What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-04 · 89 added, 126 removed, 140 unchanged (61% of the section changed)

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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, 2021, we operated from 673 locations in 42 U.S.

At March 31, 2022, we operated from 671 locations in 42 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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Impact of the COVID-19

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.

Additionally, most of the restrictive orders have been lifted, allowing people to generally return to work.

pandemic has had widespread, rapidly-evolving and unpredictable impacts on financial markets and business practices.

As conditions have continued to improve, governments and organizations have responded by adjusting their restrictions and guidelines accordingly.

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 throughout 2020 and into 2021.

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 the COVID-19

restrictions that had been in place earlier in the period.

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, which negatively impacted our operations.

During this period, we took steps to safeguard the health of our employees and customers.

This included creating additional space between work areas, providing personal protective equipment and cleaning supplies, establishing 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.

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 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 took 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 in 2020.

As restrictions have eased and normal economic conditions have largely resumed, our various austerity measures to curtail discretionary spending have eased.

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 ongoing impacts of the COVID-19

As economic activity has been recovering and the effects of the pandemic have lessened in 2021, the impact of the pandemic on our business has been more reflective of greater economic and marketplace dynamics rather than pandemic-related issues such as location closures, mandated restrictions and employee illness.

OEMs and manufacturers have experienced some level of supply chain disruptions caused by component availability, labor shortages, transportation delays, and other supply chain challenges, all of which have impacted typical lead times and overall availability of HVAC products.

While supply chain disruptions impacted third quarter 2021 residential sales, we nonetheless experienced growth in residential units during the quarter.

As of the date of this filing, product availability has improved, and we are encouraged by current volume trends and the ability of OEMs to meet strong end-market

Notwithstanding the recent resurgence of economic activity, in light of variant strains of the virus and the continued 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

The full impact of the COVID-19

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, the extent to which normal economic and operating conditions are impacted, 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.

while maintaining our operations in all material respects, our focus remains on promoting employee health and safety, serving our customers and ensuring business continuity.

As economic activity has been recovering and the effects of the pandemic have continued to lessen, the impact of the pandemic on our business has been more reflective of greater economic and marketplace dynamics rather than pandemic-related issues, such as location closures, mandated restrictions and employee illness.

Manufacturers have experienced some level of supply chain disruptions caused by component availability, labor shortages, transportation delays, and other logistical challenges, resulting in longer lead times and constrained availability of HVAC/R products.

These supply chain disruptions impacted our ability to fulfill contractor demand at various points during the first quarter of 2022.

Despite these disruptions, we experienced growth in sales of residential units during the quarter.

As of the date of this filing, product availability had improved, and more typical inventory levels are being reestablished to meet the continued strong end-market

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.

Climate Change

We believe we can meaningfully contribute to sustainability and greenhouse gas emissions reduction through the sale of high-efficiency residential HVAC equipment that replaces older systems operating at lower required minimum efficiencies.

Based on estimates validated by independent sources, since January 1, 2020 through September 30, 2021, we facilitated the reduction of an estimated 19.4 billion pounds of CO2e emissions from the sale of replacement residential air conditioners, heat pumps, and furnaces.

Climate Change and Reductions in CO 2

We believe that our business plays an important and significant role in the drive to lower CO 2

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

As such, replacing older, less efficient HVAC systems with higher efficiency systems is one of the most meaningful steps homeowners can take to reduce their electricity costs and carbon footprint.

The overwhelming majority of new HVAC systems that we sell replace systems that likely operate 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 their carbon footprint.

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 Seasonal Energy Efficiency Ratio rating, referred to as SEER, thus providing a catalyst for greater sales of higher-efficiency systems.

Recently enacted regulations will increase the current minimum SEER beginning in 2023 (in general terms, to 14 SEER from 13 SEER in the Northern U.S.

and to 15 SEER from 14 SEER for the Southern U.S.).

We offer a broad variety of systems that operate above the minimum SEER standards, ranging from base-level efficiency to systems that exceed 20 SEER.

Our sales of higher-efficiency residential HVAC systems (those above base-level efficiency) grew 31% organically during the first quarter of 2022, outpacing the overall growth rate of 26% for residential HVAC equipment in the United States.

Based on estimates validated by independent sources, we averted an estimated 11.4 million metric tons of CO 2

e emissions during the period January 1, 2020 to March 31, 2022 through the sale of replacement residential HVAC systems at higher-efficiency standards.

Joint Ventures with Carrier Global Corporation

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.

In 2009, we formed a joint venture with 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

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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.

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

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

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.

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

Critical Accounting Policies

Critical Accounting Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon the condensed consolidated unaudited financial statements included in this Quarterly Report on Form 10-Q,

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At least quarterly, management reevaluates its judgments and estimates, which are based on historical experience, current trends, and various other assumptions that are believed to be reasonable under the circumstances.

Our critical accounting policies are included in our 2020 Annual Report on Form 10-K,

Our critical accounting estimates are included in our 2021 Annual Report on Form 10-K,

as filed with the SEC on February 25, 2022.

We believe that there have been no significant changes during the quarter ended September 30, 2021 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, 2022 to the critical accounting estimates disclosed in our Annual Report on Form 10-K

for the year ended December 31, 2021.

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, 2021 and 2020:

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, 2022 and 2021:

Cost of sales

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The following narratives reflect our acquisitions of Makdad Industrial Supply Co., Inc.

(“MIS”) in August 2021, Acme Refrigeration of Baton Rouge LLC (“ACME”) in May 2021, and TEC in April 2021.

in August 2021, Acme Refrigeration of Baton Rouge LLC in May 2021, and Temperature Equipment Corporation in April 2021.

We did not acquire any businesses during the quarters ended March 31, 2022 or 2021.

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, 2021 and 2020, zero and two 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, 2021:

September 30, 2020

At March 31, 2022 and 2021, six and one locations, respectively, that we opened during the immediately preceding 12 months 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, 2022:

March 31, 2021

December 31, 2021

September 30, 2021

Third Quarter of 2021 Compared to Third Quarter of 2020

Revenues for the third quarter of 2021 increased $245.9 million, or 16%, including $112.4 million attributable to new locations acquired and $7.1 million from other locations opened during the preceding 12 months, offset by $1.7 million from locations closed.

Sales of HVAC equipment (69% of sales) increased 13%, sales of other HVAC products (27% of sales) increased 19% and sales of commercial refrigeration products (4% of sales) increased 27%.

On a same-store basis, revenues increased $128.1 million, or 8%, as

compared to the same period in 2020, reflecting a 7% increase in sales of HVAC equipment (69% of sales), which included a 5% increase of residential HVAC equipment (5% increase in U.S.

markets and a 9% increase in international markets) and a 15% increase in sales of commercial HVAC equipment, a 12% increase in sales of other HVAC products (27% of sales) and a 27% increase in sales of commercial refrigeration products (4% of sales).

For HVAC equipment, the increase in revenues was primarily due to the realization of price increases, a higher mix of high-efficiency air conditioning and heating systems, which sell at higher unit prices, and increased demand for residential HVAC equipment, resulting in a 4% increase in the average selling price and a 1% increase in volume, as well as higher sales of commercial HVAC equipment.

Gross profit for the third quarter of 2021 increased $108.9 million, or 29%, primarily as a result of increased revenues.

Gross profit margin for the quarter ended September 30, 2021 improved 280 basis-points to 27.1% versus 24.3% for the same period in 2020, primarily due to the impact of pricing and mix for residential HVAC equipment.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the third quarter of 2021 increased $60.9 million, or 28%, primarily due to increased revenues and newly acquired locations.

Selling, general and administrative expenses as a percent of revenues for the third quarter of 2021 increased to 15.8% versus 14.4% for the same period in 2020.

On a same-store basis, selling, general and administrative expenses increased 17% as compared to the same period in 2020, primarily due to variable selling costs driven by the increase in revenues, increased employee headcount, increased performance-based compensation costs commensurate with 2021’s operating performance and easing of short-term austerity measures taken during the third quarter of 2020 to reduce costs and curtail discretionary spending in response to the pandemic.

Other income of $6.1 million and $4.1 million for the third quarters of 2021 and 2020, respectively, represented our share of the net income of Russell Sigler, Inc.

(“RSI”), in which we have a 38.1% equity interest.

Interest Expense, Net

Interest expense, net for the third quarter of 2021 increased $0.1 million, or 105%, primarily as a result of an increase in average outstanding borrowings, partially offset by 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 $41.7 million for the third quarter of 2021, as compared to $30.5 million for the third 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 22.8% and 22.2% for the quarters ended September 30, 2021 and 2020.

The increase was primarily due to higher state income taxes and proportionately higher income in the third quarter of 2021 as compared to tax credits and share-based compensation deductions in the third quarter of 2020.

Income Attributable to Watsco, Inc.

Net income attributable to Watsco for the quarter ended September 30, 2021 increased $34.4 million, or 32%, compared to the same period in 2020.

The increase was primarily driven by higher revenues and expanded profit margins, partially offset by higher income taxes and an increase in the net income attributable to the non-controlling

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Revenues for the nine months ended September 30, 2021 increased $868.1 million, or 22%, including $217.1 million attributable to new locations acquired and $10.4 million from other locations opened during the preceding 12 months, offset by $4.7 million from locations closed.

March 31, 2022

Revenues for the first quarter of 2022 increased $387.5 million, or 34%, as compared to the first quarter of 2021, including $90.9 million attributable to new locations acquired and $9.5 million from other locations opened during the preceding 12 months, offset by $2.0 million from locations closed.

Sales of HVAC equipment (67% of sales) increased 32%, sales of other HVAC products (29% of sales) increased 32%, and sales of commercial refrigeration products (4% of sales) increased 35%.

On a same-store basis, revenues increased $289.1 million, or 25%, as compared to the same period in 2021, reflecting a 26% increase in sales of HVAC equipment (67% of sales), which included a 26% increase in residential HVAC equipment (26% increase in U.S.

markets and a 27% increase in international markets) and a 15% increase in sales of commercial HVAC equipment, a 16% increase in sales of other HVAC products (27% of sales) and a 28% increase in commercial refrigeration products (4% of sales).

For HVAC equipment, the increase in revenues was

primarily due to strong demand for the replacement of residential HVAC equipment, the realization of price increases, and a higher mix of high-efficiency air conditioning and heating systems, which sell at higher unit prices, resulting in a 9% increase in volume and an 6% increase in the average selling price, as well as higher sales of commercial HVAC equipment.

Gross profit for the nine months ended September 30, 2021 increased $314.8 million, or 33%, primarily as a result of increased revenues.

Gross profit margin for the nine months ended September 30, 2021 improved 220 basis-points to 26.3% versus 24.1% for the same period in 2020, primarily due to the impact of pricing and mix for residential HVAC equipment.

markets and a 20% increase in international markets) and a 29% increase sales of commercial HVAC equipment (28% increase in U.S.

markets and a 33% increase in international markets), a 24% increase in sales of other HVAC products (29% of sales), and a 35% increase in sales of commercial refrigeration products (4% of sales).

For HVAC equipment, the increase in revenues was primarily due to the realization of price increases, strong demand for residential HVAC equipment, and a greater mix of high-efficiency air conditioning and heating systems, which sell at higher unit prices, resulting in an 18% increase in the average selling price and an 8% increase in the unit volume for residential unitary air conditioning equipment.

Gross profit for the first quarter of 2022 increased $155.5 million, or 53%, as compared to the first quarter of 2021, primarily as a result of increased revenues.

Gross profit margin for the quarter ended March 31, 2022 improved 370 basis-points to 29.6% versus 25.9%, primarily due to the benefits of our use of technologies designed to optimize pricing and margins, passing on price increases from our suppliers to our customers and an improved sales mix of higher-efficiency HVAC systems.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the nine months ended September 30, 2021 increased $147.8 million, or 24%, primarily due to increased revenues and newly acquired locations.

Selling, general and administrative expenses as a percentage of revenues increased to 16.1% versus 15.9% for the nine months ended September 30, 2021 as compared to the same period in 2020.

On a same-store basis, selling, general and administrative expenses increased 17% as compared to the same period in 2020.

The increase was primarily related to increased higher variable selling costs driven by the increase in revenues, investments in employee headcount and performance-based compensation costs, increased logistics costs in response to strong demand and continuing supply chain disruptions, and increased rent expense associated with new locations opened.

Other income of $16.3 million and $9.2 million for the nine months ended September 30, 2021 and 2020, respectively, represented our share of the net income of RSI, in which we have a 38.1% equity interest.

Selling, general and administrative expenses for the first quarter of 2022 increased $65.7 million, or 30%, as compared to the first quarter of 2021, primarily due to increased revenues from existing and newly acquired locations.

Selling, general and administrative expenses as a percent of revenues for the quarter ended March 31, 2022 decreased to 18.6% versus 19.2% for the same period in 2021.

On a same-store basis, selling, general and administrative expenses increased 19% as compared to the first quarter of 2021 and as a percentage of sales decreased to 18.2% versus 19.2% as compared to the same period in 2021 primarily due to increased leverage on fixed costs driven by increased revenues.

Other income of $4.0 million and $4.7 million for the first quarters of 2022 and 2021, respectively, represented our share of the net income of Russell Sigler, Inc.

(“RSI”), in which we have a 38.1% equity interest.

Interest Expense, Net

Interest expense, net for the nine months ended September 30, 2021 decreased $0.4 million, or 36%, primarily as a result of a decrease in average outstanding borrowings for the 2021 period, in each case under our revolving credit facility, as compared to the same period in 2020.

Income taxes increased to $101.6 million for the nine months ended September 30, 2021, as compared to $63.4 million for the nine months ended September 30, 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;

Interest expense, net for the first quarter of 2022 increased $0.5 million, or 534%, primarily as a result of an increase in average outstanding borrowings under our revolving credit facility as compared to the same period in 2021.

Income taxes increased to $35.6 million for the first quarter of 2022, as compared to $15.7 million for the first quarter of 2021, 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 22.9% and 22.0% for the nine months ended September 30, 2021 and 2020, respectively.

The increase was primarily due to higher state income taxes and proportionately higher income in 2021 as compared to tax credits and share-based compensation deductions in 2020.

The effective income tax rates attributable to us were 23.8% and 22.0% for the quarters ended March 31, 2022 and 2021, respectively.

The increase was primarily due to higher state income taxes, proportionately higher income, and lower share-based deductions in 2022 as compared to the same period in 2021.

Net Income Attributable to Watsco, Inc.

Net income attributable to Watsco for the nine months ended September 30, 2021 increased $116.5 million, or 52%, compared to the same period in 2020.

Net income attributable to Watsco for the quarter ended March 31, 2022 increased $58.2 million, or 106%, compared to the same period in 2021.

The increase was primarily driven by higher revenues and expanded profit margins, partially offset by higher income taxes and an increase in the net income attributable to the non-controlling

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Sources and Uses of Cash

We rely on cash flows from operations and borrowing capacity under our revolving credit agreement to fund seasonal working capital needs and for other general corporate purposes, including dividend payments (if and as declared by our Board of Directors), capital expenditures, business acquisitions, and development of our long-term operating and technology strategies.

We rely on cash flows from operations and borrowing capacity under our revolving credit agreement to fund seasonal working capital needs and for other general corporate purposes in the short-term and the long-term, including dividend payments (if and as declared by our Board of Directors), capital expenditures, business acquisitions, and development of our long-term operating and technology strategies.

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

As of September 30, 2021, we had $137.2 million of cash and cash equivalents, of which $99.1 million was held by foreign subsidiaries.

As of March 31, 2022, we had $110.6 million of cash and cash equivalents, of which $99.0 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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Disruptions in the credit and capital markets could adversely affect our ability to draw on our revolving credit agreement and may also adversely affect the determination of interest rates, particularly rates based on LIBOR, which is one of the base rates under our revolving credit agreement.

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

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 which may exceed what would have been the comparable LIBOR rate.

On March 5, 2021, the United Kingdom Financial Conduct Authority, which regulates LIBOR, confirmed that LIBOR will either cease to be provided by any administrator or will no longer be representative after June 30, 2023 for USD LIBOR reference rates.

Our revolving credit agreement provides that it may be amended to replace LIBOR with an alternate benchmark rate.

The impact of such an amendment cannot be entirely predicted but could result in an increase in the cost of our debt.

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 increased to $1,184.2 million at September 30, 2021, reflecting 56 new locations added by acquisitions in 2021, which in aggregate added $94.5 million of working capital.

Excluding these new locations, working capital increased 9% to $1,089.7 million at September 30, 2021 from $997.3 million at December 31, 2020, primarily due to higher accounts receivable consistent with overall increased sales, the seasonality of our business, and higher levels of inventory in support of stronger business conditions.

The following table summarizes our cash flow activity for the nine months ended September 30, 2021 and 2020 (in millions):

Cash flows provided by operating activities

Cash flows used in investing activities

Cash flows used in financing activities

Working capital increased to $1,483.3 million at March 31, 2022 from $1,234.7 million at December 31, 2021, primarily due to higher accounts receivable consistent with overall increased sales, the seasonality of our business, and higher levels of inventory in support of stronger business conditions.

The following table summarizes our cash flow activity for the quarters ended March 31, 2022 and 2021 (in millions):

Cash flows used in operating activities

Cash flows (used in) provided by investing activities

Cash flows provided by (used in) financing activities

The individual items contributing to cash flow changes for the periods presented are detailed in the condensed consolidated unaudited statements of cash flows contained in this Quarterly Report on Form 10-Q.

Operating Activities

The decrease in net cash provided by operating activities was primarily due to higher accounts receivable driven by increased sales and higher levels of inventory in support of strong business conditions in 2021 as compared to 2020.

The increase in net cash used in operating activities was primarily due to increases in the level of inventory and accounts receivable, partially offset by an increase in net income due to strong business conditions in 2022.

Investing Activities

Net cash used in investing activities was higher primarily due to cash consideration paid for acquisitions.

The increase in net cash used in investing activities was primarily due to higher capital expenditures in 2022 and proceeds from the sale of equity securities in 2021.

Financing Activities

The decrease in net cash used in financing activities was primarily attributable to net repayments under our revolving credit agreement in 2020 and $21.0 million in proceeds from the non-controlling

interest for its contribution to the acquisition of TEC in 2021, partially offset by an increase in dividends paid in 2021.

Net cash provided by financing activities increased primarily due to higher borrowings partially offset by an increase in dividends paid in 2022.

Revolving Credit Agreement

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The credit agreement matures on December 5, 2023.

At September 30, 2021 $1.7 million was outstanding under the revolving credit agreement related to a foreign subsidiary.

At December 31, 2020 there was no outstanding balance under the revolving credit agreement.

At March 31, 2022 and December 31, 2021, $262.5 million and $89.0 million, respectively, were outstanding under the revolving credit agreement.

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

We believe we were in compliance with all covenants at September 30, 2021.

We believe we were in compliance with all covenants at March 31, 2022.

At-the-Market

Offering Program

On August 6, 2021, we entered into a sales agreement with Robert W.

(“Baird”), which enables the Company to issue and sell shares of Common stock in one or more negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), for a maximum aggregate offering amount of up to $300.0 million (the “ATM Program”).

The offer and sale of our Common stock pursuant to the ATM Program has been registered under the Securities Act pursuant to our automatically effective shelf registration statement on Form S-3

On February 25, 2022, we entered into an amended and restated sales agreement, together with Baird and Goldman Sachs & Co.

LLC (“GS”), for the purpose of adding GS as an additional sales agent and making necessary conforming changes.

The amended and restated sales agreement otherwise retains all material terms of the original sales agreement.

As of March 31, 2022, no shares of Common stock had been sold under the ATM Program.

Contractual Obligations

On October 15, 2022, 975,622 shares of Class B restricted stock held by our Chief Executive Officer (“CEO”) will vest.

The CEO may elect to satisfy the tax withholding obligations in connection with the vesting of the restricted stock either by the Company’s withholding of shares otherwise deliverable to the CEO, or in cash, or any combination of the two.

If the CEO elects to satisfy his tax withholding obligation through the Company’s withholding of shares, then we will satisfy the withholding tax obligations in cash.

Based on the closing price of Watsco’s Class B common stock and withholding tax rates in effect at March 31, 2022, the estimated withholding tax obligation would have been approximately $119.0 million had the shares vested on March 31, 2022.

We intend to satisfy any such withholding obligations using cash on hand or borrowing availability under our revolving credit agreement described above.

Investment in Unconsolidated Entity

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

At September 30, 2021, the estimated purchase amount we would be contingently liable for was approximately $318.0 million.

At March 31, 2022, the estimated purchase amount we would be contingently liable for was approximately $291.0 million.

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

On August 20, 2021, one of our wholly owned subsidiaries acquired MIS, a distributor of air conditioning and heating products operating from six locations in Pennsylvania.

Consideration for the purchase price consisted of $3.1 million in cash and the issuance of 3,627 shares of Common stock having a fair value of $1.0 million, net of cash acquired of $0.2 million.

On May 7, 2021, we acquired certain assets and assumed certain liabilities of ACME, a distributor of air conditioning, heating, and refrigeration products, operating from 18 locations in Louisiana and Mississippi, for $22.9 million less certain average revolving indebtedness.

Consideration for the net purchase price consisted of $18.1 million in cash, 8,492 shares of Common stock having a fair value of $2.6 million, and $3.1 million repayment of indebtedness, net of cash acquired of $1.3 million.

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, that operates 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 $5.675 and $5.15 per share of Common stock and Class B common stock during the nine months ended September 30, 2021 and 2020, respectively.

On October 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 October 29, 2021 to shareholders of record as of October 15, 2021.

We paid cash dividends of $1.95 and $1.775 per share of Common stock and Class B common stock during the quarters ended March 31, 2022 and 2021, respectively.

On April 1, 2022, our Board of Directors declared a regular quarterly cash dividend of $2.20 per share of both Common stock and Class B common stock that was paid on April 29, 2022 to shareholders of record as of April 14, 2022.

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.

At-the-Market

Offering Program

On August 6, 2021, we entered into a sales agreement with Robert W.

Inc., which enables the Company to issue and sell shares of Common stock in one or more negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), for a maximum aggregate offering amount of up to $300.0 (the “ATM Program”).

The offer and sale of our Common stock pursuant to the ATM Program has been registered under the Securities Act pursuant to our automatically effective shelf registration statement on Form S-3

As of September 30, 2021, no shares of Common stock had been sold under the ATM Program.

Company Share Repurchase Program

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

At March 31, 2022, there were 1,129,087 shares remaining authorized for repurchase under the program.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis