What changed in this filing

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Item 1. Business

2022-02-25 compared with 2021-02-26 · 79 added, 33 removed, 207 unchanged (35% of the section changed)

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The advent of HVAC/R products in Latin America and the Caribbean is also well-established but has emerged in more recent years as those economies have grown and products have become more affordable and have matured from luxury to necessity.

Based on data published in the 2019 IBIS World Industry Report for Heating and Air Conditioning Contractors in the U.S.

Based on data published in the December 2021 IBIS World Industry Report for Heating and Air Conditioning Contractors in the U.S.

and other available data, we estimate that the annual market on an installed basis for residential central air conditioning, heating, and refrigeration equipment, and related parts and supplies is approximately $120.0 billion.

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Rheem Manufacturing Company (“Rheem”);

Trane Technologies Inc.

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

Trane Technologies plc (“Trane”);

York International Corporation, a subsidiary of Johnson Controls International plc;

Lennox International Inc.

and Nortek Global HVAC, LLC (“Nortek”), a subsidiary of Nortek, Inc.

and Nortek Global HVAC, LLC, a subsidiary of Nortek, Inc.

These manufacturers distribute their products through a combination of factory-owned locations and independent distributors who, in turn, supply the equipment and related parts and supplies to contractors and dealers that sell to and install the products for consumers, businesses, and other end-users.

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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 Flexible Technologies, Inc.(“Flexible Technologies”), Resideo Technologies Inc.

We distribute products manufactured by Flexible Technologies, Inc.

(“Flexible Technologies”), Resideo Technologies, Inc.

(“Resideo”), Southwark Metal Mfg.

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With this digital evolution in mind, our efforts have addressed how customers are served, how internal processes and practices can be improved, and how data and analytics can be created and used to enhance long-term performance.

Investments include the addition of more than 200 technology employees along with investments in our locations and infrastructure to enable these technologies.

Investments include the addition of approximately 300 technology employees along with investments in our locations and infrastructure to enable these technologies.

To that end, several scalable technology platforms have been launched with the largest focus on customer-obsessed technologies, which are improving and transforming the customer experience at all of our locations.

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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.

Human Capital Management

Employee Population

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.

As of December 31, 2021, we employed approximately 6,850 full-time and 50 part-time employees, or approximately 6,900 total employees, substantially all of whom were non-union

Of these employees, approximately 9% were located in Canada and Mexico.

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

Diversity and Inclusion

We value and foster the diversity and inclusion of the people with whom we work.

Our commitment includes providing equal access to, and participation in, employment and advancement opportunities without regard to race, color, religion, national origin, age, disability, veteran or military status, pregnancy status, sex, gender identity, sexual orientation, or marital status.

Diverse teams facilitate contributions from people of different backgrounds and varied points of view.

Furthermore, we believe that well managed diverse teams make better decisions faster and outperform less diverse teams.

Additionally, we believe that employees who feel valued, understood, and inspired benefit the Company as a whole.

Inclusive leadership leads to innovative solutions and an inclusive environment is a critical foundation for us, as high-performing, engaged teams join together to help us implement our strategies.

Compensation and Benefits

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.

Pay-for-Performance

and Ownership Culture

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

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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.

Talent Development

Our culture celebrates talent sharing, career development, and agility across the Company.

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.

Health and Safety

We continuously strive to improve all aspects of our work practices.

We actively support a culture of safety and wellness for the benefit of our employees and their families along with our customers.

Providing a safe and healthy work environment is a business priority and is core to our values.

Health and safety are an essential part of a broader workforce strategy that reduces the risk of harm to employees and helps them remain healthy, engaged and productive.

To build and sustain a culture based on these principles, our commitment to safety and wellness is incorporated into the incentive structure of our key operational leaders.

For wellness, we measure employee engagement in completing annual physicals and health assessments to help ensure that our philosophical values are put into action.

For safety, we measure and carefully evaluate incidents related to workers compensation, vehicle accidents and injuries to third-parties, and we continuously seek to improve safety measures intended to reduce the number of such incidents.

In response to the COVID-19

pandemic, we took steps to safeguard the health of our employees.

This included having certain of our employees work from home, while implementing additional safety measures for employees continuing essential on-site

work, such as creating more space between work areas, providing personal protective equipment and cleaning supplies, establishing mitigation policies in the event of cases of illness, and instituting contactless sales and servicing capabilities at many of our locations.

DESCRIPTION OF BUSINESS

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(i) equipment, including residential ducted and ductless air conditioners ranging from 1 to 5 tons, gas, electric, and oil furnaces ranging from 50,000 to 150,000 BTUs, commercial air conditioning and heating equipment systems ranging from 1-1/2

to 25 tons, and other specialized equipment, (ii) parts, including replacement compressors, evaporator coils, motors, and other component parts, (iii) supplies, including thermostats, insulation material, refrigerants, ductwork, grills, registers, sheet metal, tools, copper tubing, concrete pads, tape, adhesives, and other ancillary supplies and (iv) plumbing and bathroom remodeling supplies.

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 HVAC equipment, which we currently source from approximately 20 vendors, accounted for 69% of our revenues for both the years ended December 31, 2021 and 2020.

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, 2021 and 2020.

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.

Sales of commercial refrigeration products, which we currently source from approximately 140 vendors, accounted for 3% of our revenues for both the years ended December 31, 2021 and 2020.

Distribution and Sales

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The markets we serve are as follows:

% of Revenues for

the Year Ended

% of Revenues

for the Year Ended

December 31, 2021

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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

In 2009, we formed a joint venture with Carrier Global Corporation (“Carrier”), which we refer to as Carrier Enterprise I, in which Carrier contributed company-owned locations in the Sun Belt states and Puerto Rico, and its export division in Miami, Florida, and we contributed certain 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.

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(“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.

Collectively, the Northeast locations and the Mexico operations are referred to as Carrier Enterprise II.

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.

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

In 2011, we formed a second joint venture with Carrier, which we refer to as Carrier Enterprise II, in which Carrier contributed company-owned locations in the Northeast U.S., and we contributed certain locations operating as Homans Associates LLC (“Homans”), a Watsco subsidiary, in the Northeast U.S.

Subsequently, Carrier Enterprise II purchased Carrier’s distribution operations in Mexico.

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

Effective May 31, 2019, we repurchased the 20% ownership interest in Homans from Carrier Enterprise II, following which we own 100% of Homans.

Homans previously operated as a division of Carrier Enterprise II and subsequent to the purchase operates as a wholly owned subsidiary of the Company.

In 2012, we formed a third joint venture with Carrier, which we refer to as Carrier Enterprise III.

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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 operates this business.

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

Combined, the joint ventures with Carrier represented 56% of our revenues for the year ended December 31, 2021.

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in “Business Risk Factors” in Item 1A.

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 business and affairs of the joint ventures are controlled, directed, and managed exclusively by Carrier Enterprise I’s, Carrier Enterprise II’s, Carrier Enterprise III’s, and TEC’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 and Carrier.

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Given our leadership position, Watsco represents a strategic business relationship to many of the leading manufacturers in our industry.

Significant relationships with HVAC/R equipment manufacturers include Carrier, Rheem, Goodman, Welbilt, Mitsubishi Electric Corporation, Gree Electric Appliances, Inc., Trane, Midea Group, and Nortek.

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

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To maintain brand-name recognition, HVAC/R equipment manufacturers provide national advertising and participate with us in cooperative advertising programs and promotional incentives that are targeted to both dealers and end-users.

We estimate that the replacement market for residential air conditioning equipment is approximately 85% of industry unit sales in the United States, and we expect this percentage to increase as units installed in the past 20 years wear out or otherwise become practical to replace sooner with newer, more energy-efficient models.

We estimate that the replacement market for residential air conditioning equipment is approximately 85%-90%

of industry unit sales in the United States, and we expect this percentage to increase as units installed in the past 20 years wear out or otherwise become practical to replace sooner with newer, more energy-efficient models.

The Company’s top ten suppliers accounted for 83% of our purchases, including 61% from Carrier, and 10% from Rheem.

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Distribution Agreements

We maintain trade name and distribution agreements with Carrier and Rheem that provide us distribution rights on an exclusive basis in specified territories and are not subject to a stated term or expiration date.

We maintain trade name and distribution agreements with Carrier, Rheem, and Mitsubishi that provide us distribution rights on an exclusive basis in specified territories and are not subject to a stated term or expiration date.

We also maintain distribution agreements with various other suppliers, either on an exclusive or non-exclusive

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For systems over 45,000 BTUs, the minimum efficiency level will be 14 SEER in the North and 14.5 SEER in the Southeast and Southwest.

Heat pump efficiency levels will be set at 15 SEER for all three regions.

It is too early to determine the impact to our results of operations this transition will have, however, we expect a benefit from selling higher efficiency units, which sell at higher prices.

Heat pump efficiency levels, which are measured by the equipment’s heating seasonal performance factor (“HSPF”), will be 8.8 HSPF compared with the 8.2 HSPF required by the current standard for all three regions.

It is too early to determine the impact to our results of operations this transition will have;

however, we expect a benefit from selling higher efficiency units, which sell at higher prices.

In December 2020, the American Innovation and Manufacturing Act of 2020 (the “AIM Act”) was enacted, which gave the United States Environmental Protection Agency (“EPA”) regulatory authority to address hydrofluorocarbon (“HFC”) refrigerants.

HFCs were developed to replace certain refrigerants, such as chlorofluorocarbons and hydrochlorofluorocarbons that were harmful to the ozone layer, but are considered potent greenhouse gases as a result of their global warming potential (“GWP”).

The Aim Act directed the EPA to administer an 85% phasedown down of the production and consumption of HFCs over a 15-year

timeframe beginning on January 1, 2022 and put in place restrictions on HVAC equipment that require them to have refrigerants with less than 750 GWP by January 1, 2025.

We are planning for the transition of our inventory to HVAC equipment with refrigerants that comply with the new standard, and we believe we will complete this transition in accordance with the required timeline.

During 2014, the DOE established new rules for the manufacturing of motors used in residential furnaces with the purpose of increasing the energy efficiency of these motors, and, consequently, the furnaces in which they operate.

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

Climate Change and Reductions in CO 2

We believe that our business plays an important and significant role in the drive to lower CO2e emissions.

According to the DOE, heating and air conditioning accounts for roughly half of household energy consumption in the United States.

As such, replacing HVAC systems at higher efficiency levels is one of the most meaningful steps homeowners can take to reduce their electricity costs and carbon footprint over time.

The overwhelming majority of new HVAC systems that we sell replace systems that likely operate well below current minimum efficiency standards in the United States and may use more harmful refrigerants that have been, or are being, phased-out.

consumers replace HVAC systems with new, higher-efficiency systems, homeowners will consume less energy, save costs and reduce the carbon footprint over time.

The sale of high-efficiency systems has long been a focus of ours, and we have invested in tools and technology intended to capture an increasingly richer sales mix over time.

In addition, regulatory mandates will periodically increase the required minimum SEER, thus providing a catalyst for greater sales of higher-efficiency systems.

We offer a broad variety of systems that operate beyond the minimum SEER standards, including systems that operate at more than 20 SEER.

Our sales of higher-efficiency residential HVAC systems grew 26% organically in 2021, outpacing the overall growth rate of 17% for residential HVAC equipment in the United States.

Based on estimates validated by independent sources, we averted an estimated 10.1 million metric tons of CO2e emissions during 2020 and 2021 through the sale of replacement residential HVAC systems at higher-efficiency standards – the equivalent of nearly 2.2 million passenger vehicles driven over the course of one year.

More information, including sources and assumptions used to support our estimates, can be found at www.watsco.com/environment

Information contained on, or available through, our website is not incorporated by reference in, or made a part of, this report.

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