WATSCO2014 ANNUAL REPORT
2665 South Bayshore Drive, Suite 901
Miami, FL 33133 USA
305-714-4100
www.watsco.com
FINANCIAL HIGHLIGHTS
(in thousands, except per share data)
2010
2011
2012
2013
2014
Revenues
Operating income
EBITDA(1)
Net Income attributable to Watsco, Inc.
Diluted earnings per share
Adjusted diluted earnings per share(2)
Dividends per share
Operating cash flow
Total assets
Long-term obligations
Shareholders’ equity
$ 2,844,595
165,572
176,343
80,760
2.49
2.49
2.04
152,799
1,237,227
10,016
928,896
$ 2,977,759
199,050
210,775
90,450
2.74
2.74
2.23
61,452
1,268,148
—
1,001,710
$ 3,431,712
224,908
240,819
103,334
2.70
3.03
7.48
173,343
1,682,055
316,196
1,022,040
$ 3,743,330
271,209
288,915
127,723
3.68
3.68
1.15
150,269
1,669,531
230,557
1,127,392
$ 3,944,540
305,747
323,674
151,387
4.32
4.32
2.00
144,980
1,791,067
303,885
1,132,039
(1) EBITDA is defined as earnings before interest expense, net, income taxes, depreciation and amortization. Amortization of debt acquisition costs is included
in interest expense, net.
(2) In October 2012, the Company paid a special dividend of $5.00 per share. The calculation of adjusted diluted earnings per share excludes the impact of the
special dividend.
Total
Revenues
(in millions)
Operating
Income
(in millions)
Adjusted
Diluted
Earnings
(per share)
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
$2,845
$2,978
$3,432
$3,743
$3,945
$166
$199
$225
$271
$306
$2.49
$2.74
$3.03
$3.68
$4.32
1
CO
SCALE
have achieved over the past 25 years.
The HVAC/R distribution industry is large, fragmented and growing; there
are 2,300 distribution companies in the $35 billion HVAC/R marketplace
in the Americas. As the industry leader, Watsco has advantages of scale.
Our market share, dense location network, broad product offerings,
vendor and supplier relationships, leadership and workforce experience,
unique culture, technology investments and access to capital allows us to
apply our scale and execute our strategy to sustain the growth rates we
3
DEEP
FOOTPRINT
STORES
572
12.7M
614
SQUARE FEET
DELIVERY TRUCKS
5
SOLID
WORKFORCE
EMPLOYEES
5,000
1,030
1,430
INSIDE COUNTER SALESPEOPLE
OUTSIDE SALES ENGINEERS AND TERRITORY MANAGERS
6
VAST
INVENTORY
SKUs
100,000
1,200
$700M
VENDOR PARTNERS
AVERAGE INVENTORY
8
CONSISTENT
GROWTH
TRANSACTIONS A YEAR
6.8M
50,000
19%
CONTRACTOR CUSTOMERS
25 YEAR TOTAL SHAREHOLDER RETURN
11
DEAR SHAREHOLDERS
Watsco’s strategy and unique culture continue to thrive as evidenced
We believe this performance places us in the upper echelon of all public
by our strong 2014 performance:
companies, and we are especially proud of the consistency that has
•Revenues grew 5% to a record $3.9 billion
been achieved. The obvious challenge is to sustain growth for the next
•Operating income increased 13% to a record $306 million
25 years. We will rely on the following cornerstones of our culture that
•Net income grew 19% to a record $151 million
have served us well in the past and continue to be relevant in the future:
•Earnings per share increased 17% to a record $4.32
OPERATE AS A VERY LOCAL BUSINESS. Entrepreneurial
Watsco’s 2014 performance builds on an impressive track record in
empowerment, a dense location network and a broad product offering
terms of total shareholder return. Compounded annual total return to
all enable great service to the contractor who needs everything fast.
shareholders, which measures both capital appreciation and dividends,
We not only have the largest network, but also the densestnetwork in
over the last 25 years is as follows:
terms of local market coverage.
Total Annual
REWARD PERFORMANCE. Watsco is a performance-driven
5-Year 150% 20%
company. Performance expectations are clear, concise, rigidly reinforced
10-Year 342% 16%
and, most importantly, rewarded. Along with cash incentives, the use of
15-Year 1,839% 22%
Watsco equity has been critical to our success in two important ways –
20-Year 3,752% 20%
having our leaders thinklong-term and actas owners.
25-Year 8,099% 19%
COMPETE WITH CONSISTENCY. Continuity of leadership
creates loyalty among our 50,000 contractor customers and is a critical
12
13
factor in building long-term partnerships with our major vendors. Our
GAIN SHARE FOR OUR VENDOR PARTNERS. Profitable
leadership team has been in the HVAC/R industry for over 28 years on
market share growth is a critical mission and our spirit of collaboration
average and with our company for over 19 years. We continue to seek
and partnership with our vendors has driven great results.
and invest in great new talent and build careers for our leadership team.
INNOVATE AND REVOLUTIONIZE THE MARKETPLACE.
MAINTAIN FOCUS. Watsco’s singular focus on the HVAC/R market-
Watsco is investing heavily in an array of state-of-the-art technologies to
place produces two important outcomes – we adapt and respond to the
improve our customer experience, increase productivity, enhance the
market more quickly andthe collaboration of our leaders and managers
supply chain and become a more data-driven enterprise. These are
within the HVAC/R marketplace is unparalleled. This means that great
long-term investments that we believe will revolutionize our business.
ideas can be executed quickly.
We are certainly looking forward to the next25 years.
REMAIN CONSERVATIVE. We are risk averse and therefore debt-
As always, I want to extend my gratitude to our employees for their many
averse. Our goal is to conserve our balance sheet in order to provide
contributions and recognize them for their ongoing commitment to
flexibility and quickness for any-sized opportunity that may come along
exceed the expectations of our contractor customers. Their dedication,
and to invest in our network. Strong cash flow has been a hallmark of
spirit and entrepreneurship have made us the leader in the industry
our company and paying increasing dividends over the long-term
and will serve us well as we continue to build our company.
remains an important goal as well.
14
Compounded annual total return to shareholders source: FactSet Data Systems as of February 13, 2015.
15
Albert H. Nahmad
President and Chief Executive Officer
FINANCIAL
REVIEW
Management’s Discussion and Analysis
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on
the Financial Statements
Consolidated Financial Statements:
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Selected Quarterly Financial Data
Information on Common Stock
Shareholder Return Performance
5-Year Summary of Selected Consolidated Financial Data
Corporate & Shareholder Information
18
28
29
30
31
32
33
34
36
37
57
58
59
60
61
WATSCO, INC. 2014 ANNUAL REPORT 17
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains or incorporates by reference statements that are not historical
in nature and that are intended to be, and are hereby identified as, “forward-looking statements” as defined
in the Private Securities Litigation Reform Act of 1995. Statements which are not historical in nature,
including the words “anticipate,” “estimate,” “could,” “should,” “may,” “plan,” “seek,” “expect,” “believe,”
“intend,” “target,” “will,” “project” and variations of these words and negatives thereof and similar expres-
sions are intended to identify forward-looking statements, including statements regarding, among others,
(i) economic conditions, (ii) business and acquisition strategies, (iii) potential acquisitions and/or joint
ventures, (iv) financing plans and (v) industry, demographic and other trends affecting our financial condi-
tion or results of operations. These forward-looking statements are based on management’s current expec-
tations, are not guarantees of future performance and are subject to a number of risks, uncertainties and
changes in circumstances, certain of which are beyond our control. Actual results could differ materially
from these forward-looking statements as a result of several factors, including, but not limited to:
• general economic conditions;
• competitive factors within the HVAC/R industry;
• effects of supplier concentration;
• fluctuations in certain commodity costs;
• consumer spending;
• consumer debt levels;
• new housing starts and completions;
• capital spending in the commercial construction market;
• access to liquidity needed for operations;
• seasonal nature of product sales;
• weather conditions;
• insurance coverage risks;
• federal, state and local regulations impacting our industry and products;
• prevailing interest rates;
• foreign currency exchange rate fluctuations;
• international political risk;
• cybersecurity risk; and
• the continued viability of our business strategy.
We believe these forward-looking statements are reasonable; however, you should not place undue
reliance on any forward-looking statements, which are based on current expectations. For additional infor-
mation regarding other important factors that may affect our operations and could cause actual results to
vary materially from those anticipated in the forward-looking statements see the discussion included in
Item 1A “Risk Factors” of this Annual Report on Form 10-K, as well as the other documents and reports
that we file with the SEC. Forward-looking statements speak only as of the date the statement was made.
We assume no obligation to update forward-looking information or the discussion of such risks and uncer-
tainties to reflect actual results, changes in assumptions or changes in other factors affecting forward-
looking information, except as required by applicable law. We qualify any and all of our forward-looking
statements by these cautionary factors.
The following information should be read in conjunction with the information contained in Item 1A, “Risk
Factors” and the consolidated financial statements, including the notes thereto, included under Item 8,
“Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for the year ended
December 31, 2014.
COMPANY OVERVIEW
Watsco, Inc. was incorporated in Florida in 1956, and, together with its subsidiaries (collectively,
“Watsco,” or “we”, “us” or “our”) 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, 2014, we operated from 572 locations in 38 U.S. States, Canada, Mexico
and Puerto Rico with additional market coverage on an export basis to Latin America and the Caribbean.
Revenues primarily consist of sales of air conditioning, heating and refrigeration equipment and related
parts and supplies. Selling, general and administrative expenses primarily consist of selling expenses,
the largest components of which are salaries, commissions and marketing expenses that are variable and
correlate to changes in sales. Other significant selling, general and administrative expenses relate to the
operation of warehouse facilities, including a fleet of trucks and forklifts and facility rent, which are
payable mostly under non-cancelable operating leases.
Sales of residential central air conditioners, heating equipment and parts and supplies are seasonal.
Furthermore, results of operations can be impacted favorably or unfavorably based on weather patterns,
primarily during the summer and winter selling seasons. Demand related to the residential central air
conditioning replacement market is typically highest in the second and third quarters, and demand for
heating equipment is usually highest in the fourth quarter. Demand related to the new construction
market is fairly consistent during the year, subject to weather and economic conditions, including their
effect on the number of housing completions.
JOINT VENTURES WITH CARRIER CORPORATION
In 2009, we formed a joint venture with Carrier Corporation (“Carrier”), which we refer to as Carrier
Enterprise I, in which Carrier contributed 95 of its company-owned locations in 13 Sun Belt states and
Puerto Rico and its export division in Miami, Florida, and we contributed 15 locations that distributed
Carrier products. In July 2012, we exercised our option to acquire an additional 10% ownership interest
in Carrier Enterprise I, which increased our ownership interest to 70%; and, on July 1, 2014, we exer-
cised our last remaining option to acquire an additional 10% ownership interest in Carrier Enterprise I,
which increased our controlling interest in Carrier Enterprise I to 80%. Neither we nor Carrier has any
remaining options to purchase additional ownership interests in Carrier Enterprise I or any of our other
joint ventures with Carrier, which are described below.
In 2011, we formed a second joint venture with Carrier and completed two additional transactions. In
April 2011, Carrier contributed 28 of its company-owned locations in eight Northeast U.S. States, and
we contributed 14 locations in the Northeast U.S. In July 2011, we purchased Carrier’s distribution
operations in Mexico, which included seven locations. Collectively, the Northeast locations and the
Mexico operations are referred to as Carrier Enterprise II. We have a 60% controlling interest in Carrier
Enterprise II, and Carrier has a 40% noncontrolling interest.
In 2012, we formed a third joint venture, which we refer to as Carrier Enterprise III, with UTC Canada
Corporation, referred to as UTC Canada, an affiliate of Carrier. Carrier contributed 35 of its company-
owned locations in Canada to Carrier Enterprise III. We have a 60% controlling interest in Carrier
Enterprise III, and UTC Canada has a 40% noncontrolling interest.
CRITICAL ACCOUNTING POLICIES
Management’s discussion and analysis of financial condition and results of operations is based upon the
consolidated financial statements, which have been prepared in accordance with U.S. generally accepted
accounting principles. The preparation of these consolidated financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the reported
amount of revenues and expenses during the reporting period. Actual results may differ from these estimates
under different assumptions or conditions. At least quarterly, management reevaluates its judgments and
18 WATSCO, INC. 2014 ANNUAL REPORT
WATSCO, INC. 2014 ANNUAL REPORT 19
estimates, which are based on historical experience, current trends and various other assumptions that
are believed to be reasonable under the circumstances.
Our significant accounting policies are discussed in Note 1 to our audited consolidated financial statements
included with this Annual Report on Form 10-K. Management believes that the following accounting
policies include a higher degree of judgment and/or complexity and, thus, are considered to be critical
accounting policies. Management has discussed the development and selection of critical accounting
policies with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the
disclosures relating to them.
Allowance for Doubtful Accounts
An allowance for doubtful accounts is maintained for estimated losses resulting from the inability of customers to
make required payments. We typically do not require our customers to provide collateral. Accounting for
doubtful accounts contains uncertainty because management must use judgment to assess the collectability
of these accounts. When preparing these estimates, management considers a number of factors, including
the aging of a customer’s account, past transactions with customers, creditworthiness of specific customers,
historical trends and other information. Our business is seasonal and our customers’ businesses are also
seasonal. Sales are lowest during the first and fourth quarters and past due accounts receivable balances
as a percentage of total trade receivables generally increase during these quarters. We review our accounts
receivable reserve policy periodically, reflecting current risks, trends and changes in industry conditions.
The allowance for doubtful accounts was $5.5 million and $5.7 million at December 31, 2014 and
2013, respectively, a decrease of $0.2 million. Accounts receivable balances greater than 90 days past
due as a percent of accounts receivable at December 31, 2014 decreased to 1.6% compared to 1.8% at
December 31, 2013. These decreases were primarily attributable to an improvement in the underlying
quality of our accounts receivable portfolio at December 31, 2014.
Although we believe the allowance for doubtful accounts is sufficient, a decline in economic conditions
could lead to the deterioration in the financial condition of customers, resulting in an impairment of their
ability to make payments and additional allowances may be required that could materially impact our
consolidated results of operations. We believe our exposure to concentrations of credit risk is limited due
to the large number of customers comprising our customer base and their dispersion across many different
geographical regions. Additionally, we mitigate credit risk through credit insurance programs.
Inventory Valuation Reserves
Inventory valuation reserves are established in order to report inventories at the lower of weighted-average
cost or market and the first-in, first-out method. As part of the valuation process, inventories are adjusted
to reflect excess, slow-moving and damaged inventories at their estimated net realizable value. The valua-
tion process for excess, slow-moving and damaged inventory contains uncertainty because management
must make estimates and use judgment to determine the future salability of inventories. Inventory policies
are reviewed periodically, reflecting current risks, trends and changes in industry conditions. A reserve for
estimated inventory shrinkage is also maintained and reflects the results of cycle count programs and
physical inventories. When preparing these estimates, management considers historical results, inventory
levels and current operating trends.
Valuation of Goodwill and Indefinite Lived Intangible Assets
The recoverability of goodwill is evaluated at least annually and when events or changes in circumstances
indicate that the carrying amount may not be recoverable. We have one reporting unit that is subject to
goodwill impairment testing. In performing the goodwill impairment test, we use a two-step approach.
The first step compares the reporting unit’s fair value to its carrying value. If the carrying value exceeds
the fair value, a second step is performed to measure the amount of impairment loss, if any. The identifi-
cation 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. On January 1, 2015, we performed our annual
goodwill impairment test and determined that the estimated fair value of our reporting unit significantly
exceeded its carrying value.
The recoverability of indefinite lived intangibles is also evaluated on an annual basis or more often if deemed
necessary. Indefinite lived intangibles not subject to amortization are assessed for impairment by compar-
ing the fair value of the intangible asset to its carrying amount to determine if a write-down to fair value is
required. Our annual impairment tests did not result in any impairment of our indefinite lived intangibles.
The estimates of fair value of our reporting unit and indefinite lived intangibles 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. There have
been no events or circumstances from the date of our assessments that would have an impact on this
conclusion. The carrying amount of goodwill and intangibles was $573.8 million and $596.5 million at
December 31, 2014 and 2013, respectively. Although no impairment has been recorded to date, there
can be no assurances that future impairments will not occur. An adjustment to the carrying value of
goodwill and intangibles could materially impact the consolidated results of operations.
Self-Insurance Reserves
Self-insurance reserves are maintained relative to company-wide casualty insurance and health benefit
programs. The level of exposure from catastrophic events is limited by the purchase of stop-loss and
aggregate liability reinsurance coverage. When estimating the self-insurance liabilities and related
reserves, management considers a number of factors, which include historical claims experience, demo-
graphic factors, severity factors and valuations provided by independent third-party actuaries.
Management reviews its assumptions with its independent third-party actuaries to evaluate whether the
self-insurance reserves are adequate. If actual claims or adverse development of loss reserves occur and
exceed these estimates, additional reserves may be required. The estimation process contains uncertainty
since management must use judgment to estimate the ultimate cost that will be incurred to settle
reported claims and unreported claims for incidents incurred but not reported as of the balance sheet
date. Reserves in the amounts of $4.6 million and $5.6 million at December 31, 2014 and 2013,
respectively, were established related to such insurance programs.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under this method, deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial reporting basis and the tax basis of assets and liabilities at enacted tax rates expected to be
in effect when such amounts are recovered or settled. The use of estimates by management is required to
determine income tax expense, deferred tax assets and any related valuation allowance and deferred tax
liabilities. No valuation allowance was recorded at December 31, 2014. A valuation allowance of $0.1
million was recorded at December 31, 2013 due to uncertainties related to the ability to utilize a portion
of the deferred tax assets primarily arising from foreign net operating loss carryforwards. The valuation
allowance is based on estimates of future taxable income by jurisdiction in which the deferred tax assets
will be recoverable. These estimates can be affected by a number of factors, including possible tax audits
or general economic conditions or competitive pressures that could affect future taxable income. Although
management believes that the estimates are reasonable, the deferred tax asset and any related valuation
allowance will need to be adjusted if management’s estimates of future taxable income differ from actual
taxable income. An adjustment to the deferred tax asset and any related valuation allowance could
materially impact the consolidated results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 to our consolidated financial statements included in this Annual Report on Form 10-K for
a discussion of new accounting pronouncements.
20 WATSCO, INC. 2014 ANNUAL REPORT
WATSCO, INC. 2014 ANNUAL REPORT 21
RESULTS OF OPERATIONS
The following table summarizes information derived from the audited consolidated statements of income,
expressed as a percentage of revenues, for the years ended December 31, 2014, 2013 and 2012. Due
to rounding, percentages may not add up to operating income.
Revenues
Cost of sales
Gross profit
Selling, general and administrative expenses
Operating income
Interest expense, net
Income before income taxes
Income taxes
Net income
Less: net income attributable to noncontrolling interest
2014
2013
2012
100.0%
75.8
100.0%
76.0
24.2
16.5
7.8
0.1
7.6
2.3
5.3
1.5
24.0
16.8
7.2
0.1
7.1
2.1
5.0
1.6
100.0%
76.3
23.7
17.2
6.5
0.1
6.4
1.8
4.6
1.6
Net income attributable to Watsco, Inc.
3.8%
3.4%
3.0%
We did not acquire any businesses during 2014 or 2013. The following narratives include the results of
operations for businesses acquired during 2012. The results of operations for these acquisitions have
been included in our consolidated statements of income beginning on their respective dates of acquisition.
See Note 9 to our audited consolidated financial statements included in this Annual Report on Form 10-K
for the pro forma financial information combining our results of operations with the operations of Carrier
Enterprise III.
The following narratives also reflect our purchase of an additional 20% ownership interest in Carrier
Enterprise I, 10% which became effective on July 1, 2014 and 10% which became effective on July 2,
2012.
In the following narratives, computations and disclosure information referring to “same-store basis”
exclude the effects of locations acquired or locations opened or closed during the immediately preceding
12 months unless they are within close geographical proximity to existing locations. At December 31,
2014 and 2013, 31 and 16 locations, respectively, were excluded from “same-store basis” information.
The table below summarizes the changes in our locations for 2014 and 2013:
December 31, 2012
Opened
Closed
December 31, 2013
Opened
Closed
December 31, 2014
Number of
Locations
573
6
(10)
569
17
(14)
572
2014 COMPARED TO 2013
Revenues
Revenues for 2014 increased $201.2 million, or 5%, to $3,944.5 million, including $1.9 million from
locations opened during the preceding 12 months, partially offset by $5.7 million from closed locations.
On a same-store basis, revenues increased $205.0 million, or 5%, as compared to 2013, reflecting a 7%
increase in sales of HVAC equipment (64% of sales), which included an 8% increase in residential HVAC
equipment and a 3% increase in commercial HVAC equipment, a 2% increase in sales of other HVAC
products (31% of sales) and a 7% increase in sales of commercial refrigeration products (5% of sales).
The increase in same-store revenues is primarily due to higher demand for the replacement of residential
HVAC equipment and higher demand related to the new construction market. Sales of residential HVAC
equipment also benefited from an improved sales mix of higher-efficiency air conditioning and heating
systems, which sell at higher unit prices.
Gross Profit
Gross profit for 2014 increased $57.1 million, or 6%, to $956.4 million, primarily as a result of
increased revenues. Gross profit margin improved 20 basis-points to 24.2% in 2014 from 24.0% in
2013, primarily due to higher realized gross margins for residential HVAC equipment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 2014 increased $22.6 million, or 4%, to $650.7 million,
primarily as a result of increased revenues and additional headcount. Selling, general and administrative
expenses as a percentage of revenues decreased to 16.5% for 2014 from 16.8% for 2013. The decrease in
selling, general, and administrative expenses as a percentage of revenues was primarily due to improved
leveraging of fixed operating costs as compared to 2013.
Operating Income
Operating income for 2014 increased $34.5 million, or 13%, to $305.7 million. Operating margin
improved 60 basis-points to 7.8% in 2014 from 7.2% in 2013.
Interest Expense, Net
Net interest expense for 2014 decreased $0.6 million, or 11%, to $5.2 million, primarily as a result of
a lower effective interest rate, partially offset by increased average outstanding borrowings in 2014 as
compared to 2013.
Income Taxes
Income taxes increased to $91.8 million for 2014, as compared to $77.7 million for 2013 and are a
composite of the income taxes attributable to our wholly owned operations and investments and income
taxes attributable to the Carrier joint ventures, which are taxed as partnerships for income tax purposes.
The effective income tax rate attributable to us was 37.0% in 2014 and 2013.
Net Income Attributable to Watsco, Inc.
Net income attributable to Watsco in 2014 increased $23.7 million, or 19%, to $151.4 million. The
increase was primarily driven by higher revenues, expanded profit margins and reduced selling, general
and administrative expenses as a percent of revenues, as discussed above, and by a reduction in the net
income attributable to the noncontrolling interest related to Carrier Enterprise I following our purchase of
an additional 10% ownership interest in Carrier Enterprise I in July 2014.
2013 COMPARED TO 2012
Revenues
Revenues for 2013 increased $311.6 million, or 9%, to $3,743.3 million, including $87.4 million
attributable to the 35 new Carrier Enterprise III locations and $2.5 million from other locations opened
during the preceding 12 months, offset by $7.9 million from locations closed. On a same-store basis,
revenues increased $229.6 million, or 7%, as compared to 2012, reflecting a 9% increase in sales of
HVAC equipment (12% increase in residential HVAC equipment offset by a 2% decrease in commercial
HVAC equipment), a 3% increase in sales of other HVAC products and a 3% increase in sales of commer-
cial refrigeration products. The increase in same-store revenues is primarily due to strong demand for
residential HVAC equipment.
22 WATSCO, INC. 2014 ANNUAL REPORT
WATSCO, INC. 2014 ANNUAL REPORT 23
Gross Profit
Gross profit for 2013 increased $84.9 million, or 10%, to $899.3 million, primarily as a result of
increased revenues. Gross profit margin improved 30 basis-points to 24.0% in 2013 from 23.7% in
2012. On a same-store basis, gross profit margin also improved 30 basis-points to 24.0% in 2013
from 23.7% in 2012, primarily due to higher realized gross margins for residential HVAC equipment
and non-equipment products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 2013 increased $38.6 million, or 7%, to $628.0 million,
primarily as a result of increased revenues. Selling, general and administrative expenses as a percentage of
revenues decreased to 16.8% for 2013 from 17.2% for 2012. The decrease in selling, general, and admin-
istrative expenses as a percentage of revenues was primarily due to leveraging of fixed operating costs as
compared to 2012. Selling, general and administrative expenses in 2012 included $1.2 million of acquisi-
tion-related costs. On a same-store basis, selling, general and administrative expenses increased 3% as
compared to 2012.
Operating Income
Operating income for 2013 increased $46.3 million, or 21%, to $271.2 million. Operating margin
improved 70 basis-points to 7.2% in 2013 from 6.5% in 2012. On a same-store basis, operating income
increased 19% compared to 2012.
Interest Expense, Net
Net interest expense for 2013 increased $1.2 million, or 25%, to $5.8 million, primarily as a result of
increased average outstanding borrowings, partially offset by a lower effective interest rate in 2013 as
compared to 2012.
Income Taxes
Income taxes increased to $77.7 million for 2013, as compared to $62.6 million for 2012 and are a
composite of the income taxes attributable to our wholly owned operations and investments, and income
taxes attributable to the Carrier joint ventures, which are taxed as partnerships for income tax purposes.
The effective income tax rate attributable to us was 37.0% and 36.75% in 2013 and 2012, respectively.
The increase was primarily due to higher effective tax rates for income generated by our United States
subsidiaries.
Net Income Attributable to Watsco, Inc.
Net income attributable to Watsco in 2013 increased $24.4 million, or 24%, to $127.7 million. The
increase was primarily driven by higher revenues, expanded profit margins and reduced selling, general
and administrative expenses as a percent of revenues as discussed above, and by a reduction in the net
income attributable to the noncontrolling interest related to Carrier Enterprise I following our purchase of
an additional 10% ownership interest in Carrier Enterprise I in July 2012.
LIQUIDITY AND CAPITAL RESOURCES
We assess our liquidity in terms of our ability to generate cash to execute our business strategy and fund
operating and investing activities, taking into consideration the seasonal demand for HVAC/R products,
which peaks in the months of May through August. Significant factors that could affect our liquidity
include the following:
• cash necessary to fund our business (primarily working capital requirements);
• the adequacy of our available bank line of credit;
• the ability to attract long-term capital with satisfactory terms;
• acquisitions, including joint ventures;
• dividend payments;
• capital expenditures; and
• the timing and extent of common stock repurchases.
Sources and Uses of Cash
We rely on cash flows from operations and borrowing capacity under our revolving credit agreement to
fund seasonal working capital needs and for other general corporate purposes, including dividend payments,
if and as declared by our Board of Directors, capital expenditures, business acquisitions and development
of our long-term operating strategies.
As of December 31, 2014, we had $24.4 million of cash and cash equivalents, of which, $21.6 million
was held by foreign subsidiaries. We believe that our operating cash flows, cash on hand and funds avail-
able for borrowing under our line of credit will be sufficient to meet our liquidity needs in the foreseeable
future. However, there can be no assurance that our current sources of available funds will be sufficient to
meet our cash requirements.
Our access to funds under our line of credit depends 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 line of credit and may also adversely affect the determination of interest rates,
particularly rates based on LIBOR, which is one of the base rates under our line of credit. Disruptions in
the credit and capital markets could also result in increased borrowing costs and/or reduced borrowing
capacity under our line of credit.
Working Capital
Working capital increased to $870.3 million at December 31, 2014 from $777.6 million at December
31, 2013, reflecting an increase of inventory, including some additional inventory received in anticipation
of the transition to new regional efficiency standards in 2015, and higher levels of accounts receivable
commensurate with our increase in overall business volume.
Cash Flows
The following table summarizes our cash flow activity for 2014 and 2013 (in millions):
Cash flows provided by operating activities
Cash flows used in investing activities
Cash flows used in financing activities
2014
2013
Change
$
$
$
145.0
(19.1)
(120.2)
$
$
$
150.3
(14.3)
(189.0)
$
$
$
(5.3)
(4.8)
68.8
The individual items contributing to cash flow changes for the years presented are detailed in the consoli-
dated statements of cash flows contained in this Annual Report on Form 10-K.
Operating Activities
The decrease in net cash provided by operating activities was primarily due to higher levels of inventory in
2014 as compared to 2013 and higher accounts receivable driven by increased sales, partially offset by
higher net income in 2014 as compared to 2013 and the timing of payments for accounts payable and
other liabilities.
Investing Activities
The increase in net cash used in investing activities in 2014 as compared to 2013 is primarily due to
higher capital expenditures of $6.9 million in 2014.
Financing Activities
The decrease in net cash used in financing activities was primarily attributable to higher net borrowings
under our revolving credit agreement used to exercise our second option to acquire an additional 10%
ownership interest in Carrier Enterprise I for $87.7 million and a decrease in distributions to the noncon-
trolling interest in 2014 as compared to 2013, partially offset by an increase in dividends paid in 2014.
Revolving Credit Agreement
As amended on June 25, 2014, our unsecured, syndicated revolving credit agreement provides for borrow-
ings of up to $600.0 million, which we use to fund seasonal working capital needs and other general corpo-
rate purposes, including acquisitions, dividends, stock repurchases and issuances of letters of credit. Included
in the facility are a $90.0 million swingline subfacility, a $50.0 million letter of credit subfacility and a
24 WATSCO, INC. 2014 ANNUAL REPORT
WATSCO, INC. 2014 ANNUAL REPORT 25
$75.0 million multicurrency borrowing sublimit. The revolving credit agreement matures on July 1, 2019.
Borrowings under the credit facility bear interest at either LIBOR-based rates plus a spread, which ranges
from 87.5 to 250.0 basis-points (LIBOR plus 125.0 basis-points at December 31, 2014), depending on
our ratio of total debt to EBITDA, or on rates based on the higher of the Prime rate or the Federal Funds
Rate, in each case plus a spread which ranges from 0 to 150.0 basis-points (25.0 basis-points at
December 31, 2014), depending on our ratio of total debt to EBITDA. We pay a variable commitment fee
on the unused portion of the commitment under the revolving credit agreement, ranging from 12.5 to
35.0 basis-points (17.5 basis-points at December 31, 2014).
At December 31, 2014 and 2013, $303.2 million and $230.0 million, respectively, was outstanding
under the revolving credit agreement. The revolving credit agreement contains customary affirmative and
negative covenants, including financial covenants with respect to consolidated leverage and interest
coverage ratios, and other customary restrictions. We believe we were in compliance with all such
covenants at December 31, 2014.
Contractual Obligations
As of December 31, 2014, our significant contractual obligations were as follows (in millions):
Payments due by Period
Contractual Obligations
Operating leases (1)
Purchase obligations (2)
$
2015
67.3
31.8
Total
$
99.1
2016
56.3
—
56.3
$
$
2017
41.2
—
41.2
$
$
2018
26.2
—
26.2
$
$
2019
Thereafter
Total
$
$
12.8
—
12.8
$
$
13.5 $
—
217.3
31.8
13.5 $
249.1
(1) Represents future minimum payments associated with real property, equipment, vehicles and a corporate aircraft under non-cancelable operating leases. We are committed
to pay a portion of the actual operating expenses under certain of these lease agreements and these operating expenses are excluded from the table above.
(2) Purchase obligations include amounts committed under purchase orders for goods with defined terms as to price, quantity and delivery. Purchase orders made in the ordinary
course of business that are cancelable are excluded from the above table. Any amounts for which we are liable under purchase orders for goods received are reflected in
Accounts Payable in our Consolidated Balance Sheets and are excluded from the above table.
Commercial obligations outstanding at December 31, 2014 under our revolving credit agreement
consisted of borrowings totaling $303.2 million with revolving maturities of 14 to 31 days.
Off-Balance Sheet Arrangements
Refer to Note 12 to our audited consolidated financial statements, under the caption “Off-Balance Sheet
Financial Instruments,” for a discussion of standby letters of credit and performance bonds that we were
contingently liable under at December 31, 2014.
Purchase of Ownership Interest in Joint Venture
On July 1, 2014, we exercised our second option to acquire an additional 10% ownership interest in
Carrier Enterprise I for cash consideration of $87.7 million, following which we have an 80% controlling
interest in Carrier Enterprise I. Neither we nor Carrier has any remaining options to purchase additional
ownership interests in Carrier Enterprise I or any of our other joint ventures with Carrier.
Acquisitions
We continually evaluate potential acquisitions and/or joint ventures and routinely hold discussions with a
number of acquisition candidates. Should suitable acquisition opportunities arise that would require
additional financing, we believe our financial position and earnings history provide a sufficient basis for
us to either obtain additional debt financing at competitive rates and on reasonable terms or raise capital
through the issuance of equity securities.
Common Stock Dividends
We paid cash dividends of $2.00, $1.15 and $7.48 per share of Common stock and Class B common
stock in 2014, 2013 and 2012, respectively. On January 6, 2015, our Board of Directors approved an
increase to the quarterly cash dividend rate to $0.70 per share from $0.60 per share of Common and
Class B common stock beginning with the dividend that was paid on January 30, 2015 to shareholders
of record as of January 21, 2015. Future dividends and/or dividend rate increases will be at the sole dis-
cretion 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.
Company Share Repurchase Program
In September 1999, our Board of Directors authorized the repurchase, at management’s discretion, of up
to 7,500,000 shares of common stock in the open market or via private transactions. Shares repurchased
under the program are accounted for using the cost method and result in a reduction of shareholders’ equity.
No shares were repurchased in 2014, 2013 or 2012. In aggregate, 6,370,913 shares of Common and
Class B common stock have been repurchased at a cost of $114.4 million since the inception of the
program. At December 31, 2014, there were 1,129,087 shares remaining authorized for repurchase
under the program.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, including fluctuations in foreign currency exchange rates and interest
rates. To manage certain of these exposures, we use derivative instruments, including forward contracts
and swaps. We use derivative instruments as risk management tools and not for trading purposes.
Foreign Currency Exposure
We are exposed to cash flow and earnings fluctuations resulting from currency exchange rate variations.
These exposures are transactional and translational in nature. The foreign currency exchange rates to
which we are exposed are the Canadian dollar and Mexican peso. Revenues in these markets accounted
for 8% and 3%, respectively, of our total revenues for 2014.
Our transactional exposure primarily relates to purchases by our Canadian operations in currencies other
than their local currency. To mitigate the impact of currency exchange rate movements on these purchases,
we use foreign currency forward contracts. By entering into these foreign currency forward contracts, we
lock in exchange rates that would otherwise cause losses should the U.S. dollar strengthen and gains
should the U.S. dollar weaken, in each case against the Canadian dollar. The total notional value of our
foreign currency forward contracts as of December 31, 2014 was $37.8 million, and such contracts have
varying terms expiring through October 2015.
We have exposure related to the translation of financial statements of our Canadian operations into U.S.
dollars, our functional currency. Currently, we do not hold any derivative contracts that hedge our foreign
currency translational exposure.
Historically, fluctuations in these exchange rates have not materially impacted our results of operations. Our
exposure to currency rate fluctuations could be material in the future if these fluctuations become signifi-
cant or if our Canadian and Mexican markets grow and represent a larger percentage of our total revenues.
See Note 13 to our audited consolidated financial statements included in this Annual Report on Form
10-K for further information on our derivatives.
Interest Rate Exposure
Our revolving credit facility exposes us to interest rate risk because borrowings thereunder accrue interest
at one or more variable rates. Our interest rate risk management objectives are to limit the impact of
interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these
objectives, we have historically entered into interest rate swap agreements with financial institutions that
have investment grade credit ratings, thereby minimizing credit risk associated with these instruments.
We do not currently hold any such swap agreements or any other derivative contracts that hedge our
interest rate exposure, but we may enter into such instruments in the future.
We have evaluated our exposure to interest rates based on the amount of variable debt outstanding under
our revolving credit agreement at December 31, 2014, and determined that a 100 basis-point change in
interest rates would result in an impact to income before taxes of approximately $3.0 million. See Note 6
to our audited consolidated financial statements included in this Annual Report on Form 10-K for further
information about our debt.
26 WATSCO, INC. 2014 ANNUAL REPORT
WATSCO, INC. 2014 ANNUAL REPORT 27
Management’s Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our internal control system was
designed to provide reasonable assurance to our management and Board of Directors regarding the
reliability of financial reporting and the preparation and fair presentation of our published consolidated
financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective may not prevent or detect misstatements and can provide only
reasonable assurance with respect to financial statement preparation and presentation. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer,
Senior Vice President and Chief Financial Officer, we conducted an assessment of the effectiveness of our
internal control over financial reporting as of December 31, 2014. The assessment was based on criteria
established in the framework Internal Control — Integrated Framework (2013), issued by the Committee
of Sponsoring Organizations (“COSO”) of the Treadway Commission. Based on this assessment under the
COSO framework, our management concluded that our internal control over financial reporting was
effective as of December 31, 2014. The effectiveness of our internal control over financial reporting as of
December 31, 2014 has been audited by KPMG LLP, an independent registered public accounting firm,
as stated in their report that is included herein.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Watsco, Inc.:
We have audited Watsco, Inc.’s internal control over financial reporting as of December 31, 2014, based
on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Watsco, Inc.’s management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the accompanying Management’s Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a r
easonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Watsco, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Watsco, Inc. and subsidiaries as of December
31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, share-
holders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014,
and our report dated February 24, 2015 expressed an unqualified opinion on those consolidated financial
statements.
Miami, Florida
February 24, 2015
Certified Public Accountants
KPMG LLP
28 WATSCO, INC. 2014 ANNUAL REPORT
WATSCO, INC. 2014 ANNUAL REPORT 29
Report of Independent Registered Public Accounting Firm
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
The Board of Directors and Shareholders
Watsco, Inc.:
We have audited the accompanying consolidated balance sheets of Watsco, Inc. and subsidiaries as of
December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive
income, shareholders’ equity, and cash flows for each of the years in the three-year period ended
December 31, 2014. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Watsco, Inc. and subsidiaries as of December 31, 2014 and 2013,
and the results of their operations and their cash flows for each of the years in the three-year period
ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Watsco, Inc.’s internal control over financial reporting as of December 31, 2014,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 24,
2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
Miami, Florida
February 24, 2015
Certified Public Accountants
KPMG LLP
Years Ended December 31,
2014
2013
2012
Revenues
Cost of sales
Gross profit
Selling, general and administrative expenses
Operating income
Interest expense, net
Income before income taxes
Income taxes
Net income
Less: net income attributable to noncontrolling interest
$ 3,944,540
2,988,138
$ 3,743,330
2,844,077
$ 3,431,712
2,617,317
956,402
650,655
305,747
5,206
300,541
91,839
208,702
57,315
899,253
628,044
271,209
5,830
265,379
77,660
187,719
59,996
814,395
589,487
224,908
4,665
220,243
62,642
157,601
54,267
Net income attributable to Watsco, Inc.
$
151,387
$
127,723
$
103,334
Earnings per share for Common and Class B common stock:
Basic
Diluted
See accompanying notes to consolidated financial statements.
$
$
4.33
4.32
$
$
3.69
3.68
$
$
2.70
2.70
30 WATSCO, INC. 2014 ANNUAL REPORT
WATSCO, INC. 2014 ANNUAL REPORT 31
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
Years Ended December 31,
Net income
Other comprehensive loss, net of tax
Foreign currency translation adjustment
Unrealized gain on cash flow hedging instruments arising during the period
Unrealized gain on available-for-sale securities arising during the period
Other comprehensive loss
Comprehensive income
Less: comprehensive income attributable to noncontrolling interest
2014
2013
2012
$
208,702
$
187,719
$
157,601
(21,117)
280
1
(20,836)
187,866
48,752
(16,365)
—
24
(16,341)
171,378
53,027
(3,191)
—
35
(3,156)
154,445
52,861
Comprehensive income attributable to Watsco, Inc.
$
139,114
$
118,351
$
101,584
See accompanying notes to consolidated financial statements.
December 31,
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories
Other current assets
Total current assets
Property and equipment, net
Goodwill
Intangible assets, net
Other assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of other long-term obligations
Accounts payable
Accrued expenses and other current liabilities
Total current liabilities
Long-term obligations:
Borrowings under revolving credit agreement
Other long-term obligations, net of current portion
Total long-term obligations
Deferred income taxes and other liabilities
Commitments and contingencies
Watsco, Inc. shareholders’ equity:
2014
2013
$
24,447
434,234
677,990
20,664
$
19,478
399,565
583,154
18,905
1,157,335
1,021,102
53,480
387,311
186,476
6,465
45,418
392,610
203,843
6,558
$ 1,791,067
$ 1,669,531
$
169
173,360
113,493
287,022
303,199
686
303,885
68,121
$
107
141,104
102,295
243,506
230,044
513
230,557
68,076
Common stock, $0.50 par value, 60,000,000 shares authorized; 36,444,289 and
36,364,297 shares outstanding at December 31, 2014 and 2013, respectively
Class B common stock, $0.50 par value, 10,000,000 shares authorized; 4,933,245 and 4,733,737
shares outstanding at December 31, 2014 and 2013, respectively
Preferred stock, $0.50 par value, 10,000,000 shares authorized; no shares issued
Paid-in capital
Accumulated other comprehensive loss, net of tax
Retained earnings
Treasury stock, at cost, 6,322,650 shares of Common stock and 48,263 shares of Class B common
18,222
18,182
2,467
—
580,564
(23,747)
420,879
2,367
—
606,384
(11,474)
339,362
stock at both December 31, 2014 and 2013
Total Watsco, Inc. shareholders’ equity
Noncontrolling interest
Total shareholders’ equity
See accompanying notes to consolidated financial statements.
(114,425)
(114,425)
883,960
248,079
840,396
286,996
1,132,039
1,127,392
$ 1,791,067
$ 1,669,531
32 WATSCO, INC. 2014 ANNUAL REPORT
WATSCO, INC. 2014 ANNUAL REPORT 33
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except share and per share data)
Balance at December 31, 2011
Net income
Other comprehensive loss
Issuances of non-vested (restricted) shares of common stock
Common stock contribution to 401(k) plan
Stock issuances from exercise of stock options and employee stock purchase plan
Retirement of common stock
Share-based compensation
Excess tax benefit from share-based compensation
Cash dividends declared and paid on Common and Class B common stock, $7.48 per share
Common stock issued for Carrier Enterprise III
Fair value of noncontrolling interest in Carrier Enterprise III
Decrease in noncontrolling interest in Carrier Enterprise I
Distributions to noncontrolling interest
Balance at December 31, 2012
Net income
Other comprehensive loss
Issuances of non-vested (restricted) shares of common stock
Forfeitures of non-vested (restricted) shares of common stock
Common stock contribution to 401(k) plan
Stock issuances from exercise of stock options and employee stock purchase plan
Retirement of common stock
Share-based compensation
Excess tax benefit from share-based compensation
Cash dividends declared and paid on Common and Class B common stock, $1.15 per share
Distributions to noncontrolling interest
Balance at December 31, 2013
Net income
Other comprehensive loss
Issuances of non-vested (restricted) shares of common stock
Forfeitures of non-vested (restricted) shares of common stock
Common stock contribution to 401(k) plan
Stock issuances from exercise of stock options and employee stock purchase plan
Retirement of common stock
Share-based compensation
Excess tax benefit from share-based compensation
Cash dividends declared and paid on Common and Class B common stock, $2.00 per share
Decrease in noncontrolling interest in Carrier Enterprise I
Distributions to noncontrolling interest
Balance at December 31, 2014
See accompanying notes to consolidated financial statements.
Common Stock,
Class B
Common Stock
and Preferred
Stock Shares
Common Stock,
Class B
Common Stock
and Preferred
Stock Amount
Accumulated
Other
Comprehensive
Loss
Paid-In
Capital
33,005,341
$19,688
$493,519
$(352)
(1,750)
Retained
Earnings
$404,360
103,334
Treasury
Stock
Noncontrolling
Interest
$(114,425)
$198,920
54,267
(1,406)
111,301
26,991
157,664
(29,987)
56
13
79
(15)
(56)
1,759
7,084
(2,214)
7,716
1,079
1,250,000
625
92,625
(8,692)
(256,219)
34,521,310
20,446
592,820
(2,102)
251,475
127,723
(114,425)
(9,372)
124,043
(10,000)
22,551
87,193
(17,976)
62
(5)
11
44
(9)
(62)
5
1,678
3,340
(1,668)
8,760
1,511
34,727,121
20,549
606,384
(11,474)
(12,273)
218,725
(5,000)
18,309
73,948
(26,482)
109
(2)
9
37
(13)
(109)
2
1,750
4,629
(2,602)
12,006
1,828
(43,324)
(39,836)
339,362
151,387
(114,425)
(69,870)
104,244
(43,189)
(39,010)
273,826
59,996
(6,969)
(39,857)
286,996
57,315
(8,563)
(44,411)
(43,258)
Total
$1,001,710
157,601
(3,156)
—
1,772
7,163
(2,229)
7,716
1,079
(256,219)
93,250
104,244
(51,881)
(39,010)
1,022,040
187,719
(16,341)
—
—
1,689
3,384
(1,677)
8,760
1,511
(39,836)
(39,857)
1,127,392
208,702
(20,836)
—
—
1,759
4,666
(2,615)
12,006
1,828
(69,870)
(87,735)
(43,258)
35,006,621
$20,689
$580,564
$(23,747)
$420,879
$(114,425)
$248,079
$1,132,039
34 WATSCO, INC. 2014 ANNUAL REPORT
WATSCO, INC. 2014 ANNUAL REPORT 35
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
2014
2013
2012
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
$
208,702
$
187,719
$
157,601
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Share-based compensation
Deferred income tax provision
Provision for doubtful accounts
Non-cash contribution to 401(k) plan
(Gain) loss on sale of property and equipment
Excess tax benefits from share-based compensation
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable
Inventories
Accounts payable and other liabilities
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Proceeds from sale of property and equipment
Business acquisitions, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities:
Purchase of additional ownership from noncontrolling interest
Dividends on Common and Class B common stock
Distributions to noncontrolling interest
Payment of fees related to revolving credit agreement
Net repayments under prior revolving credit agreements
Net proceeds from (repayments of) other long-term obligations
Excess tax benefits from share-based compensation
Net proceeds from issuances of common stock
Net proceeds (repayments) under current revolving credit agreement
17,927
11,473
289
2,609
1,759
(1,292)
(1,828)
(41,068)
(98,741)
45,242
(92)
17,706
9,967
8,589
961
1,689
(156)
(1,511)
(25,846)
(40,575)
(7,256)
(1,018)
15,911
7,939
6,724
1,826
1,772
103
(1,079)
(5,752)
(26,652)
11,873
3,077
144,980
150,269
173,343
(21,512)
2,388
—
(19,124)
(87,735)
(69,870)
(43,258)
(381)
—
235
1,828
4,245
74,729
(14,580)
323
—
(14,257)
—
(39,836)
(69,494)
(458)
—
602
1,511
2,185
(83,559)
(12,317)
504
(80,479)
(92,292)
(51,881)
(256,219)
(16,003)
(2,116)
(20,000)
(1)
1,079
5,312
316,748
Net cash used in financing activities
Effect of foreign exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
(120,207)
(189,049)
(23,081)
(680)
4,969
19,478
(1,255)
(54,292)
73,770
127
58,097
15,673
Cash and cash equivalents at end of year
$
24,447
$
19,478
$
73,770
Supplemental cash flow information (Note 18)
See accompanying notes to consolidated financial statements.
Organization, Consolidation and Presentation
Watsco, Inc. and its subsidiaries (collectively, “Watsco,” or we, us or our) was incorporated in Florida in
1956 and is the largest distributor of air conditioning, heating and refrigeration equipment and related
parts and supplies (“HVAC/R”) in the HVAC/R distribution industry in North America. At December 31,
2014, we operated from 572 locations in 38 U.S. states, Canada, Mexico and Puerto Rico with additional
market coverage on an export basis to Latin America and the Caribbean.
The consolidated financial statements include the accounts of Watsco, all of its wholly owned subsidiaries
and the accounts of three joint ventures with Carrier Corporation (“Carrier”), in each of which Watsco
maintains a controlling interest. All significant intercompany balances and transactions have been
eliminated in consolidation.
Foreign Currency Translation and Transactions
The functional currency of our operations in Canada is the Canadian dollar. Foreign currency denominated
assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet
date, and income and expense items are translated at the average exchange rates in effect during the
applicable period. The aggregate effect of foreign currency translation is recorded in accumulated other
comprehensive loss in our consolidated balance sheets. Our net investment in our Canadian operations is
recorded at the historical rate and the resulting foreign currency translation adjustments are included in
accumulated other comprehensive loss in our consolidated balance sheets. Gains or losses resulting from
transactions denominated in U.S. dollars are recognized in earnings within selling, general and adminis-
trative expenses in our consolidated statements of income.
Our operations in Mexico consider their functional currency to be the U.S. dollar because the majority of
their transactions are denominated in U.S. dollars. Gains or losses resulting from transactions denominated
in Mexican pesos are recognized in earnings within selling, general and administrative expenses in our
consolidated statements of income.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses for the reporting period. Significant estimates include valuation
reserves for accounts receivable, inventories and income taxes, reserves related to self-insurance programs
and the valuation of goodwill and indefinite lived intangible assets. While we believe that these estimates
are reasonable, actual results could differ from such estimates.
Cash Equivalents
All highly liquid instruments purchased with original maturities of three months or less are considered to
be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable primarily consist of trade receivables due from customers and are stated at the
invoiced amount less an allowance for doubtful accounts. An allowance for doubtful accounts is main-
tained for estimated losses resulting from the inability of customers to make required payments. When
preparing these estimates, we consider a number of factors, including the aging of a customer’s account,
past transactions with customers, creditworthiness of specific customers, historical trends and other
information. Upon determination that an account is uncollectible, the receivable balance is written off.
At December 31, 2014 and 2013, the allowance for doubtful accounts totaled $5,461 and $5,737,
respectively.
36 WATSCO, INC. 2014 ANNUAL REPORT
WATSCO, INC. 2014 ANNUAL REPORT 37
Inventories
Inventories consist of air conditioning, heating and refrigeration equipment and related parts and supplies
and are valued at the lower of cost or market using a weighted-average cost basis and the first-in, first-out
methods. As part of the valuation process, inventories are adjusted to reflect excess, slow-moving and
damaged inventories at their estimated net realizable value. Inventory policies are reviewed periodically,
reflecting current risks, trends and changes in industry conditions. A reserve for estimated inventory
shrinkage is also maintained to consider inventory shortages determined from cycle counts and physical
inventories.
Vendor Rebates
We have arrangements with several vendors that provide rebates payable to us when we achieve any of a
number of measures, generally related to the volume level of purchases. We account for such rebates as a
reduction of inventory until we sell the product, at which time such rebates are reflected as a reduction of
cost of sales in our consolidated statements of income. Throughout the year, we estimate the amount of
the rebate based on our estimate of purchases to date relative to the purchase levels that mark our
progress toward earning the rebates. We continually revise our estimates of earned vendor rebates based
on actual purchase levels. At December 31, 2014 and 2013, we had $10,088 and $9,333, respectively,
of rebates recorded as a reduction of inventory. Substantially all vendor rebate receivables are collected
within three months immediately following the end of the year.
Marketable Securities
Investments in marketable equity securities are classified as available-for-sale and are included in other
assets in our consolidated balance sheets. These equity securities are recorded at fair value using the spe-
cific identification method with unrealized holding losses, net of deferred taxes, included in accumulated
other comprehensive loss within shareholders’ equity. Dividend and interest income are recognized in the
statements of income when earned.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation
and amortization of property and equipment is computed using the straight-line method. Buildings and
improvements are depreciated or amortized over estimated useful lives ranging from 3-40 years.
Leasehold improvements are amortized over the shorter of the respective lease terms or estimated useful
lives. Estimated useful lives for other depreciable assets range from 3-10 years.
Goodwill and Other Intangible Assets
Goodwill is recorded when the purchase price paid for an acquisition exceeds the fair value of the net
identified tangible and intangible assets acquired. We evaluate goodwill for impairment annually or more
frequently when an event occurs or circumstances change that indicate that the carrying value may not be
recoverable. We test goodwill for impairment by first comparing the fair value of our reporting unit to its
carrying value. If the fair value is determined to be less than the carrying value, a second step is per-
formed to measure the amount of impairment loss.
Other intangible assets primarily consist of the value of trade names and trademarks, distributor agree-
ments, customer relationships and non-compete agreements. Indefinite lived intangibles not subject to
amortization are assessed for impairment at least annually, or more frequently if events or changes in
circumstances indicate they may be impaired, by comparing the fair value of the intangible asset to its
carrying amount to determine if a write-down to fair value is required. Finite lived intangible assets are
amortized using the straight-line method over their respective estimated useful lives.
We perform our annual impairment tests each year and have determined there to be no impairment for
any of the periods presented. There were no events or circumstances identified from the date of our
assessment that would require an update to our annual impairment tests.
Long-Lived Assets
Long-lived assets, other than goodwill, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability is
evaluated by determining whether the amortization of the balance over its remaining life can be recovered
through undiscounted future operating cash flows. We measure the impairment loss based on projected
discounted cash flows using a discount rate reflecting the average cost of funds and compared to the
asset’s carrying value. As of December 31, 2014, there were no such events or circumstances.
Fair Value Measurements
We carry various assets and liabilities at fair value in the consolidated balance sheets. Fair value is defined
as the price that would be received for an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. As such, fair value is a market-based measurement
that should be determined based on assumptions that market participants would use in pricing an asset
or liability. Fair value measurements are classified based on the following fair value hierarchy:
Level 1
Level 2
Quoted prices in active markets for identical assets or liabilities. An active market for an
asset or liability is a market in which transactions for the asset or liability occur with sufficient
frequency and volume to provide pricing information on an ongoing basis.
Observable inputs other than Level 1 prices such as quoted prices in active markets for similar
assets or liabilities; quoted prices in markets that are not active; or model-driven valuations or
other inputs that are observable or can be corroborated by observable market data for substan-
tially the full term of the assets or liabilities.
Level 3 Unobservable inputs for the asset or liability. These inputs reflect our own assumptions about
the assumptions a market participant would use in pricing the asset or liability.
Revenue Recognition
Revenue primarily consists of sales of air conditioning, heating and refrigeration equipment and related
parts and supplies and is recorded when shipment of products or delivery of services has occurred.
Substantially all customer returns relate to products that are returned under warranty obligations under-
written by manufacturers, effectively mitigating our risk of loss for customer returns. Taxes collected from
our customers and remitted to governmental authorities are presented in our consolidated statements of
income on a net basis.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2014,
2013 and 2012, was $19,754, $22,418 and $23,730, respectively.
Shipping and Handling
Shipping and handling costs associated with inbound freight are capitalized to inventories and relieved
through cost of sales as inventories are sold. Shipping and handling costs associated with the delivery of
products is included in selling, general and administrative expenses. Shipping and handling costs
included in selling, general and administrative expenses for the years ended December 31, 2014, 2013
and 2012, was $43,324, $39,395 and $37,676, respectively.
Share-Based Compensation
The fair value of stock option and non-vested (restricted) stock awards are expensed on a straight-line
basis over the vesting period of the awards. Share-based compensation expense is included in selling,
general and administrative expenses in our consolidated statements of income. Cash flows from the tax
benefits resulting from tax deductions in excess of the compensation expense recognized for those options
(windfall tax benefits) are classified as financing cash flows. Tax benefits resulting from tax deductions in
excess of share-based compensation expense recognized are credited to paid-in capital in the consolidated
balance sheets.
Income Taxes
We record United States federal, state and foreign income taxes currently payable, as well as deferred
taxes due to temporary differences between reporting income and expenses for financial statement pur-
poses versus tax purposes. Deferred tax assets and liabilities reflect the temporary differences between
the financial statement and income tax basis of assets and liabilities. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect of a change in tax rates is
38 WATSCO, INC. 2014 ANNUAL REPORT
WATSCO, INC. 2014 ANNUAL REPORT 39
recognized as income or expense in the period that includes the enactment date. We and our eligible
subsidiaries file a consolidated United States federal income tax return. As income tax returns are generally
not filed until well after the closing process for the December 31 financial statements is complete, the
amounts recorded at December 31 reflect estimates of what the final amounts will be when the actual
income tax returns are filed for that calendar year. In addition, estimates are often required with respect
to, among other things, the appropriate state income tax rates to use in the various states that we and our
subsidiaries are required to file, the potential utilization of operating loss carryforwards and valuation
allowances required, if any, for tax assets that may not be realizable in the future.
We recognize the financial statement benefit of a tax position only after determining that the relevant tax
authority would more likely than not sustain the position following an audit. For tax positions meeting the
“more-likely-than-not” threshold, the amount recognized in the financial statements is the largest benefit
that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax
authority.
Earnings per Share
We compute earnings per share using the two-class method. The two-class method of computing earnings
per share is an earnings allocation formula that determines earnings per share for common stock and any
participating securities according to dividends declared (whether paid or unpaid) and participation rights
in undistributed earnings. Shares of our non-vested (restricted) stock are considered participating securi-
ties because these awards contain a non-forfeitable right to dividends irrespective of whether the awards
ultimately vest. Under the two-class method, earnings per common share for our Common and Class B
common stock is computed by dividing the sum of distributed earnings to common shareholders and
undistributed earnings allocated to common shareholders by the weighted-average number of shares of
Common and Class B common stock outstanding for the period. In applying the two-class method, undis-
tributed earnings are allocated to Common stock, Class B common stock and participating securities
based on the weighted-average shares outstanding during the period.
Diluted earnings per share reflects the dilutive effect of potential common shares from stock options. The
dilutive effect of outstanding stock options is computed using the treasury stock method, which assumes
any proceeds that could be obtained upon the exercise of stock options, would be used to purchase com-
mon stock at the average market price for the period. The assumed proceeds include the purchase price
the optionee pays, the windfall tax benefit that we receive upon assumed exercise and the unrecognized
compensation expense at the end of each period.
Derivative Instruments and Hedging Activity
We have used derivative instruments, including forward contracts and swaps, to manage our exposure to
fluctuations in foreign currency exchange rates and interest rates. The use of these derivative instruments
modifies the exposure of these risks with the intent to reduce the risk or cost to us. We use derivative
instruments as risk management tools and not for trading purposes. All derivatives, whether designated as
hedging relationships or not, are recorded on the balance sheet at fair value. Cash flows from derivative
instruments are classified in the consolidated statements of cash flows in the same category as the cash
flows from the items subject to the designated hedge or undesignated (economic) hedge relationships.
The hedging designation may be classified as one of the following:
No Hedging Designation. The gain or loss on a derivative instrument not designated as an accounting
hedging instrument is recognized in earnings.
Cash Flow Hedge. A hedge of a forecasted transaction or of the variability of cash flows to be received
or paid related to a recognized asset or liability is considered a cash flow hedge. The effective portion of
the change in the fair value of a derivative that is designated as a cash flow hedge is recorded in other
comprehensive income and reclassified to earnings as a component of cost of sales in the period during
which the hedged transaction affects earnings. Ineffective portions of changes in the fair value of cash
flow hedges are recognized in earnings.
Fair Value Hedge. A hedge of a recognized asset or liability or an unrecognized firm commitment is
considered a fair value hedge. Fair value hedges, both the effective and ineffective portions of the changes
in the fair value of the derivative, along with the gain or loss on the hedged item that is attributable to the
hedged risk, are recorded in earnings.
See Note 13 for additional information pertaining to derivative instruments.
New Accounting Pronouncements
Presentation of Unrecognized Tax Benefits
On January 1, 2014 we adopted guidance issued by the Financial Accounting Standards Board (“FASB”)
that requires the presentation of an unrecognized tax benefit as a reduction to a deferred tax asset for a net
operating loss carryforward rather than as a liability when the uncertain tax position would reduce the net
operating loss under the tax law of the applicable jurisdiction and the entity intends to use the deferred
tax asset for that purpose. The adoption of this guidance did not have an impact on our consolidated
financial statements.
Revenue Recognition
In May 2014, the FASB issued a standard on revenue recognition that provides a single, comprehensive
revenue recognition model for all contracts with customers. The standard is principle-based and provides
a five-step model to determine the measurement of revenue and timing of when it is recognized. The core
principle is that a company will recognize revenue to reflect the transfer of goods or services to customers
at an amount that the company expects to be entitled to in exchange for those goods or services. This
standard is effective for our interim and annual reporting periods beginning after December 15, 2016 and
allows for either full retrospective adoption or modified retrospective adoption. We will adopt this guidance
on January 1, 2017, and are currently evaluating the impact on our consolidated financial statements.
2. EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings per common share for our
Common and Class B common stock:
Years Ended December 31,
2014
2013
2012
Basic Earnings per Share:
Net income attributable to Watsco, Inc. shareholders
Less: distributed and undistributed earnings allocated to non-vested
(restricted) common stock
Earnings allocated to Watsco, Inc. shareholders
Weighted-average common shares outstanding - Basic
Basic earnings per share for Common and Class B common stock
Allocation of earnings for Basic:
Common stock
Class B common stock
Diluted Earnings per Share:
Net income attributable to Watsco, Inc. shareholders
Less: distributed and undistributed earnings allocated to non-vested
$
151,387
$
127,723
$
103,334
11,444
139,943
32,308,073
4.33
128,214
11,729
139,943
151,387
$
$
$
$
$
9,064
118,659
32,195,598
3.69
108,690
9,969
118,659
127,723
$
$
$
$
$
17,656
85,678
31,680,187
2.70
78,359
7,319
85,678
103,334
$
$
$
$
$
(restricted) common stock
11,435
9,053
17,656
Earnings allocated to Watsco, Inc. shareholders
$
139,952
$
118,670
$
85,678
Weighted-average common shares outstanding - Basic
Effect of dilutive stock options
32,308,073
50,781
32,195,598
62,470
31,680,187
64,212
Weighted-average common shares outstanding - Diluted
32,358,854
32,258,068
31,744,399
Diluted earnings per share for Common and Class B common stock
$
4.32
$
3.68
$
2.70
40 WATSCO, INC. 2014 ANNUAL REPORT
WATSCO, INC. 2014 ANNUAL REPORT 41
Diluted earnings per share for our Common stock assumes the conversion of all of our Class B common stock
into Common stock as of the beginning of the fiscal year, therefore, no allocation of earnings to Class B
common stock is required. At December 31, 2014, 2013 and 2012, our outstanding Class B common stock
was convertible into 2,707,725, 2,704,832 and 2,706,338 shares of our Common stock, respectively.
Diluted earnings per share excluded 9,984, 1,066 and 17,492 shares for the years ended December 31,
2014, 2013 and 2012, respectively, related to stock options with an exercise price per share greater
than the average market value, resulting in an anti-dilutive effect on diluted earnings per share.
3. OTHER COMPREHENSIVE LOSS
Other comprehensive loss consists of the foreign currency translation adjustment associated with our
Canadian operations’ use of the Canadian dollar as their functional currency and changes in the unrealized
gains on cash flow hedging instruments and available-for-sale securities. The tax effects allocated to each
component of other comprehensive loss are as follows:
Years Ended December 31,
2014
2013
2012
Foreign currency translation adjustment
$
(21,117)
$
(16,365)
$
(3,191)
Unrealized gain on cash flow hedging instruments
Income tax expense
Unrealized gain on cash flow hedging instruments, net of tax
Unrealized gain on available-for-sale securities
Income tax expense
Unrealized gain on available-for-sale securities, net of tax
384
(104)
280
1
—
1
—
—
—
39
(15)
24
—
—
—
63
(28)
35
Other comprehensive loss
$
(20,836)
$
(16,341)
$
(3,156)
The changes in each component of accumulated other comprehensive loss, net of tax, are as follows:
Years Ended December 31,
2014
2013
2012
Foreign currency translation adjustment:
Beginning balance
Current period other comprehensive loss
Ending balance
Cash flow hedging instruments:
Beginning balance
Current period other comprehensive income
Less reclassification adjustments
Ending balance
Available-for-sale securities:
Beginning balance
Current period other comprehensive income
Ending balance
$
(11,181)
(12,442)
(23,623)
$
$
(1,785)
(9,396)
(11,181)
—
(1,785)
(1,785)
—
168
—
168
(293)
1
(292)
—
—
—
—
(317)
24
(293)
—
—
—
—
(352)
35
(317)
4.SUPPLIER CONCENTRATION
We have four key suppliers of HVAC/R equipment products. Purchases from these four suppliers comprised
76%, 73% and 72% of all purchases made in 2014, 2013 and 2012, respectively. Our largest supplier,
Carrier and its affiliates, accounted for 61%, 59% and 57% of all purchases made in 2014, 2013 and
2012, respectively. See Note 16. A significant interruption by Carrier, or any of our other three key
suppliers, in the delivery of products could impair our ability to maintain current inventory levels or a
termination of a distribution agreement could disrupt the operations of certain subsidiaries and could
materially impact our consolidated results of operations and consolidated financial position.
5. PROPERTY AND EQUIPMENT
Property and equipment, net, consists of:
December 31,
Land
Buildings and improvements
Machinery, vehicles and equipment
Furniture and fixtures
Accumulated depreciation and amortization
$
$
2014
853
58,915
68,953
21,486
2013
1,131
49,942
64,012
20,523
150,207
(96,727)
135,608
(90,190)
$
53,480
$
45,418
Depreciation and amortization expense related to property and equipment included in selling, general
and administrative expenses for the years ended December 31, 2014, 2013 and 2012, was $12,158,
$11,677 and $10,986, respectively.
6.DEBT
We maintain an unsecured, syndicated revolving credit agreement, which we use to fund seasonal
working capital needs and other general corporate purposes, including acquisitions, dividends (if and as
declared by our Board of Directors), stock repurchases and issuances of letters of credit. On June 25,
2014, we entered into an amendment to this credit agreement, which increased the borrowing capacity
from $500,000 to $600,000, extended the maturity date from July 1, 2018 to July 1, 2019, increased
the swingline subfacility from $65,000 to $90,000 and modified certain definitions. In addition to the
swingline subfacility, included in the credit facility are a $50,000 letter of credit subfacility and a
$75,000 multicurrency borrowing sublimit.
Borrowings under the credit facility bear interest at either LIBOR-based rates plus a spread, which ranges
from 87.5 to 250.0 basis-points (LIBOR plus 125.0 basis-points at December 31, 2014), depending on
our ratio of total debt to EBITDA, or on rates based on the higher of the Prime rate or the Federal Funds
Rate, in each case plus a spread which ranges from 0 to 150.0 basis-points (25.0 basis-points at
December 31, 2014), depending on our ratio of total debt to EBITDA. We pay a variable commitment fee
on the unused portion of the commitment under the revolving credit agreement, ranging from 12.5 to
35.0 basis-points (17.5 basis-points at December 31, 2014).
At December 31, 2014 and 2013, $303,199 and $230,044, respectively, was outstanding under the
revolving credit agreement. The revolving credit agreement contains customary affirmative and negative
covenants, including financial covenants with respect to consolidated leverage and interest coverage
ratios, and other customary restrictions. We believe we were in compliance with all such covenants at
December 31, 2014.
Accumulated other comprehensive loss, net of tax
$
(23,747)
$
(11,474)
$
(2,102)
42 WATSCO, INC. 2014 ANNUAL REPORT
WATSCO, INC. 2014 ANNUAL REPORT 43
7.INCOME TAXES
The components of income tax expense from our wholly-owned operations and investments and our
controlling interest in joint ventures with Carrier are as follows:
The following is a summary of the significant components of our current and long-term deferred tax assets
and liabilities:
Years Ended December 31,
U.S. federal
State
Foreign
Current
Deferred
2014
74,561
10,325
6,953
91,839
91,550
289
91,839
$
$
$
$
2013
62,616
9,234
5,810
77,660
69,071
8,589
77,660
$
$
$
$
2012
50,919
6,245
5,478
62,642
55,918
6,724
62,642
$
$
$
$
We calculate our income tax expense and our effective tax rate for 100% of income attributable to our
wholly-owned operations and investments and for our controlling interest of income attributable to our
joint ventures with Carrier, which are taxed as partnerships for income tax purposes.
Following is a reconciliation of the effective income tax rate:
Years Ended December 31,
2014
2013
2012
U.S. federal statutory rate
State income taxes, net of federal benefit and other
Tax effects on foreign income
Effective income tax rate attributable to Watsco, Inc.
Taxes attributable to noncontrolling interest
Effective income tax rate
35.0%
3.0
(1.0)
37.0
(6.4)
35.0%
3.3
(1.3)
37.0
(7.7)
35.0%
2.5
(0.8)
36.7
(8.3)
December 31,
Current deferred tax assets:
Capitalized inventory costs and inventory reserves
Self-insurance reserves
Allowance for doubtful accounts
Other current deferred tax assets
Total current deferred tax assets (1)
Long-term deferred tax assets:
Share-based compensation
Other long-term deferred tax assets
Net operating loss carryforwards
Valuation allowance
Total long-term deferred tax assets (2)
Current deferred tax liabilities:
Other current deferred tax liabilities
Total current deferred tax liabilities (1)
Long-term deferred tax liabilities:
Deductible goodwill
Depreciation
Other long-term deferred tax liabilities
$
2014
2013
$
3,262
759
992
1,588
6,601
20,108
746
221
21,075
—
21,075
(536)
(536)
(80,404)
(2,992)
(1,320)
(84,716)
2,883
1,093
882
1,539
6,397
17,455
909
283
18,647
(75)
18,572
(1,304)
(1,304)
(76,519)
(2,873)
(2,556)
(81,948)
30.6%
29.3%
28.4%
Total long-term deferred tax liabilities (2)
Net deferred tax liabilities
$
(57,576)
$
(58,283)
(1) Current deferred tax assets and liabilities have been included in the consolidated balance sheets in other current assets.
(2) Long-term deferred tax assets and liabilities have been included in the consolidated balance sheets in deferred income taxes and
other liabilities.
Amounts earned by foreign subsidiaries are generally subject to United States income taxation upon
repatriation. United States income taxes have not been provided on undistributed earnings of our foreign
subsidiaries. The cumulative undistributed earnings related to foreign operations were approximately
$80,000 at December 31, 2014. It is not practicable to estimate the amount of tax that might be
payable. Our intention is to indefinitely reinvest these earnings outside of the United States or to
repatriate the earnings only when it is tax effective to do so.
Management has determined that no valuation allowance was necessary at December 31, 2014. A
valuation allowance of $75 was recorded at December 31, 2013 to reduce the deferred tax assets to the
amount that was more likely than not to be realized. At December 31, 2014, there were state and other
net operating loss carryforwards of $7,231, which expire in varying amounts from 2015 through 2034.
These amounts are available to offset future taxable income. There were no federal net operating loss
carryforwards at December 31, 2014.
We are subject to United States federal income tax, income tax of multiple state jurisdictions and foreign
income tax. We are subject to tax audits in the various jurisdictions until the respective statutes of limita-
tions expire. We are no longer subject to United States federal tax examinations for tax years prior to
2011. For the majority of states, we are no longer subject to tax examinations for tax years prior to 2010.
As of December 31, 2014 and 2013, the total amount of gross unrecognized tax benefits (excluding the
44 WATSCO, INC. 2014 ANNUAL REPORT
WATSCO, INC. 2014 ANNUAL REPORT 45
federal benefit received from state positions) was $3,719 and $3,135, respectively. Of these totals,
$2,417 and $2,038, respectively, (net of the federal benefit received from state positions) represent the
amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate. Our continuing
practice is to recognize penalties within selling, general and administrative expenses and interest related
to income tax matters in income tax expense in the consolidated statements of income. As of December
31, 2014 and 2013, the cumulative amount of estimated accrued interest and penalties resulting from
such unrecognized tax benefits was $729 and $630, respectively, and is included in deferred income
taxes and other liabilities in the accompanying consolidated balance sheets.
The changes in gross unrecognized tax benefits are as follows:
Balance at December 31, 2011
Additions based on tax positions related to the current year
Reductions due to lapse of applicable statute of limitations
Balance at December 31, 2012
Additions based on tax positions related to the current year
Reductions due to lapse of applicable statute of limitations
Balance at December 31, 2013
Additions based on tax positions related to the current year
Reductions due to lapse of applicable statute of limitations
Balance at December 31, 2014
$
2,424
416
(366)
2,474
673
(12)
3,135
751
(167)
$
3,719
8. SHARE-BASED COMPENSATION AND BENEFIT PLANS
Share-Based Compensation Plans
We have two share-based compensation plans for employees. The 2014 Incentive Compensation Plan
(the “2014 Plan”) provides for the award of a broad variety of share-based compensation alternatives
such as non-vested (restricted) stock, non-qualified stock options, incentive stock options, performance
awards, dividend equivalents, deferred stock and stock appreciation rights at no less than 100% of the
market price on the date the award is granted. To date, awards under the 2014 Plan consist of non-
qualified stock options and non-vested (restricted) stock.
Under the 2014 Plan, the number of shares of Common and Class B common stock available for
issuance is (i) 2,000,000, plus (ii) any shares of Common stock or Class B common stock that remained
available for grant in connection with awards under the Watsco, Inc. Amended and Restated 2001
Incentive Compensation Plan (the “2001 Plan”) on the date on which our shareholders approved the
2014 Plan plus (iii) shares underlying currently outstanding awards issued under the 2001 Plan, which
shares become reissuable under the 2014 Plan to the extent that such underlying shares are not issued
due to their forfeiture, expiration, termination or otherwise. As of December 31, 2014, 2,045,421 shares
remained available for issuance under the 2014 Plan. A total of 27,450 shares of Common stock, net of
cancellations, and 10,000 shares of Class B common stock, had been awarded under the 2014 Plan as
of December 31, 2014. As of December 31, 2014, 2,007,971 shares of common stock were reserved
for future grants under the 2014 Plan. Options under the 2014 Plan vest over two to four years of service
and have contractual terms of five years. Awards of non-vested (restricted) stock, which are granted at no
cost to the employee, vest upon attainment of a certain age, generally the employee’s respective retirement
age. Vesting may be accelerated in certain circumstances prior to the original vesting date.
The 2001 Plan expired during 2014; therefore, no additional options may be granted. There were 207,450
options to exercise common stock outstanding under the 2001 Plan at December 31, 2014. Options
under the 2001 Plan vest over two to four years of service and have contractual terms of five years.
The following is a summary of stock option activity under the 2014 Plan and the 2001 Plan as of and for
the year ended December 31, 2014:
Options outstanding at December 31, 2013
Granted
Exercised
Forfeited
Expired
Options outstanding at December 31, 2014
Options exercisable at December 31, 2014
Weighted-
Average
Exercise
Price
65.30
97.34
58.53
68.49
60.40
73.62
62.69
Options
267,700
50,000
(64,000)
(11,250)
(1,000)
241,450
82,533
$
$
$
Weighted-
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
2.47
1.46
$
$
8,060
3,657
The following is a summary of non-vested (restricted) stock activity as of and for the year ended
December 31, 2014:
Non-vested (restricted) stock outstanding at December 31, 2013
Granted
Vested
Forfeited
Non-vested (restricted) stock outstanding at December 31, 2014
Weighted-
Average
Grant Date
Fair Value
40.70
96.84
45.71
56.69
45.21
$
Shares
2,487,292
218,725
(57,300)
(5,000)
2,643,717
$
The weighted-average grant date fair value of non-vested (restricted) stock granted during 2014, 2013
and 2012 was $96.84, $80.21 and $69.66, respectively. The fair value of non-vested (restricted) stock
that vested during 2014 was $5,789. The tax benefits realized from non-vested (restricted) stock that
vested during 2014 totaled $2,142. No non-vested (restricted) stock vested during 2013 or 2012.
During 2014, 21,028 shares of Common stock with an aggregate fair market value of $2,125 were
withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting
of non-vested (restricted) stock. These shares were retired upon delivery.
Share-Based Compensation Fair Value Assumptions
The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option
pricing valuation model based on the weighted-average assumptions noted in the table below. The fair
value of each stock option award, which is subject to graded vesting, is expensed, net of estimated forfei-
tures, on a straight-line basis over the requisite service period for each separately vesting portion of the
stock option. We use historical data to estimate stock option forfeitures. The expected term of stock
option awards granted represents the period of time that stock option awards granted are expected to be
outstanding and was calculated using the simplified method for plain vanilla options, which we believe
provides a reasonable estimate of expected life based on our historical data. The risk-free rate for periods
within the contractual life of the stock option award is based on the yield curve of a zero-coupon United
States Treasury bond on the date the stock option award is granted with a maturity equal to the expected
term of the stock option award. Expected volatility is based on historical volatility of our stock.
The following table presents the weighted-average assumptions used for stock options granted:
46 WATSCO, INC. 2014 ANNUAL REPORT
WATSCO, INC. 2014 ANNUAL REPORT 47
Years Ended December 31,
Expected term in years
Risk-free interest rate
Expected volatility
Expected dividend yield
Grant date fair value
2014
2013
2012
4.25
1.35%
22.07%
1.69%
4.25
0.82%
24.56%
2.20%
4.25
0.57%
31.40%
3.49%
$15.75
$13.33
$12.90
Exercise of Stock Options
The total intrinsic value of stock options exercised during 2014, 2013 and 2012 was $3,746, $2,753
and $5,641, respectively. Cash received from Common stock issued as a result of stock options exercised
during 2014, 2013 and 2012 was $3,324, $1,554 and $3,790, respectively. During 2014, 2013 and
2012, 5,454 shares of Class B common stock with an aggregate fair market value of $490, 4,749
shares of Common stock with an aggregate fair market value of $450 and 29,987 shares of Common
stock with an aggregate fair market value of $2,229, respectively, were withheld as payment in lieu of
cash for stock option exercises and related tax withholdings. During 2013, 13,227 shares of common
stock with an aggregate fair market value of $1,227 were delivered as payment in lieu of cash for stock
option exercises and related tax withholdings. These shares were retired upon delivery. In connection with
stock option exercises, the tax benefits realized from share-based compensation plans totaled $936,
$1,557 and $1,245, for the years ended December 31, 2014, 2013 and 2012, respectively.
Share-Based Compensation Expense
The following table provides information on share-based compensation expense:
Years Ended December 31,
Stock options
Non-vested (restricted) stock
Share-based compensation expense
2014
801
10,672
11,473
$
$
$
$
2013
884
9,083
9,967
$
$
2012
846
7,093
7,939
At December 31, 2014, there was $825 of unrecognized pre-tax compensation expense related to stock
options granted under the 2014 Plan and 2001 Plan, which is expected to be recognized over a
weighted-average period of approximately 1.7 years. The total fair value of stock options that vested
during 2014, 2013 and 2012 was $1,145, $822 and $315, respectively.
At December 31, 2014, there was $76,971 of unrecognized pre-tax compensation expense related to
non-vested (restricted) stock, which is expected to be recognized over a weighted-average period of
approximately 9.3 years, of which, approximately $57,000 is related to awards granted to our Chief
Executive Officer (“CEO”), which vest in approximately eight years upon his attainment of age 82. In the
event that vesting is accelerated for any circumstance, as defined in the related agreements, the remaining
unrecognized share-based compensation expense would be immediately recognized as a charge to earnings
with a corresponding tax benefit. At December 31, 2014, we were obligated to issue 102,479 shares of
non-vested (restricted) stock in connection with our CEO’s 2014 incentive compensation agreement.
Employee Stock Purchase Plan
The Watsco, Inc. Fourth Amended and Restated 1996 Qualified Employee Stock Purchase Plan (the
“ESPP”) provides for up to 1,500,000 shares of Common stock to be available for purchase by our full-
time employees with at least 90 days of service. The plan allows participating employees to purchase
shares of Common stock with a discount of 5% of the fair market value at specified times. During 2014,
2013 and 2012, employees purchased 6,995, 5,844 and 6,753 shares of Common stock at an average
price of $90.89, $79.46 and $68.76 per share, respectively. Cash dividends received by the ESPP were
reinvested in Common stock and resulted in the issuance of 2,953, 1,899 and 15,411 additional shares
during 2014, 2013 and 2012, respectively. We received net proceeds of $921, $631 and $1,522,
respectively, during 2014, 2013 and 2012, for shares of our Common stock issued under the ESPP. At
December 31, 2014, 515,204 shares remained available for purchase under the ESPP.
401(k) Plan
We have a profit sharing retirement plan for our employees that is qualified under Section 401(k) of the
Internal Revenue Code. Annual matching contributions are made based on a percentage of eligible
employee compensation deferrals. The contribution has historically been made with the issuance of
Common stock to the plan on behalf of our employees. For the years ended December 31, 2014, 2013
and 2012, we issued 18,309, 22,551 and 26,991 shares of Common stock, respectively, to the plan,
representing the Common stock discretionary matching contribution of $1,759, $1,689 and $1,772,
respectively.
9. ACQUISITIONS
Carrier Enterprise I
Carrier Enterprise, LLC (“Carrier Enterprise I”) is a joint venture formed on July 1, 2009 with Carrier that
operates a network of locations primarily throughout the Sun Belt States. From its inception until July 2,
2012, we owned 60% of the joint venture and Carrier owned 40%. We exercised an option to acquire an
additional 10% ownership interest in Carrier Enterprise I on July 2, 2012 for cash consideration of
$51,881. On July 1, 2014, we exercised our second option to acquire an additional 10% ownership inter-
est in Carrier Enterprise I for cash consideration of $87,735, following which we have an 80% controlling
interest in Carrier Enterprise I. Neither we nor Carrier has any remaining options to purchase additional
ownership interests in Carrier Enterprise I or any of our other joint ventures with Carrier, which are
described below.
Carrier Enterprise II
On April 29, 2011, we formed a second joint venture with Carrier to distribute Carrier, Bryant and Payne
branded residential, light-commercial and applied-commercial HVAC products and related parts and
supplies in the northeast U.S. We own 60% of the joint venture and Carrier owns 40%.
Carrier Enterprise III
On April 27, 2012, we completed the formation of a joint venture with UTC Canada Corporation (“UTC
Canada”), an affiliate of Carrier, to distribute Carrier-manufactured HVAC products in Canada. This joint
venture, Carrier Enterprise Canada, L.P. (“Carrier Enterprise III”), operated 37 locations throughout Canada
as of December 31, 2014. We have a 60% controlling interest in Carrier Enterprise III, and Carrier has a
40% noncontrolling interest. Total consideration paid by us for our 60% controlling interest in Carrier
Enterprise III comprised cash consideration of $80,489 and the issuance to UTC Canada of 1,250,000
shares of Common stock, having a fair value of $93,250.
The purchase price for Carrier Enterprise III resulted in the recognition of $216,463 in goodwill and intan-
gibles. The fair value of the identified intangible assets was $151,172 and consisted of $95,515 in trade
names and distribution rights and $55,657 in customer relationships to be amortized over a 15 year
period. For Canadian income tax purposes, 75% of the tax basis of the acquired goodwill is amortized at a
rate of 7% annually on a declining balance basis.
The purchase price allocation is based upon a purchase price of $173,739, which represents the fair value
of our 60% controlling interest in Carrier Enterprise III. The table below presents the allocation of the total
consideration to tangible and intangible assets acquired, liabilities assumed and the noncontrolling interest
from the acquisition of our 60% controlling interest in Carrier Enterprise III based on the respective fair
values as of April 27, 2012:
48 WATSCO, INC. 2014 ANNUAL REPORT
WATSCO, INC. 2014 ANNUAL REPORT 49
Cash
Accounts receivable
Inventories
Other current assets
Property and equipment
Goodwill
Intangible assets
Other assets
Accounts payable and accrued expenses
Noncontrolling interest
Total purchase price
$
10
46,718
55,024
481
2,517
65,291
151,172
978
(44,208)
(104,244)
The fair value of the noncontrolling interest was determined by applying a pro-rata value of the total
invested capital adjusted for a discount for lack of control that market participants would consider when
estimating the fair value of the noncontrolling interest.
The unaudited pro forma financial information, combining our results of operations with the operations of
Carrier Enterprise III as if the joint venture had been formed on January 1, 2012, is as follows:
Year Ended December 31,
Revenues
Net income
Less: net income attributable to noncontrolling interest
Net income attributable to Watsco, Inc.
Diluted earnings per share for Common and Class B common stock
2012
$ 3,526,621
156,728
54,153
102,575
2.64
$
$
The foregoing unaudited pro forma financial information is presented for informational purposes only. The
unaudited pro forma financial information from the beginning of the period presented until the acquisition
date includes adjustments to record income taxes related to our portion of Carrier Enterprise III’s income,
amortization related to identified intangible assets with finite lives and interest expense on borrowings
incurred to acquire our 60% controlling interest. This unaudited pro forma financial information does not
include adjustments to add or remove certain corporate expenses of Carrier Enterprise III, which may or may
not be incurred in future periods, or adjustments for depreciation or synergies that may be realized subse-
quent to the acquisition date. This unaudited pro forma financial information does not necessarily reflect
our future results of operations or what the results of operations would have been had we acquired our
60% controlling interest in and operated Carrier Enterprise III as of the beginning of the period presented.
The results of operations of these acquired locations have been included in the consolidated financial
statements from the date of acquisition of our controlling interest in Carrier Enterprise III.
Transaction costs
Approximately $1,200 of transaction costs is included in selling, general and administrative expenses in
our consolidated statements of income for the year ended December 31, 2012, primarily associated with
the closing and transition of Carrier Enterprise III.
$
173,739
Other intangible assets are comprised of the following:
10. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill are as follows:
Balance at December 31, 2012
Foreign currency translation adjustment
Balance at December 31, 2013
Foreign currency translation adjustment
Balance at December 31, 2014
December 31,
Indefinite lived intangible assets -
Trade names, trademarks and distribution rights
Finite lived intangible assets:
Customer relationships
Trade name
Non-compete agreements
Accumulated amortization
Finite lived intangible assets, net
$
397,262
(4,652)
392,610
(5,299)
$
387,311
Estimated
Useful Lives
2014
2013
10-15 years
10 years
7 years
$
131,271
$
138,599
76,595
1,150
369
(22,909)
80,865
1,150
369
(17,140)
55,205
65,244
$
186,476
$
203,843
Amortization expense related to finite lived intangible assets included in selling, general and administrative
expenses for the years ended December 31, 2014, 2013 and 2012, was $5,769, $6,029 and $4,925,
respectively. Amortization of finite lived intangible assets for 2015 through 2019 is expected to be
approximately $5,600 per year.
11. SHAREHOLDERS’ EQUITY
Common Stock
Common stock and Class B common stock share equally in earnings and are identical in most other
respects except (i) Common stock is entitled to one vote on most matters and each share of Class B
common stock is entitled to ten votes; (ii) shareholders of Common stock are entitled to elect 25% of the
Board of Directors (rounded up to the nearest whole number) and Class B shareholders are entitled to
elect the balance of the Board of Directors; (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.
Preferred Stock
We are authorized to issue preferred stock with such designation, rights and preferences as may be deter-
mined from time to time by our Board of Directors. Accordingly, the Board of Directors is empowered,
without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or
other rights which could adversely affect the voting power or other rights of the holders of our Common
stock and Class B common stock and, in certain instances, could adversely affect the market price of this
stock. We had no preferred stock outstanding at December 31, 2014 and 2013.
Stock Repurchase Plan
In September 1999, our Board of Directors authorized the repurchase, at management’s discretion, of up
to 7,500,000 shares of common stock in the open market or via private transactions. Shares repurchased
under the program are accounted for using the cost method and result in a reduction of shareholders’
equity. No shares were repurchased during 2014, 2013 or 2012. In aggregate, 6,322,650 shares of
50 WATSCO, INC. 2014 ANNUAL REPORT
WATSCO, INC. 2014 ANNUAL REPORT 51
Common stock and 48,263 shares of Class B common stock have been repurchased at a cost of
$114,425 since the inception of the program. At December 31, 2014, there were 1,129,087 shares
remaining authorized for repurchase under the program.
At December 31, 2014, we expect an estimated $384 pre-tax gain to be reclassified from accumulated
other comprehensive loss into earnings to reflect the fixed prices obtained from foreign exchange hedging
within the next 12 months.
12. FINANCIAL INSTRUMENTS
Recorded Financial Instruments
Recorded financial instruments consist of cash and cash equivalents, accounts receivable, accounts
payable, the current portion of long-term obligations, borrowings under our revolving credit agreement and
debt instruments included in other long-term obligations. At December 31, 2014 and 2013, the fair val-
ues of cash and cash equivalents, accounts receivable, accounts payable and the current portion of long-
term obligations approximated their carrying values due to the short-term nature of these instruments.
Derivatives Not Designated as Hedging Instruments
We also enter in foreign currency forward contracts that are not designated as hedges and/or did not
qualify for hedge accounting. These derivative instruments were effective economic hedges for all of the
periods presented. The fair value gains and losses on these contracts are recognized in earnings as a com-
ponent of selling, general and administrative expenses. The total notional value of our foreign currency
exchange contracts not designated as hedging instruments at December 31, 2014 was $14,750, and
such contracts have varying terms expiring through October 2015.
The fair values of variable rate borrowings under our revolving credit agreement and debt instruments
included in long-term obligations also approximate their carrying value based upon interest rates available
for similar instruments with consistent terms and remaining maturities.
We recognized a gain (loss) of $142, $315 and $(197) in our consolidated statements of income from
foreign currency forward contracts not designated as hedging instruments in 2014, 2013 and 2012,
respectively.
Off-Balance Sheet Financial Instruments
At December 31, 2014 and 2013, we were contingently liable under standby letters of credit aggregating
$2,662 and $2,681, respectively, which are primarily used as collateral to cover any contingency related
to additional risk assessments pertaining to our self-insurance programs. Additionally, at December 31,
2014 and 2013, we were contingently liable under various performance bonds aggregating approximately
$2,300 and $800, respectively, which are used as collateral to cover any contingencies related to our
nonperformance under agreements with certain customers. We do not expect that any material losses or
obligation will result from the issuance of the standby letters of credit or performance bonds because we
expect to meet our obligations under our self-insurance programs and to certain customers in the ordinary
course of business. Accordingly, the estimated fair value of these instruments is zero.
Concentrations of Credit Risk
Financial instruments which potentially subject us to concentrations of credit risk consist principally of
accounts receivable. Concentrations of credit risk are limited due to the large number of customers
comprising the customer base and their dispersion across many different geographical regions. We also
have access to credit insurance programs which are used as an additional means to mitigate credit risk.
13. DERIVATIVES
We enter into foreign currency forward contracts to offset the earnings impact that foreign exchange rate
fluctuations would otherwise have had on certain monetary liabilities that are denominated in nonfunc-
tional currencies.
Cash Flow Hedging Instruments
We enter into foreign currency forward contracts that are designated as cash flow hedges. The settlement
of these derivatives results in reclassifications from accumulated other comprehensive income to earnings
in the period when the hedged transaction occurs. The maximum length of time over which we hedge our
exposure to the variability in future cash flows for forecasted transactions is 12 months and, accordingly,
at December 31, 2014, all of our open foreign currency forward contracts had maturities of one year or
less. The total notional value of our foreign currency exchange contracts designated as cash flow hedges
at December 31, 2014 was $23,000, and such contracts have varying terms expiring through May
2015.
The impact from foreign exchange derivative instruments designated in cash flow hedging relationships
were as follows:
Years Ended December 31,
Gain recorded in other comprehensive loss
Gain reclassified from accumulated other comprehensive loss into earnings
$
2014
384
—
$
2013
—
—
The following table summarizes the fair value of derivative instruments, which consist solely of foreign
currency forward contracts, included in other current assets in our consolidated balance sheets. See Note 14.
Derivatives designated as hedging instruments
Derivatives not designated as hedging instruments
Total derivative instruments
Asset Derivatives Liability Derivatives
2014 2013
2014 2013
$384
260
$644
—
118
118
—
—
—
—
—
—
14. FAIR VALUE MEASUREMENTS
The following tables present our assets and liabilities carried at fair value that are measured on a recur-
ring basis:
Balance Sheet Location
Total Level 1 Level 2 Level 3
Fair Value Measurements
at December 31, 2014 Using
Assets:
Available-for-sale securities
Derivative financial instruments
Other assets
Other current assets
$266
$644
$266
—
—
$644
—
—
Balance Sheet Location
Total Level 1 Level 2 Level 3
Fair Value Measurements
at December 31, 2013 Using
Assets:
Available-for-sale securities
Derivative financial instruments
Other assets
Other current assets
$265
$118
$265
—
—
$118
—
—
The following is a description of the valuation techniques used for these assets and liabilities, as well as
the level of input used to measure fair value:
Available-for-sale securities – the investments are exchange-traded equity securities. Fair values for these
investments are based on closing stock prices from active markets and are therefore classified within
Level 1 of the fair value hierarchy.
Derivative financial instruments – the derivatives are foreign currency forward contracts. See Note 13.
Fair value is based on observable market inputs, such as forward rates in active markets; therefore, we
classify these derivatives within Level 2 of the valuation hierarchy.
52 WATSCO, INC. 2014 ANNUAL REPORT
WATSCO, INC. 2014 ANNUAL REPORT 53
There were no transfers in or out of Level 1 and Level 2 during 2014 or 2013.
15. COMMITMENTS AND CONTINGENCIES
Litigation, Claims and Assessments
We are involved in litigation incidental to the operation of our business. We vigorously defend all matters
in which we or our subsidiaries are named defendants and, for insurable losses, maintain significant levels
of insurance to protect against adverse judgments, claims or assessments that may affect us. Although
the adequacy of existing insurance coverage and the outcome of any legal proceedings cannot be pre-
dicted with certainty, based on the current information available, we do not believe the ultimate liability
associated with any known claims or litigation will have a material adverse effect on our financial condi-
tion or results of operations.
Self-Insurance
Self-insurance reserves are maintained relative to company-wide casualty insurance and health benefit
programs. The level of exposure from catastrophic events is limited by the purchase of stop-loss and
aggregate liability reinsurance coverage. When estimating the self-insurance liabilities and related
reserves, management considers a number of factors, which include historical claims experience,
demographic factors, severity factors and valuations provided by independent third-party actuaries.
Management reviews its assumptions with its independent third-party actuaries to evaluate whether the
self-insurance reserves are adequate. If actual claims or adverse development of loss reserves occur and
exceed these estimates, additional reserves may be required. Reserves in the amounts of $4,630 and
$5,582 at December 31, 2014 and 2013, respectively, were established related to such programs and
are included in accrued expenses and other current liabilities in our consolidated balance sheets.
Variable Interest Entity
As of December 31, 2014, in conjunction with our casualty insurance programs, limited equity interests
are held in a captive insurance entity. The programs permit us to self-insure a portion of losses, to gain
access to a wide array of safety-related services, to pool insurance risks and resources in order to obtain
more competitive pricing for administration and reinsurance and to limit risk of loss in any particular year.
The entity meets the definition of Variable Interest Entity (“VIE”); however, we do not meet the requirements
to include this entity in the consolidated financial statements. The maximum exposure to loss related to
our involvement with this entity is limited to approximately $4,100. See “Self-Insurance” above for further
information on commitments associated with the insurance programs and Note 12, under the caption
“Off-Balance Sheet Financial Instruments,” for further information on standby letters of credit. At
December 31, 2014, there were no other entities that met the definition of a VIE.
Operating Leases
We are obligated under various non-cancelable operating lease agreements for real property, equipment,
vehicles and a corporate aircraft used in our operations with varying terms through 2025. We are com-
mitted to pay a portion of the actual operating expenses under certain of these lease agreements. These
operating expenses are not included in the table below. Some of these arrangements have free or escalat-
ing rent payment provisions. We recognize rent expense under such arrangements on a straight-line basis
over the lease term.
At December 31, 2014, future minimum payments under non-cancelable operating leases over each of
the next five years and thereafter were as follows:
2015
2016
2017
2018
2019
Thereafter
Total minimum payments
54 WATSCO, INC. 2014 ANNUAL REPORT
$
67,307
56,263
41,174
26,221
12,849
13,525
$
217,339
Rental expense for the years ended December 31, 2014, 2013 and 2012, was $81,155, $79,585 and
$76,547, respectively.
Purchase Obligations
At December 31, 2014, we were obligated under various non-cancelable purchase orders with Carrier
and its affiliates for goods aggregating approximately $32,000.
16. RELATED PARTY TRANSACTIONS
Purchases from Carrier and its affiliates comprised 61%, 59% and 57% of all inventory purchases made
during 2014, 2013 and 2012, respectively. At December 31, 2014 and 2013, approximately $61,000
and $53,000, respectively, was payable to Carrier and its affiliates, net of receivables. Our joint ventures
with Carrier also sell HVAC products to Carrier and its affiliates. Revenues in our consolidated statements
of income for 2014, 2013 and 2012 included $38,195, $30,819 and $32,961, respectively, of sales
to Carrier and its affiliates. We believe these transactions are conducted at arm’s-length in the ordinary
course of business.
Carrier Enterprise III entered into Transaction Service Agreements (“TSAs”) with UTC Canada, pursuant to
which UTC Canada performed certain business processes on behalf of Carrier Enterprise III, including
processes involving the use of certain information technologies, and UTC Canada entered into TSAs with
Carrier Enterprise III, pursuant to which Carrier Enterprise III performed certain business processes on
behalf of UTC Canada. The services provided pursuant to the TSAs terminated on December 31, 2012.
The fees payable by Carrier Enterprise III to UTC Canada under one TSA were substantially offset by the
fees payable to Carrier Enterprise III by UTC Canada under the other TSA.
17. INFORMATION ABOUT GEOGRAPHIC AREAS
Our operations are primarily within the United States, including Puerto Rico, Canada and Mexico.
Products are also sold from the United States on an export-only basis to portions of Latin America and the
Caribbean Basin. The following tables set forth revenues and long-lived assets by geographical area:
Years Ended December 31,
2014
2013
2012
Revenues:
United States
Canada
Mexico
Total Revenues
December 31,
Long-Lived Assets:
United States
Canada
Mexico
Total Long-Lived Assets
$ 3,525,176
300,289
119,075
$ 3,325,114
318,165
100,051
$ 3,087,256
240,254
104,202
$ 3,944,540
$ 3,743,330
$ 3,431,712
2014
2013
$
434,910
187,064
5,293
$
429,202
207,340
5,329
$
627,267
$
641,871
Revenues are attributed to countries based on the location of the store from which the sale occurred.
Long-lived assets consist of property and equipment, goodwill and intangible assets.
WATSCO, INC. 2014 ANNUAL REPORT 55
18. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information was as follows:
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Years Ended December 31,
2014
2013
2012
Interest paid
Income taxes net of refunds
Common stock issued for Carrier Enterprise III
$
$
4,393
82,850
$
$
— $
5,334
73,168
$
$
— $
2,802
46,819
93,250
19. SUBSEQUENT EVENT
On January 6, 2015, our Board of Directors approved an increase in the quarterly cash dividend payable
on each share of Common stock and Class B common stock to $0.70 per share from $0.60 per share.
(In thousands, except per share data)
Year Ended December 31, 2014
Revenues (1)
Gross profit
Net income attributable to Watsco, Inc.
Earnings per share for Common
and Class B common stock (2):
Basic
Diluted
Year Ended December 31, 2013
Revenues (1)
Gross profit
Net income attributable to Watsco, Inc.
Earnings per share for Common
and Class B common stock (2):
Basic
Diluted
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Total
$
$
$
$
$
$
$
$
762,568
188,069
16,753
$ 1,170,186
279,273
56,101
$
$ 1,134,999
274,765
54,461
$
0.48
0.48
$
$
1.60
1.60
$
$
1.56
1.56
713,633
175,446
13,385
$ 1,120,452
266,680
51,318
$
$ 1,081,893
258,597
45,699
$
0.39
0.39
$
$
1.48
1.48
$
$
1.32
1.32
$
$
$
$
$
$
$
$
876,787
214,295
24,072
$ 3,944,540
956,402
151,387
$
0.69
0.69
$
$
4.33
4.32
827,352
198,530
17,321
$ 3,743,330
899,253
127,723
$
0.50
0.50
$
$
3.69
3.68
(1) Sales of residential central air conditioners, heating equipment and parts and supplies are seasonal. Demand related to the residen-
tial central air conditioning replacement market is typically highest in the second and third quarters and demand for heating equip-
ment is usually highest in the fourth quarter. Demand related to the new construction sectors throughout most of the markets is fairly
consistent during the year, except for dependence on housing completions and related weather and economic conditions.
(2) Quarterly and year-to-date earnings per share are calculated on an individual basis; therefore, the sum of earnings per share amounts
for the quarters may not equal earnings per share amounts for the year.
56 WATSCO, INC. 2014 ANNUAL REPORT
WATSCO, INC. 2014 ANNUAL REPORT 57
INFORMATION ON COMMON STOCK (UNAUDITED)
Our Common stock is traded on the New York Stock Exchange (“NYSE”) and the Professional Segment of
NYSE Euronext in Paris under the ticker symbol WSO. Our Class B common stock is traded on the NYSE
under the ticker symbol WSOB. The following table presents the high and low prices of our Common
stock and Class B common stock, as reported by the NYSE. Also presented below are dividends paid per
share for each quarter during the years ended December 31, 2014 and 2013. At February 18, 2015,
there were 230 Common stock registered shareholders and 91 Class B common stock registered
shareholders.
Common
Class B Common
Cash Dividend
High
Low
High
Low
Common
Class B
Year Ended December 31, 2014:
First quarter
Second quarter
Third quarter
Fourth quarter
Year Ended December 31, 2013:
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
$
$
100.47
104.84
104.16
108.20
84.25
89.16
95.39
97.47
$
$
91.12
96.93
85.53
86.14
74.13
77.72
85.58
91.73
$
$
99.94
105.22
104.90
107.12
84.38
89.48
96.00
97.15
$
$
91.42
96.68
87.41
87.41
74.50
78.19
85.59
92.72
$
$
0.40
0.40
0.60
0.60
0.25
0.25
0.25
0.40
0.40
0.40
0.60
0.60
0.25
0.25
0.25
0.40
SHAREHOLDER RETURN PERFORMANCE (UNAUDITED)
The following graph compares the cumulative five-year total return attained by holders of our Common
stock and Class B common stock relative to the cumulative total returns of the NYSE MKT Composite
index, the S&P Midcap 400 index and a customized peer group of companies, which are: Beacon Roofing
Supply, Inc., Lennox International Inc., Pool Corp and WESCO International, Inc. An investment of $100
(with reinvestment of all dividends) is assumed to have been made in our common stock, in each
index and in the peer group on December 31, 2009 and its relative performance is tracked through
December 31, 2014.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN*
Among Watsco, Inc., the NYSE MKT Composite Index, the S&P MidCap 400 Index and a Peer Group
$300
$250
$200
$150
$100
$50
$0
12/09
12/10
12/11
12/12
12/13
12/14
Watsco, Inc.
Watsco, Inc. Class B
NYSE MKT Composite
S&P MidCap 400
Peer Group
*$100 invested on 12/31/09 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2015 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
Watsco, Inc.
Watsco, Inc. Class B
NYSE MKT Composite
S&P MidCap 400
Peer Group
12/09
12/10
12/11
12/12
12/13
12/14
100.00
100.00
100.00
100.00
100.00
133.52
133.77
129.56
126.64
137.48
143.88
143.78
133.75
124.45
134.11
182.11
189.10
140.87
146.69
193.95
236.69
248.49
150.79
195.84
275.25
269.34
281.37
153.24
214.97
266.18
58 WATSCO, INC. 2014 ANNUAL REPORT
WATSCO, INC. 2014 ANNUAL REPORT 59
5-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with the consolidated
financial statements, including the notes thereto, included under Item 8 of Part II, “Financial Statements
and Supplementary Data,” and the information contained in Item 7 of Part II, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K for
the year ended December 31, 2014.
(In thousands, except per share data)
2014
2013
2012 (1)
2011
2010
FOR THE YEAR
Revenues
Gross profit
Operating income
Net income
Less: net income attributable to
noncontrolling interest
Net income attributable to Watsco, Inc.
Diluted earnings per share for Common and
Class B common stock
Cash dividends per share:
Common stock
Class B common stock
Weighted-average Common and
Class B common shares - Diluted
AT YEAR END
Total assets
Total long-term obligations
Total shareholders’ equity
Number of employees
$ 3,944,540
956,402
305,747
208,702
$ 3,743,330
899,253
271,209
187,719
$ 3,431,712
814,395
224,908
157,601
$ 2,977,759
728,294
199,050
137,742
$ 2,844,595
673,241
165,572
111,722
57,315
151,387
4.32
2.00
2.00
$
$
$
$
59,996
127,723
3.68
1.15
1.15
$
$
$
$
54,267
103,334
2.70
7.48
7.48
$
$
$
$
$
$
$
$
47,292
90,450
2.74
2.23
2.23
$
$
$
$
30,962
80,760
2.49
2.04
2.04
32,359
32,258
31,744
30,753
30,579
$ 1,791,067
$
303,885
$ 1,132,039
5,000
$ 1,669,531
$
230,557
$ 1,127,392
4,800
$ 1,682,055
$
316,196
$ 1,022,040
4,600
$ 1,268,148
$
$ 1,001,710
4,300
— $
$
$ 1,237,227
10,016
928,896
4,000
(1) On October 31, 2012, we paid a special dividend of $5.00 per share of Common and Class B common stock that resulted in a $0.33
per share reduction in diluted earnings per share.
CORPORATE & SHAREHOLDER INFORMATION
CORPORATE OFFICE
Watsco, Inc. 2665 South Bayshore Drive, Suite 901 Miami, FL 33133
Telephone: (305) 714-4100, Fax: (305) 858-4492, E-mail: info@watsco.com
EXECUTIVE OFFICERS
Albert H. Nahmad President & Chief Executive Officer
Barry S. Logan Senior Vice President & Secretary
Ana M. Menendez Chief Financial Officer & Treasurer
Aaron J. Nahmad Vice President of Strategy & Innovation
BOARD OF DIRECTORS
Albert H. Nahmad (3) Chairman of the Board, President and Chief Executive Officer
Cesar L. Alvarez (3) Co-Chairman, Greenberg Traurig, P.A.
David C. Darnell Vice Chairman, Bank of America
Denise Dickins (1) Associate Professor of Accounting and Auditing, East Carolina University
Steven R. Fedrizzi Chief Executive Officer, U.S. Green Building Council
Barry S. Logan Senior Vice President and Secretary
Paul F. Manley (1,2) Retired Executive Director, Holland & Knight
Bob L. Moss (1, 2, 3) Chairman and Chief Executive Officer, Moss & Associates, Inc.
Aaron J. Nahmad (3) Vice President of Strategy and Innovation
(1) Audit Committee (2) Compensation Committee (3) Nominating & Strategy Committee
STOCK INFORMATION
Common stock: New York Stock Exchange and the Professional Segment of the NYSE Euronext in Paris.
Ticker Symbol: WSO
Class B common stock: New York Stock Exchange. Ticker Symbol: WSOB
TRANSFER AGENT AND REGISTRAR
For address changes, dividend checks, account consolidation, registration changes, lost stock
certificates and other shareholder inquiries, please contact:
American Stock Transfer & Trust Company 6201 15th Avenue, Brooklyn, NY 11219
Toll-Free: (800) 937-5449, International: (718) 921-8124
Internet Site: www.amstock.com
Email: info@amstock.com
PUBLICATIONS
Our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q are available free of charge upon
request to our corporate office.
INTERNET SITES
Our website at www.watsco.com offers information about Watsco including our most recent quarterly
results and news releases.
Also, visit www.acdoctor.com to get information on energy efficiency and indoor air quality, compare
HVAC systems, find a licensed contractor and search for available rebates.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP 200 South Biscayne Boulevard, Suite 2000 Miami, FL 33131
60 WATSCO, INC. 2014 ANNUAL REPORT
WATSCO, INC. 2014 ANNUAL REPORT 61
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Strict guidelines were adhered to in the production of the paper used in this annual report, both in the forest and
in the mills. In doing so, the cause for renewable forests, preservation of natural resources, wildlife protection, and
pollution and energy reduction are advanced.
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64 WATSCO, INC. 2014 ANNUAL REPORT