WATSCO INC - Quarter Report: 2023 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-Q

☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2023

☐	Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From

Commission file number

1-5581

WATSCO, INC.

(Exact name of registrant as specified in its charter)


FLORIDA		59-0778222
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2665 South Bayshore Drive, Suite 901

Miami, FL 33133

(Address of principal executive offices, including zip code)

(305)

714-4100

(Registrant’s telephone number, including area code)

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 an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule

12b-2

of the Exchange Act.




Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Exchange Act).

Yes ☐ No ☒

The registrant’s common stock outstanding as of October 30, 2023 comprised (i) 33,866,284 shares of Common stock, $0.50 par value per share, excluding 4,778,988 treasury shares and (ii) 5,527,941 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.
PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Unaudited Financial Statements

	Condensed Consolidated Unaudited Statements of Income – Quarters and Nine Months Ended September 30, 2023 and 2022		3

	Condensed Consolidated Unaudited Statements of Comprehensive Income – Quarters and Nine Months Ended September 30, 2023 and 2022		4

	Condensed Consolidated Unaudited Balance Sheets – September 30, 2023 and December 31, 2022		5

	Condensed Consolidated Unaudited Statements of Shareholders’ Equity – Quarters and Nine Months Ended September 30, 2023 and 2022		6

	Condensed Consolidated Unaudited Statements of Cash Flows – Nine Months Ended September 30, 2023 and 2022		8

	Notes to Condensed Consolidated Unaudited Financial Statements		9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		25

Item 4.	Controls and Procedures		25

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		26

Item 1A.	Risk Factors		26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		26

Item 5.	Other Information		26

Item 6.	Exhibits		27

SIGNATURE			28

EXHIBITS

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

WATSCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF INCOME

(In thousands, except per share data)


	Quarter Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022

Revenues	$	2,126,845	$	2,035,796	$	5,680,570	$	5,693,121
Cost of sales		1,559,900		1,484,948		4,102,846		4,096,382

Gross profit		566,945		550,848		1,577,724		1,596,739
Selling, general and administrative expenses		319,834		321,522		911,046		919,629
Other income		9,506		6,927		20,384		17,289

Operating income		256,617		236,253		687,062		694,399
Interest expense, net		1,890		483		5,920		2,151

Income before income taxes		254,727		235,770		681,142		692,248
Income taxes		54,103		49,600		144,744		145,682

Net income		200,624		186,170		536,398		546,566
Less: net income attributable to non-controlling interest		29,671		28,529		82,608		83,070

Net income attributable to Watsco, Inc.	$	170,953	$	157,641	$	453,790	$	463,496

Earnings per share for Common and Class B common stock:
Basic	$	4.36	$	4.04	$	11.64	$	11.90

Diluted	$	4.35	$	4.03	$	11.60	$	11.86

See accompanying notes to condensed consolidated unaudited financial statements.

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WATSCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)


	Quarter Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023		2022

Net income	$	200,624		$	186,170		$	536,398	$	546,566
Other comprehensive (loss) income, net of tax Foreign currency translation adjustment		(6,966	)		(19,091	)		409		(24,091	)

Other comprehensive (loss) income		(6,966	)		(19,091	)		409		(24,091	)

Comprehensive income		193,658			167,079			536,807		522,475
Less: comprehensive income attributable to non-controlling interest		27,350			22,040			82,712		74,911

Comprehensive income attributable to Watsco, Inc.	$	166,308		$	145,039		$	454,095	$	447,564

See accompanying notes to condensed consolidated unaudited financial statements.

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WATSCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS

(In thousands, except per share data)


	September 30, 2023			December 31, 2022

ASSETS
Current assets:
Cash and cash equivalents	$	175,022		$	147,505
Accounts receivable, net		949,317			747,110
Inventories, net		1,549,740			1,370,173
Other current assets		56,493			33,951

Total current assets		2,730,572			2,298,739
Property and equipment, net		134,076			125,424
Operating lease right-of-use assets		362,901			317,314
Goodwill		491,522			430,711
Intangible assets, net		172,473			175,191
Investment in unconsolidated entity		137,596			132,802
Other assets		9,927			8,033

	$	4,039,067		$	3,488,214

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of lease liabilities	$	98,507		$	90,597
Borrowings under revolving credit agreement		—			56,400
Accounts payable		509,308			456,128
Accrued expenses and other current liabilities		279,813			303,397

Total current liabilities		887,628			906,522

Long-term obligations:
Borrowings under revolving credit agreement		105,600			—
Operating lease liabilities, net of current portion		272,154			232,144
Finance lease liabilities, net of current portion		12,585			11,388

Total long-term obligations		390,339			243,532

Deferred income taxes and other liabilities		95,338			89,882

Commitments and contingencies
Watsco, Inc. shareholders’ equity:
Common stock, $0.50 par value		19,323			19,054
Class B common stock, $0.50 par value		2,788			2,757
Preferred stock, $0.50 par value		—			—
Paid-in capital		1,138,749			973,060
Accumulated other comprehensive loss, net of tax		(47,405	)		(47,710	)
Retained earnings		1,197,184			1,029,516
Treasury stock, at cost		(86,630	)		(87,440	)

Total Watsco, Inc. shareholders’ equity		2,224,009			1,889,237
Non-controlling interest		441,753			359,041

Total shareholders’ equity		2,665,762			2,248,278

	$	4,039,067		$	3,488,214

See accompanying notes to condensed consolidated unaudited financial statements.

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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, 2022		38,749,887		$	21,811		$	973,060		$	(47,710	)	$	1,029,516		$	(87,440	)	$	359,041		$	2,248,278
Net income														110,073						20,298			130,371
Other comprehensive income											170									90			260
Issuances of restricted shares of common stock		116,510			58			(58	)														—
Forfeitures of restricted shares of common stock		(2,000	)		(1	)		1															—
Common stock contribution to 401(k) plan		35,533			18			8,844															8,862
Stock issuances from exercise of stock options and employee stock purchase plan		75,186			38			12,947															12,985
Issuance of Class B common stock		632			—			200															200
Retirement of common stock		(21,702	)		(11	)		(6,441	)														(6,452	)
Share-based compensation								8,763															8,763
Cash dividends declared and paid on Common and Class B common stock, $2.45 per share														(94,970	)								(94,970	)

Balance at March 31, 2023		38,954,046			21,913			997,316			(47,540	)		1,044,619			(87,440	)		379,429			2,308,297

Net income														172,764						32,639			205,403
Other comprehensive income											4,780									2,335			7,115
Issuances of restricted shares of common stock		38,000			19			(19	)														—
Forfeitures of restricted shares of common stock		(467	)		—			—															—
Stock issuances from exercise of stock options and employee stock purchase plan		30,794			15			5,622															5,637
Retirement of common stock		(1,737	)		(1	)		(594	)														(595	)
Share-based compensation								6,828															6,828
Net proceeds from the sale of Common stock		45,000						13,994									810						14,804
Cash dividends declared and paid on Common and Class B common stock, $2.45 per share														(95,439	)								(95,439	)

Balance at June 30, 2023		39,065,636			21,946			1,023,147			(42,760	)		1,121,944			(86,630	)		414,403			2,452,050

Net income														170,953						29,671			200,624
Other comprehensive (loss)											(4,645	)								(2,321	)		(6,966	)
Issuances of restricted shares of common stock		13,607			7			(7	)														—
Forfeitures of restricted shares of common stock		(1,000	)		(1	)		1															—
Stock issuances from exercise of stock options and employee stock purchase plan		37,399			19			6,610															6,629
Retirement of common stock		(1,328	)		—			(467	)														(467	)
Share-based compensation								7,262															7,262
Common stock issued for Gateway Supply Company, Inc.		280,215			140			102,203															102,343
Cash dividends declared and paid on Common and Class B common stock, $2.45 per share														(95,713	)								(95,713	)

Balance at September 30, 2023		39,394,529		$	22,111		$	1,138,749		$	(47,405	)	$	1,197,184		$	(86,630	)	$	441,753		$	2,665,762

Continued on next page.

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(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, 2021		38,799,632		$	21,836		$	1,003,932		$	(34,176	)	$	760,796		$	(87,440	)	$	332,467		$	1,997,415
Net income														113,298						21,592			134,890
Other comprehensive income											2,935									1,446			4,381
Issuances of restricted shares of common stock		105,882			53			(53	)														—
Common stock contribution to 401(k) plan		21,532			11			6,726															6,737
Stock issuances from exercise of stock options and employee stock purchase plan		24,850			12			4,408															4,420
Share-based compensation								8,667															8,667
Cash dividends declared and paid on Common and Class B common stock, $1.95 per share														(75,795	)								(75,795	)

Balance at March 31, 2022		38,951,896			21,912			1,023,680			(31,241	)		798,299			(87,440	)		355,505			2,080,715

Net income														192,557						32,949			225,506
Other comprehensive (loss)											(6,265	)								(3,116	)		(9,381	)
Issuances of restricted shares of common stock		21,177			11			(11	)														—
Forfeitures of restricted shares of common stock		(10,000	)		(5	)		5															—
Common stock contribution to 401(k) plan		28			—			9															9
Stock issuances from exercise of stock options and employee stock purchase plan		21,939			11			3,796															3,807
Retirement of common stock		(8,181	)		(4	)		(2,175	)														(2,179	)
Share-based compensation								6,987															6,987
Cash dividends declared and paid on Common and Class B common stock, $2.20 per share														(85,689	)								(85,689	)

Balance at June 30, 2022		38,976,859			21,925			1,032,291			(37,506	)		905,167			(87,440	)		385,338			2,219,775

Net income														157,641						28,529			186,170
Other comprehensive (loss)											(12,602	)								(6,489	)		(19,091	)
Issuances of restricted shares of common stock		13,000			7			(7	)														—
Stock issuances from exercise of stock options and employee stock purchase plan		51,407			25			8,639															8,664
Retirement of common stock		(1,932	)		(1	)		(548	)														(549	)
Share-based compensation								6,942															6,942
Cash dividends declared and paid on Common and Class B common stock, $2.20 per share														(85,758	)								(85,758	)

Balance at September 30, 2022		39,039,334		$	21,956		$	1,047,317		$	(50,108	)	$	977,050		$	(87,440	)	$	407,378		$	2,316,153

See accompanying notes to condensed consolidated unaudited financial statements.

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WATSCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS

(In thousands)


	Nine Months Ended September 30,
	2023			2022
Cash flows from operating activities:
Net income	$	536,398		$	546,566
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		25,406			23,440
Share-based compensation		20,791			22,017
Non-cash contribution to 401(k) plan		8,862			6,746
Deferred income tax provision		5,892			6,311
Other income from investment in unconsolidated entity		(20,384	)		(17,289	)
Other, net		2,841			5,672
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable, net		(184,106	)		(170,746	)
Inventories, net		(143,746	)		(276,653	)
Accounts payable and other liabilities		17,608			212,829
Other, net		(6,222	)		(13	)

Net cash provided by operating activities		263,340			358,880

Cash flows from investing activities:
Capital expenditures		(25,500	)		(26,526	)
Business acquisitions, net of cash acquired		(3,827	)		(47	)
Proceeds from sale of property and equipment		1,277			167

Net cash used in investing activities		(28,050	)		(26,406	)

Cash flows from financing activities:
Net proceeds under current revolving credit agreement		105,600			—
Net proceeds from issuances of Common stock under employee-related plans		20,373			16,635
Net proceeds from the sale of Common stock		15,179			—
Payment of fees related to revolving credit agreement		(837	)		—
Repurchases of common stock to satisfy employee withholding tax obligations		(2,639	)		(2,471	)
Net repayments of finance lease liabilities		(2,794	)		(2,206	)
Net repayments under prior revolving credit agreement		(56,400	)		(80,200	)
Dividends on Common and Class B common stock		(286,122	)		(247,242	)

Net cash used in financing activities		(207,640	)		(315,484	)

Effect of foreign exchange rate changes on cash and cash equivalents		(133	)		(5,030	)

Net increase in cash and cash equivalents		27,517			11,960
Cash and cash equivalents at beginning of period		147,505			118,268

Cash and cash equivalents at end of period	$	175,022		$	130,228

Supplemental cash flow information:
Common stock issued for Gateway Supply Company, Inc.	$	102,343			—

See accompanying notes to condensed consolidated unaudited financial statements.

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WATSCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

September 30, 2023

(In thousands, except share and per share data)

1. BASIS OF PRESENTATION

Basis of Consolidation

Watsco, Inc. (collectively with its subsidiaries, “Watsco,” the Company”, “we,” “us,” or “our”) was incorporated in Florida in 1956 and is the largest distributor of air conditioning, heating and refrigeration equipment and related parts and supplies (“HVAC/R”) in the HVAC/R distribution industry in North America. The accompanying September 30, 2023 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 2022 Annual Report on Form

10-K.

The condensed consolidated unaudited financial statements include the accounts of Watsco, all of its wholly owned subsidiaries, the accounts of four joint ventures with Carrier Global Corporation, which we refer to as Carrier, in which we have a controlling interest, the accounts of Carrier InterAmerica Corporation, in which we have an 80% controlling interest, and Carrier has a 20%

non-controlling

interest, and our 38.1% investment in Russell Sigler, Inc., which is accounted for under the equity method of accounting. All significant intercompany balances and transactions have been eliminated in consolidation.

The results of operations for the quarter and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023. Sales of residential central air conditioners, heating equipment, and parts and supplies are seasonal. Furthermore, profitability can be impacted favorably or unfavorably based on weather patterns, particularly 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 first and fourth quarters. Demand related to the new construction sectors throughout most of the markets we serve tends to be fairly evenly distributed throughout the year and depends largely on housing completions and related weather and economic conditions.

Equity Method Investments

Investments in which we have the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in investment in unconsolidated entity in our condensed consolidated unaudited balance sheets. Under this method of accounting, our proportionate share of the net income or loss of the investee is included in other income in our condensed consolidated unaudited statements of income. The excess, if any, of the carrying amount of our investment over our ownership percentage in the underlying net assets of the investee is attributed to certain fair value adjustments with the remaining portion recognized as goodwill.

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, net realizable value adjustments to inventories, income taxes, reserves related to loss contingencies and the valuation of goodwill, indefinite-lived intangible assets, and long-lived assets. While we believe that these estimates are reasonable, actual results could differ from such estimates.

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2. REVENUES

Disaggregation of Revenues

The following table presents our revenues disaggregated by primary geographical regions and major product lines within our single reporting segment:


	Quarter Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Primary Geographical Regions:
United States	$	1,924,556		$	1,851,071		$	5,118,591		$	5,156,846
Canada		100,030			100,567			288,653			303,149
Latin America and the Caribbean		102,259			84,158			273,326			233,126

	$	2,126,845		$	2,035,796		$	5,680,570		$	5,693,121

Major Product Lines:
HVAC equipment		70	%		69	%		69	%		69	%
Other HVAC products		26	%		27	%		27	%		27	%
Commercial refrigeration products		4	%		4	%		4	%		4	%

		100	%		100	%		100	%		100	%

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3. EARNINGS PER SHARE

The following table presents the calculation of basic and diluted earnings per share for our Common and Class B common stock:


	Quarter Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Basic Earnings per Share:
Net income attributable to Watsco, Inc. shareholders	$	170,953	$	157,641	$	453,790	$	463,496
Less: distributed and undistributed earnings allocated to restricted common stock		11,921		14,387		31,248		42,293

Earnings allocated to Watsco, Inc. shareholders	$	159,032	$	143,254	$	422,542	$	421,203


Weighted-average common shares outstanding—Basic		36,446,825		35,450,277		36,315,680		35,401,179
Basic earnings per share for Common and Class B common stock	$	4.36	$	4.04	$	11.64	$	11.90
Allocation of earnings for Basic:
Common stock	$	144,942	$	132,846	$	384,970	$	390,557
Class B common stock		14,090		10,408		37,572		30,646

	$	159,032	$	143,254	$	422,542	$	421,203

Diluted Earnings per Share:
Net income attributable to Watsco, Inc. shareholders	$	170,953	$	157,641	$	453,790	$	463,496
Less: distributed and undistributed earnings allocated to restricted common stock		11,903		14,368		31,211		42,228

Earnings allocated to Watsco, Inc. shareholders	$	159,050	$	143,273	$	422,579	$	421,268


Weighted-average common shares outstanding—Basic		36,446,825		35,450,277		36,315,680		35,401,179
Effect of dilutive stock options		132,583		112,008		122,395		128,309

Weighted-average common shares outstanding—Diluted		36,579,408		35,562,285		36,438,075		35,529,488

Diluted earnings per share for Common and Class B common stock	$	4.35	$	4.03	$	11.60	$	11.86

Anti-dilutive stock options not included above		24,988		208,610		37,533		181,115

Diluted earnings per share for our Common stock assumes the conversion of all of our Class B common stock into Common stock

the

beginning of the fiscal year; therefore, no allocation of earnings to Class B common stock is required. At September 30, 2023 and 2022,

our

outstanding Class B common stock was convertible into 3,229,118 and 2,575,725 shares of our Common stock, respectively.

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4. 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.

The change in accumulated other comprehensive loss, net of tax, was as follows:


Nine Months Ended September 30,	2023			2022

Foreign currency translation adjustment:
Beginning balance	$	(47,710	)	$	(34,176	)
Current period other comprehensive income (loss)		305			(15,932	)

Ending balance	$	(47,405	)	$	(50,108	)

5. ACQUISITIONS

Gateway Supply Company, Inc.

On September 1, 2023, we acquired substantially all the assets and assumed certain of the liabilities of Gateway Supply Company, Inc. (“GWS”), a plumbing and HVAC distributor operating from 15 locations in South Carolina and

one location in Charlotte,

North Carolina. We formed a new, wholly owned subsidiary, Gateway Supply LLC, that operates this business. Consideration for the net purchase price consisted of $4,000 in cash

, net of cash acquired of $3,097,

and 280,215 shares of Common stock having a fair value of $102,343

Of the 280,215 shares of Common stock issued, 21,228 shares are subject to a contractual restriction that generally prohibits the sale or other transfer of such shares by GWS and its permitted transferees for a period of one year following the closing date with respect to half of such shares, and two years following the closing date with respect to the other half of such shares. The preliminary

purchase price resulted in the initial estimated recognition of

59,698

in goodwill. The tax basis of the acquired goodwill recognized is not deductible for income tax purposes.

Capitol District Supply Co., Inc.

On March 3, 2023, one of our wholly owned subsidiaries acquired Capitol District Supply Co., Inc., a distributor of air conditioning and heating products with annual sales of approximately $13,000, operating from three locations in New York. Consideration for the purchase consisted of $1,217 in cash, net of cash acquired of $144, and $1,851 for repayment of

indebtedness. The

preliminary

purchase price resulted in the

initial estimated

recognition of $1,033 in goodwill. The tax basis of such goodwill is deductible for income tax purposes over 15 years.

The results of operations of these acquisitions have been included in the condensed consolidated unaudited financial statements from their respective dates of acquisition. The pro forma effect of the acquisitions was not deemed significant to the condensed consolidated unaudited financial statements.

6. DEBT

On March 16, 2023, we entered into an unsecured, five-year $600,000 syndicated multicurrency revolving credit agreement, which replaced in its entirety our prior five-year $560,000 unsecured revolving credit agreement that was nearing maturity. Proceeds from the new facility were used to repay the $235,500 outstanding under the prior facility. Additional proceeds may be used for, among other things, funding seasonal working capital needs and 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 revolving credit facility has a seasonal component from October 1 to March 31, during which the borrowing capacity may be reduced to $500,000 at our discretion (which effectively reduces fees payable in respect of the unused portion of the commitment

), and we effected this reduction on October 1, 2023.

Included in the revolving credit facility are a $125,000 swingline loan sublimit, a $10,000 letter of credit sublimit, a $75,000 alternative currency borrowing sublimit, and an $10,000 Mexican borrowing subfacility. The credit agreement matures on March 16, 2028.

Borrowings under the revolving credit facility bear interest at either Term Secured Overnight Financing Rate (“SOFR”) or Daily Simple SOFR-based rates plus 0.10%, plus a spread which ranges from 100.0 to 137.5 basis-points (Term SOFR and Daily Simple SOFR plus 100.0 basis-points at

September

30, 2023), depending on our ratio of total debt to EBITDA, or on rates based on the highest of the Federal Funds Effective Rate plus 0.5%, the Prime Rate or Term SOFR plus 1.0%, in each case plus a spread which ranges from 0 to 50.0 basis-points (0 basis-points at

September

30, 2023), depending on our ratio of total debt to EBITDA. We pay a variable commitment fee on the unused portion of the commitment under the revolving credit agreement, ranging from 12.5 to 27.5 basis-points (12.5 basis-points at

September

30, 2023). We paid fees of $837 in connection with entering into the revolving credit agreement, which are being amortized ratably through the maturity of the facility in March 2028.

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At September 30, 2023, $105,600 was 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 September 30, 2023.

7. 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.

Derivatives Not Designated as Hedging Instruments

We have 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 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 September 30, 2023 was $6,600, and such contracts expired in October 2023.

We recognized losses of

$371 and $149 from

foreign currency forward and option contracts not designated as hedging instruments in our condensed consolidated unaudited statements of income for the quarters ended September 30, 2023 and 2022, respectively. We recognized

losses of $2,423 and $524 from

foreign currency forward and option contracts not designated as hedging instruments in our condensed consolidated unaudited statements of income for the nine months ended September 30, 2023 and 2022, respectively.

8. 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 September 30, 2023 Using
	Balance Sheet Location		Total		Level 1		Level 2		Level 3
Assets:
Derivative financial instruments		Other current assets	$	9		—	$	9		—
Equity securities		Other assets	$	773	$	773		—		—
Private equities		Other assets	$	1,500		—		—	$	1,500

			Total		Fair Value Measurements at December 31, 2022 Using
		Balance Sheet Location	Total		Level 1		Level 2		Level 3
Assets:
Equity securities		Other assets	$	678	$	678		—		—
Private equities		Other assets	$	1,000		—		—	$	1,000

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:

Derivative financial instruments

– these derivatives are foreign currency forward and option contracts. See Note 7. 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.

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.

Private equities

– other investments in which fair value inputs are unobservable and are therefore classified within Level 3 of the fair value hierarchy.

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9. SHAREHOLDERS’ EQUITY

At-the-Market

Offering Program

to $300,000 (

the “ATM Program”). The offer and sale of our Common stock pursuant to the ATM Program has been registered under the Securities Act pursuant to our automatically effective shelf registration statement on Form

S-3

(File

No. 333-260758).

During

the nine months ended September 30, 2023, we issued and sold 45,000 shares of Common stock under the ATM Program for net proceeds of $15,179. Direct costs of $375 incurred in connection with the offering were charged against the proceeds from the sale of Common stock and reflected as a reduction of

paid-in

capital. At September 30, 2023, $284,745 remained available for sale under the ATM Program.

On November 3, 2023, we entered into a second amended and restated sales agreement with Baird, which removed GS as a sales agent under the ATM Program.

Common Stock Dividends

We paid cash dividends of $2.45, $2.20, $7.35, and $6.35 per share on both Common and Class B common stock during the quarters and nine months ended September 30, 2023 and 2022, respectively.

Restricted Stock

During the quarter and nine months ended September 30, 2023,

a total of

1,033 shares of Common and Class B common stock with an aggregate fair market value of $362, and

a total of

7,080 shares of Common and Class B common stock with an aggregate fair market value of $2,026, respectively, were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of restricted stock. These shares were retired upon delivery. During the quarter and nine months ended September 30, 2022,

a total of

879 shares of Class B common stock with an aggregate fair market value of $252, and

a total of

9,060 shares of Class B common stock with an aggregate fair market value of $2,431, respectively, were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of 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 nine months ended September 30, 2023 and 2022, was

$5,983, $7,929, $18,677, and $15,151, respectively.

During the quarter and nine months ended September 30, 2023, a total of

295

shares of Common stock with an aggregate fair market value of

$106

, and a total of 17,687 shares of Common stock with an aggregate fair market value of

5,489

, respectively, were withheld as payment in lieu of cash for stock option exercises. These shares were retired upon delivery. During both the quarter and nine months ended September 30, 2022, a total of

1,053

shares of Common stock with an aggregate fair market value of $298 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 September 30, 2023 and 2022, we received net proceeds of $563 and $478, respectively, for shares of our Common stock purchased under our employee stock purchase plan. During the nine months ended September 30, 2023 and 2022, we received net proceeds of $1,696 and $1,484, respectively, for shares of our Common stock purchased under our employee stock purchase

plan.

10. 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.

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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 several 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 $10,066 and $12,256 at September 30, 2023 and December 31, 2022, respectively, were established related to such programs and are included in accrued expenses and other current liabilities in our condensed consolidated unaudited balance sheets.

11. RELATED PARTY TRANSACTIONS

Purchases from Carrier and its affiliates comprised 67% and 63% of all inventory purchases made during the quarters ended September 30, 2023 and 2022, respectively. Purchases from Carrier and its affiliates comprised 65% and 60% of all inventory purchases made during the nine months ended September 30, 2023 and 2022, respectively. At September 30, 2023 and December 31, 2022, approximately $178,000 and $88,000, respectively, was payable to Carrier and its affiliates, net of receivables. We also sell HVAC products to Carrier and its affiliates. Revenues in our condensed consolidated unaudited statements of income for the quarters and nine months ended September 30, 2023 and 2022 included approximately $34,000, $26,000, $88,000, and $76,000, 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.

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 nine months ended September 30, 2023 and 2022, fees for services performed were $60,

40, $131, and $169, respectively, and $

50 and $

1 was payable at September 30, 2023 and December 31, 2022, respectively.

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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, including conditions that impact the supply chain;

•

fluctuations in certain commodity costs;

•

consumer spending;

•

consumer debt levels;

•

the resurgence of the

COVID-19

pandemic;

•

new housing starts and completions;

•

capital spending in the commercial construction market;

•

access to liquidity needed for operations;

•

seasonal nature of product sales;

•

weather patterns and conditions;

•

insurance coverage risks;

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•

federal, state, and local regulations impacting our industry and products;

•

prevailing interest rates;

•

the effect of inflation;

•

foreign currency exchange rate fluctuations;

•

international 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 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 “Economic and Marketplace Dynamics” in the discussion below, Item 1A “Risk Factors” of our Annual Report on Form

10-K

for the year ended December 31, 2022, 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 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, 2022.

Company Overview

Watsco, Inc. was incorporated in Florida in 1956, and, together with its subsidiaries (collectively, “Watsco,” the “Company,” 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 September 30, 2023, we operated from 691 locations in 42 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, profitability can be impacted favorably or unfavorably based on weather patterns, particularly 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 first and fourth quarters. Demand related to the new construction sectors throughout most of the markets we serve tends to be fairly evenly distributed throughout the year and depends largely on housing completions and related weather and economic conditions.

Climate Change and Reductions in CO

e Emissions

We believe that our business plays an important and significant role in the drive to lower CO

e emissions. According to the United States Department of Energy, heating and air conditioning accounts for roughly half of household energy consumption in the United States. As such, replacing older, less efficient HVAC systems with higher efficiency systems is one of the most meaningful steps homeowners can take to reduce their electricity costs and carbon footprints.

The overwhelming majority of new HVAC systems that we sell replace systems that likely operate below current minimum efficiency standards in the United States and may use more harmful refrigerants that have been, or are being,

phased-out. As

consumers replace HVAC systems with new, higher-efficiency systems, homeowners will consume less energy, save costs, and reduce their carbon footprints.

The sale of high-efficiency systems has long been a focus of ours, and we have invested in tools and technology intended to capture an increasingly richer sales mix over time. In addition, regulatory mandates will likely periodically increase the required minimum Seasonal Energy Efficiency Ratio rating, referred to as SEER, thus providing a catalyst for greater sales of higher-efficiency systems.

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Recently enacted regulations increased the current minimum SEER beginning in 2023 (generally, to 14 SEER from 13 SEER in the Northern U.S. and to 15 SEER from 14 SEER for the Southern U.S.).

We offer a broad variety of systems that operate above the minimum SEER standards, ranging from base-level efficiency to systems that exceed 20 SEER. Based on estimates validated by independent sources, we averted an estimated 18.3 million metric tons of CO

e emissions from January 1, 2020 to September 30, 2023 through the sale of replacement residential HVAC systems at higher-efficiency standards.

Federal Tax Credits and State Incentives

Demand for higher-efficiency products, such as variable-speed systems and heat pumps, is expected to increase due to the passage of the U.S. Inflation Reduction Act of 2022 (the “IRA”) in August 2022. This legislation is intended, in part, to promote the replacement of existing systems in favor of high-efficiency heat pump systems that reduce greenhouse gas emissions, as compared to older systems, and thereby combat climate change. Programs under the IRA include enhanced tax credits for homeowners who install qualifying HVAC equipment and tax deductions for owners of commercial buildings that are upgraded to achieve defined energy savings. The IRA also sets aside $4.3 billion for state-administered consumer rebate programs designed to promote energy savings for low and medium-income households, including HVAC systems. Final details, including qualifying products, specific programs, states participating, and other regulatory requirements contemplated by the IRA are still being finalized.

Economic and Marketplace Dynamics

The global economic recovery from the

COVID-19

pandemic has included challenges such as inflationary pressure and supply chain disruptions. Certain of our manufacturers and suppliers continue to experience some level of supply chain disruptions caused by reduced component availability, labor shortages, transportation delays, and other logistical challenges, resulting in longer lead times and constrained availability of HVAC/R products. These challenges were exacerbated by the regulatory transition to higher SEER products that became effective in 2023. Revenues for the first nine months of 2023 reflected temporary production and availability delays by one of our primary OEM partners. We estimate that revenues were negatively impacted by approximately 1% and 3% during the quarter and nine months ended September 30, 2023, respectively, in each case due to constrained availability of inventory. Our OEMs are working to improve their supply chains and product availability in order to help us meet our customers’ needs.

We cannot estimate the future impact of supply chain disruptions to the extent that these disruptions become more pronounced than current conditions. We continue to take proactive steps to limit the impact of these disruptions and are working closely with our suppliers to ensure the availability of products. Also, we continue to actively monitor the situation and may take further actions that alter our business.

Critical Accounting Estimates

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 condensed consolidated unaudited 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 estimates are included in our Annual Report on Form

10-K

for the year ended December 31, 2022, as filed with the SEC on February 24, 2023. We believe that there have been no significant changes during the quarter ended September 30, 2023 to the critical accounting estimates disclosed in our Annual Report on Form

10-K

for the year ended December 31, 2022.

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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 nine months ended September 30, 2023 and 2022:


	Quarter Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		73.3			72.9			72.2			72.0

Gross profit		26.7			27.1			27.8			28.0
Selling, general and administrative expenses		15.0			15.8			16.0			16.2
Other income		0.4			0.3			0.4			0.3

Operating income		12.1			11.6			12.1			12.2
Interest expense, net		0.1			0.0			0.1			0.0

Income before income taxes		12.0			11.6			12.0			12.2
Income taxes		2.5			2.4			2.5			2.6

Net income		9.4			9.1			9.4			9.6
Less: net income attributable to non-controlling interest		1.4			1.4			1.5			1.5

Net income attributable to Watsco, Inc.		8.0	%		7.7	%		8.0	%		8.1	%

Note: Due to rounding, percentages may not total 100.

The following narratives reflect our acquisition of Capitol District Supply Co., Inc. (“Capitol”) in March 2023 and Gateway Supply Company, Inc. (“GWS”) in September 2023. We did not acquire any businesses during the quarter or nine months ended September 30, 2022.

In the following narratives, computations and other information referring to “same-store basis” exclude the effects of locations closed, acquired, or locations opened, in each case during the immediately preceding 12 months, unless such locations are within close geographical proximity to existing locations. At September 30, 2023 and 2022, three and eleven locations, respectively, that we opened during the immediately preceding 12 months 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 September 30, 2023:


	Number of Locations
September 30, 2022		675
Opened		1
Closed		(3	)

December 31, 2022		673
Opened		5
Acquired		19
Closed		(6	)

September 30, 2023		691

Third Quarter of 2023 Compared to Third Quarter of 2022

Revenues


	Quarters Ended September 30,
(in millions)	2023		2022		Change
Revenues	$	2,126.8	$	2,035.8	$	91.0	4	%

The increase in revenues for the third quarter of 2023 included $17.9 million attributable to new locations acquired and $1.7 million from other locations opened during the preceding 12 months, offset by $2.5 million from locations closed.

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	Quarters Ended September 30,
(in millions)		2023		2022		Change
Same-store sales	$	2,107.2	$	2,033.3	$	73.9	4	%

The following table presents our revenues, as a percentage of sales, by major product lines and the related percentage change in revenues from the prior period:


	% of Sales						% Change
	2023			2022			2023			2022
HVAC equipment		70	%		69	%		6	%		13	%
Other HVAC products		26	%		27	%		(3	%)		15	%
Commercial refrigeration products		4	%		4	%		9	%		18	%

HVAC equipment sales (excluding acquisitions) reflect a 4% increase in residential products, which is composed of unitary compressor-bearing systems, furnaces, and other indoor components, (3% increase in U.S. markets and a 15% increase in international markets) and a 14% increase in sales of commercial HVAC equipment (12% increase in U.S. markets and a 19% increase in international markets). Domestic sales of unitary compressor-bearing systems increased 4%, reflecting an 8% increase in average selling price and a 4% decrease in units.

Gross Profit


	Quarters Ended September 30,
(in millions)	2023			2022			Change
Gross profit	$	566.9		$	550.8		$	16.1	3	%
Gross margin		26.7	%		27.1	%

Gross profit margin declined 40 basis-points primarily due to product mix, reflecting a stronger 6% sales growth rate of HVAC equipment (70% of sales) versus a 3% decline in sales of other HVAC products (

26% of sales

) in 2023 as compared to the same period in 2022. Generally, HVAC equipment drives lower gross profit margins than other HVAC products.

Selling, General and Administrative Expenses


	Quarters Ended September 30,
(in millions)	2023			2022			Change
Selling, general and administrative expenses	$	319.8		$	321.5		$	(1.7	)	(1	%)
Selling, general and administrative expenses as a percentage of revenues		15.0	%		15.8	%

Selling, general and administrative expenses decreased 1% for the third quarter of 2023. On a same-store basis, selling, general and administrative expenses decreased 2% as compared to 2022, primarily due to improved operating efficiencies.

Other Income

Other income of $9.5 million and $6.9 million for the third quarters of 2023 and 2022, respectively, represents our share of the net income of Russell Sigler, Inc. (“RSI”), in which we have a 38.1% equity interest.

Interest Expense, Net

Interest expense, net for the third quarter of 2023 increased $1.4 million, or 291%, primarily due to a higher effective interest rate and higher average borrowings under our revolving credit facility for the 2023 period as compared to the same period in 2022.

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Income Taxes


	Quarters Ended September 30,
(in millions)	2023			2022			Change
Income taxes	$	54.1		$	49.6		$	4.5	9	%
Effective income tax rate		23.8	%		23.8	%

Income taxes represent a composite of the income taxes attributable to our wholly owned operations and income taxes attributable to our joint ventures with Carrier Global Corporation (“Carrier”), 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 from these joint ventures.

Net Income Attributable to Watsco, Inc.

Net income attributable to Watsco, Inc. for the quarter ended September 30, 2023 increased $13.3 million, or 8%, compared to the same period in 2022. The increase was primarily driven by higher revenues, gross profit and higher other income, lower selling, general and administrative expenses, partially offset by higher interest expense, net, and higher income taxes.

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Revenues


	Nine Months Ended September 30,
(in millions)	2023		2022		Change
Revenues	$	5,680.6	$	5,693.1	$	(12.5	)	0	%

The decrease in revenues for the nine months ended September 30, 2023 included $6.5 million from locations closed, offset by $22.6 million attributable to new locations acquired and $8.0 million from other locations opened during the preceding 12 months.


	Nine Months Ended September 30,
(in millions)	2023		2022		Change
Same-store sales	$	5,650.0	$	5,686.6	$	(36.6	)	(1	%)

The following table presents our revenues, as a percentage of sales, by major product lines and the related percentage change in revenues from the prior period:


	% of Sales						% Change
	2023			2022			2023			2022
HVAC equipment		69	%		69	%		—			18	%
Other HVAC products		27	%		27	%		(4	%)		20	%
Commercial refrigeration products		4	%		4	%		7	%		25	%

HVAC equipment sales (excluding acquisitions) reflect a 4% decrease in residential products, which is composed of unitary compressor-bearing systems, furnaces, and other indoor components, (5% decrease in U.S. markets and a 2% increase in international markets) and a 17% increase in sales of commercial HVAC equipment (17% increase in U.S. markets and a 19% increase in international markets). Domestic sales of unitary compressor-bearing systems declined 3%, reflecting a 12% decrease in units and a 9% increase in average selling price.

Gross Profit


	Nine Months Ended September 30,
(in millions)	2023			2022			Change
Gross profit	$	1,577.7		$	1,596.7		$	(19.0	)	(1	%)
Gross margin		27.8	%		28.0	%

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Gross profit margin declined 20 basis-points primarily due to less beneficial pricing actions taken by our HVAC equipment suppliers in 2023 as compared to the same period in 2022.

Selling, General and Administrative Expenses


	Nine Months Ended September 30,
(in millions)	2023			2022			Change
Selling, general and administrative expenses	$	911.0		$	919.6		$	(8.6	)	(1	%)
Selling, general and administrative expenses as a percentage of revenues		16.0	%		16.2	%

Selling, general and administrative expenses for the nine months ended September 30, 2023 decreased primarily due to lower revenues. On a same-store basis, selling, general and administrative expenses decreased 2% as compared to the same period in 2022, primarily due to decreased variable costs commensurate with decreased revenues and improved operating efficiencies.

Other Income

Other income of $20.4 million and $17.3 million for the nine months ended September 30, 2023 and 2022, respectively, represents our share of the net income of RSI, in which we have a 38.1% equity interest.

Interest Expense, Net

Interest expense, net for the nine months ended September 30, 2023 increased $3.8 million, or 175%, for the 2023 period as compared to the same period in 2022, primarily due to a higher effective interest rate and higher average outstanding borrowings under our revolving credit facility.

Income Taxes


	Nine Months Ended September 30,
(in millions)	2023			2022			Change
Income taxes	$	144.7		$	145.7		$	(1.0	)	(1	%)
Effective income tax rate		24.0	%		23.8	%

Income taxes represent a composite of the income taxes attributable to our wholly owned operations and income taxes attributable to our joint ventures with Carrier, 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 from these joint ventures. The increase in the effective income tax rate was primarily due to higher state income taxes partially offset by higher share-based compensation deductions and tax credits in 2023 as compared to the same period in 2022.

Net Income Attributable to Watsco, Inc.

Net income attributable to Watsco, Inc. for the nine months ended September 30, 2023 decreased $9.7 million, or 2%, compared to the same period in 2022. The decrease was primarily driven by lower revenues and gross profit and higher interest expense, net, partially offset by lower selling, general and administrative expenses, higher other income, and lower income taxes.

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.

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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 in the short-term and the long-term, including dividend payments (if and as 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 September 30, 2023, we had $175.0 million of cash and cash equivalents, of which $152.6 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 restrictions.

We believe that our operating cash flows, cash on hand, funds available for borrowing under our revolving credit agreement, and funds available from sales of our Common stock under our ATM Program (as defined below), each of which is described below, will be sufficient to meet our liquidity needs for 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 the Secured Overnight Financing Rate (“SOFR”), which is one of the base rates under our revolving credit agreement. SOFR has limited historical data and is a secured lending rate, which could give rise to uncertainties and volatility in the benchmark rates. Additionally, disruptions in the credit and capital markets could also result in increased borrowing costs or reduced borrowing capacity under our revolving credit agreement.

Working Capital

Working capital increased to $1,842.9 million at September 30, 2023 from $1,392.2 million at December 31, 2022, due to: (i) a customary increase in inventory concurrent with our selling season, new inventory requirements pertaining to the transition to higher minimum efficiency levels for residential HVAC systems that went into effect on January 1, 2023, and an increase of safety stock as a consequence of supply chain disruptions; (ii) higher accounts receivable consistent with the seasonality of our business; and (iii) the classification of borrowings under our revolving credit agreement as a long-term liability at September 30, 2023, which were offset by an increase in accounts payable consistent with the change in inventory.

Cash Flows

The following table summarizes our cash flow activity for the nine months ended September 30, 2023 and 2022 (in millions):


	2023			2022			Change
Cash flows provided by operating activities	$	263.3		$	358.9		$	(95.6	)
Cash flows used in investing activities	$	(28.1	)	$	(26.4	)	$	(1.7	)
Cash flows used in financing activities	$	(207.6	)	$	(315.5	)	$	107.9

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 decrease in net cash provided by operating activities was primarily due to the timing of vendor payments and lower net income in 2023 as compared to 2022, partially offset by the changes in working capital discussed above.

Investing Activities

Net cash used in investing activities was higher primarily due to cash consideration paid for our acquisitions of Capitol and GWS in 2023.

Financing Activities

Net cash used in financing activities decreased primarily due to higher borrowings under our revolving credit agreement and proceeds from the sale of Common stock used for repayments under our revolving credit agreement, partially offset by an increase in dividends paid in 2023.

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Revolving Credit Agreement

On March 16, 2023, we entered into an unsecured, five-year $600.0 million syndicated multicurrency revolving credit agreement, which replaced in its entirety our prior five-year $560.0 million unsecured revolving credit agreement that was nearing maturity. Proceeds from the new facility were used to repay the $235.5 million outstanding under the prior facility. Additional proceeds may be used for, among other things, funding 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 revolving credit facility has a seasonal component from October 1 to March 31, during which the borrowing capacity may be reduced to $500.0 million at our discretion (which effectively reduces fees payable in respect of the unused portion of the commitment), and we effected this reduction on October 1, 2023. Included in the revolving credit facility are a $125.0 million swingline loan sublimit, a $10.0 million letter of credit sublimit, a $75.0 million alternative currency borrowing sublimit, and an $10.0 million Mexican borrowing subfacility. The credit agreement matures on March 16, 2028.

Borrowings under the revolving credit facility bear interest at either Term SOFR or Daily Simple SOFR-based rates plus 0.10%, plus a spread which ranges from 100.0 to 137.5 basis-points (Term SOFR and Daily Simple SOFR plus 100.0 basis-points at September 30, 2023), depending on our ratio of total debt to EBITDA, or on rates based on the highest of the Federal Funds Effective Rate plus 0.5%, the Prime Rate or Term SOFR plus 1.0%, in each case plus a spread which ranges from 0 to 50.0 basis-points (0 basis-points at September 30, 2023), depending on our ratio of total debt to EBITDA. We pay a variable commitment fee on the unused portion of the commitment under the revolving credit agreement, ranging from 12.5 to 27.5 basis-points (12.5 basis-points at September 30, 2023). We paid fees of $0.8 million in connection with entering into the revolving credit agreement, which are being amortized ratably through the maturity of the facility in March 2028.

At September 30, 2023, $105.6 million was 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 September 30, 2023.

At-the-Market

Offering Program

On February 25, 2022, we entered into an amended and restated sales agreement with Robert W. Baird & Co. Inc. (“Baird”) and Goldman Sachs & Co. LLC (“GS”), which enables the Company to issue and sell shares of Common stock in one or more negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), for a maximum aggregate offering amount of up to $300.0 million (the “ATM Program”). The offer and sale of our Common stock pursuant to the ATM Program has been registered under the Securities Act pursuant to our automatically effective shelf registration statement on Form

S-3

(File

No. 333-260758).

During the nine months ended September 30, 2023, we issued and sold 45,000 shares of Common stock under the ATM Program for net proceeds of $15.2 million. Direct costs of $0.4 million incurred in connection with the offering were charged against the proceeds from the sale of Common stock and reflected as a reduction of

paid-in

capital. At September 30, 2023, $284.7 million remained available for sale under the ATM Program.

On November 3, 2023, we entered into a second amended and restated sales agreement with Baird, which removed GS as a sales agent under the ATM Program. See Item 5 of this Quarterly Report on Form

10-Q

for additional information.

Investment in Unconsolidated Entity

Carrier Enterprise I, one of our joint ventures with Carrier, in which we have an 80% controlling interest, has a 38.1% ownership interest in RSI, an HVAC distributor operating from 34 locations in the Western U.S. Our proportionate share of the net income of RSI is included in other income in our condensed consolidated unaudited statements of income.

Carrier Enterprise I is a party to a shareholders’ agreement (the “Shareholders’ Agreement”) with RSI and its shareholders, consisting of five Sigler second generation family siblings and their affiliates, who collectively own 55.8% of RSI (the “RSI Majority Holders”) and certain next-generation Sigler family members and an employee, who collectively own 3.1% of RSI (the “RSI Minority Holders” and, together with the RSI Majority Holders, the “RSI Shareholders”). Pursuant to the Shareholders’ Agreement, the RSI 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 the higher of book value or a multiple of EBIT, the latter of which Carrier Enterprise I used to calculate the price for its 38.1% investment held in RSI. The RSI 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 the RSI Shareholders the remaining outstanding shares of RSI common stock. At September 30, 2023, using the criteria set forth in the Shareholders’ Agreement, the valuation of the RSI Shareholders’ RSI common stock was approximately $426.0 million. We believe that our operating cash flows, cash on hand, funds available for borrowing under our revolving credit agreement, or use of the ATM Program would be sufficient to purchase any additional ownership interests in RSI.

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On July 28, 2023, Watsco, Carrier Enterprise I, and the RSI Majority Holders entered into an agreement that (1) provides Carrier Enterprise I the discretion, but not the obligation, to fund up to 80% of any purchase from the RSI Majority Holders of their RSI common stock, as required under the Shareholders’ Agreement, using Watsco Common stock (the “Offered Shares”), (2) provides that any Offered Shares actually issued would be valued based on the average volume-weighted average price of Watsco’s Common stock for the ten trading days immediately preceding the payment date for the applicable RSI shares, and (3) limits the amount of RSI shares that may be collectively sold by the RSI Majority Holders to Carrier Enterprise I under the Shareholders’ Agreement to $125.0 million during any rolling

12-month

period. We have not issued or sold any Offered Shares, and there is no assurance that we will issue and sell any Offered Shares, nor is the number of Offered Shares that may be issued and sold currently determinable.

Acquisitions

On September 1, 2023, we acquired substantially all the assets and assumed certain of the liabilities of Gateway Supply Company, Inc., a plumbing and HVAC distributor operating from 16 locations in South Carolina and North Carolina. Consideration for the net purchase price consisted of $4.0 million in cash and 280,215 shares of Common stock having a fair value of $102.3 million, net of cash acquired of $3.1 million.

On March 3, 2023, one of our wholly owned subsidiaries acquired Capitol, a distributor of air conditioning and heating products with annual sales of approximately $13.0 million, operating from three locations in New York. Consideration for the purchase consisted of $1.2 million in cash, net of cash acquired of $0.1 million, and $1.9 million for repayment of indebtedness.

We continually evaluate potential acquisitions and/or joint ventures and investments in unconsolidated entities. We routinely hold discussions with several 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 $7.35 and $6.35 per share on both Common and Class B common stock during the nine months ended September 30, 2023 and 2022, respectively. On October 2, 2023, our Board of Directors declared a regular quarterly cash dividend of $2.45 per share on both Common and Class B common stock that was paid on October 31, 2023 to shareholders of record as of October 17, 2023. Future dividends and 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 September 30, 2023, there were 1,129,087 shares remaining authorized for repurchase under the program. The IRA includes, among other provisions, a 1% excise tax on stock repurchases effective January 1, 2023. In considering any further stock repurchases under our repurchase program, we intend to evaluate the impact of the IRA’s 1% excise tax.

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, 2022.

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”), Executive Vice President (“EVP”) 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, EVP 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, EVP 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 September 30, 2023 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 GWS, which represented approximately 3% of our total consolidated assets at September 30, 2023 and approximately 0.3% of our consolidated revenues for the quarter ended September 30, 2023. From the acquisition date of September 1, 2023 to September 30, 2023, the processes and systems of GWS 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 10 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 September 30, 2023 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, 2022.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities


Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Dollar Value that May Yet Be Purchased Under the Plans or Programs
July 1, 2023 to July 31, 2023		—	$	—		—	$	—
August 1, 2023 to August 31, 2023		1,033		349.99		—		—
September 1, 2023 to September 30, 2023		—		—		—		—

Total		1,033	$	349.99		—	$	—

(1)	During the quarter ended September 30, 2023, we purchased an aggregate of 1,033 shares of our common stock to satisfy the tax withholding obligations in connection with the vesting of restricted stock.

ITEM 5. OTHER INFORMATION

During the quarter ended September 30, 2023

of our officers or directors adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule

10b5-1(c)

under the Exchange Act or any

“non-Rule

10b5-1

trading arrangement”, as defined in Item 408 of Regulation

S-K.

As previously reported, on August 6, 2021, the Company entered into a Sales Agreement (the “Original Sales Agreement”) with Robert W. Baird & Co. Incorporated (“Baird”), relating to the Company’s issuance and sale, from time to time, of up to $300.0 million of its Common stock in a registered offering pursuant to the Company’s effective Registration Statement on Form

S-3.

The Sales Agreement provided for the sale of shares in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act, including sales made directly on the New York Stock Exchange, or sales made to or through a market maker other than on an exchange (the “ATM Program”). On February 25, 2022, the Company entered into an amended and restated Sales Agreement together with Baird and Goldman Sachs & Co. LLC (“GS”) for the purpose of adding GS as an additional sales agent thereunder and making necessary conforming changes. On November 3, 2023, the Company entered into a second amended and restated Sales Agreement (the “SA&R Sales Agreement”) with Baird for the purpose of removing GS as a sales agent under the ATM Program and making necessary conforming changes. The SA&R Sales Agreement otherwise retains all material terms of the Original Sales Agreement.

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The foregoing description of the SA&R Sales Agreement is only a summary and is qualified in its entirety by reference to the full text of the SA&R Sales Agreement, which is filed as Exhibit 10.1 to this Quarterly Report on Form

10-Q

and incorporated by reference in this Item 5.

ITEM 6. EXHIBITS


10.1 #		Second Amended and Restated Sales Agreement dated November 3, 2023, by and between Watsco, Inc. and Robert W. Baird & Co. Incorporated.

31.1 #		Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a- 15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 #		Certification of Executive Vice President pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.3 #		Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a- 15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 +		Certification of Chief Executive Officer, Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS #		Inline 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.

104		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL.

#	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: November 3, 2023	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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