Watsco Earnings 2020-03-31
| Balance Sheet | Income Statement | Cash Flow |
|---|---|---|
|
Assets, Equity
|
Rev, G Profit, Net Income
|
Ops, Inv, Fin
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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, 2020
or
Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Transition Period From
to
Commission file number
1-5581
I.R.S. Employer Identification Number
59-0778222
(a Florida Corporation)
Telephone: (305 )
714-4100
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading | Name of each 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
Yes
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). ☒
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.| | ☒ | 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 4, 2020 comprised (i) 32,758,823 shares of Common stock, $0.50 par value per share, excluding 4,823,988 treasury shares and (ii) 5,599,436 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. | 21 | |||||
| Item 4. | 21 | |||||
| Item 1. | 22 | |||||
| Item 1A. | 22 | |||||
| Item 2. | 22 | |||||
| Item 6. | 23 | |||||
| 24 | ||||||
| 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)
Quarters Ended March 31, | ||||||||
2020 | 2019 | |||||||
Revenues | $ | $ | ||||||
Cost of sales | ||||||||
Gross profit | ||||||||
Selling, general and administrative expenses | ||||||||
Other income | ||||||||
Operating income | ||||||||
Interest expense, net | ||||||||
Income before income taxes | ||||||||
Income taxes | ||||||||
Net income | ||||||||
Less: net income attributable to non-controlling interest | ||||||||
Net income attributable to Watsco, Inc. | $ | $ | ||||||
Earnings per share for Common and Class B common stock: | ||||||||
Basic and Diluted | $ | $ | ||||||
See accompanying notes to condensed consolidated unaudited financial statements.
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4 WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| Quarters Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Net income | $ | | $ | | ||||
| Other comprehensive (loss) income, net of tax | ||||||||
| Foreign currency translation adjustment | ( | ) | | |||||
| Unrealized gain (loss) on cash flow hedging instruments arising during the period | | ( | ) | |||||
| Reclassification of loss (gain) on cash flow hedging instruments into earnings | | ( | ) | |||||
| Other comprehensive (loss) income | ( | ) | | |||||
| Comprehensive income | | | ||||||
| Less: comprehensive (loss) income attributable to non-controlling interest | ( | ) | | |||||
| Comprehensive income attributable to Watsco, Inc. | $ | | $ | | ||||
See accompanying notes to condensed consolidated unaudited financial statements.
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4 WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
March 31, 2020 | December 31, 2019 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Accounts receivable, net | ||||||||
Inventories | ||||||||
Other current assets | ||||||||
Total current assets | ||||||||
Property and equipment, net | ||||||||
Operating lease right-of-use assets | ||||||||
Goodwill | ||||||||
Intangible assets, net | ||||||||
Investment in unconsolidated entity | ||||||||
Other assets | ||||||||
$ | $ | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of lease liabilities | $ | $ | ||||||
Accounts payable | ||||||||
Accrued expenses and other current liabilities | ||||||||
Total current liabilities | ||||||||
Long-term obligations: | ||||||||
Borrowings under revolving credit agreement | ||||||||
Operating lease liabilities, net of current portion | ||||||||
Finance lease liabilities, net of current portion | ||||||||
Total long-term obligations | ||||||||
Deferred income taxes and other liabilities | ||||||||
Commitments and contingencies | ||||||||
Watsco, Inc. shareholders’ equity: | ||||||||
Common stock, $ | ||||||||
Class B common stock, $ | ||||||||
Preferred stock, $ | ||||||||
Paid-in capital | ||||||||
Accumulated other comprehensive loss, net of tax | ( | ) | ( | ) | ||||
Retained earnings | ||||||||
Treasury stock, at cost | ( | ) | ( | ) | ||||
Total Watsco, Inc. shareholders’ equity | ||||||||
Non-controlling interest | ||||||||
Total shareholders’ equity | ||||||||
$ | $ | |||||||
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 | 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, 2019 | | $ | | $ | | $ | ( | ) | $ | | $ | ( | ) | $ | | $ | | |||||||||||||||
| Net income | | | | | | | | | ||||||||||||||||||||||||
| Other comprehensive ( loss ) | | | | ( | ) | | | ( | ) | ( | ) | |||||||||||||||||||||
| Issuances of non-vested restricted shares of common stock | | | ( | ) | | | | | — | |||||||||||||||||||||||
| Common stock contribution to 401(k) plan | | | | | | | | | ||||||||||||||||||||||||
| Stock issuances from exercise of stock options and employee stock purchase plan | | | | | | | | | ||||||||||||||||||||||||
| Retirement of common stock | ( | ) | ( | ) | ( | ) | | | | | ( | ) | ||||||||||||||||||||
| Share-based compensation | | | | | | | | | ||||||||||||||||||||||||
| Cash dividends declared and paid on Common and Class B common stock, $ | | | | | ( | ) | | | ( | ) | ||||||||||||||||||||||
| Balance at March 31, 2020 | | $ | | $ | | $ | ( | ) | $ | | $ | ( | ) | $ | | $ | | |||||||||||||||
Continued on next page.
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| (In thousands, except | Common Stock, Class B Common Stock and Preferred Stock Shares | Common Stock, Class B Common Stock and Preferred Stock Amount | Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Treasury Stock | Non-controlling Interest | Total | ||||||||||||||||||||||||
| Balance at December 31, 2018 | | $ | | $ | | $ | ( | ) | $ | | $ | ( | ) | $ | | $ | | |||||||||||||||
| Net income | | | | |||||||||||||||||||||||||||||
| Other comprehensive income | | | | |||||||||||||||||||||||||||||
| Issuances of non-vested restricted shares of common stock | | | ( | ) | — | |||||||||||||||||||||||||||
| Forfeitures of non-vested restricted shares of common stock | ( | ) | ( | ) | | — | ||||||||||||||||||||||||||
| Common stock contribution to 401(k) plan | | | | | ||||||||||||||||||||||||||||
| Stock issuances from exercise of stock options and employee stock purchase plan | | | | | ||||||||||||||||||||||||||||
| Retirement of common stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Share-based compensation | | | ||||||||||||||||||||||||||||||
| Cash dividends declared and paid on Common and Class B common stock, $ | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance at March 31, 2019 | | $ | | $ | | $ | ( | ) | $ | | $ | ( | ) | $ | | $ | | |||||||||||||||
See accompanying notes to consolidated financial statements.
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WATSCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(In thousands)
Quarters Ended March 31, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | $ | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | ||||||||
Share-based compensation | ||||||||
Non-cash contribution to 401(k) plan | ||||||||
Provision for doubtful accounts | ||||||||
Other income from investment in unconsolidated entity | ( | ) | ( | ) | ||||
Other, net | ( | ) | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | ( | ) | ( | ) | ||||
Inventories | ( | ) | ( | ) | ||||
Accounts payable and other liabilities | ||||||||
Other, net | ( | ) | ( | ) | ||||
Net cash provided by operating activities | ||||||||
Cash flows from investing activities: | ||||||||
Capital expenditures | ( | ) | ( | ) | ||||
Proceeds from sale of property and equipment | ||||||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
Cash flows from financing activities: | ||||||||
Dividends on Common and Class B common stock | ( | ) | ( | ) | ||||
Repurchases of common stock to satisfy employee withholding tax obligations | ( | ) | ( | ) | ||||
Net repayments of long-term obligations | ( | ) | ( | ) | ||||
Proceeds from short-term borrowings | — | |||||||
Net proceeds under revolving credit agreement | ||||||||
Net proceeds from issuances of common stock | ||||||||
Net cash used in financing activities | ( | ) | ( | ) | ||||
Effect of foreign exchange rate changes on cash and cash equivalents | ( | ) | ||||||
Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
Cash and cash equivalents at beginning of period | ||||||||
Cash and cash equivalents at end of period | $ | $ | ||||||
See accompanying notes to condensed consolidated unaudited financial statements.
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WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
March 31, 2020
(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, 2020 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 2019 Annual Report on Form
10-K.
The condensed consolidated unaudited financial statements contained in this report include the accounts of Watsco, all of its wholly owned subsidiaries and the accounts of three joint ventures with Carrier Global Corporation (“Carrier”), in each of which Watsco maintains a controlling interest. All significant intercompany balances and transactions have been eliminated in consolidation.
The results of operations for the quarter ended March 31, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020. 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 fourth quarter. 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. 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, valuation reserve
s
for 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 A novel strain of coronavirus,
COVID-19,
surfaced in December 2019 and has spread around the world, including to the United States In March 2020, the World Health Organization declared
COVID-19
a pandemic. The
COVID-19
pandemic has resulted, and is likely to continue to result, in significant economic disruption and has and will likely adversely affect our business and results of operations. Although these disruptions are expected to be temporary, significant uncertainty exists concerning the magnitude of the impact and duration of the
COVID-19
pandemic. As we cannot predict the duration or scope of the
COVID-19
pandemic, the anticipated negative financial impact to our results of operations cannot be reasonably estimated but could be material and last for an extended period of time. Recently Adopted Accounting Standards
Financial Instruments—Credit Losses
In June 2016, the
Financial Accounting Standards Board (“FASB”) issued guidance that modifies the impairment model to utilize an expected loss methodology in place of the incurred loss methodology for financial instruments, including trade receivables, contract assets, long-term receivables and
off-balance
sheet credit exposures. Under the new standard, an entity will be required to consider a broader range of information to estimate expected credit losses, including historical information, current conditions and a reasonable forecast period, which may result in earlier recognition of certain losses. This guidance is effective for interim and annual periods beginning after December 15, 2019 using a modified retrospective approach. The adoption of this guidance did not have a material impact on our consolidated financial statements. 9
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Intangibles—Goodwill and Other
In January 2017, the FASB issued guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this updated standard, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity also should consider income tax effects from any
tax-deductible
goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if any. This guidance is effective prospectively and is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted. The adoption of this guidance did not have a material impact on our consolidated financial statements. 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, | 2020 | 2019 | ||||||
| Primary Geographical Regions: | ||||||||
| United States | $ | | $ | | ||||
| Canada | | | ||||||
| Latin America and the Caribbean | | | ||||||
$ | | $ | | |||||
| Major Product Lines: | ||||||||
| HVAC equipment | | % | | % | ||||
| Other HVAC products | | % | | % | ||||
| Commercial refrigeration products | | % | | % | ||||
| | % | | % | |||||
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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:
| Quarters Ended March 31, | 2020 | 2019 | ||||||
| Basic Earnings per Share: | ||||||||
| Net income attributable to Watsco, Inc. shareholders | $ | | $ | | ||||
| Less: distributed and undistributed earnings allocated to non-vested restricted common stock | | | ||||||
| Earnings allocated to Watsco, Inc. shareholders | $ | | $ | | ||||
| | | | | | | | | |
| Weighted-average common shares outstanding – Basic | | | ||||||
| | | | | | | | | |
| Basic earnings per share for Common and Class B common stock | $ | | $ | | ||||
| Allocation of earnings for Basic: | ||||||||
| Common stock | $ | | $ | | ||||
| Class B common stock | | | ||||||
$ | | $ | | |||||
| Diluted Earnings per Share: | ||||||||
| Net income attributable to Watsco, Inc. shareholders | $ | | $ | | ||||
| Less: distributed and undistributed earnings allocated to non-vested restricted common stock | | | ||||||
| Earnings allocated to Watsco, Inc. shareholders | $ | | $ | | ||||
| | | | | | | | | |
| Weighted-average common shares outstanding – Basic | | | ||||||
| Effect of dilutive stock options | | | ||||||
| Weighted-average common shares outstanding – Diluted | | | ||||||
| | | | | | | | | |
| Diluted earnings per share for Common and Class B common stock | $ | | $ | | ||||
| | | | | | | | | |
| Anti-dilutive stock options not included above | | | ||||||
Diluted earnings per share for our Common stock assumes the conversion of all
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, 2020 and 2019, our outstanding Class B common stock was convertible into 2,575,740 and 2,577,875 shares of our Common stock, respectively.
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4. | OTHER COMPREHENSIVE (LOSS) INCOME |
Other comprehensive (loss) 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 (losses) on cash flow hedging instruments. The tax effects allocated to each component of other comprehensive (loss) income were as follows:
| Quarters Ended March 31, | 2020 | 2019 | ||||||
| Foreign currency translation adjustment | $ | ( | ) | $ | | |||
| | | | | | | | | |
| Unrealized gain (loss) on cash flow hedging instruments | | ( | ) | |||||
| Income tax (expense) benefit | ( | ) | | |||||
| Unrealized gain (loss) on cash flow hedging instruments, net of tax | | ( | ) | |||||
| | | | | | | | | |
| Reclassification of loss (gain) on cash flow hedging instruments into earnings | | ( | ) | |||||
| Income tax (benefit) expense | ( | ) | | |||||
| Reclassification of loss (gain) on cash flow hedging instruments into earnings, net of tax | | ( | ) | |||||
| | | | | | | | | |
| Other comprehensive (loss) income | $ | ( | ) | $ | | |||
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The changes in each component of accumulated other comprehensive loss, net of tax, were as follows:
| Quarters Ended March 31, | 2020 | 2019 | ||||||
| Foreign currency translation adjustment: | ||||||||
| Beginning balance | $ | ( | ) | $ | ( | ) | ||
| Current period other comprehensive (loss) income | ( | ) | | |||||
| Ending balance | ( | ) | ( | ) | ||||
| Cash flow hedging instruments: | ||||||||
| Beginning balance | ( | ) | | |||||
| Current period other comprehensive income (loss) | | ( | ) | |||||
| Reclassification adjustment | | ( | ) | |||||
| Ending balance | | | ||||||
| Accumulated other comprehensive loss, net of tax | $ | ( | ) | $ | ( | ) | ||
5 . | DERIVATIVES |
We enter into foreign currency forward and option contracts to offset the earnings impact that foreign exchange rate fluctuations would otherwise have on certain monetary liabilities that are denominated in nonfunctional currencies.
Cash Flow Hedging Instruments
We enter into foreign currency forward contracts that are designated as cash flow hedges. The settlement of these derivatives results in reclassifications from accumulated other comprehensive loss to earnings for the period in which the settlement of these instruments occurs. The maximum period for which we hedge our cash flow using these instruments is 12 months. Accordingly, at March 31, 2020, all
one year or less . The total notional value of our foreign currency exchange contracts designated as cash flow hedges at March 31, 2020 was $48,200 , and such contracts have varying terms expiring through December 2020 .
of
our open foreign currency forward contracts had maturities of The impact from foreign exchange derivative instruments designated as cash flow hedges was as follows:
| Quarters Ended March 31, | 2020 | 2019 | ||||||
| Gain (loss) recorded in accumulated other comprehensive loss | $ | | $ | ( | ) | |||
| Loss (gain) reclassified from accumulated other comprehensive loss into earnings | $ | | $ | ( | ) | |||
At March 31, 2020, we expected an estimated $2,597
pre-tax
gain to be reclassified into earnings to reflect the fixed prices obtained from foreign exchange hedging within the next 12 months.Derivatives Not Designated as Hedging Instruments
We have also entered into foreign currency forward and option contracts that are either not designated as hedges or did not qualify for hedge accounting. These derivative instruments were effective economic hedges for all 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 March 31,
4,900 ,
2020
was $and such contracts subsequently expired during April 2020 .
We recognized a gain (loss)
of $829 and $
113
(
)
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,
2020
and
2019
, respectively. The following table summarizes the fair value of derivative instruments, which consist solely of foreign exchange contracts, included in other current assets and accrued expenses and other current liabilities in our condensed consolidated unaudited balance sheets.
See Note
6
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| Asset Derivatives | Liability Derivatives | |||||||||||||||
| March 31, 2020 | December 31, 2019 | March 31, 2020 | December 31, 2019 | |||||||||||||
| Derivatives designated as hedging instruments | $ | | $ | — | $ | | $ | | ||||||||
| Derivatives not designated as hedging instruments | | — | | | ||||||||||||
| Total derivative instruments | $ | | $ | — | $ | | $ | | ||||||||
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, 2020 Using | ||||||||||||||||||
| Level 1 | ||||||||||||||||||||