10-Q 1 d275076d10q.htm 10-Q 10-Q
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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 March 31, 2022
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:
(305714-4100
 
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 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 May 2, 2022 comprised (i) 33,165,164
 
shares of Common stock, $0.50 par value per share, excluding 4,823,988 treasury shares and (ii) 5,797,590
 
shares of Class B common stock, $0.50 par value per share, excluding 48,263 treasury shares.
 
 
 

WATSCO, INC. AND SUBSIDIARIES
 
 
QUARTERLY REPORT ON FORM
10-Q
TABLE OF CONTENTS
 
 
  
Page No.
 
  
Item 1.
 
  
 
  
 
3
 
 
  
 
4
 
 
  
 
5
 
 
  
 
6
 
 
  
 
8
 
 
  
 
9
 
Item 2.
 
  
 
15
 
Item 3.
 
  
 
22
 
Item 4.
 
  
 
22
 
  
Item 1.
 
  
 
22
 
Item 1A.
 
  
 
22
 
Item 2.
 
  
 
22
 
Item 6.
 
  
 
23
 
  
 
24
 
EXHIBITS
  
 
2 of 24

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)
 
 
  
Quarters Ended March 31,
 
 
  
2022
 
  
2021
 
Revenues
  
$
1,523,570
 
   $ 1,136,118  
Cost of sales
  
 
1,073,212
 
     841,297  
  
 
 
 
  
 
 
 
Gross profit
  
 
450,358
 
     294,821  
Selling, general and administrative expenses
  
 
283,354
 
     217,612  
Other income
  
 
4,045
 
     4,671  
  
 
 
 
  
 
 
 
Operating income
  
 
171,049
 
     81,880  
Interest expense, net
  
 
558
 
     88  
  
 
 
 
  
 
 
 
Income before income taxes
  
 
170,491
 
     81,792  
Income taxes
  
 
35,601
 
     15,665  
  
 
 
 
  
 
 
 
Net income
  
 
134,890
 
     66,127  
Less: net income attributable to
non-controlling
interest
  
 
21,592
 
     11,035  
  
 
 
 
  
 
 
 
Net income attributable to Watsco, Inc.
  
$
113,298
 
   $ 55,092  
  
 
 
 
  
 
 
 
Earnings per share for Common and Class B common stock:
                 
Basic 
  
$
2.91
 
   $ 1.39  
  
 
 
 
  
 
 
 
Diluted
 
$
 
2.90
 
 
$
1.39
 
  
 
 
 
  
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
3 of 24

WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 
     Quarters Ended March 31,  
     2022      2021  
Net income
  
$
134,890
 
   $ 66,127  
Other comprehensive income, net of tax
                 
Foreign currency translation adjustment
  
 
4,381
 
     3,457  
Unrealized gain on cash flow hedging instruments arising during the period
  
 
 
     76  
Reclassification of loss on cash flow hedging instruments into earnings
  
 
 
     243  
    
 
 
    
 
 
 
Other comprehensive income 
  
 
4,381
       3,776  
     
Comprehensive income
  
 
139,271
 
     69,903  
Less: comprehensive income attributable to
non-controlling
interest
  
 
23,038
 
     12,337  
    
 
 
    
 
 
 
Comprehensive income attributable to Watsco, Inc.
  
$
116,233
 
   $ 57,566  
    
 
 
    
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
4 of 24

WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 
     March 31,
2022
    December 31,
2021
 
     (Unaudited)        
ASSETS
                
Current assets:
                
Cash and cash equivalents
  
$
110,607
 
  $ 118,268  
Accounts receivable, net
  
 
790,013
 
    698,456  
Inventories, net
  
 
1,390,298
 
    1,115,469  
Other current assets
  
 
29,210
 
    29,207  
    
 
 
   
 
 
 
Total current assets
  
 
2,320,128
 
    1,961,400  
 
 
 
 
 
 
 
 
 
Property and equipment, net
  
 
115,385
 
    111,019  
Operating lease
right-of-use
assets
  
 
288,660
 
    268,528  
Goodwill
  
 
434,139
 
    434,019  
Intangible assets, net
  
 
187,995
 
    186,896  
Investment in unconsolidated entity
  
 
118,853
 
    114,808  
Other assets
  
 
8,729
 
    9,191  
    
 
 
   
 
 
 
    
$
3,473,889
 
  $ 3,085,861  
  
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
  
 
Current liabilities:
  
 
Current portion of long-term obligations
  
$
86,812
 
  $ 84,501  
Accounts payable
  
 
462,569
 
    364,185  
Accrued expenses and other current liabilities
  
 
287,458
 
    278,036  
    
 
 
   
 
 
 
Total current liabilities
  
 
836,839
 
    726,722  
  
 
 
 
 
 
 
 
Long-term obligations:
  
 
Borrowings under revolving credit agreement
  
 
262,500
 
    89,000  
Operating lease liabilities, net of current portion
  
 
205,163
 
    187,024  
Finance lease liabilities, net of current portion
  
 
10,633
 
    9,189  
    
 
 
   
 
 
 
Total long-term obligations
  
 
478,296
 
    285,213  
    
 
 
   
 
 
 
Deferred income taxes and other liabilities
  
 
78,039
 
    76,511  
  
 
 
 
 
 
 
 
Commitments and contingencies
           
     
Watsco, Inc. shareholders’ equity:
                
Common stock, $0.50 par value
  
 
18,987
 
    18,941  
Class B common stock, $0.50 par value
  
 
2,925
 
    2,895  
Preferred stock, $0.50 par value
  
 
  
 
        
Paid-in
capital
  
 
1,023,680
 
    1,003,932  
Accumulated other comprehensive loss, net of tax
  
 
(31,241
)     (34,176
Retained earnings
  
 
798,299
 
    760,796  
Treasury stock, at cost
  
 
(87,440
)     (87,440
  
 
 
 
 
 
 
 
Total Watsco, Inc. shareholders’ equity
  
 
1,725,210
 
    1,664,948  
Non-controlling
interest
  
 
355,505
 
    332,467  
  
 
 
 
 
 
 
 
Total shareholders’ equity
  
 
2,080,715
 
    1,997,415  
    
 
 
   
 
 
 
    
$
3,473,889
 
  $ 3,085,861  
    
 
 
   
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
5 of 24

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, 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
non-vested
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
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
 
 
Continued on next page.
 
6 of 24

(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, 2020
  
 
38,521,694
 
 
$
21,697
 
 
$
950,915
 
 
$
(34,867
 
$
636,373
 
 
$
(87,440
 
$
293,083
 
  
$
1,779,761
 
Net income
                                     55,092               11,035        66,127  
Other comprehensive income
                             2,474                       1,302        3,776  
Issuances of
non-vested
restricted
shares of common stock
     121,934       61       (61                                      —    
Forfeitures of
non-vested
restricted
shares of common stock
     (43,000     (21     21                                        —    
Common stock contribution to 401(k)
plan
     22,752       11       5,143                                        5,154  
Stock issuances from exercise of stock
options and employee stock
purchase plan
     24,735       12       3,862                                        3,874  
Share-based compensation
                     6,656                                        6,656  
Cash dividends declared and paid on
Common and Class B common
stock, $1.775 per share
                                     (68,521                      (68,521
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
 
Balance at March 31, 2021
  
 
38,648,115
 
 
$
21,760
 
 
$
966,536
 
 
$
(32,393
 
$
622,944
 
 
$
(87,440
 
$
305,420
 
  
$
1,796,827
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
 
See accompanying notes to condensed consolidated un
a
udited financial statements.
 
7 of 24

WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
  
Quarters Ended March 31,
 
 
  
2022
 
 
2021
 
Cash flows from operating activities:
  
 
Net income
  
$
134,890
 
  $ 66,127  
Adjustments to reconcile net income to net cash used in operating activities:
                
Depreciation and amortization
  
 
7,593
 
    6,898  
Share-based compensation
  
 
7,974
 
    5,892  
Non-cash
contribution to 401(k) plan
  
 
6,737
 
    5,154  
Provision for doubtful accounts
  
 
1,061
 
    393  
Other income from investment in unconsolidated entity
  
 
(4,045
)     (4,671
Other, net
  
 
1,417
 
    1,042  
Changes in operating assets and liabilities, net of effects of acquisition:
                
Accounts receivable, net
  
 
(91,775
)     (61,072
Inventori
e
s, net
  
 
(273,703
)     (204,593
Accounts payable and other liabilities
  
 
107,755
 
    149,914  
Other, net
  
 
474
 
    (2,829
    
 
 
   
 
 
 
Net cash used in operating activities
  
 
(101,622
)     (37,745
  
 
 
 
 
 
 
 
Cash flows from investing activities:
  
 
Capital expenditures
 
 
 
 (8,324
)
 
 
(4,822
)
Business acquisition
 
 
(47
)
 
 
 
Proceeds from sale of equity securities
  
 
 
    5,993  
Proceeds from sale of property and equipment
  
 
153
 
    50  
    
 
 
   
 
 
 
Net cash (used in) provided by investing activities
  
 
(8,218
)     1,221  
    
 
 
   
 
 
 
Cash flows from financing activities:
  
 
Dividends on Common and Class B common stock
  
 
(75,795
)     (68,521
Net repayments of finance lease liabilities
  
 
(713
)     (503
Net proceeds from issuances of common stock
  
 
4,420
 
    3,874  
Net proceeds under revolving credit agreement
  
 
173,500
 
    48,900  
    
 
 
   
 
 
 
Net cash provided by (used in) financing activities
  
 
101,412
 
    (16,250
    
 
 
   
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
  
 
767
 
    582  
    
 
 
   
 
 
 
Net decrease in cash and cash equivalents
  
 
(7,661
)
 
    (52,192
Cash and cash equivalents at beginning of period
  
 
118,268
 
    146,067  
    
 
 
   
 
 
 
Cash and cash equivalents at end of period
  
$
110,607
 
  $ 93,875  
    
 
 
   
 
 
 
See accompanying notes to condensed consolidated unaudited financial statements.
 
8 of 24

WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
March 31, 2022
(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 March 31, 2022 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 2021 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, the accounts of Carrier InterAmerica Corporation, of 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 ended March 31, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022. 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.
Impact of
COVID-19
Pandemic
Since
COVID-19
was declared a pandemic in March 2020, it has impacted our operations and the operations of our customers and suppliers. Although we learned to navigate
COVID-19
while maintaining our operations in all material respects, the pandemic continued to impact our business and operating results throughout 2020 and into 2021. However, as economic activity has been recovering and the effects of the pandemic have continued to lessen, the impact of the pandemic on our business has been more reflective of greater economic and marketplace dynamics, which include supply chain disruptions and labor shortages, rather than pandemic-related issues such as quarantines, location closures, mandated restrictions, employee illnesses, and travel restrictions. The extent to which the
COVID-19
pandemic impacts our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, potential subsequent waves of
COVID-19
infection or potential new variants, the effectiveness and adoption of
COVID-19
vaccines and therapeutics, the ultimate duration and scope of the pandemic, its impact on our employees, customers and suppliers, the broader implications of the macro-economic recovery on our business, and the extent to which normal economic and operating conditions are impacted. Therefore, we cannot reasonably estimate the future impact of the
COVID-19
pandemic at this time.
 
9 of 24

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:
 
Quarters Ended March 31,
  
2022
   
2021
 
Primary Geographical Regions:
                
United States
  
$
1,371,340
 
  $ 1,011,266  
Canada
  
 
89,423
 
    74,492  
Latin America and the Caribbean
  
 
62,807
 
    50,360  
    
 
 
   
 
 
 
    
$
1,523,570
 
  $ 1,136,118  
    
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
Major Product Lines:
                
HVAC equipment
  
 
67
    67
Other HVAC products
  
 
29
    29
Commercial refrigeration products
  
 
4
    4
    
 
 
   
 
 
 
    
 
100
    100
    
 
 
   
 
 
 
 
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:
 
Quarters Ended March 31,
  
2022
 
  
2021
 
Basic Earnings per Share:
  
  
Net income attributable to Watsco, Inc. shareholders
  
$
113,298
 
   $ 55,092  
Less: distributed and undistributed earnings allocated to
non-vested
restricted common stock
  
 
10,311
 
     6,054  
    
 
 
    
 
 
 
Earnings allocated to Watsco, Inc. shareholders
  
$
102,987
 
   $ 49,038  
    
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – Basic
  
 
35,348,977
 
     35,179,521  
     
Basic earnings per share for Common and Class B common stock
  
$
2.91
 
   $ 1.39  
     
Allocation of earnings for Basic:
                 
Common stock
  
$
95,521
 
   $ 45,452  
Class B common stock
  
 
7,466
 
     3,586  
    
 
 
    
 
 
 
    
$
102,987
 
   $ 49,038  
    
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
Diluted Earnings per Share:
                 
Net income attributable to Watsco, Inc. shareholders
  
$
113,298
 
   $ 55,092  
Less: distributed and undistributed earnings allocated to
non-vested
restricted common stock
  
 
10,297
 
     6,054  
    
 
 
    
 
 
 
Earnings allocated to Watsco, Inc. shareholders
  
$
103,001
 
   $ 49,038  
    
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – Basic
  
 
35,348,977
 
     35,179,521  
Effect of dilutive stock options
  
 
155,403
 
     150,312  
    
 
 
    
 
 
 
Weighted-average common shares outstanding – Diluted
  
 
35,504,380
 
     35,329,833  
    
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share for Common and Class B common stock
  
$
2.90
 
   $ 1.39  
     
Anti-dilutive stock options not included above
  
 
143,372
 
     5,911  
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 March 31, 2022 and 2021, our outstanding Class B common stock was convertible into 2,562,448 and 2,572,536 shares of our Common stock, respectively.
 
10 of 24

4.
OTHER COMPREHENSIVE INCOME 
Other comprehensive income 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 gains on cash flow hedging instruments. The tax effects allocated to each component of other comprehensive income were as follows:
 
Quarters Ended March 31,
  
2022
    
2021
 
Foreign currency translation adjustment
  
$
4,381
     $ 3,457  
 
 
 
 
 
 
 
 
 
Unrealized gain on cash flow hedging instruments
  
 
       103  
Income tax expense
  
 
 
     (27
    
 
 
    
 
 
 
Unrealized gain on cash flow hedging instruments, net of tax
  
 
       76  
    
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
Reclassification of loss on cash flow hedging instruments into earnings
  
 
 
     333  
Income tax benefit
  
 
 
     (90
    
 
 
    
 
 
 
Reclassification of loss on cash flow hedging instruments into earnings, net of tax
  
 
 
     243  
    
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income 
  
$
4,381
 
   $ 3,776  
    
 
 
    
 
 
 
The changes in each component of accumulated other comprehensive loss, net of tax, were as follows:
 
Quarters Ended March 31,
  
2022
 
  
2021
 
Foreign currency translation adjustment:
  
  
Beginning balance
  
$
(34,176
)    $ (34,694 )
Current period other comprehensive income
  
 
2,935
       2,282  
    
 
 
    
 
 
 
Ending balance
  
 
(31,241
)      (32,412
    
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedging instruments:
                 
Beginning balance
  
 
 
     (173
Current period other comprehensive income
  
 
       46  
Reclassification adjustment
  
 
       146  
    
 
 
    
 
 
 
Ending balance
  
 
       19  
    
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive loss, net of tax
  
$
 (31,241
)
 
   $  (32,393
)
    
 
 
    
 
 
 
 
5.
DERIVATIVES
We enter into foreign currency forward and option contracts int
e
nded 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. At March 31, 2022, no foreign currency forward contracts were designated as cash flow hedges.
 
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The impact from foreign exchange derivative instruments designated as cash flow hedges was as follows:
 
Quarters Ended March 31,
  
2022
    
2021
 
Gain recorded in accumulated other comprehensive loss
    
 
   $ 103  
Loss reclassified from accumulated other comprehensive loss into earnings
    
 
   $ 333  
At March 31, 2022, no
pre-tax
gain (loss)
wa
s expected to be reclassified into earnings related to 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 and losses on these contracts are recognized in earnings as a component of selling, general and administrative expenses. We had only one foreign currency exchange contract not designated as a hedging instrument at March 31, 2022, the total notional value of which was $6,700, and such contract subsequently expired in April 2022.
We recognized (losses) gains
 of $(323) and $27 from foreign currency forward and option contracts not designated as hedging instruments in our condensed consolidated unaudited statements of income for the quarters ended March 31, 2022 and 2021, respectively.
The following table summarizes the fair value of derivative instruments, which consist solely of foreign exchange contracts, included in accrued expenses and other current liabilities in our condensed consolidated unaudited balance sheets. See Note 6.
 
 
  
Asset Derivatives
 
  
Liability Derivatives
 
 
  
March 31, 2022
 
  
December 31, 2021
 
  
March 31, 2022
 
  
December 31, 2021
 
Derivatives designated as hedging instruments
  
$
  
 
   $        
$
  
 
   $     
Derivatives not designated as hedging instruments
  
 
  
 
            
 
11
 
  
 
5
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total derivative instruments
  
$
  
 
   $        
$
11
 
  
$
5
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
12 of 24

6.
FAIR VALUE MEASUREMENTS
The following tables present our assets and liabilities carried at fair value that are measured on a recurring basis:
 
 
 
  
Balance Sheet Location
  
Total
 
  
Fair Value Measurements
at March 31, 2022 Using
 
  
Level 1
 
  
Level 2
 
  
Level 3
 
Assets:
  
 
  
     
  
     
  
     
  
     
Equity securities
   Other assets   
$
1,035
 
  
$
1,035
 
    
—  
      
—  
 
Private equities
 
Other assets
 
$
 
 
1,000
 
 
 
 
 
 
 
 
 
 
$
1,000
 
Liabilities:
                                        
Derivative financial instruments
   Accrued expenses and other

current liabilities
  
$
11
 
    
—  
    
$

11
 
  
—  
 
       
 
  
Balance Sheet Location
  
Total
 
  
Fair Value Measurements
at December 31, 2021 Using
 
  
Level 1
 
  
Level 2
 
  
Level 3
 
Assets:
  
 
  
     
  
     
  
     
  
     
Equity securities
   Other assets   
$
1,790
 
  
$
1,790
 
  
 
—  
 
  
 
—  
 
Private equities
   Other assets   
$
1,000
 
  
 
—  
 
  
 
—  
 
  
$
1,000
 
Liabilities:
                                        
Derivative financial instruments
   Accrued expenses and other

current liabilities
  
$
5
 
  
 
—  
 
  
$
5
 
  
 
—  
 
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.
Private equities
– other investment in which fair value inputs are unobservable.
Derivative financial instruments
– these derivatives are foreign currency forward and option contracts. See Note 5. 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.
During the quarter ended March 31, 2021, we recognized a realized gain of 
$3,815 recorded in our consolidated statement of income attributable to the sale of certain equity securities.

7.
SHAREHOLDERS’ EQUITY
At-the-Market
Offering Program
On August 6, 2021, we entered into a sales agreement with Robert W. Baird & Co. Inc. (“Baird”), 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 t
o $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).
On February 25, 2022, we entered into an amended and restated sales agreement
, toget
h
er
with Baird and Goldman Sachs & Co. LLC (“GS”), for the purpose of adding GS as an additional sales agent and making necessary conforming changes. The amended and restated sales agreement otherwise retains all material terms of the original sales agreement.
As of March 
31
,
2022
,
no
shares of Common stock had been sold under the ATM Program.
Common Stock Dividends
We paid
cash
dividends of $1.95 and $1.775 per sh
are of both Com
mon st
ock and Class B c
ommon stock during the quarters ended March 31, 2022 and 2021, respectively.

13 of 24

Exercise of Stock Options
Cash received from the exercise of stock options during the quarters ended March 31, 2022 and 2021 was $3,955 and $3,469, respectively.
Employee Stock Purchase Plan
During the quarters ended March 31, 2022 and 2021, we received net proceeds of $465 and $405, respectively, for shares of our Common stock purchased under our employee stock purchase plan.
 
8.
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 $9,285 and $7,253 at March 31, 2022 and December 31, 2021, respectively, were established related to such programs and are included in accrued expenses and other current liabilities in our condensed consolidated unaudited balance sheets.
 
9.
RELATED PARTY TRANSACTIONS
Purchases from Carrier and its affiliates comprised 56% and 61% of all inventory purchases made during the quarters ended March 31, 2022 and 2021, respectively. At March 31, 2022 and December 31, 2021, approximately $149,000 and $90,000, 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 ended March 31, 2022 and 2021 included approximately $21,000 and $23,000, 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 ended March 31, 2022 and 2021, fees to this firm for services performed were $32 and $66, respectively. At March 31, 2022 and December 31, 2021, $23 and $34, respectively, was payable to this firm.
 
14 of 24

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;
 
   
the continued impact 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;
 
   
federal, state, and local regulations impacting our industry and products;
 
   
prevailing interest rates;
 
   
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 the discussion below under Impact of
COVID-19
Pandemic and Item 1A “Risk Factors” of our Annual Report on Form
10-K
for the year ended December 31, 2021, 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, 2021.
 
15 of 24

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 March 31, 2022, we operated from 671 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.
Impact of the
COVID-19
Pandemic
The
COVID-19
pandemic has had widespread, rapidly-evolving and unpredictable impacts on financial markets and business practices. As conditions have continued to improve, governments and organizations have responded by adjusting their restrictions and guidelines accordingly. Although we have learned to navigate
COVID-19
while maintaining our operations in all material respects, our focus remains on promoting employee health and safety, serving our customers and ensuring business continuity.
As economic activity has been recovering and the effects of the pandemic have continued to lessen, the impact of the pandemic on our business has been more reflective of greater economic and marketplace dynamics rather than pandemic-related issues, such as location closures, mandated restrictions and employee illness. Manufacturers have experienced some level of supply chain disruptions caused by component availability, labor shortages, transportation delays, and other logistical challenges, resulting in longer lead times and constrained availability of HVAC/R products. These supply chain disruptions impacted our ability to fulfill contractor demand at various points during the first quarter of 2022. Despite these disruptions, we experienced growth in sales of residential units during the quarter. As of the date of this filing, product availability had improved, and more typical inventory levels are being reestablished to meet the continued strong
end-market
demand. We intend to continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders.
Climate Change and Reductions in CO
2
e Emissions
We believe that our business plays an important and significant role in the drive to lower CO
2
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 footprint.
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 footprint.
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 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. Recently enacted regulations will increase the current minimum SEER beginning in 2023 (in general terms, 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. Our sales of higher-efficiency residential HVAC systems (those above base-level efficiency) grew 31% organically during the first quarter of 2022, outpacing the overall growth rate of 26% for residential HVAC equipment in the United States. Based on estimates validated by independent sources, we averted an estimated 11.4 million metric tons of CO
2
e emissions during the period January 1, 2020 to March 31, 2022 through the sale of replacement residential HVAC systems at higher-efficiency standards.
 
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Joint Ventures with Carrier Global Corporation
In 2009, we formed a joint venture with Carrier, which we refer to as Carrier Enterprise I, in which Carrier contributed company-owned locations in the Sun Belt states and Puerto Rico, and its export division in Miami, Florida, and we contributed certain locations that distributed Carrier products. We have an 80% controlling interest in Carrier Enterprise I, and Carrier has a 20%
non-controlling
interest. The export division, Carrier InterAmerica Corporation, redomesticated from the U.S. Virgin Islands to Delaware effective December 31, 2019, following which Carrier InterAmerica Corporation became a separate operating entity in which we have an 80% controlling interest and Carrier has a 20%
non-controlling
interest. On August 1, 2019, Carrier Enterprise I acquired substantially all of the HVAC assets and assumed certain of the liabilities of Peirce-Phelps, Inc., an HVAC distributor operating in Pennsylvania, New Jersey, and Delaware.
In 2011, we formed a second joint venture with Carrier, which we refer to as Carrier Enterprise II, in which Carrier contributed company-owned locations in the Northeast U.S., and we contributed certain locations operating as Homans Associates LLC (“Homans”), a Watsco subsidiary, in the Northeast U.S. Subsequently, Carrier Enterprise II purchased Carrier’s distribution operations in Mexico. We have an 80% controlling interest in Carrier Enterprise II, and Carrier has a 20%
non-controlling
interest. Effective May 31, 2019, we repurchased the 20% ownership interest in Homans from Carrier Enterprise II, following which we own 100% of Homans. Homans previously operated as a division of Carrier Enterprise II and subsequent to the purchase operates as a wholly owned subsidiary of the Company.
In 2012, we formed a third joint venture with Carrier, which we refer to as Carrier Enterprise III. 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 Carrier has a 40%
non-controlling
interest.
On April 9, 2021, we acquired certain assets and assumed certain liabilities comprising the HVAC distribution business of Temperature Equipment Corporation, an HVAC distributor operating from 32 locations in Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri and Wisconsin. We formed a new, stand-alone joint venture with Carrier, TEC Distribution LLC (“TEC”), that operates this business. We have an 80% controlling interest in TEC, and Carrier has a 20%
non-controlling
interest.
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 2021 Annual Report on Form
10-K,
as filed with the SEC on February 25, 2022. We believe that there have been no significant changes during the quarter ended March 31, 2022 to the critical accounting estimates disclosed in our Annual Report on Form
10-K
for the year ended December 31, 2021.
 
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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 ended March 31, 2022 and 2021:
 
    
2022
   
2021
 
Revenues
  
 
100.0
    100.0
Cost of sales
  
 
70.4
 
    74.1  
  
 
 
   
 
 
 
Gross profit
  
 
29.6
 
    25.9  
Selling, general and administrative expenses
  
 
18.6
 
    19.2  
Other income
  
 
0.3
 
    0.4  
  
 
 
   
 
 
 
Operating income
  
 
11.2
 
    7.2  
Interest expense, net
  
 
0.0
 
    0.0  
  
 
 
   
 
 
 
Income before income taxes
  
 
11.2
 
    7.2  
Income taxes
  
 
2.3
 
    1.4  
  
 
 
   
 
 
 
Net income
  
 
8.9
 
    5.8  
Less: net income attributable to
non-controlling
interest
  
 
1.4
 
    1.0  
  
 
 
   
 
 
 
Net income attributable to Watsco, Inc.
  
 
7.4
    4.8
  
 
 
   
 
 
 
Note: Due to rounding, percentages may not add up to 100.
The following narratives reflect our acquisitions of Makdad Industrial Supply Co., Inc. in August 2021, Acme Refrigeration of Baton Rouge LLC in May 2021, and Temperature Equipment Corporation in April 2021. We did not acquire any businesses during the quarters ended March 31, 2022 or 2021.
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 March 31, 2022 and 2021, six and one 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 March 31, 2022:
 
    
Number of
Locations
 
March 31, 2021
     601  
Opened
     22  
Acquired
     56  
Closed
     (8
  
 
 
 
December 31, 2021
     671  
Opened
     2  
Closed
     (2
  
 
 
 
March 31, 2022
  
 
671
 
  
 
 
 
Revenues
Revenues for the first quarter of 2022 increased $387.5 million, or 34%, as compared to the first quarter of 2021, including $90.9 million attributable to new locations acquired and $9.5 million from other locations opened during the preceding 12 months, offset by $2.0 million from locations closed. Sales of HVAC equipment (67% of sales) increased 32%, sales of other HVAC products (29% of sales) increased 32%, and sales of commercial refrigeration products (4% of sales) increased 35%. On a same-store basis, revenues increased $289.1 million, or 25%, as compared to the same period in 2021, reflecting a 26% increase in sales of HVAC equipment (67% of sales), which included a 26% increase in residential HVAC equipment (26% increase in U.S. markets and a 20% increase in international markets) and a 29% increase sales of commercial HVAC equipment (28% increase in U.S. markets and a 33% increase in international markets), a 24% increase in sales of other HVAC products (29% of sales), and a 35% increase in sales of commercial refrigeration products (4% of sales). For HVAC equipment, the increase in revenues was primarily due to the realization of price increases, strong demand for residential HVAC equipment, and a greater mix of high-efficiency air conditioning and heating systems, which sell at higher unit prices, resulting in an 18% increase in the average selling price and an 8% increase in the unit volume for residential unitary air conditioning equipment.
 
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Gross Profit
Gross profit for the first quarter of 2022 increased $155.5 million, or 53%, as compared to the first quarter of 2021, primarily as a result of increased revenues. Gross profit margin for the quarter ended March 31, 2022 improved 370 basis-points to 29.6% versus 25.9%, primarily due to the benefits of our use of technologies designed to optimize pricing and margins, passing on price increases from our suppliers to our customers and an improved sales mix of higher-efficiency HVAC systems.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first quarter of 2022 increased $65.7 million, or 30%, as compared to the first quarter of 2021, primarily due to increased revenues from existing and newly acquired locations. Selling, general and administrative expenses as a percent of revenues for the quarter ended March 31, 2022 decreased to 18.6% versus 19.2% for the same period in 2021. On a same-store basis, selling, general and administrative expenses increased 19% as compared to the first quarter of 2021 and as a percentage of sales decreased to 18.2% versus 19.2% as compared to the same period in 2021 primarily due to increased leverage on fixed costs driven by increased revenues.
Other Income
Other income of $4.0 million and $4.7 million for the first quarters of 2022 and 2021, respectively, represented 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 first quarter of 2022 increased $0.5 million, or 534%, primarily as a result of an increase in average outstanding borrowings under our revolving credit facility as compared to the same period in 2021.
Income Taxes
Income taxes increased to $35.6 million for the first quarter of 2022, as compared to $15.7 million for the first quarter of 2021, 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 from these joint ventures. The effective income tax rates attributable to us were 23.8% and 22.0% for the quarters ended March 31, 2022 and 2021, respectively. The increase was primarily due to higher state income taxes, proportionately higher income, and lower share-based deductions in 2022 as compared to the same period in 2021.
Net Income Attributable to Watsco, Inc.
Net income attributable to Watsco for the quarter ended March 31, 2022 increased $58.2 million, or 106%, compared to the same period in 2021. The increase was primarily driven by higher revenues and expanded profit margins, partially offset by higher income taxes and an increase in the net income attributable to the
non-controlling
interest.
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 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.
 
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As of March 31, 2022, we had $110.6 million of cash and cash equivalents, of which $99.0 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
at-the-market
offering program, 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 LIBOR, which is one of the base rates under our revolving credit agreement. On March 5, 2021, the United Kingdom Financial Conduct Authority, which regulates LIBOR, confirmed that LIBOR will either cease to be provided by any administrator or will no longer be representative after June 30, 2023 for USD LIBOR reference rates. Our revolving credit agreement provides that it may be amended to replace LIBOR with an alternate benchmark rate. The impact of such an amendment cannot be entirely predicted but could result in an increase in the cost of our debt. Additionally, disruptions in the credit and capital markets could also result in increased borrowing costs and/or reduced borrowing capacity under our revolving credit agreement.
Working Capital
Working capital increased to $1,483.3 million at March 31, 2022 from $1,234.7 million at December 31, 2021, primarily due to higher accounts receivable consistent with overall increased sales, the seasonality of our business, and higher levels of inventory in support of stronger business conditions.
Cash Flows
The following table summarizes our cash flow activity for the quarters ended March 31, 2022 and 2021 (in millions):
 
    
2022
     2021      Change  
Cash flows used in operating activities
  
$
(101.6
   $ (37.7    $ (63.9
Cash flows (used in) provided by investing activities
  
$
(8.2
   $ 1.2      $ (9.4
Cash flows provided by (used in) financing activities
  
$
101.4
 
   $ (16.3    $ 117.7  
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 used in operating activities was primarily due to increases in the level of inventory and accounts receivable, partially offset by an increase in net income due to strong business conditions in 2022.
Investing Activities
The increase in net cash used in investing activities was primarily due to higher capital expenditures in 2022 and proceeds from the sale of equity securities in 2021.
Financing Activities
Net cash provided by financing activities increased primarily due to higher borrowings partially offset by an increase in dividends paid in 2022.
Revolving Credit Agreement
We maintain an unsecured, $560.0 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 $460.0 million at our discretion (which effectively reduces fees payable in respect of the unused portion of the commitment), and we effected this reduction in 2021. 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.
 
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At March 31, 2022 and December 31, 2021, $262.5 million and $89.0 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 March 31, 2022.
At-the-Market
Offering Program
On August 6, 2021, we entered into a sales agreement with Robert W. Baird & Co. Inc. (“Baird”), 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).
On February 25, 2022, we 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 and making necessary conforming changes. The amended and restated sales agreement otherwise retains all material terms of the original sales agreement.
As of March 31, 2022, no shares of Common stock had been sold under the ATM Program.
Contractual Obligations
On October 15, 2022, 975,622 shares of Class B restricted stock held by our Chief Executive Officer (“CEO”) will vest. The CEO may elect to satisfy the tax withholding obligations in connection with the vesting of the restricted stock either by the Company’s withholding of shares otherwise deliverable to the CEO, or in cash, or any combination of the two. If the CEO elects to satisfy his tax withholding obligation through the Company’s withholding of shares, then we will satisfy the withholding tax obligations in cash. Based on the closing price of Watsco’s Class B common stock and withholding tax rates in effect at March 31, 2022, the estimated withholding tax obligation would have been approximately $119.0 million had the shares vested on March 31, 2022. We intend to satisfy any such withholding obligations using cash on hand or borrowing availability under our revolving credit agreement described above.
Investment in Unconsolidated Entity
Carrier Enterprise I has a 38.1% ownership interest in RSI, an HVAC distributor operating from 35 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. 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 March 31, 2022, the estimated purchase amount we would be contingently liable for was approximately $291.0 million. We believe that our operating cash flows, cash on hand, and funds available for borrowing under our revolving credit agreement would be sufficient to purchase any additional ownership interests in RSI.
Acquisitions
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 $1.95 and $1.775 per share of Common stock and Class B common stock during the quarters ended March 31, 2022 and 2021, respectively. On April 1, 2022, our Board of Directors declared a regular quarterly cash dividend of $2.20 per share of both Common stock and Class B common stock that was paid on April 29, 2022 to shareholders of record as of April 14, 2022. 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.
 
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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 March 31, 2022, 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, 2021.
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.
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 March 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information with respect to this item may be found in Note 8 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 March 31, 2022 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, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
On March 14, 2022, we issued 21,532 shares of our Common stock to our Profit Sharing Retirement Plan & Trust (the “Plan”) representing the employer match under the Plan for the plan year ended December 31, 2021, without registration. This issuance was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 3(a)(2) thereof. The Plan is a profit sharing retirement plan that is qualified under Section 401 of the Internal Revenue Code of 1986, as amended. The assets of the Plan are held in a single trust fund for the benefit of our employees, and the Plan does not hold assets for the benefit of the employees of any other employer. All of the contributions to the Plan from our employees have been invested in assets other than our Common stock. We have contributed all of the Common stock held by the Plan as a discretionary matching contribution, which, at the time of contribution, was lower in value than the employee contributions that the contribution matched.
 
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ITEM 6. EXHIBITS
INDEX TO EXHIBITS
 
  10.1*    Twenty-third Amendment dated January 1, 2022 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1(x) to our Annual Report on Form 10-K for the year ended December 31, 2021 and incorporated herein by reference).
  10.2    Amended and Restated Sales Agreement dated February 25, 2022, by and between Watsco, Inc., Robert W. Baird & Co. Incorporated, and Goldman Sachs & Co. LLC (filed as Exhibit 10.5(b) to our Annual Report on Form 10-K for the year ended December 31, 2021 and incorporated herein by reference).
  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 March 31, 2022, formatted in Inline XBRL.
 
#
filed herewith.
+
furnished herewith.
*
Management contract or compensation plan or arrangement.
 
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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: May 5, 2022     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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