Watsco

A 93-year old 
family-owned 
business joined 
Watsco in 2019.

HERE’S WHY.

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

WATSCO Annual Report 2019

Michael, Dana, Brian, Robin Peirce

In August 2019, after 93 years as a privately-held family business,
Peirce-Phelps decided to become part of Watsco.
  Peirce-Phelps is similar to many other HVAC distributors. They are
family-owned, multi-generational and have run a solid and growing
business year in and year out with the family’s name on the buildings.
   Peirce-Phelps’s business model evolved over the years, but the family
noticed new dynamics were influencing their thought process: the pace
of change was accelerating; they wanted to grow, but faced several 
impediments; and generationally, they were at a crossroad as to how 
to transition their business.
   Eventually, Peirce-Phelps decided that the prudent choice to address
these challenges was to join Watsco. 
   What were their concerns? 
   What was their thought process? 
   What were the defining factors that led to their decision?
   For this annual report, we asked the four Peirce brothers that operate
Peirce-Phelps – Brian, Dana, Robin and Michael – to tell us, in their
words, about their journey and decision-making as a family (there are
fourth-generation Peirce family members working down the hall from
their fathers). Sharing their story should resonate with families in similar
situations and help readers better understand the Watsco culture. 
Thank you to the Peirce family for your confidence and advocacy. 
We are humbled that you’ve decided to join the Watsco family.

MAKI N G THE MOVE 

Emotion

We were concerned about giving up control and 
how the company would be run post acquisition.

One of our biggest worries was about our employees, their families and our
customers. Were they going to keep our team intact? Were they going to keep
all of our branches? Would we be able to provide the same programs, service
and support to the market?
  Fortunately, we found this worry to be completely unfounded. Watsco knew
Peirce-Phelps was a good company and they only wanted three things of us:
to continue to lead and manage the business as a market leader; to accelerate
our growth by providing us with additional capital and technology; and to
collaborate with our peers throughout the Watsco network so that we could
all learn and benefit from each other’s experience. So far, we’ve all checked
all three boxes and both companies have benefited from the transaction. This
has been a great learning process — we have already learned much from our
peer companies within Watsco.
  One of our biggest surprises was the reactions of our employees and cus-
tomers. We assumed there would be a negative reaction to us becoming part
of a larger, public company — we were wrong. Once we explained that we
would be running as a distinct and separate subsidiary as part of Watsco,
that we would continue to operate as Peirce-Phelps, and that the manage-
ment team was going to stay intact, the initial fear was gone. The vast 
majority of our customers were happy for us and glad that our relationship
would continue past the sale.
  We realized we had to treat our family business as any other asset we
owned, but this is very hard to do when your family’s identity has been 
intertwined with that of the company’s over multiple generations. This was
personal to us. It was hard to distinguish between the business and family.
We thought if we sold the business, we might lose the foundation our family
had been built on for four generations.
  With some outside help and many family meetings, we became more 
objective. We were able to split our focus between the needs of the family
and the needs of the business. We determined that by diversifying the 
family’s assets and accessing more growth capital, we could reduce our risk
and better meet the long-term needs of both. It became a win-win scenario.
  Watsco’s unique philosophy and culture have provided us the comfort and
support to accomplish all of this. We are moving forward as we always have
and enjoying the challenge of accelerating the growth of our business.

2 WATSCO, INC. 2019 ANNUAL REPORT

We wrestled through a variety of emotions. 
We realized we had to treat our family
business as any other asset we owned, 
but this is hard to do when your family’s 
identity has become intertwined with that 
of the company’s over multiple generations.

MAKI N G THE MOVE 

Succession

Succession planning was keeping us up at night. 

We spent two years debating how our family might transition from the third
to the fourth-generation in terms of both ownership and operations. Peirce-
Phelps has thrived as a sibling-owned company through three generations.
However, we had never operated as a consortium of cousins or with a large
number of non-operating family members. We were lucky to have next 
generation leaders available, but our ownership structure made it very difficult
to transfer the business without significant long-term debt. We decided it
would be best to provide cash to each owner and provide the next generation
a platform to develop their skills in a much larger enterprise. 
  We considered multiple alternatives including private equity but decided to
focus on a strategic partner who wanted to own and invest in the business
for the long-term and not flip it after five years. 
  We wanted a strategic partner that knew the HVAC business, would provide
us the capital to grow and enable us to run the business. Again, Watsco
checked all three boxes. 
  We understood Watsco’s 30+ year track record and did our homework.
They understand our business inside and out. They don’t have a giant 
corporate office that tells us how to run our business. They buy good 
companies and respect the teams that built them. It was, and continues to
be, a natural fit.
  Reflecting back, it is still tremendously emotional to know we sold our 
family’s 93 year old business. Watsco was our best choice — they want 
us to grow, they have the capital, they have the know-how, they bring
tremendous technology and they fully understand the value of long-term 
relationships. Equally important, our children — the fourth-generation of
Peirce family members — now have opportunities for growth and future 
success as part of Watsco and its broad reach. 

4 WATSCO, INC. 2019 ANNUAL REPORT

We struggled about how to transition
from a third-generation to a fourth-
generation business without creating
major financial hardships on the next 
generation and the cash flow of the business.

How many businesses has the internet 
disrupted? Our industry could be next.

M AKING THE M O VE 

Industry 
Future

Just look at what has happened to so many 
legacy businesses. 

Our industry is changing rapidly. The digital economy has disrupted many 
industries and legacy businesses. How will our industry be impacted going
forward? We were worried about the potential impacts of future industry
changes: what customers would need going forward, what new competitors
might enter the market, or what technologies would be essential to compete.
We felt it would be difficult for us to make the continuous investments
needed to be the long-term market leader as an independent company. 
We needed a partner that was already strong in technology and could 
quickly help us.
  Now we have access to Watsco’s technology platforms, customer apps,
Alert Labs’ products and Watsco Ventures — all digital capabilities we can
provide for our progressive customers. Using technology, we can provide 
customers new services where they want them, when they want them, 
24 hours per day.
  The end-consumer is already demanding more. Digital-empowered 
solutions are available for most any purchase. People want to manage 
their homes through a central control point, generally through their phones.
Watsco’s products and technologies augment our customers’ existing tech-
nologies to help them sell more, service more efficiently and handle 
homeowner’s problems before they know they exist. It’s an exciting time
to be in the industry. But the challenge seemed daunting for an independent
family business. 
  Watsco is quickly evolving the way a typical HVAC distributor operates and
is working to enhance the service capabilities of contractors. They’re becom-
ing the Amazon of the HVAC industry in terms of transforming the entire cus-
tomer experience. We are excited to provide these technologies to our market.

WATSCO, INC. 2019 ANNUAL REPORT 7

MAKI N G THE MOVE 

Technology

It came down to resources and capital. 

We had actively built our own technology roadmap and had been imple-
menting it over five years. We were making progress and were ahead of
most distributors in our market. Despite what seemed like big investments
for us, we were still far from where we wanted to be. In our initial discus-
sions, we found that Watsco had already launched most of what we had
planned — and more. 
    We now consider Watsco’s technology platforms as competitive
weapons to build our dealers’ business and grow our businesses together.
We believe our customers feel the same way. 
    We closed our transaction in August 2019 and introduced the Peirce-
Phelps mobile app to thousands of customers  at our annual meeting in
January 2020 — a remarkable effort on everyone’s part. The feedback
from customers has been strong and we are excited to build on this 
momentum going forward. 
    The strategic technology advantage we imagined is now readily avail-
able. Even better, we now have Watsco’s technology team working for 
us to come up with more great innovations in the future.

8 WATSCO, INC. 2019 ANNUAL REPORT

Watsco has a team of over 200 people 
working on technology initiatives. It’s very 
hard for a small distributor to spend 
millions on technology every year.

You must think about getting bigger and 
the way to do it is to get to a national base.
Customers are growing in size and complexity
and we need to grow with them.

M AKING THE M O VE 

Growth

It is getting tougher every day to operate in 
a defined geographic market. 

Peirce-Phelps is the leading player in our market. We operate 19 locations 
all of which are within 150 miles of our Blue Bell headquarters outside of
Philadelphia. We consistently rank in the top 20 largest HVAC distributors in
the country. The HVAC distribution industry is still a very fragmented market.
However, being large in size does not necessarily equate to scale. 
   We found that we had customers that operated beyond our contracted 
geography. They want consistency of service throughout their network and
we were unable to provide it outside of our geographic boundaries. As a part
of Watsco, we can now coordinate service throughout most of the country.
   We knew we needed to be larger to compete in the future. We could have
raised capital to invest in acquisitions, but this would have been costly and
difficult to achieve on a national scale. We were also limited in the compa-
nies we could acquire due to our relationships with our major vendors. It was
far easier to combine with Watsco to reach the scale needed. 
   We feel much more comfortable with the company’s longevity and the 
security of our employees being part of the Watsco family of companies. 
Not only have we protected our family legacy from competitive threat, we
have also secured a bright and prosperous future for future generations of
Peirce-Phelps employees and customers.

WATSCO, INC. 2019 ANNUAL REPORT 11

Financial Highlights

(in thousands, except per share data)

2015

2016

2017

2018(1)

2019(2)

                                  2015                  2016                  2017                  2018                 2019

Revenues

Operating income
EBITDA(3)

Net Income 

$ 4,113,239

$ 4,220,702

$4,341,955

4,546,653

4,770,362

336,748

355,865

345,632

365,698

353,874

375,907

372,082

394,177

366,884

391,396

attributable to Watsco, Inc.

172,929

182,810

208,221

242,932

245,950

Diluted earnings per share
Adjusted diluted earnings per share(4)
Dividends per share

4.90

4.90

2.80

5.15

5.15

3.60

5.81

5.54

4.60

6.49

6.49

5.60

6.50

6.50

6.40

Operating cash flow

Total assets

Long-term obligations

Shareholders’ equity

222,848

281,731

306,520

170,557

335,771

1,788,442

1,874,649

2,046,877

2,161,033

2,556,161

245,814

235,642

22,085

135,752

311,980

1,203,721

1,251,748

1,550,977

1,601,713

1,714,767

(1) Effective January 1, 2018, we adopted the provisions of accounting guidance related to revenue recognition. Amounts prior to January 1, 2018 have not been adjusted

and remain as originally reported for such periods.

(2) Effective January 1, 2019, we adopted the provisions of accounting guidance related to leases. Amounts prior to January 1, 2019 have not been adjusted and remain as

originally reported for such periods.

(3) EBITDA is defined as earnings before interest expense, net, income taxes, depreciation and amortization. Amortization of debt costs is included in interest expense, net.

(4) 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.

Total Revenues

(in millions)

Operating Income

(in millions)

$4,113

$4,221

$4,342

$4,547

$4,770

$337

$346

$354

$372

$367

Adjusted Diluted Earnings

(per share)

$4.90

$5.15

$5.54

$6.49

$6.50

12 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 13

To Our Valued Shareholders

Our journey to become the leading distributor of air conditioning

and heating products began in 1989. During the ensuing 30

years, Watsco has delivered results that rank it among the

most successful public companies in the United States. 

Reflecting on this success, it seems appropriate to ask: 

how was it achieved?

In this year’s annual report, we highlight our acquisition philosophy

as one of the cornerstones of our success and a fundamental strategy
that will continue to influence our growth trajectory in the years
ahead. We consider ourselves entrepreneurs and our success in large
part is attributable to the entrepreneurs that have joined our company. 
    Watsco has acquired more than 60 businesses over the last 30 years,
most of which are successful, multi-generation, family-owned businesses.
We are humbled and gratified to be entrusted with these families’ 
legacies. In many instances, the rich legacies of those businesses are
still alive and well within Watsco today.

    Our “buy and build” strategy can be summarized as follows: 
       — identify and partner with great businesses focused 

on our industry 

       — support their leadership team and honor the culture 

they’ve created 

       — ask for aggressive growth plans and help leadership 

achieve their ambitions 

       — motivate teams and reaffirm an ownership culture 

with long-term equity 

       — deploy the industry’s most comprehensive suite of technologies 
       — solicit and collaborate on big ideas to foster a spirit 

of innovation and growth

    2019 marked an important year as three market-leading businesses
joined the Watsco family. We are now a stronger company because 
of our association with these companies. With these companies under 
the Watsco umbrella, we further expand our reach and ability to 
serve customers. 

14 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 15

    
    There is no better illustration of Watsco’s “buy and build” philosophy
than our recent acquisition of Peirce-Phelps, Inc., an iconic family
business led by a third-generation group of entrepreneurial brothers.
They have a rich 93-year tradition that made them the recognized
leader in their market. 
    In the preceding pages Brian, Dana, Robin and Michael Peirce tell
their family story about how they arrived at their decision to join Watsco.
They describe it as joining our family. We think of it as joining their family.
    In 2019, we also acquired DASCO Supply, founded in 1974 and
still led by its founder Bob Schwarzenbeck, who is filled with the 
same passion and energy as always. Finally, we acquired N&S Supply,
founded in 1946 and led by a trio of third-generation family members.
Those partners – Wayne, Charles and Robert – sang Holiday songs 
to their employees at all their locations shortly after the closing, as is
their annual tradition. 
    These new leaders have injected fresh ideas and contributed new
perspectives to our business, which means our existing leaders benefit
from their insights as well. In turn, Watsco offers capital, unrivaled
scale, access to the industry’s leading technology platforms, career 
advancement and equity incentives for growth-oriented leaders and
other opportunities.

    Looking forward, our acquisition philosophy is closely aligned with
our technology strategy. Technology is now influencing and impacting
every aspect of our business. For example, Watsco now interacts with
approximately 20,000 forward-looking customers through our suite of
mobile apps, which help technicians operate more efficiently and prof-
itably. This helps our business since those progressive customers are
growing faster, and with far less attrition, than other customer segments.
This progress inspires us to aggressively invest in expanding adoption
of our technologies to more customers and affirms our belief that 
technology will become increasingly necessary to protect and grow
customer relationships.  
    The pace of change in our industry is accelerating and it will surely
look different in the years ahead. The Peirce family story is inspiring, and
we invite and encourage other families to spend time with us to learn
more. Watsco has honored the legacies of many families in the last 
30 years and we look forward to partnering with more great businesses. 

Aaron (A.J.) Nahmad
President

16 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 17

Financial Review

Management’s Discussion and Analysis

Management’s Report on Internal Control Over Financial Reporting

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

Consolidated Financial Statements:

Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Selected Quarterly Financial Data

Shareholder Return Performance

5-Year Summary of Selected Consolidated Financial Data

Shareholder Information

19

31

32

34

36
36
37
38
40

41

67

68

69

70

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 Unites States and in the international markets we serve;
• 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 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 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, 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 assumptions, or changes in other factors affecting for-
ward-looking information, except as required by applicable law. We qualify any and all our forward-look-
ing 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 and the consolidated financial statements, including the
notes thereto, included in this Annual Report to Shareholders for the year ended December 31, 2019.

WATSCO, INC. 2019 ANNUAL REPORT 19

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, 2019, we operated from 606 locations in 38 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
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. We have an 80% controlling interest in Carrier Enterprise I, and Carrier has a 20% non-
controlling interest. On August 1, 2019, Carrier Enterprise I acquired substantially all of the HVAC assets
and assumed certain of the liabilities of Peirce-Phelps, Inc. (“PPI”), an HVAC distributor operating from
19 locations in Pennsylvania, New Jersey, and Delaware. 

In 2011, we formed a second joint venture with Carrier, in which Carrier contributed 28 of its company-
owned locations in the Northeast U.S., and we contributed 14 locations in the Northeast U.S., and we
then purchased Carrier’s distribution operations in Mexico, which included seven locations. Collectively,
the Northeast locations and the Mexico operations are referred to as Carrier Enterprise II. We have an
80% controlling interest in Carrier Enterprise II, and Carrier has a 20% non-controlling interest. Effective
May 31, 2019, we purchased an additional 20% ownership interest in Homans Associates II LLC
(“Homans”) from Carrier Enterprise II, following which we owned 100% of Homans. Homans previously
operated as a division of Carrier Enterprise II and now operates as one of our stand-alone-subsidiaries. 

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-
mates under different assumptions or conditions. At least quarterly, management reevaluates its judg-
ments and estimates, which are based on historical experience, current trends, and various other
assumptions that are believed to be reasonable under the circumstances. 

Our significant accounting policies are discussed in Note 1 to our audited consolidated financial state-
ments included with this Annual Report to Shareholders. Management believes that the following
accounting policies include a higher degree of judgment and/or complexity and, thus, are considered to be
critical accounting policies. Management has discussed the development and selection of critical account-
ing policies with the Audit Committee of the Board of Directors and the Audit Committee has reviewed
the disclosures relating to them.

Allowance For Doubtful Accounts 
An allowance for doubtful accounts is maintained for estimated losses resulting from the inability of 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 $7.9 million and $6.5 million at December 31, 2019 and
2018, respectively, an increase of $1.4 million. Accounts receivable balances greater than 90 days past
due as a percent of accounts receivable at December 31, 2019 increased to 1.8% from 1.7% at
December 31, 2018. 

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, 2020, 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

20 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 21

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
$1,009.4 million and $719.2 million at December 31, 2019 and 2018, respectively, an increase of
$290.2 million, reflecting newly acquired businesses and the adoption of new guidance on the account-
ing for leases (see Note 2 to our consolidated audited financial statements contained in this Annual
Report to Shareholders). Although no impairment 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 $3.1 million and 
$2.3 million at December 31, 2019 and 2018, respectively, were established related to such insurance
programs. 

Income Taxes 
Income taxes are accounted for under the asset and liability method. Under this method, deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial reporting basis and the tax basis of assets and liabilities at enacted tax rates expected to be
in effect when such amounts are recovered or settled. The use of estimates by management is required to
determine income tax expense, deferred tax assets, and any related valuation allowance and deferred tax
liabilities. A valuation allowance of $0.7 million was recorded at December 31, 2019 due to uncertain-
ties related to the ability to utilize a portion of the deferred tax assets primarily arising from foreign net
operating loss carryforwards. No valuation allowance was recorded at December 31, 2018. 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.

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, 2019, 2018 and 2017. 

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

2019

2018

2017 

100.0%
75.7

100.0%
75.4

100.0%
75.5

24.3
16.8
0.2

7.7
0.1

7.6
1.4

6.2
1.0

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 

Net income attributable to Watsco, Inc.

5.2%

5.3%

4.8%

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

The following narratives reflect our acquisition of the HVAC distribution businesses of N&S Supply of
Fishkill, Inc. (“N&S”) in November 2019, PPI in August 2019, Dunphey & Associates Supply Co., Inc.
(“DASCO”) in April 2019, Alert Labs, Inc. (“Alert Labs”) in August 2018, and an additional HVAC distrib-
utor in November 2018, as well as the purchase of additional 1.8% and 1.4% ownership interests in
Russell Sigler, Inc. (“RSI”) in April 2019 and June 2018, respectively, and the purchase of an additional
20% ownership interest in Homans effective May 31, 2019.

In the following narratives, computations and other information referring to “same-store basis” exclude the
effects of locations closed, acquired, or locations opened, in each case during the immediately preceding
12 months, unless such locations are within close geographical proximity to existing locations. At
December 31, 2019 and 2018, nine and eight locations, respectively, that we opened were near existing
locations and were therefore included in “same-store basis” information.

22 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 23

The table below summarizes the changes in our locations for 2019 and 2018:

December 31, 2017

Opened
Acquired
Closed

December 31, 2018

Opened
Acquired
Closed

December 31, 2019

Number of 
Locations

560
13
3
(5)

571
14
33
(12)

606

2019 Compared to 2018
Revenues
Revenues for 2019 increased $223.7 million, or 5%, to $4,770.4 million, including $142.8 million
attributable to the new locations acquired and $13.0 million from other locations opened during the pre-
ceding 12 months, offset by $12.8 million from locations closed. Sales of HVAC equipment (68% of
sales) increased 5%, sales of other HVAC products (28% of sales) increased 3% and sales of commercial
refrigeration products (4% of sales) were flat. On a same-store basis, revenues increased $80.7 million,
or 2%, as compared to 2018, reflecting a 3% increase in sales of HVAC equipment (68% of sales),
which included a 4% increase in residential HVAC equipment, a 1% decrease in sales of other HVAC
products (28% of sales), and flat sales of commercial refrigeration products (4% of sales). For residential
HVAC equipment, the increase in same-store revenues was primarily due to demand for the replacement
of residential HVAC equipment, a higher mix of high-efficiency air conditioning and heating systems,
which sell at higher unit prices, and the realization of price increases, resulting in a 2% increase in vol-
ume and a 2% increase in the average selling price.

Gross Profit
Gross profit for 2019 increased $36.7 million, or 3%, to $1,157.0 million, primarily as a result of
increased revenues. Gross profit margin declined 30 basis-points to 24.3% in 2019 versus 24.6% in
2018, due to the benefit of mid-year pricing actions taken by our HVAC equipment suppliers in 2018,
which did not recur in 2019 along with general competitive conditions.

Selling, General and Administrative Expenses
Selling, general and administrative expenses for 2019 increased $42.9 million, or 6%, to $800.3 million,
primarily due to newly acquired locations. Selling, general and administrative expenses as a percentage of
revenues for 2019 increased to 16.8% versus 16.7% in 2018. Selling, general and administrative expenses
included $5.0 million of additional costs for 2019 in excess of 2018 for ongoing technology initiatives,
driven in part by our acquisition of Alert Labs in August 2018. On a same-store basis, selling, general and
administrative expenses increased 1% as compared to the same period in 2018.

Other Income
Other income of $10.3 million and $9.3 million for the years ended December 31, 2019 and 2018,
respectively, represents our share of the net income of RSI.

Operating Income
Operating income for 2019 decreased $5.2 million, or 1%, to $366.9 million. Operating margin declined
50 basis-points to 7.7% in 2019 from 8.2% at 2018. On a same-store basis, operating margin was
7.9% in 2019 as compared to 8.2% in 2018.

Interest Expense, Net
Interest expense, net for 2019 increased $1.3 million, or 47%, to $4.0 million, primarily as a result of an
increase in average outstanding borrowings, partially offset by a lower effective interest rate due to higher
interest income for the 2019 period, as compared to the same period in 2018. 

Income Taxes
Income taxes decreased 8% to $67.1 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 from these joint ventures. The effective income
tax rates attributable to us were 21.2% and 22.8% for 2019 and 2018, respectively. The decrease was
primarily due to lower estimated foreign withholding taxes and the refinement of estimated global intangi-
ble low-taxed income of foreign subsidiaries in 2019 due to the finalization of federal and state income
tax regulations. 

Net Income Attributable to Watsco, Inc.
Net income attributable to Watsco in 2019 increased $3.0 million, or 1%, to $246.0 million. The
increase was primarily driven by higher revenues and gross profit, a reduction in income taxes, and a
decrease in net income attributable to the non-controlling interest, partially offset by higher selling, gen-
eral and administrative expenses and interest expense as discussed above.

Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our
Annual Report on Form 10-K for the year ended December 31, 2018 for a discussion of results of opera-
tions for the year ended December 31, 2018 compared to the year ended December 31, 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 (if and as 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, 2019, we had $74.5 million of cash and cash equivalents, of which $58.4 million
was held by foreign subsidiaries. The repatriation of cash balances from our foreign subsidiaries could
have adverse tax impacts or be subject to capital controls; however, these balances are generally avail-
able to fund the ordinary business operations of our foreign subsidiaries without legal restrictions.

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

24 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT  25

 
 
 
 
 
 
 
 
 
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 that currently provide for the
phase-out of LIBOR by 2021. The consequences of these developments with respect to LIBOR cannot be
entirely predicted but could result in an increase in the cost of our debt, as it is currently anticipated that
lenders will replace LIBOR with the Secured Overnight Financing Rate (“SOFR”), which may exceed what
would have been the comparable LIBOR rate. Additionally, disruptions in the credit and capital markets
could also result in increased borrowing costs and/or reduced borrowing capacity under our revolving
credit agreement. 

Working Capital
Working capital was $1,085.0 million at December 31, 2019, reflecting 33 new locations added by
acquisitions in 2019, which in aggregate added $76.3 million of working capital. Excluding these new
locations, working capital decreased to $1,008.7 million at December 31, 2019 from $1,084.2 million
at December 31, 2018, primarily as a result of the adoption of the New Lease Standard on January 1,
2019 (see Note 2 to our consolidated audited financial statements contained in this Annual Report to
Shareholders). 

Cash Flows
The following table summarizes our cash flow activity for 2019 and 2018 (in millions):

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

2019

2018

Change

$
$
$

335.8
(81.0)
(264.0)

$
$
$

170.6
(26.3)
(139.6)

$
$
$

165.2
(54.7)
(124.4)

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

Operating Activities
The increase in net cash provided by operating activities was primarily due to the timing of payments for
accounts payable and other liabilities and lower increases in inventory and accounts receivable in 2019
as compared to 2018.

Investing Activities
Net cash used in investing activities was higher primarily due to cash consideration paid for acquisitions.

Financing Activities
The increase in net cash used in financing activities was primarily attributable to lower net proceeds
under our revolving credit agreement, the purchase of an additional 20% ownership interest in Homans
for $32.4 million and an increase in dividends paid, partially offset by $17.0 million in proceeds from the
non-controlling interest for its contribution to the acquisition of the HVAC distribution business of PPI in
2019.

Revolving Credit Agreement
We maintain an unsecured, $500.0 million syndicated multicurrency revolving credit agreement, which we
use to fund seasonal working capital needs and for other general corporate purposes, including acquisi-
tions, 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 $400.0 million at our discretion, and we effected
such reduction during 2019. 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, 2019), 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, 2019), 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, 2019). 

At December 31, 2019 and 2018, $155.7 million and $135.2 million, respectively, were outstanding
under the revolving credit agreement. The revolving credit agreement contains customary affirmative and
negative covenants, including financial covenants with respect to consolidated leverage and interest cover-
age ratios, and other customary restrictions. We believe we were in compliance with all covenants at
December 31, 2019.

Contractual Obligations
The following table summarizes our significant contractual obligations at December 31, 2019:

Payments due by Period (in millions)

Contractual Obligations

Operating leases (1)
Purchase obligations (2)

Total

2020

76.6
27.6

104.2

$

$

2021

2022

2023

2024

Thereafter

Total

$

$

63.4
—

63.4

$

$

47.4
—

47.4

$

$

30.7
—

30.7

$

$

15.5
—

15.5

$

$

10.3 $
—

243.9
27.6

10.3 $

271.5

(1) Includes imputed interest of $21.4 million. Additional information related to operating leases can be found in Note 2 to our audited consolidated financial statements con-
tained in this Annual Report to Shareholders.
(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 $4.4 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, 2019 under our revolving credit agreement con-
sisted of borrowings totaling $155.7 million with revolving maturities of seven days. 

Off-Balance Sheet Arrangements
Refer to Note 16 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, 2019.
Such discussion is incorporated herein by reference.

Purchase of Additional Ownership Interest in Joint Venture
Effective May 31, 2019, we purchased an additional 20% ownership interest in Homans from Carrier
Enterprise II for cash consideration of $32.4 million, which increased our ownership in Homans to
100%. Homans previously operated as a division of Carrier Enterprise II and subsequent to the purchase
operates as a stand-alone subsidiary of the Company with 16 locations in the Northeastern U.S. 

Investment in Unconsolidated Entity
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. Effective April 22, 2019,
Carrier Enterprise I acquired an additional 1.8% ownership interest in RSI, which increased Carrier
Enterprise I’s ownership interest in RSI to 38.1% for cash consideration of $4.9 million, of which we con-
tributed $3.9 million and Carrier contributed $1.0 million.

26 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 27

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 com-
mon stock, it has the right, but not the obligation, to purchase from RSI’s shareholders the remaining out-
standing shares of RSI common stock. At December 31, 2019, the estimated purchase amount we would
be contingently liable for was approximately $141.0 million. We believe that our operating cash flows,
cash on hand, and funds available for borrowing under our revolving credit agreement will be sufficient to
purchase any additional ownership interests in RSI. 

Acquisitions
On November 26, 2019, one of our wholly owned subsidiaries acquired certain assets and assumed cer-
tain liabilities of N&S, a distributor of air conditioning, heating and plumbing products operating from
seven locations in New York and Connecticut. The purchase price was composed of cash consideration of
$12.0 million, the issuance of 22,435 shares of Common stock having a fair value of $4.0 million and
the payment of certain indebtedness.

On August 1, 2019, Carrier Enterprise I acquired substantially all the HVAC assets and assumed certain
of the liabilities of PPI, an HVAC distributor operating from 19 locations in Pennsylvania, New Jersey, and
Delaware, for $85.0 million less certain average revolving indebtedness. Consideration for the net pur-
chase price consisted of $10.0 million in cash, 372,543 shares of Common stock having a fair value of
$58.3 million, net of a discount for lack of marketability, and the payment of certain average revolving
indebtedness. Carrier contributed cash of $17.0 million to Carrier Enterprise I in connection with the
acquisition of PPI. 

On April 2, 2019, one of our wholly owned subsidiaries acquired certain assets and assumed certain lia-
bilities of DASCO, a distributor of air conditioning and heating products operating from seven locations in
New Jersey, New York and Connecticut. The purchase price was composed of cash consideration of
$16.8 million and the issuance of 50,952 shares of Common stock having a fair value of $6.9 million,
net of a discount for lack of marketability.

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. 

On August 23, 2018, one of our wholly owned subsidiaries acquired Alert Labs, a technology company
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, net of a discount, were issued into escrow as contingent consideration, all of
which are subject to certain performance metrics within a three-year measurement period.  

We continually evaluate potential acquisitions and/or joint ventures and investments in unconsolidated
entities. We routinely hold discussions with several acquisition candidates. Should suitable acquisition
opportunities arise that would require additional financing, we believe our financial position and earnings
history provide a sufficient basis for us to either obtain additional debt financing at competitive rates and
on reasonable terms or raise capital through the issuance of equity securities. 

Common Stock Dividends
We paid cash dividends of $6.40, $5.60 and $4.60 per share of Common stock and Class B common
stock in 2019, 2018 and 2017, respectively. On January 2, 2020, our Board of Directors declared a reg-
ular quarterly cash dividend of $1.60 per share of both Common and Class B common stock that was
paid on January 31, 2020 to shareholders of record as of January 16, 2020. On February 11, 2020, our
Board of Directors approved an increase to the quarterly cash dividend per share of Common and Class B
common stock to $1.775 per share from $1.60 per share, beginning with the dividend that will be paid
in April 2020. 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, prof-
itability, financial condition, cash requirements, and future prospects.

Company Share Repurchase Program
In September 1999, our Board of Directors authorized the repurchase, at management’s discretion, of up
to 7,500,000 shares of common stock in the open market or via private transactions. Shares repurchased
under the program are accounted for using the cost method and result in a reduction of shareholders’
equity. We last repurchased shares under this plan in 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 inception of the
program. At December 31, 2019, 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 con-
tracts 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 2019. 

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, 2019 was $47.2 million, and such contracts have
varying terms expiring through September 2020. For the year ended December 31, 2019, foreign cur-
rency transaction gains and losses did not have a material impact on our results of operations.

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 $1.8
million impact to net income for the year ended December 31, 2019.

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

28 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 29

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, 2019 and determined that a 100 basis-point change in
interest rates would result in an impact to income before taxes of approximately $1.6 million. See Note 8
to our audited consolidated financial statements included in this Annual Report on to Shareholders for fur-
ther information about our debt.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our internal control system was
designed to provide reasonable assurance to our management and Board of Directors regarding the 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. 

In accordance with the rules and regulations of the SEC, we have not yet assessed the internal control
over financial reporting of N&S Supply of Fishkill, Inc. (“N&S”), Peirce-Phelps, Inc. (“PPI”) or Dunphey &
Associates Supply Co., Inc. (“DASCO”), which collectively represented approximately 7% of our total con-
solidated assets at December 31, 2019 and approximately 3% of our consolidated revenues for the
twelve months ended December 31, 2019. From the respective acquisition dates of November 26,
2019, August 1, 2019 and April 2, 2019 to December 31, 2019, the processes and systems of N&S,
PPI and DASCO did not impact the internal controls over financial reporting for our other consolidated
subsidiaries.

Under the supervision and with the participation of our management, including our Chief Executive
Officer, Executive Vice President and Chief Financial Officer, we conducted an assessment of the effec-
tiveness of our internal control over financial reporting as of December 31, 2019. The assessment was
based on criteria established in the framework Internal Control — Integrated Framework (2013), issued
by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission. Based on this
assessment under the COSO framework, our management concluded that our internal control over finan-
cial reporting was effective as of December 31, 2019. The effectiveness of our internal control over finan-
cial reporting as of December 31, 2019 has been audited by KPMG LLP, an independent registered
public accounting firm, as stated in their report that is included herein.

30 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 31

Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assur-
ance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of man-
agement and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect mis-
statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. 

Miami, Florida
February 28, 2020

KPMG LLP

Report of Independent Registered Public Accounting Firm 

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, 2019, 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, 2019, 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,
2019 and 2018, and the related consolidated statements of income, comprehensive income, sharehold-
ers’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and
related notes (collectively, the consolidated financial statements), and our report dated February 28,
2020 expressed an unqualified opinion on those consolidated financial statements.

The Company acquired N&S Supply of Fishkill, Inc. (N&S), Peirce-Phelps, Inc. (PPI) and Dunphey &
Associates Supply Co., Inc. (DASCO) during 2019, and management excluded from its assessment of the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, the
N&S, PPI, and DASCO’s internal control over financial reporting associated with 7% of total assets and
3% total revenues included in the consolidated financial statements of the Company as of and for the year
ended December 31, 2019. Our audit of internal control over financial reporting of the Company also
excluded an evaluation of the internal control over financial reporting of N&S, PPI and DASCO.

Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial report-
ing and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit. We 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.

32 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 33

Report of Independent Registered Public Accounting Firm 

To the Shareholders and Board of Directors
Watsco, Inc.:

Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Watsco, Inc. and subsidiaries (the
Company) as of December 31, 2019 and 2018, the related consolidated statements of income, compre-
hensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended
December 31, 2019, and the related notes  (collectively, the consolidated financial statements). In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position
of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. gener-
ally 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, 2019, 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,
2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over finan-
cial reporting.

Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of
accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Update No.
2016-02, Leases (Topic 842), as amended.

Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits. We
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 regula-
tions 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.

Critcal Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the con-
solidated financial statements that was communicated or required to be communicated to the audit com-
mittee and that: (1) relates to accounts or disclosures that are material to the consolidated financial
statements and (2) involved our especially challenging, subjective, or complex judgment. The communi-
cation of a critical audit matter does not alter in any way our opinion on the consolidated financial state-
ments, taken as a whole, and we are not, by communicating the critical audit matter below, providing a
separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Evaluation of inventory net realizable value adjustments related to excess and slow-moving inventory
As discussed in Note 1 to the consolidated financial statements, the Company values its inventory at
the lower of cost using weighted-average cost basis and first-in, first-out methods, or net realizable
value. The Company adjusts excess, slow-moving, and damaged inventory to their estimated net real-
izable value. As of December 31, 2019, the Company’s inventory balance was $920,786 thousand. 

We identified the evaluation of inventory net realizable value adjustments related to excess and slow-
moving inventory as a critical audit matter due to the amount of judgment required by the Company
in making such estimates. As a result, there was a high degree of subjective auditor judgment in
assessing such estimates, specifically as it related to the future salability of inventories. 

The primary procedures we performed to address this critical audit matter included the following. We
tested certain internal controls over the Company’s process to estimate net realizable values related
to excess and slow-moving inventory. This included controls related to the future salability of invento-
ries, assumptions used for excess and slow-moving inventory, and the Company’s review of inventory
valuation adjustments. We compared a sample of inventory units to historical performance to assess
possible write-down indications and future salability. We performed a sensitivity analysis under vari-
ous scenarios and analyzed trends of total adjustments to net realizable values in relation to total
inventory to test the Company’s determination of the inventory valuation and adjustments related to
excess and slow-moving inventory.

We have served as the Company’s auditor since 2009.

Miami, Florida
February 28, 2020

KPMG LLP

34 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 35

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

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

Years Ended December 31,

2019

2018

2017

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

$ 4,770,362
3,613,406

$ 4,546,653
3,426,401

$ 4,341,955
3,276,296

1,156,956
800,328
10,256

366,884
4,032

362,852
67,077

295,775
49,825

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

Net income attributable to Watsco, Inc.

$

245,950

$

242,932

$

208,221

Earnings per share for Common and Class B common stock:

Basic

Diluted

See accompanying notes to consolidated financial statements.

$

$

6.51

6.50

$

$

6.50

6.49

$

$

5.81

5.81

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)

Years Ended December 31,

2019

2018

2017

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

Other comprehensive income (loss)

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

$

295,775

$

296,529

$

257,290

12,298
(1,461)
(352)
—

10,485

306,260
53,392

(20,493)
1,918
(157)
—

(18,732)

277,797
46,913

15,993
(702)
(358)
(15)

14,918

272,208
54,678

Comprehensive income attributable to Watsco, Inc.

$

252,868

$

230,884

$

217,530

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
Operating lease right-of-use assets
Goodwill
Intangible assets, net
Investment in unconsolidated entity
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
Operating lease liabilities, net of current portion
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; 37,536,363 and 
36,952,762 shares outstanding at December 31, 2019 and 2018, respectively

Class B common stock, $0.50 par value, 10,000,000 shares authorized; 5,529,944 and 

5,381,132 shares outstanding at December 31, 2019 and 2018, 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, 2019 and 2018, respectively

Total Watsco, Inc. shareholders’ equity

Non-controlling interest

Total shareholders’ equity

36 WATSCO, INC. 2019 ANNUAL REPORT

See accompanying notes to consolidated financial statements. 

2019

2018

$

74,454
533,810
920,786
17,680

$

82,894
501,908
837,129
19,875

1,546,730

1,441,806

98,523
223,369
411,217
172,004
94,833
9,485

91,046
—
391,998
147,851
80,157
8,175

$ 2,556,161

$ 2,161,033

$

69,421
239,666
152,630

461,717

155,700
154,271
2,009

311,980

67,697

$

246
200,229
157,091

357,566

135,200
—
552

135,752

66,002

18,768

18,476

2,765
—
907,877
(39,050)
632,507

2,691
—
832,121
(45,968)
627,969

(87,440)

(87,440)

1,435,427
279,340

1,347,849
253,864

1,714,767

1,601,713

$ 2,556,161

$ 2,161,033

WATSCO, INC. 2019 ANNUAL REPORT 37

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

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
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, $6.40 per share
Common stock issued for Dunphey & Associates Supply Co., Inc.
Investment in unconsolidated entity
Decrease in non-controlling interest in Carrier Enterprise II
Common stock issued for Peirce-Phelps, Inc.
Investment in Peirce-Phelps, Inc.
Common stock issued for N&S Supply of Fishkill, Inc.
Distributions to non-controlling interest

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

35,530,403

$20,951

$592,350

$(43,530)

9,309

Retained
Earnings

$550,482
208,221

Treasury
Stock

Non-controlling
Interest

$(114,425)

$245,920
49,069
5,609

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) 

12,720
(17,463)
(42,831)

(34,221)
301

(12,048)

594,556
(301) 
242,932

(87,440)

253,024

53,597
(6,684)

(209,218) 

37,461,643

21,167

832,121

(45,968)

627,969
245,950

(87,440)

6,918

173,940
(12,837)
30,715
105,288
(10,623)

50,952

372,543

22,435

87
(7) 
15
53
(5)

25

186

12

(87)
7
4,259
13,411
(1,647)
16,537

6,866

(25,768)
58,158

4,020

(241,412) 

752
(46,825)

253,864
49,825
3,567

988
(6,632)

17,000

(39,272)

Total

$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)

1,601,713
295,775
10,485
—
—
4,274
13,464
(1,652)
16,537
(241,412)
6,891
988
(32,400)
58,344
17,000
4,032
(39,272)

Balance at December 31, 2019

See accompanying notes to consolidated financial statements. 

38 WATSCO, INC. 2019 ANNUAL REPORT

38,194,056

$21,533

$907,877

$(39,050)

$632,507

$(87,440)

$279,340

$1,714,767

WATSCO, INC. 2019 ANNUAL REPORT 39

 
 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

Notes to Consolidated Financial Statements
(In thousands, except share and per share data)

Years Ended December 31, 

2019

2018

2017

$

295,775

$

296,529

$

257,290

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
Non-cash contribution to 401(k) plan
Provision for doubtful accounts
Deferred income tax provision (benefit)
(Gain) loss 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:

Business acquisitions, net of cash acquired
Capital expenditures
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
Purchase of additional ownership from non-controlling interest
Repurchases of common stock to satisfy employee withholding tax obligations
Net (repayments) proceeds of other long-term obligations
Net repayments under prior revolving credit agreement
Payment of fees related to revolving credit agreement
Net proceeds from the sale of Common stock
Proceeds from non-controlling interest for investment in unconsolidated entity
Net proceeds from issuances of common stock
Proceeds from non-controlling interest for investment in Peirce-Phelps, Inc.
Net proceeds under current revolving credit agreement

24,512
17,032
4,274
3,948
1,278
(585)
(10,256)

8,457
(15,525)
12,734
(5,873)

22,095
15,508
2,945
2,619
8,290
27
(9,282)

(28,831)
(78,954)
(57,398)
(2,991)

22,033
13,293
2,428
1,991
(10,735)
115
(3,886)

(1,676)
(73,403)
99,956
(886)

335,771

170,557 

306,520  

(59,672)
(17,805)
(4,940)
1,380

(81,037)

(241,412)
(39,272)
(32,400)
(1,528)
(1,240)
—
—
—
988
13,341
17,000
20,500

(5,626)
(17,153)
(3,760)
228

(26,311)

(209,218)
(46,825)
—
(3,782)
269
(21,800)
(790)
—
752
6,591
—
135,200

—
(17,876)
(63,600)
168

(81,308)

(164,147)
(42,831)
(42,688)
(4,674)
(19)
(213,494)
—
247,744
12,720
5,244
—
—

Net cash used in financing activities

(264,023)

(139,603)

(202,145)

Effect of foreign exchange rate changes on cash and cash equivalents

Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year

849

(8,440)
82,894

(2,245)

2,398
80,496

1,419

24,486
56,010

Cash and cash equivalents at end of year

$

74,454

$

82,894

$

80,496

Supplemental cash flow information (Note 22)

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,
2019, we operated from 606 locations in 38 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.

Reclassifications
Certain reclassifications of prior year amounts have been made to conform to the 2019 presentation.
These reclassifications had no effect on net income or earnings per share as previously reported.

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.

40 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 41

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

Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable primarily consist of trade receivables due from customers and are stated at the
invoiced amount less an allowance for doubtful accounts. An allowance for doubtful accounts is main-
tained for estimated losses resulting from the inability of customers to make required payments. When
preparing these estimates, we consider a number of factors, including the aging of a customer’s account,
past transactions with customers, creditworthiness of specific customers, historical trends and other infor-
mation. Upon determination that an account is uncollectible, the receivable balance is written off. At
December 31, 2019 and 2018, the allowance for doubtful accounts totaled $7,943 and $6,503,
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, 2019 and 2018, we had $12,007 and $11,603, 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. Vendor rebates that are earned
based on products sold are credited directly to cost of sales in our consolidated statements of income. 

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. For 2019 and 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.

Operating and Finance Leases
We have operating leases for real property, vehicles and equipment, and finance leases primarily for vehi-
cles. Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion of long-
term obligations, and operating lease liabilities in our consolidated balance sheet. Finance leases are not
considered significant to our consolidated balance sheet or consolidated statement of income. Finance

lease ROU assets at December 31, 2019 of $3,150 are included in property and equipment, net in our
condensed consolidated balance sheet. Finance lease liabilities at December 31, 2019 of $3,231 are
included in current portion of other long-term obligations and other long-term obligations, net of current
portion in our condensed consolidated balance sheet.

ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities repre-
sent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabili-
ties are recognized at the applicable commencement date based on the present value of lease payments
over the lease term. As most of our leases do not provide an implicit interest rate, we use our incremental
borrowing rate based on the information available at the commencement dates of the respective leases in
determining the present value of the applicable lease payments.  

Operating lease ROU assets also include any lease pre-payments made and exclude lease incentives.
Certain of our leases include variable payments, which are excluded from lease ROU assets and lease lia-
bilities and expensed as incurred. Our leases have remaining lease terms of 1-10 years, some of which
include options to extend the leases for up to five years. The exercise of lease renewal options is at our
sole discretion, and our lease ROU assets and liabilities reflect only the options we are reasonably certain
that we will exercise. Certain real property lease agreements have lease and non-lease components,
which are generally accounted for as a single lease component. Lease expense for lease payments is rec-
ognized on a straight-line basis over the lease term. Lease payments for short-term leases, which are 12
months or less without a purchase option that is likely to be exercised, are recognized as lease cost on a
straight-line basis over the lease term.

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, 2020, 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
amortized using the straight-line method over their respective estimated useful lives.

We perform our annual impairment tests each year and have determined there to be no impairment for
any of the periods presented. There were no events or circumstances identified from the date of our
assessment that would require an update to our annual impairment tests. 

Long-Lived Assets
Long-lived assets, other than goodwill 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, 2019, 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

42 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 43

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:

included in selling, general and administrative expenses for the years ended December 31, 2019, 2018
and 2017, were $54,783, $51,741 and $47,670, respectively. 

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 both 2019 and 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 sheets. Substantially all customer returns relate to products that are returned under manufacturers’
warranty obligations. Accrued sales returns at December 31, 2019 and 2018 of $12,181 and $11,275,
respectively, were included in accrued expenses and other current liabilities in our consolidated balance
sheets.

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.

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.

Advertising Costs 
Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2019,
2018 and 2017, were $16,587, $16,520 and $24,677, respectively. See Note 3. 

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 are included in selling, general and administrative expenses. Shipping and handling costs

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

44 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 45

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 (loss) 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 17 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

Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued guidance on accounting for
leases, which requires lessees to recognize most leases on their balance sheets for the rights and obliga-
tions created by those leases. In July 2018, the FASB issued updated guidance that provides an addi-
tional 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. The adoption
of this standard and its related amendments (collectively, the “New Lease Standard”) on January 1, 2019
did not result in the recognition of a cumulative adjustment to opening retained earnings under the addi-
tional transition method, nor did it have a significant impact on our consolidated statements of income or
cash flows. See Note 2.

Recently Issued Accounting Standards Not Yet Adopted

Financial Instruments—Credit Losses
In June 2016, the FASB issued guidance that modifies the impairment model to utilize an expected loss
methodology in place of the incurred loss methodology for financial instruments, including trade receiv-
ables, contract assets, long-term receivables and off-balance sheet credit exposures. Under the new stan-
dard, an entity will be required to consider a broader range of information to estimate expected credit
losses, including historical information, current conditions and a reasonable forecast period, which may
result in earlier recognition of certain losses. This guidance is effective for interim and annual periods
beginning after December 15, 2019 using a modified retrospective approach, with early adoption permit-
ted. We do not expect the adoption of this guidance to have a material impact on our consolidated finan-
cial statements.

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. 

2. LEASES
Adoption of New Lease Standard

We adopted the New Lease Standard on January 1, 2019 using the additional transition method
described in Note 1 to these audited consolidated financial statements. Results for reporting periods
beginning on and after January 1, 2019 are presented under the New Lease Standard. Prior periods have
not been restated. The New Lease Standard had a material impact on our consolidated balance sheet due
to the recognition of ROU assets and lease liabilities for operating leases, while accounting for finance
leases remained substantially unchanged.

Practical Expedients
We elected the package of practical expedients that did not require us to reassess (1) whether existing
contracts contain embedded leases, (2) the lease classification of existing leases, and (3) whether initial
direct costs for existing leases would qualify for capitalization under the New Lease Standard. We also
elected the practical expedients related to short-term leases and separating lease components from non-
lease components for all underlying asset classes.

The components of operating lease expense were as follows:

Year Ended December 31,

Lease cost
Short-term lease cost
Variable lease cost
Sublease income

Total operating lease cost

Supplemental balance sheet information related to operating leases were as follows:

December 31,

ROU assets

Current portion of long-term obligations
Operating lease liabilities

Total operating lease liabilities

Weighted Average Remaining Lease Term (in years)
Weighted Average Discount Rate 

2019

74,755
9,427
707
(226)

84,663

$

$

2019

223,369

68,199
154,271

$

$

$

222,470

3.9 years
4.48%

46 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 47

Supplemental cash flow information related to operating leases were as follows:

Year Ended December 31,

Operating cash flows for the measurement of operating lease liabilities
Operating lease right-of-use assets obtained in exchange for operating lease obligations

2019

$
$

75,357
290,422

At December 31, 2019, maturities of operating lease liabilities over each of the next five years and there-
after were as follows:

2020
2021
2022
2023
2024
Thereafter

Total lease payments
Less imputed interest

Total lease liability

$

76,610
63,442
47,367
30,659
15,532
10,264

243,874
21,404

$

222,470

At December 31, 2019, we had additional operating leases, primarily for real property, that had not yet
commenced. Such leases had estimated future minimum rental commitments of approximately $1,300.
These operating leases will commence on March 1, 2020 with lease terms of five years. These undis-
counted amounts are not included in the table above.

Prior to the adoption of the New Lease Standard, rental commitments on an undiscounted basis were
approximately $219,300 at December 31, 2018 under non-cancelable operating leases and were
payable as follows: $70,400 in 2019, $55,100 in 2020, $41,300 in 2021, $28,500 in 2022,
$15,700 in 2023, and $8,300 thereafter.

3. 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
Latin America and the Caribbean

Major Product Lines:
HVAC equipment
Other HVAC products
Commercial refrigeration products

2019

2018

2017(1)

$ 4,184,206
294,040
292,116

$ 3,981,056
291,685
273,912

$ 3,775,729
269,603
296,623

$ 4,770,362

$ 4,546,653

$ 4,341,955

68%
28%
4%

100%

67%
29%
4%

100%

67%
28%
5%

100%

(1) As noted above, amounts prior to January 1, 2018 have not been adjusted under the modified retrospective method and remain as originally reported for such periods.

4. 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,

2019

2018

2017

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 

$

245,950

$

242,932

$

208,221

20,412

225,538

34,644,700

6.51

208,779
16,759

225,538

245,950

$

$

$

$

$

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

$

$

$

$

$

restricted common stock

20,411

19,788

17,427

Earnings allocated to Watsco, Inc. shareholders

$

225,539

$

223,144

$

190,794

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

34,644,700
30,941

34,319,890
54,379

32,824,947
37,686

Weighted-average common shares outstanding - Diluted

34,675,641

34,374,269

32,862,633

Diluted earnings per share for Common and Class B common stock

$

6.50

$

6.49

$

5.81

48 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 49

Diluted earnings per share for our Common stock assumes the conversion of all our Class B common stock
into Common stock as of the beginning of the fiscal year; therefore, no allocation of earnings to Class B
common stock is required. At December 31, 2019, 2018 and 2017, our outstanding Class B common
stock was convertible into 2,574,336, 2,581,627 and 2,601,996 shares of our Common stock, 
respectively.

Diluted earnings per share excluded 205,380, 74,270 and 11,664 shares for the years ended December
31, 2019, 2018 and 2017, 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.

5. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) consists of the foreign currency translation adjustment associated with
our Canadian operations’ use of the Canadian dollar as their functional currency and changes in the unreal-
ized gains (losses) on cash flow hedging instruments and equity securities. The tax effects allocated to each
component of other comprehensive income (loss) were as follows:

Years Ended December 31,

2019

2018

2017

Foreign currency translation adjustment

$

12,298

$

(20,493)

$

15,993

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

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

Reclassification of gain on cash flow hedging instruments into earnings 
Income tax expense

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

Unrealized gain on equity securities  
Income tax expense

Unrealized loss on equity securities, net of tax

(2,001)
540

(1,461)

(482)
130

(352)

—
—

—

2,627
(709)

1,918

(215)
58

(157)

—
—

—

(961)
259

(702)

(491)
133

(358)

51
(66)

(15)

Other comprehensive income (loss)

$

10,485

$

(18,732)

$

14,918

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

Years Ended December 31,

2019

2018

2017

Foreign currency translation adjustment:

Beginning balance 
Current period other comprehensive income (loss)

Ending balance

Cash flow hedging instruments:

Beginning balance 
Current period other comprehensive (loss) income
Reclassification adjustment

Ending balance

Equity securities:

Beginning balance 
Cumulative-effect adjustment to retained earnings
Current period other comprehensive loss

Ending balance

$

(46,604)
8,005

(38,599)

$  

(33,499)   $  
(13,105)

(43,459)  
9,960

(46,604)

(33,499)

636
(876)
(211)

(451)

—
—
—

—

(421)
1,151
(94)

636

(301)
301
—

—

215
(421)
(215)

(421)

(286)
—
(15)

(301)

Accumulated other comprehensive loss, net of tax

$

(39,050)

$

(45,968)

$

(34,221)

6. SUPPLIER CONCENTRATION
Purchases from our top ten suppliers comprised 83%, 84% and 84% of all purchases made in 2019,
2018 and 2017, respectively. Our largest supplier, Carrier and its affiliates, accounted for 62% of all pur-
chases made in 2019, 2018 and 2017. See Note 20. 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. 

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

December 31,

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

Accumulated depreciation and amortization

$

$

2019

741
81,938
86,639
56,227
18,049

2018

820
75,308
79,002
50,853
16,782

243,594
(145,071)

222,765
(131,719)

$

98,523

$

91,046

Depreciation and amortization expense related to property and equipment included in selling, general and
administrative expenses for the years ended December 31, 2019, 2018 and 2017, were $18,808,
$16,747 and $16,770, respectively.

50 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 51

8. DEBT
We maintain an unsecured, $500,000 syndicated multicurrency revolving credit agreement, which we
use to fund seasonal working capital needs and for other general corporate purposes, including acquisi-
tions, 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, and we effected
this reduction in 2019. 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, 2019), 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, 2019), 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,
2019). During 2018, we paid fees of $790 in connection with entering into the revolving credit agree-
ment, which are being amortized ratably through the maturity of the facility in December 2023.

At December 31, 2019 and 2018, $155,700 and $135,200, respectively, were outstanding under the
revolving credit agreement. The revolving credit agreement contains customary affirmative and negative
covenants, including financial covenants with respect to consolidated leverage and interest coverage
ratios, and other customary restrictions. We believe we were in compliance with all covenants at
December 31, 2019.

9. 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. At
December 31, 2018, we had 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 for the enactment-date
effects of the TCJA 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. There were no additional
refinements for any enactment-date effects related to the TCJA in 2019.

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,

2019

2018

2017

Current:

U.S. Federal
State
Foreign

Deferred:

U.S. Federal
State
Foreign

Income tax expense

$

$

$

$

$

48,359
9,362
8,078

65,799

2,603
446
(1,771)

1,278

67,077

$

$

$

$

$

47,263
10,031
7,229

64,523

7,082
1,600
(392)

8,290

72,813

$

$

$

$

$

82,333
12,162
6,461

100,956

(13,254)
(1,519)
4,038

(10,735)

90,221

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

Following is a reconciliation of the effective income tax rate: 

Years Ended December 31,

2019

2018

2017

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%
2.8
(2.0)
0.5
(0.1)
(1.0)
—
—

21.2
(2.7)

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)

Effective income tax rate

18.5%

19.7%

26.0%

52 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 53

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)

$

2019

2018

$

24,413
3,627
1,338
209
2,212
2,036

33,835
(655)

33,180

(73,898)
(14,241)
(7,188)

(95,327)

21,517
2,151
1,057
206
2,486
484

27,901
—

27,901

(69,600)
(10,695)
(8,516)

(88,811)

As of December 31, 2019 and 2018, the total amount of gross unrecognized tax benefits (excluding the
federal benefit received from state positions) was $5,367 and $4,902, respectively. Of these totals,
$4,367 and $3,997, 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, 2019 and 2018, the cumulative amount of estimated accrued interest and penalties resulting from
such unrecognized tax benefits was $855 and $755, 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, 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
Additions based on tax positions related to the current year
Reductions due to lapse of applicable statute of limitations

$

3,695
801
(271)

4,225
960
(283)

4,902
1,027
(562)

$

5,367

$

(62,147)

$

(60,910)

Balance at December 31, 2019

(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
repatriate 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
and certain state income taxes. As of December 31, 2019, we have accumulated undistributed earnings
generated by our foreign subsidiaries of approximately $72,300. Any additional taxes due with respect to
such previously taxed earnings, if repatriated, would generally be limited to certain state income taxes and
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 certain
state income taxes and foreign withholding on such earnings. The amount of certain state income taxes
and foreign withholding that might be payable on the remaining amounts at December 31, 2019 is not
practicable to estimate.

Valuation allowances are provided to reduce the related deferred income tax assets to an amount which
will, more likely than not, be realized. As of December 31, 2019 and 2018, we had a valuation
allowance of $655 and $0, respectively, to reduce our deferred tax assets to an amount that is more
likely than not to be recovered. At December 31, 2019, there were state net operating loss carryforwards
of $10,411, which expire in varying amounts from 2020 through 2039. At December 31, 2019, there
were foreign net operating loss carryforwards of $7,103, which expire in varying amounts from 2035
through 2039. These amounts are available to offset future taxable income. There were no federal net
operating loss carryforwards at December 31, 2019. 

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. 

10. 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 779,502
shares of Common stock, net of cancellations, and 787,490 shares of Class B common stock, had been
awarded under the 2014 Plan as of December 31, 2019. As of December 31, 2019, 478,429 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 no
options outstanding under the 2001 Plan at December 31, 2019. 

54 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 55

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, 2019: 

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:

Options outstanding at December 31, 2018
Granted
Exercised
Forfeited
Expired

Options outstanding at December 31, 2019

Options exercisable at December 31, 2019

Weighted-
Average
Exercise
Price

151.71
162.42
125.11
160.53
162.62

159.34

150.83

Options 

504,617
206,750
(94,525)
(28,500)
(3,667)

584,675

95,047

$

$

$

Weighted-
Average
Remaining
Contractual
Term
(in years)

Aggregate
Intrinsic
Value

3.37

2.42

$

$

12,591

2,879

The following is a summary of non-vested restricted stock activity as of and for the year ended December
31, 2019: 

Non-vested restricted stock outstanding at December 31, 2018
Granted
Vested
Forfeited

Weighted-
Average
Grant Date
Fair Value 

48.72
151.58
67.54
148.43

$

Shares 

3,062,602
173,940
(32,000)
(12,837)

Non-vested restricted stock outstanding at December 31, 2019

3,191,705

$

68.63

The weighted-average grant date fair value of non-vested restricted stock granted during 2019, 2018 and
2017 was $151.58, $167.06 and $149.47, respectively. The fair value of non-vested restricted stock
that vested during 2019, 2018 and 2017 was $4,931, $9,637 and $11,580, respectively. 

During 2019, 9,824 shares of Common and Class B common stock with an aggregate fair market value
of $1,518 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection
with the vesting of restricted stock. During 2018, 21,754 shares of Common stock 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. 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

Years Ended December 31,

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

2019

2018

2017

4.25
1.64%
18.01%
3.99%

4.25
2.69%
17.11%
3.13%

4.25
1.77%
17.41%
2.82%

$14.81

$20.05

$17.23

Exercise of Stock Options 
The total intrinsic value of stock options exercised during 2019, 2018 and 2017 was $4,153, $3,500
and $2,296, respectively. Cash received from the exercise of stock options during 2019, 2018 and 2017
was $11,703, $5,006 and $3,855, respectively. The tax benefit from stock option exercises during
2019, 2018 and 2017 was $626, $635 and $645, respectively. During 2019, 2018 and 2017, 799
shares of Common stock with an aggregate fair market value of $134, 7,027 shares of Common stock
with an aggregate fair market value of $1,269 and 350 shares of Common stock with an aggregate fair
market value of $53, 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

2019

2,440
14,592

17,032

$

$

2018

2,014
13,494

15,508

$

$

2017

1,451
11,842

13,293

$

$

At December 31, 2019, there was $3,942 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 1.7 years. The total fair value of stock options that vested during 2019, 2018
and 2017 was $2,055, $1,607 and $754, respectively.

At December 31, 2019, there was $132,642 of unrecognized pre-tax compensation expense related to
non-vested restricted stock, which is expected to be recognized over a weighted-average period of approx-
imately 11 years. Of this amount, approximately $57,000 is related to awards granted to our Chief
Executive Officer (“CEO”), of which approximately $6,000, $37,000 and $14,000 vest in approximately
3, 7 and 9 years upon his attainment of age 82, 86 and 88, respectively, and approximately $16,000 is
related to awards granted to our President, of which approximately $15,000 and $1,000 vest in approxi-
mately 24 and 26 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 unrecognized
share-based compensation expense would be immediately recognized as a charge to earnings with a cor-
responding tax benefit. At December 31, 2019, we were obligated to issue 56,823 shares of non-vested
restricted stock to our CEO that vest in 9 years and 20,886 shares of non-vested restricted stock to our
President that vest in 24 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-

56 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 57

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 2019, 2018
and 2017, employees purchased 5,676, 5,151 and 5,571 shares of Common stock at an average price
of $145.09, $168.21 and $144.58 per share, respectively. Cash dividends received by the ESPP were
reinvested in Common stock and resulted in the issuance of 5,087, 4,338 and 3,844 additional shares
during 2019, 2018 and 2017, respectively. We received net proceeds of $1,638, $1,585 and $1,389,
respectively, during 2019, 2018 and 2017, for shares of our Common stock purchased under the ESPP.
At December 31, 2019, 466,493 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, 2019, 2018 and 2017, we
issued 30,715, 17,318 and 16,389 shares of Common stock, respectively, to the plan, representing the
Common stock discretionary matching contribution of $4,274, $2,945 and $2,428, respectively.

11. PURCHASE OF 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. On February 13, 2017, we purchased an additional 10% ownership interest for cash
consideration of $42,688, which increased our controlling interest in Carrier Enterprise II to 80%.

Effective May 31, 2019, we purchased an additional 20% ownership interest in Homans Associates II
LLC (“Homans”) from Carrier Enterprise II for cash consideration of $32,400, which increased our owner-
ship in Homans to 100%. Homans previously operated as a division of Carrier Enterprise II and subse-
quent to the purchase operates as a stand-alone subsidiary of the Company with 16 locations in the
Northeastern U.S.

12. 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 distrib-
utor 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 contributed $50,880 and Carrier con-
tributed $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 consid-
eration of $3,760, of which we contributed $3,008 and Carrier contributed $752. Effective April 22,
2019, Carrier Enterprise I acquired an additional 1.8% ownership interest in RSI for cash consideration
of $4,940, of which we contributed $3,952 and Carrier contributed $988. This acquisition increased
Carrier Enterprise I’s ownership interest in RSI to 38.1%.

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 com-
mon stock, it has the right, but not the obligation, to purchase from RSI’s shareholders the remaining out-
standing 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 38.1% equity 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.

13. ACQUISITIONS
N&S Supply of Fishkill, Inc.
On November 26, 2019, one of our wholly owned subsidiaries acquired certain assets and assumed cer-
tain liabilities of N&S Supply of Fishkill, Inc., a distributor of air conditioning, heating and plumbing prod-
ucts operating from seven locations in New York and Connecticut. The purchase price was composed of
cash consideration of $12,000, the issuance of 22,435 shares of Common stock having a fair value of
$4,032 and the payment of certain indebtedness. The purchase price resulted in the recognition of
$2,722 in goodwill. The tax basis of the acquired goodwill recognized is deductible for income tax pur-
poses over 15 years.  

Peirce-Phelps, Inc.  
On August 1, 2019, Carrier Enterprise I acquired substantially all the HVAC assets and assumed certain
of the liabilities of Peirce-Phelps, Inc. (“PPI”), an HVAC distributor operating from 19 locations in
Pennsylvania, New Jersey, and Delaware, for $85,000 less certain average revolving indebtedness.
Consideration for the net purchase price consisted of $10,000 in cash, 372,543 shares of Common
stock having a fair value of $58,344, net of a discount for lack of marketability, and the payment of cer-
tain average revolving indebtedness. Carrier contributed cash of $17,000 to Carrier Enterprise I in con-
nection with the acquisition of PPI. 

The purchase price resulted in the recognition of $28,884 in goodwill and intangibles. The fair value of
the identified intangible assets was $19,000 and consisted of $13,500 in trade names and distribution
rights, and $5,500 in customer relationships to be amortized over an 18-year period. The tax basis of the
acquired goodwill recognized is deductible for income tax purposes over 15 years.

The table below presents the allocation of the total consideration to tangible and intangible assets
acquired and liabilities assumed from the acquisition of PPI based on the respective fair values as of
August 1, 2019:

Cash and cash equivalents
Accounts receivable
Inventories
Other current assets
Property and equipment
Operating lease right-of-use assets
Goodwill
Intangibles
Other assets
Accounts payable
Accrued expenses and other current liabilities
Operating lease liabilities, net of current portion

Total 

$

4,299
30,719
45,491
135
2,544
19,072
9,884
19,000
299
(11,079)
(13,038)
(14,100)

$

93,226

Dunphey & Associates Supply Co., Inc. 
On April 2, 2019, one of our wholly owned subsidiaries acquired certain assets and assumed certain lia-
bilities of Dunphey & Associates Supply Co., Inc., a distributor of air conditioning and heating products
operating from seven locations in New Jersey, New York and Connecticut, for cash consideration of
$16,758 and the issuance of 50,952 shares of Common stock having a fair value of $6,891, net of a
discount for lack of marketability. The purchase price resulted in the recognition of $8,974 in goodwill
and intangibles. The fair value of the identified intangible assets was $5,300 and consisted of $2,500
trade names and trademarks, and $2,800 in customer relationships to be amortized over a 15-year
period. The tax basis of the acquired goodwill recognized is deductible for income tax purposes over 15
years.

58 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 59

Other 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 $15,403 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 was not deemed
significant to the consolidated financial statements.

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

Balance at December 31, 2017
Acquired goodwill
Foreign currency translation adjustment

Balance at December 31, 2018
Acquired goodwill
Foreign currency translation adjustment

Balance at December 31, 2019

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

$

382,729
13,301
(4,032)

391,998
16,742
2,477

$

411,217

Estimated
Useful Lives

2019

2018

7-18 years
7 years
10 years

$

138,647

$

119,188

79,911
1,680
1,150
(49,384)

69,593
1,600
1,150
(43,680)

33,357

28,663

$

172,004

$

147,851

Amortization expense related to finite lived intangible assets included in selling, general and administrative
expenses for the years ended December 31, 2019, 2018 and 2017, were $5,704, $5,348 and $5,263,
respectively. 

Annual amortization of finite lived intangible assets for the next five years is expected to approximate the
following:

2020
2021
2022
2023
2024

$
$
$
$
$

5,800
4,900
4,100
3,500
3,300

15. 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, 2019 or 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 $250,000 (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).

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 2019, 2018 or 2017. 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, 2019, there were 1,129,087 shares remaining authorized for repurchase under the program.

60 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 61

16. 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, 2019 and 2018, 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, 2019, we were contingently liable under a standby letter of credit for $925, which was
required by a lease for real property. At December 31, 2018, we were contingently liable under standby
letters of credit aggregating $1,222, which were primarily used as collateral to cover any contingency
related to additional risk assessments pertaining to our self-insurance programs. Additionally, at
December 31, 2019 and 2018, we were contingently liable under various performance bonds aggregat-
ing approximately $10,500 and $3,600, respectively, which are used as collateral to cover any contin-
gencies 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 perform-
ance 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. 

17. 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, 2019, all 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, 2019 was $41,200,
and such contracts have varying terms expiring through September 2020. 

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

Years Ended December 31,

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

2019

$
$

(2,001)
(482) 

$
$

2018

2,627
(215)

At December 31, 2019, we expected an estimated $1,033 pre-tax loss to be reclassified into earnings to
reflect the fixed prices obtained from foreign exchange hedging within the next 12 months.

Derivatives Not Designated as Hedging Instruments
We have also entered into foreign currency forward 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 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, 2019 was
$6,000, and such contracts have varying terms expiring through February 2020. 

We recognized (losses) gains of $(540), $129 and $(829) from foreign currency forward and option con-
tracts not designated as hedging instruments in our consolidated statements of income for 2019, 2018
and 2017, respectively.

The following table summarizes the fair value of derivative instruments, which consist solely of foreign
exchange contracts, included in accrued expenses and other current liabilities and other current assets in
our consolidated balance sheets. See Note 18.

December 31,

Derivatives designated as hedging instruments
Derivatives not designated as hedging instruments

Asset Derivatives                          Liability Derivatives

2019                     2018

2019                   2018

$ — $  1,262 $          944
63

—

58

$  

3
11

14

Total derivative instruments

$ — $    1,320

$    1,007

$

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

Assets:

Equity securities

Liabilities:

Derivative financial instruments

Balance Sheet Location

Total                 Level 1                Level 2               Level 3

Fair Value Measurements
at December 31, 2019 Using

Other assets

$       402

$  402

$  — $ —

Accrued expenses and 
other current liabilities

$   1,007

$ — $   1,007

$ —

Balance Sheet Location

Total                 Level 1                Level 2               Level 3

Fair Value Measurements
at December 31, 2018 Using

Assets:

Derivative financial instruments
Equity securities

Other current assets
Other assets

$    1,320
$       279

$  — $    1,320
$ 279

$ —
$  — $ —

Liabilities:

Derivative financial instruments

Accrued expenses and 
other current liabilities

$

14

$ — $

14

$ —

62 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 63

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 17. 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 2019 or 2018.

19. 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. Reserves in the amounts of $3,062 and
$2,311 at December 31, 2019 and 2018, 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, 2019, 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 $3,700. See “Self-Insurance” above
for further information on commitments associated with the insurance programs and Note 16, under the
caption “Off-Balance Sheet Financial Instruments,” for further information on standby letters of credit. At
December 31, 2019, there were no other entities that met the definition of a VIE.

Purchase Obligations 
At December 31, 2019, we were obligated under various non-cancelable purchase orders with our key
suppliers for goods aggregating approximately $28,000, of which approximately $17,000 is with Carrier
and its affiliates. 

20. RELATED PARTY TRANSACTIONS 
Purchases from Carrier and its affiliates comprised 62% of all inventory purchases made during each of
2019, 2018 and 2017. At December 31, 2019 and 2018, approximately $86,000 and $71,000,
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 2019, 2018 and 2017 included approximately $91,000, $84,000 and $64,000, 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 Senior Chairman of Greenberg Traurig, P.A., which serves as
our principal outside counsel for compliance and acquisition-related legal services. During 2019 and
2018, we paid this firm $187 and $131, respectively, for services performed, and no amount was
payable at December 31, 2019.

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 and $951 for construction services performed
during 2018 and 2017, respectively.

21. 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,

Revenues:

United States
Canada
Latin America and the Caribbean

Total revenues

December 31,

Long-Lived Assets:
United States
Canada
Latin America and the Caribbean

Total long-lived assets

2019

2018 (2)

2017

$ 4,184,206
294,040
292,116

$ 3,981,056
291,685
273,912

$ 3,775,729
269,603
296,623

$ 4,770,362

$ 4,546,653

$ 4,341,955

2019 (1)

2018

$

808,685
180,663
20,083

$

549,649
162,648
6,930

$ 1,009,431

$

719,227

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, operating lease right-of-use assets,
property and equipment, and our investment in an unconsolidated entity.

(1) Effective January 1, 2019, we adopted the provisions of accounting guidance related to leases. Amounts prior to January 1, 2019 have not been adjusted and remain as origi-
nally reported for such periods. See Note 2.
(2) Effective January 1, 2018, we adopted the provisions of accounting guidance related to revenue recognition. Amounts prior to January 1, 2018 have not been adjusted and
remain as originally reported for such periods. See Note 3.

64 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2019 ANNUAL REPORT 65

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

Years Ended December 31,

Interest paid
Income taxes net of refunds
Common stock issued for N&S Supply of Fishkill, Inc.
Common stock issued for Peirce-Phelps, Inc.
Common stock issued for Dunphey & Associates Supply Co., Inc.
Common stock issued for Alert Labs, Inc.

$
$
$
$
$

$
$

2019

4,341
70,095
4,032
58,344
6,891

— $

2018

2017

3,065
115,301
—
—
—
6,846

$
$

5,773
48,056
—
—
—
—

23. SUBSEQUENT EVENT
On February 11, 2020, our Board of Directors approved an increase to the quarterly cash dividend per
share of Common and Class B common stock to $1.775 per share from $1.60 per share, beginning with
the dividend that will be paid in April 2020.  

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

(In thousands, except per share data)

Year Ended December 31, 2019
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, 2018
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

931,278
233,760
35,037

$ 1,371,854
327,984
$
90,155
$

$ 1,394,915
334,691
$
83,480
$

$ 1,072,315
260,521
$
37,278
$

$ 4,770,362
$ 1,156,956
245,950
$

0.88

0.88

$

$

2.40

2.40

$

$

2.20

2.20

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

$

$

$
$
$

$

$

0.92

0.92

$

$

6.51

6.50

991,326
249,644
39,593

$ 4,546,653
$ 1,120,252
242,932
$

1.02

1.02

$

$

6.50

6.49

(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.

66 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2015 ANNUAL REPORT 67

SHAREHOLDER RETURN PERFORMANCE (UNAUDITED)
The following graph compares the cumulative five-year total shareholder return attained by holders of our
Common stock and Class B common stock relative to the cumulative total returns of the 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,
2014 and its relative performance is tracked through December 31, 2019.

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

$200

$180

$160

$140

$120

$100

$80

12/14

12/15

12/16

12/17

12/18

12/19

Watsco, Inc.

S&P MidCap 400

Watsco Class B

Russell 2000 Index

S&P 500 Index

*$100 invested on 12/31/14 in stock or index, including reinvestment of dividends.Fiscal year ending December 31.
Copyright© 2020 Standard & Poor's, a division of S&P Global. All rights reserved.
Copyright© 2020 Russell Investment Group. All rights reserved.

12/31/14

12/31/15

12/31/16

12/31/17

12/31/18

12/31/19

100.00
100.00
100.00
100.00
100.00

112.04
113.56
95.59
97.82
101.38

145.65
146.08
115.95
118.11
113.51

172.39
171.07
132.94
137.30
138.29

145.63
141.30
118.30
122.08
132.23

196.53
197.69
148.49
154.07
173.86

Watsco, Inc.
Watsco Class B
Russell 2000 Index
S&P MidCap 400 Index
S&P 500 Index

68 WATSCO, INC. 2019 ANNUAL REPORT

5-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA (UNAUDITED)
The following selected consolidated financial data should be read in conjunction with the audited consoli-
dated financial statements, including the notes thereto, included under Item 8 of Part II, “Financial
Statements and Supplementary Data,” and the information contained in Item 7 of Part II, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report to
Shareholders for the year ended December 31, 2019.

(In thousands, except per share data)

2019 (1)

2018 (2) 

2017

2016 

2015

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 

$ 4,770,362
1,156,956
366,884
295,775

$ 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

49,825

245,950

6.50

6.40
6.40

$

$

$
$

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

$

$

$
$

Class B common share outstanding - Diluted

34,676

34,374

32,863

32,617

32,480

AT YEAR END
Total assets
Total long-term obligations
Total shareholders’ equity
Number of employees

$ 2,556,161
311,980
$
$ 1,714,767
5,800

$ 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) Effective January 1, 2019, we adopted the provisions of accounting guidance related to leases. Amounts prior to January 1, 2019 have not been adjusted and remain as origi-
nally reported for such periods.
(2) Effective January 1, 2018, we adopted the provisions of accounting guidance related to revenue recognition. Amounts prior to January 1, 2018 have not been adjusted and
remain as originally reported for such periods.

WATSCO, INC. 2015 ANNUAL REPORT 69

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 Executive 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

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.

70 WATSCO, INC. 2019 ANNUAL REPORT

WATSCO, INC. 2015 ANNUAL REPORT 71

Design: Suissa Design   suissadesign.com

72 WATSCO, INC. 2019 ANNUAL REPORT