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

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
June 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 August 5, 2019 comprised (i)
32,613,520
shares of Common stock, $0.50 par value per share, excluding 4,823,988 treasury shares and (ii)
5,446,199
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.
   
23
         
Item 4.
   
23
     
 
         
Item 1.
   
24
         
Item 1A.
   
24
         
Item 2.
   
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
June 30,
   
Six Months Ended
June 30,
 
 
2019
   
2018
   
2019
   
2018
 
Revenues
 
$
1,371,854
    $
1,332,743
   
$
2,303,132
    $
2,259,320
 
Cost of sales
   
1,043,870
     
1,011,977
     
1,741,388
     
1,707,721
 
                                 
Gross profit
   
327,984
     
320,766
     
561,744
     
551,599
 
Selling, general and administrative expenses
   
196,549
     
186,577
     
376,621
     
365,111
 
Other income
   
2,965
     
3,157
     
4,409
     
4,795
 
                                 
Operating income
   
134,400
     
137,346
     
189,532
     
191,283
 
Interest expense, net
   
1,212
     
763
     
1,988
     
1,328
 
                                 
Income before income taxes
   
133,188
     
136,583
     
187,544
     
189,955
 
Income taxes
   
25,278
     
28,319
     
35,830
     
39,314
 
                                 
Net income
   
107,910
     
108,264
     
151,714
     
150,641
 
Less: net income attributable to
non-controlling
interest
   
17,755
     
18,307
     
26,522
     
26,465
 
                                 
Net income attributable to Watsco, Inc.
 
$
90,155
    $
89,957
   
$
125,192
    $
124,176
 
                                 
Earnings per share for Common and Class B common stock:
   
     
     
     
 
Basic
 
$
2.40
    $
2.41
   
$
3.34
    $
3.33
 
                                 
Diluted
 
$
2.40
    $
2.40
   
$
3.34
    $
3.32
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
June 30,
   
Six Months Ended
June 30,
 
 
2019
   
2018
   
2019
   
2018
 
Net income
 
$
107,910
    $
108,264
   
$
151,714
    $
150,641
 
Other comprehensive income (loss), net of tax
   
     
     
     
 
Foreign currency translation adjustment
   
5,297
     
(5,046
)    
10,302
     
(11,691
)
Unrealized (loss) gain on cash flow hedging instruments
   
(517
)
   
380
     
(1,053
)
   
531
 
Reclassification of (gain) loss on cash flow hedging instruments into earnings
   
(128
)
   
105
     
(402
)
   
858
 
                                 
Other comprehensive income (loss)
   
4,652
     
(4,561
)    
8,847
     
(10,302
)
                                 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
   
112,562
     
103,703
     
160,561
     
140,339
 
Less: comprehensive income attributable to
non-controlling
interest
   
19,368
     
16,636
     
29,547
     
22,702
 
                                 
Comprehensive income attributable to Watsco, Inc.
 
$
93,194
    $
87,067
   
$
131,014
    $
117,637
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
 
June 30,
2019
   
December 31,
2018
 
 
(Unaudited)
   
 
ASSETS
   
     
 
Current assets:
   
     
 
Cash and cash equivalents
 
$
55,915
    $
82,894
 
Accounts receivable, net
   
655,418
     
501,908
 
Inventories
   
967,394
     
837,129
 
Other current assets
   
16,367
     
19,875
 
                 
Total current assets
   
1,695,094
     
1,441,806
 
Property and equipment, net
   
95,586
     
91,046
 
Operating lease
right-of-use
assets
   
190,530
     
—  
 
Goodwill
   
398,575
     
391,998
 
Intangible assets, net
   
155,120
     
147,851
 
Other assets
   
97,529
     
88,332
 
                 
 
$
2,632,434
    $
2,161,033
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
   
     
 
Current liabilities:
   
     
 
Current portion of long-term obligations
 
$
60,784
    $
246
 
Accounts payable
   
356,062
     
200,229
 
Accrued expenses and other current liabilities
   
163,672
     
157,091
 
                 
Total current liabilities
   
580,518
     
357,566
 
                 
Long-term obligations:
   
     
 
Borrowings under revolving credit agreement
   
219,600
     
135,200
 
Operating lease liabilities, net of current portion
   
129,636
     
—  
 
Other long-term obligations, net of current portion
   
1,712
     
552
 
                 
Total long-term obligations
   
350,948
     
135,752
 
                 
Deferred income taxes and other liabilities
   
67,606
     
66,002
 
                 
Commitments and contingencies
   
     
 
 
 
 
 
 
 
 
Watsco, Inc. shareholders’ equity:
   
     
 
Common stock, $0.50 par value
   
18,531
     
18,476
 
Class B common stock, $0.50 par value
   
2,735
     
2,691
 
Preferred stock, $0.50 par value
   
—  
     
—  
 
Paid-in
capital
   
828,932
     
832,121
 
Accumulated other comprehensive loss, net of tax
   
(40,146
)
   
(45,968
)
Retained earnings
   
632,983
     
627,969
 
Treasury stock, at cost
   
(87,440
)
   
(87,440
)
                 
Total Watsco, Inc. shareholders’ equity
   
1,355,595
     
1,347,849
 
Non-controlling
interest
   
277,767
     
253,864
 
                 
Total shareholders’ equity
   
1,633,362
     
1,601,713
 
                 
 
$
2,632,434
    $
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 income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
                                                                 
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
 
                                                                 
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 CASH FLOWS
(In thousands)
                 
 
Six Months Ended
June 30,
 
 
2019
   
2018
 
Cash flows from operating activities:
   
     
 
Net income
 
$
151,714
    $
150,641
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
   
     
 
Depreciation and amortization
   
11,656
     
11,027
 
Share-based compensation
   
8,174
     
7,336
 
Deferred income tax provision
   
1,156
     
1,569
 
Other income from investment in unconsolidated entity
   
(4,409
)
   
(4,795
)
Other, net
   
5,644
     
3,260
 
Changes in operating assets and liabilities, net of effects of acquisition:
   
     
 
Accounts receivable
   
(146,441
)
   
(183,105
)
Inventories
   
(117,591
)
   
(113,831
)
Accounts payable and other liabilities
   
161,685
     
107,908
 
Other, net
   
(3,141
)
   
734
 
                 
Net cash provided by (used in) operating activities
   
68,447
     
(19,256
)
                 
Cash flows from investing activities:
   
     
 
Business acquisition, net of cash acquired
   
(16,761
)
   
—  
 
Capital expenditures
   
(9,197
)
   
(8,824
)
Investment in unconsolidated entity
   
(4,940
)
   
—  
 
Proceeds from sale of property and equipment
   
92
     
86
 
                 
Net cash used in investing activities
   
(30,806
)
   
(8,738
)
                 
Cash flows from financing activities:
   
     
 
Dividends on Common and Class B common stock
 
 
(120,178
)
 
 
(100,765 )
Purchase of additional ownership from non-controlling interest
 
 
(32,400
)
 
 
—  
 
Repurchases of common stock to satisfy employee withholding tax obligations
 
 
(983
)
 
 
(2,213
)
Net repayments of long-term obligations
   
(230
)
   
(121
)
Distributions to non-controlling interest
   
—  
     
(2,178
)
Proceeds from short-term borrowings
   
—  
     
1,510
 
Proceeds from
non-controlling
interest for investment in unconsolidated entity
   
988
     
—  
 
Net proceeds from issuances of common stock
   
3,076
     
4,741
 
Net proceeds under revolving credit agreement
   
84,400
     
119,800
 
                 
Net cash (used in) provided by financing activities
   
(65,327
)
   
20,774
 
                 
Effect of foreign exchange rate changes on cash and cash equivalents
   
707
     
(1,276
)
                 
Net decrease in cash and cash equivalents
   
(26,979
)
   
(8,496
)
Cash and cash equivalents at beginning of period
   
82,894
     
80,496
 
                 
Cash and cash equivalents at end of period
 
$
55,915
    $
72,000
 
                 
 
 
 
 
 
 
 
Supplemental cash flow information:
   
     
 
Common stock issued for Dunphey & Associates Supply Co., Inc.
 
$
7,450
     
—  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
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WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
June 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 June 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 six months ended June 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 which 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 June 30, 2019 of $2,759 are included in property and equipment, net in our condensed consolidated unaudited balance sheet. Finance lease liabilities at June 30, 2019 of $2,852 are included in current portion of 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 are expensed as incurred. Our leases have remaining lease terms of
1-9
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
June 30, 2019
   
Six months ended
June 30, 2019
 
Lease cost
 
$
17,984
   
$
35,760
 
Short-term lease cost
   
2,433
     
4,609
 
Variable lease cost
   
109
     
315
 
Sublease income
   
(32
)
   
(81
)
                 
Total operating lease cost
 
$
20,494
   
$
40,603
 
                 
 
 
 
 
 
 
 
 
 
 
 
 
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Supplemental balance sheet information related to operating leases were as follows:
         
June 30,
 
2019
 
ROU assets
 
$
190,530
 
 
 
 
 
 
Current portion of long-term obligations
 
$
59,644
 
Operating lease liabilities
   
129,636
 
         
Total operating lease liabilities
 
$
189,280
 
         
 
 
 
 
 
Weighted Average Remaining Lease Term (in years)
   
3.7
 years
 
Weighted Average Discount Rate
   
4.53
%
 
 
 
 
 
 
 
 
 
Supplemental cash flow information related to operating leases were as follows:
         
Six Months Ended June 30,
 
2019
 
Operating cash flows for the measurement of operating lease liabilities
 
$
35,544
 
Operating lease
right-of-use
assets obtained in exchange for operating lease obligations
 
$
222,332
 
 
 
 
 
 
 
 
 
 
At June 30, 2019, maturities of operating lease liabilities over each of the next five years and thereafter were as follows:
         
Remainder of 2019
  $
35,321
 
2020
   
60,667
 
2021
   
47,995
 
2022
   
33,232
 
2023
   
19,039
 
Thereafter
   
9,921
 
         
Total lease payments
   
206,175
 
Less imputed interest
   
16,895
 
         
Total lease liability
 
$
189,280
 
         
 
 
 
 
 
 
 
 
 
At June 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 $17,000. These operating leases are expected to commence in 2019 with lease terms of
5-11
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
June 30,
   
Six Months Ended
June 30,
 
 
2019
   
2018
   
2019
   
2018
 
Primary Geographical Regions:
   
     
     
     
 
United States
 
$
1,219,208
    $
1,181,461
   
$
2,025,719
    $
1,990,962
 
Canada
   
77,751
     
79,119
     
137,007
     
131,479
 
Latin America and the Caribbean
   
74,895
     
72,163
     
140,406
     
136,879
 
                                 
 
$
1,371,854
    $
1,332,743
   
$
2,303,132
    $
2,259,320
 
                                 
Major Product Lines:
   
     
     
     
 
HVAC equipment
   
69
%
   
68
%    
68
%
   
67
%
Other HVAC products
   
28
%
   
28
%    
28
%
   
29
%
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
June 30,
   
Six Months Ended
June 30,
 
 
2019
   
2018
   
2019
   
2018
 
Basic Earnings per Share:
   
     
     
     
 
Net income attributable to Watsco, Inc. shareholders
 
$
90,155
    $
89,957
   
$
125,192
    $
124,176
 
Less: distributed and undistributed earnings allocated to
non-vested
restricted common stock
   
7,512
     
7,379
     
10,355
     
10,147
 
                                 
Earnings allocated to Watsco, Inc. shareholders
 
$
82,643
    $
82,578
   
$
114,837
    $
114,029
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding - Basic
   
34,435,099
     
34,309,885
     
34,411,738
     
34,282,261
 
Basic earnings per share for Common and Class B common stock
 
$
2.40
    $
2.41
   
$
3.34
    $
3.33
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allocation of earnings for Basic:
   
     
     
     
 
Common stock
 
$
76,456
    $
76,321
   
$
106,234
    $
105,383
 
Class B common stock
   
6,187
     
6,257
     
8,603
     
8,646
 
                                 
 
$
82,643
    $
82,578
   
$
114,837
    $
114,029
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted Earnings per Share:
   
     
     
     
 
Net income attributable to Watsco, Inc. shareholders
 
$
90,155
    $
89,957
   
$
125,192
    $
124,176
 
Less: distributed and undistributed earnings allocated to
non-vested
restricted common stock
   
7,511
     
7,374
     
10,354
     
10,144
 
                                 
Earnings allocated to Watsco, Inc. shareholders
 
$
82,644
    $
82,583
   
$
114,838
    $
114,032
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding - Basic
   
34,435,099
     
34,309,885
     
34,411,738
     
34,282,261
 
Effect of dilutive stock options
   
27,861
     
69,310
     
21,210
     
67,554