WATSCO INC - Quarter Report: 2019 September (Form 10-Q)
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
(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. WATSCO, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM
10-Q
TABLE OF CONTENTS
Page No. |
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Item 1. |
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3 |
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4 |
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5 |
||||||
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. |
24 |
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Item 6. |
25 |
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26 |
||||||
EXHIBITS |
||||||
2 of 26
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.
3 of 26
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.
4 of 26
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.
5 of 26
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 ofcommon stock |
77,049 |
39 |
(39 |
) | — |
|||||||||||||||||||||||||||
Forfeitures of non-vested restricted shares ofcommon 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 ofcommon 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 CarrierEnterprise 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.
6 of 26
| (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 ofcommon stock |
91,609 |
46 |
(46 |
) | — |
|||||||||||||||||||||||||||
| Forfeitures of non-vested restricted shares ofcommon 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 ofcommon stock |
8,500 |
4 |
(4 |
) | — |
|||||||||||||||||||||||||||
| Forfeitures of non-vested restricted shares ofcommon 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 ofcommon stock |
10,000 |
5 |
(5 |
) | — |
|||||||||||||||||||||||||||
| Forfeitures of non-vested restricted shares ofcommon 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.
7 of 26
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 |
(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.
8 of 26
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.9 of 26
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 expensed as incurred. Our leases have remaining lease terms of
pre-payments
made and exclude lease incentives. Certain of our leases include variable payments, which are excluded from lease ROU assets and lease liabilities and1-10
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 |
||||
10 of 26
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 |
|||
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 These undiscounted amounts are not included in the table above.
subsequently
commenced
on Octob
2019 with lease terms of er 1,
five years
.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.11 of 26
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 |
$ |
|||||||||||