What changed in this filing

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Item 1. Business

2023-02-24 compared with 2022-02-25 · 89 added, 104 removed, 182 unchanged (51% of the section changed)

and its subsidiaries (collectively, “Watsco,” or “we,” “us,” or “our ”

) was incorporated in Florida in 1956 and 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.

and its subsidiaries (collectively, “Watsco,” or “we,” “us,” or “our ” ) was incorporated in Florida in 1956 and 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 December 31, 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, through which we serve more than 120,000 active contractors and dealers that service the replacement and new construction markets.

States, Canada, Mexico and Puerto Rico with additional market coverage on an export basis to portions of Latin America and the Caribbean, through which we serve more than 120,000 active contractors and dealers that service the replacement and new construction markets.

Our revenues in HVAC/R distribution have increased from $64.1 million in 1989 to $7.3 billion in 2022, resulting from our strategic acquisition of companies with established market positions and subsequent building of revenues and profit through a combination of additional locations, introduction of new products, and other initiatives.

Our principal executive office is located at 2665 South Bayshore Drive, Suite 901, Miami, Florida 33133, and our telephone number is (305) 714-4100.

Our website address on the Internet is www.watsco.com and e-mails

may be sent to info@watsco.com.

Our website address on the Internet is www.watsco.com and e-mails may be sent to info@watsco.com.

Our website address is included in this report only as an inactive textual reference.

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

Based on data published in the September 2022 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 $123.0 billion.

Air conditioning and heating equipment is manufactured primarily by seven major companies that together account for approximately 90% of all units shipped in the United States each year.

These companies are:

Carrier Global Corporation (“Carrier”);

Goodman Manufacturing Company, L.P.

(“Goodman”), a subsidiary of Daikin Industries, Ltd.;

These companies are Carrier Global Corporation (“Carrier”);

Daikin Comfort Technologies North America, Inc.

(“Daikin”), a subsidiary of Daikin Industries, Ltd.;

Rheem Manufacturing Company (“Rheem”);

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The mechanical life of central air conditioning and furnaces varies by geographical region due to usage and ranges from approximately 8 to 20 years.

According to data published by the Energy Information Administration in 2018 there are approximately 91 million central air conditioning and heating systems installed in the United States that have been in service for more than 10 years.

According to data published by the Energy Information Administration in May 2022 there are approximately 102 million central air conditioning and heating systems installed in the United States that have been in service for more than 10 years.

Many installed units are currently reaching the end of their useful lives, which we believe long-term provides a growing and stable replacement market.

Additionally, we sell a variety of non-equipment

products including parts, ductwork, air movement products, insulation, tools, installation supplies, thermostats, and air quality products.

Additionally, we sell a variety of non-equipment products including parts, ductwork, air movement products, insulation, tools, installation supplies, thermostats, and air quality products.

We distribute products manufactured by Flexible Technologies, Inc.

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We also sell products to the commercial refrigeration market.

These products include condensing units, compressors, evaporators, valves, refrigerant, walk-in

coolers, and ice machines for industrial and commercial applications.

These products include condensing units, compressors, evaporators, valves, refrigerant, walk-in coolers, and ice machines for industrial and commercial applications.

We distribute products manufactured by Copeland Corporation, LLC, a subsidiary of Emerson Electric Co.

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We have employed a disciplined and conservative approach, which seeks opportunities that fit well-defined financial and strategic criteria.

The “build” component of the strategy has focused on encouraging growth at acquired companies, by adding products and locations to better serve customers, investing in scalable technologies, and exchanging ideas and

business concepts amongst leadership teams.

The “build” component of the strategy has focused on encouraging growth at acquired companies, by

adding products and locations to better serve customers, investing in scalable technologies, and exchanging ideas and business concepts amongst leadership teams.

Newly acquired businesses have access to our capital resources and established vendor relationships to provide their customers with an expanded array of product lines on favorable terms and conditions with an intensified commitment to service.

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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.

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

Specific initiatives include:

(i) mobile applications for iOS and Android devices to help customers operate more efficiently and interact with our locations more easily;

(ii) e-commerce

between our customers and our subsidiaries;

(ii) e-commerce between our customers and our subsidiaries;

(iii) supply chain optimization;

(iv) building and maintaining the largest source of digitized HVAC/R product information;

(iv) building and maintaining product information management, which is our leading repository of digitized HVAC/R product information used in our mobile applications and e-ecommerce platform;

and (v) the development of business intelligence systems and related data sets, which provide enhanced management tools.

In addition, through our subsidiary Watsco Ventures, LLC (“Watsco Ventures”), we have developed (internally and through external collaboration) a variety of early-stage technologies with the goal of helping contractor customers grow and become more profitable, and otherwise compliment the initiatives set forth above.

These initiatives include OnCall Air ® , our digital sales platform and CreditForComfort ® , its companion consumer financing platform, among others.

Strategy in Existing Markets

Our strategy for growth in existing markets focuses on customer service, product expansion, and the implementation of technology to satisfy the needs of the higher growth, higher margin replacement market, in which customers generally demand immediate, convenient, and reliable service.

We respond to this need by (i) offering a broad range of product lines, including the necessary equipment at an array of price-points, parts, and supplies to enable a contractor to install or repair a central air conditioner, furnace, or refrigeration system, (ii) maintaining a strong density of warehouse locations for increased customer convenience, (iii) maintaining well-stocked inventories to ensure that customer orders are filled in a timely manner, (iv) providing a high degree of technical expertise at the point of sale, (v) collaborating with customers to advertise and market their business and services in local markets, and (vi) developing and implementing technology to further enhance customer service capabilities.

We respond to this need by:

(i) offering a broad range of product lines, including the necessary equipment at an array of price-points, parts, and supplies to enable a contractor to install or repair a central air conditioner, furnace, or refrigeration system;

(ii) maintaining a strong density of warehouse locations for increased customer convenience;

(iii) maintaining well-stocked inventories to ensure that customer orders are filled in a timely manner;

(iv) providing a high degree of technical expertise at the point of sale;

(v) collaborating with customers to advertise and market their business and services in local markets;

and (vi) developing and implementing technology to further enhance customer service capabilities.

We believe these concepts provide a competitive advantage over smaller, less-capitalized competitors that are unable to commit resources to open and maintain additional locations, implement technological business solutions, provide the same range of products, maintain the same inventory levels, or attract the wide range of expertise that is required to support a diverse product offering.

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We continually evaluate new parts and supply products to support equipment sales and further enhance service to our customers.

This initiative includes increasing our product offering with existing vendors and identifying new product opportunities through traditional and non-traditional

supply channels.

This initiative includes increasing our product offering with existing vendors and identifying new product opportunities through traditional and non-traditional supply channels.

We have also introduced private-label products as a means to obtain market share and grow revenues.

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Other smaller acquired distributors have been integrated into or are under the management of our primary operating subsidiaries.

Through a combination of sales and market share growth,

opening of new locations, tuck-in

acquisitions, expansion of product lines, improved pricing, and programs that have resulted in higher gross profit, performance incentives, and a culture of equity value for key leadership, we have produced substantial sales and earnings growth in our acquired businesses.

Through a combination of sales and market share growth, opening of new locations, tuck-in acquisitions, expansion of product lines, improved pricing, and programs that have resulted in higher gross profit, performance incentives, and a culture of equity value for key leadership, we have produced substantial sales and earnings growth in our acquired businesses.

We continue to pursue additional strategic acquisitions, investments and joint ventures to allow further penetration in existing markets and expansion into new geographic markets.

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Given the breadth of our employee base, we tailor our human capital management policies with a view to specific employee populations.

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

As of December 31, 2022, we employed approximately 7,200 full-time and 75 part-time employees (approximately 7,275 total employees), substantially all of whom were non-union employees.

Of these employees, approximately 8% were located in Canada and Mexico.

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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.

Furthermore, we believe that diverse teams make better decisions faster and outperform similarly situated less diverse teams.

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

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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

restricted stock based on individual merit and measures of performance.

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 restricted stock based on individual merit and measures of performance.

Approximately 140 employees received such equity awards in 2022.

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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.

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

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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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The products we distribute consist of:

(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 in a limited number of stores.

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 140 vendors, accounted for 3% of our revenues for both the years ended December 31, 2021 and 2020.

(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 in a limited number of stores.

Sales of HVAC equipment, which we currently source from approximately 20 vendors, accounted for 68% and 69% of our revenues for the years ended December 31, 2022 and 2021, respectively.

Sales of other HVAC products, which we currently source from approximately 1,300 vendors, comprised 28% of our revenues in 2022 and 2021.

Sales of commercial refrigeration products, which we currently source from approximately 140 vendors, accounted for 4% and 3% of our revenues in 2022 and 2021, respectively.

Distribution and Sales

At December 31, 2022, we operated from 673 locations, a vast majority of which are located in regions that we believe have demographic trends favorable to our business.

We maintain large inventories at each of our warehouse locations and either deliver products to customers using our trucks or third-party logistics providers, or we make products available for pick-up

at the location nearest to the particular customer.

We have approximately 1,200 salespeople, averaging 14 years of experience in the HVAC/R distribution industry.

The markets we serve are as follows:

% of Revenues

for the Year Ended

% of Revenues for

the Year Ended

December 31, 2022

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Joint Ventures with Carrier Global Corporation

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.

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.

(“PPI”), an HVAC distributor operating from 19 locations in Pennsylvania, New Jersey, and Delaware.

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 interest.

In 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 in Pennsylvania, New Jersey, and Delaware.

Carrier Enterprise I has a 38.1% ownership interest in Russell Sigler, Inc., an HVAC distributor operating from 35 locations in the Western U.S.

The export division of Carrier Enterprise I, Carrier InterAmerica Corporation (“CIAC”), redomesticated from the U.S.

Virgin Islands to Delaware in 2019, following which CIAC became a separate operating entity in which we have an 80% controlling interest and Carrier has a 20% non-controlling interest.

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.

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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.

Carrier contributed 35 of its company-owned locations in Canada to Carrier Enterprise III.

We have a 60% controlling interest in Carrier Enterprise III, and Carrier has a 40% non-controlling

On April 9, 2021, we acquired certain assets and assumed certain liabilities comprising the HVAC distribution business of Temperature Equipment Corporation, an HVAC distributor operating from 32 locations in Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri and Wisconsin.

We formed a new, stand-alone joint venture with Carrier, TEC Distribution LLC (“TEC”), that 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.

See Supplier Concentration

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, Carrier Enterprise III’s, and TEC’s respective boards of directors (the “Boards”) pursuant to related operating agreements.

In 2019, we repurchased the 20% ownership interest in Homans from Carrier Enterprise II and have since solely owned and operated Homans.

In 2012, we formed a third joint venture with Carrier, which we refer to as Carrier Enterprise III, to which Carrier contributed company-owned locations in Canada.

We have a 60% controlling interest in Carrier Enterprise III, and Carrier has a 40% non-controlling interest.

In April 2021, we acquired certain assets and assumed certain liabilities comprising the HVAC distribution business of Temperature Equipment Corporation, an HVAC distributor operating from Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri and Wisconsin.

We formed a new 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 interest.

Combined, the joint ventures with Carrier represented 54% of our revenues in 2022.

See Supplier Concentration 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, Carrier Enterprise III’s, CIAC, 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.

Each Board is composed of five directors, of whom three directors represent our controlling interest and two directors represent Carrier’s non-controlling

Each Board is composed of five directors, of whom three directors represent our controlling interest and two directors represent Carrier’s non-controlling interest.

Matters presented to the Boards for vote are considered approved or consented to upon the receipt of the affirmative vote of at least a majority of all directors entitled to vote with the exception of certain governance matters, which require joint approval.

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We focus on providing products where and when the customer needs them, technical support by phone or on site as required, and quick and efficient service at our locations.

Increased customer convenience is also provided through mobile applications and e-commerce,

which allows customers to access information online 24 hours a day, seven days a week to search for desired products, verify inventory availability, obtain pricing, place orders, check order status, schedule pickup or delivery times, and make payments.

Increased customer convenience is also provided through mobile applications and e-commerce, which allows customers to access information online 24 hours a day, seven days a week to search for desired products, verify inventory availability, obtain pricing, place orders, check order status, schedule pickup or delivery times, and make payments.

We believe we compete successfully with other distributors primarily based on an experienced sales organization, strong service support, maintenance of well-stocked inventories, density of warehouse locations, high quality reputation, broad product lines, and the ability to foresee customer demand for new products.

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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, Lennox, and Midea Group.

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

HVAC/R products, including Chemours, Emerson, Flexible Technologies, Resideo, Southwark, Johns Manville, Mueller, and Owens Corning.

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

In addition, we have substantial relationships with manufacturers of non-equipment HVAC/R products, including Mueller, Flexible Technologies, Southwark, Resideo, DiversiTech Corp., Emerson, Johns Manville, Chemours, and Owens Corning.

We believe the diversity of products that we sell, along with the manufacturers’ current product offerings, quality, marketability, and brand-name recognition, allow us to operate favorably relative to our competitors.

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%-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.

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 84% of our purchases, including 60% from Carrier, and 8% from Rheem.

Given the significant concentration of our suppliers, particularly with Carrier and Rheem, any significant interruption with these suppliers, including limitations on the ability of our suppliers to manufacture, or procure from manufacturers, the products we sell, or to meet delivery requirements and commitments, in each case related to the COVID-19

pandemic, could temporarily disrupt the operations of certain of our subsidiaries, impact current inventory levels, and could adversely affect our financial results.

Given the significant concentration of our suppliers, particularly with Carrier and Rheem, any material interruption with these suppliers, including limitations on the ability of our suppliers to manufacture, or procure from manufacturers, the products we sell, or to meet delivery requirements and commitments, whether due to supply chain disruptions, labor shortages or otherwise, could temporarily disrupt the operations of certain of our subsidiaries, impact current inventory levels, and could adversely affect our financial results.

If any restrictions or significant increase in tariffs under existing trade agreements are imposed on products that our top ten suppliers import or assemble outside of the United States, particularly from Mexico and China, we could be required to raise our prices, which may result in the loss of customers and harm to our business.

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However, the Company believes that alternative or substitute products would be readily available in the event of disruption of current supplier relationships given the Company’s prominence in the marketplace, including the number of locations, sales personnel, support structure, marketing and sales expertise, financial position, and established market share.

See “Business Risk Factors” in Item 1A of this Annual Report on Form 10-K

for further discussion.

See “Business Risk Factors” in Item 1A of this Annual Report on Form 10-K for further discussion.

Distribution Agreements

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

basis, for various terms ranging from one to ten years.

We also maintain distribution agreements with various other suppliers, either on an exclusive or non-exclusive basis, for various terms ranging from one to ten years.

Certain distribution agreements for particular branded products contain provisions that restrict or limit the sale of competitive products in the locations that sell such branded products.

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

See Supplier Concentration

in “Business Risk Factors” in Item 1A of this Annual Report on Form 10-K.

See Supplier Concentration in “Business Risk Factors” in Item 1A of this Annual Report on Form 10-K.

Sales of residential central air conditioners, heating equipment, and parts and supplies are seasonal.

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Our business is subject to federal, state and local laws, and regulations relating to the storage, handling, transportation, and release of hazardous materials into the environment.

These laws and regulations include the Clean Air Act, relating to minimum energy efficiency standards of HVAC systems, and the production, servicing, and disposal of more environmentally friendly refrigerants used in such systems, including those established by the Kigali Amendment to the Montreal Protocol concerning the phase-down of the production of HFC-based

refrigerants for use in new equipment.

Montreal Protocol concerning the phase-down of the production of HFC-based refrigerants for use in new equipment.

We are also subject to regulations concerning the transport of hazardous materials, including regulations adopted pursuant to the Motor Carrier Safety Act of 1990.

Our operations are also subject to health and safety requirements including, but not limited to, the Occupational, Safety and Health Act.

These laws and regulations are continuously changing, and compliance is costly and can require changes to our business practices and significant management time and effort.

However, it is our opinion that the costs related to compliance requirements for government, environmental, or other regulations will not have a material adverse impact on our business, financial condition, and results of operations.

We believe that we operate our business in compliance with all applicable federal, state and local laws, and regulations.

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The higher the SEER, the more efficient the HVAC equipment.

The current minimum SEER allowed for HVAC equipment is 13 SEER in the North and 14 SEER for the Southeast and Southwest regions.

Beginning in 2023, the minimum efficiency level for residential HVAC systems under 45,000 BTUs will be 14 SEER in the North and 15 SEER in the Southeast and Southwest.

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, 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.

Beginning in 2023, the minimum efficiency level for residential HVAC systems under 45,000 BTUs is 14 SEER in the North and 15 SEER in the Southeast and Southwest.

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

Heat pump efficiency levels, which are measured by the equipment’s heating seasonal performance factor (“HSPF”), is 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.

however, we expect a benefit from selling higher efficiency units, which sell at higher prices, as historically these changes have increased the cost to service and repair existing systems, which in turn influences a consumer’s decision to replace them.

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.

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.

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To meet these new standards, most manufacturers have replaced the permanent split capacitor blower motors in residential furnaces with electronic controlled motors.

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

The transition of our inventory of residential furnaces to those meeting the updated FER standards was complete by the end of 2020.

Climate Change and Reductions in CO 2 e Emissions

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.

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.

As 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 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.

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 18% organically in 2022, outpacing the overall growth rate of 13% for residential HVAC equipment in the United States.

Based on estimates validated by independent sources, we averted an estimated 15.8 million metric tons of CO2e emissions from January 1, 2020 to December 31, 2022 through the sale of replacement residential HVAC systems at higher-efficiency standards – the equivalent of nearly 3.4 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.

Federal Tax Credits and State Incentives

Demand for higher-efficiency products, such as variable-speed systems and heat pumps, is expected to benefit from the passage of the U.S.

Inflation Reduction Act of 2022 (the “IRA”) in August 2022.

This legislation is intended, in part, to promote the replacement of existing systems in favor of high-efficiency heat pump systems that reduce greenhouse gas emissions, as compared to older systems, and thereby combat climate change.

Programs under the IRA include enhanced tax credits for homeowners who install qualifying HVAC equipment and tax deductions for owners of commercial buildings that are upgraded to achieve defined energy savings.

The IRA also sets aside $4.3 billion for state-administered consumer rebate programs designed to promote energy savings for low and medium-income households, including HVAC systems.

Further details, including qualifying products, specific programs, and other regulatory requirements contemplated by the IRA are being determined and are expected to be launched during 2023.

Available Information

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Our investor relations website is located at https://investors.watsco.com .

We make available, free of charge, on our investor relations website under the heading “SEC Filings” our annual reports on Form 10-K,

quarterly reports on Form 10-Q,

current reports on Form 8-K,

and any amendments to those reports filed with or furnished to the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

We make available, free of charge, on our investor relations website under the heading “SEC Filings” our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed with or furnished to the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

Our website address is included in this report only as an inactive textual reference.

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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