What changed in this filing

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Item 1. Business

2021-02-26 compared with 2020-02-28 · 51 added, 38 removed, 189 unchanged (32% of the section changed)

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At December 31, 2020, we operated from 600 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, through which we serve more than 100,000 active contractors and dealers that service the replacement and new construction markets.

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

the Caribbean, through which we serve more than 100,000 active contractors and dealers that service the replacement and new construction markets.

Our revenues in HVAC/R distribution have increased from $64.1 million in 1989 to $5.1 billion in 2020, resulting from our strategic acquisition of companies with established market positions and subsequent building of revenues and profit through a combination of additional locations, introduction of new products, and other initiatives.

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These companies are:

Carrier Corporation (“Carrier”), a subsidiary of United Technologies Corporation (“UTC”);

Carrier Global Corporation (“Carrier”);

Goodman Manufacturing Company, L.P.

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Rheem Manufacturing Company (“Rheem”);

(“Trane”), a subsidiary of Ingersoll-Rand Company Limited;

Trane Technologies Inc.

York International Corporation, a subsidiary of Johnson Controls, Inc.;

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products including parts, ductwork, air movement products, insulation, tools, installation supplies, thermostats, and air quality products.

We distribute products manufactured by Resideo Technologies Inc.

(“Resideo”), Johns Manville (“Johns Manville”) and Owens Corning Insulating Systems, LLC (“Owens Corning”), among others.

We also sell products to the refrigeration market.

We distribute products manufactured by Flexible Technologies, Inc.(“Flexible Technologies”), Resideo Technologies Inc.

(“Resideo”), Southwark Metal Mfg.

(“Southwark”), Johns Manville (“Johns Manville”) and Owens Corning Insulating Systems, LLC (“Owens Corning”), among others.

We also sell products to the commercial refrigeration market.

These products include condensing units, compressors, evaporators, valves, refrigerant, walk-in

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We have employed a disciplined and conservative approach, which seeks opportunities that fit well-defined financial and strategic criteria.

The “build” component of the strategy has focused on encouraging growth at acquired companies, by adding products and locations to better serve customers, investing in scalable technologies, and exchanging ideas and business concepts amongst leadership teams.

Newly acquired businesses have access to our capital resources and established vendor relationships to provide their customers with an expanded array of product lines on favorable terms and conditions

with an intensified commitment to service.

business concepts amongst leadership teams.

We have also developed a culture whereby leaders, managers and employees are provided the opportunity to own shares of Watsco through a variety of stock-based equity plans.

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In addition, through our subsidiary Watsco Ventures, LLC (“Watsco Ventures”), we have developed (internally and through external collaboration) a variety of early-stage technologies with the goal of helping contractor customers grow and become more profitable, and otherwise compliment the initiatives set forth above.

To further extend our technology reach, in August 2018, we acquired Alert Labs, Inc.

(“Alert Labs”), a company based in Kitchener, Ontario, Canada that develops, designs and builds “internet of things,” or IoT, hardware and software, including cloud-based and mobile solutions aimed at protecting homes and businesses from property damage and unnecessary expenses.

Alert Labs has also furthered the development of Sentree, an IoT device developed by Watsco Ventures.

Sentree attaches to an existing HVAC system and, through a proprietary cloud-based software platform, remotely measures, collects and analyzes vital performance analytics.

Strategy in Existing Markets

Our strategy for growth in existing markets focuses on customer service, product expansion, and the implementation of technology to satisfy the needs of the higher growth, higher margin replacement market, in which customers generally demand immediate, convenient, and reliable service.

We respond to this need by (i) offering a broad range of product lines, including the necessary equipment, parts, and supplies to enable a contractor to install or repair a central air conditioner, furnace, or refrigeration system, (ii) maintaining a strong density of warehouse locations for increased customer convenience, (iii) maintaining well-stocked inventories to ensure that customer orders are filled in a timely manner, (iv) providing a high degree of technical expertise at the point of sale, (v) collaborating with customers to advertise and market their business and services in local markets, and (vi) developing and implementing technology to further enhance customer service capabilities.

We respond to this need by (i) offering a broad range of product lines, including the necessary equipment at an array of price-points, parts, and supplies to enable a contractor to install or repair a central air conditioner, furnace, or refrigeration system, (ii) maintaining a strong density of warehouse locations for increased customer convenience, (iii) maintaining well-stocked inventories to ensure that customer orders are filled in a timely manner, (iv) providing a high degree of technical expertise at the point of sale, (v) collaborating with customers to advertise and market their business and services in local markets, and (vi) developing and implementing technology to further enhance customer service capabilities.

We believe these concepts provide a competitive advantage over smaller, less-capitalized competitors that are unable to commit resources to open and maintain additional locations, implement technological business solutions, provide the same range of products, maintain the same inventory levels, or attract the wide range of expertise that is required to support a diverse product offering.

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We believe our reputation for reliable, high-quality service, and relationships with contractors, who may serve both the replacement and new construction markets, allows us to compete effectively in these markets.

Performance-Based Compensation & Stock-Based Equity Plans

We maintain a culture that rewards performance through a variety of performance-based pay, commission programs, cash incentives, and stock-based equity programs.

Stock-based plans include 401(k) matching contributions to eligible employees, a voluntary employee stock purchase plan, and the granting of stock options and non-vested

restricted stock based on individual merit and measures of performance.

Our equity compensation plans are designed to promote long-term performance, as well as to create long-term employee retention, continuity of leadership, and an ownership culture whereby management and employees think and act as owners of the Company.

We believe that our restricted stock program is unique because an employee’s restricted share grants generally vest entirely and only at the end of his or her career (age 62 or later) and, prior to retirement, these grants remain subject to significant risk of forfeiture.

Product Line Expansion

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Other smaller acquired distributors have been integrated into or are under the management of our primary operating subsidiaries.

Through a combination of sales and market share growth, opening of new locations, tuck-in

Through a combination of sales and market share growth,

opening of new locations, tuck-in

acquisitions, expansion of product lines, improved pricing, and programs that have resulted in higher gross profit, performance incentives, and a culture of equity value for key leadership, we have produced substantial sales and earnings growth in our acquired businesses.

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Certain general and administrative expenses are targeted for cost savings by leveraging the overall business volume and improving operating efficiencies.

Human Capital

As of December 31, 2020, we employed approximately 5,800 full-time employees, substantially all of whom were non-union

Of these employees, approximately 10% were located in Canada and Mexico.

Additionally, we use independent contractors and temporary personnel in the normal course of business to supplement our workforce.

As the largest distributor of HVAC/R equipment and related parts and supplies in North America, we have a wide variety of employees.

Given the breadth of our employee base, we tailor our human capital management policies with a view to specific employee populations.

However, we provide a wide variety of opportunities for professional growth and talent development for all employees, including online trainings, on-the-job

experience, and education tuition assistance.

We focus on attracting and retaining employees by providing compensation and benefits programs that are competitive within our industry, taking into account each job position’s location and responsibilities.

In addition to salaries, commission programs, cash incentives, and stock-based equity plans, we also provide a 401(k) retirement plan with a company match, an employee stock purchase plan in which most of our employees may purchase our stock at a discount, healthcare and insurance benefits, health savings accounts, paid time off, and various services and tools to support our employees’ health and wellness.

We maintain a culture that rewards performance of key leaders through stock-based equity plans, which include the granting of stock options and non-vested

restricted stock based on individual merit and measures of performance.

Approximately 150 employees received such equity awards in 2020.

DESCRIPTION OF BUSINESS

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Sales of HVAC equipment, which we currently source from approximately 20 vendors, accounted for 69% and 68% of our revenues for the years ended December 31, 2020 and 2019, respectively.

Sales of other HVAC products, which we currently source from approximately 1,200 vendors, comprised 28% and 29% of our revenues for the years ended December 31, 2019 and 2018, respectively.

Sales of commercial refrigeration products, which we currently source from approximately 150 vendors, accounted for 4% of our revenues for both the years ended December 31, 2019 and 2018.

Sales of other HVAC products, which we currently source from approximately 1,200 vendors, comprised 28% of our revenues for both the years ended December 31, 2020 and 2019.

Sales of commercial refrigeration products, which we currently source from approximately 150 vendors, accounted for 3% and 4% of our revenues for the years ended December 31, 2020 and 2019, respectively.

Distribution and Sales

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United States

Joint Ventures with Carrier Corporation

In 2009, we formed a joint venture with Carrier Corporation (“Carrier”), which we refer to as Carrier Enterprise I, in which Carrier contributed 95 of its company-owned locations in 13 Sun Belt states and Puerto Rico, and its export division in Miami, Florida, and we contributed 15 locations that distributed Carrier products.

We have an 80% controlling interest in Carrier Enterprise I, and Carrier has a 20% non-controlling

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 from 19 locations in Pennsylvania, New Jersey, and Delaware.

Joint Ventures with Carrier Global Corporation

On April 3, 2020, United Technologies Corporation completed the spin-off

of Carrier Corporation into an independent, publicly traded company, named Carrier Global Corporation (“Carrier”).

In 2009, we formed a joint venture with Carrier, which we refer to as Carrier Enterprise I, in which Carrier contributed 95 of its company-owned locations in 13 Sun Belt states and Puerto Rico, and its export division in Miami, Florida, and we contributed 15 locations that distributed Carrier products.

We have an 80% controlling interest in Carrier Enterprise I, and

Carrier has a 20% non-controlling

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

On August 1, 2019, Carrier Enterprise I acquired substantially all of the HVAC assets and assumed certain of the liabilities of Peirce-Phelps, Inc.

(“PPI”), an HVAC distributor operating from 19 locations in Pennsylvania, New Jersey, and Delaware.

In 2011, we formed a second joint venture with Carrier, in which Carrier contributed 28 of its company-owned locations in the Northeast U.S., and we contributed 14 locations in the Northeast U.S., and we then purchased Carrier’s distribution operations in Mexico, which included seven locations.

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Effective May 31, 2019, we purchased an additional 20% ownership interest in Homans Associates II LLC (“Homans”) from Carrier Enterprise II, following which we owned 100% of Homans.

Homans previously operated as a division of Carrier Enterprise II and now operates as one of our stand-alone-subsidiaries.

In 2012, we formed a third joint venture, which we refer to as Carrier Enterprise III, with UTC Canada Corporation, referred to as UTC Canada, an affiliate of Carrier.

Homans previously operated as a division of Carrier Enterprise II and now operates as one of our stand-alone, wholly owned subsidiaries.

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 UTC Canada has a 40% non-controlling

We have a 60% controlling interest in Carrier Enterprise III, and Carrier has a 40% non-controlling

Combined, the joint ventures with Carrier represented 55% of our revenues for the year ended December 31, 2020.

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The business and affairs of the joint ventures are controlled, directed, and managed exclusively by Carrier Enterprise I’s, Carrier Enterprise II’s and Carrier Enterprise III’s respective boards of directors (the “Boards”) pursuant to related operating agreements.

The Boards have full, complete and exclusive authority, power, and discretion to manage and control the business, property, and affairs of their respective joint ventures, and to make all decisions regarding those matters and to perform activities customary or incident to the management of such joint ventures, including approval of distributions to us, Carrier and UTC Canada.

Each Board is composed of five directors, of whom three directors represent our controlling interest and two directors represent Carrier’s non-controlling

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In addition, we have substantial relationships with manufacturers of non-equipment

HVAC/R products, including Chemours, Emerson, Flexible Technologies, Inc., Resideo, Johns Manville, Mueller, and Owens Corning.

HVAC/R products, including Chemours, Emerson, Flexible Technologies, Resideo, Southwark, Johns Manville, Mueller, and Owens Corning.

We believe the diversity of products that we sell, along with the manufacturers’ current product offerings, quality, marketability, and brand-name recognition, allow us to operate favorably relative to our competitors.

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The Company’s top ten suppliers accounted for 85% of our purchases, including 63% from Carrier, and 11% from Rheem.

Given the significant concentration of our suppliers, particularly with Carrier and Rheem, any significant interruption with these suppliers could temporarily disrupt the operations of certain of our subsidiaries, impact current inventory levels, and could adversely affect our financial results.

If any restrictions or significant increase in tariffs under existing trade agreements are imposed on products that our top ten suppliers import or assemble products outside of the United States, particularly from Mexico and China, we could be required to raise our prices, which may result in the loss of customers and harm to our business.

Given the significant concentration of our suppliers, particularly with Carrier and Rheem, any significant interruption with these suppliers, including limitations on the ability of our suppliers to manufacture, or procure from manufacturers, the products we sell, or to meet delivery requirements and commitments, in each case related to the COVID-19

pandemic, could temporarily disrupt the operations of certain of our subsidiaries, impact current inventory levels, and could adversely affect our financial results.

If any restrictions or significant increase in tariffs under existing trade agreements are imposed on products that our top ten suppliers import or assemble outside of the United States, particularly from Mexico and China, we could be required to raise our prices, which may result in the loss of customers and harm to our business.

Future financial results are also materially dependent upon the continued market acceptance of these manufacturers’ respective products and their ability to continue to manufacture products that comply with laws relating to environmental and efficiency standards.

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Furthermore, profitability can be impacted favorably or unfavorably based on weather patterns, particularly during 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.

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Competitive pressures or other factors could cause our products or services to lose market acceptance or result in significant price erosion, all of which would have a material adverse effect on our results of operations, cash flows, and liquidity.

We had approximately 5,800 employees as of December 31, 2019, substantially all of whom are non-union

Most of our employees are employed on a full-time basis and our relations with our employees are good.

Order Backlog

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To meet these new standards, most manufacturers have replaced the permanent split capacitor blower motors in residential furnaces with electronic controlled motors.

At December 31, 2019, we had substantially completed the transition of our inventory of residential furnaces to those meeting the updated FER standards.

At December 31, 2020, the transition of our inventory of residential furnaces to those meeting the updated FER standards was complete.

Available Information

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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-K

Item 1. Business