Watsco Annual Report 2020

FY2020 Annual Report · Watsco

Loading PDF…

A PANDEMIC.
A RESPONSE.
A RECORD YEAR.

WATSCO Annual Report 2020

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

WATSCO IS PLEASED TO HAVE
SUCCESSFULLY DEALT WITH THE
BUSINESS EFFECTS OF THE
COVID-19 PANDEMIC.

WATSCO PRODUCED A RECORD
YEAR WITH VIRTUALLY ALL KEY
PERFORMANCE METRICS REACHING
ALL-TIME HIGHS.

IN THIS ANNUAL REPORT, COMPANY
LEADERS REFLECT ON FIVE KEY
FACTORS THAT ENABLED US TO
MOVE THROUGH THESE CHALLENGES
SUCCESSFULLY.

WE DEDICATE THIS ANNUAL REPORT
TO THE WATSCO FAMILY FOR THEIR
PERSEVERANCE AND HARD WORK.

FINANCIAL HIGHLIGHTS

(in thousands, except per share data)

2016

2017

2018(1)

2019(2)

2020

Revenues
Operating income
EBITDA(3)
Net Income

$ 4,220,702
345,632
365,698

$ 4,341,955 $ 4,546,653
372,082
394,177

353,874
375,907

$ 4,770,362
366,884
391,396

$ 5,054,928
401,034
426,942

attributable to Watsco, Inc.

182,810
Diluted earnings per share
5.15
Adjusted diluted earnings per share(4) 5.15
3.60
Dividends per share
281,731
Operating cash flow
1,874,649
Total assets

208,221
5.81
5.54
4.60
306,520
2,046,877

242,932
6.49
6.49
5.60
170,557
2,161,033

245,950
6.50
6.50
6.40
335,771
2,556,161

269,579
7.01
7.01
6.925
534,379
2,484,347

Borrowings under revolving

credit agreement
Shareholders’ equity

235,294
1,251,748

21,800
1,550,977

135,200
1,601,713

155,700
1,714,767

—
1,779,761

(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.

$
4
,
2
2
1

$
4
,
3
4
2

$
4
,
5
4
7

$
4
,
7
7
0

$
5
0
5
5

‘16

‘17

‘18

‘19

‘20

TOTAL
REVENUES
(in millions)

$
3
4
6

$
3
5
4

$
3
7
2

$
3
6
7

$
4
0
1

‘16

‘17

‘18

‘19

‘20

OPERATING
INCOME
(in millions)

$
5
.
1
5

$
5
.
5
4

$
6
.
4
9

$
6
.
5
0

$
7
0
1

‘16

‘17

‘18

‘19

‘20

ADJUSTED
DILUTED
EARNINGS
(per share)

2 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 3

TO OUR VALUED SHAREHOLDERS

For 32 years, Watsco has built its business in HVAC
distribution guided by core fundamentals including:

– Managing with a long-term point of view.
– Sustaining financial strength.
– Creating a competitive edge utilizing technology,
a powerful branch network and other advantages
that our scale oﬀers.

– Respecting entrepreneurs that join our company.
– Promoting an ownership culture reinforced with

long-term equity to incentivize and retain leaders.
– Providing excellent wellness and retirement benefits.
– Establishing strong and respectful relationships

with our manufacturing partners.

– Instilling a desire to grow our business and

continuously improve.

So, it is no accident that 2020 was a record year for the
company. Revenues, operating profits, net income,
earnings per share and operating cash flow all reached
their highest levels ever. e core tenets of our business
culture enabled us to emerge from 2020 a stronger
company and allowed us to drive our strategy forward,
while taking the necessary steps to safeguard and
support our customers and employees.

WATSCO, INC. 2020 ANNUAL REPORT 5

I am proud of how the Watsco family rose to the occasion.
Our entrepreneurial culture empowers leaders to think
and act locally, which proved critical in responding to
changing market conditions as our business units were
forced to reinvent their day-to-day operations. e
teams’ eﬀorts enabled us to provide essential HVAC
products as millions of people adapted to working from
home. Our operational strength, solid balance sheet,
network of 600 locations and innovative technologies
enabled us to meet the moment.

Meanwhile, our continued strategic focus on technology
benefitted our customers as well as our financial
performance. Technology has enhanced our customer
experience while allowing us to realize internal
eﬃciencies and be a better distributor. e success of
these platforms and tools has demonstrated the value
of our ongoing, long-term investments in technology,
and it is an exciting road ahead.

As the products we sell play such a key role in energy
eﬃciency, we can also be a significant contributor in the
eﬀorts to address climate change. ere are an estimated
110 million HVAC systems installed in the U.S., many
of which are operating under old eﬃciency standards.
Today’s minimum eﬃciency standards are helpful at
reducing energy consumption, but even greater

conservation can be achieved with the products
that we oﬀer. We have a role to play in educating
contractors and consumers on the benefits of these
higher-eﬃciency systems that both reduce energy
consumption and cost of ownership. As the industry
leader, we can do so at a scale greater than our
competitors and we will collaborate with our OEM
partners to lead these eﬀorts.

At the end of such a challenging year, it is humbling
to be in such a strong position. Our success would
not have been possible without the work and
commitment of our 5,800 employees, who remained
dedicated to our success throughout even the most
challenging moments.

Our focus remains on the long-term with strong
financial fundamentals, a spirit of entrepreneurism,
and a thirst to improve our business and customer
experience through technology.

Aaron (A.J.) Nahmad
President

6 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 7

1/ PEOPLE

STAYING IN TOUCH: As the leader in our industry, there
are unparalleled opportunities for our leaders to collaborate
and learn from peers throughout the company. In 2020,
the breadth of our teams and the value of frequent commu-
nication with employees and customers proved critical.
Regional teams across the company connected regularly,
spoke transparently, and built a deep sense of community.
In a time of uncertainty, this helped ensure stability and
unity. Our community extends to our customers, whom we
were able to help navigate the early days of the pandemic.
Together, we were able to mitigate short-term disruptions
and transition quickly to a period of robust growth.

“THE HEALTH, SAFETY AND
SECURITY OF OUR PEOPLE
COME FIRST.”

WAYNE NUSSBICKEL
PRESIDENT, N&S SUPPLY

At the core of our community values is a culture of long-term thinking. We work hard to
attract, motivate and retain high-caliber talent who are passionate about long-term growth
for Watsco and its customers. is is reinforced through unique, long-term equity programs.
In turn, the passion, dedication, and innovative spirit of our people gave us the ability to
meet and overcome the toughest of challenges faced in 2020.

8 WATSCO, INC. 2020 ANNUAL REPORT

FOR OUR CUSTOMERS: Watsco’s customer-facing
technologies proved to be key not only in sustaining busi-
ness in 2020, but also in building market share. Robust
e-commerce platforms and mobile apps allow for immediate
order placement and access to the industry’s leading reposi-
tory of product information directly from a job site. Watsco’s
proprietary warehouse technology delivers speed, conven-
ience, and order reliability. Express Pick-up streamlines the
traditional fulfillment of orders, enabling quicker service,
and Curbside Pick-up allows for social distancing with a
contactless experience.

2/ TECHNOLOGY

“WE ACCELERATED THE
PACE OF CHANGE IN THE
WAY WE DO BUSINESS BY
USING THE TECHNOLOGY
WE ALREADY HAD IN PLACE
TO HELP OUR CUSTOMERS.
OUR TECHNOLOGY ADOP-
TION EXCEEDED EXPECTA-
TIONS. AND WE BELIEVE
IT GAVE US A SIGNIFICANT
COMPETITIVE ADVANTAGE.”

ZAC LINDE
PRESIDENT, GEMAIRE DISTRIBUTORS

Watsco continues to aggressively invest in technologies to transform its customer
experience. We have the industry’s most eﬀective tools that make it easier for HVAC
contractors to do business with our company and improve their own eﬃciency. e
events of 2020 accelerated the adoption of technology and have demonstrated that these
investments are critical for sustaining business now and in the future.

WATSCO, INC. 2020 ANNUAL REPORT 11

3/ ENTREPRENEURSHIP

Watsco’s culture is rooted in entrepreneurship and our success in large part is attributable
to the entrepreneurs that have joined our company. We have acquired more than 60
businesses since 1989, some of which currently operate as primary operating subsidiaries.
As part of our “buy and build” strategy, we empower the leadership teams in the field to
make decisions and we provide support with capital, incentives, technology, vendor
relationships, and whatever else they require.

“THE PANDEMIC GAVE US
THE OPPORTUNITY TO
RESET. WE DIDN’T WANT
TO DO THE SAME THING
EVERY OTHER DISTRIBU-
TOR WAS DOING. WATSCO
PROVIDED GUIDANCE AND
THEN STEPPED BACK TO
ALLOW US TO RUN OUR
OPERATIONS.”

MATT ROTH
PRESIDENT, BAKER DISTRIBUTING CO

LEMONS TO LEMONADE: Watsco’s entrepreneurial spirit
kicked in and people made the best of a difficult situation.
One business unit created a new customer experience team
dedicated to enhancing growth. With greater reliance on
Watsco’s business intelligence software, the team identified
additional opportunities and further segmented their cus-
tomers to better target their marketing efforts.

12 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 13

“WE KEPT OUR FOCUS LONG-
TERM THROUGHOUT THE
YEAR. WHILE COMPETITORS
WERE SLASHING COSTS, WE
HELD STEADY, DIDN’T LAY
OFF ANY EMPLOYEES AND
MAINTAINED INVENTORY
AVAILABILITY TO BE READY
WHEN THE DEMAND WOULD
EVENTUALLY RETURN.
AND IT DID.”

MIKE GONSALVES
PRESIDENT, CARRIER ENTERPRISE CANADA

Long-term thinking is a fundamental cornerstone of Watsco’s culture. Our long-standing
goal is to maintain a conservative, risk-averse financial position to allow investment in
new growth opportunities whenever they arise. During 2020, Watsco generated a record
$534 million in cash flow, which far exceeded net income, and finished the year debt-free.
We believe our strong balance sheet and access to low-cost capital from our $560 million
revolving credit facility provide confidence to our customers, employees, and OEM partners.

4/ LONG-TERM

THE DELICATE BALANCE: As the manufacturing
community faced supply chain challenges, demand
remained generally level. Leadership teams across Watsco
tackled the problem. One team, for example, assembled
key players from sales, inventory and order management
and met daily, often seven days a week, to prioritize
fulfillment based on the needs of their customers.

14 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 15

5/ SCALE

PROACTIVE PAYS OFF: The initial economic risks attribut-
able to COVID-19 presented enormous stress on accounts
receivables. Our operational leaders forecasted the problem
and promptly acted on it. Customers who were going to be
hit hard financially were identified and were approached to
see how they could be helped – whether by modifying a
payment structure, guiding them on obtaining government
loans or even expanding credit card payments. Each busi-
ness unit knew their customers best and acted accordingly.
Customers felt reassured and relationships solidified.

“WOULD WE HAVE BEEN AS
EFFECTIVE WITHOUT THE
SUPPORT OF WATSCO?
ABSOLUTELY NOT. WE WERE
ABLE TO UTILIZE ITS STRONG
FINANCIAL POSITION, ITS
DEEP VENDOR RELATION-
SHIPS, AND ITS PHENOME-
NAL TECHNOLOGY. WE
POSSESS THE BENEFITS OF A
FORTUNE 500 COMPANY AND
THE LUXURY OF RUNNING
OUR BUSINESS WITH GREAT
CORPORATE SUPPORT.”

RICH IANDOLI
PRESIDENT, HOMANS ASSOCIATES

Watsco entered the HVAC/R distribution business 32 years ago and has scaled the company
to be the largest in the industry. We currently operate from 600 locations in North America,
serve more than 100,000 active HVAC contracting companies, and have strategic business
relationships with many of the leading manufacturers in our industry. 2020 marked further
progress toward our long-term goal of scaling Watsco’s technologies. Eﬀective leveraging of
our scale gives us a distinct advantage and a clear competitive edge during good times as well
as challenging times like this past year.

16 WATSCO, INC. 2020 ANNUAL REPORT

FINANCIAL REVIEW

Management’s Discussion and Analysis

Management’s Report on Internal Control Over Financial Reporting

Report of Independent Registered Public Accounting Firm

Consolidated Financial Statements:

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

Notes to Consolidated Financial Statements

Selected Quarterly Financial Data

Shareholder Return Performance

5-Year Summary of Selected Consolidated Financial Data

Shareholder Information

36
36
37
38
40

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;
• the continued impact of the COVID-19 pandemic;
• 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 of our forward-
looking statements by these cautionary factors.

The following information should be read in conjunction with the information contained in Item 1A, “Risk
Factors” of our Annual Report on Form 10-K and the consolidated financial statements, including the
notes thereto, included in this Annual Report to Shareholders for the year ended December 31, 2020.

WATSCO, INC. 2020 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, 2020, we operated from 600 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, profitability can be impacted favorably or unfavorably based on weather patterns, particu-
larly during the Summer and Winter selling seasons. Demand related to the residential central air condi-
tioning replacement market is typically highest in the second and third quarters, and demand for heating
equipment is usually highest in the first and fourth quarters. Demand related to the new construction sec-
tors throughout most of the markets we serve tends to be fairly evenly distributed throughout the year and
depends largely on housing completions and related weather and economic conditions.

IMPACT OF THE COVID-19 PANDEMIC
A novel strain of coronavirus, COVID-19, surfaced in December 2019 and has spread around the world,
including to the United States. In March 2020, the World Health Organization declared COVID-19 a pan-
demic. For certain periods of the pandemic thus far, some U.S. states had been under executive orders
requiring that all workers remain at home unless their work was critical, essential, or life-sustaining. We
believe that, based on the various standards published to date, the work our employees perform is essen-
tial, and as such we continued to operate with certain modifications during these periods. Certain of our
locations experienced short-term closures for COVID-19 employee health concerns or operated at a dimin-
ished capacity, which negatively impacted business during March and April of 2020. At the end of the
second quarter of 2020, many of the markets in which we operate had begun to ease COVID-19 restric-
tions that had been in place earlier in the period. However, during the second half of 2020, viral infec-
tions began to increase, resulting in the resumption of restrictions in certain markets in which we operate.

Consistent with broader social trends, we have taken steps to safeguard the health of our employees and
customers. This includes creating space between work areas, providing ample personal protective equip-
ment and cleaning supplies, having formal policies for mitigation in the event of cases of illness, utilizing
technologies where work duties allow to enable work from home capabilities, and instituting contactless
sales and servicing capabilities at many of our locations to create social distancing. As of the date of this
filing, all our locations are operating, and due to these precautions, have continued to function effectively,
including our internal controls over financial reporting. In light of the continued high rate of viral infections
that exists as of the date of this filing, there remains significant uncertainty concerning the magnitude of
the impact and duration of the COVID-19 pandemic.

In response to the pandemic, we implemented plans intended to preserve adequate liquidity and ensure
that our business continued to operate during this uncertain time. In addition, we have taken actions to
reduce costs, including reductions in compensation, rent abatement, changes to vendor terms and other
austerity measures to curtail discretionary spending in light of the circumstances. Other costs, including
hourly wages, overtime, sales commissions, temporary labor, performance-based compensation, advertis-
ing, and delivery expenses are expected to vary in correlation with our overall business activity. As restric-
tions ease and normal economic conditions and operations resume, the various austerity measures to
curtail discretionary spending have eased.

With respect to liquidity, we believe that our balance sheet remains strong with $146.1 million in cash,

no outstanding borrowings drawn from our $560.0 million credit facility and $1.8 billion of shareholders’
equity as of December 31, 2020. On February 9, 2021, our Board of Directors approved an increase to
the quarterly cash dividend per share of Common and Class B common stock to $1.95 per share begin-
ning with the dividend that will be paid in April 2021. Future dividends and/or changes in dividend rates
are at the sole discretion of the Board of Directors and depend upon factors including, but not limited to,
cash flow generated by operations, profitability, financial condition, cash requirements, and future
prospects. During these uncertain times, we believe that our scale, our current debt-free position, conser-
vative leverage ratio, and our historical ability to generate cash flow positions us well as we work through
the impacts of the COVID-19 pandemic.

The full impact of the COVID-19 pandemic on our financial condition and results of operations will con-
tinue to depend on future developments, such as the ultimate duration and scope of the pandemic, its
impact on our employees, customers, and suppliers, how quickly normal economic conditions and opera-
tions resume and whether the pandemic exacerbates other risks disclosed in Item 1A “Risk Factors” of
our Annual Report on Form 10-K for the year ended December 31, 2020. We will continue to actively
monitor the situation and may take further actions that alter our business operations as may be required
by federal, state or local authorities or that we determine are in the best interests of our employees, cus-
tomers, suppliers and shareholders.

JOINT VENTURES WITH CARRIER GLOBAL CORPORATION
On April 3, 2020, United Technologies Corporation completed the spin-off of Carrier Corporation into an
independent, publicly traded company, named Carrier Global Corporation (“Carrier”).

In 2009, we formed a joint venture with 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.
The export division, Carrier InterAmerica Corporation, redomesticated from the U.S. Virgin Islands to
Delaware effective December 31, 2019, following which Carrier InterAmerica Corporation became a sep-
arate operating entity in which we have an 80% controlling interest and Carrier has a 20% non-control-
ling 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, wholly owned
subsidiaries.

In 2012, we formed a third joint venture with Carrier, which we refer to as Carrier Enterprise III. Carrier
contributed 35 of its company-owned locations in Canada to Carrier Enterprise III. We have a 60% con-
trolling interest in Carrier Enterprise III, and Carrier 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-

20 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 21

ments and estimates, which are based on historical experience, current trends, and various other assump-
tions that are believed to be reasonable under the circumstances.

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

Allowance for Doubtful Accounts
An allowance for doubtful accounts is maintained for estimated losses resulting from the inability of 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, including potential impacts of business and
economic conditions. Our business and our customers’ businesses are 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 $7.1 million and $7.9 million at December 31, 2020 and
2019, respectively, a decrease of $0.8 million. Accounts receivable balances greater than 90 days past
due as a percent of accounts receivable at December 31, 2020 decreased to 1.4% from 1.8% at
December 31, 2019. These decreases were primarily attributable to an improvement in the underlying
quality of our accounts receivable portfolio at December 31, 2020.

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, 2021, we performed our annual
evaluation of goodwill impairment and determined that the estimated fair value of our reporting unit sig-
nificantly exceeded its carrying value.

The recoverability of indefinite lived intangibles and long-lived assets are also evaluated on an annual
basis or more often if deemed necessary. Indefinite lived intangibles and long-lived assets not subject to
amortization are assessed for impairment by comparing the fair value of the intangible asset or long-lived
asset to its carrying amount to determine if a write-down to fair value is required. Our annual evaluation
did not indicate any impairment of indefinite lived intangibles or long-lived assets.

The estimates of fair value of our reporting unit, indefinite lived intangibles, and long-lived assets are
based on the best information available as of the date of the assessment and incorporates management’s
assumptions about expected future cash flows and contemplates other valuation techniques. Future cash
flows can be affected by changes in the industry, a declining economic environment, or market condi-
tions. There have been no events or circumstances from the date of our assessments that would have had
an impact on this conclusion. The carrying amounts of goodwill, intangibles, and long-lived assets were
$999.9 million and $1,009.4 million at December 31, 2020 and 2019, respectively, a decrease of $9.5
million. 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 $5.4 million and $3.1
million at December 31, 2020 and 2019, respectively, were established related to such insurance pro-
grams.

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 both December 31, 2020 and 2019
due to uncertainties related to the ability to utilize a portion of the deferred tax assets primarily arising
from foreign net operating loss carryforwards. The valuation allowance is based on estimates of future tax-
able 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 con-
ditions, or competitive pressures that could affect future taxable income. Although management believes
that the estimates are reasonable, the deferred tax asset and any related valuation allowance will need to
be adjusted if management’s estimates of future taxable income differ from actual taxable income. An
adjustment to the deferred tax asset and any related valuation allowance could materially impact the con-
solidated results of operations.

22 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 23

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 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, 2020, 2019 and 2018.

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

2020

2019

2018

100.0%
75.8

100.0%
75.7

100.0%
75.4

24.2
16.5
0.2

7.9
0.0

7.9
1.5

6.4
1.1

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

Net income attributable to Watsco, Inc.

5.3%

5.2%

5.3%

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, as well as the purchase of an additional 1.8% ownership interest in Russell
Sigler, Inc. (“RSI”) in April 2019, and the purchase of an additional 20% ownership interest in Homans
effective May 31, 2019. We did not acquire any businesses during 2020.

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, 2020 and 2019, two and nine locations, respectively, that we opened were near existing
locations and were therefore included in “same-store basis” information.

The table below summarizes the changes in our locations for 2020 and 2019:

December 31, 2018

Opened
Acquired
Closed

December 31, 2019

Opened
Closed

December 31, 2020

Number of
Locations

571
14
33
(12)

606
3
(9)

600

2020 Compared to 2019
Revenues
Revenues for 2020 increased $284.6 million, or 6%, to $5,054.9 million, including $174.1 million
attributable to new locations acquired and $4.2 million from other locations opened during the preceding
12 months, offset by $10.9 million from locations closed. Sales of HVAC equipment (69% of sales)
increased 7%, sales of other HVAC products (28% of sales) increased 3% and sales of commercial refrig-
eration products (3% of sales) decreased 4%. On a same-store basis, revenues increased $117.2 million,
or 2%, as compared to 2019, reflecting a 4% increase in sales of HVAC equipment (69% of sales),
which included a 9% increase in residential HVAC equipment (10% increase in U.S. markets and a 2%
decrease in international markets) and a 15% decrease in sales of commercial HVAC equipment (10%
decrease in U.S. markets and a 27% decrease in international markets), flat sales of other HVAC prod-
ucts (28% of sales), and a 4% decrease in sales of commercial refrigeration products (3% of sales). The
increase in same-store revenues of HVAC equipment was primarily due to demand for the replacement of
residential HVAC equipment, partially offset by lower sales of commercial HVAC equipment due to the
pandemic-related market disruption. The increase in residential HVAC equipment was composed of a
10% increase in volume while the average selling price remained flat.

Gross Profit
Gross profit for 2020 increased $65.9 million, or 6%, to $1,222.8 million, primarily as a result of
increased revenues. Gross profit margin declined 10 basis-points to 24.2% in 2020 versus 24.3% in
2019, primarily due to a shift in sales mix toward HVAC equipment, which generates a lower gross profit
margin than non-equipment products.

Selling, General and Administrative Expenses
Selling, general and administrative expenses for 2020 increased $32.7 million, or 4%, to $833.1 million,
primarily due to increased revenues. Selling, general and administrative expenses as a percentage of rev-
enues for 2020 decreased to 16.5% versus 16.8% in 2019. On a same-store basis, selling, general and
administrative expenses decreased 1% as compared to 2019 primarily due to actions taken to improve
operating efficiencies and to reduce costs and curtail discretionary spending in response to the pandemic.
Selling, general and administrative expenses included $3.0 million of additional costs for 2020 in excess of
2019 for ongoing technology initiatives, including initiatives designed to mitigate the impact of the pandemic.

Other Income
Other income of $11.3 million and $10.3 million for the years ended December 31, 2020 and 2019,
respectively, represented our share of the net income of RSI.

Operating Income
Operating income for 2020 increased $34.2 million, or 9%, to $401.0 million. Operating margin
improved 20 basis-points to 7.9% in 2020 from 7.7% at 2019. On a same-store basis, operating margin
was 8.1% in 2020 as compared to 7.7% in 2019.

Interest Expense, Net
Interest expense, net for 2020 decreased $2.8 million, or 69%, to $1.2 million, primarily as a result of a
decrease in average outstanding borrowings and a lower effective interest rate for the 2020 period, as
compared to the same period in 2019.

Income Taxes
Income taxes increased 14% to $76.6 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 22.0% and 21.2% for 2020 and 2019, respectively. The increase was
primarily due to higher state income taxes, offset by greater share-based compensation and lower esti-
mated foreign withholding taxes in 2019 as compared to 2020.

24 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 25

Net Income Attributable to Watsco, Inc.
Net income attributable to Watsco in 2020 increased $23.6 million, or 10%, to $269.6 million. The
increase was primarily driven by higher revenues and gross profit, and lower interest expense, net.

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, 2019 for a discussion of results of opera-
tions for the year ended December 31, 2019 compared to the year ended December 31, 2018.

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, 2020, we had $146.1 million of cash and cash equivalents, of which $82.8 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
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 after December 31, 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 decreased to $997.3 million at December 31, 2020 from $1,085.0 million at December
31, 2019, primarily as a result of lower levels of inventory due to inventory optimization activities, pan-
demic-related supply chain disruptions, and higher levels of accounts payable and accrued expenses in
2020 versus 2019.

Cash Flows
The following table summarizes our cash flow activity for 2020 and 2019 (in millions):

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

2020

2019

Change

$
$
$

534.4
(16.3)
(448.5)

$
$
$

335.8
(81.0)
(264.0)

$
$
$

198.6
64.7
(184.5)

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

Operating Activities
The increase in net cash provided by operating activities was primarily due to a reduction in the level of
inventories and the comparative timing of payments for accrued expenses and other current liabilities in
2020 versus 2019.

Investing Activities
Net cash used in investing activities was lower in 2020 due to cash consideration paid for acquisitions
and the purchase of an additional ownership interest in RSI in 2019, whereas we acquired no new busi-
nesses or any portions thereof in 2020.

Financing Activities
The increase in net cash used in financing activities was primarily attributable to net repayments under
our revolving credit agreement and an increase in dividends paid in 2020.

Revolving Credit Agreement
We maintain an unsecured, syndicated multicurrency revolving credit agreement, which we use to fund
seasonal working capital needs and for other general corporate purposes, including acquisitions, dividends
(if and as declared by our Board of Directors), capital expenditures, stock repurchases and issuances of let-
ters of credit. On April 10, 2020, we increased the aggregate borrowing capacity of our revolving credit
agreement from $500.0 million to $560.0 million. The credit facility has a seasonal component from
October 1 to March 31, during which the borrowing capacity may be reduced to $460.0 million at our dis-
cretion, and we effected this reduction in 2020. Included in the credit facility are a $100.0 million swing-
line 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, 2020), 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, 2020), 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, 2020).

At December 31, 2020 there was no outstanding balance under the revolving credit agreement. At
December 31, 2019 $155.7 million was outstanding under the revolving credit agreement. The revolving
credit agreement contains customary affirmative and negative covenants, including financial covenants
with respect to consolidated leverage and interest coverage ratios, and other customary restrictions. We
believe we were in compliance with all covenants at December 31, 2020.

26 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 27

Contractual Obligations
The following table summarizes our significant contractual obligations at December 31, 2020:

cash on hand, and funds available for borrowing under our revolving credit agreement will be sufficient to
purchase any additional ownership interests in RSI.

Payments due by Period (in millions)

Contractual Obligations

Operating leases (1)
Purchase obligations (2)

Total

2021

77.2
31.8

109.0

2022

2023

2024

2025

Thereafter

Total

62.3
—

62.3

44.9
—

44.9

25.1
—

25.1

9.7
—

9.7

6.8 $
—

226.0
31.8

6.8 $

257.8

(1) Includes imputed interest of $16.2 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 Shareholderss.
(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 $5.5 million of net liabili-
ties for unrecognized tax benefits relating to various tax positions we have taken, the timing of which is
uncertain.

At December 31, 2020, there were no commercial obligations outstanding under our revolving credit
agreement.

Off-Balance Sheet Arrangements
Refer to Note 16 to our audited consolidated financial statements contained in this Annual Report on
Form 10-K, under the caption “Off-Balance Sheet Financial Instruments,” for a discussion of a standby
letter of credit and performance bonds for which we were contingently liable at December 31, 2020.
Such discussion is incorporated herein by reference.

Purchase of Remaining 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 wholly owned subsidiary of the Company with 17 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% for cash consideration of $3.8 million, 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 contributed $3.9 million and Carrier
contributed $1.0 million.

Carrier Enterprise I is a party to a shareholders’ agreement (the “Shareholders’ Agreement”) with RSI and
its shareholders. Pursuant to the Shareholders’ Agreement, RSI’s shareholders have the right to sell, and
Carrier Enterprise I has the obligation to purchase, their respective shares of RSI for a purchase price
determined based on either book value or a multiple of EBIT, the latter of which Carrier Enterprise I used
to calculate the price paid for its investment in RSI. RSI’s shareholders may transfer their respective
shares of RSI common stock only to members of the Sigler family or to Carrier Enterprise I, and, at any
time from and after the date on which Carrier Enterprise I owns 85% or more of RSI’s outstanding 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, 2020, the estimated purchase amount we would
be contingently liable for was approximately $200.0 million. We believe that our operating cash flows,

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 $3.9 million, net of
a discount for lack of marketability, and the repayment 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 repayment 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.

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 $6.925, $6.40 and $5.60 per share of Common stock and Class B common
stock in 2020, 2019, and 2018, respectively. On January 4, 2021, our Board of Directors declared a
regular quarterly cash dividend of $1.775 per share of both Common and Class B common stock that
was paid on January 29, 2021 to shareholders of record as of January 15, 2021. On February 9, 2021,
our Board of Directors approved an increase to the quarterly cash dividend per share of Common and
Class B common stock to $1.95 per share from $1.775 per share, beginning with the dividend that will
be paid in April 2021. 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 opera-
tions, profitability, 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, 2020, there were 1,129,087 shares remaining authorized for repurchase
under the program.

28 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 29

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.

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, 2020. 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, 2020. The effectiveness of our internal control over finan-
cial reporting as of December 31, 2020 has been audited by KPMG LLP, an independent registered
public accounting firm, as stated in their report that is included herein.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, including fluctuations in foreign currency exchange rates and interest rates.
To manage certain of these exposures, we use derivative instruments, including forward and option contracts
and swaps. We use derivative instruments as risk management tools and not for trading purposes.

Foreign Currency Exposure
We are exposed to cash flow and earnings fluctuations resulting from currency exchange rate variations.
These exposures are transactional and translational in nature. The foreign currency exchange rates to
which we are exposed are the Canadian dollar and Mexican peso. Revenues in these markets accounted
for 6% and 2%, respectively, of our total revenues for 2020.

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. We had only one foreign
exchange contract at December 31, 2020, the total notional value of which was $1.0 million, and such
contract expired during January 2021. For the year ended December 31, 2020, foreign currency transac-
tion 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 $2.5
million impact to net income for the year ended December 31, 2020.

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.

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.

At December 31, 2020, we had no exposure to interest rates based on variable debt outstanding as no
amount was outstanding under our revolving credit agreement, however, we evaluated our exposure to
interest rates based on the average amount of variable debt outstanding under our revolving credit agree-
ment during 2020 and determined that a 100 basis-point change in interest rates would result in an
impact to income before taxes of approximately $0.7 million. See Note 8 to our audited consolidated
financial statements included in this Annual Report to Shareholders for further information about our debt.

30 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 31

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, 2020, 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, 2020, 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,
2020 and 2019, the related consolidated statements of income, comprehensive income, shareholders’
equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the
related notes (collectively, the consolidated financial statements), and our report dated February 26,
2021 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial 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.

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 26, 2021

KPMG LLP

32 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2020, 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, 2020, 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 26,
2021 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.

Critical 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 judgments. 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, 2020, the Company’s inventory balance was $781,299 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 following are the primary procedures we performed to address this critical audit matter. We
evaluated the design and tested the operating effectiveness of 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 inventories, assumptions used for excess and
slow-moving inventory, and the Company’s review of inventory net realizable value adjustments.
We compared a selection of inventory units to historical performance to assess possible write-down
indications and future salability. We performed a sensitivity analysis under various 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 26, 2021

KPMG LLP

34 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 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,

2020

2019

2018

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

$ 5,054,928
3,832,107

$ 4,770,362
3,613,406

$ 4,546,653
3,426,401

1,222,821
833,051
11,264

401,034
1,239

399,795
76,623

323,172
53,593

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

Net income attributable to Watsco, Inc.

269,579

245,950

242,932

Earnings per share for Common and Class B common stock:

Basic

Diluted

See accompanying notes to consolidated financial statements.

7.03

7.01

6.51

6.50

6.49

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)

Years Ended December 31,

2020

2019

2018

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

Other comprehensive income (loss)

323,172

295,775

296,529

6,272
880
(418)

6,734

12,298
(1,461)
(352)

10,485

(20,493)
1,918
(157)

(18,732)

277,797
46,913

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

329,906
56,144

306,260
53,392

Comprehensive income attributable to Watsco, Inc.

273,762

252,868

230,884

See accompanying notes to consolidated financial statements.

December 31,

ASSETS
Current assets:

Cash and cash equivalents
Accounts receivable, net
Inventories, net
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
Finance lease liabilities, 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; 37,702,489 and
37,536,363 shares outstanding at December 31, 2020 and 2019, respectively

Class B common stock, $0.50 par value, 10,000,000 shares authorized; 5,691,456 and

5,529,944 shares outstanding at December 31, 2020 and 2019, 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, 2020 and 2019, respectively

Total Watsco, Inc. shareholders’ equity

Non-controlling interest

Total shareholders’ equity

36 WATSCO, INC. 2020 ANNUAL REPORT

See accompanying notes to consolidated financial statements.

2020

2019

146,067
535,288
781,299
21,791

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

1,484,445

1,546,730

98,225
209,169
412,486
169,929
97,847
12,246

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

$ 2,484,347

$ 2,556,161

71,804
251,553
163,788

487,145

—
139,527
4,811

144,338

73,103

69,421
239,666
152,630

461,717

155,700
154,271
2,009

311,980

67,697

18,851

18,768

2,846
—
950,915
(34,867)
636,373

2,765
—
907,877
(39,050)
632,507

(87,440)

1,486,678
293,083

1,435,427
279,340

1,779,761

1,714,767

$ 2,484,347

$ 2,556,161

WATSCO, INC. 2020 ANNUAL REPORT 37

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

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

Balance at December 31, 2019
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, $6.925 per share
Adjustment to fair value of Common stock issued for N&S Supply of Fishkill, Inc.
Distributions to non-controlling interest

Balance at December 31, 2020

See accompanying notes to consolidated financial statements.

38 WATSCO, INC. 2020 ANNUAL REPORT

Common Stock,
Class B
Common Stock
and Preferred
Stock Shares

Common Stock,
Class B
Common Stock
and Preferred
Stock Amount

Paid-In
Capital

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

6,822

Accumulated
Other
Comprehensive
Loss

$(34,221)
301

(12,048)

Retained
Earnings

$594,556
(301)
242,932

Treasury
Stock

Non-controlling
Interest

$(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)

186

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

6,866

(25,768)
58,158

4,020

(241,412)

38,194,056

21,533

907,877

(39,050)

632,507
269,579

(87,440)

4,183

184,265
(3,589)
25,216
144,894
(23,148)

92
(2)
13
72
(11)

(92)
2
4,530
21,528
(4,631)
21,862

(161)

(265,713)

752
(46,825)

253,024
49,825
3,567

988
(6,632)

17,000

(39,272)

279,340
53,593
2,551

(42,401)

Total

$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)

1,714,767
323,172
6,734
—
—
4,543
21,600
(4,642)
21,862
(265,713)
(161)
(42,401)

38,521,694

$21,697

$950,915

$(34,867)

$636,373

$(87,440)

$293,083

$1,779,761

WATSCO, INC. 2020 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,

2020

2019

2018

323,172

295,775

296,529

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
Loss (gain) on sale of property and equipment
Deferred income tax provision
Other income from investment in unconsolidated entity

Changes in operating assets and liabilities, net of effects of acquisitions:

Accounts receivable
Inventories, net
Accounts payable and other liabilities
Other, net

Net cash provided by operating activities

Cash flows from investing activities:

Capital expenditures
Business acquisitions, net of cash acquired
Investment in unconsolidated entity
Proceeds from sale of property and equipment

Net cash used in investing activities

Cash flows from financing activities:

Dividends on Common and Class B common stock
Net (repayments) proceeds under current revolving credit agreement
Distributions to non-controlling interest
Repurchases of common stock to satisfy employee withholding tax obligations
Net (repayments) proceeds of other long-term obligations
Payment of fees related to revolving credit agreement
Purchase of additional ownership from non-controlling interest
Net repayments under prior revolving credit agreement
Proceeds from non-controlling interest for investment in unconsolidated entity
Proceeds from non-controlling interest for investment in Peirce-Phelps, Inc.
Net proceeds from issuances of common stock

25,908
22,129
4,543
2,688
17
40
(11,264)

(3,559)
139,929
33,936
(3,160)

534,379

(16,436)
—
—
94

(16,342)

(265,713)
(155,700)
(42,401)
(2,299)
(1,441)
(196)
—
—
—
—
19,257

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

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

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

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

335,771

170,557

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

(81,037)

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

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

(26,311)

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

Net cash used in financing activities

(448,493)

(264,023)

(139,603)

Effect of foreign exchange rate changes on cash and cash equivalents

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

2,069

71,613
74,454

849

(8,440)
82,894

(2,245)

2,398
80,496

Cash and cash equivalents at end of year

146,067

74,454

82,894

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,
2020, we operated from 600 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.

On April 3, 2020, United Technologies Corporation completed the spin-off of Carrier Corporation into an
independent, publicly traded company, now named Carrier Global Corporation, which we refer to as
Carrier. The consolidated financial statements include the accounts of Watsco, all of its wholly owned
subsidiaries and the accounts of three joint ventures with Carrier. Carrier InterAmerica Corporation
(“CIAC”), the export division of our first joint venture with Carrier, redomesticated from the U.S. Virgin
Islands to Delaware effective December 31, 2019, following which CIAC became a separate operating
entity in which we have an 80% controlling interest and Carrier has a 20% non-controlling interest. All
significant intercompany balances and transactions have been eliminated in consolidation.

Impact of COVID-19 Pandemic
A novel strain of coronavirus, COVID-19, surfaced in December 2019 and has spread around the world,
including to the United States. In March 2020, the World Health Organization declared COVID-19 a pan-
demic. The COVID-19 pandemic has impacted and could further impact our operations and the opera-
tions of our suppliers and customers as a result of quarantines, facility closures, illnesses, and travel and
logistics restrictions. The extent to which the COVID-19 pandemic continues to impact our business,
results of operations, and financial condition will depend on future developments, which are highly uncer-
tain and cannot be predicted, including, but not limited to the magnitude, duration, spread, severity, and
impact of the COVID-19 pandemic, the effects of the COVID-19 pandemic on our employees, customers,
suppliers, and vendors, and to what extent normal economic and operating conditions can resume. Even
after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our busi-
ness as a result of any economic recession or depression that has occurred as a result of the COVID-19
pandemic. Therefore, we cannot reasonably estimate the impact at this time.

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.

40 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 41

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 investment in unconsolidated
entity 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 under-
lying net assets of the investee is attributed to certain fair value adjustments with the remaining portion
recognized as goodwill.

Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclo-
sure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses for the reporting period. Significant estimates include valua-
tion reserves for accounts receivable, net realizable value adjustments to inventories, income taxes,
reserves related to loss contingencies and the valuation of goodwill, indefinite-lived intangible assets and
long-lived assets. While we believe that these estimates are reasonable, actual results could differ from
such estimates.

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

Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable primarily consist of trade receivables due from customers and are stated at the
invoiced amount less an allowance for doubtful accounts. An allowance for doubtful accounts is main-
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, including potential impacts of business and economic conditions. Upon determination that an
account is uncollectible, the receivable balance is written off. At December 31, 2020 and 2019, the
allowance for doubtful accounts totaled $7,087 and $7,943, 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 and Purchase Discounts
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, 2020 and 2019, we had $13,434 and $12,007, 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.

We also have vendors that offer a cash discount when we pay their invoice within a specified period of
time. We account for such cash discounts as a reduction of inventory until we sell the product at which

time such cash discounts are reflected as a reduction of cost of sales in our consolidated statements of
income. At December 31, 2020 and 2019, we had $12,029 and $10,098, respectively, of cash dis-
counts recorded as a reduction of inventory.

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. Changes in the fair value of equity securities
and dividend income are recognized in our consolidated statements of income.

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. Machinery, vehicles, and equipment are depreciated over estimated useful lives ranging from 3-10
years. Computer hardware and software are depreciated over estimated useful lives ranging from 3-10
years. Furniture and fixtures are depreciated over estimated useful lives ranging from 5-7 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, net of current portion in our consolidated balance sheets.
Finance leases are not considered significant to our consolidated balance sheets or consolidated state-
ments of income. Finance lease ROU assets at December 31, 2020 and 2019, of $6,232 and $3,150,
respectively, are included in property and equipment, net in our consolidated balance sheets. Finance
lease liabilities at December 31, 2020 and 2019, of $6,383 and $3,231, respectively, are included in
current portion of long-term obligations and finance lease liabilities, net of current portion in our consoli-
dated balance sheets.

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 1-9 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.

Practical Expedients
We elected the practical expedients related to short-term leases and separating lease components from
non-lease components for all underlying asset classes.

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 comparing the fair value of our reporting unit to its carry-
ing value. If the fair value is determined to be less than the carrying value, an impairment charge would

42 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 43

be recognized. On January 1, 2021, we performed our annual evaluation 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 recoverable.
Recoverability is evaluated by determining whether the amortization of the balance over its remaining life
can be recovered through undiscounted future operating cash flows. We measure the impairment loss based
on projected discounted cash flows using a discount rate reflecting the average cost of funds and com-
pared to the asset’s carrying value. As of December 31, 2020, there were no such events or circumstances.

Fair Value Measurements
We carry various assets and liabilities at fair value in the consolidated balance sheets. Fair value is defined
as the price that would be received for an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. As such, fair value is a market-based measurement
that should be determined based on assumptions that market participants would use in pricing an asset or
liability. Fair value measurements are classified based on the following fair value hierarchy:

Level 1

Level 2

Quoted prices in active markets for identical assets or liabilities. An active market for an asset
or liability is a market in which transactions for the asset or liability occur with sufficient fre-
quency and volume to provide pricing information on an ongoing basis.

Observable inputs other than Level 1 prices such as quoted prices in active markets for similar
assets or liabilities; quoted prices in markets that are not active; or model-driven valuations or
other inputs that are observable or can be corroborated by observable market data for substan-
tially the full term of the assets or liabilities.

Level 3 Unobservable inputs for the asset or liability. These inputs reflect our own assumptions about

the assumptions a market participant would use in pricing the asset or liability.

Revenue Recognition
Revenue primarily consists of sales of air conditioning, heating and refrigeration equipment, and related
parts and supplies. 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 2020 and 2019.

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, 2020 and 2019 of $12,739 and $12,181,
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, 2020,
2019, and 2018, were $12,588, $16,587, and $16,520, respectively.

Shipping and Handling
Shipping and handling costs associated with inbound freight are capitalized to inventories and relieved
through cost of sales as inventories are sold. Shipping and handling costs associated with the delivery of
products are included in selling, general and administrative expenses. Shipping and handling costs
included in selling, general and administrative expenses for the years ended December 31, 2020, 2019,
and 2018, were $55,019, $54,783, and $51,741, respectively.

Share-Based Compensation
The fair value of stock option and non-vested restricted stock awards are expensed net of estimated forfei-
tures on a straight-line basis over the vesting period of the awards. Share-based compensation expense is
included in selling, general and administrative expenses in our consolidated statements of income. Tax
benefits resulting from tax deductions in excess of share-based compensation expense are recognized in
our provision for income taxes in our consolidated statements of income.

Income Taxes
We record U.S. federal, state and foreign income taxes currently payable, as well as deferred taxes due to
temporary differences between reporting income and expenses for financial statement purposes versus tax
purposes. Deferred tax assets and liabilities reflect the temporary differences between the financial state-
ment and income tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or
expense in the period that includes the enactment date. We and our eligible subsidiaries file a consoli-
dated U.S. federal income tax return. As income tax returns are generally not filed until well after the clos-
ing process for the December 31 financial statements is complete, the amounts recorded at December 31
reflect estimates of what the final amounts will be when the actual income tax returns are filed for that
calendar year. In addition, estimates are often required with respect to, among other things, the appropri-
ate state income tax rates to use in the various states that we and our subsidiaries are required to file, the
potential utilization of operating loss carryforwards and valuation allowances required, if any, for tax
assets that may not be realizable in the future.

We recognize the financial statement benefit of a tax position only after determining that the relevant tax
authority would more likely than not sustain the position following an audit. For tax positions meeting the
“more-likely-than-not” threshold, the amount recognized in the financial statements is the largest benefit
that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax
authority.

44 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 45

Recently Adopted Accounting Standards

Financial Instruments—Credit Losses
In June 2016, the Financial Accounting Standards Board (“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 receivables, contract assets, long-term receivables and off-balance
sheet credit exposures. Under the new standard, 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 retrospec-
tive approach. The adoption of this guidance did not have a material impact on our consolidated financial
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. The
adoption of this guidance did not have a material impact on our consolidated financial statements.

2. LEASES

The components of operating lease expense were as follows:

Years ended December 31,

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

Total operating lease cost

2020

2019

82,543
6,317
942
(228)

74,755
9,427
707
(226)

89,574

84,663

Earnings per Share
We compute earnings per share using the two-class method. The two-class method of computing earnings
per share is an earnings allocation formula that determines earnings per share for common stock and any
participating securities according to dividends declared (whether paid or unpaid) and participation rights in
undistributed earnings. Shares of our non-vested restricted stock are considered participating securities
because these awards contain a non-forfeitable right to dividends irrespective of whether the awards ulti-
mately vest. Under the two-class method, earnings per common share for our Common and Class B com-
mon stock is computed by dividing the sum of distributed earnings to common shareholders and
undistributed earnings allocated to common shareholders by the weighted-average number of shares of
Common and Class B common stock outstanding for the period. In applying the two-class method, undis-
tributed earnings are allocated to Common stock, Class B common stock and participating securities based
on the weighted-average shares outstanding during the period.

Diluted earnings per share reflects the dilutive effect of potential common shares from stock options. The
dilutive effect of outstanding stock options is computed using the treasury stock method, which assumes
any proceeds that could be obtained upon the exercise of stock options, would be used to purchase com-
mon stock at the average market price for the period. The assumed proceeds include the purchase price
the optionee pays, the windfall tax benefit that we receive upon assumed exercise and the unrecognized
compensation expense at the end of each period.

Derivative Instruments and Hedging Activity
We have used derivative instruments, including forward and option contracts and swaps, to manage our
exposure to fluctuations in foreign currency exchange rates and interest rates. The use of these derivative
instruments modifies the exposure of these risks with the intent to reduce the risk or cost to us. We use
derivative instruments as risk management tools and not for trading purposes. All derivatives, whether
designated as hedging relationships or not, are recorded on the balance sheet at fair value. Cash flows
from derivative instruments are classified in the consolidated statements of cash flows in the same cate-
gory as the cash flows from the items subject to the designated hedge or undesignated (economic) hedge
relationships. The hedging designation may be classified as one of the following:

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

Cash Flow Hedge. A hedge of a forecasted transaction or of the variability of cash flows to be received or
paid related to a recognized asset or liability is considered a cash flow hedge. The effective portion of the
change in the fair value of a derivative that is designated as a cash flow hedge is recorded in other com-
prehensive income (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.

46 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 47

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

3. REVENUES
Disaggregation of Revenues

December 31,

ROU assets

Current portion of operating lease liabilities
Operating lease liabilities

Total operating lease liabilities

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

2020

209,169

70,232
139,527

209,759

3.5 years
4.00%

2019

223,369

68,199
154,271

222,470

3.9 years
4.48%

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

Years Ended December 31,

Operating cash flows for the measurement of operating lease liabilities
Operating lease ROU assets obtained in exchange for operating lease obligations

2020

80,921
59,093

$
$

2019

$
$

75,357
290,422

At December 31, 2020, maturities of operating lease liabilities over each of the next five years and there-
after were as follows:

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

2020

2019

2018

$ 4,535,262
301,727
217,939

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

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

$ 5,054,928

$ 4,770,362

$ 4,546,653

69%
28%
3%

100%

68%
28%
4%

100%

67%
29%
4%

100%

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,

2020

2019

2018

2021
2022
2023
2024
2025
Thereafter

Total lease payments
Less imputed interest

Total lease liability

77,170
62,291
44,931
25,052
9,709
6,842

225,995
16,236

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

209,759

Weighted-average common shares outstanding - Basic

Basic earnings per share for Common and Class B common stock

At December 31, 2020, we had additional operating leases, primarily for real property, that had not yet
commenced. Such leases had estimated future minimum rental commitments of approximately $21,300.
These operating leases are expected to commence in 2021 with lease terms of 5-11 years. These undis-
counted amounts are not included in the table above.

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

restricted common stock

23,140

20,411

19,788

Earnings allocated to Watsco, Inc. shareholders

246,439

225,539

223,144

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

35,069,516
81,055

34,644,700
30,941

34,319,890
54,379

Weighted-average common shares outstanding - Diluted

35,150,571

34,675,641

34,374,269

Diluted earnings per share for Common and Class B common stock

7.01

6.50

6.49

48 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 49

269,579

245,950

242,932

23,140

246,439

35,069,516

7.03

228,361
18,078

246,439

269,579

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

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, 2020, 2019, and 2018, our outstanding Class B common
stock was convertible into 2,572,536, 2,574,336, and 2,581,627 shares of our Common stock, respec-
tively.

Diluted earnings per share excluded 19,722, 205,380, and 74,270 shares for the years ended December
31, 2020, 2019, and 2018, 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. The tax effects allocated to each component of other
comprehensive income (loss) were as follows:

Years Ended December 31,

2020

2019

2018

Foreign currency translation adjustment

6,272

12,298

(20,493)

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

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

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

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

1,205
(325)

880

(574)
156

(418)

(2,001)
540

(1,461)

(482)
130

(352)

2,627
(709)

1,918

(215)
58

(157)

Other comprehensive income (loss)

6,734

10,485

(18,732)

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

Years Ended December 31,

2020

2019

2018

Foreign currency translation adjustment:

Beginning balance
Current period other comprehensive income (loss)

Ending balance

Cash flow hedging instruments:

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

Ending balance

Equity securities:

Beginning balance
Cumulative-effect adjustment to retained earnings

Ending balance

(38,599)
3,905

(34,694)

(46,604)
8,005

(33,499)
(13,105)

(38,599)

(46,604)

(451)
528
(250)

(173)

—
—

—

636
(876)
(211)

(451)

—
—

—

(421)
1,151
(94)

636

(301)
301

—

Accumulated other comprehensive loss, net of tax

(34,867)

(39,050)

(45,968)

6. SUPPLIER CONCENTRATION
Purchases from our top ten suppliers comprised 85%, 83%, and 84% of all purchases made in 2020,
2019, and 2018, respectively. Our largest supplier, Carrier and its affiliates, accounted for 63%, 62%,
and 62% of all purchases made in 2020, 2019, and 2018, respectively. See Note 20. A significant
interruption by Carrier, or any of our other key suppliers, in the delivery of products could impair our abil-
ity to maintain current inventory levels and could materially impact our consolidated results of operations
and consolidated financial position.

At December 31, 2020, $68,182 was recorded as a reduction of inventory related to pricing claim
advances, of which $54,593 was provided by Carrier and its affiliates.

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

2020

741
80,877
92,577
62,776
19,077

2019

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

256,048
(157,823)

243,594
(145,071)

98,225

98,523

50 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 51

Depreciation and amortization expense related to property and equipment included in selling, general and
administrative expenses for the years ended December 31, 2020, 2019, and 2018, were $19,963,
$18,808, and $16,747, respectively.

8. DEBT
We maintain an unsecured, syndicated multicurrency revolving credit agreement, which we use to fund
seasonal working capital needs and for other general corporate purposes, including acquisitions, dividends
(if and as declared by our Board of Directors), capital expenditures, stock repurchases and issuances of
letters of credit. On April 10, 2020, we increased the aggregate borrowing capacity of our revolving credit
agreement from $500,000 to $560,000. The credit facility has a seasonal component from October 1 to
March 31, during which the borrowing capacity may be reduced to $460,000 at our discretion, and we
effected this reduction in 2020. 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, 2020), 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, 2020), 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,
2020). During 2020, we paid fees of $196 in connection with the increase in the aggregate borrowing
capacity of our revolving credit agreement, which are being amortized ratably through the maturity of the
facility in December 2023.

At December 31, 2020 there was no outstanding balance under the revolving credit agreement. At
December 31, 2019 $155,700 was outstanding under the revolving credit agreement. The revolving
credit agreement contains customary affirmative and negative covenants, including financial covenants
with respect to consolidated leverage and interest coverage ratios, and other customary restrictions. We
believe we were in compliance with all covenants at December 31, 2020.

9. INCOME TAXES
The components of income tax expense from our wholly owned operations and investments and our con-
trolling interest in CIAC and joint ventures with Carrier are as follows:

Years Ended December 31,

2020

2019

2018

Current:

U.S. Federal
State
Foreign

Deferred:

U.S. Federal
State
Foreign

58,895
12,909
4,779

76,583

218
21
(199)

48,359
9,362
8,078

65,799

2,603
446
(1,771)

1,278

47,263
10,031
7,229

64,523

7,082
1,600
(392)

8,290

Income tax expense

76,623

67,077

72,813

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 CIAC and our joint ven-
tures 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,

2020

2019

2018

U.S. federal statutory rate
State income taxes, net of federal benefit and other
Excess tax benefits from share-based compensation
Tax effects on foreign income
GILTI
Tax credits and other
Repatriation transition tax
Deferred tax impact of enacted tax rate changes

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

21.0%
3.3
(2.3)
0.3
—
(0.3)
—
—

22.0
(2.8)

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)

Effective income tax rate

19.2%

18.5%

19.7%

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)

2020

2019

27,223
3,189
949
518
5,090
2,930

39,899
(668)

39,231

(78,288)
(16,441)
(7,050)

(101,779)

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

33,835
(655)

33,180

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

(95,327)

(62,548)

(62,147)

(1) Net deferred tax liabilities have been included in the consolidated balance sheets in deferred income taxes and other liabilities.

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.

52 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 53

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 refine-
ments for any enactment-date effects related to the TCJA in 2019 or 2020.

The TCJA one-time repatriation transition tax and GILTI liabilities effectively taxed the undistributed earn-
ings previously deferred from U.S. federal and certain state income taxes. As of December 31, 2020, we
have accumulated undistributed earnings generated by our foreign subsidiaries of approximately
$85,000. 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, 2020 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. At December 31, 2020 and 2019, we had a valuation allowance
of $668 and $655, respectively, to reduce our deferred tax assets to an amount that is more likely than
not to be recovered. At December 31, 2020, there were state net operating loss carryforwards of
$14,427, which expire in varying amounts from 2021 through 2040. At December 31, 2020, there
were foreign net operating loss carryforwards of $10,565, which expire in varying amounts from 2036
through 2040. These amounts are available to offset future taxable income. There were no federal net
operating loss carryforwards at December 31, 2020.

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
2016. For the majority of states and foreign jurisdictions, we are no longer subject to tax examinations for
tax years prior to 2015.

At December 31, 2020 and 2019, the total amount of gross unrecognized tax benefits (excluding the fed-
eral benefit received from state positions) was $6,505 and $5,367, respectively. Of these totals, $5,461
and $4,367, 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. At December 31, 2020 and
2019, the cumulative amount of estimated accrued interest and penalties resulting from such unrecog-
nized tax benefits was $982 and $855, 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, 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

Balance at December 31, 2019
Additions based on tax positions related to the current year
Reductions due to lapse of applicable statute of limitations

Balance at December 31, 2020

4,225
960
(283)

4,902
1,027
(562)

5,367
1,911
(773)

6,505

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.

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 915,752
shares of Common stock, net of cancellations, and 968,166 shares of Class B common stock, had been
awarded under the 2014 Plan as of December 31, 2020. As of December 31, 2020, 161,503 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 following is a summary of stock option activity under the 2014 Plan as of and for the year ended
December 31, 2020:

Options outstanding at December 31, 2019
Granted
Exercised
Forfeited

Options outstanding at December 31, 2020

Options exercisable at December 31, 2020

Weighted-
Average
Exercise
Price

159.34
207.60
146.90
175.76

174.83

161.15

Options

584,675
161,500
(135,809)
(25,250)

585,116

89,697

Weighted-
Average
Remaining
Contractual
Term
(in years)

Aggregate
Intrinsic
Value

3.22

2.27

30,729

5,866

The following is a summary of non-vested restricted stock activity as of and for the year ended December
31, 2020:

Non-vested restricted stock outstanding at December 31, 2019
Granted
Vested
Forfeited

Weighted-
Average
Grant Date
Fair Value

68.63
193.89
108.36
164.94

3,191,705
184,265
(37,274)
(3,589)

Non-vested restricted stock outstanding at December 31, 2020

3,335,107

75.00

54 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 55

The weighted-average grant date fair value of non-vested restricted stock granted during 2020, 2019,
and 2018 was $193.89, $151.58, and $167.06, respectively. The fair value of non-vested restricted
stock that vested during 2020, 2019, and 2018 was $7,354, $4,931, and $9,637, respectively.

During 2020, 11,693 shares of Common and Class B common stock with an aggregate fair market value
of $2,299 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection
with the vesting of restricted stock. 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 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. These shares were retired upon delivery.

Share-Based Compensation Fair Value Assumptions
The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option
pricing valuation model based on the weighted-average assumptions noted in the table below. The fair
value of each stock option award, which is subject to graded vesting, is expensed, net of estimated forfei-
tures, on a straight-line basis over the requisite service period for each separately vesting portion of the
stock option. We use historical data to estimate stock option forfeitures. The expected term of stock
option awards granted represents the period of time that stock option awards granted are expected to be
outstanding and was calculated using the simplified method for plain vanilla options, which we believe
provides a reasonable estimate of expected life based on our historical data. The risk-free rate for periods
within the contractual life of the stock option award is based on the yield curve of a zero-coupon United
States Treasury bond on the date the stock option award is granted with a maturity equal to the expected
term of the stock option award. Expected volatility is based on historical volatility of our stock.

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

Years Ended December 31,

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

2020

2019

2018

4.25
0.26%
20.89%
3.69%

4.25
1.64%
18.01%
3.99%

4.25
2.69%
17.11%
3.13%

$20.76

$14.81

$20.05

Exercise of Stock Options
The total intrinsic value of stock options exercised during 2020, 2019, and 2018 was $8,753, $4,153,
and $3,500, respectively. Cash received from the exercise of stock options during 2020, 2019, and
2018 was $17,608, $11,703, and $5,006, respectively. The tax benefit from stock option exercises
during 2020, 2019, and 2018 was $1,586, $626, and $635, respectively. During 2020, 2019, and
2018, 11,455 shares of Common stock with an aggregate fair market value of $2,343, 799 shares of
Common stock with an aggregate fair market value of $134 and 7,027 shares of Common stock with an
aggregate fair market value of $1,269, 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

2020

2,447
19,682

22,129

2019

2,440
14,592

17,032

2018

2,014
13,494

15,508

At December 31, 2020, there was $4,184 of unrecognized pre-tax compensation expense related to
stock options granted under the 2014 Plan, which is expected to be recognized over a weighted-average
period of approximately 1.8 years. The total fair value of stock options that vested during 2020, 2019,
and 2018 was $2,177, $2,055, and $1,607, respectively.

At December 31, 2020, there was $152,187 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 $4,000, $31,000, and $22,000 vest in approximately
2, 6, and 8 years upon his attainment of age 82, 86, and 88, respectively, and approximately $23,000
is related to awards granted to our President, of which approximately $22,000 and $1,000 vest in
approximately 23 and 25 years upon his attainment of age 62 and 64, respectively. In the event that
vesting is accelerated for any circumstance, as defined in the related agreements, the remaining unrecog-
nized share-based compensation expense would be immediately recognized as a charge to earnings with
a corresponding tax benefit. At December 31, 2020, we were obligated to issue 42,909 shares of non-
vested restricted stock to our CEO that vest in 8 years and 35,025 shares of non-vested restricted stock
to our President that vest in 23 years in connection with 2020’s performance-based incentive compensa-
tion program.

Employee Stock Purchase Plan
The Watsco, Inc. Fourth Amended and Restated 1996 Qualified Employee Stock Purchase Plan (the “ESPP”)
provides for up to 1,500,000 shares of Common stock to be available for purchase by our full-time
employees with at least 90 days of service. The ESPP allows participating employees to purchase shares
of Common stock at a 5% discount to the fair market value at specified times. During 2020, 2019, and
2018, employees purchased 5,121, 5,676, and 5,151 shares of Common stock at an average price of
$171.89, $145.09, and $168.21 per share, respectively. Cash dividends received by the ESPP were
reinvested in Common stock and resulted in the issuance of 3,964, 5,087, and 4,338 additional shares
during 2020, 2019, and 2018, respectively. We received net proceeds of $1,649, $1,638, and $1,585,
respectively, during 2020, 2019, and 2018, for shares of our Common stock purchased under the ESPP.
At December 31, 2020, 457,408 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, 2020, 2019,
and 2018, we issued 25,216, 30,715, and 17,318 shares of Common stock, respectively, to the plan,
representing the Common stock discretionary matching contribution of $4,543, $4,274 and $2,945,
respectively.

11. PURCHASE OF REMAINING OWNERSHIP INTEREST IN JOINT VENTURE
Effective May 31, 2019, we purchased an additional 20% ownership interest in Homans Associates II
LLC (“Homans”) from our second joint venture with Carrier, Carrier Enterprise Northeast, LLC, which we
refer to as Carrier Enterprise II, for cash consideration of $32,400, 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 wholly owned subsidiary of the Company with 17 locations in the
Northeastern U.S.

56 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 57

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
$3,871, net of a discount for lack of marketability, and the repayment of certain indebtedness. The pur-
chase price resulted in the recognition of $4,672 in goodwill and intangibles. The fair value of the identi-
fied intangible assets was $1,540 and consisted of $770 trade names and distribution rights, and $770
in customer relationships to be amortized over an 18-year period. The tax basis of such goodwill is
deductible for income tax purposes 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 repayment of
certain 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
such goodwill 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 ROU 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 such goodwill is deductible for income tax purposes over 15 years.

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.

58 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 59

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

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

Balance at December 31, 2019
Acquired goodwill
Foreign currency translation adjustment

Balance at December 31, 2020

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

391,998
16,742
2,477

411,217
410
859

412,486

Estimated
Useful Lives

2020

2019

7-18 years
7 years
10 years

140,867

138,647

81,527
1,714
1,150
(55,329)

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

29,062

33,357

169,929

172,004

Amortization expense related to finite lived intangible assets included in selling, general and administrative
expenses for the years ended December 31, 2020, 2019, and 2018, were $5,945, $5,704, and
$5,348, respectively.

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

2021
2022
2023
2024
2025

$
$
$
$
$

5,100
4,300
3,700
3,500
3,400

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, 2020 or 2019.

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 2020, 2019 or 2018. 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, 2020, there were 1,129,087 shares remaining authorized for repurchase under the pro-
gram.

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 and borrowings under our revolving credit agreement.
At December 31, 2020 and 2019, the fair values 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 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, 2020 and 2019, we were contingently liable under a standby letter of credit for
$1,075 and $925, respectively, which was required by a lease for real property. Additionally, at
December 31, 2020 and 2019, we were contingently liable under various performance bonds aggregat-
ing approximately $11,400 and $10,500, 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 letter of credit or perform-
ance bonds because we expect to meet our obligations under our lease for real property 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.

60 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 61

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

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, 2020, all of our open
foreign currency forward contracts had maturities of one year or less. We had only one foreign currency
exchange contract designated as a cash flow hedge at December 31, 2020, the total notional value of
which was $1,000, and such contract subsequently expired during January 2021.

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

Assets:

Equity securities

Liabilities:

Derivative financial instruments

Years Ended December 31,

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

2020

$
$

1,205
(574)

$
$

2019

(2,001)
(482)

Assets:

Equity securities
Private equities

At December 31, 2020, we expected an estimated $402 pre-tax loss to be reclassified into earnings to
reflect the fixed prices obtained from foreign exchange hedging within the next 12 months.

Liabilities:

Derivative financial instruments

Balance Sheet Location

Total Level 1 Level 2 Level 3

Fair Value Measurements
at December 31, 2020 Using

Other assets

$ 6,065

—

Accrued expenses and
other current liabilities

101

— $

101

—

Balance Sheet Location

Total Level 1 Level 2 Level 3

Fair Value Measurements
at December 31, 2019 Using

Other assets
Other assets

$ 402
$ 2,500

402
—

—
—
— $ 2,500

Accrued expenses and
other current liabilities

1,007

— $ 1,007

—

Derivatives Not Designated as Hedging Instruments
We have also entered into foreign currency forward and option contracts that are either not designated as
hedges or did not qualify for hedge accounting. These derivative instruments were effective economic
hedges for all of the periods presented. The fair value gains and losses on these contracts are recognized
in earnings as a component of selling, general and administrative expenses. We had only one foreign cur-
rency exchange contract not designated as a hedging instrument at December 31, 2020, the total
notional value of which was $4,600, and such contract subsequently expired during January 2021.

We recognized (losses) gains of $(490), $(540), and $129 from foreign currency forward and option con-
tracts not designated as hedging instruments in our consolidated statements of income for 2020, 2019,
and 2018, 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 in our consolidated balance
sheets. See Note 18.

December 31,

Derivatives designated as hedging instruments
Derivatives not designated as hedging instruments

Total derivative instruments

Asset Derivatives Liability Derivatives

2020 2019

$ —
—

$ — $ 91 $

—

944
63

$ —

$ — $ 101 $

1,007

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.

Private equities – investment in Porch.com, Inc. Fair value was based on cost as of December 23, 2019
as inputs for the asset were unobservable, therefore, we classified this investment within Level 3 of the
fair value hierarchy at December 31, 2019. The company went public on December 23, 2020 and
accordingly, the fair value was based on the closing stock price from active markets and therefore was
transferred to Level 1 of the fair value hierarchy at December 31, 2020.

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.

62 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 63

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 $5,404 and
$3,062 at December 31, 2020 and 2019, 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, 2020, 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 $3,600. At December 31, 2020,
we have a cash deposit of $2,400 with the captive insurance entity as collateral to cover any contingency
related to additional risk assessments pertaining to our self-insurance programs. See “Self-Insurance”
above for further information on commitments associated with the insurance programs. At December 31,
2020, there were no other entities that met the definition of a VIE.

Purchase Obligations
At December 31, 2020, we were obligated under various non-cancelable purchase orders with our key
suppliers for goods aggregating approximately $32,000, of which approximately $13,000 is with Carrier
and its affiliates.

20. RELATED PARTY TRANSACTIONS
Purchases from Carrier and its affiliates comprised 63%, 62%, and 62% of all inventory purchases made
during 2020, 2019 and 2018, respectively. At December 31, 2020 and 2019, approximately $81,000
and $86,000, 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 2020, 2019, and 2018 included approximately $103,000, $91,000, and $84,000,
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 2020, 2019,
and 2018, fees for services performed were $156, $187, and $131, respectively, and $8 was payable
at December 31, 2020.

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 for construction services performed during 2018.

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

2020

2019

2018

$ 4,535,262
301,727
217,939

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

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

$ 5,054,928

$ 4,770,362

$ 4,546,653

2020

2019

799,665
180,518
19,719

808,685
180,663
20,083

999,902

$ 1,009,431

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 ROU assets, property
and equipment, and our investment in an unconsolidated entity.

22. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information was as follows:

Years Ended December 31,

2020

2019

2018

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.

$
$
$

1,844
70,889
(161)

$
$
$
— $
— $
—

$
$

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

— $

3,065
115,301
—
—
—
6,846

23. SUBSEQUENT EVENT
On February 9, 2021, our Board of Directors approved an increase to the quarterly cash dividend per
share of Common and Class B common stock to $1.95 per share from $1.775 per share, beginning with
the dividend that will be paid in April 2021.

64 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 65

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

(In thousands, except per share data)

Year Ended December 31, 2020
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, 2019
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

$ 1,008,156
247,615
$
30,502
$

$ 1,355,385
319,199
$
86,578
$

$ 1,536,671
373,763
$
106,489
$

$ 1,154,716
282,244
$
46,010
$

$ 5,054,928
$ 1,222,821
269,579
$

$
$
$

0.72

2.26

2.77

2.76

1.14

7.03

7.01

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

2.40

2.20

0.92

6.51

6.50

(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 first and fourth quarters. 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 eco-
nomic 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.

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,
2015 and its relative performance is tracked through December 31, 2020.

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

$240

$220

$200

$180

$160

$140

$120

$100

$80

$60

12/15

12/16

12/17

12/18

12/19

12/20

Watsco, Inc.

S&P MidCap 400

Watsco Class B

Russell 2000 Index

S&P 500 Index

*$100 invested on 12/31/15 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
Copyright© 2021 Standard & Poor's, a division of S&P Global. All rights reserved.
Copyright© 2021 Russell Investment Group. All rights reserved.

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

12/31/15

12/31/16

12/31/17

12/31/18

12/31/19

12/31/20

100.00
100.00
100.00
100.00
100.00

130.00
128.63
121.31
120.74
111.96

153.87
150.64
139.08
140.35
136.40

129.98
124.43
123.76
124.80
130.42

175.41
174.08
155.35
157.49
171.49

228.94
232.06
186.36
179.00
203.04

66 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 67

5-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA (UNAUDITED)
The following selected consolidated financial data should be read in conjunction with the audited consoli-
dated financial statements, including the notes thereto, and the information contained in Management’s
Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report to
Shareholders for the year ended December 31, 2020.

(In thousands, except per share data)

2020

2019 (1)

2018 (2)

2017

2016

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

$ 5,054,928
1,222,821
401,034
323,172

$ 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

53,593

269,579

7.01

6.925
6.925

$
$

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

$
$

Class B common share outstanding - Diluted

35,151

34,676

34,374

32,863

32,617

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

$ 2,484,347
144,338
$
$ 1,779,761
5,800

$ 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) 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.

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
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

68 WATSCO, INC. 2020 ANNUAL REPORT

WATSCO, INC. 2020 ANNUAL REPORT 69

Design:
Suissa Design
suissadesign.com

70 WATSCO, INC. 2020 ANNUAL REPORT

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.

WATSCO, INC. 2020 ANNUAL REPORT 71

72 WATSCO, INC. 2020 ANNUAL REPORT