Watsco Annual Report 2016

← All annual reports

FY2016 Annual Report · Watsco

Loading PDF…

WATSCO

ANNUAL REPORT 2016

EXPANDING OUR CULTURE

2665 South Bayshore Drive, Suite 901
Miami, FL 33133 USA
305-714-4100
www.watsco.com

WATSCO

ANNUAL REPORT 2016

EXPANDING OUR CULTURE

Watsco’s culture is rooted in entrepreneurism and
long-term thinking. Over the last several years,
enabled by our investments in technology, we have
expanded that culture to include data-driven decision
making plus a spirit of innovation and experimentation.
There is great pride in the 5,000+ people that work

at Watsco. Our stories vary, but we share a vision of
continuous improvement and a hunger to succeed. The
team is armed with new tools like business intelligence,
mobile apps, e-commerce and supply chain optimiza-
tion, which enhance productivity and the ability to
delight our customers.

It’s the people of Watsco, the culture that binds us,
and the tools that we are leveraging that we have high-
lighted in this year’s annual report. With the addition
of these tools and the expansion of our culture, Watsco
has a renewed posture to win in the digital age.

FINANCIAL HIGHLIGHTS

TOTAL REVENUES (in millions)

2012

2013

2014

2015

2016

(in thousands, except per share data)

2012

2013

2014

2015

2016

$3,743 $3,945 $4,113 $4,221

$3,432

$337

$346

$306

$271

$225

OPERATING INCOME (in millions)

2012

2013

2014

2015

2016

$4.90 $5.15

$4.32

$3.68

$3.03

ADJUSTED DILUTED EARNINGS (per share)

2012

2013

2014

2015

2016

Revenues

Operating income

EBITDA(1)

$ 3,431,712

$ 3,743,330

$ 3,944,540

$ 4,113,239

$4,220,702

224,908

240,819

2.70

3.03

7.48

271,209

288,915

127,723

3.68

1.15

305,747

323,674

151,387

4.32

2.00

336,748

355,865

172,929

4.90

2.80

345,632

365,698

182,810

5.16

5.15

3.60

173,343

150,269

144,980

221,383

277,756

1,682,055

1,669,531

1,791,067

1,788,442

1,874,649

316,196

230,557

303,885

245,814

235,642

1,022,040

1,127,392

1,132,039

1,203,721

1,251,748

Net Income attributable to Watsco, Inc. 103,334

Diluted earnings per share

Adjusted diluted earnings per share(2)

Dividends per share

Operating cash flow

Total assets

Long-term obligations

Shareholders’ equity

(1) EBITDA is defined as earnings before interest expense, net, income taxes, depreciation and amortization. Amortization of debt 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 earnings per share excluded the impact of the spe-
cial dividend.

2/3

FINANCIAL HIGHLIGHTS

TOTAL REVENUES (in millions)

2012

2013

2014

2015

2016

(in thousands, except per share data)

2012

2013

2014

2015

2016

$3,743 $3,945 $4,113 $4,221

$3,432

$337

$346

$306

$271

$225

OPERATING INCOME (in millions)

2012

2013

2014

2015

2016

$4.90 $5.15

$4.32

$3.68

$3.03

ADJUSTED DILUTED EARNINGS (per share)

2012

2013

2014

2015

2016

Revenues

Operating income

EBITDA(1)

$ 3,431,712

$ 3,743,330

$ 3,944,540

$ 4,113,239

$4,220,702

224,908

240,819

2.70

3.03

7.48

271,209

288,915

127,723

3.68

1.15

305,747

323,674

151,387

4.32

2.00

336,748

355,865

172,929

4.90

2.80

345,632

365,698

182,810

5.16

5.15

3.60

173,343

150,269

144,980

221,383

277,756

1,682,055

1,669,531

1,791,067

1,788,442

1,874,649

316,196

230,557

303,885

245,814

235,642

1,022,040

1,127,392

1,132,039

1,203,721

1,251,748

Net Income attributable to Watsco, Inc. 103,334

Diluted earnings per share

Adjusted diluted earnings per share(2)

Dividends per share

Operating cash flow

Total assets

Long-term obligations

Shareholders’ equity

(1) EBITDA is defined as earnings before interest expense, net, income taxes, depreciation and amortization. Amortization of debt 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 earnings per share excluded the impact of the spe-
cial dividend.

2/3

continually share our success and wealth as a company
with our owners.

We continue to invest in technologies that will transform
our business over several years. Though still early, we
are encouraged by the initial level of adoption by both
customers and employees. Our goals with these invest-
ments are to further strengthen Watsco’s leadership
position, accelerate sales and profit growth, increase
the speed, convenience and efficiency in serving our
customers and to extend our reach into new geographies
and sales channels.

At the core of the Company’s success are the 5,000
plus employees of Watsco, a group that we are proud of,
and who have challenged themselves to continue to
outperform in the digital age. Many of the faces in this
year’s annual report have been with us for a long time;
others have joined more recently as we have grown and
invested in our business. Collectively this team is rooted
in our cultural tenants of entrepreneurism and long-term

DEAR SHAREHOLDERS:

Watsco is a collection of ambitious people, bound by a
unique culture, focused on winning. Over the last 25
years, that has proven to be a formula for success. Our
company has become the undisputed industry leader
and produced a 21% compounded annual total return to
shareholders, which ranks us in the upper echelon of all
public companies.

We are happy to celebrate another record-setting year in
2016. Watsco’s total shareholder return in 2016 was
30%. Sales, operating profit, net income and earnings
per share reached their highest levels ever. It was also a
blockbuster year for cash flow – a record $285 million
or approximately $8.52 per share, which far exceeded
net income. We also increased dividends again this year,
which we consider to be a simple, important way to

4/5

continually share our success and wealth as a company
with our owners.

DEAR SHAREHOLDERS:

4/5

and respond in ways that cannot be matched by our
competitors.

Remain conservative and risk averse with our finances
to provide the flexibility to invest in any opportunity at
a low cost of capital.

We intend to maintain these cultural disciplines,
strengthen our industry position and build market share
with our supplier partners. I am grateful for the efforts
and contributions of our great Watsco team members.
The market for HVAC/R products on an installed basis
is an estimated $88 billion in North America, and
powered by the exceptional team at Watsco, we expect
exciting years ahead.

Albert H. Nahmad
Chairman & Chief Executive Officer

thinking, and now we are embracing modern technolo-
gies and processes and a passion for innovation and
experimentation.

Our fundamentals can be boiled down to a short list
of priorities:

Instill an entrepreneurial spirit and culture of innova-
tion to continually improve our performance and
revolutionize our customers’ businesses.

Operate as a local business by empowering leaders in
the field and enabling great service through a dense
network of locations.

Compete by forging long-term supplier partnerships
and by motivating and retaining our leadership teams
for the duration of their careers.

Concentrate our focus on HVAC/R products to build the
largest depository of industry knowledge and to adapt

6/7

and respond in ways that cannot be matched by our
competitors.

Remain conservative and risk averse with our finances
to provide the flexibility to invest in any opportunity at
a low cost of capital.

Albert H. Nahmad
Chairman & Chief Executive Officer

thinking, and now we are embracing modern technolo-
gies and processes and a passion for innovation and
experimentation.

Our fundamentals can be boiled down to a short list
of priorities:

Instill an entrepreneurial spirit and culture of innova-
tion to continually improve our performance and
revolutionize our customers’ businesses.

Operate as a local business by empowering leaders in
the field and enabling great service through a dense
network of locations.

Compete by forging long-term supplier partnerships
and by motivating and retaining our leadership teams
for the duration of their careers.

Concentrate our focus on HVAC/R products to build the
largest depository of industry knowledge and to adapt

6/7

INSIGHTFUL DECISION-MAKING

BIBUSINESS INTELLIGENCE

Our Business Intelligence (BI) platform is increas-
ingly being adopted and utilized throughout the
organization. In 2016, the number of Watsco team
members using BI increased 12% to more than
1,500, and the rate of analytical queries increased
31% per user. More than ever, we are applying an
inquisitive lens to our data to identify insights and
actions that equate to incremental competitive
advantages. As an example, Mike B. (pictured right)
routinely fires up his BI Sales Opportunity Dash-
board to see customers who are at risk of attrition
(a predictive analytic) and algorithmically generated
product recommendations specific to those
customers.

8/9

“This is who we are now.

We are technology, data and analytics driven.”

INSIGHTFUL DECISION-MAKING

BIBUSINESS INTELLIGENCE

8/9

“This is who we are now.

We are technology, data and analytics driven.”

NEW TOOLS

SSALES

Our salesforce is excited to bring tech-laden tools like
the Contractor Assist mobile app to their customers.
Tens of thousands of contractors use our apps, which
are loaded with feature-functionality that helps them
be more efficient and makes it simple to do business
with the Watsco companies. No competitor has
such a comprehensive tool. David D. (pictured left)
explains that the mobile app truly differentiates our
brands and creates a “wow” experience with his
customers.

“I now have the data and the tools to support

or challenge my decisions. I’m seeing the diﬀerence
they’re making.”

10/11

NEW TOOLS

SSALES

“I now have the data and the tools to support

or challenge my decisions. I’m seeing the diﬀerence
they’re making.”

10/11

SCSUPPLY CHAIN

When it comes to supply chain efficiency, information
is king. The more you know, the better you can man-
age the process and engineer improvements. We are
lacing our branch network with technology to enable
continuous operational efficiencies. At the time of
print we had 359 locations with a modern wireless
infrastructure, with 150 of those locations utilizing
our proprietary Order Fulfillment software and 68
locations offering express pickup, another customer
“wow” experience. Our supply chain optimization
programs are improving fill-rates, increasing inventory
turns, reducing our footprint and minimizing our
operating costs while improving our customer service
levels. Robin W. (pictured right) is a veteran branch
manager turned technology evangelist; her store is
seeing huge wins with these new tools.

CREATING EFFICIENCIES

12/13

“We get our customers in and out in minutes.

Our tools make them more eﬃcient.
And me as well.”

SCSUPPLY CHAIN

CREATING EFFICIENCIES

12/13

“We get our customers in and out in minutes.

Our tools make them more eﬃcient.
And me as well.”

EMPOWERING CONTRACTORS

EE-COMMERCE

Digitization via e-commerce unlocks a slew of
enhancements to our business. To name a few: we
are now open 24/7/365; we can offer hundreds of
thousands of products to our customers where
before we were limited to the physical shelf space
at a location; and our salesforce can reallocate time
from order taking to providing incremental value to
their customers. More importantly, e-commerce
enables efficiencies for our customers that they’ve
never experienced before, such as: digitizing their
own workforce to enhance business processes that
save time and reduce errors; shortening the process
of finding and ordering the products they need via
our shopping tools; and managing the “backend” of
their business quickly whether in the office or in the
field. Eric E. (pictured left) sets up all his customers
on e-commerce because it’s a win for him and a win
for them.

14/15

“Our customers now have access to our extensive
catalog of product data. All at their ﬁngertips.”

EMPOWERING CONTRACTORS

EE-COMMERCE

14/15

“Our customers now have access to our extensive
catalog of product data. All at their ﬁngertips.”

FINANCIAL REVIEW

Management’s Discussion and Analysis

Management’s Report on Internal Control Over Financial Reporting

Report of Independent Registered Public Accounting Firm

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

WATSCO, INC. 2016 ANNUAL REPORT 17

FINANCIAL REVIEW

Management’s Discussion and Analysis

Management’s Report on Internal Control Over Financial Reporting

Report of Independent Registered Public Accounting Firm

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

WATSCO, INC. 2016 ANNUAL REPORT 17

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS
This Annual Report to Shareholders contains or incorporates by reference statements that are not histori-
cal 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,” “focused,” “outlook” and variations of these words and neg-
atives thereof and similar expressions are intended to identify forward-looking statements, including state-
ments 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 condition or results of operations. These forward-looking statements are
based on management’s current expectations, 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, please see the discussion
included in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31,
2016, as well as the other documents and reports that we file with the SEC. Forward-looking statements
speak only as of the date the statements were made. We assume no obligation to update forward-looking
information or the discussion of such risks and uncertainties to reflect actual results, changes in assump-
tions 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” of our Annual Report on Form 10-K for the year ended December 31, 2016 and the consoli-
dated financial statements, including the notes thereto, included in this Annual Report to Shareholders.

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, 2016, we operated from 565 locations in 37 U.S. States, Canada, Mexico
and Puerto Rico with additional market coverage on an export basis to portions of 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 cor-
relate 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 mar-
ket 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 to 80%. Neither Watsco 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 United States. 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. On November 29, 2016, we purchased an addi-
tional 10% ownership interest in Carrier Enterprise II, and, on February 13, 2017, we again purchased
an additional 10% ownership interest in Carrier Enterprise II, which together increased our controlling
interest to 80%.

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% non-controlling 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

18 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

18 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

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 esti-
mates under different assumptions or conditions. At least quarterly, management reevaluates its judg-
ments and 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 state-
ments included with this Annual Report to Shareholders. 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 account-
ing 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 low-
est 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 periodi-
cally, reflecting current risks, trends and changes in industry conditions.

The allowance for doubtful accounts was $6.2 million and $5.3 million at December 31, 2016 and 2015,
respectively, an increase of $0.9 million. The increase from December 31, 2015 is primarily due to an increase
in the over 90 day balances. Accounts receivable balances greater than 90 days past due as a percent of
accounts receivable at December 31, 2016 increased to 1.6% compared to 1.4% at December 31, 2015 pri-
marily due to one account in which our exposure is mitigated by credit insurance.

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 our 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 customer credit risk is limited due to the large number of customers com-
prising our customer base and their dispersion across many different geographical regions. Additionally, we miti-
gate 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, 2017, 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
comparing 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 had an impact on this
conclusion. The carrying amounts of goodwill and intangibles were $538.3 million and $538.8 million at
December 31, 2016 and 2015, 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 good-
will 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 $3.0 million and $3.2 million at December 31, 2016 and 2015,
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, 2016 or 2015. 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 mate-
rially impact the consolidated results of operations.

NEW ACCOUNTING STANDARDS
Refer to Note 1 to our audited consolidated financial statements included in this Annual Report to
Shareholders for a discussion of new accounting standards.

RESULTS OF OPERATIONS
The following table summarizes information derived from our audited consolidated statements of income,
expressed as a percentage of revenues, for the years ended December 31, 2016, 2015 and 2014.

20 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

goodwill impairment test and determined that the estimated fair value of our reporting unit significantly
exceeded its carrying value.

NEW ACCOUNTING STANDARDS
Refer to Note 1 to our audited consolidated financial statements included in this Annual Report to
Shareholders for a discussion of new accounting standards.

20 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

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 non-controlling interest

2016

2015

2014

100.0%
75.5

24.5
16.3

8.2
0.1

8.1
2.5

5.6
1.3

24.5
16.3

8.2
0.1

8.1
2.5

5.5
1.3

100.0%
75.8

24.2
16.5

7.8
0.1

7.6
2.3

5.3
1.5

Net income attributable to Watsco, Inc.

4.3%

4.2%

3.8%

Note: Due to rounding, percentages may not add up to 100.

The following narratives reflect our additional 10% ownership interest in Carrier Enterprise II, which
became effective on November 29, 2016 and our additional 10% ownership interest in Carrier Enterprise
I, which became effective on July 1, 2014. We did not acquire any businesses during 2016, 2015 or
2014.

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,
2016 and 2015, 21 and 26 locations, respectively, were excluded from “same-store basis” information.
The table below summarizes the changes in our locations for 2016 and 2015:

December 31, 2014

Opened
Closed

December 31, 2015

Opened
Closed

December 31, 2016

Number of
Locations

572
10
(16)

566
10
(11)

565

2016 COMPARED TO 2015
REVENUES
Revenues for 2016 increased $107.5 million, or 3%, to $4,220.7 million, including $1.4 million from
locations opened during the preceding 12 months, offset by $18.4 million from locations closed. On a
same-store basis, revenues increased $124.5 million, or 3%, as compared to 2015, reflecting a 3%
increase in sales of HVAC equipment (66% of sales), which included a 4% increase in residential HVAC
equipment and a 1% increase in commercial HVAC equipment, a 1% increase in sales of other HVAC
products (29% of sales) and a 6% increase in sales of commercial refrigeration products (5% of sales).
The increase in same-store revenues was primarily due to demand for the replacement of residential
HVAC equipment.

GROSS PROFIT
Gross profit for 2016 increased $27.2 million, or 3%, to $1,034.6 million, primarily as a result of
increased revenues. Gross profit margin remained consistent at 24.5% in 2016 as compared to 2015.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for 2016 increased $18.3 million, or 3%, to $689.0 million,
primarily due to increased revenues. Selling, general and administrative expenses as a percentage of rev-
enues remained consistent at 16.3% in 2016 as compared to 2015. Selling, general and administrative
expenses for 2016 included $3.3 million of additional costs related to ongoing technology initiatives, as
compared to 2015. On a same-store basis, selling, general and administrative expenses increased 3% as
compared to 2015.

OPERATING INCOME
Operating income for 2016 increased $8.9 million, or 3%, to $345.6 million. Operating margin remained
consistent at 8.2% in 2016 as compared to 2015.

INTEREST EXPENSE, NET
Interest expense, net, for 2016 decreased $1.8 million, or 33%, to $3.7 million, primarily as a result of a
decrease in average outstanding borrowings, partially offset by a higher effective interest rate in 2016, in
each case as compared to 2015.

INCOME TAXES
Income taxes increased to $105.9 million for 2016, as compared to $104.7 million for 2015 and are a
composite of the income taxes attributable to our wholly owned operations and income taxes attributable
to the Carrier joint ventures, which are primarily taxed as partnerships for income tax purposes. The effec-
tive income tax rates attributable to us were 36.0% and 37.0% in 2016 and 2015, respectively. The
decrease was primarily due to a $2.9 million benefit from the adoption of new accounting guidance
related to share-based payments in 2016. See Note 1 to our consolidated financial statements contained
in this Annual Report to Shareholders.

NET INCOME ATTRIBUTABLE TO WATSCO, INC.
Net income attributable to Watsco in 2016 increased $9.9 million, or 6%, to $182.8 million. The
increase was primarily driven by higher revenues and by a reduction in the net income attributable to the
non-controlling interest related to Carrier Enterprise II following our purchase of an additional 10% owner-
ship interest in Carrier Enterprise II in November 2016.

2015 COMPARED TO 2014
REVENUES
Revenues for 2015 increased $168.7 million, or 4%, to $4,113.2 million, including $4.9 million from
locations opened during the preceding 12 months, offset by $32.8 million from locations closed. On a
same-store basis, revenues increased $196.6 million, or 5%, as compared to 2014, reflecting a 7%
increase in sales of HVAC equipment (66% of sales), which included a 6% increase in residential HVAC
equipment and an 8% increase in commercial HVAC equipment, a 2% increase in sales of other HVAC
products (29% of sales) and a 2% increase in sales of commercial refrigeration products (5% of sales).
The increase in same-store revenues was primarily due to strong demand for the replacement of residen-
tial and commercial HVAC equipment. Revenues from 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 2015 increased $51.0 million, or 5%, to $1,007.4 million, primarily as a result of
increased revenues. Gross profit margin improved 30 basis-points to 24.5% in 2015 from 24.2% in
2014, primarily due to higher realized gross margins for non-HVAC equipment products.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for 2015 increased $20.0 million, or 3%, to $670.6 million,
primarily due to increased revenues. Selling, general and administrative expenses as a percentage of rev-

22 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

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 non-controlling interest

2016

2015

2014

100.0%
75.5

24.5
16.3

8.2
0.1

8.1
2.5

5.6
1.3

24.5
16.3

8.2
0.1

8.1
2.5

5.5
1.3

100.0%
75.8

24.2
16.5

7.8
0.1

7.6
2.3

5.3
1.5

Net income attributable to Watsco, Inc.

4.3%

4.2%

3.8%

Note: Due to rounding, percentages may not add up to 100.

December 31, 2014

Opened
Closed

December 31, 2015

Opened
Closed

December 31, 2016

Number of
Locations

572
10
(16)

566
10
(11)

565

OPERATING INCOME
Operating income for 2016 increased $8.9 million, or 3%, to $345.6 million. Operating margin remained
consistent at 8.2% in 2016 as compared to 2015.

22 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

enues decreased to 16.3% for 2015 from 16.5% for 2014. The decrease in selling, general, and adminis-
trative expenses as a percentage of revenues was primarily due to improved leveraging of fixed operating
costs as compared to 2014. Selling, general and administrative expenses included $7.1 million of addi-
tional costs for 2015 in excess of 2014 for ongoing technology initiatives. On a same-store basis, selling,
general and administrative expenses increased 4% as compared to 2014.

OPERATING INCOME
Operating income for 2015 increased $31.0 million, or 10%, to $336.7 million. Operating margin
improved 40 basis-points to 8.2% in 2015 from 7.8% in 2014. The increase was driven by higher rev-
enues, expanded gross profit margin and reduced selling, general and administrative expenses as a per-
cent of revenues, as discussed above.

INTEREST EXPENSE, NET
Interest expense, net, for 2015 increased $0.3 million, or 7%, to $5.5 million, primarily as a result of an
increase in average outstanding borrowings, partially offset by a lower effective interest rate in 2015, in
each case as compared to 2014.

INCOME TAXES
Income taxes increased to $104.7 million for 2015, as compared to $91.8 million for 2014 and are a
composite of the income taxes attributable to our wholly owned operations and income taxes attributable
to the Carrier joint ventures, which are primarily taxed as partnerships for income tax purposes. The effec-
tive income tax rate attributable to us was 37.0% in both 2015 and 2014.

NET INCOME ATTRIBUTABLE TO WATSCO, INC.
Net income attributable to Watsco in 2015 increased $21.5 million, or 14%, to $172.9 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 non-controlling interest related to Carrier Enterprise I following our purchase of
an additional 10% ownership interest in Carrier Enterprise I in July 2014.

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 needed to fund our business (primarily working capital requirements);
• borrowing capacity under our 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, if any.

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 pay-
ments, if and as declared by our Board of Directors, capital expenditures, business acquisitions and devel-
opment of our long-term operating and technology strategies.

As of December 31, 2016, we had $56.0 million of cash and cash equivalents, of which, $50.7 million
was held by foreign subsidiaries. The repatriation of cash balances from our foreign subsidiaries could
have adverse tax consequences or be subject to capital controls; however, those balances are generally
available without legal restrictions to fund ordinary business operations. Refer to Note 7 to our consoli-
dated financial statements included in this Annual Report to Shareholders for a discussion of undistrib-
uted earnings of our foreign subsidiaries.

We believe that our operating cash flows, cash on hand and funds available 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, par-
ticularly 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 capac-
ity under our line of credit.

WORKING CAPITAL
Working capital increased 2% to $925.3 million at December 31, 2016 from $911.0 million at
December 31, 2015, primarily reflecting higher levels of accounts receivable commensurate with our
increase in overall business volume.

CASH FLOWS
The following table summarizes our cash flow activity for 2016 and 2015 (in millions):

Cash flows provided by operating activities
Cash flows used in investing activities
Cash flows used in financing activities

2016

2015

Change

$
$
$

277.8
(42.8)
(213.9)

$
$
$

221.4
(22.9)
(186.3)

$
$
$

56.4
(19.9)
(27.6)

The individual items contributing to cash flow changes for the years presented are detailed in the audited
consolidated statements of cash flows contained in this Annual Report to Shareholders.

OPERATING ACTIVITIES
The increase in net cash provided by operating activities was primarily due to the timing of payments for
accounts payable and other liabilities in 2016 as compared to 2015.

INVESTING ACTIVITIES
The increase in net cash used in investing activities in 2016 as compared to 2015 was primarily due to
the purchase of a corporate aircraft, which is replacing a previously leased aircraft, for $30.7 million in
2016 partially offset by the purchase of owned space for expansion of our corporate headquarters in
2015.

FINANCING ACTIVITIES
The increase in net cash used in financing activities was primarily attributable to the purchase of an addi-
tional 10% ownership interest in Carrier Enterprise II for $42.9 million and an increase in dividends paid
in 2016, partially offset by lower net repayments under our revolving credit agreement in 2016 as com-
pared to 2015.

REVOLVING CREDIT AGREEMENT
We maintain an unsecured, syndicated revolving credit agreement that provides for borrowings of up to
$600.0 million. Borrowings are used to fund seasonal working capital needs and for other general corpo-
rate purposes, including acquisitions, dividends (if and as declared by our Board of Directors), capital
expenditures, stock repurchases and issuances of letters of credit. The credit agreement matures on July 1,
2019. Included in the facility are a $90.0 million swingline subfacility, a letter of credit subfacility and a
$75.0 million multicurrency borrowing sublimit. On January 24, 2017, we entered into an amendment to
this credit agreement, which reduced the letter of credit subfacility from $50.0 million to $10.0 million
and modified certain definitions.

24 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

CASH FLOWS
The following table summarizes our cash flow activity for 2016 and 2015 (in millions):

Cash flows provided by operating activities
Cash flows used in investing activities
Cash flows used in financing activities

2016

2015

Change

$
$
$

277.8
(42.8)
(213.9)

$
$
$

221.4
(22.9)
(186.3)

$
$
$

56.4
(19.9)
(27.6)

The individual items contributing to cash flow changes for the years presented are detailed in the audited
consolidated statements of cash flows contained in this Annual Report to Shareholders.

OPERATING ACTIVITIES
The increase in net cash provided by operating activities was primarily due to the timing of payments for
accounts payable and other liabilities in 2016 as compared to 2015.

24 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

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 (0 basis-points at December
31, 2016), 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 (15.0 basis-points at December 31, 2016).

At December 31, 2016 and 2015, $235.3 million and $245.3 million were outstanding under the revolv-
ing credit agreement, respectively. The revolving credit agreement contains customary affirmative and neg-
ative 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 covenants at December
31, 2016.

CONTRACTUAL OBLIGATIONS
As of December 31, 2016, our significant contractual obligations were as follows (in millions):

Payments due by Period

Contractual Obligations

2017

2018

2019

2020

2021

Thereafter

Total

Operating leases (1)
Purchase obligations (2)

Total

56.6
29.0

85.6

48.4
—

48.4

35.9
—

35.9

21.7
—

21.7

13.2
—

13.2

13.4 $
—

189.2
29.0

13.4 $

218.2

(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 audited consolidated balance sheets and are excluded from the above table.

Commercial obligations outstanding at December 31, 2016 under our revolving credit agreement con-
sisted of borrowings totaling $235.3 million with revolving maturities of seven to eight 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 for which we
were contingently liable under at December 31, 2016. Such discussion is incorporated herein by refer-
ence.

PURCHASE OF ADDITIONAL OWNERSHIP INTEREST IN JOINT VENTURE
On November 29, 2016, we purchased an additional 10% ownership interest in Carrier Enterprise II for
cash consideration of $42.9 million, and, on February 13, 2017, we purchased an additional 10% own-
ership interest in Carrier Enterprise II for cash consideration of $42.7 million, following which we have an
80% controlling interest in Carrier Enterprise II. The source of cash was borrowings under our revolving
credit agreement.

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 addi-
tional 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 $3.60, $2.80 and $2.00 per share of Common stock and Class B common
stock in 2016, 2015 and 2014, respectively. On January 3, 2017, our Board of Directors declared a reg-
ular quarterly cash dividend of $1.05 per share of Common and Class B common stock that was paid on
January 31, 2017 to shareholders of record as of January 17, 2017. Future dividends and/or changes in

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

COMPANY SHARE 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 repur-
chased under the program are accounted for using the cost method and result in a reduction of share-
holders’ equity. No shares were repurchased in 2016, 2015 or 2014. 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, 2016, 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 6% and 3%, respectively, of our total revenues for 2016.

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 pur-
chases, we use foreign currency forward contracts. By entering into these foreign currency forward con-
tracts, 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, 2016 was $37.9 million, and such
contracts have varying terms expiring through September 2017.

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
significant 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 to
Shareholders for further information on our derivative instruments.

INTEREST RATE EXPOSURE
Our revolving credit facility exposes us to interest rate risk because borrowings thereunder accrue interest
at one or more variable interest 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, 2016, and determined that a 100 basis-point
change in interest rates would result in an impact to income before taxes of approximately $2.4 million.
See Note 6 to our audited consolidated financial statements included in this Annual Report to
Shareholders for further information about our debt.

26 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

CONTRACTUAL OBLIGATIONS
As of December 31, 2016, our significant contractual obligations were as follows (in millions):

Payments due by Period

Contractual Obligations

2017

2018

2019

2020

2021

Thereafter

Total

Operating leases (1)
Purchase obligations (2)

Total

56.6
29.0

85.6

48.4
—

48.4

35.9
—

35.9

21.7
—

21.7

13.2
—

13.2

13.4 $
—

189.2
29.0

13.4 $

218.2

(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.

Commercial obligations outstanding at December 31, 2016 under our revolving credit agreement con-
sisted of borrowings totaling $235.3 million with revolving maturities of seven to eight days.

See Note 13 to our audited consolidated financial statements included in this Annual Report to
Shareholders for further information on our derivative instruments.

26 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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 relia-
bility of financial reporting and the preparation and fair presentation of our published consolidated finan-
cial 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 inade-
quate 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 effective-
ness of our internal control over financial reporting as of December 31, 2016. 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 assess-
ment under the COSO framework, our management concluded that our internal control over financial
reporting was effective as of December 31, 2016. The effectiveness of our internal control over financial
reporting as of December 31, 2016 has been audited by KPMG LLP, an independent registered public
accounting firm, as stated in their report that is included herein.

The Board of Directors and Shareholders
Watsco, Inc.:

We have audited Watsco, Inc.’s internal control over financial reporting as of December 31, 2016, 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 responsi-
ble for maintaining effective internal control over financial reporting and for its assessment of the effective-
ness 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 rea-
sonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assur-
ance 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 man-
agement 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 mis-
statements. 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, 2016, 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, 2016 and 2015, 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, 2016,
and our report dated February 21, 2017 expressed an unqualified opinion on those consolidated financial
statements.

Miami, Florida
February 21, 2017
Certified Public Accountants

KPMG LLP

28 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Watsco, Inc.:

Miami, Florida
February 21, 2017
Certified Public Accountants

KPMG LLP

28 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

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, 2016 and 2015, 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, 2016. 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 man-
agement, 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, 2016 and 2015, and
the results of their operations and their cash flows for each of the years in the three year period ended
December 31, 2016, 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, 2016,
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 21,
2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.

Miami, Florida
February 21, 2017
Certified Public Accountants

KPMG LLP

Years Ended December 31,

2016

2015

2014

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 non-controlling interest

$ 4,220,702
3,186,118

$ 4,113,239
3,105,882

$ 3,944,540
2,988,138

1,034,584
688,952

1,007,357
670,609

345,632
3,713

341,919
105,936

235,983
53,173

336,748
5,547

331,201
104,677

226,524
53,595

956,402
650,655

305,747
5,206

300,541
91,839

208,702
57,315

Net income attributable to Watsco, Inc.

182,810

172,929

151,387

Earnings per share for Common and Class B common stock:

Basic

Diluted

See accompanying notes to consolidated financial statements.

5.16

5.15

4.91

4.90

4.33

4.32

30 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

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.:

Miami, Florida
February 21, 2017
Certified Public Accountants

KPMG LLP

Years Ended December 31,

2016

2015

2014

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 non-controlling interest

$ 4,220,702
3,186,118

$ 4,113,239
3,105,882

$ 3,944,540
2,988,138

1,034,584
688,952

1,007,357
670,609

345,632
3,713

341,919
105,936

235,983
53,173

336,748
5,547

331,201
104,677

226,524
53,595

956,402
650,655

305,747
5,206

300,541
91,839

208,702
57,315

Net income attributable to Watsco, Inc.

182,810

172,929

151,387

Earnings per share for Common and Class B common stock:

Basic

Diluted

See accompanying notes to consolidated financial statements.

5.16

5.15

4.91

4.90

4.33

4.32

30 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

Years Ended December 31,

2016

2015

2014

Net income
Other comprehensive gain (loss), net of tax
Foreign currency translation adjustment
Unrealized (loss) gain on cash flow hedging instruments
Reclassification of loss (gain) on cash flow hedging instruments into earnings
Unrealized gain (loss) on available-for-sale securities

Other comprehensive gain (loss)

Comprehensive income
Less: comprehensive income attributable to non-controlling interest

235,983

226,524

208,702

6,211
(965)
323
14

5,583

241,566
55,382

(39,378)
2,713
(1,993)
(8)

(38,666)

187,858
38,086

(21,117)
280
—
1

(20,836)

187,866
48,752

Comprehensive income attributable to Watsco, Inc.

186,184

149,772

139,114

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:

2016

2015

56,010
475,974
685,011
23,161

35,229
451,079
673,967
20,990

1,240,156

1,181,265

90,502
379,737
158,564
5,690

62,715
378,310
160,481
5,671

$ 1,874,649

$ 1,788,442

200
185,482
129,206

314,888

235,294
348

235,642

72,371

184
145,162
124,955

270,301

245,300
514

245,814

68,606

Common stock, $0.50 par value, 60,000,000 shares authorized; 36,682,562 and
36,616,197 shares outstanding at December 31, 2016 and 2015, respectively

Class B common stock, $0.50 par value, 10,000,000 shares authorized; 5,218,754 and 5,066,209

shares outstanding at December 31, 2016 and 2015, 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

18,341

18,308

2,610
—
592,350
(43,530)
550,482

2,533
—
602,522
(46,904)
495,276

stock at both December 31, 2016 and 2015

Total Watsco, Inc. shareholders’ equity

Non-controlling interest

Total shareholders’ equity

See accompanying notes to consolidated financial statements.

(114,425)

1,005,828
245,920

957,310
246,411

1,251,748

1,203,721

$ 1,874,649

$ 1,788,442

32 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

Years Ended December 31,

2016

2015

2014

Other comprehensive gain (loss)

Comprehensive income
Less: comprehensive income attributable to non-controlling interest

235,983

226,524

208,702

6,211
(965)
323
14

5,583

241,566
55,382

(39,378)
2,713
(1,993)
(8)

(38,666)

187,858
38,086

(21,117)
280
—
1

(20,836)

187,866
48,752

Comprehensive income attributable to Watsco, Inc.

186,184

149,772

139,114

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:

2016

2015

56,010
475,974
685,011
23,161

35,229
451,079
673,967
20,990

1,240,156

1,181,265

90,502
379,737
158,564
5,690

62,715
378,310
160,481
5,671

$ 1,874,649

$ 1,788,442

200
185,482
129,206

314,888

235,294
348

235,642

72,371

184
145,162
124,955

270,301

245,300
514

245,814

68,606

Common stock, $0.50 par value, 60,000,000 shares authorized; 36,682,562 and
36,616,197 shares outstanding at December 31, 2016 and 2015, respectively

Class B common stock, $0.50 par value, 10,000,000 shares authorized; 5,218,754 and 5,066,209

shares outstanding at December 31, 2016 and 2015, respectively

18,341

18,308

2,610
—
592,350
(43,530)
550,482

2,533
—
602,522
(46,904)
495,276

stock at both December 31, 2016 and 2015

Total Watsco, Inc. shareholders’ equity

Non-controlling interest

Total shareholders’ equity

See accompanying notes to consolidated financial statements.

(114,425)

1,005,828
245,920

957,310
246,411

1,251,748

1,203,721

$ 1,874,649

$ 1,788,442

32 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except share and per share data)

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 non-controlling interest in Carrier Enterprise I
Distributions to non-controlling interest

Balance at December 31, 2014
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, $2.80 per share
Distributions to non-controlling interest

Balance at December 31, 2015
Net income
Other comprehensive gain
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
Cash dividends declared and paid on Common and Class B common stock, $3.60 per share
Decrease in non-controlling interest in Carrier Enterprise II
Distributions to non-controlling interest

Balance at December 31, 2016

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

34,727,121

$20,549

$606,384

$(11,474)

(12,273)

Retained
Earnings

$339,362
151,387

Treasury
Stock

Non-controlling
Interest

$(114,425)

$286,996
57,315
(8,563)

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)

(69,870)

35,006,621

20,689

580,564

(23,747)

420,879
172,929

(114,425)

(23,157)

200,479
(5,000)
18,343
124,262
(33,212)

100
(2)
9
62
(17)

(100)
2
1,954
8,570
(4,123)
13,233
2,422

35,311,493

20,841

602,522

(46,904)

3,374

183,144
(26,000)
20,045
72,482
(30,761)

92
(13)
10
36
(15)

(92)
13
2,338
5,660
(4,003)
11,848

(25,936)

(98,532)

495,276
182,810

(114,425)

(127,604)

(44,411)
(43,258)

248,079
53,595
(15,509)

(39,754)

246,411
53,173
2,209

(16,973)
(38,900)

Total

$1,127,392
208,702
(20,836)
—
—
1,759
4,666
(2,615)
12,006
1,828
(69,870)
(87,735)
(43,258)

1,132,039
226,524
(38,666)
—
—
1,963
8,632
(4,140)
13,233
2,422
(98,532)
(39,754)

1,203,721
235,983
5,583
—
—
2,348
5,696
(4,018)
11,848
(127,604)
(42,909)
(38,900)

35,530,403

$20,951

$592,350

$(43,530)

$550,482

$(114,425)

$245,920

$1,251,748

34 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)

Years Ended December 31,

2016

2015

2014

235,983

226,524

208,702

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 on sale of property and equipment
Excess tax benefits from share-based compensation

Changes in operating assets and liabilities:

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

Net cash used in investing activities

Cash flows from financing activities:

Dividends on Common and Class B common stock
Purchase of additional ownership from non-controlling interest
Distributions to non-controlling interest
Net (repayments) proceeds under revolving credit agreement
Net (repayments) proceeds from other long-term obligations
Payment of fees related to revolving credit agreement
Excess tax benefits from share-based compensation
Net proceeds from issuances of common stock

20,066
12,319
2,720
3,487
2,348
(189)
—

(26,941)
(9,729)
39,759
(2,067)

19,117
12,596
4,687
2,688
1,963
(487)
(2,422)

(26,121)
(3,652)
(13,225)
(285)

17,927
11,473
289
2,609
1,759
(1,292)
(1,828)

(41,068)
(98,741)
45,242
(92)

277,756

221,383

144,980

(43,577)
744

(42,833)

(127,604)
(42,909)
(38,900)
(10,006)
(150)
—
—
5,653

(23,698)
760

(22,938)

(98,532)
—
(39,754)
(56,256)
(157)
—
2,422
5,957

(21,512)
2,388

(19,124)

(69,870)
(87,735)
(43,258)
74,729
235
(381)
1,828
4,245

Net cash used in financing activities

(213,916)

(186,320)

(120,207)

Effect of foreign exchange rate changes on cash and cash equivalents

Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Supplemental cash flow information (Note 18)

See accompanying notes to consolidated financial statements.

(226)

20,781
35,229

(1,343)

10,782
24,447

(680)

4,969
19,478

56,010

35,229

24,447

ORGANIZATION, CONSOLIDATION AND PRESENTATION
Watsco, Inc. (collectively with its subsidiaries, “Watsco,” “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,
2016, we operated from 565 locations in 37 U.S. states, Canada, Mexico and Puerto Rico with addi-
tional market coverage on an export basis to portions of 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 elimi-
nated 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 primarily within cost of sales 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 denomi-
nated in Mexican pesos are recognized in earnings primarily 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 disclo-
sure 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 valua-
tion reserves for accounts receivable, inventories and income taxes, reserves related to self-insurance pro-
grams 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 infor-
mation. Upon determination that an account is uncollectible, the receivable balance is written off. At
December 31, 2016 and 2015, the allowance for doubtful accounts totaled $6,169 and $5,305,
respectively.

36 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)

Years Ended December 31,

2016

2015

2014

235,983

226,524

208,702

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:

Changes in operating assets and liabilities:

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

Net cash used in investing activities

Cash flows from financing activities:

20,066
12,319
2,720
3,487
2,348
(189)
—

(26,941)
(9,729)
39,759
(2,067)

19,117
12,596
4,687
2,688
1,963
(487)
(2,422)

(26,121)
(3,652)
(13,225)
(285)

17,927
11,473
289
2,609
1,759
(1,292)
(1,828)

(41,068)
(98,741)
45,242
(92)

277,756

221,383

144,980

(43,577)
744

(42,833)

(127,604)
(42,909)
(38,900)
(10,006)
(150)
—
—
5,653

(23,698)
760

(22,938)

(98,532)
—
(39,754)
(56,256)
(157)
—
2,422
5,957

(21,512)
2,388

(19,124)

(69,870)
(87,735)
(43,258)
74,729
235
(381)
1,828
4,245

Net cash used in financing activities

(213,916)

(186,320)

(120,207)

Effect of foreign exchange rate changes on cash and cash equivalents

Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Supplemental cash flow information (Note 18)

See accompanying notes to consolidated financial statements.

(226)

20,781
35,229

(1,343)

10,782
24,447

(680)

4,969
19,478

56,010

35,229

24,447

CASH EQUIVALENTS
All highly liquid instruments purchased with original maturities of three months or less are considered to
be cash equivalents.

36 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

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, 2016 and 2015, we had $9,926 and $8,086, 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. Furniture and fixtures are depreciated over estimated useful lives ranging from 5-7 years. 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 cir-
cumstances indicate they may be impaired, by comparing the fair value of the intangible asset to its car-
rying 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 cir-
cumstances 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, 2016, 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 fre-
quency 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, 2016,
2015 and 2014, were $22,242, $21,150 and $19,754, 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, 2016, 2015
and 2014, were $42,809, $41,345 and $43,324, 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 (wind-
fall tax benefits) were classified as financing cash flows for the years ended December 31, 2015 and
2014. Tax benefits resulting from tax deductions in excess of share-based compensation expense realized
in 2016 are recognized in our provision for income taxes in the consolidated income statement. Tax bene-
fits resulting from tax deductions in excess of share-based compensation expense recognized were cred-
ited to paid-in capital in the consolidated balance sheets for the years ended December 31, 2015 and
2014. Refer to “Share-Based Payments” within New Accounting Standards contained in this Note 1 for
additional information.

38 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

Level 1

Level 2

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.

ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2016,
2015 and 2014, were $22,242, $21,150 and $19,754, respectively.

38 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

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 recog-
nized as income or expense in the period that includes the enactment date. We and our eligible sub-
sidiaries 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 securities
because these awards contain a non-forfeitable right to dividends irrespective of whether the awards ulti-
mately vest. Under the two-class method, earnings per common share for our Common and Class B com-
mon 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 within selling, general and administrative expenses.

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 com-
prehensive income and reclassified to earnings as a component of cost of sales in the period for 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 con-
sidered 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 STANDARDS

REVENUE RECOGNITION
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued a standard on revenue
recognition that provides a single, comprehensive revenue recognition model for all contracts with cus-
tomers. The standard is principle-based and provides a five-step model to determine the measurement of
revenue and timing of when it is recognized. This standard will be applied using either of the following
transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior
reporting period with the option to elect certain practical expedients or (ii) a modified retrospective
approach with the cumulative effect of initially adopting the standard recognized at the date of adoption,
which requires additional footnote disclosures. This standard is effective for our interim and annual report-
ing periods beginning after December 15, 2017, with early adoption permitted for annual reporting peri-
ods beginning after December 15, 2016. We will adopt this guidance on January 1, 2018. While we are
currently evaluating the method of adoption and the impact of the provisions of this standard, we expect
similar performance obligations to result under this guidance as compared with deliverables and separate
units of accounting currently identified. As a result, we expect the timing of our revenue recognition to
generally remain the same.

PRESENTATION OF DEBT ISSUANCE COSTS
In April 2015, the FASB issued guidance that will require that debt issuance costs related to a recognized
debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that
debt liability, rather than as an asset. This guidance is effective retrospectively for interim and annual
reporting periods beginning after December 15, 2015. The adoption of this guidance did not have an
impact on our consolidated financial statements.

MEASUREMENT OF INVENTORY
In July 2015, the FASB issued guidance that simplifies the measurement of inventory by replacing the
lower of cost or market test with a lower of cost and net realizable value test. The guidance applies to all
inventory that is measured using first-in, first-out or average cost methods. This guidance must be applied
prospectively and will be effective for interim and annual reporting periods beginning after December 15,
2016. We do not expect the adoption of this guidance to have a material impact on our consolidated
financial statements.

CLASSIFICATION OF DEFERRED TAXES
In November 2015, the FASB issued guidance that requires deferred tax assets and liabilities to be classi-
fied as noncurrent in a classified balance sheet. This guidance can be applied either prospectively or ret-
rospectively and will be effective for interim and annual reporting periods beginning after December 15,
2016, with early adoption permitted. We do not expect the adoption of this guidance to have a material
impact to our consolidated balance sheets.

LEASES
In February 2016, the FASB issued guidance on accounting for leases, which requires lessees to recog-
nize most leases on their balance sheets for the rights and obligations created by those leases. The guid-
ance requires enhanced disclosures regarding the amount, timing and uncertainty of cash flows arising

40 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT 41

No Hedging Designation. The gain or loss on a derivative instrument not designated as an accounting
hedging instrument is recognized in earnings within selling, general and administrative expenses.

Cash Flow Hedge. A hedge of a forecasted transaction or of the variability of cash flows to be received or

See Note 13 for additional information pertaining to derivative instruments.

NEW ACCOUNTING STANDARDS

40 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT 41

from leases. This guidance will be applied using a modified retrospective approach and is effective for
interim and annual periods beginning after December 15, 2018 with early adoption permitted. We will
adopt this guidance on January 1, 2019. While we are still evaluating the impact of adopting this guid-
ance on our consolidated financial statements, including the option to elect certain practical expedients,
we expect that upon adoption the right-of-use assets and lease liabilities recorded could be material to
our consolidated balance sheets. However, we do not expect a material impact to our consolidated state-
ments of income.

SHARE-BASED PAYMENTS
In March 2016, the FASB issued amended guidance related to employee share-based payment account-
ing. The guidance requires that all income tax effects of awards to be recognized in the income statement
when the awards vest or are settled. The guidance also requires presentation of excess tax benefits as an
operating activity on the statement of cash flows rather than as a financing activity. The guidance
increases the amount companies can withhold to cover income taxes on awards without triggering liability
classification for shares used to satisfy statutory income tax withholding obligations and requires applica-
tion of a modified retrospective transition method. The amended guidance will be effective for interim and
annual periods beginning after December 15, 2016. Early adoption is permitted if all provisions are
adopted in the same period.

We elected to early adopt the amended guidance during the quarter ended June 30, 2016, which
required us to reflect any adjustments as of January 1, 2016, the beginning of the annual period that
includes the interim period of adoption. The primary impact of adoption was the recognition of excess tax
benefits in our provision for income taxes rather than paid-in capital for all periods in 2016. We elected
to apply the presentation requirements for cash flows related to excess tax benefits prospectively. The
accounting for income taxes and minimum statutory withholding tax requirements had no impact to
retained earnings as of January 1, 2016, where the cumulative effect of these changes are required to be
recorded. We have elected to continue to estimate forfeitures expected to occur to determine the amount
of compensation cost to be recognized in each period.

Adoption of the amended guidance resulted in the recognition of excess tax benefits in our provision for
income taxes rather than paid-in capital of $2,898 for 2016, and impacted our previously reported quar-
terly results for March 31, 2016 as follows:

Quarter Ended March 31 2016,

As Reported

As Adjusted

Income Statement:
Income taxes
Net income
Diluted earnings per share
Diluted weighted-average common shares outstanding

Balance Sheet:
Paid-in capital

Cash Flow Statement:
Net cash provided by operating activities
Net cash used in financing activities

$15,508
$34,174
$0.71
32,537,225

$14,654
$35,028
$0.74
32,546,314

$610,285

$609,431

$41,852
$(41,638)

$42,706
$(42,492)

2. EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings per share for our Common and
Class B common stock:

Years Ended December 31,

2016

2015

2014

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

182,810

172,929

151,387

14,806

168,004

32,582,385

5.16

154,021
13,983

168,004

182,810

13,634

159,295

32,435,961

4.91

146,037
13,258

159,295

172,929

11,444

139,943

32,308,073

4.33

128,214
11,729

139,943

151,387

restricted common stock

14,801

13,626

11,435

Earnings allocated to Watsco, Inc. shareholders

168,009

159,303

139,952

Weighted-average common shares outstanding - Basic
Effect of dilutive stock options

32,582,385
34,119

32,435,961
44,395

32,308,073
50,781

Weighted-average common shares outstanding - Diluted

32,616,504

32,480,356

32,358,854

Diluted earnings per share for Common and Class B common stock

5.15

4.90

4.32

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 com-
mon stock is required. At December 31, 2016, 2015 and 2014, our outstanding Class B common stock was
convertible into 2,711,811, 2,699,710 and 2,707,725 shares of our Common stock, respectively.

Diluted earnings per share excluded 31,839, 67,014 and 9,984 shares for the years ended December 31,
2016, 2015 and 2014, 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.

42 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT 43

Quarter Ended March 31 2016,

As Reported

As Adjusted

Income Statement:
Income taxes
Net income
Diluted earnings per share
Diluted weighted-average common shares outstanding

Balance Sheet:
Paid-in capital

Cash Flow Statement:
Net cash provided by operating activities
Net cash used in financing activities

$15,508
$34,174
$0.71
32,537,225

$14,654
$35,028
$0.74
32,546,314

$610,285

$609,431

$41,852
$(41,638)

$42,706
$(42,492)

2. EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings per share for our Common and
Class B common stock:

Years Ended December 31,

2016

2015

2014

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

182,810

172,929

151,387

14,806

168,004

32,582,385

5.16

154,021
13,983

168,004

182,810

13,634

159,295

32,435,961

4.91

146,037
13,258

159,295

172,929

11,444

139,943

32,308,073

4.33

128,214
11,729

139,943

151,387

restricted common stock

14,801

13,626

11,435

Earnings allocated to Watsco, Inc. shareholders

168,009

159,303

139,952

Weighted-average common shares outstanding - Basic
Effect of dilutive stock options

32,582,385
34,119

32,435,961
44,395

32,308,073
50,781

Weighted-average common shares outstanding - Diluted

32,616,504

32,480,356

32,358,854

Diluted earnings per share for Common and Class B common stock

5.15

4.90

4.32

42 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT 43

3. OTHER COMPREHENSIVE GAIN (LOSS)
Other comprehensive gain (loss) consists of the foreign currency translation adjustment associated with our
Canadian operations’ use of the Canadian dollar as its functional currency and changes in the unrealized
gains (losses) on cash flow hedging instruments and available-for-sale securities. The tax effects allocated
to each component of other comprehensive loss were as follows:

Years Ended December 31,

2016

2015

2014

Foreign currency translation adjustment

6,211

(39,378)

(21,117)

Unrealized (loss) gain on cash flow hedging instruments
Income tax benefit (expense)

Unrealized (loss) gain on cash flow hedging instruments, net of tax

Reclassification of loss (gain) on cash flow hedging instruments into earnings
Income tax (benefit) expense

(1,321)
356

(965)

442
(119)

Reclassification of loss (gain) on cash flow hedging instruments into earnings, net of tax

323

Unrealized gain (loss) on available-for-sale securities
Income tax (expense) benefit

Unrealized gain (loss) on available-for-sale securities, net of tax

27
(13)

3,716
(1,003)

2,713

(2,730)
737

(1,993)

(12)
4

(8)

384
(104)

280

—
—

—

1
—

Other comprehensive gain (loss)

5,583

(38,666)

(20,836)

The changes in each component of accumulated other comprehensive loss, net of tax, were as follows:

Years Ended December 31,

2016

2015

2014

Foreign currency translation adjustment:

Beginning balance
Current period other comprehensive gain (loss)

Ending balance

Cash flow hedging instruments:

Beginning balance
Current period other comprehensive (loss) income
Less reclassification adjustment

Ending balance

Available-for-sale securities:

Beginning balance
Current period other comprehensive income (loss)

Ending balance

(47,204)
3,745

(43,459)

(23,623)
(23,581)

(11,181)
(12,442)

(47,204)

(23,623)

600
(579)
194

215

(300)
14

(286)

168
1,628
(1,196)

600

(292)
(8)

(300)

—
168
—

168

(293)
1

(292)

Accumulated other comprehensive loss, net of tax

(43,530)

(46,904)

(23,747)

4.SUPPLIER CONCENTRATION
Purchases from our top ten suppliers comprised 85%, 84% and 82% of all purchases made in 2016,
2015 and 2014, respectively. Our largest supplier, Carrier and its affiliates, accounted for 62%, 62% and
61% of all purchases made in 2016, 2015 and 2014, respectively. See Note 16. A significant interrup-
tion by Carrier, or any of our other key suppliers, in the delivery of products could impair our ability to
maintain current inventory levels 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
Computer hardware and software

Accumulated depreciation and amortization

2016

820
71,082
74,640
15,090
42,515

2015

820
69,675
43,150
14,311
38,876

204,147
(113,645)

166,832
(104,117)

90,502

62,715

Depreciation and amortization expense related to property and equipment included in selling, general and
administrative expenses for the years ended December 31, 2016, 2015 and 2014, were $14,853,
$13,802 and $12,158, respectively.

6. DEBT
We maintain an unsecured, syndicated revolving credit agreement that provides for borrowings of up to
$600,000. Borrowings are used to fund seasonal working capital needs and for other general corporate
purposes, including acquisitions, dividends (if and as declared by our Board of Directors), capital expendi-
tures, stock repurchases and issuances of letters of credit. The credit agreement matures on July 1,
2019. Included in the credit facility are a $90,000 swingline subfacility, a letter of credit subfacility and
a $75,000 multicurrency borrowing sublimit. On January 24, 2017, we entered into an amendment to
this credit agreement, which reduced the letter of credit subfacility from $50,000 to $10,000 and modi-
fied certain definitions.

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 100.0 basis-points at December 31, 2016), 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 (0 basis-points at December
31, 2016), 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 (15.0 basis-points at December 31, 2016).

At December 31, 2016 and 2015, $235,294 and $245,300, respectively, were 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 covenants at
December 31, 2016.

44 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT 45

Years Ended December 31,

2016

2015

2014

Foreign currency translation adjustment

6,211

(39,378)

(21,117)

Unrealized (loss) gain on cash flow hedging instruments
Income tax benefit (expense)

Unrealized (loss) gain on cash flow hedging instruments, net of tax

Reclassification of loss (gain) on cash flow hedging instruments into earnings
Income tax (benefit) expense

(1,321)
356

(965)

442
(119)

Reclassification of loss (gain) on cash flow hedging instruments into earnings, net of tax

323

Unrealized gain (loss) on available-for-sale securities
Income tax (expense) benefit

Unrealized gain (loss) on available-for-sale securities, net of tax

27
(13)

3,716
(1,003)

2,713

(2,730)
737

(1,993)

(12)
4

(8)

384
(104)

280

—
—

—

1
—

Other comprehensive gain (loss)

5,583

(38,666)

(20,836)

The changes in each component of accumulated other comprehensive loss, net of tax, were as follows:

Years Ended December 31,

2016

2015

2014

Foreign currency translation adjustment:

Beginning balance
Current period other comprehensive gain (loss)

Ending balance

Cash flow hedging instruments:

Beginning balance
Current period other comprehensive (loss) income
Less reclassification adjustment

Ending balance

Available-for-sale securities:

Beginning balance
Current period other comprehensive income (loss)

Ending balance

(47,204)
3,745

(43,459)

(23,623)
(23,581)

(11,181)
(12,442)

(47,204)

(23,623)

600
(579)
194

215

(300)
14

(286)

168
1,628
(1,196)

600

(292)
(8)

(300)

—
168
—

168

(293)
1

(292)

Accumulated other comprehensive loss, net of tax

(43,530)

(46,904)

(23,747)

5. PROPERTY AND EQUIPMENT
Property and equipment, net, consists of:

December 31,

Land
Buildings and improvements
Machinery, vehicles and equipment
Furniture and fixtures
Computer hardware and software

Accumulated depreciation and amortization

2016

820
71,082
74,640
15,090
42,515

2015

820
69,675
43,150
14,311
38,876

204,147
(113,645)

166,832
(104,117)

90,502

62,715

44 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT 45

7. INCOME TAXES
The components of income tax expense from our wholly-owned operations and investments and our con-
trolling 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

2016

86,719
9,801
9,416

105,936

103,216
2,720

105,936

2015

85,585
9,431
9,661

104,677

99,990
4,687

104,677

2014

74,561
10,325
6,953

91,839

91,550
289

91,839

We calculate our income tax expense and our effective tax rate for 100% of income attributable to our
wholly-owned operations and for our controlling interest of income attributable to our joint ventures with
Carrier, which are primarily taxed as partnerships for income tax purposes.

Following is a reconciliation of the effective income tax rate:

Years Ended December 31,

2016

2015

2014

U.S. federal statutory rate
State income taxes, net of federal benefit and other
Excess tax benefits from share-based compensation
Tax effects on foreign income

Effective income tax rate attributable to Watsco, Inc.
Taxes attributable to non-controlling interest

35.0%
2.1
(1.0)
(0.1)

36.0
(5.0)

35.0%
2.3
—
(0.3)

37.0
(5.4)

35.0%
3.0
—
(1.0)

37.0
(6.4)

Effective income tax rate

31.0%

31.6%

30.6%

December 31,

Current deferred tax assets:

Capitalized inventory costs and inventory reserves
Allowance for doubtful accounts
Self-insurance reserves
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

Total long-term deferred tax liabilities (2)

Net deferred tax liabilities

2016

2015

2,301
1,379
500
1,778

5,958

26,239
449
209

26,897
—

26,897

(473)

(88,581)
(5,883)
(1,160)

(95,624)

1,794
1,053
519
1,921

5,287

23,603
352
207

24,162
—

24,162

(686)

(83,868)
(3,774)
(1,533)

(89,175)

(63,242)

(60,412)

(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 repa-
triation. United States income taxes have not been provided on undistributed earnings of our foreign sub-
sidiaries. The cumulative undistributed earnings related to foreign operations were approximately
$130,000 at December 31, 2016. 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 repatri-
ate the earnings only when it is tax effective to do so.

Management has determined that no valuation allowance was necessary at both December 31, 2016
and 2015. At December 31, 2016, there were state and other net operating loss carryforwards of
$6,872, which expire in varying amounts from 2017 through 2036. These amounts are available to off-
set future taxable income. There were no federal net operating loss carryforwards at December 31, 2016.

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
2013. For the majority of states, we are no longer subject to tax examinations for tax years prior to 2012.

As of December 31, 2016 and 2015, the total amount of gross unrecognized tax benefits (excluding the
federal benefit received from state positions) was $3,695 and $3,513, respectively. Of these totals,
$2,573 and $2,416, respectively, (net of the federal benefit received from state positions) represent the

46 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT 47

7. INCOME TAXES
The components of income tax expense from our wholly-owned operations and investments and our con-
trolling 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

2016

86,719
9,801
9,416

105,936

103,216
2,720

105,936

2015

85,585
9,431
9,661

104,677

99,990
4,687

104,677

2014

74,561
10,325
6,953

91,839

91,550
289

91,839

Following is a reconciliation of the effective income tax rate:

Years Ended December 31,

2016

2015

2014

U.S. federal statutory rate
State income taxes, net of federal benefit and other
Excess tax benefits from share-based compensation
Tax effects on foreign income

Effective income tax rate attributable to Watsco, Inc.
Taxes attributable to non-controlling interest

35.0%
2.1
(1.0)
(0.1)

36.0
(5.0)

35.0%
2.3
—
(0.3)

37.0
(5.4)

35.0%
3.0
—
(1.0)

37.0
(6.4)

Effective income tax rate

31.0%

31.6%

30.6%

December 31,

Current deferred tax assets:

Capitalized inventory costs and inventory reserves
Allowance for doubtful accounts
Self-insurance reserves
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

Total long-term deferred tax liabilities (2)

Net deferred tax liabilities

2016

2015

2,301
1,379
500
1,778

5,958

26,239
449
209

26,897
—

26,897

(473)

(88,581)
(5,883)
(1,160)

(95,624)

1,794
1,053
519
1,921

5,287

23,603
352
207

24,162
—

24,162

(686)

(83,868)
(3,774)
(1,533)

(89,175)

(63,242)

(60,412)

other liabilities.

46 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT 47

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, 2016 and 2015, the cumulative amount of estimated accrued interest and penalties resulting from
such unrecognized tax benefits was $414 and $384, 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, 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
Additions based on tax positions related to the current year
Reductions due to lapse of applicable statute of limitations and tax assessments

Balance at December 31, 2015
Additions based on tax positions related to the current year
Reductions due to lapse of applicable statute of limitations

Balance at December 31, 2016

3,135
751
(167)

3,719
871
(1,077)

3,513
547
(365)

3,695

8. SHARE-BASED COMPENSATION AND BENEFIT PLANS

SHARE-BASED COMPENSATION PLANS
We maintain the 2014 Incentive Compensation Plan (the “2014 Plan”) that 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.
The 2014 Plan replaced the Watsco, Inc. Amended and Restated 2001 Incentive Compensation Plan
(the “2001 Plan”) upon its expiration in 2014.

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) 45,421 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”) as of the date 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. A total of 293,950 shares of Common stock,
net of cancellations, and 326,623 shares of Class B common stock, had been awarded under the 2014
Plan as of December 31, 2016. As of December 31, 2016, 1,424,848 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 specified age, generally toward the end of
an employee’s career at age 62 or older. 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 37,750
options to exercise common stock outstanding under the 2001 Plan at December 31, 2016. 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, 2016:

Options outstanding at December 31, 2015

Granted
Exercised
Forfeited

Options outstanding at December 31, 2016

Options exercisable at December 31, 2016

Weighted-
Average
Exercise
Price

102.96
140.41
71.18
127.56

122.80

109.81

Options

257,334
107,000
(63,084)
(7,000)

294,250

24,419

Weighted-
Average
Remaining
Contractual
Term
(in years)

Aggregate
Intrinsic
Value

3.56

2.92

7,451

935

The following is a summary of non-vested restricted stock activity as of and for the year ended December
31, 2016:

Non-vested restricted stock outstanding at December 31, 2015
Granted
Vested
Forfeited

Weighted-
Average
Grant Date
Fair Value

49.99
130.01
63.26
112.79

2,819,196
183,144
(77,450)
(26,000)

Non-vested restricted stock outstanding at December 31, 2016

2,898,890

54.13

The weighted-average grant date fair value of non-vested restricted stock granted during 2016, 2015 and
2014 was $130.01, $114.55 and $96.84, respectively. The fair value of non-vested restricted stock
that vested during 2016, 2015 and 2014 was $10,096, $2,468 and $5,789, respectively.

During 2016, 30,413 shares of Common and Class B common stock with an aggregate fair market value
of $3,967 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection
with the vesting of restricted stock. During 2015, 7,206 shares of Common stock with an aggregate fair
market value of $889 were withheld as payment in lieu of cash to satisfy tax withholding obligations in
connection with the vesting of restricted stock. 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 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.

48 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT 49

The changes in gross unrecognized tax benefits are as follows:

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
Additions based on tax positions related to the current year
Reductions due to lapse of applicable statute of limitations and tax assessments

Balance at December 31, 2015
Additions based on tax positions related to the current year
Reductions due to lapse of applicable statute of limitations

Balance at December 31, 2016

3,135
751
(167)

3,719
871
(1,077)

3,513
547
(365)

3,695

8. SHARE-BASED COMPENSATION AND BENEFIT PLANS

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, 2016:

Options outstanding at December 31, 2015

Granted
Exercised
Forfeited

Options outstanding at December 31, 2016

Options exercisable at December 31, 2016

Weighted-
Average
Exercise
Price

102.96
140.41
71.18
127.56

122.80

109.81

Options

257,334
107,000
(63,084)
(7,000)

294,250

24,419

Weighted-
Average
Remaining
Contractual
Term
(in years)

Aggregate
Intrinsic
Value

3.56

2.92

7,451

935

The following is a summary of non-vested restricted stock activity as of and for the year ended December
31, 2016:

Non-vested restricted stock outstanding at December 31, 2015
Granted
Vested
Forfeited

Weighted-
Average
Grant Date
Fair Value

49.99
130.01
63.26
112.79

2,819,196
183,144
(77,450)
(26,000)

Non-vested restricted stock outstanding at December 31, 2016

2,898,890

54.13

48 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT 49

The following table presents the weighted-average assumptions used for stock options granted:

Years Ended December 31,

Expected term in years
Risk-free interest rate
Expected volatility
Expected dividend yield
Grant date fair value

2016

2015

2014

4.25
1.24%
18.65%
2.54%

4.25
1.25%
20.96%
2.29%

4.25
1.35%
22.07%
1.69%

$16.37

$17.17

$15.75

EXERCISE OF STOCK OPTIONS
The total intrinsic value of stock options exercised during 2016, 2015 and 2014 was $4,490, $7,525
and $3,746, respectively. Cash received from the exercise of stock options during 2016, 2015 and 2014
was $4,447, $4,850 and $3,324, respectively. During 2016, 2015 and 2014, 348 shares of Common
stock with an aggregate fair market value of $51, 26,006 shares of Class B common stock with an
aggregate fair market value of $3,251 and 5,454 shares of Class B common stock with an aggregate fair
market value of $490, respectively, were withheld as payment in lieu of cash for stock option exercises
and related tax withholdings. These shares were retired upon delivery.

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

2016

1,149
11,170

12,319

2015

952
11,644

12,596

2014

801
10,672

11,473

At December 31, 2016, there was $2,096 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 1.8 years. The total fair value of stock options that vested dur-
ing 2016, 2015 and 2014 was $736, $856 and $1,145, respectively.

At December 31, 2016, there was $100,397 of unrecognized pre-tax compensation expense related to
non-vested restricted stock, which is expected to be recognized over a weighted-average period of approx-
imately 11 years. Of this amount, approximately $59,000 is related to awards granted to our Chief
Executive Officer (“CEO”), of which approximately $13,000 and $46,000 vest in approximately 6 and 10
years upon his attainment of age 82 and 86, respectively. In the event that vesting is accelerated for any
circumstance, as defined in the related agreements, the remaining unrecognized share-based compensa-
tion expense would be immediately recognized as a charge to earnings with a corresponding tax benefit.
At December 31, 2016, we were obligated to issue 67,853 shares of non-vested restricted stock to our
CEO that vest in 10 years and 25,774 shares of non-vested restricted stock to our President that vest in
27 years in connection with 2016 performance based incentive compensation.

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 ESPP allows participating employees to purchase
shares of Common stock at a 5% discount to the fair market value at specified times. During 2016, 2015
and 2014, employees purchased 5,956, 6,463 and 6,995 shares of Common stock at an average price
of $125.84, $112.53 and $90.89 per share, respectively. Cash dividends received by the ESPP were
reinvested in Common stock and resulted in the issuance of 3,442, 3,183 and 2,953 additional shares
during 2016, 2015 and 2014, respectively. We received net proceeds of $1,206, $1,107 and $921,
respectively, during 2016, 2015 and 2014, for shares of our Common stock purchased under the ESPP.
At December 31, 2016, 496,160 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, 2016, 2015
and 2014, we issued 20,045, 18,343 and 18,309 shares of Common stock, respectively, to the plan,
representing the Common stock discretionary matching contribution of $2,348, $1,963 and $1,759,
respectively.

9. PURCHASE OF ADDITIONAL OWNERSHIP INTEREST IN JOINT VENTURES
On November 29, 2016, we purchased an additional 10% ownership interest in Carrier Enterprise
(“Carrier Enterprise II”) for cash consideration of $42,909, and, on February 13, 2017, we purchased an
additional 10% ownership interest in Carrier Enterprise II for cash consideration of $42,688, following
which we have an 80% controlling interest in Carrier Enterprise II.

On July 1, 2014, we exercised our second option to acquire an additional 10% ownership interest in
Carrier Enterprise, LLC (“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 pur-
chase additional ownership interests in Carrier Enterprise I.

10. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill are as follows:

Balance at December 31, 2014
Foreign currency translation adjustment

Balance at December 31, 2015
Foreign currency translation adjustment

Balance at December 31, 2016

Other intangible assets are comprised of the following:

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

387,311
(9,001)

378,310
1,427

379,737

Estimated
Useful Lives

2016

2015

10-15 years
10 years
7 years

120,288

118,205

70,194
1,150
369
(33,437)

68,981
1,150
369
(28,224)

38,276

42,276

158,564

160,481

Amortization expense related to finite lived intangible assets included in selling, general and administrative
expenses for the years ended December 31, 2016, 2015 and 2014, were $5,213, $5,315 and $5,769,
respectively. Amortization of finite lived intangible assets for 2017 through 2020 is expected to be approxi-
mately $5,200 per year and in 2021 is expected to be approximately $4,300.

50 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

The following table presents the weighted-average assumptions used for stock options granted:

Years Ended December 31,

Expected term in years
Risk-free interest rate
Expected volatility
Expected dividend yield
Grant date fair value

2016

2015

2014

4.25
1.24%
18.65%
2.54%

4.25
1.25%
20.96%
2.29%

4.25
1.35%
22.07%
1.69%

$16.37

$17.17

$15.75

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

2016

1,149
11,170

12,319

2015

952
11,644

12,596

2014

801
10,672

11,473

10. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill are as follows:

Balance at December 31, 2014
Foreign currency translation adjustment

Balance at December 31, 2015
Foreign currency translation adjustment

Balance at December 31, 2016

Other intangible assets are comprised of the following:

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

387,311
(9,001)

378,310
1,427

379,737

Estimated
Useful Lives

2016

2015

10-15 years
10 years
7 years

120,288

118,205

70,194
1,150
369
(33,437)

68,981
1,150
369
(28,224)

38,276

42,276

158,564

160,481

50 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

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 com-
mon 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, 2016 or 2015.

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 2016, 2015 or 2014. In aggregate, 6,322,650 shares of
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, 2016, there were 1,129,087 shares
remaining authorized for repurchase under the program.

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, 2016 and 2015, 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.

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.

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
At December 31, 2016 and 2015, we were contingently liable under standby letters of credit aggregating
$2,430 and $2,690, 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,
2016 and 2015, we were contingently liable under various performance bonds aggregating approximately
$8,000 and $4,000, 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
obligations 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 com-
prising 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 on certain monetary liabilities that are denominated in nonfunctional
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 loss to earnings for
the period in which the settlement of these instruments occur. The maximum period for which we hedge
our cash flow using these instruments is 12 months. Accordingly, at December 31, 2016, all of our open
foreign currency forward contracts had maturities of one year or less. The total notional value of our for-
eign currency exchange contracts designated as cash flow hedges at December 31, 2016 was $33,200,
and such contracts have varying terms expiring through September 2017.

The impact from foreign exchange derivative instruments designated as cash flow hedges were as follows:

Years Ended December 31,

(Loss) gain recorded in accumulated other comprehensive loss
Loss (gain) reclassified from accumulated other comprehensive loss into earnings

2016

$
$

(1,321)
442

$
$

2015

3,716
(2,730)

At December 31, 2016, we expected an estimated $490 pre-tax gain to be reclassified into earnings to
reflect the fixed prices obtained from foreign exchange hedging within the next 12 months.

DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
We have also entered into foreign currency forward contracts that are either not designated as hedges 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 component of selling, general and administrative expenses. The total notional value of our foreign cur-
rency exchange contracts not designated as hedging instruments at December 31, 2016 was $4,650,
and such contracts have varying terms expiring through March 2017.

We recognized (losses) gains of $(306), $2,552 and $142 from foreign currency forward contracts not
designated as hedging instruments in our consolidated statements of income for 2016, 2015 and 2014,
respectively.

The following table summarizes the fair value of derivative instruments, which consist solely of foreign
currency forward contracts, included in other current assets and accrued expenses and other current lia-
bilities in our consolidated balance sheets. See Note 14.

December 31,

Derivatives designated as hedging instruments
Derivatives not designated as hedging instruments

Total derivative instruments

Asset Derivatives Liability Derivatives

2016 2015

227
14

923
326

$ 35
4

$ 241

$ 1,249

$ 39

3
4

52 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

12. FINANCIAL INSTRUMENTS

The impact from foreign exchange derivative instruments designated as cash flow hedges were as follows:

Years Ended December 31,

(Loss) gain recorded in accumulated other comprehensive loss
Loss (gain) reclassified from accumulated other comprehensive loss into earnings

2016

$
$

(1,321)
442

$
$

2015

3,716
(2,730)

At December 31, 2016, we expected an estimated $490 pre-tax gain to be reclassified into earnings to
reflect the fixed prices obtained from foreign exchange hedging within the next 12 months.

December 31,

Derivatives designated as hedging instruments
Derivatives not designated as hedging instruments

Total derivative instruments

Asset Derivatives Liability Derivatives

2016 2015

227
14

923
326

$ 35
4

$ 241

$ 1,249

$ 39

3
4

52 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

14. FAIR VALUE MEASUREMENTS
The following tables present our assets and liabilities carried at fair value that are measured on a recur-
ring basis:

Assets:

Available-for-sale securities
Derivative financial instruments

Liabilities:

Derivative financial instruments

Balance Sheet Location

Total Level 1 Level 2 Level 3

Fair Value Measurements
at December 31, 2016 Using

Other assets
Other current assets

$ 281
$ 241

$ 281
$ — $ 241

$ — $ —
$ —

Accrued expenses and
other current liabilities

$ 39

$ — $

$ —

Balance Sheet Location

Total Level 1 Level 2 Level 3

Fair Value Measurements
at December 31, 2015 Using

Assets:

Available-for-sale securities
Derivative financial instruments

Other assets
Other current assets

$ 254
$ 1,249

$ 254
$ — $ 1,249

$ — $ —
$ —

Liabilities:

Derivative financial instruments

Accrued expenses and
other current liabilities

$ — $

$ —

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 – these 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 – these 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.

There were no transfers in or out of Level 1 and Level 2 during 2016 or 2015.

15. COMMITMENTS AND CONTINGENCIES

LITIGATION, CLAIMS AND ASSESSMENTS
In December 2015, a purported Watsco shareholder, Nelson Gaskins, filed a derivative lawsuit in the
U.S. District Court for the Southern District of Florida against Watsco’s Board of Directors. The Company
is a nominal defendant. The lawsuit alleges breach of fiduciary duties regarding CEO incentive compensa-
tion and seeks to recover alleged excessive incentive compensation and unspecified damages. The defen-
dants believe the claims are entirely without merit and intend to vigorously defend against them. We
believe the ultimate outcome of this matter will not have a material adverse effect on our consolidated
results of operations and consolidated financial position.

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 lev-
els 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, 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. Reserves in the amounts of $2,951 and
$3,214 at December 31, 2016 and 2015, 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, 2016, 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 require-
ments 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 $4,300. 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, 2016, 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, 2016, future minimum payments under non-cancelable operating leases over each of
the next five years and thereafter were as follows:

2017
2018
2019
2020
2021
Thereafter

Total minimum payments

56,639
48,420
35,926
21,650
13,184
13,362

189,181

Rental expense for the years ended December 31, 2016, 2015 and 2014, was $83,260, $82,581 and
$81,155, respectively.

PURCHASE OBLIGATIONS
At December 31, 2016, we were obligated under various non-cancelable purchase orders with our key
suppliers for goods aggregating approximately $29,000, of which approximately $17,000 is with Carrier
and its affiliates.

16. RELATED PARTY TRANSACTIONS
Purchases from Carrier and its affiliates comprised 62%, 62% and 61% of all inventory purchases made
during 2016, 2015 and 2014, respectively. At December 31, 2016 and 2015, approximately $63,000
and $85,000, respectively, was payable to Carrier and its affiliates, net of receivables. Our joint ventures

54 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

14. FAIR VALUE MEASUREMENTS
The following tables present our assets and liabilities carried at fair value that are measured on a recur-
ring basis:

Assets:

Available-for-sale securities
Derivative financial instruments

Liabilities:

Derivative financial instruments

Balance Sheet Location

Total Level 1 Level 2 Level 3

Fair Value Measurements
at December 31, 2016 Using

Other assets
Other current assets

$ 281
$ 241

$ 281
$ — $ 241

$ — $ —
$ —

Accrued expenses and
other current liabilities

$ 39

$ — $

$ —

Balance Sheet Location

Total Level 1 Level 2 Level 3

Fair Value Measurements
at December 31, 2015 Using

Assets:

Available-for-sale securities
Derivative financial instruments

Other assets
Other current assets

$ 254
$ 1,249

$ 254
$ — $ 1,249

$ — $ —
$ —

Liabilities:

Derivative financial instruments

Accrued expenses and
other current liabilities

$ — $

$ —

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:

There were no transfers in or out of Level 1 and Level 2 during 2016 or 2015.

15. COMMITMENTS AND CONTINGENCIES

At December 31, 2016, future minimum payments under non-cancelable operating leases over each of
the next five years and thereafter were as follows:

2017
2018
2019
2020
2021
Thereafter

Total minimum payments

56,639
48,420
35,926
21,650
13,184
13,362

189,181

Rental expense for the years ended December 31, 2016, 2015 and 2014, was $83,260, $82,581 and
$81,155, respectively.

54 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

(In thousands, except per share data)

Year Ended December 31, 2016
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, 2015
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

$
$
$

851,424
212,447
25,537

$ 1,214,435
291,861
$
64,621
$

$ 1,241,232
302,204
$
63,099
$

0.71

1.82

1.78

808,972
204,225
23,048

$ 1,223,439
295,245
$
65,423
$

$ 1,177,012
285,846
$
57,968
$

0.65

1.86

1.85

1.64

$
$
$

913,611
228,072
29,553

$ 4,220,702
$ 1,034,584
182,810
$

0.81

5.16

5.15

903,816
222,041
26,490

$ 4,113,239
$ 1,007,357
172,929
$

0.75

4.91

4.90

(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
even 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.

with Carrier also sell HVAC products to Carrier and its affiliates. Revenues in our consolidated statements
of income for 2016, 2015 and 2014 included approximately $56,000, $62,000 and $38,000, respec-
tively, of sales to Carrier and its affiliates. We believe these transactions are conducted on terms equiva-
lent to an arm’s-length basis in the ordinary course of business.

A member of our Board of Directors is the Chairman and Chief Executive Officer of Moss & Associates LLC
(“Moss & Associates”), which serves as our general contractor for the remodeling of our corporate head-
quarters and receives customary payments for these services. Moss & Associates was paid $291 for serv-
ices performed during 2016 and $109 was payable at December 31, 2016.

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,

2016

2015

2014

Revenues:

United States
Canada
Mexico

Total revenues

December 31,

Long-Lived Assets:
United States
Canada
Mexico

Total long-lived assets

$ 3,813,204
267,220
140,278

$ 3,710,977
263,908
138,354

$ 3,525,176
300,289
119,075

$ 4,220,702

$ 4,113,239

$ 3,944,540

2016

2015

467,728
155,758
5,317

441,656
154,437
5,413

628,803

601,506

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.

18. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information was as follows:

Years Ended December 31,

Interest paid
Income taxes net of refunds

2016

3,362
99,006

$
$

2015

2014

$
$

4,993
103,261

$
$

4,393
82,850

19. SUBSEQUENT EVENTS
On January 3, 2017, our Board of Directors declared a regular quarterly cash dividend of $1.05 per
share of Common and Class B common stock that was paid on January 31, 2017 to shareholders of
record as of January 17, 2017.

On January 24, 2017, we entered into an amendment to our credit agreement, which reduced the letter
of credit subfacility from $50,000 to $10,000 and modified certain definitions. See Note 6.

On February 13, 2017, we purchased an additional 10% ownership interest in Carrier Enterprise II for
cash consideration of $42,688, following which we have an 80% controlling interest in Carrier Enterprise
II. The source of cash was borrowings under our revolving credit agreement. See Note 9.

56 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

(In thousands, except per share data)

Year Ended December 31, 2016
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, 2015
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

$
$
$

851,424
212,447
25,537

$ 1,214,435
291,861
$
64,621
$

$ 1,241,232
302,204
$
63,099
$

0.71

1.82

1.78

808,972
204,225
23,048

$ 1,223,439
295,245
$
65,423
$

$ 1,177,012
285,846
$
57,968
$

0.65

1.86

1.85

1.64

$
$
$

913,611
228,072
29,553

$ 4,220,702
$ 1,034,584
182,810
$

0.81

5.16

5.15

903,816
222,041
26,490

$ 4,113,239
$ 1,007,357
172,929
$

0.75

4.91

4.90

(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.

Years Ended December 31,

2016

2015

2014

Revenues:

United States
Canada
Mexico

Total revenues

December 31,

Long-Lived Assets:
United States
Canada
Mexico

Total long-lived assets

$ 3,813,204
267,220
140,278

$ 3,710,977
263,908
138,354

$ 3,525,176
300,289
119,075

$ 4,220,702

$ 4,113,239

$ 3,944,540

2016

2015

467,728
155,758
5,317

441,656
154,437
5,413

628,803

601,506

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.

18. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information was as follows:

Years Ended December 31,

Interest paid
Income taxes net of refunds

2016

3,362
99,006

$
$

2015

2014

$
$

4,993
103,261

$
$

4,393
82,850

On January 24, 2017, we entered into an amendment to our credit agreement, which reduced the letter
of credit subfacility from $50,000 to $10,000 and modified certain definitions. See Note 6.

56 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

INFORMATION ON COMMON STOCK (UNAUDITED)
Our Common stock is traded on the New York Stock Exchange (“NYSE”) 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, 2016 and 2015. At February 17, 2017, there were 227 Common stock registered share-
holders and 113 Class B common stock registered shareholders.

Common

Class B Common

Cash Dividend

High

Low

High

Low

Common

Class B

Year Ended December 31, 2016:

First quarter
Second quarter
Third quarter
Fourth quarter

Year Ended December 31, 2015:

First quarter
Second quarter
Third quarter
Fourth quarter

$
$
$
$

134.84
140.69
149.64
159.03

125.70
128.49
131.81
131.89

$
$
$
$

108.09
129.00
138.37
130.88

104.92
120.14
118.13
116.24

$
$
$
$

131.58
139.84
148.67
157.72

124.80
127.15
130.15
131.21

$
$
$
$

108.25
129.17
138.85
131.01

104.50
120.74
118.91
113.49

$
$
$
$

0.85
0.85
0.85
1.05

0.70
0.70
0.70
0.70

$
$
$
$

0.85
0.85
0.85
1.05

0.70
0.70
0.70
0.70

SHAREHOLDER RETURN PERFORMANCE (UNAUDITED)
The following graph compares the cumulative five-year total shareholder 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 and the S&P Midcap 400 index. Given our position as the largest distributor of HVAC/R
equipment, parts and supplies in North America, our unique, sole line of business, the nature of our cus-
tomers (air conditioning and heating contractors) and the products and markets we serve, we cannot rea-
sonably identify an appropriate peer group; therefore, we have included in the graph below the
performance of the S&P Midcap 400 index, which contains companies with market capitalizations similar
to our own. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in
our common stock and in each index on December 31, 2011 and its relative performance is tracked
through December 31, 2016.

The performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this annual
report into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incor-
porate this information by reference, and shall not otherwise be deemed filed under such acts.

COMPARISON OF 5-YEAR CUMULATIVE TOTAL SHAREHOLDERR RETURN

$300

$280

$260

$240

$220

$200

$180

$160

$140

$120

$100

$80

Watsco
Class B

Watsco,
Inc.

S&P
MidCap
400

NYSE MKT
Composite

12/11

12/12

12/13

12/14

12/15

12/16

Watsco, Inc.

S&P MidCap 400

Watsco Class B

NYSE MKT Composite

12/11

12/12

12/13

12/14

12/15

12/16

Watsco, Inc.
Watsco Class B
NYSE MKT Composite
S&P MidCap 400

$
$
$
$

100.00
100.00
100.00
100.00

$
$
$
$

126.57
131.52
106.15
117.88

$
$
$
$

164.51
172.83
115.07
157.37

$
$
$
$

187.20
195.69
118.71
172.74

$
$
$
$

209.74
222.23
106.60
168.98

$
$
$
$

272.66
285.86
117.67
204.03

58 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

Common

Class B Common

Cash Dividend

High

Low

High

Low

Common

Class B

Year Ended December 31, 2016:

First quarter
Second quarter
Third quarter
Fourth quarter

Year Ended December 31, 2015:

First quarter
Second quarter
Third quarter
Fourth quarter

$
$
$
$

134.84
140.69
149.64
159.03

125.70
128.49
131.81
131.89

$
$
$
$

108.09
129.00
138.37
130.88

104.92
120.14
118.13
116.24

$
$
$
$

131.58
139.84
148.67
157.72

124.80
127.15
130.15
131.21

$
$
$
$

108.25
129.17
138.85
131.01

104.50
120.74
118.91
113.49

$
$
$
$

0.85
0.85
0.85
1.05

0.70
0.70
0.70
0.70

$
$
$
$

0.85
0.85
0.85
1.05

0.70
0.70
0.70
0.70

COMPARISON OF 5-YEAR CUMULATIVE TOTAL SHAREHOLDERR RETURN

$300

$280

$260

$240

$220

$200

$180

$160

$140

$120

$100

$80

Watsco
Class B

Watsco,
Inc.

S&P
MidCap
400

NYSE MKT
Composite

12/11

12/12

12/13

12/14

12/15

12/16

Watsco, Inc.

S&P MidCap 400

Watsco Class B

NYSE MKT Composite

12/11

12/12

12/13

12/14

12/15

12/16

Watsco, Inc.
Watsco Class B
NYSE MKT Composite
S&P MidCap 400

$
$
$
$

100.00
100.00
100.00
100.00

$
$
$
$

126.57
131.52
106.15
117.88

$
$
$
$

164.51
172.83
115.07
157.37

$
$
$
$

187.20
195.69
118.71
172.74

$
$
$
$

209.74
222.23
106.60
168.98

$
$
$
$

272.66
285.86
117.67
204.03

58 WATSCO, INC. 2016 ANNUAL REPORT

WATSCO, INC. 2016 ANNUAL REPORT

5-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA (UNAUDITED)
The following selected consolidated financial data should be read in conjunction with the audited consoli-
dated financial statements, including the notes thereto, and the information contained in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report to
Shareholders.

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

(In thousands, except per share data)

2016

2015

2014

2013

2012 (1)

FOR THE YEAR
Revenues
Gross profit
Operating income
Net income
Less: net income attributable to

non-controlling 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

$ 4,220,702
1,034,584
345,632
235,983

$ 4,113,239
1,007,357
336,748
226,524

$ 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

53,173

182,810

5.15

3.60
3.60

$
$

53,595

172,929

4.90

2.80
2.80

$
$

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

$
$

32,617

32,480

32,359

32,258

31,744

$ 1,874,649
235,642
$
$ 1,251,748
5,050

$ 1,788,442
245,814
$
$ 1,203,721
4,950

$ 1,791,067
303,885
$
$ 1,132,039
4,950

$ 1,669,531
230,557
$
$ 1,127,392
4,750

$ 1,682,055
316,196
$
$ 1,022,040
4,600

(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.

EXECUTIVE OFFICERS
Albert H. Nahmad Chief Executive Officer
Aaron J. Nahmad President
Barry S. Logan Senior Vice President & Secretary
Ana M. Menendez Chief Financial Officer & Treasurer

BOARD OF DIRECTORS
Albert H. Nahmad Chairman of the Board and Chief Executive Officer
David C. Darnell (1) Retired Vice Chairman, Bank of America
Denise Dickins (1,2,3) Associate Professor of Accounting and Auditing, East Carolina University
Steven R. Fedrizzi (2) Chairman and Chief Executive Officer, International WELL Building Institute
Barry S. Logan Senior Vice President and Secretary
Bob L. Moss (3) Chairman and Chief Executive Officer, Moss & Associates LLC
Aaron J. Nahmad President
George P. Sape (1,2,3) Retired Managing Partner of Epstein Becker and Green, P.C.

(1) Audit Committee (2) Compensation Committee (3) Nominating & Governance Committee

STOCK INFORMATION
Common stock: New York Stock Exchange. 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. 2016 ANNUAL REPORT