What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-04 compared with 2022-05-05 · 85 added, 50 removed, 179 unchanged (43% of the section changed)

12 unchanged sentences

consumer debt levels;

the continued impact of the COVID-19

the continued impact of the

new housing starts and completions;

23 unchanged sentences

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 March 31, 2022, we operated from 671 locations in 42 U.S.

At June 30, 2022, we operated from 673 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.

13 unchanged sentences

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

Certain of our manufacturers and suppliers continue to experience 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 half of 2022.

Despite these disruptions, we experienced growth in sales of residential units during the first half of 2022.

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.

10 unchanged sentences

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.

Our sales of higher-efficiency residential HVAC systems (those above base-level efficiency) grew 22% organically during the first half of 2022, outpacing the overall growth rate of 20% for residential HVAC equipment in the United States.

Based on estimates validated by independent sources, we averted an estimated 12.9 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.

e emissions during the period January 1, 2020 to June 30, 2022 through the sale of replacement residential HVAC systems at higher-efficiency standards.

Joint Ventures with Carrier Global Corporation

24 unchanged sentences

as filed with the SEC on February 25, 2022.

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

We believe that there have been no significant changes during the quarter ended June 30, 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 ended March 31, 2022 and 2021:

The following table summarizes information derived from our condensed consolidated unaudited statements of income, expressed as a percentage of revenues, for the quarters and six months ended June 30, 2022 and 2021:

Ended June 30,

Cost of sales

7 unchanged sentences

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

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.

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

We did not acquire any businesses during the quarter or six months ended June 30, 2022.

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 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

At June 30, 2022 and 2021, nine 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 June 30, 2022:

June 30, 2021

December 31, 2021

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.

June 30, 2022

Second Quarter of 2022 Compared to Second Quarter of 2021

Revenues for the second quarter of 2022 increased $284.1 million, or 15%, as compared to the second quarter of 2021, including $11.2 million attributable to the new locations acquired and $14.3 million from other locations opened during the preceding 12 months, offset by $5.2 million from locations closed.

Sales of HVAC equipment (70% of sales) increased 19%, sales of other HVAC products (26% of sales) increased 23% and sales of commercial refrigeration products (4% of sales) increased 26%.

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 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.

On a same-store basis, revenues increased $263.8 million, or 14%, as compared to the same period in 2021, reflecting a 13% increase in sales of HVAC equipment (70% of sales), which included a 14% increase in sales of residential HVAC equipment (15% increase in U.S.

markets) and a 5% increase in sales of commercial HVAC equipment, a 15% increase in sales of other HVAC products (26% of sales) and a 26% 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 and a higher mix of high-efficiency air conditioning and heating systems, which sell at higher unit prices, resulting in a 16% increase in the average selling price and a 1% decrease in volume, as well as higher sales of commercial HVAC equipment.

Gross profit for the second quarter of 2022 increased $117.6 million, or 25%, as compared to the second quarter of 2021, primarily as a result of increased revenues.

Gross profit margin for the quarter ended June 30, 2022 improved 210 basis-points to 27.9% versus 25.8% for the same period in 2021, 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 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.

Selling, general and administrative expenses for the second quarter of 2022 increased $48.1 million, or 18%, as compared to the second quarter of 2021, primarily due to increased revenues.

Selling, general and administrative expenses as a percent of revenues for the second quarter of 2022 increased to 14.8% versus 14.4% for the same period in 2021.

On a same-store basis, selling, general and administrative expenses increased 17% as compared to the same period in 2021, primarily due to increased higher variable selling costs driven by the increase in revenues, investments in headcount, and new locations opened in 2022.

Other income of $6.3 million and $5.5 million for the second 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 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;

Interest expense, net for the second quarter of 2022 increased $0.7 million, or 148%, primarily as a result of an increase in average outstanding borrowings and a higher effective interest rate, in each case under our revolving credit facility, as compared to the same period in 2021.

Income taxes increased to $60.5 million for the second quarter of 2022, as compared to $44.2 million for the second 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 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.

The effective income tax rates attributable to us were 23.8% and 23.4% for the quarters ended June 30, 2022 and 2021, respectively.

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

Net Income Attributable to Watsco, Inc.

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

Net income attributable to Watsco, Inc.

for the quarter ended June 30, 2022 increased $48.5 million, or 34%, compared to the same period in 2021.

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

First Half of 2022 Compared to First Half of 2021

Revenues for the first half of 2022 increased $671.6 million, or 22%, as compared to the first half of 2021, including $102.1 million attributable to the new locations acquired and $23.9 million from other locations opened during the preceding 12 months, offset by $7.3 million from locations closed.

Sales of HVAC equipment (69% of sales) increased 24%, sales of other HVAC products (28% of sales) increased 27%, and sales of commercial refrigeration products (3% of sales) increased 30%.

On a same-store basis, revenues increased $552.9 million, or 19%, as compared to the same period in 2021, reflecting an 18% increase in sales of HVAC equipment (69% of sales), which included a 19% increase in sales of residential HVAC equipment (20% increase in U.S.

markets) and a 15% increase in sales of commercial HVAC equipment, a 19% increase in sales of other HVAC products (27% of sales) and a 30% increase in commercial refrigeration products (4% of sales).

For HVAC equipment, the increase in revenues was primarily due to 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 17% increase in the average selling price and a 3% increase in volume, as well as higher sales of commercial HVAC equipment.

Gross profit for the first half of 2022 increased $273.1 million, or 35%, as compared to the first half of 2021, primarily as a result of increased revenues.

Gross profit margin for the six months ended June 30, 2022 improved 270 basis-points to 28.6% versus 25.9% for the same period in 2021, 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 first half of 2022 increased $113.8 million, or 23%, as compared to the first half of 2021, primarily due to increased revenues from existing and newly acquired locations.

Selling, general and administrative expenses as a percentage of revenues for the six months ended June 30, 2022 increased to 16.4% versus 16.2% for the same period in 2021.

On a same-store basis, selling, general and administrative expenses increased 18% as compared to the same period in 2021, primarily due to increased higher variable selling costs driven by the increase in revenues, investments in headcount, and new locations opened in 2022.

Other income of $10.4 million and $10.2 million for the first half of 2022 and 2021, respectively, represented our share of the net income of RSI, in which we have a 38.1% equity interest.

Interest Expense, Net

Interest expense, net for the first half of 2022 increased $1.1 million, or 211%, 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 $96.1 million for the first half of 2022, as compared to $59.9 million for the first half 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 23.8% and 23.0% for the first half of 2022 and 2021, respectively.

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

Net Income Attributable to Watsco, Inc.

Net income attributable to Watsco, Inc.

for the first half of 2022 increased $106.7 million, or 54%, compared to the same period in 2021.

Liquidity and Capital Resources

11 unchanged sentences

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

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.

As of June 30, 2022, we had $129.0 million of cash and cash equivalents, of which $99.3 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;

10 unchanged sentences

Working Capital

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

Working capital increased to $1,562.6 million at June 30, 2022 from $1,234.7 million at December 31, 2021, primarily due to higher levels of inventory in support of stronger business conditions, as well as deeper inventory stocking due to supply chain disruptions and increased cost of inventory due to inflation, and higher accounts receivable consistent with overall increased sales.

These increases were partially offset by the timing of accounts payable and accrued liabilities.

The following table summarizes our cash flow activity for the six months ended June 30, 2022 and 2021 (in millions):

Cash flows provided by operating activities

Cash flows used in investing activities

Cash flows 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 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.

The decrease in net cash provided by operating activities was primarily due to increases in the level of inventory, partially offset by an increase in net income due to strong business conditions and timing of vendor payments in 2022 as compared to 2021.

Investing Activities

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.

Net cash used in investing activities was lower in 2022 primarily due to cash consideration paid for businesses acquired in 2021.

Financing Activities

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

The increase in net cash used in financing activities was primarily attributable to $21.0 million in proceeds from the non-controlling

interest for its contribution to the acquisition of TEC in 2021 and an increase in dividends paid in 2022.

Revolving Credit Agreement

3 unchanged sentences

The credit agreement matures on December 5, 2023.

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

At June 30, 2022 and December 31, 2021, $203.6 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 March 31, 2022.

We believe we were in compliance with all covenants at June 30, 2022.

At-the-Market

6 unchanged sentences

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.

As of June 30, 2022, no shares of Common stock had been sold under the ATM Program.

Contractual Obligations

2 unchanged sentences

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.

Based on the closing price of Watsco’s Class B common stock and withholding tax rates in effect at June 30, 2022, the estimated withholding tax obligation would have been approximately $94.0 million had the shares vested on June 30, 2022.

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

5 unchanged sentences

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

At June 30, 2022, the estimated purchase amount we would be contingently liable for was approximately $306.0 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 consisted of $3.2 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 purchase 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, which 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.

2 unchanged sentences

Common Stock Dividends

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.

We paid cash dividends of $4.15 and $3.725 per share of Common stock and Class B common stock during the six months ended June 30, 2022 and 2021, respectively.

On July 1, 2022, our Board of Directors declared a regular quarterly cash dividend of $2.20 per share of both Common and Class B common stock that was paid on July 29, 2022 to shareholders of record as of July 15, 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.

4 unchanged sentences

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

At June 30, 2022, 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