What changed in this filing

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Item 1. Business

2024-02-23 compared with 2023-02-24 · 61 added, 51 removed, 220 unchanged (34% 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,” the “Company”, 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, 2023, we operated from 690 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 125,000 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 2023, 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.

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Air Conditioning, Heating and Refrigeration Industry

The HVAC/R distribution industry is highly fragmented with approximately 6,500 distribution companies.

The HVAC/R distribution industry is highly fragmented.

According to data published in the December 2023 IBIS World Industry Report for Heating and Air Conditioning Wholesaling in the U.S., the HVAC/R distribution industry has approximately 2,200 distribution companies with an aggregate estimated annual market size of $64.0 billion.

The estimated annual market on an installed basis, which adds the contractor’s value to the market size, for residential HVAC/R products is approximately $126.0 billion according to the November 2023 IBIS World Industry Report for Heating and Air Conditioning Contractors in the U.S.

The industry in the United States and Canada is well-established, having had its primary period of growth during the post-World War II era with the advent of affordable central air conditioning and heating systems for both residential and commercial applications.

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 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.

Air conditioning and heating equipment is manufactured primarily by eight 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”);

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Lennox International Inc.

Mitsubishi Electric Trane HVAC US LLC (“Mitsubishi”);

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

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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 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.

According to data published by the Energy Information Administration in March 2023, 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 operate well below current minimum efficiency standards and 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.

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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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Culture of Innovation & Technology Strategy

In recent years, we have established a strong culture of innovation, whereby people, processes and technology have rapidly evolved to modernize and digitize our business.

We have established a strong culture of innovation, whereby people, processes and technology have evolved to modernize and digitize our business.

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

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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.

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

Strategy in Existing Markets

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Product Line Expansion

We actively seek new or expanded territories of distribution from our key equipment suppliers.

We actively seek new and expanded territories of distribution from our key equipment suppliers.

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.

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

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

We believe that our private-label branded products complement our existing product offerings at selected locations, based on customer needs and the particular market position and price of these products.

Acquisition Strategy

We focus on acquiring and investing in businesses that either complement our current presence in existing markets or establish a presence in new geographic markets.

Since 1989, we have acquired 66 HVAC/R distribution businesses, some of which currently operate as primary operating subsidiaries.

We focus on acquiring and investing in businesses that either complement our presence in existing markets or establish a presence in new geographic markets.

Since 1989, we have acquired 69 HVAC/R distribution businesses, some of which are now primary operating subsidiaries.

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

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We maintain a specialized staff at our corporate headquarters that provides functional support for our subsidiaries’ growth strategies in their respective markets.

Such functional support staff includes specialists in finance, accounting, product procurement, information technology, treasury and working capital management, tax planning, risk management, and safety.

Certain general and administrative expenses are targeted for cost savings by leveraging the overall business volume and improving operating efficiencies.

Human Capital Management

Employee Population

Employee Population and Turnover

As the largest distributor of HVAC/R equipment and related parts and supplies in North America, we have a wide variety of employees.

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

We closely monitor employee turnover, utilizing exit interviews to gather pertinent information that we use to refine our retention strategies.

The voluntary turnover rate for our U.S.

employees in 2023, 2022, and 2021 was approximately 19%, 20%, and 19%, respectively.

We believe this rate is typical for a company of our size that employs a large hourly workforce such as ours.

Diversity and Inclusion

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

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

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

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

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

As of December 31, 2023, approximately 21% of our employees and 22% of our managers in the U.S.

and Puerto Rico were women.

Compensation and Benefits

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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.

Sales of HVAC equipment, which we currently source from approximately 20 vendors, accounted for 69% and 68% of our revenues in 2023 and 2022, respectively.

Sales of other HVAC products, which we currently source from approximately 1,400 vendors, comprised 27% and 28% of our revenues in 2023 and 2022, respectively.

Sales of commercial refrigeration products, which we currently source from approximately 150 vendors, accounted for 4% of our revenues in both 2023 and 2022.

Distribution and Sales

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The largest market we serve is the United States, in which the most significant markets for HVAC/R products are in the Sun Belt states.

Accordingly, the majority of our distribution locations are in the Sun Belt, with the highest concentration in Florida and Texas.

Accordingly, most of our distribution locations are in the Sun Belt, with the highest concentration in Florida and Texas.

These markets have been a strategic focus of ours given their size, the reliance by homeowners and businesses on HVAC/R products to maintain a comfortable indoor environment, and the population growth in these areas over the last 40 years, which has led to a substantial installed base requiring replacement, a shorter useful life for equipment given the significant hours of operation, and the focus by electrical utilities on consumer incentives designed to promote replacement of HVAC/R equipment in an effort to improve energy efficiency.

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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.

The export division, 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.

Carrier Enterprise I has a 38.4% ownership interest in Russell Sigler, Inc.

(“RSI”), an HVAC distributor operating from 34 locations in the Western U.S.

RSI is Carrier’s second largest independent North American distributor and had sales of approximately $1.2 billion in 2023.

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 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.

In 2021, we acquired certain assets and assumed certain liabilities comprising the HVAC distribution business of Temperature Equipment Corporation, one of Carrier’s independent distributors with locations in Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri and Wisconsin.

We formed a new joint venture with Carrier, TEC Distribution LLC (“TEC”), that owns and 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 55% of our revenues in 2023.

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.

See Supplier Concentration and Supply Chain Risks 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’s, and TEC’s respective boards of directors (the “Boards”) pursuant to related operating agreements.

The Boards have full, complete and exclusive authority, power, and discretion to manage and control the business, property, and affairs of their respective joint ventures, and to make all decisions regarding those matters and to perform activities customary or incident to the management of such joint ventures, including approval of distributions to us and Carrier.

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

The Boards are each 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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Air conditioning and heating contractors and dealers that install HVAC/R products in homes and businesses must be licensed given the highly regulated nature of the products, refrigerant, natural gas, and building and zoning requirements.

We currently serve more than 120,000 active contractors and dealers who service the replacement and new construction markets for residential and light commercial central air conditioning, heating, and refrigeration systems.

We currently serve more than 125,000 active contractors and dealers who service the replacement and new construction markets for residential and commercial central air conditioning, heating, and refrigeration systems.

No single customer in 2023, 2022, or 2021 represented more than 2% of our consolidated revenues.

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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, Daikin, Mitsubishi Electric Corporation, Gree Electric Appliances, Inc., Welbilt, Bosch Global, Trane, Lennox, and Midea Group.

Significant relationships with HVAC/R equipment manufacturers include Carrier, Rheem, Daikin, Mitsubishi, 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.

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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 and Supply Chain Risks 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.

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

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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.

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

Our industry and business are also subject to United States Department of Energy (“DOE”) standards related to the minimum required efficiency levels of residential central air conditioning systems and heat pumps.

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

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.

Beginning in 2023, the minimum efficiency level for residential HVAC systems under 45,000 BTUs became 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, 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.

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

We completed the transition of our inventory to the higher SEER products during 2023.

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.

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

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

The mandate dictates that residential furnace fans manufactured in the United States on or after the effective date of July 3, 2019, must have a Fan Energy Rating (“FER”) value reduction of 12% or 46% in watts/cfm, depending on the type of furnace.

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

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

As a result of this transition, we expect to benefit from selling units that contain more environmentally friendly refrigerants, 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.

Climate Change and Reductions in CO 2 e Emissions

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According to the DOE, 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.

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 footprints.

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.

As consumers replace HVAC systems with new, higher-efficiency systems, homeowners will consume less energy, save costs, and reduce their carbon footprints.

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.

In addition, regulatory mandates will likely 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 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.

Based on estimates validated by independent sources, we averted an estimated 19.2 million metric tons of CO2e emissions from January 1, 2020 to December 31, 2023 through the sale of replacement residential HVAC systems at higher-efficiency standards – the equivalent of nearly 4.3 million gas powered 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 .

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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.

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

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

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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.

IRA details, including qualifying products, specific programs, states participating, and other regulatory requirements are still being finalized.

Available Information

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

Code of Ethics and Conduct

The Board of Directors has adopted codes of ethics and conduct that are designed to ensure that our directors, officers, and employees are aware of their ethical responsibilities and avoid conduct that may pose risks to the Company.

We maintain (i) an Employee Code of Business Ethics and Conduct that is applicable to all employees, and (ii) a Code of Conduct for Executives that is applicable to members of our Board of Directors, our executive officers, and other senior operating and financial personnel.

Amendments to either code of conduct or any grant of a waiver requiring disclosure under applicable SEC rules will be disclosed on our website, www.watsco.com .

There were no amendments to or waivers from either code of conduct in 2023.

Oversight of investigations of known or potential violations under either code of conduct is the responsibility of the Audit Committee of the Board of Directors (the “Audit Committee”).

To obtain copies of our Codes of Ethics and Conduct, please visit our investor relations website at https://investors.watsco.com under the section captioned “Governance.”

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