WATSCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
June 30, 2017
(In thousands,
except share and per share data)
1. BASIS OF PRESENTATION
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 June 30, 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 and six months ended June 30, 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.
Equity Method Investments
Investments in which we have
the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in other assets in our consolidated balance sheets. Under this method of accounting, our proportionate share
of the net income or loss of the investee is included in our consolidated statements of income.
Reclassifications
Certain reclassifications of prior year amounts have been made to conform to the 2017 presentation. These reclassifications had no effect on net income or
earnings per share as previously reported.
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
7 of 22
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.
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.
Intangibles Goodwill and Other
In January 2017, the FASB issued guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.
Under this updated standard, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units 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 effective prospectively and
is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted. We do not expect the adoption of this guidance to have a material impact to our consolidated financial statements.
Stock Compensation
In May 2017, the FASB issued guidance
to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions or the
classification of the award (as equity or liability) changes as a result of the change in terms or conditions. This guidance is effective prospectively and is effective for interim and annual periods beginning after December 15, 2017 with
early adoption permitted. We do not expect the adoption of this guidance to have a material impact to our consolidated financial statements.
2.
EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings per share for our Common and Class B common stock:
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Quarter Ended
June 30,
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Six Months Ended
June 30,
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2017
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2016
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2017
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2016
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Basic Earnings per Share:
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Net income attributable to Watsco, Inc. shareholders
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$
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73,756
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$
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64,621
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$
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99,937
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$
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90,158
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Less: distributed and undistributed earnings allocated to non-vested restricted common
stock
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6,189
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5,254
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8,376
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7,304
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Earnings allocated to Watsco, Inc. shareholders
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$
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67,567
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$
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59,367
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$
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91,561
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$
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82,854
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Weighted-average common shares outstanding Basic
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32,682,474
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32,574,901
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32,662,653
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32,543,354
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Basic earnings per share for Common and Class B common stock
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$
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2.07
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$
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1.82
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$
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2.80
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$
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2.55
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8 of 22
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Quarter Ended
June 30,
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Six Months Ended
June 30,
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2017
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2016
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2017
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2016
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Allocation of earnings for Basic:
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Common stock
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$
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61,966
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$
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54,411
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$
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83,966
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$
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75,930
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Class B common stock
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5,601
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4,956
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7,595
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6,924
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$
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67,567
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$
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59,367
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$
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91,561
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$
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82,854
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Diluted Earnings per Share:
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Net income attributable to Watsco, Inc. shareholders
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$
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73,756
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$
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64,621
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$
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99,937
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$
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90,158
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Less: distributed and undistributed earnings allocated to non-vested restricted common
stock
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6,186
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5,251
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8,374
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7,302
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Earnings allocated to Watsco, Inc. shareholders
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$
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67,570
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$
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59,370
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$
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91,563
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$
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82,856
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Weighted-average common shares outstanding Basic
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32,682,474
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32,574,901
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32,662,653
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32,543,354
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Effect of dilutive stock options
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26,172
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31,435
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31,653
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32,972
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Weighted-average common shares outstanding Diluted
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32,708,646
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32,606,336
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32,694,306
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32,576,326
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Diluted earnings per share for Common and Class B common stock
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$
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2.07
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$
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1.82
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$
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2.80
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$
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2.54
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Anti-dilutive stock options not included above
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63,467
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714
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27,787
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16,363
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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 June 30, 2017 and 2016, our outstanding Class B common stock was convertible into 2,709,311 and 2,719,495 shares of our Common
stock, respectively.
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 gains (losses) 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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Quarter Ended
June 30,
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Six Months Ended
June 30,
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2017
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2016
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2017
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2016
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Foreign currency translation adjustment
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$
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5,770
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$
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1,193
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$
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7,925
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$
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14,886
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Unrealized gain (loss) on cash flow hedging instruments
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304
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(1,483
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)
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(119
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)
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(2,569
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)
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Income tax (expense) benefit
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(82
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)
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401
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32
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694
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Unrealized gain (loss) on cash flow hedging instruments, net of tax
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222
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(1,082
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)
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(87
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)
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(1,875
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)
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Reclassification of (gain) loss on cash flow hedging instruments into earnings
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(937
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)
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1,611
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(1,180
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)
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|
545
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Income tax expense (benefit)
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254
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|
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(435
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)
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319
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(147
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)
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Reclassification of (gain) loss on cash flow hedging instruments into earnings, net of
tax
|
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(683
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)
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1,176
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(861
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)
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398
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Unrealized (loss) gain on available-for-sale securities
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(8
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)
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(28
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)
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5
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(15
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)
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Income tax benefit (expense)
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3
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10
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(2
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)
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6
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Unrealized (loss) gain on available-for-sale securities, net of tax
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(5
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)
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(18
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)
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3
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(9
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)
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Other comprehensive income
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$
|
5,304
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$
|
1,269
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$
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6,980
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$
|
13,400
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9 of 22
The changes in each component of accumulated other comprehensive loss, net of tax, were as follows:
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Six Months Ended June 30,
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2017
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2016
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Foreign currency translation adjustment:
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Beginning balance
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$
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(43,459
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)
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$
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(47,204
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)
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Current period other comprehensive income
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4,907
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|
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9,095
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Ending balance
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(38,552
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)
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(38,109
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)
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Cash flow hedging instruments:
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Beginning balance
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215
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|
|
600
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Current period other comprehensive loss
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(52
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)
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(1,125
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)
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Less reclassification adjustment
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(517
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)
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239
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|
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Ending balance
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(354
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)
|
|
|
(286
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)
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Available-for-sale securities:
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|
|
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Beginning balance
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|
(286
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)
|
|
|
(300
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)
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Current period other comprehensive income (loss)
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3
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|
|
|
(9
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)
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|
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|
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Ending balance
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(283
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)
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|
|
(309
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)
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Accumulated other comprehensive loss, net of tax
|
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$
|
(39,189
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)
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$
|
(38,704
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)
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4. DEBT
We maintain an
unsecured, syndicated revolving credit agreement that provides for borrowings of up to $600,000. Borrowings are used to fund seasonal working capital needs and for other general corporate purposes, including acquisitions, dividends (if and as
declared by our Board of Directors), capital 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 June 30, 2017 and December 31, 2016, $379,300 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 June 30, 2017.
At June 30, 2017, $1,676 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 13, 2018, is non-committed and provides for borrowings of up to approximately $4,200 (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 joint venture with Carrier Corporation (Carrier), Carrier Enterprise Northeast LLC, which we refer to as Carrier Enterprise
II. Carrier Enterprise II had sales of approximately $500,000 in 2016 from 41 locations in the northeastern United States and 12 locations in Mexico. We initially owned a 60% controlling interest in Carrier Enterprise II. On November 29, 2016,
we purchased an additional 10% ownership interest for cash consideration of $42,909, and, on February 13, 2017, we purchased an additional 10% ownership interest for cash consideration of $42,688, which together increased our controlling
interest in Carrier Enterprise II to 80%.
6. 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 an approximately 35%
ownership interest in Russell Sigler, Inc. (RSI), an HVAC distributor with annual sales of approximately $650,000 operating from 30 locations in the Western U.S. We have an 80% controlling interest in Carrier Enterprise I, and Carrier
has a 20% non-controlling interest. Carrier Enterprise I acquired its ownership interest in RSI for cash consideration of $63,600, of which we contributed $50,880 and Carrier contributed $12,720. Carrier Enterprise I entered into a shareholders
agreement (the Shareholders Agreement) with RSI and RSIs other shareholders. Pursuant to the Shareholders Agreement, RSIs 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 EBIT, the latter of which Carrier Enterprise I used to calculate the price paid for its investment in RSI. RSIs shareholders may transfer their respective
shares of RSI common stock only to members of the Sigler family or to Carrier Enterprise I,
10 of 22
and, at any time from and after the date on which Carrier Enterprise I owns 85% or more of RSIs outstanding common stock, it has the right, but not the obligation, to purchase from
RSIs shareholders the remaining outstanding shares of common stock. Additionally, Carrier Enterprise I has the right to appoint two of RSIs six board members. Given Carrier Enterprise Is 35% voting equity interest in RSI and its
right to appoint two out of RSIs six board members, this investment in RSI is accounted for under the equity method.
7. DERIVATIVES
We enter into foreign currency forward contracts to offset the earnings impact that foreign exchange rate fluctuations would otherwise have on certain monetary
liabilities that are denominated in nonfunctional currencies.
Cash Flow Hedging Instruments
We enter into foreign currency forward contracts that are designated as cash flow hedges. The settlement of these derivatives results in reclassifications from
accumulated other comprehensive loss to earnings for the period in which the settlement of these instruments occurs. The maximum period for which we hedge our cash flow using these instruments is 12 months. Accordingly, at June 30, 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 June 30, 2017 was $33,300, and such contracts have varying
terms expiring through March 2018.
The impact from foreign exchange derivative instruments designated as cash flow hedges was as follows:
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Quarter Ended
June 30,
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Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Gain (loss) recorded in accumulated other comprehensive loss
|
|
$
|
304
|
|
|
$
|
(1,483
|
)
|
|
$
|
(119
|
)
|
|
$
|
(2,569
|
)
|
(Gain) loss reclassified from accumulated other comprehensive loss into earnings
|
|
$
|
(937
|
)
|
|
$
|
1,611
|
|
|
$
|
(1,180
|
)
|
|
$
|
545
|
|
At June 30, 2017, we expected an estimated $809 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 June 30, 2017 was $7,700, and such contracts have varying terms expiring through August 2017.
We recognized a gain (loss) of $173 and $(33) from foreign currency forward contracts not designated as hedging instruments in our condensed consolidated
unaudited statements of income for the quarters ended June 30, 2017 and 2016, respectively. We recognized losses of $410 and $464 from foreign currency forward contracts not designated as hedging instruments in our condensed consolidated
unaudited statements of income for the six months ended June 30, 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 8.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Derivatives designated as hedging instruments
|
|
$
|
|
|
|
$
|
227
|
|
|
$
|
1,044
|
|
|
$
|
35
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
14
|
|
|
|
179
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative instruments
|
|
$
|
|
|
|
$
|
241
|
|
|
$
|
1,223
|
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 of 22
8. 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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|
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|
|
|
|
|
|
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|
|
|
|
|
Balance Sheet Location
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|
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Total
|
|
|
Fair Value Measurements
at June 30, 2017 Using
|
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|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
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|
|
Other assets
|
|
|
$
|
286
|
|
|
$
|
286
|
|
|
$
|
|
|
|
$
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
Accrued expenses and other
current liabilities
|
|
|
$
|
1,223
|
|
|
$
|
|
|
|
$
|
1,223
|
|
|
$
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
|
Total
|
|
|
Fair Value Measurements
at December 31, 2016 Using
|
|
|
|
|
|
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 7. 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 six months ended June 30, 2017.
9. SHAREHOLDERS EQUITY
Common Stock Dividends
We paid cash dividends of $1.05,
$0.85, $2.10 and $1.70 per share of Common stock and Class B common stock during the quarters and six months ended June 30, 2017 and 2016, respectively.
Non-Vested Restricted Stock
During the quarters ended
June 30, 2017 and 2016, we granted 55,500 and 24,500 shares of non-vested restricted stock, respectively. During the six months ended June 30, 2017 and 2016, we granted 155,899 and 112,178 shares of non-vested restricted stock,
respectively.
During the quarter and six months ended June 30, 2017, 20,100 shares of Common stock with an aggregate fair market value of $2,771
were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of non-vested restricted stock. These shares were retired upon delivery. During the quarter ended June 30, 2016, an aggregate of
20,195 shares of Common and Class B common stock with an aggregate fair market value of $2,603 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of non-vested restricted stock. During the
six months ended June 30, 2016, an aggregate of 27,477 shares of Common and Class B common stock with an aggregate fair market value of $3,548 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with
the vesting of non-vested restricted stock. These shares were retired upon delivery.
12 of 22
Exercise of Stock Options
During the quarters ended June 30, 2017 and 2016, 2,250 and 7,500 stock options, respectively, were exercised for Common stock. During the six months
ended June 30, 2017 and 2016, 16,000 and 34,500 stock options, respectively, were exercised for Common stock. Cash received from common stock issued as a result of stock options exercised during the quarters and six months ended June 30,
2017 and 2016, was $208, $454, $1,310 and $2,258, respectively.
Employee Stock Purchase Plan
During the quarters ended June 30, 2017 and 2016, 2,306 and 2,203 shares of Common stock were issued under our employee stock purchase plan for which we
received net proceeds of $317 and $287, respectively. During the six months ended June 30, 2017 and 2016, 4,259 and 4,831 shares of Common stock were issued under our employee stock purchase plan for which we received net proceeds of $602 and
$584, respectively.
401(k) Plan
During the six
months ended June 30, 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
|
|
Net income attributable to non-controlling interest
|
|
|
24,678
|
|
Contribution for unconsolidated entity
|
|
|
12,720
|
|
Foreign currency translation adjustment
|
|
|
3,018
|
|
Decrease in non-controlling interest in Carrier Enterprise II
|
|
|
(17,463
|
)
|
Distributions to non-controlling interest
|
|
|
(6,799
|
)
|
Gain reclassified from accumulated other comprehensive loss into earnings
|
|
|
(344
|
)
|
Loss recorded in accumulated other comprehensive loss
|
|
|
(35
|
)
|
|
|
|
|
|
Non-controlling interest at June 30, 2017
|
|
$
|
261,695
|
|
|
|
|
|
|
10. COMMITMENTS AND CONTINGENCIES
Litigation, Claims and Assessments
In December 2015, a
purported Watsco shareholder, Nelson Gaskins (the Plaintiff), 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 was a
nominal defendant. The lawsuit alleged breach of fiduciary duties regarding CEO incentive compensation and sought to recover alleged excessive incentive compensation and unspecified damages. The Court dismissed this action and the Plaintiff filed a
notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit (the Appellate Court). In May 2017, the Appellate Court dismissed the Plaintiffs appeal and the action with prejudice. Neither the Plaintiff nor the
Plaintiffs lawyers received any payment from or on behalf of Watsco or its Directors in connection with this lawsuit and the related appeal.
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 $2,815 and $2,951 at June 30, 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.
13 of 22
11. RELATED PARTY TRANSACTIONS
Purchases from Carrier and its affiliates comprised 62% of all inventory purchases made during both the quarters ended June 30, 2017 and 2016.
Purchases from Carrier and its affiliates comprised 62% of all inventory purchases made during both the six months ended June 30, 2017 and 2016. At June 30, 2017 and December 31, 2016, approximately $122,000 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 and six months ended June 30, 2017 and 2016 included approximately $21,000, $17,000, $32,000 and $29,000, 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. We paid Moss & Associates LLC $226 and $644 for construction services performed during the quarter and six months ended
June 30, 2017, respectively, and $58 was payable at June 30, 2017.
A member of our Board of Directors is the Senior Chairman of Greenberg
Traurig, P.A., which serves as our principal outside counsel and receives customary fees for legal services. During the quarter and six months ended June 30, 2017, we paid this firm $200 and $220, respectively, for services performed and $150
was payable at June 30, 2017.