
74.9 |
||||||
Gross profit |
24.6 |
25.1 |
||||||
Selling, general and administrative expenses |
20.2 |
19.3 |
||||||
Other income |
0.1 |
0.2 |
||||||
Operating income |
4.5 |
5.9 |
||||||
Interest expense, net |
0.1 |
0.1 |
||||||
Income before income taxes |
4.4 |
5.8 |
||||||
Income taxes |
0.8 |
1.1 |
||||||
Net income |
3.6 |
4.7 |
||||||
Less: net income attributable to non-controlling interest |
0.6 |
0.9 |
||||||
Net income attributable to Watsco, Inc. |
3.0 |
% |
3.8 |
% | ||||
Number of Locations |
||||
March 31, 2019 |
575 |
|||
Opened |
8 |
|||
Acquired |
33 |
|||
Closed |
(10 |
) | ||
December 31, 2019 |
606 |
|||
Opened |
1 |
|||
Closed |
(4 |
) | ||
March 31, 2020 |
603 |
|||
• | cash needed to fund our business (primarily working capital requirements); |
• | borrowing capacity under our revolving credit facility; |
• | the ability to attract long-term capital with satisfactory terms; |
• | acquisitions, including joint ventures and investments in unconsolidated entities; |
• | dividend payments; |
• | capital expenditures; and |
• | the timing and extent of common stock repurchases. |
2020 |
2019 |
Change |
||||||||||
Cash flows provided by operating activities |
$ |
41.9 |
$ | 52.9 |
$ | (11.0 |
) | |||||
Cash flows used in investing activities |
$ |
(3.8 |
) |
$ | (4.1 |
) | $ | 0.3 |
||||
Cash flows used in financing activities |
$ |
(59.4 |
) |
$ | (54.9 |
) | $ | (4.5 |
) |
10.1 # |
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10.2 |
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31.1 # |
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31.2 # |
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31.3 # |
||||
32.1 + |
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101.INS # |
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||
101.SCH # |
Inline XBRL Taxonomy Extension Schema Document. | |||
101.CAL # |
Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||
101.DEF # |
Inline XBRL Taxonomy Extension Definition Linkbase Document. | |||
101.LAB # |
Inline XBRL Taxonomy Extension Label Linkbase Document. | |||
101.PRE # |
Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |||
104 |
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in Inline XBRL. |
# | filed herewith. |
+ | furnished herewith. |
WATSCO, INC. | ||||||
(Registrant) | ||||||
Date: May 7, 2020 |
By: |
/s/ Ana M. Menendez | ||||
Ana M. Menendez | ||||||
Chief Financial Officer (on behalf of the Registrant and as Principal Financial Officer) |