What changed in this filing

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Item 1A. Risk Factors

2024-02-23 compared with 2023-02-24 · 42 added, 69 removed, 96 unchanged (54% of the section changed)

5 unchanged sentences

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, that comply with laws relating to environmental and efficiency standards, and that keep up with shifting consumer preferences.

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.

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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.

We maintain trade name and distribution agreements with Carrier and Rheem that provide us distribution rights on an exclusive basis in specified territories.

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Competitive pressures or other factors could cause our products or services to lose market acceptance or result in significant price erosion, all of which would have a material adverse effect on our results of operations, cash flows, and liquidity.

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.

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.

These breaches or intrusions could lead to business interruption, exposure of proprietary or confidential information, data corruption, damage to our reputation, exposure to legal and regulatory proceedings and other costs.

Such events could have a material adverse impact on our financial condition, results of operations and cash flows.

In addition, we could be adversely affected if any of our significant customers or suppliers experiences any similar events that disrupt their business operations or damage their reputation.

Failure to successfully manage the operational challenges and risks associated with, or resulting from, upgrades and conversions to newer versions of our information technology systems core to our operations could adversely affect our results of operations, cash flows, and liquidity.

We maintain change management processes, monitoring practices, and protections of our information technology to reduce these risks and test our systems on an ongoing basis for potential threats.

The Audit Committee is briefed on information security matters at least once a year.

We carry cybersecurity insurance to help mitigate the financial exposure and related notification procedures in the event of intentional intrusion.

There can be no assurance, however, that our efforts will prevent the risk of a security breach of our databases or systems that could adversely affect our business.

Foreign Currency Exchange Rate Fluctuations

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Access to funds under our line of credit is dependent on the ability of the syndicate banks to meet their respective funding commitments.

Disruptions in the credit and capital markets could adversely affect our ability to draw on our revolving credit agreement and may also adversely affect the determination of interest rates, particularly rates based on LIBOR, which is one of the base rates under our revolving credit agreement.

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.

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.

Disruptions in the credit and capital markets could adversely affect our ability to draw on our revolving credit agreement and may also adversely affect the determination of interest rates.

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.

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.

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;

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;

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

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.

Such events could have a material adverse impact on our financial condition, results of operations and cash flows.

In addition, we could be adversely affected if any of our significant customers or suppliers experiences any similar events that disrupt their business operations or damage their reputation.

We maintain change management processes, monitoring practices, and protections of our information technology to reduce these risks and test our systems on an ongoing basis for potential threats.

The Audit Committee is briefed on information security matters at least once a year.

We carry cybersecurity insurance to help mitigate the financial exposure and related notification procedures in the event of intentional intrusion.

There can be no assurance, however, that our efforts will prevent the risk of a security breach of our databases or systems that could adversely affect our business.

International Risk

1 unchanged sentence

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

In addition, post-pandemic delays and closures in China 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.

Additionally, failure to comply with the United States Foreign Corrupt Practices Act could subject us to, among other things, penalties and legal expenses that could harm our reputation and have a material adverse effect on our business, financial condition, and results of operations.

Goodwill, Intangibles and Long-Lived Assets

At December 31, 2023, goodwill, intangibles, and long-lived assets represented approximately 36% of our total assets.

The recoverability of goodwill, indefinite lived intangibles, and long-lived assets is evaluated at least annually and when events or changes in circumstances indicate that the carrying amounts may not be recoverable.

The identification and measurement of goodwill impairment involves the estimation of the fair value of our reporting unit and contains uncertainty because management must use judgment in determining appropriate assumptions to be used in the measurement of fair value.

The estimates of fair value of our reporting unit, indefinite lived intangibles, and long-lived assets are based on the best information available as of the date of the assessment and incorporates management’s assumptions about expected future cash flows and contemplates other valuation techniques.

Future cash flows can be affected by changes in the industry, a declining economic environment, or market conditions.

We cannot assure you that we will not suffer material impairments to goodwill, intangibles, or long-lived assets in the future.

Risks Related to Loss Contingencies

We carry general liability, comprehensive property damage, workers’ compensation, health benefits, cybersecurity, and other insurance coverage that management considers adequate for the protection of its assets and operations at reasonable premiums.

There can be no assurance that the coverage limits and related premiums of such policies will be adequate to cover claims, losses and expenses for lawsuits which have been, or may be, brought against us.

A loss in excess of insurance coverage could have a material adverse effect on our financial position and/or profitability.

Certain self-insurance risks for casualty insurance programs and health benefits are retained and reserves are established based on claims filed and estimates of claims incurred but not yet reported.

Assurance cannot be provided that actual claims will not exceed present estimates.

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 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 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.

Moreover, litigation related to sustainability practices could result in potential operating expenses arising from fines, settlements, and legal costs, as well as reputational impacts.

Risks Related to our Common Stock

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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).

Nahmad, President (the son of our Chairman and CEO), and Valerie Schimel, Director (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 foundation.

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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Securities markets worldwide experience significant price and volume fluctuations.

This market volatility, as well as general economic, market or political conditions, could reduce the market price of shares of our common stock in spite of our operating performance.

The trading price of our common stock may be adversely affected due to a number of factors, most of which we cannot predict or control, such as the following:

This market volatility, as well as general economic, market or political conditions, could reduce the market price of shares of our common stock despite our operating performance.

The trading price of our common stock may be adversely affected due to many factors, most of which we cannot predict or control, such as the following:

fluctuations in our operating results;

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political instability, natural disasters, war and/or events of terrorism.

Trading Liquidity

The trading market for our common stock is limited, and there can be no assurance that a more liquid trading market for our common stock will develop.

There can be no assurance as to the liquidity of any market for our common stock, the ability of the holders of our common stock to sell any of their securities and the price at which the holders of our common stock will be able to sell such securities.

Payment of Dividends

The amount of any future dividends that we will pay, if any, will depend upon a number of factors.

Future dividends will be declared and paid at the sole discretion of the Board of Directors and will depend upon such factors as cash flow generated by operations, profitability, financial condition, cash requirements, future prospects, and other factors deemed relevant by our Board of Directors.

Future dividends will be declared and paid at the sole discretion of the Board of Directors and will depend upon such factors as cash flow generated by operations, profitability, financial condition, cash requirements, prospects, and other factors deemed relevant by our Board of Directors.

The right of our Board of Directors to declare dividends, however, is subject to the availability of sufficient funds under Florida law to pay dividends.

4 unchanged sentences

If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.

General Risk Factors

Goodwill, Intangibles and Long-Lived Assets

At December 31, 2022, goodwill, intangibles, and long-lived assets represented approximately 34% of our total assets.

Future cash flows can be affected by changes in the industry, a declining economic environment, or market conditions.

We cannot assure you that we will not suffer material impairments to goodwill, intangibles, or long-lived assets in the future.

Risks Related to Loss Contingencies

A loss in excess of insurance coverage could have a material adverse effect on our financial position and/or profitability.

Certain self-insurance risks for casualty insurance programs and health benefits are retained and reserves are established based on claims filed and estimates of claims incurred but not yet reported.

Assurance cannot be provided that actual claims will not exceed present estimates.

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 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.

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