What changed in this filing

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Item 1. Business

2025-02-28 compared with 2024-02-23 · 60 added, 59 removed, 222 unchanged (35% of the section changed)

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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.

of Latin America and the Caribbean, through which we serve more than 130,000 active contractors that service the replacement and new construction markets.

Our revenues in HVAC/R distribution have increased from $64.1 million in 1989 to $7.6 billion in 2024, 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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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.

According to data published in the November 2024 IBIS World Industry Report for Heating and Air Conditioning Wholesaling in the U.S., the HVAC/R distribution industry has approximately 2,100 distribution companies with an aggregate estimated annual market size of $74.0 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 $134.0 billion according to the October 2024 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.

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Trane Technologies plc (“Trane”);

York International Corporation, a subsidiary of Johnson Controls International plc;

York International Corporation, a subsidiary of Bosch Group;

Lennox International Inc.

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

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

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

These manufacturers distribute their products through a combination of factory-owned locations and independent distributors who, in turn, supply the equipment and related parts and supplies to contractors and dealers that sell to and install the products for consumers, businesses, and other end-users.

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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.

(“Flexible Technologies”), Resideo Technologies, Inc.

We distribute products manufactured by Flexible Technologies, Inc., a subsidiary of Smiths Group plc (“Flexible Technologies”), Resideo Technologies, Inc.

(“Resideo”), Southwark Metal Mfg.

(“Southwark”), Johns Manville (“Johns Manville”), and Owens Corning Insulating Systems, LLC (“Owens Corning”), among others.

(“Southwark”), Johns Manville, a subsidiary of Berkshire Hathaway, Inc.

(“Johns Manville”), and Owens Corning Insulating Systems, LLC (“Owens Corning”), among others.

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.

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

(“Emerson”), The Chemours Company (“Chemours”), Mueller Industries, Inc.

(“Mueller”), and Welbilt, Inc.

(“Welbilt”), among others.

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

We distribute products manufactured by Copeland Corporation, LLC (“Copeland”), The Chemours Company (“Chemours”), Mueller Industries, Inc.

(“Mueller”), and Pentair, Inc.

(“Pentair”), among others.

Culture and Business Strategy

Watsco began its HVAC/R distribution strategy in 1989 and has grown by using a “buy and build” philosophy, resulting in substantial long-term growth in revenues and profits.

The “buy” component of the strategy has focused on acquiring or investing in market leaders to either expand into new geographic areas or gain additional market share in existing markets.

The “buy” component of the strategy has focused on acquiring or investing in market leaders to either expand into new geographic areas or complement our presence in existing markets.

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.

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.

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

We have also developed a culture whereby leaders, managers and employees are provided the opportunity to own shares of Watsco through a variety of stock-based equity plans.

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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 OnCall Air Finance+, its companion consumer financing platform, among others.

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

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

Strategy in Existing Markets

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We encourage our local leadership to operate in a manner that builds upon the long-term relationships they have established with their suppliers and customers.

Typically, we maintain the identity of businesses by retaining their historical trade names, management teams and sales organizations, and continuity of their product brand-name offerings.

Typically, we maintain the identity of acquired businesses by retaining their historical trade names, management teams and sales organizations, and continuity of their product brand-name offerings.

We believe this strategy allows us to build on the value of the acquired operations by creating additional sales opportunities while providing an attractive exit strategy for the former owners of these companies.

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

Diversity and Inclusion

Talent Attraction, Development, and Retention

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 training, on-the-job experience, mentorships, and education tuition assistance.

We are committed to ensuring equal access to, and participation in, employment and advancement opportunities, regardless of race, color, religion, national origin, age, disability, veteran or military status, pregnancy status, sex, gender identity, sexual orientation, or marital status.

We value and foster the diversity and inclusion of the people with whom we work.

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, experiences, and varied points of view.

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.

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.

We believe that when employees feel valued, understood, and inspired, the entire Company benefits.

Moreover, fostering an equal opportunity environment promotes innovative solutions and cultivates high-performing, engaged teams that collaborate to achieve our strategic goals.

Compensation and Benefits

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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 restricted stock based on individual merit and measures of performance.

Approximately 130 employees received such equity awards in 2023.

Ownership Culture

We maintain an ownership culture that helps align the long-term interests of our shareholders with a long-term wealth-building opportunity for our employees through a variety of stock-based equity plans.

These plans include the contribution of Watsco shares to employees participating in our 401(k) plan, the availability of an employee stock purchase plan for our U.S.

employees, and the granting of stock options and restricted stock based on individual merit and measures of performance.

As a result, approximately 4,200 employees are Watsco shareholders.

Our equity compensation plans are designed to promote long-term performance, as well as to create long-term employee retention, continuity of leadership, and an ownership culture whereby management and employees think and act as owners of the Company.

We believe that our restricted stock program is unique because an employee’s restricted share grants generally vest entirely and only at the end of his or her career (age 62 or later) and, prior to retirement, these grants remain subject to significant risk of forfeiture.

Talent Development

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.

Health and Safety

We believe that our restricted stock program is unique because an employee’s restricted share grants generally vest only at the end of his or her career (age 62 or later) and, prior to retirement, these grants remain subject to significant risk of forfeiture.

Workforce Health and Safety

We continuously strive to improve all aspects of our work practices.

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To build and sustain a culture based on these principles, our commitment to safety and wellness is incorporated into the incentive structure of our key operational leaders.

For wellness, we measure employee engagement in completing annual physicals and health assessments to help ensure that our philosophical values are put into action.

For wellness, we measure employee engagement in completing an annual physical to help ensure that our philosophical values are put into action.

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.

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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 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 HVAC equipment, which we currently source from approximately 20 vendors, accounted for 69% of our revenues in both 2024 and 2023.

Sales of other HVAC products, which we currently source from more than 1,500 vendors, comprised 27% of our revenues in both 2024 and 2023.

Sales of commercial refrigeration products, which we currently source from approximately 150 vendors, accounted for 4% of our revenues in both 2024 and 2023.

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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.

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 during the post-World War II era, 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.

The table below identifies the number of our stores by location as of December 31, 2024:

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Massachusetts

West Virginia

New Hampshire

West Virginia

United States

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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.

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.

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

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.

In 2021, we and Carrier formed a new joint venture and acquired certain assets and assumed certain liabilities comprising the HVAC distribution business of Temperature Equipment Corporation (“TEC”), one of Carrier’s independent distributors with locations in Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri and Wisconsin.

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.

Combined, our joint ventures with Carrier represented 54% of our revenues in 2024.

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 business and affairs of the joint ventures are controlled, directed, and managed exclusively by their 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.

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.

Customers and Customer Service

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 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.

Air conditioning and heating contractors 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 130,000 active contractors who service the replacement and new construction markets for residential and commercial central air conditioning, heating, and refrigeration systems.

No single customer in 2024, 2023, or 2022 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, 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.

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

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

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.

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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.

If the Trump administration imposes restrictions or significant tariff increases under existing trade agreements on products imported or assembled outside the United States by our top ten suppliers, particularly from Mexico, where a significant portion of residential HVAC equipment is assembled, and China, we may incur higher inventory costs and we would, in turn, need to raise our selling prices.

This could adversely impact our sales and market share and negatively impact our business.

Future financial results are also materially dependent upon the continued market acceptance of these manufacturers’ respective products and their ability to continue to manufacture products that comply with laws relating to environmental and efficiency standards.

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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 maintain trade name and distribution agreements with Carrier, Rheem, and Mitsubishi that provide us with 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.

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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.

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.

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.

Although HFCs were introduced as alternatives to ozone-depleting substances like chlorofluorocarbons and hydrochlorofluorocarbons, they are now recognized as potent greenhouse gases due to their high global warming potential (“GWP”).

Consequently, a phasedown of HFC production and consumption by 85% over a 15-year period commenced on January 1, 2022, and regulations were established requiring HVAC systems manufactured to use refrigerants with a GWP under 700 by January 1, 2025.

In response to these regulations, OEMs have transitioned their products to incorporate the new refrigerants.

The sell-through period for existing HVAC systems using HFC refrigerants with a GWP above 700 extends through December 31, 2025.

The Company expects these regulations to reduce the carbon footprint of end-users and increase average selling prices over time, subject to customary risks of quality, availability, and performance of new HVAC systems.

Climate Change and Reductions in CO 2 e Emissions

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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 likely 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 Seasonal Energy Efficiency Ratio rating, referred to as 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.

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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.

According to the DOE, heat pumps can reduce electricity use for heating by approximately 65% as compared to gas furnaces.

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.

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

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

However, the Trump administration has indicated that credits enacted under the IRA may be subject to reduction or elimination;

therefore, the availability of these credits in 2025 and thereafter is uncertain.

Available Information

We are required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”).

Information that we file with the SEC is available at the SEC’s website at www.sec.gov.

Our website is at www.watsco.com .

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 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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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.

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

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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