A CULT UR E O F I N NOVAT IO N
2665 South Bayshore Drive, Suite 901
Miami, FL 33133 USA
305-714-4100
www.watsco.com
2018 ANNUAL REPORT
ENTREPRENEURS are innovators. They are business leaders
who take measured risks and work relentlessly to grow profitable
businesses.
THAT’S WHO WE ARE. Watsco's history and culture are built on
the foundations of entrepreneurship. We promote the core values of
innovation, growth, and an exceptional customer experience. Our
decentralized structure is designed to celebrate and support the
entrepreneurs and teams who run our operations. Across our
footprint there are over 600 business leaders who own their P&L
and are empowered to make business decisions based on local
dynamics, rather than corporate mandates.
THAT’S WHO OUR CUSTOMERS ARE. They are business owners
with similar values and goals, also taking risks and seeking excel-
lence and growth. They are team builders, technicians, administra-
tors, and often family members that work hard to serve their
customers and create profits.
WATSCOPRENEURSHIP: We know that when our customers win,
we win, so we go beyond simply offering products for sale. We are
bringing innovative resources to our customers to leverage in their
businesses and create a multiplier effect. These are technology
platforms, training services, and new business opportunities that
help our customers transform their companies and win more often
in the marketplace. When complementary entrepreneurial forces
such as Watsco and its customers collaborate, the possibilities are
not double, but exponential.
DEAR
SHAREHOLDERS
2018 marks Watsco’s 30-year anniversary in HVAC/R distribution. Over
this period, we have produced an 18% compounded annual total return to
shareholders, which ranks us in the upper echelon of all public companies.
While we are proud of this track record, we also recognize there is much
more to accomplish in the $35 billion North American HVAC/R distribu-
tion market. We continue to challenge our leaders to innovate, grow, and
build on this success, particularly in light of our ongoing investments in
ground-breaking technology that is the envy of our industry.
Looking at the big picture, we believe our success is the result of our
commitment to several key principles, which we have summarized in
past letters and I will emphasize once again:
–Instill a passion for entrepreneurism, innovation and continuous
improvement.
–Operate as a local business, no matter how great our scale, by
empowering leaders in the field to make local decisions.
–Think and act long-term with an equity ownership culture
that motivates and retains great performers throughout their
careers.
–Lead the HVAC/R industry, build the largest repository of talent
and partner with manufacturers in ways that cannot be
matched by our competitors.
–Remain financially conservative and risk averse, which
provides the flexibility to invest in any size opportunity at
a low cost of capital.
–Develop, launch and iterate the industry's most customer-
obsessed technology platforms.
2018 was another record year for Watsco as sales, operating profit, net
income and earnings per share reached their highest levels ever. We also
finished the year with a strong balance sheet and we are actively seeking
investments to grow our business. Dividends were increased again this
year to an annual rate of $6.40 per share. 2019 marks our 45th consecu-
tive year for paying dividends and we believe it is a meaningful way to
share our success and wealth as a company with our shareholders.
2018 also demonstrated continued progress with our catalogue of
customer-obsessed technologies that have been brought to life in recent
years. We have made massive investments to equip our customers with
the industry's most progressive technologies, including e-commerce,
mobile apps, order fulfillment functionality and supply chain optimization.
All of these technologies are rooted in the belief that speed, productivity
and efficiency will be ever more critical as the digital era progresses.
2 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 3
The simple equation is: when our customers win, we win. That core belief
has fueled our technology investments and continues to guide our
progress. We are proud to report the following accomplishments in 2018:
E-Commerce and App Usage Progress in 2018 versus 2017
Growth in e-commerce sales 33% growth in online sales to
$1.2 billion
E-commerce transactions 34% increase in transactions
Current e-commerce run-rate 29% of sales versus 25% last year
Unique iOS or Android app 16% increase in weekly active users
weekly users
Products (SKUs) digitized 5% increase to over 685,000 SKUs
and available on-line
Line items per order on-line 37% more line items per order
versus in-store
Sales attrition rate for 2.5-times less attrition than
e-commerce users non-users
Business Intelligence (BI) Platform
Increase in internal BI users 7% increase to over 1,600
weekly-users
Average BI queries per week 9% increase in queries per week user
per user
Number of total user inquiries 13% increase to 20.3 million queries
during the year
Warehouse Efficiency
Locations with 369 locations versus 329
Order Fulfillment (OF) software last year
Number of orders filled with OF 2.6 million versus 2.1 million
last year
Delivery truck miles tracked 5.8 million miles versus 4.2 million
and analyzed last year
Locations with express pickup 164 locations versus 134 last year
We are inspired by the progress made in 2018 and we are excited at the
prospects for 2019, while recognizing that adoption at scale will take
time. As far as “scale,” across our footprint of 571 locations, we service
approximately 250,000 contractors and technicians and complete over
7 million sale transactions a year. In other words, we have merely
scratched the surface of what is possible in terms of value creation and
it is this potential that propels us forward.
As always, I want to extend my gratitude to our employees for their many
contributions and recognize them for their ongoing commitment to exceed
the expectations of our contractor customers. Their dedication and innova-
tive spirit have made us the leader in the industry and will serve us well
as we continue to build and transform our company.
Aaron (A.J.) Nahmad
President
4 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 5
FINANCIAL
HIGHLIGHTS
(in thousands, except per share data)
2014
2015
2016
2017
2018
Revenues
Operating income
EBITDA(1)
Net Income
$ 3,944,540
$ 4,113,239
$ 4,220,702
$4,341,955
4,546,653
305,747
323,674
336,748
355,865
345,632
365,698
353,874
375,907
372,082
394,177
attributable to Watsco, Inc.
151,387
172,929
182,810
208,221
242,932
Diluted earnings per share
Adjusted diluted earnings per share(2)
Dividends per share
4.32
4.32
2.00
4.90
4.90
2.80
5.15
5.15
3.60
5.81
5.54
4.60
6.49
6.49
5.60
Operating cash flow
Total assets
Long-term obligations
Shareholders’ equity
144,980
222,848
281,731
306,520
170,557
1,791,067
1,788,442
1,874,649
2,046,877
2,161,033
303,885
245,814
235,642
22,085
135,752
1,132,039
1,203,721
1,251,748
1,550,977
1,601,713
Total Revenues (in millions)
$3,945
$4,113
$4,221
$4,342
$4,547
2014
2015
2016
2017
2018
Operating Income (in millions)
$306
2014
$337
2015
$346
2016
$354
2017
$372
2018
(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) On December 2017, the Tax Cuts and Job Act of 2017 (the “TCJA”) was signed into law. Adjusted diluted earnings per share for 2017 excludes the one-time
tax benefit recognized by the company in the application of the TCJA.
Adjusted Diluted Earnings (per share)
$4.32
2014
$4.90
2015
$5.15
2016
$5.54
2017
$6.49
2018
6 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 7
Watsco and its customers share a culture that is
rooted in entrepreneurship. We are competitive
self-starters, we are innovative visionaries, and
we are demanding leaders. We operate without
bureaucracy and politics, we dislike waste, we
strive for efficiency, and we are committed to
driving sustainable growth. That’s Watsco.
And that’s our customers.
CO-CULTURE.
8 WATSCO, INC. 2018 ANNUAL REPORT
We support our customers by providing products
at competitive prices in convenient locations,
technical know-how and support, business
coaching for owners, and technology tools such
as e-commerce, mobile apps, and software
solutions to modernize their business. Together
we are developing a new paradigm to grow with
speed, efficiency, and expertise.
INNOVATIVE
RESOURCES.
SHARED
GROWTH.
10 WATSCO, INC. 2018 ANNUAL REPORT
We reward our business leaders with equity-based
compensation that is designed to promote long-
term thinking, to reward and retain high-caliber
talent, and to cultivate an “ownership culture”
so that employees think and act as owners of
the Company. This includes 401(k) matching
contributions, stock options, and restricted stock.
LONG-TERM
REWARDS.
WATSCO, INC. 2018 ANNUAL REPORT 13
We listen to each other and we push each other.
As more customers engage with Watsco and find
it easier to win, the tougher business will be for
contractors who haven't partnered with us. Our
entrepreneurial spirit, vision, leadership, scale,
and innovative technology platforms will continue
to drive our success and that of our customers,
exponentially.
EXPONENTIAL
RESULTS.
14 WATSCO, INC. 2018 ANNUAL REPORT
FINANCIAL
REVIEW
Management’s Discussion and Analysis 18
Management’s Report on Internal Control Over Financial Reporting 30
Report of Independent Registered Public Accounting Firm 31
Report of Independent Registered Public Accounting Firm 32
Consolidated Financial Statements:
Consolidated Statements of Income 33
Consolidated Statements of Comprehensive Income 34
Consolidated Balance Sheets 35
Consolidated Statements of Shareholders’ Equity 36
Consolidated Statements of Cash Flows 38
Notes to Consolidated Financial Statements 39
Selected Quarterly Financial Data 62
Shareholder Return Performance 63
5-Year Summary of Selected Consolidated Financial Data 64
Shareholder Information IBC
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,” “goal,” “designed,” and variations of
these words and negatives thereof and similar expressions are intended to identify forward-looking state-
ments, including statements regarding, among others, (i) economic conditions, (ii) business and acquisi-
tion strategies, (iii) potential acquisitions and/or joint ventures and investments in unconsolidated entities,
(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, both in the U.S. and in international markets served;
• 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 patterns and 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,
2018, 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, 2018 and the consoli-
dated financial statements, including the notes thereto, included in this Annual Report to Shareholders for
the year ended December 31, 2018.
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, 2018, we operated from 571 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
correlate to changes in sales. Other significant selling, general and administrative expenses relate to the
operation of warehouse facilities, including a fleet of trucks and forklifts, and facility rent, a majority of
which we operate 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 evenly distributed throughout the year and depends largely on housing completions and
related weather and economic conditions.
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 the Northeast U.S., and we con-
tributed 14 locations in the Northeast U.S. In July 2011, we purchased Carrier’s distribution operations
in Mexico, which included seven locations. Collectively, the Northeast locations and the Mexico opera-
tions are referred to as Carrier Enterprise II. On November 29, 2016, we purchased an additional 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
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-
18 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 19
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 assump-
tions 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 cus-
tomers 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 several fac-
tors, including the aging of a customer’s account, past transactions with customers, creditworthiness of
specific customers, historical trends and other information. Our business is seasonal and our customers’
businesses are also seasonal. Sales are lowest during the first and fourth quarters, and past due accounts
receivable balances as a percentage of total trade receivables generally increase during these quarters. We
review our accounts receivable reserve policy periodically, reflecting current risks, trends, and changes in
industry conditions.
The allowance for doubtful accounts was $6.5 million and $6.1 million at December 31, 2018 and
2017, respectively, an increase of $0.4 million. Accounts receivable balances greater than 90 days past
due as a percent of accounts receivable at December 31, 2018 increased to 1.7% from 1.3% at
December 31, 2017 primarily due to an 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 requiring additional allowances that could materially impact our con-
solidated results of operations. We believe our exposure to customer credit risk is limited due to the large
number of customers comprising our customer base and their dispersion across many different geographi-
cal regions. Additionally, we mitigate credit risk through credit insurance programs.
Inventory Valuation Reserves
Inventory valuation reserves are established to report inventories at the lower of cost using the weighted-
average and the first-in, first-out methods, or net realizable value. As part of the valuation process, inven-
tories are adjusted to reflect excess, slow-moving, and damaged goods. The valuation process contains
uncertainty because management must make estimates and use judgment to determine the future salabil-
ity 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, Indefinite Lived Intangible Assets and Long-Lived 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, 2019, we performed our annual
evaluation of goodwill impairment and determined that the estimated fair value of our reporting unit sig-
nificantly exceeded its carrying value.
The recoverability of indefinite lived intangibles and long-lived assets are also evaluated on an annual
basis or more often if deemed necessary. Indefinite lived intangibles and long-lived assets not subject to
amortization are assessed for impairment by comparing the fair value of the intangible asset or long-lived
asset to its carrying amount to determine if a write-down to fair value is required. Our annual evaluation
did not indicate any impairment of indefinite lived intangibles or long-lived assets.
The estimates of fair value of our reporting unit, indefinite lived intangibles, and long-lived assets are
based on the best information available as of the date of the assessment and incorporates management’s
assumptions about expected future cash flows and contemplates other valuation techniques. Future cash
flows can be affected by changes in the industry, a declining economic environment, or market condi-
tions. 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, intangibles, and long-lived assets were
$620.0 million and $611.3 million at December 31, 2018 and 2017, respectively. Although no impair-
ment losses have been recorded to date, there can be no assurance that impairments will not occur in the
future. An adjustment to the carrying value of goodwill, intangibles, and long-lived assets could materially
adversely impact the consolidated results of operations.
Loss Contingencies
Accruals are recorded for various contingencies including self-insurance, legal proceedings, environmental
matters, and other claims that arise in the normal course of business. The estimation process contains
uncertainty because accruals are based on judgment, the probability of losses and, where applicable, the
consideration of opinions of external legal counsel and actuarially determined estimates. Additionally, we
record receivables from third party insurers when recovery has been determined to be probable.
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 several factors, which include historical claims experience, demographic
factors, severity factors, and valuations provided by independent third-party actuaries. Management
reviews its assumptions with its independent third-party actuaries to evaluate whether self-insurance
reserves are adequate. If actual claims or adverse development of loss reserves occur and exceed these
estimates, additional reserves may be required and could materially impact the consolidated results of
operations. The estimation process contains uncertainty since management must use judgment to esti-
mate 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 $2.3 million at both
December 31, 2018 and 2017, 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, 2018 or 2017. 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 several factors, including changes to tax laws, or
possible tax audits, or general economic conditions, or competitive pressures that could affect future tax-
able 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 valua-
tion allowance could materially 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 recently adopted and to be adopted accounting standards.
20 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 21
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, 2018, 2017 and 2016.
Revenues
Cost of sales
Gross profit
Selling, general and administrative expenses
Other income
Operating income
Interest expense, net
Income before income taxes
Income taxes
Net income
Less: net income attributable to non-controlling interest
2018
2017
2016
100.0%
75.4
100.0%
75.5
100.0%
75.5
24.6
16.7
0.2
8.2
0.1
8.1
1.6
6.5
1.2
24.5
16.5
0.1
8.2
0.1
8.0
2.1
5.9
1.1
24.5
16.3
—
8.2
0.1
8.1
2.5
5.6
1.3
Net income attributable to Watsco, Inc.
5.3%
4.8%
4.3%
Note: Due to rounding, percentages may not add up to 100.
The following narratives reflect the acquisition of Alert Labs Inc. in August 2018 and the acquisition of an
HVAC distributor in November 2018 as well as our ownership interest in Russell Sigler, Inc. (“RSI”), in
which we purchased a 34.9% ownership interest in June 2017 and an additional 1.4% ownership inter-
est in June 2018, our additional 10% ownership interest in Carrier Enterprise II, which became effective
in February 2017, and our additional 10% ownership interest in Carrier Enterprise II, which became
effective in November 2016.
In the following narratives, computations and other information referring to “same-store basis” exclude the
effects of locations closed, acquired, or locations opened, unless they are within close geographical prox-
imity to existing locations, during the immediately preceding 12 months. At December 31, 2018 and
2017, 8 and 3 locations opened, respectively, were near existing locations and were therefore excluded
from “same-store basis” information.
The table below summarizes the changes in our locations for 2018 and 2017:
December 31, 2016
Opened
Closed
December 31, 2017
Opened
Acquired
Closed
December 31, 2018
Number of
Locations
565
15
(20)
560
13
3
(5)
571
2018 Compared to 2017
Revenues
Revenues for 2018 increased $204.7 million, or 5%, to $4,546.7 million, including $18.8 million from
locations opened and acquired during the preceding 12 months, offset by $11.0 million from locations
closed. On a same-store basis, revenues increased $196.9 million, or 5%, as compared to 2017, reflect-
ing a 6% increase in sales of HVAC equipment (67% of sales), which included both a 6% increase in res-
idential HVAC equipment and commercial HVAC equipment, a 5% increase in sales of other HVAC
products (29% of sales), and flat sales of commercial refrigeration products (4% of sales). The increase in
same-store revenues was primarily due to realization of price increases, demand for the replacement of
residential and commercial HVAC equipment and a higher mix of high-efficiency air conditioning and
heating systems, which sell at higher unit prices.
Gross Profit
Gross profit for 2018 increased $54.6 million, or 5%, to $1,120.3 million, primarily as a result of
increased revenues. Gross profit margin improved 10 basis-points to 24.6% in 2018 versus 24.5% in
2017, primarily due to an improvement in selling margins for HVAC equipment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 2018 increased $41.8 million, or 6%, to $757.5 million,
primarily due to increased revenues, as well as due to increased costs related to incentive compensation,
health-related costs, and ongoing technology initiatives. Selling, general and administrative expenses as a
percentage of revenues for 2018 increased to 16.7% versus 16.5% in 2017. On a same-store basis, sell-
ing, general and administrative expenses increased 6% as compared to the same period in 2017. The
increase in selling, general and administrative expenses as a percentage of revenues was primarily due to
our inability to leverage fixed operating costs to the same extent as in 2017.
Other Income
Other income of $9.3 million and $3.9 million for the years ended December 31, 2018 and 2017,
respectively, represents our share of the net income of RSI.
Operating Income
Operating income for 2018 increased $18.2 million, or 5%, to $372.1 million. Operating margin
remained consistent at 8.2% in 2018 as compared to 2017.
Interest Expense, Net
Interest expense, net, for 2018 decreased $3.6 million, or 57%, to $2.7 million, primarily as a result of a
decrease in average outstanding borrowings, partially offset by a higher effective interest rate in 2018, in
each case under our revolving credit facility, as compared to 2017.
Income Taxes
Income taxes decreased 19% to $72.8 million and represent a composite of the income taxes attributable
to our wholly owned operations and income taxes attributable to the Carrier joint ventures, which are pri-
marily taxed as partnerships for income tax purposes; therefore, Carrier is responsible for its proportionate
share of income taxes attributable to its share of earnings. The effective income tax rates attributable to
Watsco were 22.8% and 29.8% for 2018 and 2017, respectively. The decrease was primarily due to the
reduction of the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018 as a result of
the Tax Cuts and Jobs Act of 2017 (the “TCJA”).
Net Income Attributable to Watsco, Inc.
Net income attributable to Watsco in 2018 increased $34.7 million, or 17%, to $242.9 million. The
increase was primarily driven by higher revenues and other income, expanded gross margin, lower inter-
est expense, net, and lower income taxes, partially offset by higher selling, general and administrative
expenses as a percentage of revenues, as discussed above.
22 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 23
2017 Compared to 2016
Revenues
Revenues for 2017 increased $121.3 million, or 3%, to $4,342.0 million, including $5.7 million from
locations opened during the preceding 12 months, offset by $24.5 million from locations closed. On a
same-store basis, revenues increased $140.1 million, or 3%, as compared to 2016, reflecting a 4%
increase in sales of HVAC equipment (67% of sales), which included a 5% increase in residential HVAC
equipment and a 2% increase in commercial HVAC equipment, a 1% increase in sales of other HVAC
products (28% of sales), and flat sales of commercial refrigeration products (5% of sales). The increase in
revenues was primarily due to demand for the replacement of residential HVAC equipment.
Gross Profit
Gross profit for 2017 increased $31.1 million, or 3%, to $1,065.7 million, primarily as a result of
increased revenues. Gross profit margin remained consistent at 24.5% in 2017 as compared to 2016.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 2017 increased $26.7 million, or 4%, to $715.7 million,
primarily due to increased revenues, additional sales and service-related headcount, and increased costs
related to ongoing technology initiatives. Selling, general and administrative expenses as a percentage of rev-
enues for 2017 increased to 16.5% versus 16.3% in 2016.
Other Income
Other income of $3.9 million for 2017 represents our 34.9% share of the net income of RSI, purchased
in June 2017.
Operating Income
Operating income for 2017 increased $8.2 million, or 2%, to $353.9 million. Operating margin remained
consistent at 8.2% in 2017 as compared to 2016.
Interest Expense, Net
Interest expense, net, for 2017 increased $2.7 million, or 71%, to $6.4 million, primarily as a result of
an increase in average outstanding borrowings and a higher effective interest rate in 2017, in each case
as compared to 2016.
Income Taxes
Income taxes decreased 15% to $90.2 million and represent a composite of the income taxes attributable
to our wholly owned operations and income taxes attributable to the Carrier joint ventures, which are pri-
marily taxed as partnerships for income tax purposes; therefore, Carrier is responsible for its proportionate
share of income taxes attributable to its share of earnings. The effective income tax rates attributable to
Watsco were 29.8% and 36.0% for 2017 and 2016, respectively. The 2017 effective income tax rate
attributable to us reflects a decrease in income taxes due to the revaluation of our U.S. deferred income
taxes, partially offset by an increase in income taxes related to previously undistributed earnings of our
foreign subsidiaries because of the TCJA, which was enacted on December 22, 2017. The decrease in
2017’s effective rate also reflects higher share-based payment deductions in 2017 as compared to 2016.
Net Income Attributable to Watsco, Inc.
Net income attributable to Watsco in 2017 increased $25.4 million, or 14%, to $208.2 million. The
increase was primarily driven by higher revenues and other income, as discussed above, a reduction in
income taxes, and increase in net income attributable to the non-controlling interest related to Carrier
Enterprise II following our purchases of additional 10% ownership interests in both November 2016 and
February 2017.
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 revolving credit facility;
• the ability to attract long-term capital with satisfactory terms;
• acquisitions, including joint ventures and investments in unconsolidated entities;
• dividend payments;
• capital expenditures; and
• the timing and extent of common stock repurchases.
Sources and Uses of Cash
We rely on cash flows from operations and borrowing capacity under our revolving credit agreement to
fund seasonal working capital needs and for other general corporate purposes, including dividend pay-
ments (to the extent declared by our Board of Directors), capital expenditures, business acquisitions, and
development of our long-term operating and technology strategies. Additionally, we may also generate
cash through the issuance and sale of our Common stock.
As of December 31, 2018, we had $82.9 million of cash and cash equivalents, of which $75.5 million
was held by foreign subsidiaries. The repatriation of cash balances from our foreign subsidiaries could
have adverse tax costs or be subject to capital controls; however, these balances are generally available
without legal restrictions to fund the ordinary business operations of our foreign subsidiaries.
We believe that our operating cash flows, cash on hand, and funds available for borrowing under our
revolving credit agreement are 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 revolving credit agreement 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 revolving credit agreement and may also adversely affect the determina-
tion of interest rates, particularly rates based on LIBOR, which is one of the base rates under our revolv-
ing credit agreement. LIBOR is the subject of recent proposals for reform. These reforms and other
pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The conse-
quences of these developments with respect to LIBOR cannot be entirely predicted but could result in an
increase in the cost of our debt. Disruptions in the credit and capital markets, including a transition away
from LIBOR, could also result in increased borrowing costs and/or reduced borrowing capacity under our
revolving credit agreement.
Working Capital
Working capital increased 18% to $1,084.2 million at December 31, 2018 from $920.9 million at
December 31, 2017, reflecting lower levels of accounts payable and accrued expenses and higher levels
of inventories and accounts receivable.
Cash Flows
The following table summarizes our cash flow activity for 2018 and 2017 (in millions):
Cash flows provided by operating activities
Cash flows used in investing activities
Cash flows used in financing activities
2018
2017
Change
$
$
$
170.6
(26.3)
(139.6)
$
$
$
306.5
(81.3)
(202.1)
$
$
$
(135.9)
55.0
62.5
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 decrease in net cash provided by operating activities was primarily due to the timing of payments for
accrued expenses and other current liabilities and higher accounts receivable driven by increased sales,
partially offset by higher net income in 2018.
24 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 25
Investing Activities
Net cash used in investing activities was lower due to the purchase of an ownership interest in RSI for
$63.6 million in 2017, partially offset by cash consideration for acquisitions and the purchase of an addi-
tional ownership interest in RSI in 2018.
Financing Activities
The decrease in net cash used in financing activities was primarily attributable to proceeds borrowed
under our revolving credit agreement in 2018 and the purchase of an additional 10% interest in Carrier
Enterprise II for $42.7 million in 2017, partially offset by an increase in dividends paid in 2018.
At-the-Market Offering Program
On August 23, 2017, we entered into a sales agreement with Robert W. Baird & Co. Inc., which enabled
the Company to issue and sell shares of Common stock in one or more negotiated transactions that are
deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as
amended (the “Securities Act”), for a maximum aggregate offering amount of up to $250.0 million (the
“ATM Program”). The offer and sale of our Common stock pursuant to the ATM Program was registered
under the Securities Act pursuant to our automatically effective shelf registration statement on Form S-3
(File No. 333-207831).
During 2017, we sold 1,498,662 shares of Common stock under the ATM Program for net proceeds of
$247.7 million. Direct costs of $0.3 million incurred in connection with the offering were charged against
the proceeds from the sale of Common stock and reflected as a reduction of paid-in capital. As of
December 31, 2017, we had completed the offering of shares under the ATM Program. The net proceeds
were primarily used to repay outstanding debt and for general corporate purposes.
Revolving Credit Agreement
On December 5, 2018, we entered into an unsecured, five-year $500.0 million syndicated multicurrency
revolving credit agreement, which replaced in its entirety our prior five-year $300.0 million revolving credit
agreement, which was nearing maturity. Proceeds from the new facility were used to repay an aggregate of
approximately $54.7 million outstanding under the prior facility. Additional proceeds may be used for,
among other things, funding seasonal working capital needs and other general corporate purposes, includ-
ing acquisitions, dividends (if and as declared by our Board of Directors), capital expenditures, stock repur-
chases and issuances of letters of credit. The credit facility has a seasonal component from October 1 to
March 31, during which the borrowing capacity may be reduced to $400.0 million at our discretion
(which would effectively reduce fees payable in respect of the unused portion of the commitment, as
described below). Included in the credit facility are a $100.0 million swingline subfacility, a $10.0 million
letter of credit subfacility, a $75.0 million alternative currency borrowing sublimit and an $8.0 million
Mexican borrowing sublimit. The credit agreement matures on December 5, 2023.
Borrowings under the credit facility bear interest at either LIBOR-based rates plus a spread, which ranges
from 87.5 to 150.0 basis-points (LIBOR plus 87.5 basis-points at December 31, 2018), depending on
our ratio of total debt to EBITDA, or on rates based on the highest of the Federal Funds Effective Rate plus
0.5%, the Prime Rate or the Eurocurrency Rate plus 1.0%, in each case plus a spread which ranges from
0 to 50.0 basis-points (0 basis-points at December 31, 2018), 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 7.5 to 20.0 basis-points (7.5 basis-points at December 31, 2018). We
paid fees of $0.8 million in connection with entering into the revolving credit agreement, which are being
amortized ratably through the maturity of the facility in December 2023.
At December 31, 2018, $135.2 million was outstanding under the revolving credit agreement. The revolv-
ing 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, 2018.
Contractual Obligations
As of December 31, 2018, our significant contractual obligations were as follows (in millions):
Payments due by Period
Contractual Obligations
Operating leases (1)
Purchase obligations (2)
Total
2019
70.4
35.0
105.4
$
$
2020
2021
2022
2023
Thereafter
Total
$
$
55.1
—
55.1
$
$
41.3
—
41.3
$
$
28.5
—
28.5
$
$
15.7
—
15.7
$
$
8.3 $
—
219.3
35.0
8.3 $
254.3
(1) Represents future minimum payments associated with real property, vehicles, and equipment under non-cancelable operating leases. Operating expenses that are separate
from rental expense that we are committed to pay under certain of these lease agreements 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.
We have not included in the contractual obligations table above approximately $4.0 million of net liabili-
ties for unrecognized tax benefits relating to various tax positions we have taken, the timing of which is
uncertain.
Commercial obligations outstanding at December 31, 2018 under our revolving credit agreement con-
sisted of borrowings totaling $135.2 million with revolving maturities of seven days.
Off-Balance Sheet Arrangements
Refer to Note 15 to our audited consolidated financial statements contained in this Annual Report to
Shareholders, 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 at December 31, 2018.
Such discussion is incorporated herein by reference.
Purchase of Additional Ownership Interest in Joint Venture
On February 13, 2017, we purchased an additional 10% ownership interest in Carrier Enterprise II for
cash consideration of $42.7 million, which increased our controlling interest in Carrier Enterprise II to
80%. We used borrowings under our revolving credit agreement to finance this acquisition, which we
subsequently repaid using a portion of the proceeds from the ATM program.
Investment in Unconsolidated Equity
On June 21, 2017, Carrier Enterprise I acquired a 34.9% ownership interest in RSI, an HVAC distributor
operating from 30 locations in the Western U.S. for cash consideration of $63.6 million, of which we
contributed $50.9 million, and Carrier contributed $12.7 million. Effective June 29, 2018, Carrier
Enterprise I acquired an additional 1.4% ownership interest in RSI, which increased Carrier Enterprise I’s
ownership interest in RSI to 36.3%. Total cash consideration of $3.8 million was paid on July 5, 2018,
of which we contributed $3.0 million and Carrier contributed $0.8 million. Carrier Enterprise I is a party
to a shareholders agreement (the “Shareholders Agreement”) with RSI and its shareholders. Pursuant to
the Shareholders Agreement, RSI’s shareholders have the right to sell, and Carrier Enterprise I has the
obligation to purchase, their respective shares of RSI for a purchase price determined based on either
book value or a multiple of EBIT, the latter of which Carrier Enterprise I used to calculate the price paid
for its investment in RSI. RSI’s shareholders may transfer their respective shares of RSI common stock
only to members of the Sigler family or to Carrier Enterprise I, and, at any time from and after the date on
which Carrier Enterprise I owns 85% or more of RSI’s outstanding common stock, it has the right, but not
the obligation, to purchase from RSI’s shareholders the remaining outstanding shares of RSI common
stock. At December 31, 2018, the estimated purchase amount we would be contingently liable for is
approximately $135.0 million. We believe that our operating cash flows, cash on hand, and funds avail-
able for borrowing under our revolving credit agreement will be sufficient to purchase any additional own-
ership interests in RSI.
26 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 27
We have exposure related to the translation of financial statements of our Canadian operations into U.S.
dollars, our functional currency. We do not currently hold any derivative contracts that hedge our foreign
currency translational exposure. A 10% change in the Canadian dollar would have had an estimated $1.9
million impact to net income for the year ended December 31, 2018.
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 sig-
nificant or if our Canadian and Mexican markets grow and represent a larger percentage of our total rev-
enues.
See Note 16 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, 2018 and determined that a 100 basis-point change in
interest rates would result in an impact to income before taxes of approximately $1.4 million. See Note 7
to our audited consolidated financial statements included in this Annual Report to Shareholders for further
information about our debt.
Acquisitions
On August 23, 2018, one of our wholly owned subsidiaries acquired Alert Labs Inc., a technology com-
pany based in Ontario, Canada for cash consideration of $5.9 million and the issuance of 23,873 shares
of Common stock having a fair value of $4.0 million, net of a discount for lack of marketability, less $0.2
million related to our previously held equity interest. In addition, 23,230 shares of Common stock having
a fair value of $3.0 million were issued into escrow as contingent consideration, all of which are subject
to certain performance metrics within a three-year measurement period.
On November 30, 2018, one of our wholly owned subsidiaries acquired certain assets and assumed cer-
tain liabilities of a wholesale distributor of air conditioning and heating products operating from three
locations in North Carolina.
We continually evaluate potential acquisitions, including joint ventures and investments in unconsolidated
entities, and routinely hold discussions with a number of acquisition candidates. Should suitable acquisi-
tion opportunities arise that would require additional financing, we believe our financial position and earn-
ings 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 $5.60, $4.60 and $3.60 per share of Common stock and Class B common
stock in 2018, 2017 and 2016, respectively. On January 2, 2019, our Board of Directors declared a reg-
ular quarterly cash dividend of $1.60 per share of Common and Class B common stock that was paid on
January 31, 2019 to shareholders of record as of January 16, 2019. Future dividends and/or changes in
dividend rates are at the sole discretion of the Board of Directors and depend upon factors including, but
not limited to, cash flow generated by operations, profitability, financial condition, cash requirements, and
future prospects.
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 repurchased
under the program are accounted for using the cost method and result in a reduction of shareholders’
equity. We last repurchased shares under this plan during 2008. 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 incep-
tion of the program. At December 31, 2018, 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 and option
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 2018.
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 exchange contracts as of December 31, 2018 was $46.8 million, and such contracts have
varying terms expiring through September 2019. For the year ended December 31, 2018, foreign cur-
rency transaction gains and losses did not have a material impact on our results of operations.
28 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 29
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, 2018. 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, 2018. The effectiveness of our internal control over financial
reporting as of December 31, 2018 has been audited by KPMG LLP, an independent registered public
accounting firm, as stated in their report that is included herein.
30 WATSCO, INC. 2018 ANNUAL REPORT
To the Shareholders and Board of Directors
Watsco, Inc.:
Opinion on Internal Control Over Financial Reporting We have audited Watsco, Inc. and subsidiaries’
(the “Company”) internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31,
2018 and 2017, 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, 2018, and the
related notes (collectively, the consolidated financial statements), and our report dated February 28,
2019 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion The Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial report-
ing, 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 are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial
reporting 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 reasonable basis for
our opinion.
Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of finan-
cial reporting and the preparation of financial statements for external purposes in accordance with gener-
ally 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, accu-
rately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reason-
able assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect 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.
Miami, Florida
February 28, 2019
KPMG LLP
WATSCO, INC. 2018 ANNUAL REPORT 31
Report of Independent Registered Public Accounting Firm
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Years Ended December 31,
2018
2017
2016
Revenues
Cost of sales
Gross profit
Selling, general and administrative expenses
Other Income
Operating income
Interest expense, net
Income before income taxes
Income taxes
Net income
Less: net income attributable to non-controlling interest
$ 4,546,653
3,426,401
$ 4,341,955
3,276,296
$ 4,220,702
3,186,118
1,120,252
757,452
9,282
372,082
2,740
369,342
72,813
296,529
53,597
1,065,659
715,671
3,886
353,874
6,363
347,511
90,221
257,290
49,069
1,034,584
688,952
—
345,632
3,713
341,919
105,936
235,983
53,173
Net income attributable to Watsco, Inc.
$
242,932
$
208,221
$
182,810
Earnings per share for Common and Class B common stock:
Basic
Diluted
See accompanying notes to consolidated financial statements.
$
$
6.50
6.49
$
$
5.81
5.81
$
$
5.16
5.15
To the Shareholders and Board of Directors
Watsco, Inc.:
Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated bal-
ance sheets of Watsco, Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, 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, 2018, and the related notes (collec-
tively, the “consolidated financial statements”). In our opinion, the consolidated financial statements pres-
ent fairly, in all material respects, the financial position of the Company as of December 31, 2018 and
2017, and the results of its operations and its cash flows for each of the years in the three year period
ended December 31, 2018, 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) (PCAOB), the Company’s internal control over financial reporting as of December
31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28,
2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over finan-
cial reporting.
Basis for Opinion These consolidated financial statements are the responsibility of the Company’s man-
agement. Our responsibility is to express an opinion on these consolidated financial statements based on
our audits. We are a public accounting firm registered with the PCAOB and are required to be independ-
ent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud. Our audits included perform-
ing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated finan-
cial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2009.
Miami, Florida
February 28, 2019
KPMG LLP
32 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 33
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
Years Ended December 31,
2018
2017
2016
Net income
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustment
Unrealized gain (loss) on cash flow hedging instruments
Reclassification of (gain) loss on cash flow hedging instruments into earnings
Unrealized (loss) gain on equity securities
Other comprehensive (loss) income
Comprehensive income
Less: comprehensive income attributable to non-controlling interest
$
296,529
$
257,290
$
235,983
(20,493)
1,918
(157)
—
(18,732)
277,797
46,913
15,993
(702)
(358)
(15)
14,918
6,211
(965)
323
14
5,583
272,208
54,678
241,566
55,382
Comprehensive income attributable to Watsco, Inc.
$
230,884
$
217,530
$
186,184
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:
Common stock, $0.50 par value, 60,000,000 shares authorized; 36,952,762 and
36,825,128 shares outstanding at December 31, 2018 and 2017, respectively
Class B common stock, $0.50 par value, 10,000,000 shares authorized; 5,381,132 and
5,275,838 shares outstanding at December 31, 2018 and 2017, 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, 4,823,988 shares of Common stock and 48,263 shares
of Class B common stock at both December 31, 2018 and 2017, respectively
Total Watsco, Inc. shareholders’ equity
Non-controlling interest
Total shareholders’ equity
See accompanying notes to consolidated financial statements.
2018
2017
$
82,894
501,908
837,129
19,875
$
80,496
478,133
761,314
17,454
1,441,806
1,337,397
91,046
391,998
147,851
88,332
91,198
382,729
161,065
74,488
$ 2,161,033
$ 2,046,877
$
246
200,229
157,091
357,566
135,200
552
135,752
66,002
$
244
230,476
185,757
416,477
21,800
285
22,085
57,338
18,476
18,412
2,691
—
832,121
(45,968)
627,969
2,638
—
804,008
(34,221)
594,556
(87,440)
(87,440)
1,347,849
253,864
1,297,953
253,024
1,601,713
1,550,977
$ 2,161,033
$ 2,046,877
34 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORTT 35
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except share and per share data)
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
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
Net proceeds from the sale of Common stock
Cash dividends declared and paid on Common and Class B common stock, $4.60 per share
Investment in unconsolidated entity
Decrease in non-controlling interest in Carrier Enterprise II
Distributions to non-controlling interest
Balance at December 31, 2017
Cumulative-effect adjustment
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
Cash dividends declared and paid on Common and Class B common stock, $5.60 per share
Common stock issued for Alert Labs Inc.
Investment in unconsolidated entity
Distributions to non-controlling interest
Balance at December 31, 2018
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
35,311,493
$20,841
$602,522
$(46,904)
3,374
Retained
Earnings
$495,276
182,810
Treasury
Stock
Non-controlling
Interest
$(114,425)
$246,411
53,173
2,209
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)
(127,604)
35,530,403
20,951
592,350
(43,530)
550,482
208,221
(114,425)
9,309
176,899
(10,000)
16,389
49,166
(32,804)
1,498,662
88
(5)
8
24
(16)
(88)
5
2,420
5,263
(4,701)
13,536
220,448
(25,225)
37,228,715
21,050
804,008
142,865
(10,000)
17,318
64,423
(28,781)
71
(5)
9
32
(14)
(71)
5
2,936
7,820
(5,030)
15,631
47,103
24
6,822
26,985
(164,147)
(34,221)
301
(12,048)
594,556
(301)
242,932
(87,440)
253,024
53,597
(6,684)
(209,218)
752
(46,825)
(16,973)
(38,900)
245,920
49,069
5,609
12,720
(17,463)
(42,831)
Total
$1,203,721
235,983
5,583
—
—
2,348
5,696
(4,018)
11,848
(127,604)
(42,909)
(38,900)
1,251,748
257,290
14,918
—
—
2,428
5,287
(4,717)
13,536
247,433
(164,147)
12,720
(42,688)
(42,831)
1,550,977
—
296,529
(18,732)
—
—
2,945
7,852
(5,044)
15,631
(209,218)
6,846
752
(46,825)
37,461,643
$21,167
$832,121
$(45,968)
$627,969
$(87,440)
$253,864
$1,601,713
36 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 37
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
Years Ended December 31,
2018
2017
2016
$
296,529
$
257,290
$
235,983
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 (benefit)
Non-cash contribution to 401(k) plan
Provision for doubtful accounts
Loss (gain) on sale of property and equipment
Other income from investment in unconsolidated entity
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable
Inventories
Accounts payable and other liabilities
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Business acquisitions, net of cash acquired
Investment in unconsolidated entity
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
Distributions to non-controlling interest
Net repayments under prior revolving credit agreement
Repurchases of common stock to satisfy employee withholding tax obligations
Payment of fees related to revolving credit agreement
Net proceeds from the sale of Common stock
Purchase of additional ownership from non-controlling interest
Net proceeds (repayments) of other long-term obligations
Proceeds from non-controlling interest for investment in unconsolidated entity
Net proceeds from issuances of common stock
Net proceeds under current revolving credit agreement
22,095
15,508
8,290
2,945
2,619
27
(9,282)
(28,831)
(78,954)
(57,398)
(2,991)
22,033
13,293
(10,735)
2,428
1,991
115
(3,886)
(1,676)
(73,403)
99,956
(886)
20,066
12,319
2,720
2,348
3,487
(189)
—
(26,941)
(9,729)
43,734
(2,067)
170,557
306,520
281,731
(17,153)
(5,626)
(3,760)
228
(26,311)
(209,218)
(46,825)
(21,800)
(3,782)
(790)
—
—
269
752
6,591
135,200
(17,876)
—
(63,600)
168
(81,308)
(164,147)
(42,831)
(213,494)
(4,674)
—
247,744
(42,688)
(19)
12,720
5,244
—
(43,577)
—
—
744
(42,833)
(127,604)
(38,900)
(10,006)
(3,975)
—
—
(42,909)
(150)
—
5,653
—
Net cash used in financing activities
(139,603)
(202,145)
(217,891)
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
(2,245)
2,398
80,496
1,419
24,486
56,010
(226)
20,781
35,229
Cash and cash equivalents at end of year
$
82,894
$
80,496
$
56,010
Supplemental cash flow information (Note 21)
See accompanying notes to consolidated financial statements.
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,
2018, we operated from 571 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.
Equity Method Investments
Investments in which we have the ability to exercise significant influence, but do not control, are
accounted for under the equity method of accounting and are included in other assets in our consolidated
balance sheets. Under this method of accounting, our proportionate share of the net income or loss of the
investee is included in other income in our consolidated statements of income. The excess, if any, of the
carrying amount of our investment over our ownership percentage in the underlying net assets of the
investee is attributed to certain fair value adjustments with the remaining portion recognized as goodwill.
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 loss contingencies
and the valuation of goodwill, indefinite lived intangible assets and long-lived 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-
38 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 39
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, 2018 and 2017, the allowance for doubtful accounts totaled $6,503 and $6,049,
respectively.
Inventories
Inventories consist of air conditioning, heating and refrigeration equipment and related parts and supplies
and are valued at the lower of cost using the weighted-average cost basis and the first-in, first-out meth-
ods, or net realizable value. 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, 2018 and 2017, we had $11,603 and $11,621, respec-
tively, of rebates recorded as a reduction of inventory. Substantially all vendor rebate receivables are col-
lected within three months immediately following the end of the year.
Equity Securities
Investments in equity securities are recorded at fair value using the specific identification method and are
included in other assets in our consolidated balance sheets. Unrealized holding gains and losses, net of
deferred taxes, were included in accumulated other comprehensive loss within shareholders’ equity for
2017 and 2016. For 2018, changes in the fair value of equity securities were recognized through income
rather than comprehensive income. 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 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. On January 1, 2019, we performed our annual evalu-
ation of goodwill impairment and determined that the estimated fair value of our reporting unit
significantly exceeded its carrying value.
Intangible assets primarily consist of the value of trade names and trademarks, distributor agreements,
customer relationships and patented and unpatented technology. 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 amor-
tized 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 and intangible assets, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the assets may not be recover-
able. Recoverability is evaluated by determining whether the amortization of the balance over its remain-
ing 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, 2018 there were no such events or cir-
cumstances.
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. We generate our revenue primarily from the sale of finished products to customers;
therefore, the significant majority of our contracts are short-term in nature and have only a single perform-
ance obligation to deliver products; therefore, we satisfy our performance obligation under such contracts
when we transfer control of the product to the customer. Some contracts contain a combination of prod-
uct sales and services, the latter of which is distinct and accounted for as a separate performance obliga-
tion. We satisfy our performance obligations for services when we render the services within the
agreed-upon service period. Total service revenue is not material and accounted for less than 1% of our
consolidated revenues for 2018.
Revenue is recognized when control transfers to our customers when products are picked up or via ship-
ment of products or delivery of services. We measure revenue as the amount of consideration we expect
to be entitled to receive in exchange for those goods or services, net of any variable considerations (e.g.,
rights to return product, sales incentives, others) and any taxes collected from customers and subse-
quently remitted to governmental authorities. Revenue for shipping and handling charges is recognized
when products are delivered to the customer.
Product Returns
We estimate product returns based on historical experience and record them on a gross basis on our bal-
ance sheet. Substantially all customer returns relate to products that are returned under manufacturers’
warranty obligations. Accrued sales returns of $11,275 at December 31, 2018 were included in accrued
40 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 41
expenses and other current liabilities in our consolidated balance sheet.
Sales Incentives
We estimate sales incentives expected to be paid over the term of the program based on the most likely
amounts. Sales incentives are accounted for as a reduction in the transaction price and are generally paid
on an annual basis.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2018,
2017 and 2016, were $16,520, $24,677 and $22,242, respectively. See Note 2.
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, 2018, 2017
and 2016, were $51,741, $47,670 and $42,809, respectively.
Share-Based Compensation
The fair value of stock option and non-vested restricted stock awards are expensed net of estimated forfei-
tures 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. Tax
benefits resulting from tax deductions in excess of share-based compensation expense are recognized in
our provision for income taxes in our consolidated statements of income.
Income Taxes
We record U.S. 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 purposes versus tax
purposes. Deferred tax assets and liabilities reflect the temporary differences between the financial state-
ment 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 recognized as income or
expense in the period that includes the enactment date. We and our eligible subsidiaries file a consoli-
dated U.S. federal income tax return. As income tax returns are generally not filed until well after the clos-
ing 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 appropri-
ate 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 and option 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 cate-
gory 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 16 for additional information pertaining to derivative instruments.
Loss Contingencies
Accruals are recorded for various contingencies including self-insurance, legal proceedings, environmental
matters, and other claims that arise in the normal course of business. The estimation process contains
uncertainty because accruals are based on judgment, the probability of losses and, where applicable, the
consideration of opinions of external legal counsel and actuarially determined estimates. Additionally, we
record receivables from third party insurers when recovery has been determined to be probable.
Recently Adopted 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. In 2015 and 2016, the FASB issued several updates to this
standard. The adoption of this standard and its related amendments (collectively, the “New Revenue
Standard”) on January 1, 2018 did not result in the recognition of a cumulative adjustment to opening
retained earnings under the modified retrospective approach, nor did it have a significant impact on our
consolidated net income, balance sheet or cash flow. See Note 2.
Financial Instruments
In January 2016, the FASB issued guidance related to certain aspects of recognition, measurement, pres-
entation and disclosure of financial instruments. Most prominent among the changes to the standard is
42 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 43
the requirement that changes in the fair value of equity investments, with certain exceptions, be recog-
nized through net income rather than other comprehensive income. This guidance must be applied using
a modified retrospective approach through a cumulative-effect adjustment to retained earnings and
became effective for interim and annual periods beginning after December 15, 2017. The adoption of this
guidance did not have a material impact on our consolidated financial statements. A cumulative-effect
adjustment captured the previously held unrealized losses of $301 related to our equity securities carried
at fair value. See Note 4.
Stock Compensation
In May 2017, the FASB issued guidance to clarify when to account for a change to the terms or condi-
tions of a share-based payment award as a modification. Under the new guidance, modification account-
ing is required only if the fair value, the vesting conditions or the classification of the award (as equity or
liability) changes as a result of the change in terms or conditions. This guidance must be applied prospec-
tively and became effective for interim and annual periods beginning after December 15, 2017. The
adoption of this guidance did not have a material impact on our consolidated financial statements.
Derivatives and Hedging
In August 2017, the FASB issued guidance to simplify the accounting for hedging derivatives. This guid-
ance is effective prospectively and is effective for interim and annual periods beginning after December
15, 2018 with early adoption permitted. We elected to adopt this guidance during the quarter ended
June 30, 2018, which did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted
Leases
IIn 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. In July
2018, updated guidance was issued which provides an additional transition method of adoption that
allows entities to initially apply the standard at the adoption date and recognize a cumulative-effect
adjustment to the opening balance of retained earnings. We adopted this standard and its related amend-
ments (collectively, the “New Lease Standard”) on January 1, 2019, using this additional transition
method, and we have elected the available practical expedients upon adoption.
Although we continue to evaluate the impact of the New Lease Standard on our consolidated balance
sheet, we do not expect that it will have a material impact on our consolidated statements of income.
Following adoption of the New Lease Standard, we record a right-of-use (“ROU”) asset and lease liability,
representing our obligation to make lease payments for operating leases greater than one year in duration,
measured on a discounted basis. We expect that the ROU asset and lease liability recorded will be
approximately 10% of our total assets. In preparation for the adoption, we are implementing business
processes and controls over the financial reporting of leases, which will facilitate our reporting under the
New Lease Standard in the first quarter of 2019. See Note 18, under the caption “Operating Leases,” for
our minimum lease commitments at December 31, 2018.
Intangibles—Goodwill and Other
In January 2017, the FASB issued guidance to simplify the subsequent measurement of goodwill by elim-
inating Step 2 from the goodwill impairment test. Under this updated standard, an entity should recog-
nize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair
value, but the loss recognized should not exceed the total amount of goodwill allocated to that reporting
unit. An entity also should consider income tax effects from any tax-deductible goodwill on the carrying
amount of the reporting unit when measuring the goodwill impairment loss, if any. This guidance is effec-
tive prospectively and is effective for interim and annual periods beginning after December 15, 2019 with
early adoption permitted. We do not expect the adoption of this guidance to have a material impact on
our consolidated financial statements.
Disclosure Update and Simplification
In August 2018, the Securities and Exchange Commission (“SEC”) issued the final rule under SEC
Release No. 33-10532, “Disclosure Update and Simplification,” that amends certain of its disclosure
requirements that have become redundant, duplicative, overlapping, outdated or superseded. The amend-
ments include removing the requirement to disclose information on geographic regions from the
Description of Business section of Form 10-K and replacing the requirement that a registrant disclose the
high and low trading prices of entity's ordinary shares with a requirement to disclose the ticker symbol of
its shares. Additionally, the final rule extends to interim periods the annual disclosure requirement of pre-
senting changes in each caption of stockholders' equity and the amount of dividends per share. These dis-
closures are required to be provided for the current and comparative year-to-date interim periods. The
final rule is effective for all filings on or after November 5, 2018. We have adopted all relevant disclosure
requirements for our Annual Report on Form 10-K for the year ended December 31, 2018.
2. REVENUES
We adopted the New Revenue Standard on January 1, 2018 using the modified retrospective approach.
The New Revenue Standard did not have an impact on the amount or timing of our revenue recognition;
however, certain payments to customers were reclassified from advertising expenses to a reduction from
revenues, resulting in an immaterial impact to the individual financial statement line items of our consoli-
dated statements of income. Results for reporting periods beginning on and after January 1, 2018 are pre-
sented under the New Revenue Standard, while prior period results have not been adjusted and continue
to be reported under the accounting standards in effect for those periods.
Disaggregation of Revenues
The following table presents our revenues disaggregated by primary geographical regions and major prod-
uct lines within our single reporting segment:
Years Ended December 31,
Primary Geographical Regions:
United States
Canada
Mexico
Major Product Lines:
HVAC equipment
Other HVAC products
Commercial refrigeration products
2018
2017(1)
2016(1)
$ 4,126,639
291,685
128,329
$ 3,919,684
269,603
152,668
$ 3,813,204
267,220
140,278
$ 4,546,653
$ 4,341,955
$ 4,220,702
67% $
29%
4%
100%
$
67%
28%
5%
100%
66%
29%
5%
100%
(1) As noted above, prior period amounts have not been adjusted under the modified retrospective method and remain as originally reported for such periods..
Practical Expedients
We generally expense sales commissions when incurred because the amortization period is one year or
less. These costs are recorded within selling, general and administrative expenses. We do not disclose the
value of unsatisfied performance obligations for contracts with an original expected length of one year or
less.
44 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 45
3. 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,
2018
2017
2016
4. OTHER COMPREHENSIVE (LOSS) INCOME
Other comprehensive (loss) income consists of the foreign currency translation adjustment associated with
our Canadian operations’ use of the Canadian dollar as their functional currency and changes in the unreal-
ized gains (losses) on cash flow hedging instruments and equity securities. The tax effects allocated to
each component of other comprehensive (loss) income were as follows:
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
$
242,932
$
208,221
$
182,810
19,792
223,140
34,319,890
6.50
206,355
16,785
223,140
242,932
$
$
$
$
$
17,430
190,791
32,824,947
5.81
175,667
15,124
190,791
208,221
$
$
$
$
$
14,806
168,004
32,582,385
5.16
154,021
13,983
168,004
182,810
$
$
$
$
$
restricted common stock
19,788
17,427
14,801
Earnings allocated to Watsco, Inc. shareholders
$
223,144
$
190,794
$
168,009
Weighted-average common shares outstanding - Basic
Effect of dilutive stock options
34,319,890
54,379
32,824,947
37,686
32,582,385
34,119
Years Ended December 31,
2018
2017
Foreign currency translation adjustment
$
(20,493)
$
15,993
$
Unrealized gain (loss) on cash flow hedging instruments
Income tax (expense) benefit
Unrealized gain (loss) on cash flow hedging instruments, net of tax
Reclassification of (gain) loss on cash flow hedging instruments into earnings
Income tax expense (benefit)
Reclassification of (gain) loss on cash flow hedging instruments into earnings, net of tax
Unrealized gain on equity securities
Income tax expense
Unrealized (loss) gain on equity securities, net of tax
2,627
(709)
1,918
(215)
58
(157)
—
—
—
(961)
259
(702)
(491)
133
(358)
51
(66)
(15)
2016
6,211
(1,321)
356
(965)
442
(119)
323
27
(13)
14
Other comprehensive (loss) income
$
(18,732)
$
14,918
$
5,583
The changes in each component of accumulated other comprehensive loss, net of tax, were as follows:
Weighted-average common shares outstanding - Diluted
34,374,269
32,862,633
32,616,504
Years Ended December 31,
2018
2017
2016
Diluted earnings per share for Common and Class B common stock
$
6.49
$
5.81
$
5.15
Foreign currency translation adjustment:
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, 2018, 2017 and 2016, our outstanding Class B common stock was
convertible into 2,581,627, 2,601,996 and 2,711,811 shares of our Common stock, respectively.
Diluted earnings per share excluded 74,270, 11,664 and 31,839 shares for the years ended December 31,
2018, 2017 and 2016, 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.
Beginning balance
Current period other comprehensive (loss) income
Ending balance
Cash flow hedging instruments:
Beginning balance
Current period other comprehensive income (loss)
Reclassification adjustment
Ending balance
Equity securities:
Beginning balance
Cumulative-effect adjustment to retained earnings
Current period other comprehensive (loss) income
Ending balance
$
(33,499)
(13,105)
(46,604)
$
(43,459) $
9,960
(47,204)
3,745
(33,499)
(43,459)
(421)
1,151
(94)
636
(301)
301
—
—
215
(421)
(215)
(421)
(286)
—
(15)
(301)
600
(579)
194
215
(300)
—
14
(286)
Accumulated other comprehensive loss, net of tax
$
(45,968)
$
(34,221)
$
(43,530)
46 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 47
5.SUPPLIER CONCENTRATION
Purchases from our top ten suppliers comprised 84%, 84% and 85% of all purchases made in 2018,
2017 and 2016, respectively. Our largest supplier, Carrier and its affiliates, accounted for 62% of all pur-
chases made in 2018, 2017 and 2016. See Note 19. A significant interruption 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.
6. 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
$
$
2018
820
75,308
79,002
16,782
50,853
2017
820
74,486
76,117
15,282
47,377
222,765
(131,719)
214,082
(122,884)
$
91,046
$
91,198
Depreciation and amortization expense related to property and equipment included in selling, general and
administrative expenses for the years ended December 31, 2018, 2017 and 2016, were $16,747,
$16,770 and $14,853, respectively.
7. DEBT
On December 5, 2018, we entered into an unsecured, five-year $500,000 syndicated multicurrency
revolving credit agreement, which replaced in its entirety our prior five-year $300,000 revolving credit
agreement, which was nearing maturity. Proceeds from the new facility were used to repay an aggregate
of approximately $54,700 outstanding under the prior facility. Additional proceeds may be used for,
among other things, funding seasonal working capital needs and other general corporate purposes, includ-
ing acquisitions, dividends (if and as declared by our Board of Directors), capital expenditures, stock
repurchases and issuances of letters of credit. The credit facility has a seasonal component from October
1 to March 31, during which the borrowing capacity may be reduced to $400,000 at our discretion
(which would effectively reduce fees payable in respect of the unused portion of the commitment, as
described below). Included in the credit facility are a $100,000 swingline subfacility, a $10,000 letter of
credit subfacility, a $75,000 alternative currency borrowing sublimit and an $8,000 Mexican borrowing
sublimit. The credit agreement matures on December 5, 2023.
Borrowings under the credit facility bear interest at either LIBOR-based rates plus a spread, which ranges
from 87.5 to 150.0 basis-points (LIBOR plus 87.5 basis-points at December 31, 2018), depending on
our ratio of total debt to EBITDA, or on rates based on the highest of the Federal Funds Effective Rate
plus 0.5%, the Prime Rate or the Eurocurrency Rate plus 1.0%, in each case plus a spread which ranges
from 0 to 50.0 basis-points (0 basis-points at December 31, 2018), 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 7.5 to 20.0 basis-points (7.5 basis-points at December 31,
2018). We paid fees of $790 in connection with entering into the revolving credit agreement, which are
being amortized ratably through the maturity of the facility in December 2023.
At December 31, 2018, $135,200 was outstanding under the revolving credit agreement. The revolving
credit agreement contains customary affirmative and negative covenants, including financial covenants
with respect to consolidated leverage and interest coverage ratios, and other customary restrictions. We
believe we were in compliance with all covenants at December 31, 2018.
8. INCOME TAXES
On December 22, 2017, Public Law 115-97 “An Act to Provide for Reconciliation Pursuant to Titles II
and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” was enacted. This law is com-
monly referred to as the Tax Cuts and Jobs Act of 2017 (the “TCJA”). The TCJA made broad and complex
changes to the U.S. tax code including but not limited to, reducing the U.S. federal corporate tax rate
from 35% to 21% effective January 1, 2018 and requiring a one-time repatriation transition tax on cer-
tain undistributed earnings of foreign subsidiaries. The TCJA also put in place new tax laws that applied
prospectively, which included, but were not limited to, generally eliminating U.S. federal income taxes on
dividends from foreign subsidiaries and a new provision designed to tax U.S. allocated expenses as well
as currently taxing certain global intangible low-taxed income (“GILTI”) of foreign subsidiaries. GILTI is a
tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. We have
elected to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense.
U.S. GAAP requires the impact of tax legislation to be recorded in the period of enactment. We recognized
the tax effects of the TCJA for the year ended December 31, 2017 and recorded a provisional net income
tax benefit of $9,955. This amount included an income tax benefit from the revaluation of U.S. deferred
income taxes, partially offset by an estimate for income tax expense to record U.S. federal, state and for-
eign withholding tax on previously undistributed earnings of our foreign subsidiaries. We applied the guid-
ance in Staff Accounting Bulletin 118 when accounting for the enactment-date effects of the TCJA. As of
December 31, 2018, we have completed our accounting for all the enactment-date income tax effects of
the TCJA. In 2018, we increased our previously estimated net income tax benefit by $1,819 to $11,774,
following the refinement of estimated U.S. federal and state income taxes on previously undistributed
earnings of our foreign subsidiaries.
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:
Years Ended December 31,
U.S. Federal
State
Foreign
Current
Deferred
2018
54,345
11,631
6,837
72,813
64,523
8,290
72,813
2017
69,079
10,643
10,499
90,221
100,956
(10,735)
90,221
$
$
$
$
2016
86,719
9,801
9,416
105,936
103,216
2,720
105,936
$
$
$
$
$
$
$
$
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.
48 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 49
Following is a reconciliation of the effective income tax rate:
Years Ended December 31,
2018
2017
2016
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
GILTI
Tax credits and other
Repatriation transition tax
Deferred tax impact of enacted tax rate changes
Effective income tax rate attributable to Watsco, Inc.
Taxes attributable to non-controlling interest
21.0%
3.6
(2.0)
0.5
0.3
—
(0.9)
0.3
22.8
(3.1)
35.0%
2.4
(2.7)
(1.0)
—
(0.6)
3.0
(6.3)
29.8
(3.8)
35.0%
2.3
(1.0)
(0.1)
—
(0.2)
—
—
36.0
(5.0)
Effective income tax rate
19.7%
26.0%
31.0%
The following is a summary of the significant components of our net deferred tax liabilities:
December 31,
Deferred tax assets:
Share-based compensation
Capitalized inventory costs and inventory reserves
Allowance for doubtful accounts
Self-insurance reserves
Other
Net operating loss carryforwards
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Deductible goodwill
Depreciation
Other
Total deferred tax liabilities
Net deferred tax liabilities (1)
$
2018
2017
$
21,517
2,151
1,057
206
2,486
484
27,901
—
27,901
18,977
2,107
929
153
2,423
291
24,880
—
24,880
(69,600)
(10,695)
(8,516)
(88,811)
(67,246)
(5,519)
(5,189)
(77,954)
$
(60,910)
$
(53,074)
(1) Net deferred tax liabilities have been included in the consolidated balance sheets in deferred income taxes and other liabilities.
Prior to enactment of the TCJA, U.S. income taxes had not been provided on undistributed earnings of our
foreign subsidiaries as we had intended to reinvest such earnings permanently outside the U.S. or to repa-
triate such earnings only when it was tax effective to do so. The TCJA one-time repatriation transition tax
and GILTI liabilities effectively taxed the undistributed earnings previously deferred from U.S. Federal
income taxes. As of December 31, 2018, we have accumulated undistributed earnings generated by our
foreign subsidiaries of approximately $93,000. Any additional taxes due with respect to such previously-
taxed earnings, if repatriated, would generally be limited to foreign withholding. Deferred taxes have been
recorded for foreign withholding taxes on certain earnings of our foreign consolidated subsidiaries
expected to be repatriated. We do not intend to distribute the remaining previously-taxed foreign earnings
and therefore have not recorded deferred taxes for foreign withholding on such earnings. The amount of
foreign withholding that might be payable on the remaining amounts at December 31, 2018 is not material.
Valuation allowances are provided to reduce the related deferred income tax assets to an amount which
will, more likely than not, be realized. As a result of our assessment of the realization of deferred income
tax assets, we have concluded that it is more likely than not that all of our deferred income tax assets will
be realized and thus no valuation allowance was necessary at both December 31, 2018 and 2017. At
December 31, 2018, there were state net operating loss carryforwards of $8,263, which expire in vary-
ing amounts from 2019 through 2038. These amounts are available to offset future taxable income.
There were no federal net operating loss carryforwards at December 31, 2018.
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
2015. For the majority of states and foreign jurisdictions, we are no longer subject to tax examinations for
tax years prior to 2014.
As of December 31, 2018 and 2017, the total amount of gross unrecognized tax benefits (excluding the
federal benefit received from state positions) was $4,902 and $4,225, respectively. Of these totals,
$3,997 and $3,457, respectively, (net of the federal benefit received from state positions) represent the
amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate. Our continuing
practice is to recognize penalties within selling, general and administrative expenses and interest related
to income tax matters in income tax expense in the consolidated statements of income. As of December
31, 2018 and 2017, the cumulative amount of estimated accrued interest and penalties resulting from
such unrecognized tax benefits was $755 and $540, respectively, and is included in deferred income
taxes and other current liabilities in the accompanying consolidated balance sheets.
The changes in gross unrecognized tax benefits were as follows:
Balance at December 31, 2015
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, 2016
Additions based on tax positions related to the current year
Reductions due to lapse of applicable statute of limitations
Balance at December 31, 2017
Additions based on tax positions related to the current year
Reductions due to lapse of applicable statute of limitations
Balance at December 31, 2018
$
3,513
547
(365)
3,695
801
(271)
4,225
960
(283)
$
4,902
9. 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 2001 Plan as of the date our share-
holders 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 601,252
50 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 51
shares of Common stock, net of cancellations, and 626,387 shares of Class B common stock, had been
awarded under the 2014 Plan as of December 31, 2018. As of December 31, 2018, 817,782 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 circum-
stances prior to the original vesting date.
The 2001 Plan expired during 2014; therefore, no additional options may be granted. There were 1,000
options to exercise common stock outstanding under the 2001 Plan at December 31, 2018. 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, 2018:
Options outstanding at December 31, 2017
Granted
Exercised
Forfeited
Expired
Options outstanding at December 31, 2018
Options exercisable at December 31, 2018
Weighted-
Average
Exercise
Price
136.44
173.48
114.09
155.83
122.62
151.71
135.89
Options
398,833
188,550
(54,934)
(26,832)
(1,000)
504,617
71,487
$
$
$
Weighted-
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
3.31
2.13
$
$
1,733
826
The following is a summary of non-vested restricted stock activity as of and for the year ended December
31, 2018:
Non-vested restricted stock outstanding at December 31, 2017
Granted
Vested
Forfeited
Weighted-
Average
Grant Date
Fair Value
51.22
167.06
66.52
142.52
$
Shares
2,985,239
142,865
(55,502)
(10,000)
Non-vested restricted stock outstanding at December 31, 2018
3,062,602
$
48.72
The weighted-average grant date fair value of non-vested restricted stock granted during 2018, 2017 and
2016 was $167.06, $149.47 and $130.01, respectively. The fair value of non-vested restricted stock
that vested during 2018, 2017 and 2016 was $9,637, $11,580 and $10,096, respectively.
During 2018, 21,754 shares of Common and Class B common stock with an aggregate fair market value
of $3,775 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection
with the vesting of restricted stock. During 2017, 32,454 shares of Common stock with an aggregate fair
market value of $4,664 were withheld as payment in lieu of cash to satisfy tax withholding obligations in
connection with the vesting of restricted stock. 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. These shares were
retired upon delivery.
Share-Based Compensation Fair Value Assumptions
The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option
pricing valuation model based on the weighted-average assumptions noted in the table below. The fair
value of each stock option award, which is subject to graded vesting, is expensed, net of estimated forfei-
tures, on a straight-line basis over the requisite service period for each separately vesting portion of the
stock option. We use historical data to estimate stock option forfeitures. The expected term of stock
option awards granted represents the period of time that stock option awards granted are expected to be
outstanding and was calculated using the simplified method for plain vanilla options, which we believe
provides a reasonable estimate of expected life based on our historical data. The risk-free rate for periods
within the contractual life of the stock option award is based on the yield curve of a zero-coupon United
States Treasury bond on the date the stock option award is granted with a maturity equal to the expected
term of the stock option award. Expected volatility is based on historical volatility of our stock.
The following table presents the weighted-average assumptions used for stock options granted:
Years Ended December 31,
Expected term in years
Risk-free interest rate
Expected volatility
Expected dividend yield
Grant date fair value
2018
2017
2016
4.25
2.69%
17.11%
3.13%
4.25
1.77%
17.41%
2.82%
4.25
1.24%
18.65%
2.54%
$20.05
$17.23
$16.37
Exercise of Stock Options
The total intrinsic value of stock options exercised during 2018, 2017 and 2016 was $3,500, $2,296
and $4,123, respectively. Cash received from the exercise of stock options during 2018, 2017 and 2016
was $5,006, $3,855 and $4,447, respectively. During 2018, 2017 and 2016, 7,027 shares of
Common stock with an aggregate fair market value of $1,269, 350 shares of Common stock with an
aggregate fair market value of $53 and 348 shares of Common stock with an aggregate fair market value
of $51, 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
2018
2,014
13,494
15,508
$
$
2017
1,451
11,842
13,293
$
$
2016
1,149
11,170
12,319
$
$
At December 31, 2018, there was $3,598 of unrecognized pre-tax compensation expense related to
stock options granted under the 2014 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 during 2018, 2017
and 2016 was $1,607, $754 and $736, respectively.
At December 31, 2018, there was $118,124 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 11.2 years. Of this amount, approximately $56,000 is related to awards granted to our Chief
Executive Officer (“CEO”), of which approximately $9,000, $42,000 and $5,000 vest in approximately
4, 8 and 10 years upon his attainment of age 82, 86 and 88, respectively, and approximately $13,000
is related to awards granted to our President, of which approximately $12,000 and $1,000 vest in
approximately 25 and 27 years upon his attainment of age 62 and 64, respectively. In the event that
vesting is accelerated for any circumstance, as defined in the related agreements, the remaining unrecog-
nized share-based compensation expense would be immediately recognized as a charge to earnings with
52 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 53
a corresponding tax benefit. At December 31, 2018, we were obligated to issue 45,752 shares of non-
vested restricted stock to our CEO that vest in 10 years and 23,297 shares of non-vested restricted stock
to our President that vest in 25 years in connection with 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 2018, 2017
and 2016, employees purchased 5,151, 5,571 and 5,956 shares of Common stock at an average price
of $168.21, $144.58 and $125.84 per share, respectively. Cash dividends received by the ESPP were
reinvested in Common stock and resulted in the issuance of 4,338, 3,844 and 3,442 additional shares
during 2018, 2017 and 2016, respectively. We received net proceeds of $1,585, $1,389 and $1,206,
respectively, during 2018, 2017 and 2016, for shares of our Common stock purchased under the ESPP.
At December 31, 2018, 477,256 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, 2018, 2017
and 2016, we issued 17,318, 16,389 and 20,045 shares of Common stock, respectively, to the plan,
representing the Common stock discretionary matching contribution of $2,945, $2,428 and $2,348,
respectively.
10. PURCHASE OF ADDITIONAL OWNERSHIP INTEREST IN JOINT VENTURE
In 2011, we formed a joint venture with Carrier, Carrier Enterprise Northeast LLC, which we refer to as
Carrier Enterprise II. We initially owned a 60% controlling interest in Carrier Enterprise II. On November
29, 2016, we purchased an additional 10% ownership interest for cash consideration of $42,909, and,
on February 13, 2017, we purchased an additional 10% ownership interest for cash consideration of
$42,688, which together increased our controlling interest in Carrier Enterprise II to 80%.
11. INVESTMENT IN UNCONSOLIDATED ENTITY
On June 21, 2017, our first joint venture with Carrier, Carrier Enterprise, LLC, which we refer to as Carrier
Enterprise I, acquired a 34.9% ownership interest in Russell Sigler, Inc. (“RSI”), an HVAC distributor with
2018 sales of approximately $770,000, operating from 30 locations in the Western U.S. We have an
80% controlling interest in Carrier Enterprise I, and Carrier has a 20% non-controlling interest. Carrier
Enterprise I acquired its ownership interest in RSI for cash consideration of $63,600, of which we con-
tributed $50,880, and Carrier contributed $12,720. Effective June 29, 2018, Carrier Enterprise I
acquired an additional 1.4% ownership interest in RSI, which increased Carrier Enterprise I’s ownership
interest in RSI to 36.3% for cash consideration of $3,760, of which we contributed $3,008 and Carrier
contributed $752. Carrier Enterprise I is a party to a shareholders agreement (the “Shareholders
Agreement”) with RSI and its shareholders. Pursuant to the Shareholders Agreement, RSI’s shareholders
have the right to sell, and Carrier Enterprise I has the obligation to purchase, their respective shares of RSI
for a purchase price determined based on either book value or a multiple of EBIT, the latter of which
Carrier Enterprise I used to calculate the price paid for its investment in RSI. RSI’s shareholders may trans-
fer their respective shares of RSI common stock only to members of the Sigler family or to Carrier
Enterprise I, and, at any time from and after the date on which Carrier Enterprise I owns 85% or more of
RSI’s outstanding common stock, it has the right, but not the obligation, to purchase from RSI’s sharehold-
ers the remaining outstanding shares of RSI common stock. Additionally, Carrier Enterprise I has the right
to appoint two of RSI’s six board members. Given Carrier Enterprise I’s 36.3% ownership interest in RSI
and its right to appoint two out of RSI’s six board members, this investment in RSI is accounted for under
the equity method.
12. ACQUISITIONS
On August 23, 2018, one of our wholly owned subsidiaries acquired Alert Labs Inc., a technology com-
pany based in Ontario, Canada for cash consideration of $5,889 and the issuance of 23,873 shares of
Common stock having a fair value of $3,991, net of a discount for lack of marketability, less $171
related to our previously held equity interest. In addition, 23,230 shares of Common stock having a fair
value of $3,026 were issued into escrow as contingent consideration, all of which are subject to certain
performance metrics within a three-year measurement period. The purchase price resulted in the recogni-
tion of $14,941 in goodwill and intangibles. The fair value of the identified intangible assets was $1,640
and consisted of $1,600 in patented and unpatented technologies and $40 in customer relationships to
be amortized over a seven year period. The tax basis of the acquired goodwill recognized is not deductible
for income tax purposes.
On November 30, 2018, one of our wholly owned subsidiaries acquired certain assets and assumed cer-
tain liabilities of a wholesale distributor of air conditioning and heating products operating from three
locations in North Carolina.
The results of operations of these acquisitions have been included in the consolidated financial state-
ments from their respective dates of acquisition. The pro forma effect of the acquisitions were not deemed
significant to the consolidated financial statements.
13. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill are as follows:
Balance at December 31, 2016
Foreign currency translation adjustment
Balance at December 31, 2017
Acquired goodwill
Foreign currency translation adjustment
Balance at December 31, 2018
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
Patented and unpatented technology
Trade name
Accumulated amortization
Finite lived intangible assets, net
$
379,737
2,992
382,729
13,301
(4,032)
$
391,998
Estimated
Useful Lives
2018
2017
10-15 years
7 years
10 years
$
119,188
$
125,194
69,593
1,600
1,150
(43,680)
73,053
—
1,150
(38,332)
28,663
35,871
$
147,851
$
161,065
54 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 55
Amortization expense related to finite lived intangible assets included in selling, general and administrative
expenses for the years ended December 31, 2018, 2017 and 2016, were $5,348, $5,263 and $5,213,
respectively. Annual amortization of finite lived intangible assets for the next five years is expected to
approximate the following.
2019
2020
2021
2022
2023
$
$
$
$
$
5,000
5,000
4,200
3,400
2,800
14. 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, 2018 or 2017.
At-the-Market Offering Program
On August 23, 2017, we entered into a sales agreement with Robert W. Baird & Co. Inc., which enabled
the Company to issue and sell shares of Common stock in one or more negotiated transactions that are
deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as
amended (the “Securities Act”), for a maximum aggregate offering amount of up to $250,000 (the “ATM
Program”). The offer and sale of our Common stock pursuant to the ATM Program was registered under
the Securities Act pursuant to our automatically effective shelf registration statement on Form S-3 (File
No. 333-207831).
During 2017, we sold 1,498,662 shares of Common stock under the ATM Program for net proceeds of
$247,744. Direct costs of $311 incurred in connection with the offering were charged against the pro-
ceeds from the sale of Common stock and reflected as a reduction of paid-in capital. As of December 31,
2017, we had completed the offering of shares under the ATM Program. The net proceeds were primarily
used to repay outstanding debt and for general corporate purposes.
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 2018, 2017 or 2016. We last repurchased shares under this
plan during 2008. In aggregate, 6,322,650 shares of Common stock and 48,263 shares of Class B com-
mon stock have been repurchased at a cost of $114,425 since the inception of the program. At
December 31, 2018, there were 1,129,087 shares remaining authorized for repurchase under the pro-
gram.
15. 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, 2018 and 2017, 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, 2018 and 2017, we were contingently liable under standby letters of credit aggregating
$1,222 and $2,430, 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,
2018 and 2017, we were contingently liable under various performance bonds aggregating approximately
$3,600 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.
16. DERIVATIVES
We enter into foreign currency forward and option 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 occurs. The maximum period for which we hedge
our cash flow using these instruments is 12 months. Accordingly, at December 31, 2018, 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, 2018 was $40,000,
and such contracts have varying terms expiring through September 2019.
The impact from foreign exchange derivative instruments designated as cash flow hedges was as follows:
Years Ended December 31,
Gain (loss) recorded in accumulated other comprehensive loss
(Gain) reclassified from accumulated other comprehensive loss into earnings
2018
2,627
(215)
$
$
2017
(961)
(491)
$
$
At December 31, 2018, we expected an estimated $1,450 pre-tax gain to be reclassified into earnings to
reflect the fixed prices obtained from foreign exchange hedging within the next 12 months.
56 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 57
Derivatives Not Designated as Hedging Instruments
We have also entered into foreign currency forward and option 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 currency exchange contracts not designated as hedging instruments at December 31, 2018
was $6,800, and such contracts have varying terms expiring through February 2019.
We recognized gains (losses) of $129, $(829) and $(306) from foreign currency forward and option con-
tracts not designated as hedging instruments in our consolidated statements of income for 2018, 2017
and 2016, respectively.
The following table summarizes the fair value of derivative instruments, which consist solely of foreign
exchange contracts, included in other current assets and accrued expenses and other current liabilities in
our consolidated balance sheets. See Note 17.
December 31,
Derivatives designated as hedging instruments
Derivatives not designated as hedging instruments
Total derivative instruments
Asset Derivatives Liability Derivatives
2018 2017
2018 2017
$ 1,262
58
$
70
180
$ 3
11
$ 773
184
$ 1,320
$ 250
$ 14
$
957
17. FAIR VALUE MEASUREMENTS
The following tables present our assets and liabilities carried at fair value that are measured on a recur-
ring basis:
Assets:
Derivative financial instruments
Equity securities
Liabilities:
Derivative financial instruments
Balance Sheet Location
Total Level 1 Level 2 Level 3
Fair Value Measurements
at December 31, 2018 Using
Other current assets
Other assets
$ 1,320
$ 279
$ — $ 1,320
$ 279
$ —
$ — $ —
Accrued expenses and
other current liabilities
$ 14
$ — $
14
$ —
Balance Sheet Location
Total Level 1 Level 2 Level 3
Fair Value Measurements
at December 31, 2017 Using
Assets:
Derivative financial instruments
Equity securities
Other current assets
Other assets
$ 250
$ 332
$ — $ 250
$ 332
$ —
$ — $ —
Liabilities:
Derivative financial instruments
Accrued expenses and
other current liabilities
$
957
$ — $
957
$ —
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:
Equity securities – these investments are exchange-traded equity securities. Fair values for these invest-
ments 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 and option contracts.
See Note 16. 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 2018 or 2017.
18. COMMITMENTS AND CONTINGENCIES
Litigation, Claims and Assessments
We are involved in litigation incidental to the operation of our business. We vigorously defend all matters
in which we or our subsidiaries are named defendants and, for insurable losses, maintain significant 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 and could materially impact the consolidated
results of operations. 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 inci-
dents incurred but not reported as of the balance sheet date. Reserves in the amounts of $2,311 and
$2,344 at December 31, 2018 and 2017, 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, 2018, 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 $3,900. See “Self-Insurance” above
for further information on commitments associated with the insurance programs and Note 15, under the
caption “Off-Balance Sheet Financial Instruments,” for further information on standby letters of credit. At
December 31, 2018, there were no other entities that met the definition of a VIE.
58 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 59
Operating Leases
We are obligated under various non-cancelable operating lease agreements for real property, vehicles and
equipment used in our operations with varying terms through 2028. Operating expenses that are separate
from rental expense that we are committed to pay under certain of these lease agreements are not
included in the table below. Some of these arrangements have free or escalating rent payment provisions.
We recognize rent expense under such arrangements on a straight-line basis over the lease term.
At December 31, 2018, future minimum payments under non-cancelable operating leases over each of
the next five years and thereafter were as follows:
2019
2020
2021
2022
2023
Thereafter
Total minimum payments
$
70,388
55,102
41,321
28,482
15,712
8,245
$
219,250
Rental expense for the years ended December 31, 2018, 2017 and 2016, was $84,537, $84,076 and
$83,260, respectively.
Purchase Obligations
At December 31, 2018, we were obligated under various non-cancelable purchase orders with our key
suppliers for goods aggregating approximately $35,000, of which approximately $22,000 is with Carrier
and its affiliates.
19. RELATED PARTY TRANSACTIONS
Purchases from Carrier and its affiliates comprised 62% of all inventory purchases made during each of
2018, 2017 and 2016. At December 31, 2018 and 2017, approximately $71,000 and $75,000,
respectively, was payable to Carrier and its affiliates, net of receivables. Our joint ventures with Carrier
also sell HVAC products to Carrier and its affiliates. Revenues in our consolidated statements of income
for 2018, 2017 and 2016 included approximately $84,000, $64,000 and $56,000, respectively, of
sales to Carrier and its affiliates. We believe these transactions are conducted on terms equivalent 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, which served as general contractor for the remodeling of our Miami headquarters that was com-
pleted in 2018. We paid Moss & Associates LLC $124, $951 and $291 for construction services per-
formed during 2018, 2017 and 2016, respectively, and no amount was payable at December 31, 2018.
A member of our Board of Directors is the Senior Chairman of Greenberg Traurig, P.A., which serves as
our principal outside counsel and receives customary fees for legal services. During 2018 and 2017, we
paid this firm $131 and $475, respectively, for services performed, and no amount was payable at
December 31, 2018.
20. 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,
2018
2017
2016
Revenues:
United States
Canada
Mexico
Total revenues
December 31,
Long-Lived Assets:
United States
Canada
Mexico
Total long-lived assets
$ 4,126,639
291,685
128,329
$ 3,919,684
269,603
152,668
$ 3,813,204
267,220
140,278
$ 4,546,653
$ 4,341,955
$ 4,220,702
2018
2017
$
550,939
162,648
5,640
$
540,136
163,944
5,400
$
719,227
$
709,480
Revenues are attributed to countries based on the location of the store from which the sale occurred.
Long-lived assets consist primarily of goodwill and intangible assets, property and equipment, and our
investment in an unconsolidated entity.
21. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information was as follows:
Years Ended December 31,
2018
2017
2016
Interest paid
Income taxes net of refunds
Common stock issued for Alert Labs Inc.
$
$
$
3,065
115,301
6,846
$
$
$
5,773
48,056
$
$
— $
3,362
99,006
—
60 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 61
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
SHAREHOLDER RETURN PERFORMANCE (UNAUDITED)
(In thousands, except per share data)
Year Ended December 31, 2018
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, 2017
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
$
$
$
$
$
$
$
$
$
$
926,577
230,833
34,219
$ 1,332,743
320,766
$
89,957
$
$ 1,296,007
319,009
$
79,163
$
0.89
0.89
$
$
2.41
2.40
$
$
2.12
2.11
872,095
218,556
26,181
$ 1,275,924
310,278
$
73,756
$
$ 1,229,591
295,895
$
65,029
$
0.71
0.71
$
$
2.07
2.07
$
$
1.82
1.82
$
$
$
$
$
$
$
$
$
$
991,326
249,644
39,593
$ 4,546,653
$ 1,120,252
242,932
$
1.02
1.02
$
$
6.50
6.49
964,345
240,930
43,255
$ 4,341,955
$ 1,065,659
208,221
$
1.19
1.19
$
$
5.81
5.81
(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
evenly distributed throughout 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.
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 Russell 2000
index, the S&P MidCap 400 index, and the S&P 500 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 customers (air conditioning and heating contractors), and the products and markets we serve, we
cannot reasonably identify an appropriate peer group; therefore, we have included in the graph below the
performance of the Russell 2000 index, the S&P MidCap 400 index, and the S&P 500 index, which con-
tain 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,
2013 and its relative performance is tracked through December 31, 2018.
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 SHAREHOLDER RETURN*
Among Watsco, Inc, the Russell 2000 Index, the S&P Midcap 400 Index and the S&P 500 Index
$250
$200
$150
$100
$50
$0
12/13
12/14
12/15
12/16
12/17
12/18
Watsco, Inc.
S&P MidCap 400
Watsco Class B
Russell 2000 Index
S&P 500 Index
*$100 invested on 12/31/13 in stock or index, including reinvestment of dividends.Fiscal year ending December 31.
Copyright© 2019 Standard & Poor's, a division of S&P Global. All rights reserved.
Copyright© 2019 Russell Investment Group. All rights reserved.
Watsco, Inc.
Watsco Class B
Russell 2000 Index
S&P MidCap 400 Index
S&P 500 Index
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
100.00
100.00
100.00
100.00
100.00
113.80
113.23
104.89
109.77
113.69
127.50
128.59
100.26
107.38
115.26
165.74
165.41
121.63
129.65
129.05
196.18
193.71
139.44
150.71
157.22
165.72
160.00
124.09
134.01
150.33
62 WATSCO, INC. 2018 ANNUAL REPORT
WATSCO, INC. 2018 ANNUAL REPORT 63
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.
(In thousands, except per share data)
2018
2017
2016
2015
2014
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
$ 4,546,653
1,120,252
372,082
296,529
$ 4,341,955
1,065,659
353,874
257,290
$ 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
53,597
242,932
6.49
5.60
5.60
$
$
$
$
49,069
208,221
5.81
4.60
4.60
$
$
$
$
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
$
$
$
$
Class B common shares - Diluted
34,374
32,863
32,617
32,480
32,359
AT YEAR END
Total assets
Total long-term obligations
Total shareholders’ equity
Number of employees
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
www.watsco.com
EXECUTIVE OFFICERS
Albert H. Nahmad Chief Executive Officer
Aaron J. Nahmad President
Barry S. Logan Senior Vice President & Secretary
Stephen F. Rush Executive Vice President & Chief Operating Officer
Ana M. Menendez Chief Financial Officer & Treasurer
BOARD OF DIRECTORS
Albert H. Nahmad (4) Chairman of the Board and Chief Executive Officer
Cesar L. Alvarez (4) Senior Chairman, Greenberg Traurig, P.A.
J. Michael Custer (1) Principal, Kaufman Rossin
Denise Dickins (1,2,3) Professor of Accounting and Auditing, East Carolina University
Brian E. Keeley (1,4) President and Chief Executive Officer, Baptist Health South Florida, Inc.
Bob L. Moss (3) Chairman and Chief Executive Officer, Moss & Associates LLC
Aaron J. Nahmad (4) President
Steven (Slava) Rubin (2,4) Co-Founder, Indiegogo, Inc. and Founder, humbition
George P. Sape (2,3) Retired Managing Partner of Epstein Becker and Green, P.C.
(1) Audit Committee (2) Compensation Committee (3) Nominating & Governance Committee (4) Strategy Committee
$ 2,161,033
$
135,752
$ 1,601,713
5,200
$ 2,046,877
$
22,085
$ 1,550,977
5,200
$ 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
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
American Stock Transfer & Trust Company is the transfer agent, registrar and dividend disbursing agent
for Watsco’s common stock. Questions and communications from registered shareholders regarding
address changes, dividend checks, account consolidation, registration changes, lost stock
certificates and other shareholder inquiries, should be directed to:
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.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP 78 SW 7th Street, Suite 1200 Miami, FL 33130
Strict guidelines were adhered to in the production of the paper used in this annual report, both in the forest and
in the mills. In doing so, the cause for renewable forests, preservation of natural resources, wildlife protection, and
pollution and energy reduction are advanced.
64 WATSCO, INC. 2018 ANNUAL REPORT
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