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WATSCO INC - Quarter Report: 2019 September (Form 10-Q)

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, 2019
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
,
Suite 901
Miami
, Florida
33133
Telephone:
(
305
)
 
714-4100
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common stock, $0.50 par value
 
WSO
 
New York Stock Exchange
Class B common stock, $0.50 par value
 
WSOB
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Yes
  
    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    
Yes
  
    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
Large accelerated filer
 
 
Accelerated filer
 
             
Non-accelerated
filer
 
 
Smaller reporting company
 
             
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  
    No  
The registrant’s common stock outstanding as of October 2
8
, 2019 comprised (i)
32,647,671
shares of Common stock, $0.50 par value per share, excluding
4,823,988
treasury shares and (ii)
5,453,477
shares of
Class B common stock, $0.50 par value
per share, excluding 48,263 treasury shares. 
 
 
 

 
Table of Contents
 
WATSCO, INC. AND SUBSIDIARIES
 
QUARTERLY REPORT ON FORM
10-Q
TABLE OF CONTENTS
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
 
 
 
 
 
 
 
 
 
 
 
4
 
 
 
 
 
 
 
 
 
 
 
5
 
 
 
 
 
 
 
 
 
 
 
6
 
 
 
 
 
 
 
 
 
 
 
8
 
 
 
 
 
 
 
 
 
 
 
9
 
 
 
 
 
 
 
 
Item 2.
 
 
 
17
 
 
 
 
 
 
 
 
Item 3.
 
 
 
24
 
 
 
 
 
 
 
 
Item 4.
 
 
 
24
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
24
 
 
 
 
 
 
 
 
Item 1A.
 
 
 
24
 
 
 
 
 
 
 
 
Item 6.
 
 
 
25
 
 
 
 
 
 
 
 
26
 
 
 
 
 
 
EXHIBITS
 
 
 
 
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Table of Contents
 
PART I. FINANCIAL INFORMATION
ITEM 1.
CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
 
 
 
 
 
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF INCOME
(In thousands, except per share data)
                                 
 
Quarter Ended
September 30,
   
Nine Months Ended
September 30,
 
 
2019
   
2018
   
2019
   
2018
 
Revenues
 
$
1,394,915
    $
1,296,007
   
$
3,698,047
    $
3,555,327
 
Cost of sales
   
1,060,224
     
976,998
     
2,801,612
     
2,684,719
 
                                 
Gross profit
   
334,691
     
319,009
     
896,435
     
870,608
 
Selling, general and administrative expenses
   
212,902
     
200,408
     
589,523
     
565,519
 
Other income
   
3,530
     
3,696
     
7,939
     
8,491
 
                                 
Operating income
   
125,319
     
122,297
     
314,851
     
313,580
 
Interest expense, net
   
1,434
     
1,047
     
3,422
     
2,375
 
                                 
Income before income taxes
   
123,885
     
121,250
     
311,429
     
311,205
 
Income taxes
   
24,230
     
24,364
     
60,060
     
63,678
 
                                 
Net income
   
99,655
     
96,886
     
251,369
     
247,527
 
Less: net income attributable to
non-controlling
interest
   
16,175
     
17,723
     
42,697
     
44,188
 
                                 
Net income attributable to Watsco, Inc.
 
$
83,480
    $
79,163
   
$
208,672
    $
203,339
 
                                 
Earnings per share for Common and Class B common stock:
   
     
     
     
 
Basic
 
$
2.20
    $
2.12
   
$
5.54
    $
5.44
 
                                 
Diluted
 
$
2.20
    $
2.11
   
$
5.54
    $
5.43
 
                                 
 
 
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
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Table of Contents
 
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
                                 
 
Quarter Ended
September 30,
   
Nine Months Ended
September 30,
 
 
2019
   
2018
   
2019
   
2018
 
Net income
 
$
99,655
    $
96,886
   
$
251,369
    $
247,527
 
Other comprehensive (loss) income, net of tax
   
     
     
     
 
Foreign currency translation adjustment
   
(3,038
)    
4,269
     
7,264
     
(7,422
)
Unrealized gain (loss) on cash flow hedging instruments
   
255
     
231
     
(798
)    
762
 
Reclassification of gain on cash flow hedging instruments into earnings
   
(140
)
   
(915
)    
(542
)
   
(57
)
                                 
Other comprehensive (loss) income
   
(2,923
)    
3,585
     
5,924
     
(6,717
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
   
96,732
     
100,471
     
257,293
     
240,810
 
Less: comprehensive income attributable to
non-controlling
interest
   
15,146
     
19,006
     
44,693
     
41,708
 
                                 
Comprehensive income attributable to Watsco, Inc.
 
$
81,586
    $
81,465
   
$
212,600
    $
199,102
 
                                 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
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Table of Contents
 
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
                 
 
September 30,
2019
   
December 31,
2018
 
 
(Unaudited)
   
 
ASSETS
   
     
 
Current assets:
   
     
 
Cash and cash equivalents
 
$
60,150
    $
82,894
 
Accounts receivable, net
   
640,802
     
501,908
 
Inventories
   
970,475
     
837,129
 
Other current assets
   
19,400
     
19,875
 
                 
Total current assets
   
1,690,827
     
1,441,806
 
Property and equipment, net
   
97,926
     
91,046
 
Operating lease
right-of-use
assets
   
225,366
     
—  
 
Goodwill
   
407,009
     
391,998
 
Intangible assets, net
   
171,310
     
147,851
 
Other assets
   
100,621
     
88,332
 
                 
 
$
2,693,059
    $
2,161,033
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
   
     
 
Current liabilities:
   
     
 
Current portion of
other 
long-term obligations
 
$
67,587
    $
246
 
Accounts payable
   
311,317
     
200,229
 
Accrued expenses and other current liabilities
   
163,384
     
157,091
 
                 
Total current liabilities
   
542,288
     
357,566
 
                 
Long-term obligations:
   
     
 
Borrowings under revolving credit agreement
   
169,300
     
135,200
 
Operating lease liabilities, net of current portion
   
157,503
     
—  
 
Other long-term obligations, net of current portion
   
1,863
     
552
 
                 
Total long-term obligations
   
328,666
     
135,752
 
                 
Deferred income taxes and other liabilities
   
69,083
     
66,002
 
                 
Commitments and contingencies
                 
Watsco, Inc. shareholders’ equity:
   
     
 
Common stock, $0.50 par value
   
18,734
     
18,476
 
Class B common stock, $0.50 par value
   
2,751
     
2,691
 
Preferred stock, $0.50 par value
   
—  
     
—  
 
Paid-in
capital
   
894,917
     
832,121
 
Accumulated other comprehensive loss, net of tax
   
(42,040
)
   
(45,968
)
Retained earnings
   
656,187
     
627,969
 
Treasury stock, at cost
   
(87,440
)
   
(87,440
)
                 
Total Watsco, Inc. shareholders’ equity
   
1,443,109
     
1,347,849
 
Non-controlling
interest
   
309,913
     
253,864
 
                 
Total shareholders’ equity
   
1,753,022
     
1,601,713
 
                 
 
$
2,693,059
    $
2,161,033
 
                 
 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
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Table of Contents
 
WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except share and per share data)
 
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
   
37,461,643
   
$
21,167
   
$
832,121
   
$
(45,968
)
 
$
627,969
   
$
(87,440
)
 
$
253,864
   
$
1,601,713
 
Net income
   
     
     
     
     
35,037
     
     
8,767
     
43,804
 
Other comprehensive income
   
     
     
     
2,783
     
     
     
1,412
     
4,195
 
Issuances of
non-vested
restricted shares of
common stock
   
77,049
     
39
     
(39
)    
     
     
     
     
—  
 
Forfeitures of
non-vested
restricted shares of
common stock
   
(5,000
)    
(3
)    
3
     
     
     
     
     
—  
 
Common stock contribution to 401(k) plan
   
30,715
     
15
     
4,259
     
     
     
     
     
4,274
 
Stock issuances from exercise of stock
options and employee stock purchase plan
   
8,925
     
4
     
1,121
     
     
     
     
     
1,125
 
Retirement of common stock
   
(2,985
)    
(1
)    
(427
)    
     
     
     
     
(428
)
Share-based compensation
   
     
     
4,537
     
     
     
     
     
4,537
 
Cash dividends declared and paid on Common and Class B common stock, $1.60 per share
   
     
     
     
     
(59,965
)    
     
     
(59,965
)
                                                                 
Balance at March 31, 2019
   
37,570,347
   
$
21,221
   
$
841,575
   
$
(43,185
)
 
$
603,041
   
$
(87,440
)
 
$
264,043
   
$
1,599,255
 
                                                                 
Net income
   
     
     
     
     
90,155
     
     
17,755
     
107,910
 
Other comprehensive
incom
e
   
     
     
     
3,039
     
     
     
1,613
     
4,652
 
Issuances of
non-vested
restricted shares of
common stock
   
26,354
     
13
     
(13
)    
     
     
     
     
—  
 
Stock issuances from exercise of stock options and employee stock purchase plan
   
15,807
     
9
     
1,942
     
     
     
     
     
1,951
 
Retirement of common stock
   
(3,608
)    
(2
)    
(553
)    
     
     
     
     
(555
)
Share-based compensation
   
     
     
4,324
     
     
     
     
     
4,324
 
Cash dividends declared and paid on Common and Class B common stock, $1.60 per share
   
     
     
     
     
(60,213
)    
     
     
(60,213
)
Common stock issued for Dunphey & Associates Supply Co., Inc.
   
50,952
     
25
     
7,425
     
     
     
     
     
7,450
 
Investment in unconsolidated entity
   
     
     
     
     
     
     
988
     
988
 
Decrease in
non-controlling
interest in Carrier
Enterprise II
   
     
     
(25,768
)    
     
     
     
(6,632
)    
(32,400
)
                                                                 
Balance at June 30, 2019
   
37,659,852
   
$
21,266
   
$
828,932
   
$
(40,146
)
 
$
632,983
   
$
(87,440
)
 
$
277,767
   
$
1,633,362
 
                                                                 
Net income
   
     
     
     
     
83,480
     
     
16,175
     
99,655
 
Other comprehensive
(loss)
   
     
     
     
(1,894
)    
     
     
(1,029
)    
(2,923
)
Issuances of
non-vested
restricted shares of common stock
   
37,834
     
19
     
(19
)    
     
     
     
     
—  
 
Forfeitures of non-vested restricted shares of common stock
 
 
(5,337
)
 
 
(3
)
 
 
3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—  
 
Stock issuances from exercise of stock
options and employee stock purchase plan
   
36,374
     
19
     
4,510
     
     
     
     
     
4,529
 
Retirement of common stock
   
(4,030
)    
(2
)    
(667
)    
     
     
     
     
(669
)
Share-based compensation
   
     
     
3,706
     
     
     
     
     
3,706
 
Cash dividends declared and paid on
Common and Class B common stock,
$1.60 per share
   
     
     
     
     
(60,276
)    
     
     
(60,276
)
Common stock issued for Peirce-Phelps, Inc.
 
 
372,543
 
 
 
186
 
 
 
58,452
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
58,638
 
Investment in Peirce-Phelps, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
17,000
 
 
 
17,000
 
                                                                 
Balance at September 30, 2019
   
38,097,236
   
$
21,485
   
$
894,917
   
$
(42,040
)
 
$
656,187
   
$
(87,440
)
 
$
309,913
   
$
1,753,022
 
                                                                 
Continued on next page.
 
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Table of Contents 
 
                                                                 
(In thousands, except share and per share data)
 
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, 2017
   
37,228,715
   
$
21,050
   
$
804,008
   
$
(34,221
)
 
$
594,556
   
$
(87,440
)
 
$
253,024
   
$
1,550,977
 
Cumulative-effect adjustment
   
     
     
     
301
     
(301
)    
     
     
—  
 
Net income
   
     
     
     
     
34,219
     
     
8,158
     
42,377
 
Other comprehensive loss
   
     
     
     
(3,649
)    
     
     
(2,092
)    
(5,741
)
Issuances of
non-vested
restricted shares of
common stock
   
91,609
     
46
     
(46
)    
     
     
     
     
—  
 
Forfeitures of
non-vested
restricted shares of
common stock
   
(3,000
)    
(2
)    
2
     
     
     
     
     
—  
 
Common stock contribution to 401(k) plan
   
17,318
     
9
     
2,936
     
     
     
     
     
2,945
 
Stock issuances from exercise of stock
options and employee stock purchase plan
   
37,130
     
19
     
4,322
     
     
     
     
     
4,341
 
Retirement of common stock
   
(5,041
)    
(3
)    
(911
)    
     
     
     
     
(914
)
Share-based compensation
   
     
     
4,400
     
     
     
     
     
4,400
 
Cash dividends declared and paid on Common and Class B common stock, $1.25 per share
   
     
     
     
     
(46,581
)    
     
     
(46,581
)
Distributions to
non-controlling
interest
   
     
     
     
     
     
     
(2,178
)    
(2,178
)
                                                                 
Balance at March 31, 2018
   
37,366,731
   
$
21,119
   
$
814,711
   
$
(37,569
)
 
$
581,893
   
$
(87,440
)
 
$
256,912
   
$
1,549,626
 
                                                                 
Net income
   
     
     
     
     
89,957
     
     
18,307
     
108,264
 
Other comprehensive loss
   
     
     
     
(2,890
)    
     
     
(1,671
)    
(4,561
)
Issuances of
non-vested
restricted shares of
common stock
   
8,500
     
4
     
(4
)    
     
     
     
     
—  
 
Forfeitures of
non-vested
restricted shares of
common stock
   
(5,000
)    
(2
)    
2
     
     
     
     
     
—  
 
Stock issuances from exercise of stock
options and employee stock purchase plan
   
11,935
     
6
     
1,595
     
     
     
     
     
1,601
 
Retirement of common stock
   
(14,534
)    
(7
)    
(2,492
)    
     
     
     
     
(2,499
)
Share-based compensation
   
     
     
3,747
     
     
     
     
     
3,747
 
Cash dividends declared and paid on Common and Class B common stock, $1.45 per share
   
     
     
     
     
(54,184
)    
     
     
(54,184
)
                                                                 
Balance at June 30, 2018
   
37,367,632
   
$
21,120
   
$
817,559
   
$
(40,459
)
 
$
617,666
   
$
(87,440
)
 
$
273,548
   
$
1,601,994
 
                                                                 
Net income
   
     
     
     
     
79,163
     
     
17,723
     
96,886
 
Other comprehensive income
   
     
     
     
2,302
     
     
     
1,283
     
3,585
 
Issuances of
non-vested
restricted shares of
common stock
   
10,000
     
5
     
(5
)    
     
     
     
     
—  
 
Forfeitures of
non-vested
restricted shares of
common stock
   
(2,000
)    
(1
)    
1
     
     
     
     
     
—  
 
Stock issuances from exercise of stock options and employee stock purchase plan
   
10,835
     
5
     
1,294
     
     
     
     
     
1,299
 
Retirement of common stock
   
(9,206
)    
(5
)    
(1,626
)    
     
     
     
     
(1,631
)
Share-based compensation
   
     
     
3,671
     
     
     
     
     
3,671
 
Cash dividends declared and paid on Common and Class B common stock, $1.45 per share
   
     
     
     
     
(54,186
)    
     
     
(54,186
)
Common stock issued for Alert Labs
,
Inc.
   
47,103
     
24
     
8,156
     
     
     
     
     
8,180
 
Investment in unconsolidated entity
   
     
     
     
     
     
     
752
     
752
 
                                                                 
Balance at September 30, 2018
   
37,424,364
   
$
21,148
   
$
829,050
   
$
(38,157
)
 
$
642,643
   
$
(87,440
)
 
$
293,306
   
$
1,660,550
 
                                                                 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
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WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
Nine Months Ended
September 30,
 
 
2019
   
2018
 
Cash flows from operating activities:
   
     
 
Net income
 
$
251,369
    $
247,527
 
Adjustments to reconcile net income to net cash provided by operating activities:
   
     
 
Depreciation and amortization
   
17,983
     
16,500
 
Share-based compensation
   
11,992
     
11,769
 
Non-cash contribution to 401(k) plan
   
4,274
     
2,945
 
Deferred income tax provision
   
2,765
     
3,925
 
Other income from investment in unconsolidated
 
entity
   
(7,939
)
   
(8,491
)
Other, net
   
1,260
     
927
 
Changes in operating assets and liabilities, net of effects of acquisitions:
   
     
 
Accounts receivable
   
(102,813
)
   
(126,181
)
Inventories
   
(74,448
)
   
(50,566
)
Accounts payable and other liabilities
   
99,627
     
(23,286
)
Other, net
   
(6,539
)
   
(5,004
)
Net cash provided by operating activities
   
197,531
     
70,065
 
Cash flows from investing activities:
   
     
 
Business acquisitions, net of cash acquired
   
(47,343
)
   
(5,828
)
Capital expenditures
   
(14,007
)
   
(12,897
)
Investment in unconsolidated entity
   
(4,940
)
   
(3,760
)
Proceeds from sale of property and equipment
   
1,295
     
143
 
Net cash used in investing activities
   
(64,995
)
   
(22,342
)
Cash flows from financing activities:
   
     
 
Dividends on Common and Class B common stock
   
(180,454
)
   
(154,951
)
Purchase of additional ownership from non-controlling interest
   
(32,400
)
   
—  
 
Repurchases of common stock to satisfy employee withholding tax obligations
   
(1,528
)
   
(3,782
)
Net repayments of other long-term obligations
   
(920
)
   
(182
)
Distributions to non-controlling interest
   
—  
     
(2,178
)
 
Proceeds from non-controlling interest for investment in unconsolidated entity
   
988
     
752
 
Net proceeds from issuances of common stock
   
7,480
     
5,979
 
Proceeds from non-controlling interest for investment in Peirce-Phelps, Inc.
   
17,000
     
—  
 
Net proceeds under revolving credit agreement
   
34,100
     
94,600
 
Net cash used in financing activities
   
(155,734
)
   
(59,762
)
Effect of foreign exchange rate changes on cash and cash equivalents
   
454
     
(845
)
Net decrease in cash and cash equivalents
   
(22,744
)
   
(12,884
)
Cash and cash equivalents at beginning of period
   
82,894
     
80,496
 
Cash and cash equivalents at end of period
 
$
60,150
    $
67,612
 
 
 
 
 
 
 
 
 
 
Supplemental cash flow information:
   
     
 
Common stock issued for Peirce-Phelps, Inc.
 
$
58,638
 
 
 
—  
 
Common stock issued for Dunphey & Associates Supply Co., Inc.
 
$
7,450
 
 
 
—  
 
Common stock issued for Alert Labs, Inc.
   
—  
    $
8,180
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
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WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
September 30, 2019
(In thousands, except share and per share data)
1.
BASIS OF PRESENTATION
Basis of Consolidation
Watsco, Inc. (collectively with its subsidiaries, “Watsco,” “we,” “us,” or “our”) was incorporated in Florida in 1956 and is the largest distributor of air conditioning, heating and refrigeration equipment and related parts and supplies (“HVAC/R”) in the HVAC/R distribution industry in North America. The accompanying September 30, 2019 interim condensed consolidated unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, but we believe the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation have been included in the condensed consolidated unaudited financial statements included herein. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2018 Annual Report on Form
10-K.
The condensed consolidated unaudited financial statements contained in this report include the accounts of Watsco, all of its wholly owned subsidiaries and the accounts of three joint ventures with Carrier Corporation (“Carrier”), in each of which Watsco maintains a controlling interest. All significant intercompany balances and transactions have been eliminated in consolidation.
The results of operations for the quarter and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019. Sales of residential central air conditioners, heating equipment, and parts and supplies are seasonal. Furthermore, results of operations can be impacted favorably or unfavorably based on weather patterns, primarily during the Summer and Winter selling seasons. Demand related to the residential central air conditioning replacement market is typically highest in the second and third quarters, and demand for heating equipment is usually highest in the fourth quarter. Demand related to the new construction market is generally evenly distributed throughout the year, subject to weather and economic conditions, including their effect on the number of housing completions.
Use of Estimates
The preparation of condensed consolidated unaudited financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated unaudited financial statements and the reported amounts of revenues and expenses for the reporting period. Significant estimates include valuation reserves for accounts receivable, inventories and income taxes, reserves related to loss contingencies and the valuation of goodwill, indefinite
-
lived intangible assets and long-lived intangible assets. While we believe that these estimates are reasonable, actual results could differ from such estimates.
Recently Adopted Accounting Standards
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued guidance on accounting for leases, which requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. In July 2018, the FASB issued updated guidance that provides an additional transition method of adoption that allows entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. The adoption of this standard and its related amendments (collectively, the “New Lease Standard”) on January 1, 2019 did not result in the recognition of a cumulative adjustment to opening retained earnings under the additional transition method, nor did it have a significant impact on our consolidated statements of income or cash flows. See Note 2.
Recently Issued Accounting Standards Not Yet Adopted
Intangibles—Goodwill and Other
In January 2017, the FASB issued guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this updated standard, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity also should consider income tax effects from any
tax-deductible
goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if any. This guidance is effective prospectively and is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
 
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2.
LEASES
 
 
 
 
 
 
 
 
 
 
Adoption of New Lease Standard
We adopted the New Lease Standard on January 1, 2019 using the additional transition method described in Note 1 to these condensed consolidated unaudited financial statements. Results for reporting periods beginning on and after January 1, 2019 are presented under the New Lease Standard. Prior periods have not been restated. The New Lease Standard had a material impact on our consolidated balance sheet due to the recognition of
right-of-use
(“ROU”) assets and lease liabilities for operating leases, while accounting for finance leases remained substantially unchanged.
Practical Expedients
We elected the package of practical expedients
that
did not require us to reassess (1) whether existing contracts contain embedded leases, (2) the lease classification of existing leases, and (3) whether initial direct costs for existing leases would qualify for capitalization under the New Lease Standard. We also elected the practical expedients related to short-term leases and separating lease components from
non-lease
components for all underlying asset classes.
Operating and Finance Leases
We have operating leases for real property, vehicles and equipment, and finance leases primarily for vehicles. Operating leases are included in operating lease
right-of-use
assets, current portion of long-term obligations, and operating lease liabilities in our consolidated balance sheet. Finance leases are not considered significant to our consolidated balance sheet or consolidated statement of income. Finance lease ROU assets at September 30, 2019 of $2,960 are included in property and equipment, net in our condensed consolidated unaudited balance sheet. Finance lease liabilities at September 30, 2019 of $3,047 are included in current portion of
other 
long-term obligations and other long-term obligations, net of current portion in our condensed consolidated unaudited balance sheet.
ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement dates of the respective leases in determining the present value of the applicable lease payments.
Operating lease ROU assets also include any lease
pre-payments
made and exclude lease incentives. Certain of our leases include variable payments, which are excluded from lease ROU assets and lease liabilities and
 
expensed as incurred. Our leases have remaining lease terms of
1-10
years, some of which include options to extend the leases for up to five years. The exercise of lease renewal options is at our sole discretion, and our lease ROU assets and liabilities reflect only the options we are reasonably certain that we will exercise. Certain real property lease agreements have lease and
non-lease
components, which are generally accounted for as a single lease component. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Lease payments for short-term leases, which are 12 months or less without a purchase option that is likely to be exercised, are recognized as lease cost on a straight-line basis over the lease term.
The components of operating lease expense were as follows:
 
                 
 
Quarter ended
September 30, 2019
   
Nine months ended
September 30, 2019
 
Lease cost
 
$
   18,887
   
$
   54,647
 
Short-term lease cost
   
2,489
     
7,098
 
Variable lease cost
   
216
     
531
 
Sublease income
   
(81
)
   
(162
)
                 
Total operating lease cost
 
$
21,511
   
$
62,114
 
                 
 
 
 
 
 
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Supplemental balance sheet information related to operating leases were as follows:
September 30,
 
2019
 
ROU assets
 
$
225,366
 
Current portion of long-term obligations
 
$
66,403
 
Operating lease liabilities
   
157,503
 
         
Total operating lease liabilities
 
$
223,906
 
         
 
 
 
 
 
Weighted Average Remaining Lease Term (in years)
   
4.0
 
years
 
Weighted Average Discount Rate
   
4.54
%
Supplemental cash flow information related to operating l
e
ases were as follows:
Nine Months Ended September 30,
 
2019
 
Operating cash flows for the measurement of operating lease liabilities
 
$
55,214
 
Operating lease
right-of-use
assets obtained in exchange for operating lease obligations
 
$
274,366
 
At September 30, 2019, maturities of operating lease liabilities over each of the next five years and thereafter were as follows:
Remainder of 2019
  $
19,553
 
2020
   
72,188
 
2021
   
59,390
 
2022
   
43,563
 
2023
   
28,167
 
Thereafter
   
23,617
 
         
Total lease payments
   
246,478
 
Less imputed interest
   
22,572
 
         
Total lease liability
 
$
223,906
 
         
At September 30, 2019, we had additional operating leases, primarily for real property, that had not yet commenced. Such leases had estimated future minimum rental commitments of approximately $1,600. These operating leases
subsequently 
commence
d
 
on Octob
er 1,
 
2019 with lease terms of
five years
.
These undiscounted amounts are not included in the table above.
Prior to the adoption of the New Lease Standard, rental commitments on an undiscounted basis were approximately $219,300 at December 31, 2018 under
non-cancelable
operating leases and were payable as follows: $70,400 in 2019, $55,100 in 2020, $41,300 in 2021, $28,500 in 2022, $15,700 in 2023, and $8,300 thereafter.
 
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3.
REVENUES
Disaggregation of Revenues
The following table presents our revenues disaggregated by primary geographical regions and major product lines within our single reporting segment:
 
Quarter Ended
September 30,
   
Nine Months Ended
September 30,
 
 
2019
   
2018
   
2019
   
2018
 
Primary Geographical Regions:
   
     
     
     
 
United States
 
$
1,232,564
    $
1,134,852
   
$
3,258,283
    $
3,125,814
 
Canada
   
85,422
     
87,251
     
222,429
     
218,730
 
Latin America and the Caribbean
   
76,929
     
73,904
     
217,335
     
210,783
 
                                 
 
$
1,394,915
    $
1,296,007
   
$
3,698,047
    $
3,555,327
 
                                 
Major Product Lines:
   
     
     
     
 
HVAC equipment
   
68
%
   
68
%    
68
%
   
68
%
Other HVAC products
   
29
%
   
28
%    
28
%
   
28
%
Commercial refrigeration products
   
3
%
   
4
%    
4
%
   
4
%
                                 
   
100
%
   
100
%    
100
%
   
100
%
                                 
4.
EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings per share for our Common and Class B common stock:
 
Quarter Ended
September 30,
   
Nine Months Ended
September 30,
 
 
2019
   
2018
   
2019
   
2018
 
Basic Earnings per Share:
   
     
     
     
 
Net income attributable to Watsco, Inc. shareholders
 
$
83,480
    $
79,163
   
$
208,672
    $
203,339
 
Less: distributed and undistributed earnings allocated to
non-vested
restricted common stock
   
6,973
     
6,451
     
17,326
     
16,600
 
                                 
Earnings allocated to Watsco, Inc. shareholders
 
$
76,507
    $
72,712
   
$
191,346
    $
186,739
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding - Basic
   
34,755,627
     
34,339,859
     
34,544,425
     
34,301,672
 
Basic earnings per share for Common and Class B common stock
 
$
2.20
    $
2.12
   
$
5.54
    $
5.44
 
Allocation of earnings for Basic:
   
     
     
     
 
Common stock
 
$
70,836
    $
67,201
   
$
177,075
    $
172,571
 
Class B common stock
   
5,671
     
5,511
     
14,271
     
14,168
 
                                 
 
$
76,507
    $
72,712
   
$
191,346
    $
186,739
 
                                 
Diluted Earnings per Share:
   
     
     
     
 
Net income attributable to Watsco, Inc. shareholders
 
$
83,480
    $
79,163
   
$
208,672
    $
203,339
 
Less: distributed and undistributed earnings allocated to
non-vested
restricted common stock
   
6,971
     
6,448
     
17,325
     
16,593
 
                                 
Earnings allocated to Watsco, Inc. shareholders
 
$
76,509
    $
72,715
   
$
191,347
    $
186,746
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding - Basic
   
34,755,627
     
34,339,859
     
34,544,425
     
34,301,672
 
Effect of dilutive stock options
   
33,328
     
59,530
     
25,294
     
64,850
 
                                 
Weighted-average common shares outstanding - Diluted
   
34,788,955
     
34,399,389
     
34,569,719
     
34,366,522
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share for Common and Class B common stock
 
$
2.20
    $
2.11
   
$