What changed in this filing

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Item 1A. Risk Factors

2021-02-26 compared with 2020-02-28 · 43 added, 31 removed, 114 unchanged (39% of the section changed)

Business Risk Factors

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

pandemic adversely impacted our operations in March and April 2020 and could continue to adversely affect our business and results of operations, including as government authorities impose or reimpose mandatory closures, work-from-home orders and social distancing protocols, or impose other restrictions due to the continued high rate of viral infections that exist as of this date.

These actions could materially adversely affect our ability to adequately staff and maintain our operations, interrupt our supply lines, impair our ability to sustain sufficient financial liquidity and adversely impact our financial results.

related factors that have impacted us, or may negatively impact, sales, gross margin and other results of operations in the future include, but are not limited to:

limitations on the ability of our suppliers to manufacture, or procure from manufacturers, the products we sell, or to meet delivery requirements and commitments;

limitations on the ability of our employees to perform their work due to illness or other disruptions caused by the pandemic, including local, state, or federal orders requiring employees to remain at home;

limitations on the ability of carriers to deliver our products to customers;

limitations on the ability of our customers to conduct their businesses and purchase our products;

and limitations on the ability of our customers to pay us on a timely basis.

Moreover, the COVID-19

pandemic could alter the mix of our business due to a shift in consumer demand towards repair of equipment rather than replacement, as well as changes in our sales mix toward value-oriented equipment and lower demand and/or disruption to new construction and commercial markets, which would result in a reduction in our sales and consequential gross margin.

As we cannot predict the duration or scope of the COVID-19

pandemic in the future, the potential negative financial impact to our results of operations cannot be reasonably estimated but could be material and last for an extended period of time.

Supplier Concentration

6 unchanged sentences

Many HVAC equipment and component manufacturers, including Carrier and Rheem, source component parts from China and/or assemble a significant amount of products for residential and light-commercial applications from Mexico.

If any restrictions or significant increases in tariffs are imposed related to such products sourced or assembled from Mexico and China as a result of amendments to existing trade agreements, and our product costs consequently increase, we would be required to raise our prices, which may result in cost inflation, the loss of customers, and harm to our business.

In addition, a novel strain of coronavirus, COVID-19,

surfaced in Wuhan, China in December 2019, resulting in increased travel restrictions and extended shutdown of certain businesses in the region.

The impact of COVID-19

on our business is uncertain at this time and will depend on future developments;

however, prolonged closures in China may disrupt the operations of certain of our suppliers, which could negatively impact our business.

If any restrictions, including a potential increase in tariffs, are imposed related to such products sourced or assembled from Mexico and China, including as a result of amendments to existing trade agreements, and our product costs consequently increase, we would be required to raise our prices, which may result in cost inflation, the loss of customers, and harm to our business.

In addition, COVID-19,

which surfaced in Wuhan, China in December 2019, resulted in increased travel restrictions and extended shutdown of certain businesses in the region.

The continuing impact of COVID-19

on our business will depend on future developments;

however, closures in China and/or Mexico may disrupt the operations of certain of our suppliers, which could negatively impact our business.

We maintain trade name and distribution agreements with Carrier and Rheem that provide us distribution rights on an exclusive basis in specified territories.

4 unchanged sentences

Other than where such location-level restrictions apply, we may distribute other manufacturers’ lines of air conditioning or heating equipment in other locations in the same territories.

On November 26, 2018, the parent company of Carrier, UTC, announced that it intended to separate into three independent companies consisting of its aerospace business, its elevator business, and Carrier.

UTC indicated the proposed separation is expected to be effected through tax-free

spin-offs of its elevator business and Carrier, subject to the completion of financing and satisfaction of customary conditions, and disclosed that UTC expected to complete the spin-offs in 2020.

It is too early to determine whether the proposed spin-off

of Carrier will have any impact on us and our results of operations, and there can be no assurances regarding the ultimate timing of the separation or that the separation will be completed.

Risks Inherent in Acquisitions

23 unchanged sentences

Furthermore, profitability can be impacted favorably or unfavorably based on the severity or mildness of weather patterns during Summer or 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 is fairly evenly distributed throughout the year and depends largely on housing completions and related weather and economic conditions.

11 unchanged sentences

LIBOR is the subject of recent proposals for reform that currently provide for the phase-out

of LIBOR by 2021.

of LIBOR after December 31, 2021.

The consequences of these developments with respect to LIBOR cannot be entirely predicted but could result in an increase in the cost of our debt, as it is currently anticipated that lenders will replace LIBOR with an alternative rate that may exceed what would have been the comparable LIBOR rate.

16 unchanged sentences

We maintain monitoring practices and protections of our information technology to reduce these risks and test our systems on an ongoing basis for potential threats.

The Audit Committee is briefed on information security matters at least once a year.

We carry cybersecurity insurance to help mitigate the financial exposure and related notification procedures in the event of intentional intrusion.

3 unchanged sentences

Our international sales and operations, as well as sourcing of products from suppliers with international operations, are also sensitive to changes in foreign national priorities, including government budgets, as well as political and economic instability.

In addition, prolonged closures in China due to COVID-19

In addition, closures in China and Mexico due to COVID-19

may disrupt the operations of certain of our suppliers, which could negatively impact our business.

1 unchanged sentence

Additionally, failure to comply with the United States Foreign Corrupt Practices Act could subject us to, among other things, penalties and legal expenses that could harm our reputation and have a material adverse effect on our business, financial condition, and results of operations.

General Risk Factors

Goodwill, Intangibles and Long-Lived Assets

At December 31, 2019, goodwill, intangibles, and long-lived assets represented approximately 39% of our total assets.

The recoverability of goodwill, indefinite lived intangibles, and long-lived assets is evaluated at least annually and when events or changes in circumstances indicate that the carrying amounts may not be recoverable.

The identification and measurement of goodwill impairment involves the estimation of the fair value of our reporting unit and contains uncertainty because management must use judgment in determining appropriate assumptions to be used in the measurement of fair value.

The estimates of fair value of our reporting unit, indefinite lived intangibles, and long-lived assets are based on the best information available as of the date of the assessment and incorporates management’s assumptions about expected future cash flows and contemplates other valuation techniques.

Future cash flows can be affected by changes in the industry, a declining economic environment, or market conditions.

We cannot assure you that we will not suffer material impairments to goodwill, intangibles, or long-lived assets in the future.

Risks Related to Loss Contingencies

We carry general liability, comprehensive property damage, workers’ compensation, health benefits, and other insurance coverage that management considers adequate for the protection of its assets and operations at reasonable premiums.

There can be no assurance that the coverage limits and related premiums of such policies will be adequate to cover claims, losses and expenses for lawsuits which have been, or may be, brought against us.

A loss in excess of insurance coverage could have a material adverse effect on our financial position and/or profitability.

Certain self-insurance risks for casualty insurance programs and health benefits are retained and reserves are established based on claims filed and estimates of claims incurred but not yet reported.

Assurance cannot be provided that actual claims will not exceed present estimates.

Exposure to catastrophic losses has been limited by maintaining excess and aggregate liability coverage and implementing stop-loss control programs.

Risks Related to our Common Stock

2 unchanged sentences

These interests represent 53% of the aggregate combined voting power (including 51% beneficially owned by Albert H.

Nahmad, Chairman and Chief Executive Officer, through shares owned by him and shares held by affiliated limited partnerships and various family trusts).

Nahmad, Chairman and Chief Executive Officer, and Aaron J.

Nahmad, President, through shares owned by them and shares held by affiliated limited partnerships and various family trusts).

Accordingly, our directors and executive officers collectively have the voting power to elect six members of our nine-person Board of Directors.

27 unchanged sentences

The trading markets for our common stock rely in part on the research and reports that industry or financial analysts publish about us or our business or industry.

If one or more of the analysts who cover us downgrade our stock or our industry, or the stock of UTC or any of our competitors, or publish negative or unfavorable research about our business, the price of our stock could decline.

If one or more of the analysts who cover us downgrade our stock or our industry, or the stock of Carrier or any of our competitors, or publish negative or unfavorable research about our business, the price of our stock could decline.

If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.

General Risk Factors

Goodwill, Intangibles and Long-Lived Assets

At December 31, 2020, goodwill, intangibles, and long-lived assets represented approximately 40% of our total assets.

Future cash flows can be affected by changes in the industry, a declining economic environment, or market conditions.

We cannot assure you that we will not suffer material impairments to goodwill, intangibles, or long-lived assets in the future.

Risks Related to Loss Contingencies

We carry general liability, comprehensive property damage, workers’ compensation, health benefits, cybersecurity, and other insurance coverage that management considers adequate for the protection of its assets and operations at reasonable premiums.

A loss in excess of insurance coverage could have a material adverse effect on our financial position and/or profitability.

Certain self-insurance risks for casualty insurance programs and health benefits are retained and reserves are established based on claims filed and estimates of claims incurred but not yet reported.

Assurance cannot be provided that actual claims will not exceed present estimates.

Exposure to catastrophic losses has been limited by maintaining excess and aggregate liability coverage and implementing stop-loss control programs.

UNRESOLVED STAFF COMMENTS

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 1A. Risk Factors