What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-06 compared with 2020-11-05 · 78 added, 124 removed, 136 unchanged (60% 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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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 the COVID-19

Pandemic, Item 1A “Risk Factors” contained in Part II of this Quarterly Report on this Form 10-Q

and Item 1A “Risk Factors” of our Annual Report on Form 10-K

Pandemic and Item 1A “Risk Factors” of our Annual Report on Form 10-K

for the year ended December 31, 2020, as well as the other documents and reports that we file with the SEC.

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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 the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K

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, 2020.

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

At March 31, 2021, we operated from 601 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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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.

Impact of the COVID-19

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

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

For certain periods of the COVID-19

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 business during the second quarter of 2020.

Some of our locations experienced short-term closures for COVID-19

employee health concerns or operated at a diminished capacity, which negatively impacted our business during March and April 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, 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.

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

Although we have learned to navigate COVID-19

while maintaining our operations in all material respects, the pandemic continued to impact our business and operating results in the first quarter of 2021.

Consistent with broader social trends, we have taken steps to safeguard the health of our employees and customers.

This has included creating space between work areas, providing ample personal protective equipment and cleaning supplies, having formal policies for mitigation in the event of cases of illness, utilizing technologies where work duties enable working from home, and instituting contactless sales and servicing capabilities at many of our locations to create social distancing.

As of the date of this filing, all of our locations are operating, and, due to these precautions, have been functioning effectively, including our internal controls over financial reporting.

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

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.

During these uncertain times, we believe that our scale, our current low debt-level, conservative leverage ratio, and our historical ability to generate cash flow positions us well as we work through the impacts of the COVID-19

As restrictions ease and normal economic conditions and operations resume, the various austerity measures to curtail discretionary spending have eased.

With respect to liquidity, we believe that our balance sheet remains strong with $93.9 million in cash, $48.9 million in borrowings drawn under our $560.0 million credit facility and $1.8 billion of shareholders’ equity, in each case as of March 31, 2021.

During these uncertain times, we believe that our scale, our currently low debt level, conservative leverage ratio, and our historical ability to generate cash flow positions us well as we work through the impacts of the COVID-19

The full impact of the COVID-19

pandemic on our financial condition and results of operations will depend on future developments, such as the ultimate duration and scope of the pandemic, its impact on our employees, customers, and suppliers, how quickly normal economic conditions and operations resume and whether the pandemic exacerbates other risks disclosed in Item 1A “Risk Factors” of our Annual Report on Form 10-K

pandemic on our financial condition and results of operations will continue to depend on future developments, such as the ultimate duration and scope of the pandemic, its impact on our employees, customers and suppliers, how quickly normal economic conditions and operations resume and whether the pandemic exacerbates the risks disclosed in Item 1A “Risk Factors” of our Annual Report on Form 10-K

for the year ended December 31, 2020.

We will 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.

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”).

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.

Joint Ventures with 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

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.

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

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.

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

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, which we refer to as Carrier Enterprise III, with Carrier.

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

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 will operate this business.

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

Critical Accounting Policies

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as filed with the SEC on February 26, 2021.

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

We believe that there have been no significant changes during the quarter ended March 31, 2021 to the critical accounting policies disclosed in our Annual Report on Form 10-K

for the year ended December 31, 2020.

New Accounting Standards

Refer to Note 1 to our condensed consolidated unaudited financial statements included in this Quarterly Report on Form 10-Q

for a discussion of recently adopted accounting standards.

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 nine months ended September 30, 2020 and 2019:

Quarter Ended

September 30,

Nine Months Ended

September 30,

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, 2021 and 2020:

Cost of sales

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Due to rounding, percentages may not add up to 100.

The following narratives reflect our acquisition of the HVAC distribution businesses of N&S Supply of Fishkill, Inc.

(“N&S”) in November 2019, PPI in August 2019, Dunphey & Associates Supply Co., Inc.

(“DASCO”) in April 2019, as well as the purchase of an additional 1.8% ownership interest in Russell Sigler, Inc.

(“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 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 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

At March 31, 2021 and 2020, one and seven 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 March 31, 2021:

March 31, 2020

December 31, 2020

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 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 $3.5 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 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 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

March 31, 2021

Revenues for the first quarter of 2021 increased $128.0 million, or 13%, as compared to the first quarter of 2020, including $1.3 million attributable to locations opened during the preceding 12 months, offset by $1.6 million from locations closed.

Sales of HVAC equipment (67% of sales) increased 14%, which included an 18% increase in residential HVAC equipment, sales of other HVAC products (29% of sales) increased 11%, and sales of commercial refrigeration products (4% of sales) increased 10%.

On a same-store basis, revenues increased $128.3 million, or 13%, as compared to the same period in 2020.

For HVAC equipment, the increase in revenues was primarily due to demand for residential HVAC equipment and a higher mix of high-efficiency air conditioning and heating systems, which sell at higher unit prices, resulting in a 16% increase in volume and a 2% increase in the average selling price.

Gross profit for the first quarter of 2021 increased $47.2 million, or 19%, as compared to the first quarter of 2020, primarily as a result of increased revenues.

Gross profit margin for the quarter ended March 31, 2021 increased 130 basis-points to 25.9% versus 24.6%, primarily due to the impact of pricing and mix for HVAC equipment.

Selling, General and Administrative Expenses

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.

Selling, general and administrative expenses for the first quarter of 2021 increased $14.2 million, or 7%, as compared to the first quarter of 2020, primarily due to increased revenues.

Selling, general and administrative expenses as a percent of revenues for the quarter ended March 31, 2021 decreased to 19.2% versus 20.2% for the same period in 2020 primarily due to increased leverage on fixed costs driven by increased revenues and actions taken to improve operating efficiencies and to reduce costs and curtail discretionary spending in response to the pandemic.

Other income of $4.7 million and $1.0 million for the first quarters of 2021 and 2020, respectively, represents our share of the net income of Russell Sigler, Inc.

Interest Expense, Net

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;

Interest expense, net, for the first quarter of 2021 decreased 89%, primarily as a result of a decrease in average outstanding borrowings and a lower effective interest rate, in each case under our revolving credit facility, as compared to the same period in 2020.

Income taxes increased to $15.7 million for the first quarter of 2021, as compared to $8.2 million for the first quarter of 2020, 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 22.0% 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.

The effective income tax rates attributable to us were 22.0% and 21.0% for the quarters ended March 31, 2021 and 2020, respectively.

The increase was primarily due to higher state income taxes in 2021 as compared to the same period in 2020.

Net Income Attributable to Watsco, Inc.

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.

Net income attributable to Watsco, Inc.

for the quarter ended March 31, 2021 increased $24.6 million, or 81%, compared to the same period in 2020.

The increase was primarily driven by higher revenues, gross profit, and other income 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 September 30, 2020, we had $92.6 million of cash and cash equivalents, of which $64.7 million was held by foreign subsidiaries.

As of March 31, 2021, we had $93.9 million of cash and cash equivalents, of which $78.7 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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LIBOR is the subject of recent proposals for reform that currently provide for the phase-out

of LIBOR by 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 the Secured Overnight Financing Rate (“SOFR”), which may exceed what would have been the comparable LIBOR rate.

We believe that the transition from LIBOR will not materially impact our financial position or results of operations.

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 the Secured Overnight Financing Rate, which may exceed what would have been the comparable LIBOR rate.

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 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

Cash flows used in investing activities

Working capital increased to $1,064.5 million at March 31, 2021 from $997.3 million at December 31, 2020, reflecting higher levels of inventories, primarily due to the seasonality of our business.

The following table summarizes our cash flow activity for the quarters ended March 31, 2021 and 2020 (in millions):

Cash flows (used in) provided by operating activities

Cash flows provided by (used in) investing activities

Cash flows used in financing 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 and the comparative timing of payments for accrued expenses and other current liabilities in 2020 versus 2019.

The increase in net cash used in operating activities was primarily due to increases in the level of inventory in 2021 as compared to 2020.

Investing Activities

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.

Net cash provided by investing activities was primarily due to proceeds from the sale of equity securities, partially offset by higher capital expenditures in 2021.

Financing Activities

The increase in net cash used in financing activities was primarily attributable to net repayments under our revolving credit agreement and an increase in dividends paid in 2020.

The decrease in net cash used in financing activities was primarily attributable to higher borrowings partially offset by an increase in dividends paid in 2021.

Revolving Credit Agreement

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On April 10, 2020, we increased the aggregate borrowing capacity of our revolving credit agreement from $500.0 million to $560.0 million.

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 2020.

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.

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

At March 31, 2021 $48.9 million was outstanding under the revolving credit agreement.

At December 31, 2020 there was no outstanding balance 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 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 wholly owned subsidiary of the Company with 17 locations in the Northeastern U.S.

We believe we were in compliance with all covenants at March 31, 2021.

Investment in Unconsolidated Entity

On June 21, 2017, Carrier Enterprise I acquired a 34.9% ownership interest in RSI, an HVAC distributor operating from 30 locations in the Western U.S.

for cash consideration of $63.6 million, of which we contributed $50.9 million, and Carrier contributed $12.7 million.

Effective June 29, 2018, Carrier Enterprise I acquired an additional 1.4% ownership interest in RSI, which increased Carrier Enterprise I’s ownership interest in RSI to 36.3% for cash consideration of $3.8 million, of which we contributed $3.0 million and Carrier contributed $0.8 million.

Effective April 22, 2019, Carrier Enterprise I acquired an additional 1.8% ownership interest in RSI, which increased Carrier Enterprise I’s ownership interest in RSI to 38.1% for cash consideration of $4.9 million, of which we contributed $3.9 million and Carrier contributed $1.0 million.

Carrier Enterprise I has a 38.1% ownership interest in RSI, an HVAC distributor operating from 30 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.

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

At March 31, 2021, the estimated purchase amount we would be contingently liable for was approximately $222.0 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.

On November 26, 2019, one of our wholly owned subsidiaries acquired certain assets and assumed certain liabilities of N&S, a distributor of air conditioning, heating and plumbing products operating from seven locations in New York and Connecticut.

The purchase price was composed of cash consideration of $12.0 million, the issuance of 22,435 shares of Common stock having a fair value of $4.0 million and the payment of certain indebtedness.

On August 1, 2019, Carrier Enterprise I acquired substantially all the HVAC assets and assumed certain of the liabilities of PPI, an HVAC distributor operating from 19 locations in Pennsylvania, New Jersey, and Delaware, for $85.0 million less certain average revolving indebtedness.

Consideration for the net purchase price consisted of $10.0 million in cash, 372,543 shares of Common stock having a fair value of $58.3 million, net of a discount for lack of marketability, and the payment of certain average revolving indebtedness.

Carrier contributed cash of $17.0 million to Carrier Enterprise I in connection with the acquisition of PPI.

On April 2, 2019, one of our wholly owned subsidiaries acquired certain assets and assumed certain liabilities of DASCO, a distributor of air conditioning and heating products operating from seven locations in New Jersey, New York and Connecticut.

The purchase price was composed of cash consideration of $16.8 million and the issuance of 50,952 shares of Common stock having a fair value of $6.9 million, net of a discount for lack of marketability.

We formed a new, stand-alone joint venture with Carrier, TEC, that will operate this business.

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

Consideration for the purchase was paid in cash, consisting of $105.2 million paid to Temperature Equipment Corporation (Carrier contributed $21.0 million and we contributed $84.2 million) and $1.5 million for repayment of indebtedness.

We continually evaluate potential acquisitions and/or joint ventures and investments in unconsolidated entities.

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Common Stock Dividends

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.

We paid cash dividends of $1.775 and $1.60 per share of Common stock and Class B common stock during the quarters ended March 31, 2021 and 2020, respectively.

On April 1, 2021, our Board of Directors declared a regular quarterly cash dividend of $1.95 per share of both Common and Class B common stock that was paid on April 30, 2021 to shareholders of record as of April 15, 2021.

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

At March 31, 2021, there were 1,129,087 shares remaining authorized for repurchase under the program.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

2 unchanged sentences

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