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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
 
                                 
Weighted-average common shares outstanding - Diluted
   
34,462,960
     
34,379,195
     
34,432,948
     
34,349,815
 
                                 
Diluted earnings per share for Common and Class B common stock
 
$
2.40
    $
2.40
   
$
3.34
    $
3.32
 
Anti-dilutive stock options not included above
   
174,457
     
40,797
     
213,270
     
24,044
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Diluted earnings per share for our Common stock assumes the conversion of all of our Class B common stock into Common stock as of the beginning of the fiscal year; therefore, no allocation of earnings to Class B common stock is required. At June 30, 2019 and 2018, our outstanding Class B common stock was convertible into 2,577,858 
and 2,599,496
shares of our Common stock, respectively.
5.
OTHER COMPREHENSIVE
INCOME 
(LOSS)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive
income
(loss) consists of the foreign currency translation adjustment associated with our Canadian operations’ use of the Canadian dollar as their functional currency and changes in the unrealized (losses)
gains
on cash flow hedging instruments.
The tax effects allocated to each component of other comprehensive income (loss) were as follows:
 
                                 
 
Quarter Ended
June 30,
   
Six Months Ended
June 30,
 
 
2019
   
2018
   
2019
   
2018
 
Foreign currency translation adjustment
 
5,297
    $
(5,046
)  
10,302
    $
(11,691
)
Unrealized (loss)
gain
on cash flow hedging instruments
   
(709
)
   
520
     
(1,444
)
   
727
 
Income tax
benefit 
(expense)
   
192
     
(140
)    
391
     
(196
)
                                 
Unrealized (loss) gain on cash flow hedging instruments, net of tax 
   
(517
)
   
380
     
(1,053
)
   
531
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reclassification of (gain)
loss
on cash flow hedging instruments into earnings
   
(176
)
   
144
     
(551
)
   
1,175
 
Income tax expense (benefit) 
   
48
     
(39
)    
149
     
(317
)
                                 
Reclassification of (gain) 
loss
on cash flow hedging instruments into earnings, net of
tax
   
(128
)
   
105
     
(402
)
   
858
 
Other comprehensive
income 
(loss)
 
$
4,652
    $
(4,561
)  
$
8,847
    $
(10,302
)
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The changes in each component of accumulated other comprehensive loss, net of tax, were as follows:
                 
Six Months Ended June 30,
 
2019
 
 
2018
 
Foreign currency translation adjustment:
   
     
 
Beginning balance
 
$
(46,604
)
  $
(33,499
)
Current period other comprehensive
income 
(loss)
   
6,695
     
(7,373
)
                 
Ending balance
   
(39,909
)
   
(40,872
)
                 
Cash flow hedging instruments:
   
     
 
Beginning balance
   
636
     
(421
)
Current period other comprehensive (loss) income
   
(631
)
   
319
 
Reclassification adjustment
   
(242
)
   
515
 
                 
Ending balance
   
(237
)
   
413
 
                 
Equity securities:
   
     
 
Beginning balance
   
—  
     
(301
)
Cumulative-effect adjustment to retained earnings
   
—  
     
301
 
                 
Ending balance
   
—  
     
—  
 
                 
Accumulated other comprehensive loss, net of tax
 
$
(40,146
)
  $
(40,459
)
                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6.
PURCHASE OF OWNERSHIP INTEREST FROM JOINT VENTURE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective May 31, 2019, we purchased an additional 20% ownership interest in Homans Associates II LLC (“Homans”) from Carrier Enterprise Northeast, LLC (“Carrier Enterprise II”) for cash consideration of $32,400, which increased our ownership in Homans to 100%. Homans previously operated as a division of Carrier Enterprise II and subsequent to the purchase operates as a stand-alone subsidiary of the Company with 16 locations in the Northeastern U.S.
 
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7.
INVESTMENT IN UNCONSOLIDATED ENTITY
On June 21, 2017, our first joint venture with Carrier, Carrier Enterprise, LLC, which we refer to as Carrier Enterprise I, acquired a 34.9% ownership interest in Russell Sigler, Inc. (“RSI”), an HVAC distributor operating from 30 locations in the Western U.S. We have an 80% controlling interest in Carrier Enterprise I, and Carrier has a 20% non-controlling interest. Carrier Enterprise I acquired its ownership interest in RSI for cash consideration of $63,600, of which we contributed $50,880 and Carrier contributed $12,720. Effective June 29, 2018, Carrier Enterprise I acquired an additional 1.4% ownership interest in RSI, which increased Carrier Enterprise I’s ownership interest in RSI to 36.3% for cash consideration of $3,760 that was paid on July 5, 2018, of which we contributed $3,008 and Carrier contributed $752. Effective April 22, 2019, Carrier Enterprise I acquired an additional 1.8% ownership interest in RSI for cash consideration of $4,940, of which we contributed $3,952 and Carrier contributed $988. This acquisition increased Carrier Enterprise I’s ownership interest in RSI to 38.1%.
Carrier Enterprise I is a party to a shareholders agreement (the “Shareholders Agreement”) with RSI and its shareholders. Pursuant to the Shareholders Agreement, RSI’s shareholders have the right to sell, and Carrier Enterprise I has the obligation to purchase, their respective shares of RSI for a purchase price determined based on either book value or a multiple of EBIT, the latter of which Carrier Enterprise I used to calculate the price paid for its investment in RSI. RSI’s shareholders may transfer their respective shares of RSI common stock only to members of the Sigler family or to Carrier Enterprise I, and, at any time from and after the date on which Carrier Enterprise I owns 85
% or more of RSI’s outstanding common stock, it has the right, but not the obligation, to purchase from RSI’s shareholders the remaining outstanding shares of RSI common stock. Additionally, Carrier Enterprise I has the right to appoint two of RSI’s six board members. Given Carrier Enterprise I’s 38.1​​​​​​​% voting equity interest in RSI and its right to appoint two out of RSI’s six board members, this investment in RSI is accounted for under the equity method.
8.
ACQUISITION
On April 2, 2019, one of our wholly owned subsidiaries acquired certain assets and assumed certain liabilities of Dunphey & Associates Supply Co., Inc., a distributor of air conditioning and heating products operating from seven locations in New Jersey, New York and Connecticut. The purchase price was composed of cash consideration of $16,781 and the issuance of 50,952 shares of Common stock having a fair value of $7,450.
The results of operations of this acquisition has been included in the consolidated financial statements from the date of acquisition. The pro forma effect of the acquisition was not deemed significant to the consolidated financial statements.
9.
DERIVATIVES
We enter into foreign currency forward and option contracts to offset the earnings impact that foreign exchange rate fluctuations would otherwise have on certain monetary liabilities that are denominated in nonfunctional currencies.
Cash Flow Hedging Instruments
We enter into foreign currency forward contracts that are designated as cash flow hedges. The settlement of these derivatives results in reclassifications from accumulated other comprehensive loss to earnings for the period in which the settlement of these instruments occurs. The maximum period for which we hedge our cash flow using these instruments is 12 months. Accordingly, at June 30, 2019, all of our open foreign currency forward contracts had maturities of one year or less. The total notional value of our foreign currency exchange contracts designated as cash flow hedges at June 30, 2019 was $43,900, and such contracts have varying terms expiring through
March 2020
.
The impact from foreign exchange derivative instruments designated as cash flow hedges was as follows:
 
Quarter Ended
June 30,
   
Six Months Ended
June 30,
 
 
2019
   
2018
   
2019
   
2018
 
(Loss) gain
recorded in accumulated other comprehensive loss
 
$
(709
)
  $
520
   
$
(1,444
)
  $
727
 
(Gain) loss reclassified from accumulated other comprehensive loss into earnings
 
$
(176
)
  $
144
   
$
(551
)
  $
1,175
 
At June 30, 2019, we expected an estimated $545
pre-tax 
loss to be reclassified into earnings to reflect the fixed prices obtained from foreign exchange hedging within the next 12 months.
Derivatives Not Designated as Hedging Instruments
We have also entered into foreign currency forward and option contracts that are either not designated as hedges or did not qualify for hedge accounting. These derivative instruments were effective economic hedges for all of the periods presented. The fair value gains
 
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and losses on these contracts are recognized in earnings as a component of selling, general and administrative expenses. The total notional value of our foreign currency exchange contracts not designated as hedging instruments at June 30, 2019 was $15,160, and such contracts have varying terms expiring through
August 2019
.
We recognized (losses) gains of $(190) and $180 from foreign currency forward and option contracts not designated as hedging instruments in our condensed consolidated unaudited statements of income for the quarters ended June 30, 2019 and 2018, respectively. We recognized losses of $303 and $191 from foreign currency forward and option contracts not designated as hedging instruments in our condensed consolidated unaudited statements of income for the six months ended June 30, 2019 and 2018, respectively.
The following table summarizes the fair value of derivative instruments, which consist solely of foreign exchange contracts, included in other current assets and accrued expenses and other current liabilities in our condensed consolidated unaudited balance sheets. See Note 10.
 
Asset Derivatives
   
Liability Derivatives
 
 
June 30, 2019
   
December 31, 2018
   
June 30, 2019
   
December 31, 2018
 
Derivatives designated as hedging instruments
 
$
11
    $
1,262
   
$
851
    $
3
 
Derivatives not designated as hedging
instruments
   
     
58
     
164
     
11
 
                                 
Total derivative instruments
 
$
11
    $
1,320
   
$
1,015
    $
14
 
                                 
10.
FAIR VALUE MEASUREMENTS
The following tables present our assets and liabilities carried at fair value that are measured on a recurring basis:
 
 
Total
   
Fair Value Measurements
at June 30, 2019 Using
 
Balance Sheet Location
 
Level 1
   
Level 2
   
Level 3
   
Assets:
 
   
     
     
     
 
Derivative financial instruments
 
Other current assets
 
$
11
   
$
—  
   
$
11
   
$
—  
 
Equity securities
 
Other assets
 
$
310
   
$
310
   
$
—  
   
$
—  
 
Liabilities:
 
   
     
     
     
 
Derivative financial instruments
 
Accrued expenses and other current liabilities
 
$
1,015
   
$
—  
   
$
1,015
   
$
—  
 
 
 
Total
   
Fair Value Measurements
at December 31, 2018 Using
 
Balance Sheet Location
 
Level 1
   
Level 2
   
Level 3
   
Assets:
 
   
     
     
     
 
Derivative financial instruments
 
Other current assets
  $
1,320
    $
—  
    $
1,320
    $
—  
 
Equity securities
 
Other assets
  $
279
    $
279
    $
—  
    $
—  
 
Liabilities:
 
   
     
     
     
 
Derivative financial instruments
 
Accrued expenses and other current liabilities
  $
14
    $
—  
    $
14
    $
—  
 
The following is a description of the valuation techniques used for these assets and liabilities, as well as the level of input used to measure fair value:
Equity securities
– these investments are exchange-traded equity securities. Fair values for these investments are based on closing stock prices from active markets and are therefore classified within Level 1 of the fair value hierarchy.
Derivative financial instruments
– these derivatives are foreign currency forward and option contracts. See Note 9. Fair value is based on observable market inputs, such as forward rates in active markets; therefore, we classify these derivatives within Level 2 of the valuation hierarchy.
There were no transfers in or out of Level 1 and Level 2 during the six months ended June 30, 2019.
 
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11.
SHAREHOLDERS’ EQUITY
Common Stock Dividends
We paid cash dividends of $1.60, $1.45, $3.20, and $2.70 per share of both Common stock and Class B common stock during the quarters and six months ended June 30, 2019 and 2018, respectively.
Non-Vested
Restricted Stock
During the quarter and six months ended June 30, 2019, 3,608 shares of Common and Class B common stock with an aggregate fair market value of $555, and 6,593 shares of Common and Class B common stock with an aggregate fair market value of $983, respectively, were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of
non-vested
restricted stock. These shares were retired upon delivery. During the quarter and six months ended June 30, 2018,
12,924
shares of Common stock with an aggregate fair market value of $
2,213
were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of
non-vested
restricted stock. These shares were retired upon delivery.
Exercise of Stock Options
Cash received from Common stock issued as a result of stock options exercised during the quarters and six months ended June 30, 2019 and 2018, was $1,526, $1,369, $2,243, and $3,981, respectively.
During the quarter ended June 30, 2018, 1,610 shares of Common stock with an aggregate fair market value of $286 were withheld as payment in lieu of cash for stock option exercises. These shares were retired upon delivery. During the six months ended June 30, 2018, 6,651 shares of Common stock with an aggregate fair market value of $1,200 were withheld as payment in lieu of cash for stock option exercises. These shares were retired upon delivery.
Employee Stock Purchase Plan
During the quarters ended June 30, 2019 and 2018, we received net proceeds of $423 and $414, respectively, for shares of Common stock issued under our employee stock purchase plan. During the six months ended June 30, 2019 and 2018, we received net proceeds of $833 and $760, respectively, for shares of Common stock issued under our employee stock purchase plan.
12.
COMMITMENTS AND CONTINGENCIES
Litigation, Claims and Assessments
We are involved in litigation incidental to the operation of our business. We vigorously defend all matters in which we or our subsidiaries are named defendants and, for insurable losses, maintain significant levels of insurance to protect against adverse judgments, claims or assessments that may affect us. Although the adequacy of existing insurance coverage and the outcome of any legal proceedings cannot be predicted with certainty, based on the current information available, we do not believe the ultimate liability associated with any known claims or litigation will have a material adverse effect on our financial condition or results of operations.
Self-Insurance
Self-insurance reserves are maintained relative to company-wide casualty insurance and health benefit programs. The level of exposure from catastrophic events is limited by the purchase of stop-loss and aggregate liability reinsurance coverage. When estimating the self-insurance liabilities and related reserves, management considers a number of factors, which include historical claims experience, demographic factors, severity factors, and valuations provided by independent third-party actuaries. Management reviews its assumptions with its independent third-party actuaries to evaluate whether the self-insurance reserves are adequate. If actual claims or adverse development of loss reserves occur and exceed these estimates, additional reserves may be required. Reserves in the amounts of $3,383 and $2,311 at June 30, 2019 and December 31, 2018, respectively, were established related to such programs and are included in accrued expenses and other current liabilities in our condensed consolidated unaudited balance sheets.
13.
RELATED PARTY TRANSACTIONS
Purchases from Carrier and its affiliates comprised 63% and 64% of all inventory purchases made during the quarters ended June 30, 2019 and 2018, respectively. Purchases from Carrier and its affiliates comprised 62% and 63% of all inventory purchases made during the six months ended June 30, 2019 and 2018, respectively. At June 30, 2019 and December 31, 2018, approximately $122,000 and $71,000, respectively, was payable to Carrier and its affiliates, net of receivables. Our joint ventures with Carrier also sell HVAC products to Carrier and its affiliates. Revenues in our condensed consolidated unaudited statements of income for the quarters and six months ended June 30, 2019 and 2018 included approximately $23,000, $21,000, $44,000, and $37,000, respectively, of sales to Carrier and its affiliates. We believe these transactions are conducted on terms equivalent to an
arm’s-length
basis in the ordinary course of business.
 
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A member of our Board of Directors is the Senior Chairman of Greenberg Traurig, P.A., which serves as our principal outside counsel for compliance and acquisition-related legal services. During the quarters and six months ended June 30, 2019 and June 30, 2018, we paid this firm $0, $14, $0 and $18 for services performed, respectively, and no amount was payable at June 30, 2019.
A member of our Board of Directors is the Chairman and Chief Executive Officer of Moss & Associates LLC, which served as general contractor for the remodeling of our Miami headquarters that was completed in 2018. We paid Moss & Associates LLC $71 and $124 for construction services performed during the quarters and six months ended June 30, 2018, respectively.
 
14.
SUBSEQUENT EVENT
On August 1, 2019, Carrier Enterprise I acquired substantially all of the assets and assumed certain of the liabilities of Peirce-Phelps, Inc. (“PPI”), an HVAC distributor operating from 19 locations in Pennsylvania, New Jersey, and Delaware, for $85,000 less certain average revolving indebtedness. Consideration for the net purchase price consisted of $10,000 in cash and 372,543 shares of Common stock having a fair value of $58,638. Carrier contributed cash of $
17,000
 to Carrier Enterprise I in connection with the acquisition of PPI.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form
10-Q
contains or incorporates by reference statements that are not historical in nature and that are intended to be, and are hereby identified as, “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Statements which are not historical in nature, including the words “anticipate,” “estimate,” “could,” “should,” “may,” “plan,” “seek,” “expect,” “believe,” “intend,” “target,” “will,” “project,” “focused,” “outlook,” “goal,” “designed,” and variations of these words and negatives thereof and similar expressions are intended to identify forward-looking statements, including statements regarding, among others, (i) economic conditions, (ii) business and acquisition strategies, (iii) potential acquisitions and/or joint ventures and investments in unconsolidated entities, (iv) financing plans, and (v) industry, demographic and other trends affecting our financial condition or results of operations. These forward-looking statements are based on management’s current expectations, are not guarantees of future performance and are subject to a number of risks, uncertainties, and changes in circumstances, certain of which are beyond our control. Actual results could differ materially from these forward-looking statements as a result of several factors, including, but not limited to:
  general economic conditions, both in the United States and in the international markets we serve;
  competitive factors within the HVAC/R industry;
  effects of supplier concentration;
  fluctuations in certain commodity costs;
  consumer spending;
  consumer debt levels;
  new housing starts and completions;
  capital spending in the commercial construction market;
  access to liquidity needed for operations;
  seasonal nature of product sales;
  weather patterns and conditions;
  insurance coverage risks;
  federal, state, and local regulations impacting our industry and products;
  prevailing interest rates;
  foreign currency exchange rate fluctuations;
  international political risk;
  cybersecurity risk; and
  the continued viability of our business strategy.
We believe these forward-looking statements are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on current expectations. For additional information regarding other important factors that may affect our operations and could cause actual results to vary materially from those anticipated in the forward-looking statements, please see the discussion included in Item 1A “Risk Factors” of our Annual Report on Form
10-K
for the year ended December 31, 2018, as well as the other documents and reports that we file with the SEC. Forward-looking statements speak only as of the date the statements were
 
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made. We assume no obligation to update forward-looking information or the discussion of such risks and uncertainties to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information, except as required by applicable law. We qualify any and all of our forward-looking statements by these cautionary factors.
The following information should be read in conjunction with the condensed consolidated unaudited financial statements, including the notes thereto, included under Part I, Item 1 of this Quarterly Report on Form
10-Q.
In addition, reference should be made to our audited consolidated financial statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form
10-K
for the year ended December 31, 2018.
Company Overview
Watsco, Inc. was incorporated in Florida in 1956, and, together with its subsidiaries (collectively, “Watsco,” or “we,” “us,” or “our”) 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. At June 30, 2019, we operated from 585 locations in 37 U.S. States, Canada, Mexico, and Puerto Rico with additional market coverage on an export basis to portions of Latin America and the Caribbean.
Revenues primarily consist of sales of air conditioning, heating, and refrigeration equipment, and related parts and supplies. Selling, general and administrative expenses primarily consist of selling expenses, the largest components of which are salaries, commissions, and marketing expenses that are variable and correlate to changes in sales. Other significant selling, general and administrative expenses relate to the operation of warehouse facilities, including a fleet of trucks and forklifts, and facility rent, a majority of which we operate under
non-cancelable
operating leases.
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 fairly evenly distributed throughout the year and depends largely on housing completions and related weather and economic conditions.
Joint Ventures with Carrier Corporation
In 2009, we formed a joint venture with Carrier Corporation (“Carrier”), which we refer to as Carrier Enterprise I, in which Carrier contributed 95 of its company-owned locations in 13 Sun Belt states and Puerto Rico, and its export division in Miami, Florida, and we contributed 15 locations that distributed Carrier products. We have an 80% controlling interest in Carrier Enterprise I, and Carrier has a 20%
non-controlling
interest.
In 2011, we formed a second joint venture with Carrier and completed two additional transactions. In April 2011, Carrier contributed 28 of its company-owned locations in the Northeast U.S., and we contributed 14 locations in the Northeast U.S. In July 2011, we purchased Carrier’s distribution operations in Mexico, which included seven locations. Collectively, the Northeast locations and the Mexico operations are referred to as Carrier Enterprise II. We have an 80% controlling interest in Carrier Enterprise II, and Carrier has a 20%
non-controlling
interest. Effective May 31, 2019, we purchased an additional 20% ownership interest in Homans Associates II LLC (“Homans”) from Carrier Enterprise II, following which we owned 100% of Homans. Homans previously operated as a division of Carrier Enterprise II and now operates as one of our stand-alone-subsidiaries.
In 2012, we formed a third joint venture, which we refer to as Carrier Enterprise III, with UTC Canada Corporation, referred to as UTC Canada, an affiliate of Carrier. Carrier contributed 35 of its company-owned locations in Canada to Carrier Enterprise III. We have a 60% controlling interest in Carrier Enterprise III, and UTC Canada has a 40%
non-controlling
interest.
Critical Accounting Policies
Management’s discussion and analysis of financial condition and results of operations is based upon the condensed consolidated unaudited financial statements included in this Quarterly Report on Form
10-Q,
which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated unaudited financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. At least quarterly, management reevaluates its judgments and estimates, which are based on historical experience, current trends, and various other assumptions that are believed to be reasonable under the circumstances.
Our critical accounting policies are included in our 2018 Annual Report on Form
10-K,
as filed with the SEC on February 28, 2019. We believe that there have been no significant changes during the quarter ended June 30, 2019 to the critical accounting policies disclosed in our Annual Report on Form
10-K
for the year ended December 31, 2018.
 
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New Accounting Standards
Refer to Note 1 to our condensed consolidated unaudited financial statements included in this Quarterly Report on Form
10-Q
for a discussion of recently adopted and to be adopted accounting standards.
Results of Operations
The following table summarizes information derived from our condensed consolidated unaudited statements of income, expressed as a percentage of revenues, for the quarters and six months ended June 30, 2019 and 2018:
                                 
 
Quarter
Ended June 30,
   
Six Months
Ended June 30,
 
 
2019
   
2018
   
2019
   
2018
 
Revenues
   
100.0
%
   
100.0
%    
100.0
%
   
100.0
%
Cost of sales
   
76.1
     
75.9
     
75.6
     
75.6
 
                                 
Gross profit
   
23.9
     
24.1
     
24.4
     
24.4
 
Selling, general and administrative expenses
   
14.3
     
14.0
     
16.4
     
16.2
 
Other income
   
0.2
     
0.2
     
0.2
     
0.2
 
                                 
Operating income
   
9.8
     
10.3
     
8.2
     
8.5
 
Interest expense, net
   
0.1
     
0.1
     
0.1
     
0.1
 
                                 
Income before income taxes
   
9.7
     
10.2
     
8.1
     
8.4
 
Income taxes
   
1.8
     
2.1
     
1.6
     
1.7
 
                                 
Net income
   
7.9
     
8.1
     
6.6
     
6.7
 
Less: net income attributable to
non-controlling
interest
   
1.3
     
1.4
     
1.2
     
1.2
 
                                 
Net income attributable to Watsco, Inc.
   
6.6
%
   
6.7
%    
5.4
%
   
5.5
%
                                 
 
 
 
Note: Due to rounding, percentages may not add up to 100.
The following narratives reflect our acquisition of Dunphey & Associates Supply Co., Inc. in April 2019, Alert Labs Inc. in August 2018, and our acquisition of an HVAC distributor in November 2018 as well as the purchase of an additional 1.8% and 1.4% ownership interest in Russell Sigler, Inc. (“RSI”) in April 2019 and June 2018, respectively, and the purchase of an additional 20% ownership interest in Homans effective May 31, 2019.
In the following narratives, computations and other information referring to “same-store basis” exclude the effects of locations closed, acquired, or locations opened, unless they are within close geographical proximity to existing locations, during the immediately preceding 12 months. At both June 30, 2019 and 2018, 8 locations opened were near existing locations and were therefore included in “same-store basis” information.
The table below summarizes the changes in our locations for the 12 months ended June 30, 2019:
         
 
Number of
Locations
 
June 30, 2018
   
568
 
Opened
   
4
 
Acquired
   
3
 
Closed
   
(4
)
         
December 31, 2018
   
571
 
Opened
   
11
 
Acquired
   
7
 
Closed
   
(4
)
         
June 30, 2019
   
585
 
         
 
 
 
Second Quarter of 2019 Compared to Second Quarter of 2018
Revenues
Revenues for the second quarter of 2019 increased $39.1 million, or 3%, including $22.8 million from locations opened and acquired during the preceding 12 months, offset by $3.6 million from locations closed. On a same-store basis, revenues increased $19.9 million, or 1%, as compared to the same period in 2018, reflecting a 3% increase in sales of HVAC equipment (69% of sales), which included a 4% increase in residential HVAC equipment, a 2% decrease in sales of other HVAC products (28% of sales) and a 1% decrease in sales of commercial refrigeration products (3% of sales). For residential HVAC equipment, the increase in revenues was primarily due
 
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to realization of price increases and a higher mix of high-efficiency air conditioning and heating systems, which sell at higher unit prices, and demand for the replacement of residential HVAC equipment, resulting in a 3% increase in the average selling price and a 1% increase in volume.
Gross Profit
Gross profit for the second quarter of 2019 increased $7.2 million, or 2%, primarily as a result of increased revenues. Gross profit margin for the quarter ended June 30, 2019 declined 20 basis-points to 23.9% versus 24.1% for the same period in 2018, primarily due to a shift in sales mix toward HVAC equipment, which generates a lower gross profit margin than
non-equipment
products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the second quarter of 2019 increased $10.0 million, or 5%, primarily due to increased revenues. Selling, general and administrative expenses as a percent of revenues for the quarter ended June 30, 2019 increased to 14.3% versus 14.0% for the same period in 2018. On a same-store basis, selling, general and administrative expenses increased 3% as compared to the same period in 2018. Excluding new locations opened or acquired during the last 12 months, selling, general and administrative expenses increased $4.6 million, or 2%. Selling, general and administrative expenses included $1.5 million of additional costs for 2019 in excess of 2018 for ongoing technology initiatives.
Other Income
Other income of $3.0 million and $3.2 million for the second quarters of 2019 and 2018, respectively, represented our share of the net income of RSI.
Interest Expense, Net
Interest expense, net for the second quarter of 2019 increased $0.4 million, or 59%, primarily as a result of an increase in average outstanding borrowings and a higher effective interest rate for the 2019 period, in each case under our revolving credit facility, as compared to the same period in 2018.
Income Taxes
Income taxes decreased to $25.3 million for the second quarter of 2019, as compared to $28.3 million for the second quarter of 2018 and represent a composite of the income taxes attributable to our wholly owned operations and income taxes attributable to the Carrier joint ventures, which are primarily taxed as partnerships for income tax purposes; therefore, Carrier is responsible for its proportionate share of income taxes attributable to its share of earnings. The effective income tax rates attributable to us were 21.7% and 23.8% for the quarters ended June 30, 2019 and 2018, respectively. The decrease was primarily due to lower estimated foreign withholding taxes in the second quarter of 2019 as compared to the same period in 2018.
Net Income Attributable to Watsco, Inc.
Net income attributable to Watsco for the quarter ended June 30, 2019 increased $0.2 million compared to the same period in 2018. The increase was primarily driven by higher revenues and gross profit, a reduction in income taxes and a decrease in net income attributable to the
non-controlling
interest related to the purchase of the additional 20% interest in Homans, partially offset by higher selling, general and administrative expenses and interest expense as discussed above.
First Half of 2019 Compared to First Half of 2018
Revenues
Revenues for the first half of 2019 increased $43.8 million, or 2%, including $26.9 million from locations opened and acquired during the preceding 12 months, offset by $6.2 million from locations closed. On a same-store basis, revenues increased $23.1 million, or 1%, as compared to the same period in 2018, reflecting a 3% increase in sales of HVAC equipment (68% of sales), a 2% decrease in sales of other HVAC products (28% of sales) and a 2% decrease in commercial refrigeration products (4% of sales). For residential HVAC equipment, the increase in revenues was primarily due to realization of price increases and a higher mix of high-efficiency air conditioning and heating systems, which sell at higher unit prices, resulting in a 3% increase in the average selling price.
Gross Profit
Gross profit for the first half of 2019 increased $10.1 million, or 2%, primarily as a result of increased revenues. Gross profit margin remained consistent at 24.4% for the first half of 2019 as compared to the same period in 2018.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first half of 2019 increased $11.5 million, or 3%, primarily due to increased revenues. Selling, general and administrative expenses as a percentage of revenues for the six months ended June 30, 2019 increased
 
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to 16.4% versus 16.2% for the same period in 2018. On a same-store basis, selling, general and administrative expenses increased 1% as compared to the same period in 2018. Excluding new locations opened or acquired during the last 12 months, selling, general and administrative expenses increased $4.3 million, or 1%. Selling, general and administrative expenses included $2.9 million of additional costs for 2019 in excess of 2018 for ongoing technology initiatives.
Other Income
Other income of $4.4 million and $4.8 million for the first half of 2019 and 2018, respectively, represented our share of the net income of RSI.
Interest Expense, Net
Interest expense, net for the first half of 2019 increased $0.7 million, or 50%, primarily as a result of an increase in average outstanding borrowings and a higher effective interest rate for the 2019 period, in each case under our revolving credit facility, as compared to the same period in 2018.
Income Taxes
Income taxes decreased to $35.8 million for the first half of 2019, as compared to $39.3 million for the first half of 2018 and represent a composite of the income taxes attributable to our wholly owned operations and income taxes attributable to the Carrier joint ventures, which are primarily taxed as partnerships for income tax purposes; therefore, Carrier is responsible for its proportionate share of income taxes attributable to its share of earnings. The effective income tax rates attributable to us were 22.0% and 23.8% for the first half of 2019 and 2018, respectively. The decrease was primarily due to lower estimated foreign withholding taxes in the first half of 2019 as compared to the same period in 2018.
Net Income Attributable to Watsco, Inc.
Net income attributable to Watsco for the first half of 2019 increased $1.0 million, or 1%, compared to the same period in 2018. The increase was primarily driven by higher revenues and gross profit, and a reduction in income taxes, partially offset by higher selling, general and administrative expenses and interest expense as discussed above.
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to execute our business strategy and fund operating and investing activities, taking into consideration the seasonal demand for HVAC/R products, which peaks in the months of May through August. Significant factors that could affect our liquidity include the following:
  cash needed to fund our business (primarily working capital requirements);
 
 
 
  borrowing capacity under our revolving credit facility;
 
 
 
  the ability to attract long-term capital with satisfactory terms;
 
 
 
  acquisitions, including joint ventures and investments in unconsolidated entities;
 
 
 
  dividend payments;
 
 
 
  capital expenditures; and
 
 
 
  the timing and extent of common stock repurchases.
 
 
 
Sources and Uses of Cash
We rely on cash flows from operations and borrowing capacity under our revolving credit agreement to fund seasonal working capital needs and for other general corporate purposes, including dividend payments (to the extent declared by our Board of Directors), capital expenditures, business acquisitions, and development of our long-term operating and technology strategies. Additionally, we may also generate cash through the issuance and sale of our Common stock.
As of June 30, 2019, we had $55.9 million of cash and cash equivalents, of which $37.7 million was held by foreign subsidiaries. The repatriation of cash balances from our foreign subsidiaries could have adverse tax impacts or be subject to capital controls; however, these balances are generally available to fund the ordinary business operations of our foreign subsidiaries without legal or other restrictions.
We believe that our operating cash flows, cash on hand, and funds available for borrowing under our revolving credit agreement are sufficient to meet our liquidity needs in the foreseeable future. However, there can be no assurance that our current sources of available funds will be sufficient to meet our cash requirements.
Our access to funds under our revolving credit agreement depends on the ability of the syndicate banks to meet their respective funding commitments. Disruptions in the credit and capital markets could adversely affect our ability to draw on our revolving credit agreement and may also adversely affect the determination of interest rates, particularly rates based on LIBOR, which is one of the
 
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base rates under our revolving credit agreement. LIBOR is the subject of recent proposals for reform that currently provide for the
phase-out
of LIBOR by 2021. The consequences of these developments with respect to LIBOR cannot be entirely predicted but could result in an increase in the cost of our debt, as it is currently anticipated that LIBOR will be replaced by lenders with an alternative rate, which may exceed what would have been the comparable LIBOR rate. Disruptions in the credit and capital markets, including a transition away from LIBOR, could also result in increased borrowing costs and/or reduced borrowing capacity under our revolving credit agreement.
Working Capital
Working capital increased to $1,114.6 million at June 30, 2019 from $1,084.2 million at December 31, 2018, reflecting higher levels of accounts receivable and inventories, primarily due to the seasonality of our business. Inventory is also higher as a result of new locations opened and acquired, as well as additional inventory received in anticipation of the transition to new energy conservation standards for residential furnace fans that became effective on July 3, 2019. These increases were partially offset by the timing of accounts payable and accrued liabilities as well as the current portion of lease liabilities recognized as current liabilities as a result of the adoption of the New Lease Standard on January 1, 2019.
Cash Flows
The following table summarizes our cash flow activity for the six months ended June 30, 2019 and 2018 (in millions):
                         
 
2019
   
2018
   
Change
 
Cash flows provided by (used in) operating activities
 
$
68.4
    $
(19.3
)   $
87.7
 
Cash flows used in investing activities
 
$
(30.8
)
  $
(8.7
)   $
(22.1
)
Cash flows (used in) provided by financing activities
 
$
 (65.3
)
  $
20.8
    $
(86.1
)
 
 
 
The individual items contributing to cash flow changes for the periods presented are detailed in the condensed consolidated unaudited statements of cash flows contained in this Quarterly Report on Form
10-Q.
Operating Activities
The increase in net cash provided by operating activities was primarily due to the comparative timing of payments for accrued expenses and other current liabilities in 2019 versus 2018.
Investing Activities
Net cash used in investing activities was higher due to cash consideration paid for acquisitions and the purchase of an additional ownership interest in RSI in 2019.
Financing Activities
The increase in net cash used in financing activities was primarily attributable to lower net proceeds under our revolving credit agreement, the purchase of an additional 20% ownership interest in Homans for $32.4 million and an increase in dividends paid in 2019.
Revolving Credit Agreement
We maintain an unsecured, $500.0 million syndicated multicurrency revolving credit agreement, which we use to fund seasonal working capital needs and for other general corporate purposes, including acquisitions, dividends (if and as declared by our Board of Directors), capital expenditures, stock repurchases and issuances of letters of credit. The credit facility has a seasonal component from October 1 to March 31, during which the borrowing capacity may be reduced to $400.0 million at our discretion (which would effectively reduce fees payable in respect of the unused portion of the commitment). Included in the credit facility are a $100.0 million swingline subfacility, a $10.0 million letter of credit subfacility, a $75.0 million alternative currency borrowing sublimit and an $8.0 million Mexican borrowing sublimit. The credit agreement matures on December 5, 2023.
At June 30, 2019 and December 31, 2018, $219.6 million and $135.2 million, respectively, were outstanding under the revolving credit agreement. The revolving credit agreement contains customary affirmative and negative covenants, including financial covenants with respect to consolidated leverage and interest coverage ratios, and other customary restrictions. We believe we were in compliance with all covenants at June 30, 2019.
Purchase of Additional Ownership Interest from Joint Venture
Effective May 31, 2019, we purchased an additional 20% ownership interest in Homans from Carrier Enterprise II for cash consideration of $32.4 million, which increased our ownership in Homans to 100%. Homans previously operated as a division of Carrier Enterprise II and subsequent to the purchase operates as a stand-alone subsidiary of the Company with 16 locations in the Northeastern U.S.
 
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Investment in Unconsolidated Entity
On June 21, 2017, Carrier Enterprise I acquired a 34.9% ownership interest in RSI, an HVAC distributor operating from 30 locations in the Western U.S. for cash consideration of $63.6 million, of which we contributed $50.9 million, and Carrier contributed $12.7 million. Effective June 29, 2018, Carrier Enterprise I acquired an additional 1.4% ownership interest in RSI, which increased Carrier Enterprise I’s ownership interest in RSI to 36.3%. Total cash consideration of $3.8 million was paid on July 5, 2018, of which we contributed $3.0 million and Carrier contributed $0.8 million. Effective April 22, 2019, Carrier Enterprise I acquired an additional 1.8% ownership interest in RSI, which increased Carrier Enterprise I’s ownership interest in RSI to 38.1% for cash consideration of $4.9 million, of which we contributed $3.9 million and Carrier contributed $1.0 million.
Carrier Enterprise I is a party to a shareholders agreement (the “Shareholders Agreement”) with RSI and its shareholders. Pursuant to the Shareholders Agreement, RSI’s shareholders have the right to sell, and Carrier Enterprise I has the obligation to purchase, their respective shares of RSI for a purchase price determined based on either book value or a multiple of EBIT, the latter of which Carrier Enterprise I used to calculate the price paid for its investment in RSI. RSI’s shareholders may transfer their respective shares of RSI common stock only to members of the Sigler family or to Carrier Enterprise I, and, at any time from and after the date on which Carrier Enterprise I owns 85% or more of RSI’s outstanding common stock, it has the right, but not the obligation, to purchase from RSI’s shareholders the remaining outstanding shares of RSI common stock. At June 30, 2019, the estimated purchase amount we would be contingently liable for was approximately $138.0 million. We believe that our operating cash flows, cash on hand, and funds available for borrowing under our revolving credit agreement will be sufficient to purchase any additional ownership interests in RSI.
Acquisitions
On April 2, 2019, one of our wholly owned subsidiaries acquired certain assets and assumed certain liabilities of Dunphey & Associates Supply Co., Inc., a distributor of air conditioning and heating products operating from seven locations in New Jersey, New York and Connecticut. The purchase price was composed of cash consideration of $16.8 million and the issuance of 50,952 shares of Common stock having a fair value of $7.5 million.
On August 1, 2019, Carrier Enterprise I acquired substantially all of the assets and assumed certain of the liabilities of Peirce-Phelps, Inc. (“PPI”), an HVAC distributor operating from 19 locations in Pennsylvania, New Jersey, and Delaware, for $85.0 million less certain average revolving indebtedness. Consideration for the net purchase price consisted of $10.0 million in cash and 372,543 shares of Common stock having a fair value of $58.6 million. Carrier contributed cash of $17.0 million to Carrier Enterprise I in connection with the acquisition of PPI.
We continually evaluate potential acquisitions and/or joint ventures and investments in unconsolidated entities. We routinely hold discussions with a number of acquisition candidates. Should suitable acquisition opportunities arise that would require additional financing, we believe our financial position and earnings history provide a sufficient basis for us to either obtain additional debt financing at competitive rates and on reasonable terms or raise capital through the issuance of equity securities.
Common Stock Dividends
We paid cash dividends of $3.20 and $2.70 per share of Common stock and Class B common stock during the six months ended June 30, 2019 and 2018, respectively. On July 1, 2019, our Board of Directors declared a regular quarterly cash dividend of $1.60 per share of both Common and Class B common stock that was paid on July 31, 2019 to shareholders of record as of July 16, 2019. Future dividends and/or changes in dividend rates are at the sole discretion of the Board of Directors and depend upon factors including, but not limited to, cash flow generated by operations, profitability, financial condition, cash requirements, and future prospects.
Company Share Repurchase Program
In September 1999, our Board of Directors authorized the repurchase, at management’s discretion, of up to 7,500,000 shares of common stock in the open market or via private transactions. Shares repurchased under the program are accounted for using the cost method and result in a reduction of shareholders’ equity. We last repurchased shares under this plan in 2008. In aggregate, 6,370,913 shares of Common and Class B common stock have been repurchased at a cost of $114.4 million since the inception of the program. At June 30, 2019, there were 1,129,087 shares remaining authorized for repurchase under the program.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
 
There have been no material changes to the information regarding market risk provided in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form
10-K
for the year ended December 31, 2018.
ITEM 4.
CONTROLS AND PROCEDURES
 
 
 
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule
13a-15(e)
under the Securities Exchange Act of 1934, as amended (“the Exchange Act”)) that are, among other things, designed to ensure that information required to be disclosed by us under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer (“CEO”), Senior Vice President (“SVP”) and Chief Financial Officer (“CFO”), to allow for timely decisions regarding required disclosure and appropriate SEC filings.
 
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Our management, with the participation of our CEO, SVP and CFO, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, and, based on that evaluation, our CEO, SVP and CFO concluded that our disclosure controls and procedures were effective, at a reasonable assurance level, at and as of such date.
Changes in Internal Control over Financial Reporting
We are continuously seeking to improve the efficiency and effectiveness of our operations and of our internal controls. This results in refinements to processes throughout the Company. However, there were no changes in internal controls over financial reporting (as such term is defined in Rules
13a-15(f)
and
15d-15(f)
under the Exchange Act) during the quarter ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. In accordance with the rules and regulations of the SEC, we have not yet assessed the internal control over financial reporting of Dunphey & Associates Supply Co., Inc. (“DASCO”), which represented approximately 1% of our total consolidated assets at June 30, 2019 and approximately 1% of our consolidated revenues for the six months ended June 30, 2019. From the acquisition date of April 2, 2019, the processes and systems of DASCO did not impact the internal controls over financial reporting for our other consolidated subsidiaries.
PART II. OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
 
Information with respect to this item may be found in Note 12 to our condensed consolidated unaudited financial statements contained in this Quarterly Report on Form
10-Q
under the caption “Litigation, Claims and Assessments,” which information is incorporated by reference in this Item 1 of Part II of this Quarterly Report on Form
10-Q.
ITEM 1A.
RISK FACTORS
 
Information about risk factors for the quarter ended June 30, 2019 does not differ materially from that set forth in Part I, Item 1A, of our Annual Report on Form
10-K
for the year ended December 31, 2018.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Recent Sales of Unregistered Securities
On April 2, 2019, we issued 50,952 shares of unregistered Common stock in connection with an asset purchase agreement representing 30% of the purchase price to acquire certain assets and assume certain liabilities of Dunphey & Associates Supply Co. This issuance was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 3(a)(2) thereof.
 
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ITEM 6.
EXHIBITS
         
         
 
  31.1 #
   
         
 
  31.2 #
   
         
 
  31.3 #
   
         
 
  32.1 +
   
         
 
101.INS #
   
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document.
         
 
101.SCH #
   
Inline XBRL Taxonomy Extension Schema Document.
         
 
101.CAL #
   
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
         
 
101.DEF #
   
Inline XBRL Taxonomy Extension Definition Linkbase Document.
         
 
101.LAB #
   
Inline XBRL Taxonomy Extension Label Linkbase Document.
         
 
101.PRE #
   
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
 
# filed herewith.
+ furnished herewith.
 
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
             
 
 
WATSCO, INC.
 
 
(Registrant)
             
Date: August 8, 2019
 
 
By:
 
/s/ Ana M. Menendez
 
 
 
Ana M. Menendez
 
 
 
Chief Financial Officer (on behalf of the Registrant and as Principal Financial Officer)
 
 
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