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 Symbol(s) |
Name of each exchange on which registered | ||
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☒ |
Accelerated filer |
☐ | |||
Non-accelerated filer |
☐ |
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. |
17 |
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Item 3. |
24 |
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Item 4. |
24 |
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Item 1. |
24 |
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Item 1A. |
25 |
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Item 6. |
26 |
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27 |
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EXHIBITS |
Quarter Ended June 30, |
Six Months Ended June 30, |
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2020 |
2019 |
2020 |
2019 |
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Revenues |
$ |
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$ | |
$ |
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$ | |
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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. |
$ |
|
$ | |
$ |
|
$ | |
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Earnings per share for Common and Class B common stock: |
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Basic |
$ |
|
$ | |
$ |
|
$ | |
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Diluted |
$ |
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$ | |
$ |
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$ | |
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Quarter Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
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Net income |
$ |
|
$ | |
$ |
|
$ | |
||||||||
Other comprehensive income (loss), net of tax |
||||||||||||||||
Foreign currency translation adjustment |
|
|
( |
) |
|
|||||||||||
Unrealized (loss) gain on cash flow hedging instruments |
( |
) |
( |
) |
|
( |
) | |||||||||
Reclassification of gain on cash flow hedging instruments into earnings |
( |
) |
( |
) | ( |
) |
( |
) | ||||||||
Other comprehensive income (loss) |
|
|
( |
) |
|
|||||||||||
Comprehensive income |
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|
|
|
||||||||||||
Less: comprehensive income attributable to non-controlling interest |
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|
|
||||||||||||
Comprehensive income attributable to Watsco, Inc. |
$ |
|
$ | |
$ |
|
$ | |
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June 30, 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: |
||||||||
Current portion of lease liabilities |
$ |
|
$ | |
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Accounts payable |
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|
||||||
Accrued expenses and other current liabilities |
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|
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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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|
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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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|
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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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|
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Total shareholders’ equity |
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$ |
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$ | |
|||||
(In thousands, except share and per |
Common Stock, Class B Common Stock and Preferred Stock Shares |
Common Stock, Class B Common Stock and Preferred Stock Amount |
Paid-In Capital |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Treasury Stock |
Non-controlling Interest |
Total |
||||||||||||||||||||||||
Balance at December 31, 2019 |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
$ |
|
$ |
|
|||||||||||||||
Net income |
|
|
|
|||||||||||||||||||||||||||||
Other comprehensive (loss) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||||
Issuances of non-vested restrictedshares of common |
|
|
( |
) |
— |
|||||||||||||||||||||||||||
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 |
|
|
||||||||||||||||||||||||||||||
Cash dividends declared and Common and Class B common stock, $ per |
( |
) |
( |
) | ||||||||||||||||||||||||||||
Balance at March 31, 2020 |
|
|
|
( |
) |
|
( |
) |
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|
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Net income |
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Other comprehensive income |
|
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|
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Issuances of non-vested restrictedshares of common |
|
|
( |
) |
— |
|||||||||||||||||||||||||||
Stock issuances from exercise of stock options and p urchaseplan |
|
|
|
|
||||||||||||||||||||||||||||
Retirement of common stock |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||
Share-based compensation |
|
|
||||||||||||||||||||||||||||||
Cash dividends declared and Common and Class B stock, $ per |
( |
) |
( |
) | ||||||||||||||||||||||||||||
Balance at June 30, 2020 |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
$ |
|
$ |
|
|||||||||||||||
(In thousands, except share and per |
Common Stock, Class B Common Stock and Preferred Stock Shares |
Common Stock, Class B Common Stock and Preferred Stock Amount |
Paid-In Capital |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Treasury Stock |
Non-controlling Interest |
Total |
||||||||||||||||||||||||
Balance at December 31, 2018 |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
$ |
|
$ |
|
|||||||||||||||
Net income |
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|
|
|
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|
|
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Other comprehensive income |
|
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Issuances of non-vested restrictedshares of common stock |
|
|
( |
) |
— |
|||||||||||||||||||||||||||
Forfeitures of non-vested estricted r shares of common stock |
( |
) |
( |
) |
|
— |
||||||||||||||||||||||||||
Common stock contribution to 401(k) plan |
|
|
|
|
||||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock plan |
|
|
|
|
||||||||||||||||||||||||||||
Retirement of common stock |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||
Share-based compensation |
|
|
||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $ per share |
( |
) |
( |
) | ||||||||||||||||||||||||||||
Balance at March 31, 2019 |
|
|
|
( |
) |
|
( |
) |
|
|
||||||||||||||||||||||
Net income |
|
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|
|||||||||||||||||||||||||||||
Other comprehensive income |
|
|
|
|||||||||||||||||||||||||||||
Issuances of non-vested restrictedshares of common stock |
|
|
( |
) |
— |
|||||||||||||||||||||||||||
Stock issuances from exercise of stock options and employee stock purchase plan |
|
|
|
|
||||||||||||||||||||||||||||
Retirement of common stock |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||
Share-based compensation |
|
|
||||||||||||||||||||||||||||||
Cash dividends declared and paid on Common and Class B common stock, $ per share |
( |
) |
( |
) | ||||||||||||||||||||||||||||
Common stock issued for Dunphey & Associates Supply Co., Inc. |
|
|
|
|
||||||||||||||||||||||||||||
Investment in unconsolidated entity |
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|
||||||||||||||||||||||||||||||
Decrease in non-controlling interest inCarrier Enterprise II |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||||
Balance at June 30, 2019 |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
$ |
|
$ |
|
|||||||||||||||
Six Months Ended June 30, |
||||||||
|
2020 |
2019 |
||||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
$ |
|
$ | |
||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
|
|
||||||
Share-based compensation |
|
|
||||||
Deferred income tax provision |
|
|
||||||
Other income from investment in unconsolidated entity |
( |
) |
( |
) | ||||
Other, net |
|
|
||||||
Changes in operating assets and liabilities, net of effects of acquisition: |
||||||||
Accounts receivable |
( |
) |
( |
) | ||||
Inventories |
|
( |
) | |||||
Accounts payable and other liabilities |
|
|
||||||
Other, net |
( |
) |
( |
) | ||||
Net cash provided by operating activities |
|
|
||||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
( |
) |
( |
) | ||||
Business acquisition, net of cash acquired |
— |
( |
) | |||||
Investment in unconsolidated entity |
— |
( |
) | |||||
Proceeds from sale of property and equipment |
|
|
||||||
Net cash used in investing activities |
( |
) |
( |
) | ||||
Cash flows from financing activities: |
||||||||
Dividends on Common and Class B common stock |
( |
) |
( |
) | ||||
Net (repayments) proceeds under revolving credit agreement |
( |
) |
|
|||||
Repurchases of common stock to satisfy employee withholding tax obligations |
( |
) |
( |
) | ||||
Net repayments of long-term obligations |
( |
) |
( |
) | ||||
Payment of fees related to revolving credit agreement |
( |
) |
— |
|||||
Purchase of additional ownership from non-controlling interest |
— |
( |
) | |||||
Proceeds from non-controlling interest for investment in unconsolidated entity |
— |
|
||||||
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 increase (decrease) in cash and cash equivalents |
|
( |
) | |||||
Cash and cash equivalents at beginning of period |
|
|
||||||
Cash and cash equivalents at end of period |
$ |
|
$ | |
||||
Supplemental cash flow information: |
||||||||
Common stock issued for Dunphey & Associates Supply Co., Inc. |
— |
$ |
|
1. |
BASIS OF PRESENTATION |
2. |
REVENUES |
Quarter Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Primary Geographical Regions: |
||||||||||||||||
United States |
$ |
$ | $ |
$ | ||||||||||||
Canada |
||||||||||||||||
Latin America and the Caribbean |
||||||||||||||||
$ |
$ | $ |
$ | |||||||||||||
Major Product Lines: |
||||||||||||||||
HVAC equipment |
% |
% | % |
% | ||||||||||||
Other HVAC products |
% |
% | % |
% | ||||||||||||
Commercial refrigeration products |
% |
% | % |
% | ||||||||||||
% |
% | % |
% | |||||||||||||
3. |
EARNINGS PER SHARE |
Quarter Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Basic Earnings per Share: |
||||||||||||||||
Net income attributable to Watsco, Inc. shareholders |
$ |
|
$ | |
$ |
|
$ | |
||||||||
Less: distributed and undistributed earnings allocated to non-vested restricted common stock |
|
|
|
|
||||||||||||
Earnings allocated to Watsco, Inc. shareholders |
$ |
|
$ | |
$ |
|
$ | |
||||||||
|
|
|
|
|
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|
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|
|
Weighted-average common shares outstanding—Basic |
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|
|
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|
|
|
|
|
Basic earnings per share for Common and Class B common stock |
$ |
|
$ | |
$ |
|
$ | |
||||||||
Allocation of earnings for Basic: |
||||||||||||||||
Common stock |
$ |
|
$ | |
$ |
|
$ | |
||||||||
Class B common stock |
|
|
|
|
||||||||||||
$ |
|
$ | |
$ |
|
$ | |
|||||||||
Diluted Earnings per Share: |
||||||||||||||||
Net income attributable to Watsco, Inc. shareholders |
$ |
|
$ | |
$ |
|
$ | |
||||||||
Less: distributed and undistributed earnings allocated to non-vested restricted common stock |
|
|
|
|
||||||||||||
Earnings allocated to Watsco, Inc. shareholders |
$ |
|
$ | |
$ |
|
$ | |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding—Basic |
|
|
|
|
||||||||||||
Effect of dilutive stock options |
|
|
|
|
||||||||||||
Weighted-average common shares outstanding—Diluted |
|
|
|
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share for Common and Class B common stock |
$ |
|
$ | |
$ |
|
$ | |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive stock options not included above |
|
|
|
|
4. |
OTHER COMPREHENSIVE INCOME (LOSS) |
Quarter Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Foreign currency translation adjustment |
$ |
|
$ | |
$ |
( |
) |
$ | |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on cash flow hedging instruments |
( |
) |
( |
) | |
( |
) | |||||||||
Income tax benefit (expense) |
|
|
( |
) |
|
|||||||||||
Unrealized (loss) gain on cash flow hedging instruments, net of tax |
( |
) |
( |
) | |
( |
) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of gain on cash flow hedging instruments into earnings |
( |
) |
( |
) | ( |
) |
( |
) | ||||||||
Income tax expense |
|
|
|
|
||||||||||||
Reclassification of gain on cash flow hedging instruments into earnings, net of tax |
( |
) |
( |
) | ( |
) |
( |
) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
$ |
|
$ | |
$ |
( |
) |
$ | |
|||||||
Six Months Ended June 30, |
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. |
PURCHASE OF OWNERSHIP INTEREST FROM JOINT VENTURE |
6. |
INVESTMENT IN UNCONSOLIDATED ENTITY |
7. |
ACQUISITIONS |
Cash and cash equivalents |
$ |
|||
Accounts receivable |
||||
Inventories |
||||
Other current assets |
||||
Property and equipment |
||||
Operating lease right-of-use |
||||
Goodwill |
||||
Intangibles |
||||
Other assets |
||||
Accounts payable |
( |
) | ||
Accrued expenses and other current liabilities |
( |
) | ||
Operating lease liabilities, net of current portion |
( |
) | ||
|
|
|||
Total |
$ |
|||
|
|
8. |
DEBT |
9. |
DERIVATIVES |
Quarter Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
(Loss) gain recorded in accumulated other comprehensive loss |
$ |
( |
) |
$ | ( |
) | $ |
$ | ( |
) | ||||||
Gain reclassified from accumulated other comprehensive loss into earnings |
$ |
( |
) |
$ | ( |
) | $ |
( |
) |
$ | ( |
) |
Asset Derivatives |
Liability Derivatives |
|||||||||||||||
June 30, 2020 |
December 31, 2019 |
June 30, 2020 |
December 31, 2019 |
|||||||||||||
Derivatives designated as hedging instruments |
$ |
$ | — |
$ |
$ | |||||||||||
Derivatives not designated as hedging instruments |
— |
— |
||||||||||||||
Total derivative instruments |
$ |
$ | — |
$ |
$ | |||||||||||
10. |
FAIR VALUE MEASUREMENTS |
Total |
Fair Value Measurements at June 30, 2020 Using |
|||||||||||||||||
Balance Sheet Location |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||||
Assets: |
||||||||||||||||||
Derivative financial instruments |
Other current assets |
$ |
$ |
— |
$ |
$ |
— |
|||||||||||
Equity securities |
Other assets |
$ |
$ |
$ |
— |
$ |
— |
|||||||||||
Liabilities: |
||||||||||||||||||
Derivative financial instruments |
Accrued expenses and other current liabilities |
$ |
$ |
— |
$ |
$ |
— |
|||||||||||
Fair Value Measurements at December 31, 2019 Using |
||||||||||||||||||
Balance Sheet Location |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||||
Assets: |
||||||||||||||||||
Equity securities |
Other assets |
$ | $ | $ | — |
$ | — |
|||||||||||
Liabilities: |
||||||||||||||||||
Derivative financial instruments |
Accrued expenses and other current liabilities |
$ | $ | — |
$ | $ | — |
11. |
SHAREHOLDERS’ EQUITY |
12. |
COMMITMENTS AND CONTINGENCIES |
13. |
RELATED PARTY TRANSACTIONS |
• | 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 continued impact of the COVID-19 pandemic; |
• | new housing starts and completions; |
• | capital spending in the commercial construction market; |
• | access to liquidity needed for operations; |
• | seasonal nature of product sales; |
• | weather patterns and conditions; |
• | insurance coverage risks; |
• | federal, state, and local regulations impacting our industry and products; |
• | prevailing interest rates; |
• | foreign currency exchange rate fluctuations; |
• | international risk; |
• | cybersecurity risk; and |
• | the continued viability of our business strategy. |
Quarter Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Revenues |
100.0 |
% |
100.0 | % | 100.0 |
% |
100.0 | % | ||||||||
Cost of sales |
76.4 |
76.1 | 76.0 |
75.6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
23.6 |
23.9 | 24.0 |
24.4 | ||||||||||||
Selling, general and administrative expenses |
14.3 |
14.3 | 16.8 |
16.4 | ||||||||||||
Other income |
0.3 |
0.2 | 0.2 |
0.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income |
9.5 |
9.8 | 7.4 |
8.2 | ||||||||||||
Interest expense, net |
0.0 |
0.1 | 0.0 |
0.1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
9.5 |
9.7 | 7.3 |
8.1 | ||||||||||||
Income taxes |
1.8 |
1.8 | 1.4 |
1.6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
7.7 |
7.9 | 5.9 |
6.6 | ||||||||||||
Less: net income attributable to non-controlling interest |
1.3 |
1.3 | 1.0 |
1.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income attributable to Watsco, Inc. |
6.4 |
% |
6.6 | % | 5.0 |
% |
5.4 | % | ||||||||
|
|
|
|
|
|
|
|
Number of Locations |
||||
June 30, 2019 |
585 | |||
Opened |
3 | |||
Acquired |
26 | |||
Closed |
(8 | ) | ||
|
|
|||
December 31, 2019 |
606 | |||
Opened |
2 | |||
Closed |
(5 | ) | ||
|
|
|||
June 30, 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 |
$ |
261.3 |
$ | 68.4 | $ | 192.9 | ||||||
Cash flows used in investing activities |
$ |
(8.0 |
) |
$ | (30.8 | ) | $ | 22.8 | ||||
Cash flows used in financing activities |
$ |
(247.3 |
) |
$ | (65.3 | ) | $ | (182.0 | ) |
ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
# | filed herewith. |
+ | furnished herewith. |
* | Pursuant to Item 601(a)(5) of Regulation S-K, schedules and similar attachments to this exhibit have been omitted because they do not contain information material to an investment or voting decision and such information is not otherwise disclosed in such exhibit. The Company will supplementally provide a copy of any omitted schedule or similar attachment to the U.S. Securities and Exchange Commission or its staff upon request. |
WATSCO, INC. (Registrant) | ||||||
Date: August 6, 2020 | By: | /s/ Ana M. Menendez | ||||
Ana M. Menendez | ||||||
Chief Financial Officer (on behalf of the Registrant and as Principal Financial Officer) |