WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
March 31, 2017
(In thousands,
except share and per share data)
Basis of Consolidation
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. The accompanying March 31, 2017 interim condensed
consolidated unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements prepared in
accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to those rules and regulations, but we believe the disclosures made are adequate to make the information presented not
misleading. In the opinion of management, all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation have been included in the condensed consolidated unaudited financial statements included herein. These
statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2016 Annual Report on Form
10-K.
The condensed consolidated unaudited financial statements contained in this report include the accounts of Watsco, all of its wholly owned subsidiaries and the
accounts of three joint ventures with Carrier Corporation (Carrier), in each of which Watsco maintains a controlling interest. All significant intercompany balances and transactions have been eliminated in consolidation.
The results of operations for the quarter ended March 31, 2017 are not necessarily indicative of the results to be expected for the year ending
December 31, 2017. Sales of residential central air conditioners, heating equipment and parts and supplies are seasonal. Furthermore, results of operations can be impacted favorably or unfavorably based on weather patterns, primarily during the
Summer and Winter selling seasons. Demand related to the residential central air conditioning replacement market is typically highest in the second and third quarters, and demand for heating equipment is usually highest in the fourth quarter. Demand
related to the new construction market is fairly consistent during the year, subject to weather and economic conditions, including their effect on the number of housing completions.
Use of Estimates
The preparation of condensed
consolidated unaudited financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the condensed consolidated unaudited financial statements and the reported amounts of revenues and expenses for the reporting period. Significant estimates include valuation reserves for accounts receivable, inventories and income taxes, reserves
related to self-insurance programs and the valuation of goodwill and indefinite lived intangible assets. While we believe that these estimates are reasonable, actual results could differ from such estimates.
New Accounting Standards
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (the FASB) issued a standard on revenue recognition that provides a single, comprehensive
revenue recognition model for all contracts with customers. The standard is principle-based and provides a five-step model to determine the measurement of revenue and timing of when it is recognized. This standard will be applied using either
of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients or (ii) a modified retrospective
approach with the cumulative effect of initially adopting the standard recognized at the date of adoption, which requires additional footnote disclosures. This standard is effective for our interim and annual reporting periods beginning after
December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. We will adopt this guidance on January 1, 2018. While we are currently evaluating the method of adoption and the impact
of the provisions of this standard, we expect similar performance obligations to result under this guidance as compared with deliverables and separate units of accounting currently identified. As a result, we expect the timing of our revenue
recognition to generally remain the same.
Measurement of Inventory
In July 2015, the FASB issued guidance that simplifies the measurement of inventory by replacing the lower of cost or market test with a lower of cost and net
realizable value test. The guidance applies to all inventory that is measured using
first-in,
first-out
or average cost methods. This guidance must be applied
prospectively and became effective for interim and annual reporting periods beginning after December 15, 2016. The adoption of this guidance did not have an impact on our consolidated financial statements.
7 of 21
Classification of Deferred Taxes
In November 2015, the FASB issued guidance that requires deferred tax assets and liabilities to be classified as noncurrent in a classified balance sheet. This
guidance may be applied either prospectively or retrospectively and became effective for interim and annual reporting periods beginning after December 15, 2016. The adoption of this guidance on January 1, 2017 using the prospective
approach did not have a material impact on our consolidated financial statements.
Leases
In February 2016, the FASB issued guidance on accounting for leases, which requires lessees to recognize most leases on their balance sheets for the rights and
obligations created by those leases. The guidance requires enhanced disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. This guidance will be applied using a modified retrospective approach and is effective
for interim and annual periods beginning after December 15, 2018 with early adoption permitted. We will adopt this guidance on January 1, 2019. While we are still evaluating the impact of adopting this guidance on our consolidated
financial statements, including the option to elect certain practical expedients, we expect that, upon adoption, the
right-of-use
assets and lease liabilities recorded
could be material to our consolidated balance sheets. However, we do not expect a material impact to our consolidated statements of income.
Share-Based Payments
In March 2016, the FASB issued
amended guidance related to employee share-based payment accounting. The guidance requires that all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. The guidance also requires presentation of
excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. The guidance increases the amount companies can withhold to cover income taxes on awards without triggering liability classification for
shares used to satisfy statutory income tax withholding obligations and requires application of a modified retrospective transition method. The amended guidance became effective for interim and annual periods beginning after December 15, 2016.
Early adoption is permitted if all provisions are adopted in the same period.
We elected to early adopt the amended guidance during the quarter ended
June 30, 2016, which required us to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. The primary impact of adoption was the recognition of excess tax benefits
in our provision for income taxes rather than
paid-in
capital and an increase to our diluted weighted-average shares outstanding for all periods in 2016. We elected to apply the presentation requirements for
cash flows related to excess tax benefits prospectively. The accounting for income taxes and minimum statutory withholding tax requirements had no impact to retained earnings as of January 1, 2016, where the cumulative effect of these changes
are required to be recorded. We have elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period.
Adoption of the amended guidance resulted in the recognition of excess tax benefits in our provision for income taxes rather than
paid-in
capital of $2,898 for 2016, and impacted our previously reported quarterly results for March 31, 2016 as follows:
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|
|
|
|
|
|
|
Quarter Ended March 31, 2016
|
|
As Reported
|
|
|
As Adjusted
|
|
Income Statement:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
$15,508
|
|
|
|
$14,654
|
|
Net income
|
|
|
$34,174
|
|
|
|
$35,028
|
|
Diluted earnings per share
|
|
|
$0.71
|
|
|
|
$0.74
|
|
Diluted weighted-average common shares outstanding
|
|
|
32,537,225
|
|
|
|
32,546,314
|
|
|
|
|
Balance Sheet:
|
|
|
|
|
|
|
|
|
Paid-in
capital
|
|
|
$610,285
|
|
|
|
$609,431
|
|
|
|
|
Cash Flow Statement:
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
$41,852
|
|
|
|
$42,706
|
|
Net cash used in financing activities
|
|
|
$(41,638)
|
|
|
|
$(42,492)
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|
8 of 21
The following table presents the calculation of basic and diluted earnings per share
for our Common and Class B common stock:
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|
|
|
|
|
|
Quarters Ended March 31,
|
|
2017
|
|
|
2016
|
|
Basic Earnings per Share:
|
|
|
|
|
|
|
|
|
Net income attributable to Watsco, Inc. shareholders
|
|
|
$ 26,181
|
|
|
|
$ 25,537
|
|
Less: distributed and undistributed earnings allocated to
non-vested
restricted common stock
|
|
|
3,120
|
|
|
|
2,413
|
|
|
|
|
|
|
|
|
|
|
Earnings allocated to Watsco, Inc. shareholders
|
|
|
$ 23,061
|
|
|
|
$ 23,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding Basic
|
|
|
32,642,612
|
|
|
|
32,511,806
|
|
|
|
|
Basic earnings per share for Common and Class B common stock
|
|
|
$ 0.71
|
|
|
|
$ 0.71
|
|
|
|
|
Allocation of earnings for Basic:
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|
|
|
|
|
|
Common stock
|
|
|
$ 21,147
|
|
|
|
$ 21,205
|
|
Class B common stock
|
|
|
1,914
|
|
|
|
1,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 23,061
|
|
|
|
$ 23,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share:
|
|
|
|
|
|
|
|
|
Net income attributable to Watsco, Inc. shareholders
|
|
|
$ 26,181
|
|
|
|
$ 25,537
|
|
Less: distributed and undistributed earnings allocated to
non-vested
restricted common stock
|
|
|
3,120
|
|
|
|
2,413
|
|
|
|
|
|
|
|
|
|
|
Earnings allocated to Watsco, Inc. shareholders
|
|
|
$ 23,061
|
|
|
|
$ 23,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding Basic
|
|
|
32,642,612
|
|
|
|
32,511,806
|
|
Effect of dilutive stock options
|
|
|
37,194
|
|
|
|
25,419
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding Diluted
|
|
|
32,679,806
|
|
|
|
32,537,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share for Common and Class B common stock
|
|
|
$ 0.71
|
|
|
|
$ 0.71
|
|
Diluted earnings per share for our Common stock assumes the conversion of all of our Class B common stock into Common
stock as of the beginning of the fiscal year; therefore, no allocation of earnings to Class B common stock is required. At March 31, 2017 and 2016, our outstanding Class B common stock was convertible into 2,709,311 and 2,698,100
shares of our Common stock, respectively.
Diluted earnings per share excluded 16,067 and 126,000 shares for the quarters ended March 31, 2017 and
2016, respectively, related to stock options with an exercise price per share greater than the average market value, resulting in an anti-dilutive effect on diluted earnings per share.
3.
|
OTHER COMPREHENSIVE INCOME
|
Other comprehensive income consists of the foreign currency translation
adjustment associated with our Canadian operations use of the Canadian dollar as its functional currency and changes in the unrealized (losses) gains on cash flow hedging instruments and
available-for-sale
securities. The tax effects allocated to each component of other comprehensive income were as follows:
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|
|
|
|
|
|
Quarters Ended March 31,
|
|
2017
|
|
|
2016
|
|
Foreign currency translation adjustment
|
|
$
|
2,155
|
|
|
$
|
13,693
|
|
Unrealized loss on cash flow hedging instruments
|
|
|
(423
|
)
|
|
|
(1,086
|
)
|
Income tax benefit
|
|
|
114
|
|
|
|
293
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on cash flow hedging instruments, net of tax
|
|
|
(309
|
)
|
|
|
(793
|
)
|
|
|
|
|
|
|
|
|
|
Reclassification of gain on cash flow hedging instruments into earnings
|
|
|
(243
|
)
|
|
|
(1,066
|
)
|
Income tax expense
|
|
|
65
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
Reclassification of gain on cash flow hedging instruments into earnings, net of tax
|
|
|
(178
|
)
|
|
|
(778
|
)
|
|
|
|
|
|
|
|
|
|
9 of 21
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Quarters Ended March 31,
|
|
2017
|
|
|
2016
|
|
Unrealized gain on
available-for-sale
securities
|
|
|
13
|
|
|
|
13
|
|
Income tax expense
|
|
|
(5
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Unrealized gain on
available-for-sale
securities, net of tax
|
|
|
8
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
$
|
1,676
|
|
|
$
|
12,131
|
|
|
|
|
|
|
|
|
|
|
The changes in each component of accumulated other comprehensive loss, net of tax, were as follows:
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|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
2017
|
|
|
2016
|
|
Foreign currency translation adjustment:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
(43,459)
|
|
|
$
|
(47,204)
|
|
Current period other comprehensive income
|
|
|
1,324
|
|
|
|
8,362
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
(42,135)
|
|
|
|
(38,842)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
215
|
|
|
|
600
|
|
Current period other comprehensive loss
|
|
|
(185)
|
|
|
|
(476)
|
|
Less reclassification adjustment
|
|
|
(107)
|
|
|
|
(467)
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
(77
|
)
|
|
|
(343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
(286)
|
|
|
|
(300)
|
|
Current period other comprehensive income
|
|
|
8
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
(278)
|
|
|
|
(291)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss, net of tax
|
|
$
|
(42,490)
|
|
|
$
|
(39,476)
|
|
|
|
|
|
|
|
|
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|
We maintain an unsecured, syndicated revolving credit agreement that provides for borrowings of
up to $600,000. Borrowings are used to fund seasonal working capital needs and for other general corporate purposes, including acquisitions, dividends (if and as declared by our Board of Directors), capital expenditures, stock repurchases and
issuances of letters of credit. The credit agreement matures on July 1, 2019. Included in the credit facility are a $90,000 swingline subfacility, a letter of credit subfacility and a $75,000 multicurrency borrowing sublimit. On
January 24, 2017, we entered into an amendment to this credit agreement, which reduced the letter of credit subfacility from $50,000 to $10,000 and modified certain definitions.
At March 31, 2017 and December 31, 2016, $280,300 and $235,294, respectively, were outstanding under the revolving credit agreement. The revolving
credit agreement contains customary affirmative and negative covenants, including financial covenants with respect to consolidated leverage and interest coverage ratios, and other customary restrictions. We believe we were in compliance with all
covenants at March 31, 2017.
At March 31, 2017, $1,596 of short-term borrowings were outstanding under a credit line established by our Mexican
subsidiary. This line of credit has a
one-year
term, maturing on June 14, 2017, is
non-committed
and provides for borrowings of up to approximately $4,000 (MXN
75,000) for general corporate purposes. No short-term borrowings were outstanding under this credit line at December 31, 2016.
5.
|
PURCHASE OF ADDITIONAL OWNERSHIP INTEREST IN JOINT VENTURE
|
In 2011, we formed a second joint venture
with Carrier Corporation (Carrier) and completed two additional transactions. In April 2011, Carrier contributed 28 of its company-owned locations in eight Northeast U.S. states, and we contributed 14 locations in the Northeast U.S. In
July 2011, we purchased Carriers distribution operations in Mexico, which included seven locations. Collectively, the Northeast locations and the Mexico operations are referred to as Carrier Enterprise II. Following formation of this joint
venture, we owned a 60% controlling interest. On November 29, 2016, we purchased an additional 10% ownership interest in Carrier
10 of 21
Enterprise II for cash consideration of $42,909, and, on February 13, 2017, we purchased an additional 10% ownership interest in Carrier Enterprise II for cash consideration of $42,688,
which together increased our controlling interest in Carrier Enterprise II to 80%.
We enter into foreign currency forward contracts to offset the earnings impact that
foreign exchange rate fluctuations would otherwise have on certain monetary liabilities that are denominated in nonfunctional currencies.
Cash Flow
Hedging Instruments
We enter into foreign currency forward contracts that are designated as cash flow hedges. The settlement of these derivatives
results in reclassifications from accumulated other comprehensive income (loss) to earnings for the period in which the settlement of these instruments occur. The maximum period for which we hedge our cash flow using these instruments is 12 months.
Accordingly, at March 31, 2017, all of our open foreign currency forward contracts had maturities of one year or less. The total notional value of our foreign currency exchange contracts designated as cash flow hedges at March 31, 2017 was
$46,500, and such contracts have varying terms expiring through December 2017.
The impact from foreign exchange derivative instruments designated as cash
flow hedges was as follows:
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|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
2017
|
|
|
2016
|
|
Loss recorded in accumulated other comprehensive loss
|
|
$
|
(423
|
)
|
|
$
|
(1,086
|
)
|
Gain reclassified from accumulated other comprehensive loss into earnings
|
|
$
|
(243
|
)
|
|
$
|
(1,066
|
)
|
At March 31, 2017, we expected an estimated $176
pre-tax
loss to be reclassified
into earnings to reflect the fixed prices obtained from foreign exchange hedging within the next 12 months.
Derivatives Not Designated as Hedging
Instruments
We have also entered into foreign currency forward contracts that are either not designated as hedges or did not qualify for hedge
accounting. These derivative instruments were effective economic hedges for all of the periods presented. The fair value gains and losses on these contracts are recognized in earnings as a component of selling, general and administrative expenses.
The total notional value of our foreign currency exchange contracts not designated as hedging instruments at March 31, 2017 was $15,050, and such contracts have varying terms expiring through June 2017.
We recognized losses of $583 and $431 from foreign currency forward contracts not designated as hedging instruments in our condensed consolidated unaudited
statements of income for the quarters ended March 31, 2017 and 2016, respectively.
The following table summarizes the fair value of derivative
instruments, which consist solely of foreign currency forward contracts, included in other current assets and accrued expenses and other current liabilities in our condensed consolidated unaudited balance sheets. See Note 7.
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|
|
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
|
|
Liability Derivatives
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
March 31, 2017
|
|
|
|
|
December 31, 2016
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
$
|
184
|
|
|
|
|
|
|
$
|
227
|
|
|
|
|
$
|
342
|
|
|
|
|
$
|
35
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
514
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative instruments
|
|
|
|
|
|
$
|
184
|
|
|
|
|
|
|
$
|
241
|
|
|
|
|
$
|
856
|
|
|
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
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11 of 21
7.
|
FAIR VALUE MEASUREMENTS
|
The following tables present our assets and liabilities carried at fair value
that are measured on a recurring basis:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
at March 31, 2017 Using
|
|
|
|
Balance Sheet Location
|
|
Total
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
Other assets
|
|
$ 294
|
|
$
|
294
|
|
|
$
|
|
|
|
$
|
|
|
Derivative financial instruments
|
|
Other current assets
|
|
$ 184
|
|
$
|
|
|
|
$
|
184
|
|
|
$
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
Accrued expenses and other
current
liabilities
|
|
$ 856
|
|
$
|
|
|
|
$
|
856
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
at December 31, 2016 Using
|
|
|
|
Balance Sheet Location
|
|
Total
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
Other assets
|
|
$ 281
|
|
$
|
281
|
|
|
$
|
|
|
|
$
|
|
|
Derivative financial instruments
|
|
Other current assets
|
|
$ 241
|
|
$
|
|
|
|
$
|
241
|
|
|
$
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
Accrued expenses and other
current
liabilities
|
|
$ 39
|
|
$
|
|
|
|
$
|
39
|
|
|
$
|
|
|
The following is a description of the valuation techniques used for these assets and liabilities, as well as the level of
input used to measure fair value:
Available-for-sale
securities
the investments are exchange-traded equity securities. Fair values for these investments are based on closing stock prices from active markets and are therefore classified within Level 1 of the fair value hierarchy.
Derivative financial instruments
these derivatives are foreign currency forward contracts. See Note 6. Fair value is based on observable market
inputs, such as forward rates in active markets; therefore, we classify these derivatives within Level 2 of the valuation hierarchy.
There were no
transfers in or out of Level 1 and Level 2 during the quarter ended March 31, 2017.
Common Stock Dividends
We paid cash dividends of $1.05 and $0.85 per share of Common stock and Class B common stock during the quarters ended March 31, 2017 and 2016,
respectively.
Non-Vested
Restricted Stock
During the quarters ended March 31, 2017 and 2016, we granted 100,399 and 87,678 shares of
non-vested
restricted
stock, respectively. During the quarter ended March 31, 2016, 7,282 shares of Common stock with an aggregate fair market value of $945 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.
Exercise of Stock Options
During the quarters ended March 31, 2017 and 2016, 13,750 and 27,000 stock options, respectively, were exercised for Common stock. Cash received from
Common stock issued as a result of stock options exercised during the quarters ended March 31, 2017 and 2016 was $1,102 and $1,804, respectively.
Employee Stock Purchase Plan
During the quarters ended
March 31, 2017 and 2016, 1,953 and 2,628 shares of Common stock were issued under our employee stock purchase plan for which we received net proceeds of $285 and $297, respectively.
12 of 21
401(k) Plan
During the quarters ended March 31, 2017 and 2016, we issued 16,389 and 20,045 shares of Common stock, respectively, to our profit sharing retirement
plan, representing the Common stock discretionary matching contribution of $2,428 and $2,348, respectively.
Non-controlling
Interest
Of our three joint ventures with Carrier, we have a 60% controlling interest in one and an 80% controlling interest in each of the other two, while Carrier has
either a 40% or 20%
non-controlling
interest in such joint ventures, as applicable. The following table reconciles shareholders equity attributable to Carriers
non-controlling
interest:
|
|
|
|
|
Non-controlling
interest at December 31,
2016
|
|
$
|
245,920
|
|
Decrease in
non-controlling
interest in Carrier Enterprise
II
|
|
|
(17,463
|
)
|
Net income attributable to
non-controlling
interest
|
|
|
7,587
|
|
Foreign currency translation adjustment
|
|
|
831
|
|
Distributions to
non-controlling
interest
|
|
|
(6,798
|
)
|
Loss recorded in accumulated other comprehensive loss
|
|
|
(124
|
)
|
Gain reclassified from accumulated other comprehensive loss into earnings
|
|
|
(71
|
)
|
|
|
|
|
|
Non-controlling
interest at March 31,
2017
|
|
$
|
229,882
|
|
|
|
|
|
|
9.
|
COMMITMENTS AND CONTINGENCIES
|
Litigation, Claims and Assessments
In December 2015, a purported Watsco shareholder, Nelson Gaskins, filed a derivative lawsuit in the U.S. District Court for the Southern District of Florida
(the Court) against Watscos Board of Directors. The Company is a nominal defendant. The lawsuit alleges breach of fiduciary duties regarding CEO incentive compensation and seeks to recover alleged excessive incentive compensation
and unspecified damages. In an order dated March 20, 2017, the Court dismissed the plaintiffs complaint, with permission to file an amended complaint, by March 31, 2017, but only with respect to portions of the original complaint. On
March 31, 2017, plaintiffs counsel advised that they had elected not to file an amended complaint. On April 20, 2017, the Court issued an order noting that the case has been dismissed and plaintiff thereafter filed a notice of
appeal. The defendants believe the claims plaintiff had asserted are entirely without merit and intend to vigorously defend against plaintiffs appeal from the dismissal of those claims. We believe the ultimate outcome of this matter will not
have a material adverse effect on our consolidated results of operations and consolidated financial position.
We are involved in litigation incidental to
the operation of our business. We vigorously defend all matters in which we or our subsidiaries are named defendants and, for insurable losses, maintain significant levels of insurance to protect against adverse judgments, claims or assessments that
may affect us. Although the adequacy of existing insurance coverage and the outcome of any legal proceedings cannot be predicted 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 condition or results of operations.
Self-Insurance
Self-insurance reserves are maintained relative to company-wide casualty insurance and health benefit programs. The level of exposure from catastrophic events
is limited by the purchase of stop-loss and aggregate liability reinsurance coverage. When estimating the self-insurance liabilities and related reserves, management considers a number of factors, which include historical claims experience,
demographic factors, severity factors and valuations provided by independent third-party actuaries. Management reviews its assumptions with its independent third-party actuaries to evaluate whether the self-insurance reserves are adequate. If actual
claims or adverse development of loss reserves occur and exceed these estimates, additional reserves may be required. Reserves in the amounts of $3,249 and $2,951 at March 31, 2017 and December 31, 2016, respectively, were established
related to such programs and are included in accrued expenses and other current liabilities in our condensed consolidated unaudited balance sheets.
10.
|
RELATED PARTY TRANSACTIONS
|
Purchases from Carrier and its affiliates comprised 62% and 61% of all
inventory purchases made during the quarters ended March 31, 2017 and 2016, respectively. At March 31, 2017 and December 31, 2016, approximately $101,000 and $63,000, 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 condensed consolidated unaudited statements of income for the quarters ended March 31, 2017 and 2016 included approximately
$11,000 and $12,000, respectively, of sales to Carrier and its affiliates. We believe these transactions are conducted on terms equivalent to an
arms-length
basis in the ordinary course of business.
A member of our Board of Directors is the Chairman and Chief Executive Officer of Moss & Associates LLC, which serves as general contractor for the
remodeling of our Miami headquarters. Moss & Associates LLC was paid $418 for construction services performed during the quarter ended March 31, 2017 and zero was payable at March 31, 2017.
13 of 21
On April 24, 2017, our Board of Directors approved an increase to the quarterly
cash dividend per share of Common and Class B common stock to $1.25 per share from $1.05 per share, beginning with the dividend that will be paid in July 2017.