What changed in this filing

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Item 1A. Risk Factors

2023-02-24 compared with 2022-02-25 · 42 added, 39 removed, 123 unchanged (40% of the section changed)

Business Risk Factors

pandemic continues to have widespread, rapidly-evolving and unpredictable impacts on financial markets and business practices.

As conditions fluctuate, governments have responded by adjusting their restrictions and guidelines accordingly.

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 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, potential subsequent waves of COVID-19

infection or potential new variants, the effectiveness and adoption of COVID-19

vaccines and therapeutics, the broader implications of the macro-economic recovery on our business, and the extent to which normal economic and operating conditions are impacted.

We intend to continue to actively monitor the evolution of the pandemic 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.

related factors that have impacted us, or may negatively impact, sales, gross margin and other results of operations in the future include, but are not limited to:

limitations on the ability of our suppliers to manufacture, or procure from manufacturers, the products we sell, or to meet delivery requirements and commitments;

limitations on the ability of our employees to perform their work due to illness or other disruptions caused by the pandemic, including local, state, or federal orders requiring employees to remain at home;

limitations on the ability of carriers to deliver our products to customers;

limitations on the ability of our customers to conduct their businesses and purchase our products;

and limitations on the ability of our customers to pay us on a timely basis.

As we cannot predict the duration or ultimate scope of the COVID-19

pandemic, the potential negative financial impact to our results of operations cannot be reasonably estimated but could be material and last for an extended period of time.

Supplier Concentration

Supplier Concentration and Supply Chain Risks

The Company’s top ten suppliers accounted for 84% of our purchases during 2022, including 60% from Carrier, and 8% from Rheem.

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Given the significant concentration of our supply chain, particularly with Carrier and Rheem, any significant interruption by any of the key manufacturers or a termination of a relationship could temporarily disrupt the operations of certain of our subsidiaries.

Additionally, our operations are materially dependent upon the continued market acceptance and quality of these manufacturers’ products and their ability to continue to manufacture

products that are competitive and that comply with laws relating to environmental and efficiency standards.

Additionally, our operations are materially dependent upon the continued market acceptance and quality of these manufacturers’ products and their ability to continue to manufacture products that are competitive and that comply with laws relating to environmental and efficiency standards.

Our inability to obtain products from one or more of these manufacturers or a decline in market acceptance of these manufacturers’ products could have a material adverse effect on our results of operations, cash flows, and liquidity.

Many HVAC equipment and component manufacturers, including Carrier and Rheem, source component parts from China and/or assemble a significant number of products for residential and light-commercial applications from Mexico.

If any restrictions, including a potential increase in tariffs, are imposed related to such products sourced or assembled from Mexico and China, including as a result of amendments to existing trade agreements, and our product costs consequently increase, we would be required to raise our prices, which may result in cost inflation, the loss of customers, and harm to our business.

In addition, COVID-19,

which surfaced in Wuhan, China in December 2019, resulted in increased travel restrictions and extended shutdown of certain businesses in the region.

The continuing impact of COVID-19

on our business will depend on future developments;

If any restrictions, including overall trade relations, a potential increase in tariffs, are imposed related to such products sourced or assembled from Mexico and China, including as a result of amendments to existing trade agreements, and our product costs consequently increase, we would be required to raise our prices, which may result in cost inflation, the loss of customers, and harm to our business.

In addition, COVID-19, which surfaced in Wuhan, China in December 2019, resulted in increased travel restrictions and extended shutdown of certain businesses in the region.

The continuing impact of COVID-19 on our business will depend on future developments;

however, closures in China and/or Mexico may disrupt the operations of certain of our suppliers, which could negatively impact our business.

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Such agreements are not subject to a stated term or expiration date.

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

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

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the successful operation and/or integration of acquired companies;

the efficiency and effectiveness of the acquired companies internal control environment;

diversion of management’s attention from other daily functions;

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We must continuously recruit, retain, and motivate management and other employees to both maintain our current business and to execute our strategic initiatives.

Our success has also depended on the contributions and abilities of our store employees upon whom we rely on to give customers a superior in-store

Our success has also depended on the contributions and abilities of our store employees upon whom we rely on to give customers a superior in-store experience.

Accordingly, our performance depends on our ability to recruit and retain high quality employees to work in and manage our stores.

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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.

Federal Reserve has selected the Secured Overnight Funding Rate (“SOFR”) as the preferred alternate rate to LIBOR.

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

SOFR is calculated differently from LIBOR and has inherent differences, including SOFR’s limited historical data and that LIBOR is an unsecured lending rate while SOFR is a secured lending rate, which could give rise to uncertainties and volatility in the benchmark rates.

While we continue to evaluate the potential impact of a transition to SOFR, these changes could result in interest obligations that are more than or do not otherwise correlate exactly over time with the payments that would have been made on such debt if LIBOR was available in its current form, including a potential increase in our overall interest expense.

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.

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Additionally, if the conditions of the capital and credit markets adversely affect the financial institutions that have committed to extend us credit, they may be unable to fund borrowings under such commitments, which could have an adverse impact on our financial condition, liquidity, and our ability to borrow funds for working capital, acquisitions, capital expenditures, and other corporate purposes.

COVID-19 Pandemic

The COVID-19 pandemic has had, and could continue to have widespread, rapidly-evolving and unpredictable impacts on global financial markets and business practices.

As conditions fluctuate, governments have responded by adjusting their restrictions and guidelines accordingly.

In light of the periodic resurgence in cases and the spread of variant strains of the virus, there remains uncertainty concerning the nature and extent of the continuing impact of the COVID-19 pandemic.

While the COVID-19 pandemic has subsided with the normalization of living with COVID-19 following the increase in

accessibility to COVID-19 vaccines and antiviral treatments, the full impact of the COVID-19 pandemic on our business, financial condition, and results of operations is uncertain and 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, potential subsequent waves of COVID-19 infection or potential new variants, the effectiveness and adoption of COVID-19 vaccines and therapeutics and the broader implications on the macro-economic environment.

COVID-19 related factors and economic and marketplace dynamics that have impacted us, or may negatively impact, sales, gross margin and other results of operations due to a future resurgence of the pandemic include, but are not limited to:

limitations on the ability of our suppliers to obtain necessary raw materials and parts to manufacture, or procure from manufacturers, the products we sell, or to meet delivery requirements and commitments;

transportation delays and other logistical challenges resulting in longer lead times and constrained availability of HVAC/R products;

labor shortages or an increase in the cost of labor;

limitations on the ability of carriers to deliver our products to customers;

limitations on the ability of our customers to obtain financing for significant purchases and operations, conduct their businesses, and purchase our products;

and limitations on the ability of our customers to pay us on a timely basis.

As we cannot predict the duration or ultimate scope of any future resurgence of the COVID-19 pandemic, the potential negative financial impact to our results of operations cannot be reasonably estimated but could be material and last for an extended period of time.

Cybersecurity Risks

In addition to the disruptions that may occur from interruptions in our information technology systems, cybersecurity threats and sophisticated and targeted cyberattacks pose a risk to our information technology systems.

We have established security policies, processes and defenses designed to help identify and protect against intentional and unintentional misappropriation

or corruption of our information technology systems and information and disruption of our operations.

We have established security policies, processes and defenses designed to help identify and protect against intentional and unintentional misappropriation or corruption of our information technology systems and information and disruption of our operations.

Despite these efforts, our information technology systems may be damaged, disrupted or shut down due to attacks by hackers and other persons obtaining unauthorized access, malicious software, ransomware, computer viruses, undetected intrusion, hardware failures or other events, and in these circumstances our disaster recovery plans may be ineffective or inadequate.

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Our international sales and operations, as well as sourcing of products from suppliers with international operations, are also sensitive to changes in foreign national priorities, including government budgets, as well as political and economic instability.

In addition, closures in China and Mexico due to COVID-19

may disrupt the operations of certain of our suppliers, which could negatively impact our business.

In addition, closures in China due to their zero-COVID policy may disrupt the operations of certain of our suppliers, which could negatively impact our business.

Unfavorable changes in any of the foregoing could adversely affect our results of operations or could cause a disruption in our supply chain for products sourced internationally.

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Class B Common Stock and Insider Ownership

As of December 31, 2021, our directors and executive officers and entities affiliated with them owned (i) Common stock representing 1% of the outstanding shares of Common stock and (ii) Class B common stock representing 84% of the outstanding shares of Class B common stock.

As of December 31, 2022, our directors and executive officers and entities affiliated with them owned:

(i) Common stock representing 1% of the outstanding shares of Common stock and (ii) Class B common stock representing 88% of the outstanding shares of Class B common stock.

These interests represent 55% of the aggregate combined voting power (including 53% beneficially owned by Albert H.

Nahmad, Chairman and Chief Executive Officer, and Aaron J.

Nahmad, President, through shares owned by them and shares held by affiliated limited partnerships and various family trusts).

Nahmad, Chairman and Chief Executive Officer (“CEO”), Aaron J.

Nahmad, President, and Valerie Schimel, Director, who is the daughter of our Chairman and CEO, through shares owned by them and shares held by affiliated limited partnerships, various family trusts, and a charitable organization).

Accordingly, our directors and executive officers collectively have the voting power to elect six members of our nine-person Board of Directors.

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(iii) cash dividends may be paid on Common stock without paying a cash dividend on Class B common stock, and no cash dividend may be paid on Class B common stock unless at least an equal cash dividend is paid on Common stock;

and (iv) Class B common stock is convertible at any time into Common stock on a one-for-one

basis at the option of the shareholder.

and (iv) Class B common stock is convertible at any time into Common stock on a one-for-one basis at the option of the shareholder.

We are not restricted from issuing additional shares of our Common stock or Class B common stock (which we refer to together as common stock), including securities that are convertible into or exchangeable for, or that represent the right to receive, our common stock or any substantially similar securities in the future.

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Exposure to catastrophic losses has been limited by maintaining excess and aggregate liability coverage and implementing stop-loss control programs.

However, more frequent catastrophic weather events linked to climate change may impact the availability and cost of property and casualty insurance.

However, more frequent catastrophic weather events may impact the availability and cost of property and casualty insurance.

Risks Related to Natural Disasters, Epidemics, or Other Unexpected Events

The occurrence of one or more natural disasters, including those linked to climate change, power outages, or other unexpected events, including hurricanes, fires, earthquakes, volcanic eruptions, tsunamis, floods and other forms of severe weather, health epidemics, pandemics (including COVID-19) or other contagious outbreaks, conflicts, wars or terrorist acts, in the U.S.

or in other countries in which we or our suppliers or customers operate could adversely affect our operations and financial performance.

Natural disasters, power outages or other unexpected events could damage or close one or more of our locations or disrupt our operations temporarily or long-term, such as by causing business interruptions or by affecting the availability products we sell.

Existing insurance arrangements may not cover all of the costs or lost cash flows that may arise from such events.

The occurrence of any of these events could also increase our insurance and other operating costs or impact our sales.

UNRESOLVED STAFF COMMENTS

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 1A. Risk Factors