What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-08-06 · 77 added, 73 removed, 183 unchanged (45% of the section changed)

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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.

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.

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was incorporated in Florida in 1956, and, together with its subsidiaries (collectively, “Watsco,” or “we,” “us,” or “our”) is the largest distributor of air conditioning, heating, and refrigeration equipment, and related parts and supplies (“HVAC/R”) in the HVAC/R distribution industry in North America.

At June 30, 2020, we operated from 603 locations in 38 U.S.

At September 30, 2020, we operated from 603 locations in 38 U.S.

States, Canada, Mexico, and Puerto Rico with additional market coverage on an export basis to portions of Latin America and the Caribbean.

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In March 2020, the World Health Organization declared COVID-19

pandemic significantly impacted business during the second quarter of 2020.

states were under executive orders requiring that all workers remain at home unless their work was critical, essential, or life-sustaining.

We believe that, based on the various standards published to date, the work our employees are performing is essential, and as such we continued to operate with certain modifications.

For certain periods of the pandemic thus far, some U.S.

states had been under executive orders requiring that all workers remain at home unless their work was critical, essential, or life-sustaining.

We believe that, based on the various standards published to date, the work our employees perform is essential, and as such we continued to operate with certain modifications during these periods.

A few of our locations experienced short-term closures for COVID-19

employee health concerns or operated at a diminished capacity, which negatively impacted sales during the quarter and may continue to negatively impact sales until the COVID-19

pandemic moderates.

As of the date of this filing, while all of our locations currently continue to operate, we have restricted public access to our branches and have instituted contactless sales and servicing capabilities designed to safeguard our employees and customers.

employee health concerns or operated at a diminished capacity, which negatively impacted business during the second quarter of 2020.

At the end of the second quarter of 2020, many of the markets in which we operate had begun to ease COVID-19

restrictions that had been in place earlier in the period.

However, as of the date of this filing, viral infections have begun to increase, resulting in the resumption of restrictions in certain markets in which we operate.

As a result, significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19

However, during the third quarter of 2020, viral infections began to increase, resulting in the resumption of restrictions in certain markets in which we operate.

As of the date of this filing, all of our locations are operating, and we have instituted contactless sales and servicing capabilities at many of our locations designed to safeguard our employees and customers.

In light of the continued high rate of viral infections that exists as of the date of this filing, there remains significant uncertainty concerning the magnitude of the impact and duration of the COVID-19

In response to the pandemic, we have implemented plans intended to preserve adequate liquidity and ensure that our business can continue to operate during this uncertain time.

In addition, we have taken actions to reduce costs, including reductions in fixed-cost compensation, rent abatement, changes to vendor terms and various austerity measures to curtail discretionary spending in light of the circumstances.

Other variable costs, including hourly wages, overtime, sales commissions, temporary labor, performance-based compensation, advertising, and delivery expenses are expected to moderate consistent with our overall business activity.

If and to the extent restrictions ease and normal economic conditions and operations resume, the various austerity measures to curtail discretionary spending may cease.

With respect to liquidity, we believe that our balance sheet remains strong with $79.6 million in cash, $33.4 million in borrowings drawn from our $560.0 million credit facility and $1.7 billion of shareholders’ equity as of June 30, 2020.

Our quarterly dividend plans remain currently unchanged, most recently at $1.775 per share.

In addition, we have taken actions to reduce costs, including reductions in compensation, rent abatement, changes to vendor terms and other austerity measures to curtail discretionary spending in light of the circumstances.

Other costs, including hourly wages, overtime, sales commissions, temporary labor, performance-based compensation, advertising, and delivery expenses are expected to vary in correlation with our overall business activity.

If and to the extent restrictions ease and normal economic conditions and operations resume, the various austerity measures to curtail discretionary spending may ease.

With respect to liquidity, we believe that our balance sheet remains strong with $92.6 million in cash, $0.7 million in borrowings drawn from our $560.0 million credit facility and $1.8 billion of shareholders’ equity as of September 30, 2020.

Our philosophy toward quarterly dividends remains currently unchanged, most recently at $1.775 per share.

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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as filed with the SEC on February 28, 2020.

We believe that there have been no significant changes during the quarter ended June 30, 2020 to the critical accounting policies disclosed in our Annual Report on Form 10-K

We believe that there have been no significant changes during the quarter ended September 30, 2020 to the critical accounting policies disclosed in our Annual Report on Form 10-K

for the year ended December 31, 2019.

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Results of Operations

The following table summarizes information derived from our condensed consolidated unaudited statements of income, expressed as a percentage of revenues, for the quarters and six months ended June 30, 2020 and 2019:

Ended June 30,

Quarter Ended

September 30,

Nine Months Ended

September 30,

Cost of sales

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(“RSI”) in April 2019, and the purchase of an additional 20% ownership interest in Homans effective May 31, 2019.

We did not acquire any businesses during the quarter or six months ended June 30, 2020.

We did not acquire any businesses during the quarter or nine months ended September 30, 2020.

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 June 30, 2020 and 2019, three and eight locations, respectively, that we opened were near existing locations and were therefore included in “same-store basis” information.

The table below summarizes the changes in our locations for the 12 months ended June 30, 2020:

June 30, 2019

At September 30, 2020 and 2019, two and 10 locations, respectively, that we opened were near existing locations and were therefore included in “same-store basis” information.

The table below summarizes the changes in our locations for the 12 months ended September 30, 2020:

September 30, 2019

December 31, 2019

June 30, 2020

Second Quarter of 2020 Compared to Second Quarter of 2019

Revenues for the second quarter of 2020 decreased $16.5 million, or 1%, including $66.5 million attributable to the new locations acquired and $0.8 million from other locations opened during the preceding 12 months, offset by $4.8 million from locations closed.

Sales of HVAC equipment (71% of sales) increased 1%, sales of other HVAC products (26% of sales) decreased 6% and sales of commercial refrigeration products (3% of sales) decreased 15%.

On a same-store basis, revenues decreased $79.0 million, or 6%, as compared to the same period in 2019, reflecting a 4% decrease in sales of HVAC equipment (70% of sales), which included flat sales of residential HVAC equipment and a 20% decrease in sales of commercial HVAC equipment, a 9% decrease in sales of other HVAC products (27% of sales) and a 15% decrease in sales of commercial refrigeration products (3% of sales).

The decrease in HVAC equipment revenues was primarily attributable to lower sales of commercial HVAC equipment due to the pandemic-related market disruption, while both the average selling price and volume of residential HVAC equipment remained flat.

Gross profit for the second quarter of 2020 decreased $8.8 million, or 3%, primarily as a result of decreased revenues.

Gross profit margin for the quarter ended June 30, 2020 declined 30 basis-points to 23.6% versus 23.9% for the same period in 2019, primarily due to a shift in sales mix toward HVAC equipment, which generates a lower gross profit margin than non-equipment

September 30, 2020

Third Quarter of 2020 Compared to Third Quarter of 2019

Revenues for the third quarter of 2020 increased $141.8 million, or 10%, including $38.1 million attributable to new locations acquired and $1.3 million from other locations opened during the preceding 12 months, offset by $2.4 million from locations closed.

Sales of HVAC equipment (70% of sales) increased 12%, sales of other HVAC products (27% of sales) increased 4% and sales of commercial refrigeration products (3% of sales) remained flat.

On a same-store basis, revenues increased $104.8 million, or 8%, as compared to the same period in 2019, reflecting a 10% increase in sales of HVAC equipment (70% of sales), which included a 17% increase of residential HVAC equipment (19% increase in U.S.

markets and a 3% increase in international markets) and a 17% decrease in sales of commercial HVAC equipment, a 2% increase in sales of other HVAC products (27% of sales) and flat sales of commercial refrigeration products (3% of sales).

The increase in same-store revenues of HVAC equipment was primarily due to strong demand for the replacement of residential HVAC equipment and an increased mix of high-efficiency air conditioning and heating systems, which sell at higher unit prices, partially offset by lower sales of commercial HVAC equipment due to the pandemic-related market disruption.

The increase in residential HVAC equipment was composed of an 18% increase in volume and a 1% increase in the average selling price.

Gross profit for the third quarter of 2020 increased $39.1 million, or 12%, primarily as a result of increased revenues.

Gross profit margin for the quarter ended September 30, 2020 improved 30 basis-points to 24.3% versus 24.0% for the same period in 2019, primarily due to higher realized gross margins for residential HVAC equipment.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the second quarter of 2020 decreased $2.5 million, or 1%, primarily due to decreased revenues.

Selling, general and administrative expenses as a percent of revenues for the second quarter of 2020 remained flat at 14.3% versus the same period in 2019.

On a same-store basis, selling, general and administrative expenses decreased 7% as compared to the same period in 2019, primarily due to actions taken to reduce costs and curtail discretionary spending in response to the pandemic as well as decreased variable costs commensurate with decreased revenues.

Selling, general and administrative expenses for the third quarter of 2020 increased $8.1 million, or 4%, primarily due to increased revenues.

Selling, general and administrative expenses as a percent of revenues for the third quarter of 2020 decreased to 14.4% versus 15.3% for the same period in 2019.

On a same-store basis, selling, general and administrative expenses were flat as compared to the same period in 2019 primarily due to actions taken to improve operating efficiency and to reduce costs and curtail discretionary spending in response to the pandemic.

Selling, general and administrative expenses included $0.2 million of additional costs for 2020 in excess of 2019 for ongoing technology initiatives, including initiatives designed to ameliorate the impact of, or otherwise address, the pandemic.

Other income of $4.1 million and $3.0 million for the second quarters of 2020 and 2019, respectively, represented our share of the net income of RSI.

Other income of $4.1 million and $3.5 million for the third quarters of 2020 and 2019, respectively, represented our share of the net income of RSI.

Interest Expense, Net

Interest expense, net for the second quarter of 2020 decreased $0.9 million, or 77%, primarily as a result of a decrease in average outstanding borrowings and a lower effective interest rate for the 2020 period, in each case under our revolving credit facility, as compared to the same period in 2019.

Income taxes decreased to $24.7 million for the second quarter of 2020, as compared to $25.3 million for the second quarter of 2019 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;

Interest expense, net for the third quarter of 2020 decreased $1.3 million, or 92%, primarily as a result of a decrease in average outstanding borrowings and a lower effective interest rate for the 2020 period, in each case under our revolving credit facility, as compared to the same period in 2019.

Income taxes increased to $30.5 million for the third quarter of 2020, as compared to $24.2 million for the third quarter of 2019 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 22.1% and 21.7% for the quarters ended June 30, 2020 and 2019, respectively.

The increase was primarily due to lower estimated foreign withholding taxes in the second quarter of 2019 as compared to the same period in 2020.

Net Income Attributable to Watsco, Inc.

Net income attributable to Watsco for the quarter ended June 30, 2020 decreased $3.6 million, or 4%, compared to the same period in 2019.

The decrease was primarily driven by lower revenues and gross profit, partially offset by lower selling, general and administrative expenses, higher other income, and a reduction in interest expense, net.

First Half of 2020 Compared to First Half of 2019

Revenues for the first half of 2020 increased $60.4 million, or 3%, including $127.5 million attributable to the new locations acquired and $2.3 million from other locations opened during the preceding 12 months, offset by $7.7 million from locations closed.

Sales of HVAC equipment (69% of sales) increased 3%, sales of other HVAC products (28% of sales) were flat and sales of commercial refrigeration products (3% of sales) decreased 8%.

On a same-store basis, revenues decreased $61.7 million, or 3%, as compared to the same period in 2019, reflecting a 2% decrease in sales of HVAC equipment (69% of sales), which included a 1% increase in sales of residential HVAC equipment (2% increase in U.S.

markets and an 11% decrease in international markets) and a 14% decrease in sales of commercial HVAC equipment, a 4% decrease in sales of other HVAC products (28% of sales) and an 8% decrease in commercial refrigeration products (3% of sales).

The decrease in HVAC equipment revenues was primarily attributable to lower sales of commercial HVAC equipment due to pandemic-related market disruption, partially offset by a 2% increase in volume of residential HVAC equipment.

Gross profit for the first half of 2020 increased $5.1 million, or 1%, primarily as a result of increased revenues.

Gross profit margin for the six months ended June 30, 2020 declined 40 basis-points to 24.0% versus 24.4% for the same period in 2019, primarily due to a shift in sales mix toward HVAC equipment, which generates a lower gross profit margin than non-equipment

products and a lower benefit of pricing actions taken by our HVAC equipment suppliers.

The effective income tax rate attributable to us was consistent at 22.2% for both quarters ended September 30, 2020 and 2019.

Income Attributable to Watsco, Inc.

Net income attributable to Watsco for the quarter ended September 30, 2020 increased $23.0 million, or 28%, compared to the same period in 2019.

The increase was primarily driven by higher revenues and gross profit, and reduced selling, general and administrative expenses as a percentage of revenues.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Revenues for the nine months ended September 30, 2020 increased $202.2 million, or 5%, including $165.7 million attributable to new locations acquired and $3.6 million from other locations opened during the preceding 12 months, offset by $10.2 million from locations closed.

Sales of HVAC equipment (70% of sales) increased 7%, sales of other HVAC products (27% of sales) increased 2% and sales of commercial refrigeration products (3% of sales) decreased 5%.

On a same-store basis, revenues increased $43.1 million, or 1%, as compared to the same period in 2019, reflecting a 3% increase in sales of HVAC equipment (69% of sales), which included a 7% increase in residential HVAC equipment (8% increase in U.S.

markets and a 4% decrease in international markets) and a 15% decrease in sales of commercial HVAC equipment, a 2% decrease in sales of other HVAC products (27% of sales) and a 5% decrease in commercial refrigeration products (4% of sales).

The increase in same-store revenues of HVAC equipment was primarily due to demand for the replacement of residential HVAC equipment, partially offset by lower sales of commercial HVAC equipment due to the pandemic-related market disruption.

The increase in residential HVAC equipment was composed of an 8% increase in volume while the average selling price remained flat.

Gross profit for the nine months ended September 30, 2020 increased $44.1 million, or 5%, primarily as a result of increased revenues.

Gross profit margin for the nine months ended September 30, 2020 declined 10 basis-points to 24.1% versus 24.2% for the same period in 2019, primarily due to a shift in sales mix toward HVAC equipment, which generates a lower gross profit margin than non-equipment

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the first half of 2020 increased $20.8 million, or 6%, primarily due to newly acquired locations.

Selling, general and administrative expenses as a percentage of revenues for the six months ended June 30, 2020 increased to 16.8% versus 16.4% for the same period in 2019.

On a same-store basis, selling, general and administrative expenses decreased 2% as compared to the same period in 2019 primarily due to actions taken to reduce costs and curtail discretionary spending in response to the pandemic as well as decreased variable costs commensurate with decreased revenues.

Selling, general and administrative expenses included $1.6 million of additional costs for 2020 in excess of 2019 for ongoing technology initiatives.

Other income of $5.1 million and $4.4 million for the first half of 2020 and 2019, respectively, represented our share of the net income of RSI.

Selling, general and administrative expenses for the nine months ended September 30, 2020 increased $29.0 million, or 5%, primarily due to increased revenues.

Selling, general and administrative expenses as a percentage of revenues remained consistent at 15.9% for the nine months ended September 30, 2020 as compared to the same period in 2019.

On a same-store basis, selling, general and administrative expenses decreased 1% as compared to the same period in 2019 primarily due to actions taken to improve operating efficiencies and to reduce costs and curtail discretionary spending in response to the pandemic.

Selling, general and administrative expenses included $1.8 million of additional costs for 2020 in excess of 2019 for ongoing technology initiatives, including initiatives designed to ameliorate the impact of, or otherwise address, the pandemic.

Other income of $9.2 million and $7.9 million for the nine months ended September 30, 2020 and 2019, respectively, represented our share of the net income of RSI.

Interest Expense, Net

Interest expense, net for the first half of 2020 decreased $0.9 million, or 46%, primarily as a result of a decrease in average outstanding borrowings and a lower effective interest rate for the 2020 period, in each case under our revolving credit facility, as compared to the same period in 2019.

Income taxes decreased to $32.9 million for the first half of 2020, as compared to $35.8 million for the first half of 2019 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;

Interest expense, net for the nine months ended September 30, 2020 decreased $2.2 million, or 65%, primarily as a result of a decrease in average outstanding borrowings and a lower effective interest rate for the 2020 period, in each case under our revolving credit facility, as compared to the same period in 2019.

Income taxes increased to $63.4 million for the nine months ended September 30, 2020, as compared to $60.1 million for the nine months ended September 30, 2019 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 21.8% and 22.0% for the first half of 2020 and 2019, respectively.

The effective income tax rates attributable to us were 22.0% and 22.1% for the nine months ended September 30, 2020 and 2019, respectively.

The decrease was primarily due to higher share-based payment tax benefits in 2020 as compared to the same period in 2019.

Net Income Attributable to Watsco, Inc.

Net income attributable to Watsco for the first half of 2020 decreased $8.1 million, or 6%, compared to the same period in 2019.

The decrease was primarily driven by higher selling, general and administrative expenses, partially offset by lower interest expense, net, a reduction in income taxes, and a decrease in the net income attributable to the non-controlling

Net income attributable to Watsco for the nine months ended September 30, 2020 increased $14.9 million, or 7%, compared to the same period in 2019.

The increase was primarily driven by higher revenues and gross profit, and lower interest expense, net.

Liquidity and Capital Resources

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Additionally, we may also generate cash through the issuance and sale of our Common stock.

As of June 30, 2020, we had $79.6 million of cash and cash equivalents, of which $60.0 million was held by foreign subsidiaries.

As of September 30, 2020, we had $92.6 million of cash and cash equivalents, of which $64.7 million was held by foreign subsidiaries.

The repatriation of cash balances from our foreign subsidiaries could have adverse tax impacts or be subject to capital controls;

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Working Capital

Working capital decreased to $992.6 million at June 30, 2020 from $1,085.0 million at December 31, 2019, reflecting lower levels of inventory due to pandemic-related market disruption resulting in lower purchases in 2020 versus 2019, higher levels of accounts payable and accrued expenses offset by higher levels of accounts receivable due to the seasonality of our business.

The following table summarizes our cash flow activity for the six months ended June 30, 2020 and 2019 (in millions):

Working capital decreased to $1,034.6 million at September 30, 2020 from $1,085.0 million at December 31, 2019, reflecting lower levels of inventory from inventory optimization activities and due to pandemic-related supply chain disruptions, resulting in reduced purchases in 2020 versus 2019, higher levels of accounts payable and accrued expenses, which were offset by higher levels of accounts receivable due to the seasonality of our business.

The following table summarizes our cash flow activity for the nine months ended September 30, 2020 and 2019 (in millions):

Cash flows provided by operating activities

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Operating Activities

The increase in net cash provided by operating activities was primarily due to a reduction in the level of inventories.

The increase in net cash provided by operating activities was primarily due to a reduction in the level of inventories and the comparative timing of payments for accrued expenses and other current liabilities in 2020 versus 2019.

Investing Activities

Net cash used in investing activities was lower due to cash consideration paid for acquisitions and the purchase of an additional ownership interest in RSI in 2019.

Net cash used in investing activities was lower in 2020 due to cash consideration paid for acquisitions and the purchase of an additional ownership interest in RSI in 2019.

Financing Activities

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The credit agreement matures on December 5, 2023.

At June 30, 2020 and December 31, 2019, $33.4 million and $155.7 million, respectively, were outstanding under the revolving credit agreement.

At September 30, 2020 and December 31, 2019, $0.7 million and $155.7 million, respectively, were outstanding under the revolving credit agreement.

The revolving credit agreement contains customary affirmative and negative covenants, including financial covenants with respect to consolidated leverage and interest coverage ratios, and other customary restrictions.

We believe we were in compliance with all covenants at June 30, 2020.

We believe we were in compliance with all covenants at September 30, 2020.

Purchase of Additional Ownership Interest from Joint Venture

Effective May 31, 2019, we purchased an additional 20% ownership interest in Homans from Carrier Enterprise II for cash consideration of $32.4 million, which increased our ownership in Homans to 100%.

Homans previously operated as a division of Carrier Enterprise II and subsequent to the purchase operates as a stand-alone subsidiary of the Company with 16 locations in the Northeastern U.S.

Homans previously operated as a division of Carrier Enterprise II and subsequent to the purchase operates as a wholly owned subsidiary of the Company with 17 locations in the Northeastern U.S.

Investment in Unconsolidated Entity

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RSI’s shareholders may transfer their respective shares of RSI common stock only to members of the Sigler family or to Carrier Enterprise I, and, at any time from and after the date on which Carrier Enterprise I owns 85% or more of RSI’s outstanding common stock, it has the right, but not the obligation, to purchase from RSI’s shareholders the remaining outstanding shares of RSI common stock.

At June 30, 2020, the estimated purchase amount we would be contingently liable for was approximately $170.0 million.

At September 30, 2020, the estimated purchase amount we would be contingently liable for was approximately $183.0 million.

We believe that our operating cash flows, cash on hand, and funds available for borrowing under our revolving credit agreement will be sufficient to purchase any additional ownership interests in RSI.

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Common Stock Dividends

We paid cash dividends of $3.375 and $3.20 per share of Common stock and Class B common stock during the six months ended June 30, 2020 and 2019, respectively.

On July 1, 2020, our Board of Directors declared a regular quarterly cash dividend of $1.775 per share of both Common and Class B common stock that was paid on July 31, 2020 to shareholders of record as of July 16, 2020.

We paid cash dividends of $5.15 and $4.80 per share of Common stock and Class B common stock during the nine months ended September 30, 2020 and 2019, respectively.

On October 1, 2020, our Board of Directors declared a regular quarterly cash dividend of $1.775 per share of both Common and Class B common stock that was paid on October 30, 2020 to shareholders of record as of October 15, 2020.

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In aggregate, 6,370,913 shares of Common and Class B common stock have been repurchased at a cost of $114.4 million since the inception of the program.

At June 30, 2020, there were 1,129,087 shares remaining authorized for repurchase under the program.

At September 30, 2020, there were 1,129,087 shares remaining authorized for repurchase under the program.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis