10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934

For the Fiscal Year Ended December 31, 2016

or

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period from                      to                     

Commission File Number 1-5581

WATSCO, INC.

(Exact name of registrant as specified in its charter)

FLORIDA	59-0778222
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2665 South Bayshore Drive, Suite 901

Miami, FL 33133

(Address of principal executive offices, including zip code)

(305) 714-4100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common stock, $0.50 par value	New York Stock Exchange
Class B common stock, $0.50 par value	New York Stock Exchange

Securities registered pursuant to section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ☒    NO  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  ☐    NO  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ☒    NO  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ☒    NO  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  ☐    NO  ☒

The aggregate market value of the registrant’s voting common equity held by non-affiliates of the registrant as of June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $3,693 million, based on the closing sale price of the registrant’s common stock on that date. For purposes of determining this number, all named executive officers and directors of the registrant as of June 30, 2016 were considered affiliates of the registrant. This number is provided only for the purposes of this Annual Report on Form 10-K and does not represent an admission by either the registrant or any such person as to the affiliate status of such person.

The registrant’s common stock outstanding as of February 17, 2017 comprised (i) 30,362,119 shares of Common stock, excluding 6,322,650 treasury shares, and (ii) 5,243,829 shares of Class B common stock, excluding 48,263 treasury shares.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required by Parts I and II is incorporated by reference from the registrant’s 2016 Annual Report, attached hereto as Exhibit 13. The information required by Part III (Items 10, 11, 12, 13 and 14) is incorporated herein by reference from the registrant’s definitive proxy statement for the 2017 annual meeting of shareholders (to be filed pursuant to Regulation 14A).

WATSCO, INC. AND SUBSIDIARIES

Form 10-K

For the Fiscal Year Ended December 31, 2016

INDEX

PART I		Page
Item 1.	Business		3
Item 1A.	Risk Factors		10
Item 1B.	Unresolved Staff Comments		13
Item 2.	Properties		13
Item 3.	Legal Proceedings		13
Item 4.	Mine Safety Disclosures		13
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		14
Item 6.	Selected Financial Data		15
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		15
Item 8.	Financial Statements and Supplementary Data		15
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		15
Item 9A.	Controls and Procedures		15
Item 9B.	Other Information		16
PART III
PART IV
Item 15.	Exhibits and Financial Statement Schedules		16
SIGNATURES			20

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PART I

Forward-Looking Statements

This Annual Report on Form 10-K contains or incorporates by reference statements that are not historical 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” and variations of these words and negatives thereof and similar expressions are intended to identify forward-looking statements, including statements regarding, among others, (i) economic conditions, (ii) business and acquisition strategies, (iii) potential acquisitions and/or joint ventures, (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;

• competitive factors within the HVAC/R industry;

• effects of supplier concentration;

• fluctuations in certain commodity costs;

• consumer spending;

• consumer debt levels;

• new housing starts and completions;

• capital spending in the commercial construction market;

• access to liquidity needed for operations;

• seasonal nature of product sales;

• weather conditions;

• insurance coverage risks;

• federal, state and local regulations impacting our industry and products;

• prevailing interest rates;

• foreign currency exchange rate fluctuations;

• international political risk;

• cybersecurity risk; and

• the continued viability of our business strategy.

We believe these forward-looking statements are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on current expectations. For additional information regarding other important factors that may affect our operations and could cause actual results to vary materially from those anticipated in the forward-looking statements, please see the discussion included in Item 1A “Risk Factors” of this 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 forward-looking information, except as required by applicable law. We qualify any and all of our forward-looking statements by these cautionary factors.

ITEM 1. BUSINESS

General

Watsco, Inc. and its subsidiaries (collectively, “Watsco,” or “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, 2016, we operated from 565 locations in 37 U.S. States, Canada, Mexico and Puerto Rico with additional market coverage on an export basis to portions of Latin America and the Caribbean, through which we serve approximately 88,000 active contractors and dealers that service the replacement and new construction markets. Our revenues in HVAC/R distribution have increased from $64.1 million in 1989 to $4.2 billion in 2016, resulting from our strategic acquisition of companies with established market positions and subsequent building of revenues and profit through a combination of additional locations, introduction of new products and other initiatives.

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Our principal executive office is located at 2665 South Bayshore Drive, Suite 901, Miami, Florida 33133, and our telephone number is (305) 714-4100. Our website address on the Internet is www.watsco.com and e-mails may be sent to info@watsco.com. Our website address is included in this report only as an inactive textual reference. Information contained on, or available through, our website is not incorporated by reference in, or made a part of, this report.

Air Conditioning, Heating and Refrigeration Industry

The HVAC/R distribution industry is highly fragmented with approximately 2,100 distribution companies. The industry in the United States and Canada is well-established, having had its primary period of growth during the post-World War II era with the advent of affordable central air conditioning and heating systems for both residential and commercial applications. The advent of HVAC/R products in Latin America and the Caribbean is also well-established, but has emerged in more recent years as those economies have grown and products have become more affordable and have matured from luxury to necessity.

Based on data published in the 2016 IBIS World Industry Report for Heating and Air Conditioning Contractors in the U.S. and other available data, we estimate that the annual market on an installed basis for residential central air conditioning, heating and refrigeration equipment and related parts and supplies is approximately $88.0 billion. Air conditioning and heating equipment is manufactured primarily by seven major companies that together account for approximately 90% of all units shipped in the United States each year. These companies are: Carrier Corporation (“Carrier”), a subsidiary of United Technologies Corporation; Goodman Manufacturing Company, L.P. (“Goodman”), a subsidiary of Daikin Industries, Ltd.; Rheem Manufacturing Company (“Rheem”); Trane Inc. (“Trane”), a subsidiary of Ingersoll-Rand Company Limited; York International Corporation, a subsidiary of Johnson Controls, Inc.; Lennox International, Inc.; and Nordyne Corporation (“Nordyne”), a subsidiary of Nortek Corporation. These manufacturers distribute their products through a combination of factory-owned and independent distributors who, in turn, supply the equipment and related parts and supplies to contractors and dealers nationwide that sell to and install the products for consumers, businesses and other end-users.

Air conditioning and heating equipment is sold to the replacement and new construction markets for both residential and commercial applications. The residential replacement market has increased in size and importance over the past several years as a result of the aging of the installed base of residential central air conditioners and furnaces, the introduction of new higher energy efficient models, the remodeling and expansion of existing homes, the addition of central air conditioning to homes that previously had only heating products and consumers’ overall unwillingness to live without air conditioning or heating products. The mechanical life of central air conditioning and furnaces varies by geographical region due to usage and ranges from approximately 8 to 20 years. According to data published by the Energy Information Administration in 2013 there are approximately 89 million central air conditioning and heating systems installed in the United States that have been in service for more than 10 years. Many installed units are currently reaching the end of their useful lives, which we believe will provide a growing and stable replacement market.

Additionally, we sell a variety of non-equipment products, representing more than 300,000 SKUs, including parts, ductwork, air movement products, insulation, tools, installation supplies, thermostats and air quality products. We distribute products manufactured by Honeywell International, Inc. (“Honeywell”), Johns Manville (“Johns Manville”) and Owens Corning Insulating Systems, LLC (“Owens Corning”), among others.

We also sell products to the refrigeration market. These products include condensing units, compressors, evaporators, valves, refrigerant, walk-in coolers and ice machines for industrial and commercial applications. We distribute products manufactured by Copeland Compressor Corporation, a subsidiary of Emerson Electric Co. (“Emerson”), The Chemours Company (“Chemours”), Mueller Industries, Inc. (“Mueller”) and Welbilt, Inc. (“Welbilt”), among others.

Culture and Business Strategy

We have built our network of locations using a “buy and build” philosophy, which has produced substantial historical long-term growth in revenues and profits. The “buy” component of the strategy has focused on acquiring market leaders to either expand into new geographic areas or gain additional market share in existing markets. We have employed a disciplined and conservative approach which seeks opportunities that fit well-defined financial and strategic criteria. The “build” component of the strategy has focused on implementing a growth culture at acquired companies, by adding products and locations to better serve customers, investing in scalable technologies and exchanging ideas and business concepts amongst the executive management teams. Newly acquired businesses have access to our capital resources and established vendor relationships to provide their customers with an expanded array of product lines on favorable terms and conditions with an intensified commitment to service. We have also developed a culture whereby leaders, managers and employees are provided the opportunity to own shares of Watsco through a variety of stock-based equity plans. We believe that this culture instills a performance-driven, long-term focus on the part of our employees and aligns their interests with the interests of other Watsco shareholders.

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Strategy in Existing Markets

Our strategy for growth in existing markets focuses on customer service and product expansion to satisfy the needs of the higher growth, higher margin replacement market, in which customers generally demand immediate, convenient and reliable service. We respond to this need by (i) offering a broad range of product lines, including the necessary equipment, parts and supplies to enable a contractor to install or repair a central air conditioner, furnace or refrigeration system, (ii) maintaining a strong density of warehouse locations for increased customer convenience, (iii) maintaining well-stocked inventories to ensure that customer orders are filled in a timely manner, (iv) providing a high degree of technical expertise at the point of sale and (v) developing and implementing technology to further enhance customer service capabilities. We believe these concepts provide a competitive advantage over smaller, less-capitalized competitors that are unable to commit resources to open and maintain additional locations, implement technological business solutions, provide the same range of products, maintain the same inventory levels or attract the wide range of expertise that is required to support a diverse product offering. In some geographic areas, we believe we have a competitive advantage over factory-operated distribution networks, which typically do not maintain inventories of parts and supplies that are as diversified as ours and which have fewer warehouse locations than we do, making it more difficult for these competitors to meet the time-sensitive demands of the replacement market.

In addition to the replacement market, we sell to the new construction market, including new homes and commercial construction. We believe our reputation for reliable, high-quality service and relationships with contractors, who may serve both the replacement and new construction markets, allow us to compete effectively in these markets.

Technology Strategy

We are actively transforming our business by investing in scalable technology platforms to further strengthen our leadership position, accelerate sales and profit growth, increase the speed and convenience of serving customers and extend our reach into new geographies and sales channels. Our initiatives include: (i) the development and implementation of mobile applications for iOS and Android devices focused on helping our customers operate more efficiently and interact with our locations more easily; (ii) enabling e-commerce between our customers and our subsidiaries; (iii) supply chain optimization; (iv) building the largest source of digitized HVAC/R product information; (v) the development and implementation of business analytics systems and related data sets, which provide enhanced management tools; and (vi) maintaining our website, ACDoctor.com, which educates consumers about energy efficient HVAC solutions and financial incentives related to the installation of energy efficient systems and connects them with high quality contractors.

Performance-Based Compensation & Stock-Based Equity Plans

We maintain a culture that rewards performance through a variety of performance-based pay, commission programs, cash incentives and stock-based equity programs. Stock-based plans include 401(k) matching contributions to eligible employees, a voluntary employee stock purchase plan and the granting of stock options and non-vested restricted stock based on individual merit and measures of performance. Our equity compensation plans are designed to promote long-term performance, as well as to create long-term employee retention, continuity of leadership and an ‘ownership culture’ whereby management and employees think and act as owners of the Company. We believe that our restricted stock program is unique because an employee’s restricted share grants generally vest entirely at the end of his or her career (age 62 or later) and, prior to retirement, these grants remain subject to significant risks of forfeiture.

Product Line Expansion

We actively seek new or expanded territories of distribution from our key equipment suppliers. We continually evaluate new parts and supply products to support equipment sales and further enhance service to our customers. This initiative includes increasing the product offering with existing vendors and identifying new product opportunities through traditional and non-traditional supply channels. We have also introduced private-label products as a means to obtain market share and grow revenues. We believe that our private-label branded products complement our existing product offerings at selected locations, based on customer needs and the particular market position and price of these products.

Acquisition Strategy

We focus on acquiring businesses that either complement our current presence in existing markets or establish a presence in new geographic markets. Since 1989, we have acquired 59 HVAC/R distribution businesses, six of which currently operate as primary operating subsidiaries. The other smaller acquired distributors have been integrated into or are under the management of our primary operating subsidiaries. Through a combination of sales and market share growth, opening of new locations, tuck-in acquisitions, expansion of product lines, improved pricing and programs that have resulted in higher gross profit, performance incentives and a culture of equity value for key leadership, we have produced substantial sales and earnings growth post-acquisition. We continue to pursue additional strategic acquisitions and/or joint ventures to allow further penetration in existing markets and expansion into new geographic markets.

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Operating Philosophy

We encourage our local leadership to operate in a manner that builds upon the long-term relationships they have established with their suppliers and customers. Typically, we maintain the identity and culture of businesses by retaining their historical trade names, management teams and sales organizations and continuity of their product brand-name offerings. We believe this strategy allows us to build on the value of the acquired operations by creating additional sales opportunities while providing an attractive exit strategy for the former owners of these companies.

We maintain a specialized staff at our corporate headquarters that provides functional support for our subsidiaries’ growth strategies in their respective markets. Such functional support staff includes specialists in finance, accounting, product procurement, information technology, treasury and working capital management, tax planning, risk management and safety. Certain general and administrative expenses are targeted for cost savings by leveraging the overall business volume and improving operating efficiencies.

DESCRIPTION OF BUSINESS

Products

We sell an expansive line of products and maintain a diverse mix of inventory to meet our customers’ immediate needs, and we seek to provide products a contractor would generally require when installing or repairing a central air conditioner, furnace or refrigeration system on short notice. The cooling capacity of air conditioning units is measured in tons. One ton of cooling capacity is equivalent to 12,000 British Thermal Units (“BTUs”) and is generally adequate to air condition approximately 500 square feet of residential space. The products we distribute consist of: (i) equipment, including residential ducted and ductless air conditioners ranging from 1 to 5 tons, gas, electric and oil furnaces ranging from 50,000 to 150,000 BTUs, commercial air conditioning and heating equipment and systems ranging from 1-1/2 to 25 tons and other specialized equipment, (ii) parts, including replacement compressors, evaporator coils, motors and other component parts and (iii) supplies, including thermostats, insulation material, refrigerants, ductwork, grills, registers, sheet metal, tools, copper tubing, concrete pads, tape, adhesives and other ancillary supplies.

Sales of HVAC equipment, which we currently source from approximately 20 vendors, accounted for 66% of our revenues for both the years ended December 31, 2016 and 2015. Sales of other HVAC products, which we currently source from approximately 1,200 vendors, comprised 29% of our revenues for both the years ended December 31, 2016 and 2015. Sales of commercial refrigeration products, which we currently source from approximately 150 vendors, accounted for 5% of our revenues for both the years ended December 31, 2016 and 2015.

Distribution and Sales

At December 31, 2016, we operated from 565 locations, a vast majority of which are located in regions that we believe have demographic trends favorable to our business. We maintain large inventories at each of our warehouse locations, and either deliver products to customers using one of our trucks or a third party logistics provider, or we make products available for pick-up at the location nearest to the customer. We have approximately 1,000 commissioned salespeople, averaging more than 10 years of experience in the HVAC/R distribution industry.

The markets we serve are as follows:

	% of Revenues for the Year Ended December 31, 2016			Number of Locations as of December 31, 2016
United States		87	%		507
Latin America and the Caribbean		7	%		21
Canada		6	%		37
Total		100	%		565

The largest market we serve is the United States, in which the most significant markets for HVAC/R products are in the Sun Belt States. Accordingly, the majority of our distribution locations are in the Sun Belt, with the highest concentration in Florida and Texas. These markets have been a strategic focus of ours given their size, the reliance by homeowners and businesses on HVAC/R products to maintain a comfortable indoor environment and the population growth in these areas over the last 40 years, which has led to a substantial installed base requiring replacement, a shorter useful life for equipment given the hours of operation and the focus by electrical utilities on consumer incentives designed to promote replacement of HVAC/R equipment in an effort to improve energy efficiency.

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Markets

The table below identifies the number of our stores by location as of December 31, 2016:

Florida	107
Texas	82
North Carolina	37
California	36
Georgia	36
South Carolina	29
Tennessee	22
Virginia	22
Louisiana	19
New York	13
Alabama	9
Mississippi	9
Massachusetts	8
Missouri	8
Maryland	7
Arizona	6
Arkansas	6
Connecticut	6
Kansas	5
New Jersey	5
Oklahoma	5
Utah	5
Maine	3
Iowa	2
Kentucky	2
Nebraska	2
Nevada	2
Pennsylvania	2
Rhode Island	2
South Dakota	2
West Virginia	2
Colorado	1
Indiana	1
New Hampshire	1
New Mexico	1
North Dakota	1
Vermont	1
United States	507
Canada	37
Mexico	12
Puerto Rico	9
Total	565

Joint Ventures with Carrier Corporation

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. In July 2012, we exercised our option to acquire an additional 10% ownership interest in Carrier Enterprise I, which increased our ownership interest to 70%; and, on July 1, 2014, we exercised our last remaining option to acquire an additional 10% ownership interest in Carrier Enterprise I, which increased our controlling interest to 80%. Neither we nor Carrier has any remaining options to purchase additional ownership interests in Carrier Enterprise I, or any of our other joint ventures with Carrier, which are described below.

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In 2011, we formed a second joint venture with Carrier and completed two additional transactions. In April 2011, Carrier contributed 28 of its company-owned locations in eight Northeast U.S. states, and we contributed 14 locations in the Northeast United States. In July 2011, we 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. 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 Enterprise II, and, on February 13, 2017, we again purchased an additional 10% ownership interest in Carrier Enterprise II, which together increased our controlling interest to 80%.

In 2012, we formed a third joint venture, which we refer to as Carrier Enterprise III, with UTC Canada Corporation, referred to as UTC Canada, an affiliate of Carrier. Carrier contributed 35 of its company-owned locations in Canada to Carrier Enterprise III. We have a 60% controlling interest in Carrier Enterprise III, and UTC Canada has a 40% non-controlling interest.

Combined, the joint ventures with Carrier represented 61% of our revenues for the year ended December 31, 2016. See Supplier Concentration in “Business Risk Factors” in Item 1A.

The business and affairs of the joint ventures are controlled, directed and managed exclusively by Carrier Enterprise I’s, Carrier Enterprise II’s and Carrier Enterprise III’s respective boards of directors (the “Boards”) pursuant to related operating agreements. The Boards have full, complete and exclusive authority, power and discretion to manage and control the business, property and affairs of their respective joint ventures and to make all decisions regarding those matters and to perform activities customary or incident to the management of such joint ventures, including approval of distributions to us, Carrier and UTC Canada. Each Board is composed of five directors, of whom three directors represent our controlling interest and two directors represent Carrier’s non-controlling interest. Matters presented to the Boards for vote are considered approved or consented to upon the receipt of the affirmative vote of at least a majority of all directors entitled to vote with the exception of certain governance matters, which require joint approval.    

Customers and Customer Service

Air conditioning and heating contractors and dealers that install HVAC/R products in homes and businesses must be licensed given the highly-regulated nature of the products, refrigerant, natural gas and building and zoning requirements. We currently serve approximately 88,000 active contractors and dealers who service the replacement and new construction markets for residential and light commercial central air conditioning, heating and refrigeration systems. No single customer in 2016, 2015 or 2014 represented more than 2% of our consolidated revenues. We focus on providing products where and when the customer needs them, technical support by phone or on site as required, and quick and efficient service at our locations. Increased customer convenience is also provided through mobile applications and e-commerce, which allows customers to access information online 24 hours a day, seven days a week to search for desired products, verify inventory availability, obtain pricing, place orders, check order status, schedule pickup or delivery times and make payments. We believe we compete successfully with other distributors primarily on the basis of an experienced sales organization, strong service support, maintenance of well-stocked inventories, density of warehouse locations, high quality reputation, broad product lines and the ability to foresee customer demand for new products.

Key Supplier Relationships

Given our leadership position, Watsco represents a strategic business relationship to many of the leading manufacturers in our industry. Significant relationships with HVAC/R equipment manufacturers include Carrier, Rheem, Goodman, Welbilt, Mitsubishi Electric Corporation, Gree Electric Appliances, Inc., Trane, Midea Group and Nordyne. In addition, we have substantial relationships with manufacturers of non-equipment HVAC/R products, including Chemours, Emerson, Flexible Technologies, Inc., Honeywell, Johns Manville, Mueller and Owens Corning.

We believe the diversity of products that we sell, along with the manufacturers’ current product offerings, quality, marketability and brand-name recognition, allow us to operate favorably relative to our competitors. To maintain brand-name recognition, the HVAC/R equipment manufacturers provide national advertising and participate with us in cooperative advertising programs and promotional incentives that are targeted to both dealers and end-users. We estimate that the replacement market for residential air conditioning equipment is approximately 85% of industry unit sales in the United States, and we expect this percentage to increase as units installed in the past 20 years wear out or otherwise become practical to replace sooner with newer, more energy-efficient models.

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The Company’s top ten suppliers accounted for 85% of our purchases, including 62% from Carrier and 10% from Rheem. Given the significant concentration of our suppliers, particularly with Carrier and Rheem, any significant interruption with these suppliers could temporarily disrupt the operations of certain of our subsidiaries, impact current inventory levels and could adversely affect our financial results. If any restrictions or significant increase in tariffs under existing trade agreements or the elimination of the North American Free Trade Agreement (“NAFTA”) are imposed on products that our top ten suppliers import or assemble products outside of the United States, particularly from Mexico and China, we could be required to raise our prices, which may result in the loss of customers and harm to our business. Future financial results are also materially dependent upon the continued market acceptance of these manufacturers’ respective products and their ability to continue to manufacture products that comply with laws relating to environmental and efficiency standards. However, the Company believes that alternative or substitute products would be readily available in the event of disruption of current supplier relationships given the Company’s prominence in the marketplace, including the number of locations, sales personnel, support structure, marketing and sales expertise, financial position and established market share. See “Business Risk Factors” in Item 1A of this Annual Report on Form 10-K for further discussion.

Distribution Agreements

We maintain trade name and distribution agreements with Carrier and Rheem that provide us distribution rights on an exclusive basis in specified territories that are not subject to a stated term or expiration date. We also maintain distribution agreements with various other suppliers, either on an exclusive or non-exclusive basis, for various terms ranging from one to ten years. Certain distribution agreements contain provisions that restrict or limit the sale of competitive products in the locations that sell such branded products. Other than where such location-level restrictions apply, we may distribute the lines of other manufacturer’s air conditioning or heating equipment in other locations in the same territories.

See Supplier Concentration in “Business Risk Factors” in Item 1A of this Annual Report on Form 10-K.

Seasonality

Sales of residential central air conditioners, heating equipment and parts and supplies are seasonal. Furthermore, profitability can be impacted favorably or unfavorably based on the severity or mildness of weather patterns during Summer or 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 sectors throughout most of the markets is fairly even during the year except for dependence on housing completions and related weather and economic conditions.

Competition

We operate in highly competitive environments. We compete with a number of distributors and also with several air conditioning and heating equipment manufacturers that distribute a significant portion of their products through their own distribution organizations in certain markets. Competition within any given geographic market is based upon product availability, customer service, price and quality. Competitive pressures or other factors could cause our products or services to lose market acceptance or result in significant price erosion, all of which would have a material adverse effect on our results of operations, cash flows and liquidity.

Employees

We had approximately 5,050 employees as of December 31, 2016, substantially all of which are non-union employees. Most of these employees are employed on a full-time basis and our relations with our employees are good.

Order Backlog

Order backlog is not a material aspect of our business, and no material portion of our business is subject to government contracts.

Government Regulations, Environmental and Health and Safety Matters

Our business is subject to federal, state and local laws and regulations relating to the storage, handling, transportation and release of hazardous materials into the environment. These laws and regulations include the Clean Air Act, relating to minimum energy efficiency standards of HVAC systems and the production, servicing and disposal of certain ozone-depleting refrigerants used in such systems, including those established at the Montreal Protocol in 1992 concerning the phase-out of the production of CFC-based refrigerants on January 1, 2010 for use in new equipment. We are also subject to regulations concerning the transport of hazardous materials, including regulations adopted pursuant to the Motor Carrier Safety Act of 1990. Our operations are also subject to health and safety requirements including the Occupational, Safety and Health Act. We believe that we operate our business in compliance with all applicable federal, state and local laws, rules and regulations.

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Our industry and business are also subject to a United States Department of Energy (“DOE”) mandate, effective January 1, 2015, that effects changes to the minimum required efficiency of HVAC systems. The DOE has divided the United States into three regions, the North, the Southeast and the Southwest, according to the number of hours that an air conditioner spends cooling a home during the hotter months. Prior to 2015, there was a national minimum standard for energy efficiency of 13 SEER (seasonal energy efficiency rating, the metric used to measure energy efficiency) for all equipment produced in the United States. Beginning in 2015, the new standard increased the minimum allowed efficiency to 14 SEER for the Southeast and Southwest regions. During 2015, the Company began transitioning out of its 13 SEER inventory in these regions while an increasing mix of higher-efficiency 14 SEER inventory was purchased and sold. This transition was completed during 2016 in accordance with the timeline required by the mandate.

Financial 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 geographic area (in millions):

Years Ended December 31,	2016		2015		2014
Revenues:
United States	$	3,813	$	3,711	$	3,525
Canada		267		264		301
Mexico		141		138		119
Total Revenues	$	4,221	$	4,113	$	3,945
December 31,	2016		2015		2014
Long-Lived Assets:
United States	$	468	$	442	$	435
Canada		156		155		187
Mexico		5		5		5
Total Long-Lived Assets	$	629	$	602	$	627

Revenues are attributed to countries based on the location of the store from which the sale occurred. Long-lived assets consist of property and equipment, goodwill and intangible assets.

Available Information

Our website is at www.watsco.com. Our investor relations website is located at www.investors.watsco.com. We make available, free of charge, on our investor relations website under the heading “SEC Filings” our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed with or furnished to the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our website address is included in this report only as an inactive textual reference. Information contained on, or available through, our website is not incorporated by reference in, or made a part of, this report.

ITEM 1A. RISK FACTORS

Business Risk Factors

Supplier Concentration

The Company’s top ten suppliers accounted for 85% of our purchases during 2016, including 62% from Carrier and 10% from Rheem. Given the significant concentration of our supply chain, particularly with Carrier and Rheem, any significant interruption by any of the key manufacturers or a termination of a relationship could temporarily disrupt the operations of certain of our subsidiaries. Additionally, our operations are materially dependent upon the continued market acceptance and quality of these manufacturers’ products and their ability to continue to manufacture products that are competitive and that comply with laws relating to environmental and efficiency standards. Our inability to obtain products from one or more of these manufacturers or a decline in market acceptance of these manufacturers’ products could have a material adverse effect on our results of operations, cash flows and liquidity.

10

Many HVAC equipment and component manufacturers, including Carrier and Rheem, source component parts and/or assemble a significant amount of products for residential and light-commercial applications from Mexico. If any restrictions or significant increases in tariffs are imposed related to such products sourced or assembled from Mexico, whether as a result of amendments to existing trade agreements or the elimination of NAFTA, and our product costs consequently increase, we would be required to raise our prices, which may result in cost inflation, the loss of customers and harm to our business.

We maintain trade name and distribution agreements with Carrier and Rheem that provide us distribution rights on an exclusive basis in specified territories. Such agreements are not subject to a stated term or expiration date.

We also maintain other distribution agreements with various other suppliers, either on an exclusive or non-exclusive basis, for various terms ranging from one to ten years. Certain of the distribution agreements contain provisions that restrict or limit the sale of competitive products in the locations that sell such branded products. Other than where such location-level restrictions apply, we may distribute other manufacturers’ lines of air conditioning or heating equipment in other locations in the same territories.

Risks Inherent in Acquisitions

As part of our strategy, we intend to pursue additional acquisitions of complementary businesses, including through joint ventures. If we complete future acquisitions or enter into new joint ventures, we may be required to incur or assume additional debt and/or issue additional shares of our common stock as consideration, which will dilute our existing shareholders’ ownership interest in us and may affect our results of operations. Growth through acquisitions involves a number of risks, including, but not limited to, the following:

• the ability to identify and consummate transactions with complementary acquisition candidates;

• the successful operation and/or integration of acquired companies;

• diversion of management’s attention from other daily functions;

• issuance by us of equity securities that would dilute ownership of our existing shareholders;

• incurrence and/or assumption of significant debt and contingent liabilities; and

• possible loss of key employees and/or customer relationships of the acquired companies.

In addition, acquired companies may have liabilities that we failed, or were unable, to discover in the course of performing due diligence investigations. We cannot assure you that the indemnification, if any, granted to us by sellers of acquired companies or by joint venture partners will be sufficient in amount, scope or duration to offset the possible liabilities associated with businesses or properties that we assume upon consummation of an acquisition or joint venture. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business.

Failure to successfully manage the operational challenges and risks associated with, or resulting from, acquisitions could adversely affect our results of operations, cash flows and liquidity.

Competition

We operate in highly competitive environments. We compete with a number of distributors and also with several air conditioning and heating equipment manufacturers that distribute a significant portion of their products through their own distribution organizations in certain markets. Competition within any given geographic market is based upon product availability, customer service, price and quality. Competitive pressures or other factors could cause our products or services to lose market acceptance or result in significant price erosion, all of which would have a material adverse effect on our results of operations, cash flows and liquidity.

Foreign Currency Exchange Rate Fluctuations

The functional currency of our operations in Canada is the Canadian dollar, and the functional currency of our operations in Mexico is the U.S. dollar because the majority of our Mexican transactions are denominated in U.S. dollars. Foreign currency exchange rates and fluctuations may have an impact on transactions denominated in Canadian dollars and Mexican Pesos, and, therefore, could adversely affect our financial performance. Although we use foreign currency forward contracts to mitigate the impact of currency exchange rate movements, we do not currently hold any derivative contracts that hedge our foreign currency translational exposure.

11

Seasonality

Sales of residential central air conditioners, heating equipment and parts and supplies are seasonal, resulting in fluctuations in our revenue from quarter to quarter. Furthermore, profitability can be impacted favorably or unfavorably based on the severity or mildness of weather patterns during Summer or 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 sectors throughout most of the markets is fairly even during the year except for dependence on housing completions and related weather and economic conditions.

Dependence on Key Personnel

Much of our success has depended on the skills, experience and services of senior management personnel. The loss of any of our executive officers or other key senior management personnel could harm our business. We must continue to recruit, retain and motivate management and other employees sufficiently in order to both maintain our current business and to execute our strategic initiatives. Our success has also substantially depended on the contributions and abilities of our store employees whom we rely on to give customers a superior in-store experience. Accordingly, our performance depends on our ability to recruit and retain high quality employees to work in and manage our stores. If we are unable to recruit, retain and motivate employees sufficiently in order to maintain our current business and support our projected growth and expansion, our business and financial performance may be adversely affected.

Decline in Economic Conditions

We rely predominantly on the credit markets and, to a lesser extent, on the capital markets to meet our financial commitments and short-term liquidity needs if internal funds are not available from our operations. Our access to funds under our line of credit is dependent 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 line of credit and may also affect the determination of certain interest rates, particularly rates based on LIBOR, which is one of the base rates under our line of credit. Any disruptions in these markets could result in increased borrowing costs and/or reduced borrowing capacity under our line of credit. Any long-term disruption could require that we take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Such measures could include reducing or eliminating dividend payments, deferring capital expenditures and reducing or eliminating discretionary uses of cash.

A decline in economic conditions and lack of availability of business and consumer credit could have an adverse effect on our business and results of operations. Any capital and credit market disruption could cause broader economic downturns, which may lead to reduced demand for our products and increased incidence of customers’ inability to pay their accounts. Further, bankruptcies or similar events by customers may cause us to incur bad debt expense at levels higher than historically experienced. Also, our suppliers may be negatively impacted by deteriorating economic conditions, causing disruption or delay of product availability. These events would adversely impact our results of operations, cash flows and financial position. Additionally, if the conditions of the capital and credit markets adversely affect the financial institutions that have committed to extended credit to us, they may be unable to fund borrowings under such commitments, which could have an adverse impact on our financial condition, liquidity and our ability to borrow funds, if needed, for working capital, acquisitions, capital expenditures and other corporate purposes.

International Political Risk

Our international sales and operations, as well as sourcing of products from suppliers with international operations, are subject to various risks associated with changes in local laws, regulations and policies, including those related to tariffs, trade restrictions and trade agreements, investments, taxation, capital controls, employment regulations, different liability standards and limitations on the repatriation of funds due to foreign currency controls. Our international sales and operations, as well as sourcing of products from suppliers with international operations are also sensitive to changes in foreign national priorities, including government budgets, as well as political and economic instability. Unfavorable changes in any of the foregoing could adversely affect our results of operations or could cause a disruption in our supply chain for products sourced internationally. Additionally, failure to comply with the United States Foreign Corrupt Practices Act could subject us to, among other things, penalties and legal expenses that could harm our reputation and have a material adverse effect on our business, financial condition and results of operations.

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General Risk Factors

Goodwill and Intangibles

At December 31, 2016, goodwill and intangibles represented approximately 29% of our total assets. The recoverability of goodwill and indefinite lived intangibles is evaluated at least annually and when events or changes in circumstances indicate that the carrying amounts may not be recoverable. The identification 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. The estimates of fair value of our reporting unit and indefinite lived intangibles 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 conditions. We cannot assure you that we will not suffer material impairments to goodwill in the future.

Risks Related to Insurance Coverage

We carry general liability, comprehensive property damage, workers’ compensation, health benefits and other insurance coverage that management considers adequate for the protection of its assets and operations. There can be no assurance, however, that the coverage limits of such policies will be adequate to cover losses and expenses for lawsuits brought or which may be brought against us. A loss in excess of insurance coverage could have a material adverse effect on our financial position and/or profitability. Certain self-insurance risks for casualty insurance programs and health benefits are retained and reserves are established based on claims filed and estimates of claims incurred but not yet reported. Assurance cannot be provided that actual claims will not exceed present estimates. Exposure to catastrophic losses has been limited by maintaining excess and aggregate liability coverage and implementing stop-loss control programs.

Insider Ownership

As of December 31, 2016, our directors and executive officers and entities affiliated with them owned (i) Common stock representing 1% of the outstanding shares of Common stock and (ii) Class B common stock representing 89% of the outstanding shares of Class B common stock. These interests represent 56% of the aggregate combined voting power (including 53% beneficially owned by Albert H. Nahmad, Chairman and Chief Executive Officer, through shares owned by him and shares held by affiliated limited partnerships and various family trusts). Accordingly, our directors and executive officers collectively have the voting power to elect six members of our nine-person Board of Directors.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our main properties include warehousing and distribution facilities, trucks and administrative office space.

Warehousing and Distribution Facilities

At December 31, 2016, we operated 565 warehousing and distribution facilities across 37 U.S. states, Canada, Mexico and Puerto Rico, having an aggregate of approximately 12.3 million square feet of space, of which approximately 12.0 million square feet is leased. The majority of these leases are for terms of three to five years. We believe that our facilities are sufficient to meet our present operating needs.

Trucks

At December 31, 2016, we operated 646 ground transport vehicles, including delivery and pick-up trucks, vans and tractors. Of this number, 386 trucks were leased and the rest were owned. We believe that the present size of our truck fleet is adequate to support our operations.

Administrative Facility

Senior management and support staff are located at our corporate headquarters in Miami, Florida in approximately 22,000 square feet of owned space.

ITEM 3. LEGAL PROCEEDINGS

Information with respect to this item may be found in Note 15 to our audited consolidated financial statements contained in this Annual Report on Form 10-K under the caption “Litigation, Claims and Assessments,” which information is incorporated by reference in this Item 3 of Part I of this Annual Report on Form 10-K.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

13

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Stock Exchange Information, Common Share Price Performance and Dividends

Our Common stock is listed on the New York Stock Exchange under the ticker symbol WSO, and our Class B common stock is listed on the New York Stock Exchange under the ticker symbol WSOB.

Our 2016 Annual Report contains “Information on Common Stock,” which contains the high and low sales prices and dividend information with respect to our Common stock and Class B common stock for the years ended December 31, 2016 and 2015, and is incorporated herein by reference.

Shareholder Return Performance

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 NYSE MKT Composite index and the S&P Midcap 400 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 S&P Midcap 400 index, which contains 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, 2011 and its relative performance is tracked through December 31, 2016.

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 incorporate this information by reference, and shall not otherwise be deemed filed under such acts.

Comparison of 5 Year Cumulative Total Shareholder Return

Copyright© 2016 S&P, a division of McGraw Hill Financial. All rights reserved.

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	12/11		12/12		12/13		12/14		12/15		12/16
Watsco, Inc.		100.00		126.57		164.51		187.20		209.74		272.66
Watsco Class B		100.00		131.52		172.83		195.69		222.23		285.86
NYSE MKT Composite		100.00		106.15		115.07		118.71		106.60		117.67
S&P Midcap 400		100.00		117.88		157.37		172.74		168.98		204.03

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

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. No shares were repurchased under this plan in 2016, 2015 or 2014. 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 this plan. At December 31, 2016, there were 1,129,087 shares remaining authorized for repurchase under this plan. We did not otherwise repurchase any of our common stock during the quarter ended December 31, 2016.

Dividends

Cash dividends per share of $3.60, $2.80 and $2.00 for both Common and Class B common stock were paid in 2016, 2015 and 2014, respectively. Future dividends will be declared and paid at the sole discretion of the Board of Directors and will depend upon such factors as cash flow generated by operations, profitability, financial condition, cash requirements, future prospects and other factors deemed relevant by our Board of Directors.

ITEM 6. SELECTED FINANCIAL DATA

Our 2016 Annual Report contains “Selected Consolidated Financial Data”, which section is incorporated herein by reference.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our 2016 Annual Report contains “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, which section is incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our 2016 Annual Report contains “Quantitative and Qualitative Disclosures about Market Risk”, which section is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our 2016 and 2015 Consolidated Balance Sheets and other consolidated financial statements for the years ended December 31, 2016, 2015 and 2014, together with the report thereon of KPMG LLP dated February 21, 2017 in our 2016 Annual Report are incorporated herein by reference.

The 2016 and 2015 unaudited Selected Quarterly Financial Data appearing in our 2016 Annual Report is incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”)) that are, among other things, designed to ensure that information required to be disclosed by us under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer (“CEO”), Senior Vice President (“SVP”) and Chief Financial Officer (“CFO”), to allow for timely decisions regarding required disclosure and appropriate SEC filings.

Our management, with the participation of our CEO, SVP and CFO, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, and, based on that evaluation, our CEO, SVP and CFO concluded that our disclosure controls and procedures were effective, at a reasonable assurance level, at and as of such date.

15

Management’s Report on Internal Control over Financial Reporting

Our 2016 Annual Report contains “Management’s Report on Internal Control over Financial Reporting” and the report thereon of KPMG LLP dated February 21, 2017, and each is incorporated herein by reference.

Changes in Internal Control over Financial Reporting

We are continuously seeking to improve the efficiency and effectiveness of our operations and of our internal controls. This results in refinements to processes throughout the Company. However, there were no changes in internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

This part of Form 10-K, which includes Items 10 through 14, is omitted because we will file definitive proxy material pursuant to Regulation 14A not more than 120 days after the close of our most recently ended fiscal year, which proxy material will include the information required by Items 10 through 14 and is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1)	Financial Statements. Our consolidated financial statements are incorporated by reference from our 2016 Annual Report.
(2)	Financial Statement Schedules. The schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
(3)	Exhibits. The following exhibits are submitted with this Annual Report on Form 10-K or, where indicated, incorporated by reference to other filings.

3.1	Composite Articles of Incorporation of Watsco, Inc. (filed as Exhibit 3.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 and incorporated herein by reference).
3.2	Watsco, Inc. Second Amended and Restated Bylaws effective August 1, 2016 (filed as Exhibit 3.1 to the Current Report on Form 8-K on August 5, 2016 and incorporated herein by reference).
4.1	Specimen form of Class B Common Stock Certificate (filed as Exhibit 4.6 to the Registration Statement on Form S-1 (No. 33-56646) and incorporated herein by reference).
4.2	Specimen form of Common Stock Certificate (filed as Exhibit 4.4 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference).
10.1(a)	Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.20 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and incorporated herein by reference). *
10.1(b)	First Amendment dated January 1, 2001 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.13 to the Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference). *
10.1(c)	Second Amendment dated January 1, 2002 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference). *
10.1(d)	Third Amendment dated January 1, 2003 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.11 to the Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference). *

16

10.1(e)	Fourth Amendment dated January 1, 2004 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 and incorporated herein by reference). *
10.1(f)	Fifth Amendment dated January 1, 2005 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 and incorporated herein by reference). *
10.1(g)	Sixth Amendment dated January 1, 2006 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.16 to the Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference). *
10.1(h)	Seventh Amendment dated January 1, 2007 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.18 to the Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference). *
10.1(i)	Eighth Amendment dated January 1, 2008 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 and incorporated herein by reference). *
10.1(j)	Ninth Amendment dated December 10, 2008 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.19 to the Annual Report on Form 10-K for the year ended December 31, 2008 and incorporated herein by reference). *
10.1(k)	Tenth Amendment dated January 1, 2009 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 and incorporated herein by reference). *
10.1(l)	Eleventh Amendment dated January 1, 2010 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and incorporated herein by reference). *
10.1(m)	Twelfth Amendment dated January 1, 2011 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 and incorporated herein by reference). *
10.1(n)	Thirteenth Amendment dated January 1, 2012 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 and incorporated herein by reference). *
10.1(o)	Fourteenth Amendment dated January 1, 2013 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 and incorporated herein by reference). *
10.1(p)	Fifteenth Amendment dated January 1, 2014 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 and incorporated herein by reference). *
10.1(q)	Sixteenth Amendment dated January 1, 2015 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 and incorporated herein by reference). *
10.1(r)	Seventeenth Amendment dated January 1, 2016 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 and incorporated herein by reference). *
10.2	Watsco, Inc. Amended and Restated 2001 Incentive Compensation Plan (filed as Appendix A to the Definitive Proxy Statement on Schedule 14A in respect of our 2009 Annual Meeting of Shareholders and incorporated herein by reference). *
10.3	Watsco, Inc. 2014 Incentive Compensation Plan (filed as Appendix A to the Definitive Proxy Statement on Schedule 14A in respect of our 2014 Annual Meeting of Shareholders and incorporated herein by reference). *

17

10.4	Fourth Amended and Restated 1996 Qualified Employee Stock Purchase Plan dated April 18, 2011 (filed as Appendix A to the Definitive Proxy Statement on Schedule 14A in respect of our 2011 Annual Meeting of Shareholders and incorporated herein by reference). *
10.5(a)	Credit Agreement dated as of April 27, 2012, by and among Watsco, Inc., as Borrower, Watsco Canada, Inc., as Canadian Borrower, the Lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, Bank of America, N.A. and Wells Fargo Bank, National Association as Co-Syndication Agents and U.S. Bank National Association as Documentation Agent (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q on August 2, 2013 and incorporated herein by reference).
10.5(b)	Amendment No. 1 dated as of August 8, 2012, to the Credit Agreement dated as of April 27, 2012 (filed as Exhibit 10.4(b) to the Annual Report on Form 10-K for the year ended December 31, 2012, filed on February 28, 2013 and incorporated herein by reference).
10.5(c)	Amendment No. 2, dated as of July 1, 2013, to Credit Agreement dated as of April 27, 2012, by and among Watsco, Inc., as Borrower, Watsco Canada, Inc., as Canadian Borrower, the Lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, Bank of America, N.A. and Wells Fargo Bank, National Association as Co-Syndication Agents and U.S. Bank National Association as Documentation Agent (filed as Exhibit 10.1 to the Current Report on Form 8-K on July 2, 2013 and incorporated herein by reference).
10.5(d)	Amendment No. 3, dated as of June 25, 2014, to Credit Agreement dated as of April 27, 2012, by and among Watsco, Inc., as Borrower, Watsco Canada, Inc., as Canadian Borrower, the Lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, Bank of America, N.A. and Wells Fargo Bank, National Association as Co-Syndication Agents and U.S. Bank National Association as Documentation Agent (filed as Exhibit 10.1 to the Current Report on Form 8-K on June 27, 2014 and incorporated herein by reference).
10.5(e)	Amendment No. 4, dated as of January 24, 2017, to Credit Agreement dated as of April 27, 2012, by and among Watsco, Inc., as Borrower, Watsco Canada, Inc., as Canadian Borrower, the Lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, Bank of America, N.A. and Wells Fargo Bank, National Association as Co-Syndication Agents and U.S. Bank National Association as Documentation Agent. #
10.6	Operating Agreement of Carrier Enterprise, LLC (Amended and Restated), dated as of July 1, 2009 (filed as Exhibit 10.2 to the Current Report on Form 8-K on July 8, 2009 and incorporated herein by reference).
10.7	Second Amended and Restated Shareholder Agreement by and among Watsco, Inc., Carrier Corporation and UTC Canada Corporation, dated as of April 27, 2012 (filed as Exhibit 10.4 to the Current Report on Form 8-K on May 3, 2012 and incorporated herein by reference).
10.8	Operating Agreement of Carrier Enterprise Northeast, LLC, dated as of April 30, 2011 (filed as Exhibit 10.29 to the Annual Report on Form 10-K for the year ended December 31, 2011 and incorporated herein by reference).
10.9	Carrier Enterprise Canada (G.P.), Inc. Shareholders’ Agreement dated as of April 27, 2012 (filed as Exhibit 10.2 to the Current Report on Form 8-K on May 3, 2012 and incorporated herein by reference).
13	2016 Annual Report to Shareholders (with the exception of the information incorporated by reference into Items 1, 5, 6, 7 and 8 of this Form 10-K, the 2016 Annual Report to Shareholders is provided solely for the information of the SEC and is not deemed “filed” as part of this Form 10-K). #
21.1	Subsidiaries of the Registrant. #
23.1	Consent of Independent Registered Public Accounting Firm – KPMG LLP. #
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. #
31.2	Certification of Senior Vice President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. #
31.3	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. #

18

32.1	Certification of Chief Executive Officer, Senior Vice President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +
101.INS	XBRL Instance Document. #
101.SCH	XBRL Taxonomy Extension Schema Document. #
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document. #
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document. #
101.LAB	XBRL Taxonomy Extension Label Linkbase Document. #
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document. #

# filed herewith.

+ furnished herewith.

* Management contract or compensation plan or arrangement.

19

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	WATSCO, INC.
February 21, 2017	By:	/s/ Albert H. Nahmad
		Albert H. Nahmad, Chief Executive Officer
February 21, 2017	By:	/s/ Ana M. Menendez
		Ana M. Menendez, Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

SIGNATURE	TITLE	DATE
/S/    ALBERT H. NAHMAD         Albert H. Nahmad	Chairman of the Board and Chief Executive Officer (principal executive officer)	February 21, 2017
/S/    BARRY S. LOGAN         Barry S. Logan	Director and Senior Vice President	February 21, 2017
/S/    ANA M. MENENDEZ         Ana M. Menendez	Chief Financial Officer (principal accounting officer and principal financial officer)	February 21, 2017
/S/    DAVID C. DARNELL          David C. Darnell	Director	February 21, 2017
/S/    DENISE DICKINS         Denise Dickins	Director	February 21, 2017
/S/    STEVEN R. FEDRIZZI         Steven R. Fedrizzi	Director	February 21, 2017
/S/    BOB L. MOSS         Bob L. Moss	Director	February 21, 2017
/S/    AARON J. NAHMAD         Aaron J. Nahmad	Director and President	February 21, 2017
/S/    GEORGE P. SAPE         George P. Sape	Director	February 21, 2017

20

Exhibit Index

Exhibit Number	Description
3.1	Composite Articles of Incorporation of Watsco, Inc. (filed as Exhibit 3.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 and incorporated herein by reference).
3.2	Watsco, Inc. Second Amended and Restated Bylaws effective August 1, 2016 (filed as Exhibit 3.1 to the Current Report on Form 8-K on August 5, 2016 and incorporated herein by reference).
4.1	Specimen form of Class B Common Stock Certificate (filed as Exhibit 4.6 to the Registration Statement on Form S-1 (No. 33-56646) and incorporated herein by reference).
4.2	Specimen form of Common Stock Certificate (filed as Exhibit 4.4 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference).
10.1(a)	Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.20 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and incorporated herein by reference).
10.1(b)	First Amendment dated January 1, 2001 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.13 to the Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference).
10.1(c)	Second Amendment dated January 1, 2002 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference).
10.1(d)	Third Amendment dated January 1, 2003 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.11 to the Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference).
10.1(e)	Fourth Amendment dated January 1, 2004 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 and incorporated herein by reference).
10.1(f)	Fifth Amendment dated January 1, 2005 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 and incorporated herein by reference).
10.1(g)	Sixth Amendment dated January 1, 2006 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.16 to the Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference).
10.1(h)	Seventh Amendment dated January 1, 2007 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.18 to the Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference).
10.1(i)	Eighth Amendment dated January 1, 2008 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 and incorporated herein by reference).
10.1(j)	Ninth Amendment dated December 10, 2008 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.19 to the Annual Report on Form 10-K for the year ended December 31, 2008 and incorporated herein by reference).
10.1(k)	Tenth Amendment dated January 1, 2009 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 and incorporated herein by reference).
10.1(l)	Eleventh Amendment dated January 1, 2010 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and incorporated herein by reference).

21

10.1(m)	Twelfth Amendment dated January 1, 2011 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 and incorporated herein by reference).
10.1(n)	Thirteenth Amendment dated January 1, 2012 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 and incorporated herein by reference).
10.1(o)	Fourteenth Amendment dated January 1, 2013 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 and incorporated herein by reference).
10.1(p)	Fifteenth Amendment dated January 1, 2014 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 and incorporated herein by reference).
10.1(q)	Sixteenth Amendment dated January 1, 2015 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 and incorporated herein by reference).
10.1(r)	Seventeenth Amendment dated January 1, 2016 to Employment Agreement and Incentive Plan dated January 31, 1996 by and between Watsco, Inc. and Albert H. Nahmad (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 and incorporated herein by reference).
10.2	Watsco, Inc. Amended and Restated 2001 Incentive Compensation Plan (filed as Appendix A to the Definitive Proxy Statement on Schedule 14A in respect of our 2009 Annual Meeting of Shareholders and incorporated herein by reference).
10.3	Watsco, Inc. 2014 Incentive Compensation Plan (filed as Appendix A to the Definitive Proxy Statement on Schedule 14A in respect of our 2014 Annual Meeting of Shareholders and incorporated herein by reference).
10.4	Fourth Amended and Restated 1996 Qualified Employee Stock Purchase Plan dated April 18, 2011 (filed as Appendix A to the Definitive Proxy Statement on Schedule 14A in respect of our 2011 Annual Meeting of Shareholders and incorporated herein by reference).
10.5(a)	Credit Agreement dated as of April 27, 2012, by and among Watsco, Inc., as Borrower, Watsco Canada, Inc., as Canadian Borrower, the Lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, Bank of America, N.A. and Wells Fargo Bank, National Association as Co-Syndication Agents and U.S. Bank National Association as Documentation Agent (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q on August 2, 2013 and incorporated herein by reference).
10.5(b)	Amendment No. 1 dated as of August 8, 2012, to the Credit Agreement dated as of April 27, 2012 (filed as Exhibit 10.4(b) to the Annual Report on Form 10-K for the year ended December 31, 2012, filed on February 28, 2013 and incorporated herein by reference).
10.5(c)	Amendment No. 2, dated as of July 1, 2013, to Credit Agreement dated as of April 27, 2012, by and among Watsco, Inc., as Borrower, Watsco Canada, Inc., as Canadian Borrower, the Lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, Bank of America, N.A. and Wells Fargo Bank, National Association as Co-Syndication Agents and U.S. Bank National Association as Documentation Agent (filed as Exhibit 10.1 to the Current Report on Form 8-K on July 2, 2013 and incorporated herein by reference).
10.5(d)	Amendment No. 3, dated as of June 25, 2014, to Credit Agreement dated as of April 27, 2012, by and among Watsco, Inc., as Borrower, Watsco Canada, Inc., as Canadian Borrower, the Lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, Bank of America, N.A. and Wells Fargo Bank, National Association as Co-Syndication Agents and U.S. Bank National Association as Documentation Agent (filed as Exhibit 10.1 to the Current Report on Form 8-K on June 27, 2014 and incorporated herein by reference).

22

10.5(e)	Amendment No. 4, dated as of January 24, 2017, to Credit Agreement dated as of April 27, 2012, by and among Watsco, Inc., as Borrower, Watsco Canada, Inc., as Canadian Borrower, the Lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, Bank of America, N.A. and Wells Fargo Bank, National Association as Co-Syndication Agents and U.S. Bank National Association as Documentation Agent. #
10.6	Operating Agreement of Carrier Enterprise, LLC (Amended and Restated), dated as of July 1, 2009 (filed as Exhibit 10.2 to the Current Report on Form 8-K on July 8, 2009 and incorporated herein by reference).
10.7	Second Amended and Restated Shareholder Agreement by and among Watsco, Inc., Carrier Corporation and UTC Canada Corporation, dated as of April 27, 2012 (filed as Exhibit 10.4 to the Current Report on Form 8-K on May 3, 2012 and incorporated herein by reference).
10.8	Operating Agreement of Carrier Enterprise Northeast, LLC, dated as of April 30, 2011 (filed as Exhibit 10.29 to the Annual Report on Form 10-K for the year ended December 31, 2011 and incorporated herein by reference).
10.9	Carrier Enterprise Canada (G.P.), Inc. Shareholders’ Agreement dated as of April 27, 2012 (filed as Exhibit 10.2 to the Current Report on Form 8-K on May 3, 2012 and incorporated herein by reference).
13	2016 Annual Report to Shareholders (with the exception of the information incorporated by reference into Items 1, 5, 6, 7 and 8 of this Form 10-K, the 2016 Annual Report to Shareholders is provided solely for the information of the SEC and is not deemed “filed” as part of this Form 10-K).
21.1	Subsidiaries of the Registrant.
23.1	Consent of Independent Registered Public Accounting Firm – KPMG LLP.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Senior Vice President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.3	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer, Senior Vice President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

23

EX-10.5(E)

Exhibit 10.5(e)

AMENDMENT NO. 4

Dated as of January 24, 2017

to

CREDIT AGREEMENT

Dated as of April 27, 2012

THIS AMENDMENT NO. 4 (this “Amendment”) is made as of January 24, 2017 by and among Watsco, Inc., a Florida corporation (the “Company”), Watsco Canada, Inc., a New Brunswick corporation (the “Canadian Borrower” and, collectively with the Company, the “Borrowers”), the financial institutions listed on the signature pages hereof and JPMorgan Chase Bank, N.A., as Administrative Agent (in such capacity, the “Administrative Agent”), under that certain Credit Agreement dated as of April 27, 2012 by and among the Borrowers, the Canadian Subsidiary Borrowers from time to time party thereto, the Lenders, the Administrative Agent and JPMorgan Chase Bank, N.A., as Collateral Agent (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”). Capitalized terms used herein and not otherwise defined herein shall have the respective meanings given to them in the Credit Agreement.

WHEREAS, the Borrowers have requested that the requisite Lenders and the Administrative Agent agree to certain amendments to the Credit Agreement;

WHEREAS, the Borrowers, the Lenders party hereto and the Administrative Agent have so agreed on the terms and conditions set forth herein;

NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrowers, the Lenders party hereto and the Administrative Agent hereby agree to enter into this Amendment.

1. Amendments to the Credit Agreement. Effective as of the date of satisfaction of the conditions precedent set forth in Section 2 below, the parties hereto agree that the Credit Agreement is hereby amended as follows:

(a) Section 1.01 of the Credit Agreement is hereby amended to insert the following definition in the appropriate alphabetical order:

“Amendment No. 4 Effective Date” means January 24, 2017.

(b) Section 2.05(a) of the Credit Agreement is hereby amended to delete the reference to “agrees to make” and replace such reference with a reference to “may in its sole discretion make”.

(c) Section 2.06(b) of the Credit Agreement is hereby amended to delete each reference to “$50,000,000” appearing therein and replace each such reference with a reference to “$10,000,000”.

(d) Section 2.17 of the Credit Agreement is hereby amended to insert a new clause (j) therein immediately following clause (i) thereof as follows:

(j) Certain FATCA Matters. For purposes of determining withholding Taxes imposed under FATCA, from and after the Amendment No. 4 Effective Date, the Loan Parties and the Administrative Agent shall treat (and the Lenders hereby authorize the Administrative Agent to treat) this Agreement and the Loans as not qualifying as “grandfathered obligations” within the meaning of Treasury Regulation Section 1.1471-2(b)(2)(i) or 1.1471-2T(b)(2)(i).

2. Conditions of Effectiveness. The effectiveness of this Amendment is subject to the condition precedent that:

(a) The Administrative Agent shall have received counterparts of this Amendment duly executed by the Borrowers, the Subsidiary Guarantors, the Required Lenders, the Issuing Banks, the Swingline Lender and the Administrative Agent.

3. Representations and Warranties of the Loan Parties. Each Loan Party hereby represents and warrants as follows:

(a) This Amendment and the Credit Agreement as modified hereby constitute legal, valid and binding obligations of such Loan Party and are enforceable against such Loan Party in accordance with their terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general principles of equity.

(b) As of the date hereof and after giving effect to the terms of this Amendment, (i) no Default or Event of Default shall have occurred and be continuing and (ii) the representations and warranties of such Borrower set forth in the Credit Agreement, as amended hereby, are true and correct in all material respects (provided that any representation or warranty qualified by materiality or Material Adverse Effect is true and correct in all respects).

4. Reference to and Effect on the Credit Agreement.

(a) Upon the effectiveness hereof, each reference to the Credit Agreement or any other Loan Document shall mean and be a reference to the Credit Agreement as amended hereby.

(b) Each Loan Document and all other documents, instruments and agreements executed and/or delivered in connection therewith shall remain in full force and effect and are hereby ratified and confirmed.

(c) Except with respect to the subject matter hereof, the execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Administrative Agent or the Lenders, nor constitute a waiver of any provision of the Credit Agreement, the Loan Documents or any other documents, instruments and agreements executed and/or delivered in connection therewith.

5. Consent and Reaffirmation. Without in any way establishing a course of dealing by the Administrative Agent or any Lender, each of the undersigned consents to the Amendment and reaffirms the terms and conditions of the Credit Agreement, the Subsidiary Guaranty and any other Loan Document executed by it and acknowledges and agrees that the Credit Agreement, the Subsidiary Guaranty and each and every such Loan Document executed by the undersigned in connection with the Credit Agreement remains in full force and effect and is hereby reaffirmed, ratified and confirmed.

2

6. Governing Law. This Amendment shall be construed in accordance with and governed by the law of the State of New York.

7. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.

8. Counterparts. This Amendment may be executed by one or more of the parties hereto on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Signatures delivered by facsimile or PDF shall have the same force and effect as manual signatures delivered in person.

[Signature Pages Follow]

3

IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and year first above written.

WATSCO, INC., as the Company
By:	/s/ Ana M. Menendez
Name:	Ana M. Menendez
Title:	CFO and Treasurer
WATSCO CANADA, INC., as the Canadian Borrower
By:	/s/ Ana M. Menendez
Name:	Ana M. Menendez
Title:	VP and Treasurer

Signature Page to Amendment No. 4 to

Credit Agreement dated as of April 27, 2012

Watsco, Inc. et al

WATSCO CANADA, INC.,		WATSCO HOLDINGS, INC.,
as a Subsidiary Guarantor		as a Subsidiary Guarantor
By:	/s/ Ana M. Menendez	By:	/s/ Ana M. Menendez
Name:	Ana M. Menendez	Name:	Ana M. Menendez
Title:	VP and Treasurer	Title:	VP and Treasurer
WATSCO HOLDINGS II, INC.,		WATSCO HOLDINGS III, LLC,
as a Subsidiary Guarantor		as a Subsidiary Guarantor
By:	/s/ Ana M. Menendez	By:	/s/ Ana M. Menendez
Name:	Ana M. Menendez	Name:	Ana M. Menendez
Title:	VP and Treasurer	Title:	VP and Treasurer
EAST COAST METAL DISTRIBUTORS LLC,		BAKER DISTRIBUTING COMPANY LLC,
as a Subsidiary Guarantor		as a Subsidiary Guarantor
By:	/s/ Ana M. Menendez	By:	/s/ Ana M. Menendez
Name:	Ana M. Menendez	Name:	Ana M. Menendez
Title:	VP and Asst. Secretary	Title:	VP and Asst. Secretary
GEMAIRE DISTRIBUTORS LLC, as a Subsidiary Guarantor
By:	/s/ Ana M. Menendez
Name:	Ana M. Menendez
Title:	VP and Asst. Secretary

Signature Page to Amendment No. 4 to

Credit Agreement dated as of April 27, 2012

Watsco, Inc. et al

JPMORGAN CHASE BANK, N.A., individually as a Lender, as the Swingline Lender, as an Issuing Bank and as Administrative Agent
By:	/s/ Blakely Engel
Name:	Blakely Engel
Title:	Vice President

Signature Page to Amendment No. 4 to

Credit Agreement dated as of April 27, 2012

Watsco, Inc. et al

BANK OF AMERICA, N.A., as a Lender and as an Issuing Bank
By:	/s/ Julia H. Rocawich
Name:	Julia H. Rocawich
Title:	Senior Vice President
BANK OF AMERICA, N.A. (CANADA BRANCH), as a Lender
By:	/s/ Medina Sales de Andrade
Name:	Medina Sales de Andrade
Title:	Vice President

Signature Page to Amendment No. 4 to

Credit Agreement dated as of April 27, 2012

Watsco, Inc. et al

WELLS FARGO BANK, NATIONAL ASSOCIATION, as a Lender and as an Issuing Bank
By:	/s/ Benny Gonzalez
Name:	Benny Gonzalez
Title:	Vice President

Signature Page to Amendment No. 4 to

Credit Agreement dated as of April 27, 2012

Watsco, Inc. et al

U.S. BANK NATIONAL ASSOCIATION, as a Lender
By:	/s/ Kenneth R. Fieler
Name:	Kenneth R. Fieler
Title:	Vice President

Signature Page to Amendment No. 4 to

Credit Agreement dated as of April 27, 2012

Watsco, Inc. et al

THE NORTHERN TRUST COMPANY, as a Lender
By:	/s/ Myriam C. Bailey
Name:	Myriam C. Bailey
Title:	Senior Vice President

Signature Page to Amendment No. 4 to

Credit Agreement dated as of April 27, 2012

Watsco, Inc. et al

BRANCH BANKING & TRUST COMPANY, as a Lender
By:	/s/ Charles Graeub, III
Name:	Charles Graeub, III
Title:	Vice President

Signature Page to Amendment No. 4 to

Credit Agreement dated as of April 27, 2012

Watsco, Inc. et al

BANK OF MONTREAL, CHICAGO BRANCH, as a Lender
By:	/s/ Thomas Hasenauer
Name:	Thomas Hasenauer
Title:	Director
BANK OF MONTREAL, TORONTO BRANCH, as a Lender
By:	/s/ Peter Chauvin
Name:	Peter Chauvin
Title:	Director

Signature Page to Amendment No. 4 to

Credit Agreement dated as of April 27, 2012

Watsco, Inc. et al

REGIONS BANK, as a Lender
By:	/s/ Alfred J. Bacchi
Name:	Alfred J. Bacchi
Title:	Managing Director

Signature Page to Amendment No. 4 to

Credit Agreement dated as of April 27, 2012

Watsco, Inc. et al

EX-13

EXHIBIT 13

WATSCO, INC. AND SUBSIDIARIES

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included under Item 8 of Part II, “Financial Statements and Supplementary Data,” and the information contained in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K for the year ended December 31, 2016.

(In thousands, except per share data)	2016		2015		2014		2013		2012 (1)
FOR THE YEAR
Revenues	$	4,220,702	$	4,113,239	$	3,944,540	$	3,743,330	$	3,431,712
Gross profit		1,034,584		1,007,357		956,402		899,253		814,395
Operating income		345,632		336,748		305,747		271,209		224,908
Net income		235,983		226,524		208,702		187,719		157,601
Less: net income attributable to non-controlling interest		53,173		53,595		57,315		59,996		54,267
Net income attributable to Watsco, Inc.	$	182,810	$	172,929	$	151,387	$	127,723	$	103,334
Diluted earnings per share for Common and Class B common stock	$	5.15	$	4.90	$	4.32	$	3.68	$	2.70
Cash dividends per share:
Common stock	$	3.60	$	2.80	$	2.00	$	1.15	$	7.48
Class B common stock	$	3.60	$	2.80	$	2.00	$	1.15	$	7.48
Weighted-average Common and Class B common shares outstanding - Diluted		32,617		32,480		32,359		32,258		31,744
AT YEAR END
Total assets	$	1,874,649	$	1,788,442	$	1,791,067	$	1,669,531	$	1,682,055
Total long-term obligations	$	235,642	$	245,814	$	303,885	$	230,557	$	316,196
Total shareholders’ equity	$	1,251,748	$	1,203,721	$	1,132,039	$	1,127,392	$	1,022,040
Number of employees		5,050		4,950		4,950		4,750		4,600

(1) On October 31, 2012, we paid a special dividend of $5.00 per share of Common and Class B common stock that resulted in a $0.33 per share reduction in diluted earnings per share.

WATSCO, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Annual Report on Form 10-K contains or incorporates by reference statements that are not historical 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” and variations of these words and negatives thereof and similar expressions are intended to identify forward-looking statements, including statements regarding, among others, (i) economic conditions, (ii) business and acquisition strategies, (iii) potential acquisitions and/or joint ventures, (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;

• competitive factors within the HVAC/R industry;

• effects of supplier concentration;

• fluctuations in certain commodity costs;

• consumer spending;

• consumer debt levels;

• new housing starts and completions;

• capital spending in the commercial construction market;

• access to liquidity needed for operations;

• seasonal nature of product sales;

• weather conditions;

• insurance coverage risks;

• federal, state and local regulations impacting our industry and products;

• prevailing interest rates;

• foreign currency exchange rate fluctuations;

• international political risk;

• cybersecurity risk; and

• the continued viability of our business strategy.

We believe these forward-looking statements are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on current expectations. For additional information regarding other important factors that may affect our operations and could cause actual results to vary materially from those anticipated in the forward-looking statements, please see the discussion included in Item 1A “Risk Factors” of this 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 forward-looking information, except as required by applicable law. We qualify any and all of our forward-looking statements by these cautionary factors.

The following information should be read in conjunction with the information contained in Item 1A, “Risk Factors” and the consolidated financial statements, including the notes thereto, included under Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for the year ended December 31, 2016.

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, 2016, we operated from 565 locations in 37 U.S. States, Canada, Mexico and Puerto Rico with additional market coverage on an export basis to portions of Latin America and the Caribbean.

Revenues primarily consist of sales of air conditioning, heating and refrigeration equipment and related parts and supplies. Selling, general and administrative expenses primarily consist of selling expenses, the largest components of which are salaries, commissions and marketing expenses that are variable and correlate to changes in sales. Other significant selling, general and administrative expenses relate to the operation of warehouse facilities, including a fleet of trucks and forklifts and facility rent, which are payable mostly under non-cancelable operating leases.

Sales of residential central air conditioners, heating equipment and parts and supplies are seasonal. Furthermore, results of operations can be impacted favorably or unfavorably based on weather patterns, primarily during the Summer and Winter selling seasons. Demand related to the residential central air conditioning replacement market is typically highest in the second and third quarters, and demand for heating equipment is usually highest in the fourth quarter. Demand related to the new construction market is fairly consistent during the year, subject to weather and economic conditions, including their effect on the number of housing completions.

Joint Ventures with Carrier Corporation

In 2009, we formed a joint venture with Carrier Corporation (“Carrier”), which we refer to as Carrier Enterprise I, in which Carrier contributed 95 of its company-owned locations in 13 Sun Belt states and Puerto Rico and its export division in Miami, Florida, and we contributed 15 locations that distributed Carrier products. In July 2012, we exercised our option to acquire an additional 10% ownership interest in Carrier Enterprise I, which increased our ownership interest to 70%; and, on July 1, 2014, we exercised our last remaining option to acquire an additional 10% ownership interest in Carrier Enterprise I, which increased our controlling interest to 80%. Neither Watsco nor Carrier has any remaining options to purchase additional ownership interests in Carrier Enterprise I or any of our other joint ventures with Carrier, which are described below.

In 2011, we formed a second joint venture with Carrier and completed two additional transactions. In April 2011, Carrier contributed 28 of its company-owned locations in eight Northeast U.S. states, and we contributed 14 locations in the Northeast United States. In July 2011, we 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. On November 29, 2016, we purchased an additional 10% ownership interest in Carrier Enterprise II, and, on February 13, 2017, we again purchased an additional 10% ownership interest in Carrier Enterprise II, which together increased our controlling interest to 80%.

In 2012, we formed a third joint venture, which we refer to as Carrier Enterprise III, with UTC Canada Corporation, referred to as UTC Canada, an affiliate of Carrier. Carrier contributed 35 of its company-owned locations in Canada to Carrier Enterprise III. We have a 60% controlling interest in Carrier Enterprise III, and UTC Canada has a 40% non-controlling interest.

Critical Accounting Policies

Management’s discussion and analysis of financial condition and results of operations is based upon the consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. At least quarterly, management reevaluates its judgments and estimates, which are based on historical experience, current trends and various other assumptions that are believed to be reasonable under the circumstances.

Our significant accounting policies are discussed in Note 1 to our audited consolidated financial statements included with this Annual Report on Form 10-K. Management believes that the following accounting policies include a higher degree of judgment and/or complexity and, thus, are considered to be critical accounting policies. Management has discussed the development and selection of critical 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 customers 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 a number of factors, including the aging of a customer’s account, past transactions with customers, creditworthiness of specific customers, historical trends and other information. Our business is seasonal and our customers’ businesses are also seasonal. Sales are lowest during the first and fourth quarters and past due accounts receivable balances as a percentage of total trade receivables generally increase during these quarters. We review our accounts receivable reserve policy periodically, reflecting current risks, trends and changes in industry conditions.

The allowance for doubtful accounts was $6.2 million and $5.3 million at December 31, 2016 and 2015, respectively, an increase of $0.9 million. The increase from December 31, 2015 is primarily due to an increase in the over 90 day balances. Accounts receivable balances greater than 90 days past due as a percent of accounts receivable at December 31, 2016 increased to 1.6% compared to 1.4% at December 31, 2015 primarily due to one account in which our exposure is mitigated by credit insurance.

Although we believe the allowance for doubtful accounts is sufficient, a decline in economic conditions could lead to the deterioration in the financial condition of our customers, resulting in an impairment of their ability to make payments and additional allowances may be required that could materially impact our consolidated 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 geographical regions. Additionally, we mitigate credit risk through credit insurance programs.

Inventory Valuation Reserves

Inventory valuation reserves are established in order to report inventories at the lower of weighted-average cost or market and the first-in, first-out method. As part of the valuation process, inventories are adjusted to reflect excess, slow-moving and damaged inventories at their estimated net realizable value. The valuation process for excess, slow-moving and damaged inventory contains uncertainty because management must make estimates and use judgment to determine the future salability 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 and Indefinite Lived Intangible 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 identification 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, 2017, we performed our annual goodwill impairment test and determined that the estimated fair value of our reporting unit significantly exceeded its carrying value.

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

The estimates of fair value of our reporting unit and indefinite lived intangibles 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 conditions. 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 and intangibles were $538.3 million and $538.8 million at December 31, 2016 and 2015, respectively. Although no impairment has been recorded to date, there can be no assurances that future impairments will not occur. An adjustment to the carrying value of goodwill and intangibles could materially impact the consolidated results of operations.

Self-Insurance Reserves

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. The estimation process contains uncertainty since management must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims for incidents incurred but not reported as of the balance sheet date. Reserves in the amounts of $3.0 million and $3.2 million at December 31, 2016 and 2015, respectively, were established related to such insurance programs.

Income Taxes

Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting basis and the tax basis of assets and liabilities at enacted tax rates expected to be in effect when such amounts are recovered or settled. The use of estimates by management is required to determine income tax expense, deferred tax assets and any related valuation allowance and deferred tax liabilities. No valuation allowance was recorded at December 31, 2016 or 2015. The valuation allowance is based on estimates of future taxable income by jurisdiction in which the deferred tax assets will be recoverable. These estimates can be affected by a number of factors, including possible tax audits or general economic conditions 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 consolidated results of operations.

New Accounting Standards

Refer to Note 1 to our audited consolidated financial statements included in this Annual Report on Form 10-K for a discussion of new 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, 2016, 2015 and 2014.

	2016			2015			2014
Revenues		100.0	%		100.0	%		100.0	%
Cost of sales		75.5			75.5			75.8
Gross profit		24.5			24.5			24.2
Selling, general and administrative expenses		16.3			16.3			16.5
Operating income		8.2			8.2			7.8
Interest expense, net		0.1			0.1			0.1
Income before income taxes		8.1			8.1			7.6
Income taxes		2.5			2.5			2.3
Net income		5.6			5.5			5.3
Less: net income attributable to non-controlling interest		1.3			1.3			1.5
Net income attributable to Watsco, Inc.		4.3	%		4.2	%		3.8	%

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

The following narratives reflect our additional 10% ownership interest in Carrier Enterprise II, which became effective on November 29, 2016 and our additional 10% ownership interest in Carrier Enterprise I, which became effective on July 1, 2014. We did not acquire any businesses during 2016, 2015 or 2014.

In the following narratives, computations and disclosure information referring to “same-store basis” exclude the effects of locations acquired or locations opened or closed during the immediately preceding 12 months unless they are within close geographical proximity to existing locations. At December 31, 2016 and 2015, 21 and 26 locations, respectively, were excluded from “same-store basis” information. The table below summarizes the changes in our locations for 2016 and 2015:

	Number of Locations
December 31, 2014		572
Opened		10
Closed		(16	)
December 31, 2015		566
Opened		10
Closed		(11	)
December 31, 2016		565

2016 Compared to 2015

Revenues

Revenues for 2016 increased $107.5 million, or 3%, to $4,220.7 million, including $1.4 million from locations opened during the preceding 12 months, offset by $18.4 million from locations closed. On a same-store basis, revenues increased $124.5 million, or 3%, as compared to 2015, reflecting a 3% increase in sales of HVAC equipment (66% of sales), which included a 4% increase in residential HVAC equipment and a 1% increase in commercial HVAC equipment, a 1% increase in sales of other HVAC products (29% of sales) and a 6% increase in sales of commercial refrigeration products (5% of sales). The increase in same-store revenues was primarily due to demand for the replacement of residential HVAC equipment.

Gross Profit

Gross profit for 2016 increased $27.2 million, or 3%, to $1,034.6 million, primarily as a result of increased revenues. Gross profit margin remained consistent at 24.5% in 2016 as compared to 2015.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for 2016 increased $18.3 million, or 3%, to $689.0 million, primarily due to increased revenues. Selling, general and administrative expenses as a percentage of revenues remained consistent at 16.3% in 2016 as compared to 2015. Selling, general and administrative expenses for 2016 included $3.3 million of additional costs related to ongoing technology initiatives, as compared to 2015. On a same-store basis, selling, general and administrative expenses increased 3% as compared to 2015.

Operating Income

Operating income for 2016 increased $8.9 million, or 3%, to $345.6 million. Operating margin remained consistent at 8.2% in 2016 as compared to 2015.

Interest Expense, Net

Interest expense, net, for 2016 decreased $1.8 million, or 33%, to $3.7 million, primarily as a result of a decrease in average outstanding borrowings, partially offset by a higher effective interest rate in 2016, in each case as compared to 2015.

Income Taxes

Income taxes increased to $105.9 million for 2016, as compared to $104.7 million for 2015 and are a composite of the income taxes attributable to our wholly owned operations and income taxes attributable to the Carrier joint ventures, which are primarily taxed as partnerships for income tax purposes. The effective income tax rates attributable to us were 36.0% and 37.0% in 2016 and 2015, respectively. The decrease was primarily due to a $2.9 million benefit from the adoption of new accounting guidance related to share-based payments in 2016. See Note 1 to our consolidated financial statements contained in this Annual Report on Form 10-K.

Net Income Attributable to Watsco, Inc.

Net income attributable to Watsco in 2016 increased $9.9 million, or 6%, to $182.8 million. The increase was primarily driven by higher revenues and by a reduction in the net income attributable to the non-controlling interest related to Carrier Enterprise II following our purchase of an additional 10% ownership interest in Carrier Enterprise II in November 2016.

2015 Compared to 2014

Revenues

Revenues for 2015 increased $168.7 million, or 4%, to $4,113.2 million, including $4.9 million from locations opened during the preceding 12 months, offset by $32.8 million from locations closed. On a same-store basis, revenues increased $196.6 million, or 5%, as compared to 2014, reflecting a 7% increase in sales of HVAC equipment (66% of sales), which included a 6% increase in residential HVAC equipment and an 8% increase in commercial HVAC equipment, a 2% increase in sales of other HVAC products (29% of sales) and a 2% increase in sales of commercial refrigeration products (5% of sales). The increase in same-store revenues was primarily due to strong demand for the replacement of residential and commercial HVAC equipment. Revenues from sales of residential HVAC equipment also benefited from an improved sales mix of higher-efficiency air conditioning and heating systems, which sell at higher unit prices.

Gross Profit

Gross profit for 2015 increased $51.0 million, or 5%, to $1,007.4 million, primarily as a result of increased revenues. Gross profit margin improved 30 basis-points to 24.5% in 2015 from 24.2% in 2014, primarily due to higher realized gross margins for non-HVAC equipment products.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for 2015 increased $20.0 million, or 3%, to $670.6 million, primarily due to increased revenues. Selling, general and administrative expenses as a percentage of revenues decreased to 16.3% for 2015 from 16.5% for 2014. The decrease in selling, general, and administrative expenses as a percentage of revenues was primarily due to improved leveraging of fixed operating costs as compared to 2014. Selling, general and administrative expenses included $7.1 million of additional costs for 2015 in excess of 2014 for ongoing technology initiatives. On a same-store basis, selling, general and administrative expenses increased 4% as compared to 2014.

Operating Income

Operating income for 2015 increased $31.0 million, or 10%, to $336.7 million. Operating margin improved 40 basis-points to 8.2% in 2015 from 7.8% in 2014. The increase was driven by higher revenues, expanded gross profit margin and reduced selling, general and administrative expenses as a percent of revenues, as discussed above.

Interest Expense, Net

Interest expense, net, for 2015 increased $0.3 million, or 7%, to $5.5 million, primarily as a result of an increase in average outstanding borrowings, partially offset by a lower effective interest rate in 2015, in each case as compared to 2014.

Income Taxes

Income taxes increased to $104.7 million for 2015, as compared to $91.8 million for 2014 and are a composite of the income taxes attributable to our wholly owned operations and income taxes attributable to the Carrier joint ventures, which are primarily taxed as partnerships for income tax purposes. The effective income tax rate attributable to us was 37.0% in both 2015 and 2014.

Net Income Attributable to Watsco, Inc.

Net income attributable to Watsco in 2015 increased $21.5 million, or 14%, to $172.9 million. The increase was primarily driven by higher revenues, expanded profit margins and reduced selling, general and administrative expenses as a percent of revenues, as discussed above, and by a reduction in the net income attributable to the non-controlling interest related to Carrier Enterprise I following our purchase of an additional 10% ownership interest in Carrier Enterprise I in July 2014.

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 bank line of credit;

• the ability to attract long-term capital with satisfactory terms;

• acquisitions, including joint ventures;

• dividend payments;

• capital expenditures; and

• the timing and extent of common stock repurchases, if any.

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 payments, if and as declared by our Board of Directors, capital expenditures, business acquisitions and development of our long-term operating and technology strategies.

As of December 31, 2016, we had $56.0 million of cash and cash equivalents, of which, $50.7 million was held by foreign subsidiaries. The repatriation of cash balances from our foreign subsidiaries could have adverse tax consequences or be subject to capital controls; however, those balances are generally available without legal restrictions to fund ordinary business operations. Refer to Note 7 to our consolidated financial statements included in this Annual Report on Form 10-K for a discussion of undistributed earnings of our foreign subsidiaries.

We believe that our operating cash flows, cash on hand and funds available for borrowing under our line of credit will be 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 line of credit 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 line of credit and may also adversely affect the determination of interest rates, particularly rates based on LIBOR, which is one of the base rates under our line of credit. Disruptions in the credit and capital markets could also result in increased borrowing costs and/or reduced borrowing capacity under our line of credit.

Working Capital

Working capital increased 2% to $925.3 million at December 31, 2016 from $911.0 million at December 31, 2015, primarily reflecting higher levels of accounts receivable commensurate with our increase in overall business volume.

Cash Flows

The following table summarizes our cash flow activity for 2016 and 2015 (in millions):

	2016			2015			Change
Cash flows provided by operating activities	$	277.8		$	221.4		$	56.4
Cash flows used in investing activities	$	(42.8	)	$	(22.9	)	$	(19.9	)
Cash flows used in financing activities	$	(213.9	)	$	(186.3	)	$	(27.6	)

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 on Form 10-K.

Operating Activities

The increase in net cash provided by operating activities was primarily due to the timing of payments for accounts payable and other liabilities in 2016 as compared to 2015.

Investing Activities

The increase in net cash used in investing activities in 2016 as compared to 2015 was primarily due to the purchase of a corporate aircraft, which is replacing a previously leased aircraft, for $30.7 million in 2016 partially offset by the purchase of owned space for expansion of our corporate headquarters in 2015.

Financing Activities

The increase in net cash used in financing activities was primarily attributable to the purchase of an additional 10% ownership interest in Carrier Enterprise II for $42.9 million and an increase in dividends paid in 2016, partially offset by lower net repayments under our revolving credit agreement in 2016 as compared to 2015.

Revolving Credit Agreement

We maintain an unsecured, syndicated revolving credit agreement that provides for borrowings of up to $600.0 million. 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 facility are a $90.0 million swingline subfacility, a letter of credit subfacility and a $75.0 million multicurrency borrowing sublimit. On January 24, 2017, we entered into an amendment to this credit agreement, which reduced the letter of credit subfacility from $50.0 million to $10.0 million and modified certain definitions.

Borrowings under the credit facility bear interest at either LIBOR-based rates plus a spread, which ranges from 87.5 to 250.0 basis-points (LIBOR plus 100.0 basis-points at December 31, 2016), depending on our ratio of total debt to EBITDA, or on rates based on the higher of the Prime rate or the Federal Funds Rate, in each case plus a spread which ranges from 0 to 150.0 basis-points (0 basis-points at December 31, 2016), 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 12.5 to 35.0 basis-points (15.0 basis-points at December 31, 2016).

At December 31, 2016 and 2015, $235.3 million and $245.3 million were outstanding under the revolving credit agreement, respectively. 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, 2016.

Contractual Obligations

As of December 31, 2016, our significant contractual obligations were as follows (in millions):

	Payments due by Period
Contractual Obligations	2017		2018		2019		2020		2021		Thereafter		Total
Operating leases (1)	$	56.6	$	48.4	$	35.9	$	21.7	$	13.2	$	13.4	$	189.2
Purchase obligations (2)		29.0		—		—		—		—		—		29.0
Total	$	85.6	$	48.4	$	35.9	$	21.7	$	13.2	$	13.4	$	218.2

(1) Represents future minimum payments associated with real property, equipment, vehicles and a corporate aircraft under non-cancelable operating leases. We are committed to pay a portion of the actual operating expenses under certain of these lease agreements, and these operating expenses are excluded from the table above.

(2) Purchase obligations include amounts committed under purchase orders for goods with defined terms as to price, quantity and delivery. Purchase orders made in the ordinary course of business that are cancelable are excluded from the above table. Any amounts for which we are liable under purchase orders for goods received are reflected in Accounts Payable in our audited consolidated balance sheets and are excluded from the above table.

Commercial obligations outstanding at December 31, 2016 under our revolving credit agreement consisted of borrowings totaling $235.3 million with revolving maturities of seven to eight days.

Off-Balance Sheet Arrangements

Refer to Note 12 to our audited consolidated financial statements, under the caption “Off-Balance Sheet Financial Instruments,” for a discussion of standby letters of credit and performance bonds for which we were contingently liable under at December 31, 2016. Such discussion is incorporated herein by reference.

Purchase of Additional Ownership Interest in Joint Venture

On November 29, 2016, we purchased an additional 10% ownership interest in Carrier Enterprise II for cash consideration of $42.9 million, and, on February 13, 2017, we purchased an additional 10% ownership interest in Carrier Enterprise II for cash consideration of $42.7 million, following which we have an 80% controlling interest in Carrier Enterprise II. The source of cash was borrowings under our revolving credit agreement.

Acquisitions

We continually evaluate potential acquisitions and/or joint ventures and routinely hold discussions with a number of 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 $3.60, $2.80 and $2.00 per share of Common stock and Class B common stock in 2016, 2015 and 2014, respectively. On January 3, 2017, our Board of Directors declared a regular quarterly cash dividend of $1.05 per share of Common and Class B common stock that was paid on January 31, 2017 to shareholders of record as of January 17, 2017. Future dividends and/or changes in dividend rates will be at the sole discretion of the Board of Directors and will depend upon such factors as cash flow generated by operations, profitability, financial condition, cash requirements, future prospects and other factors deemed relevant by our Board of Directors.

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. No shares were repurchased in 2016, 2015 or 2014. 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, 2016, there were 1,129,087 shares remaining authorized for repurchase under the program.

Quantitative and Qualitative Disclosures about Market Risk

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

Foreign Currency Exposure

We are exposed to cash flow and earnings fluctuations resulting from currency exchange rate variations. These exposures are transactional and translational in nature. The foreign currency exchange rates to which we are exposed are the Canadian dollar and Mexican peso. Revenues in these markets accounted for 6% and 3%, respectively, of our total revenues for 2016.

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 purchases, we use foreign currency forward contracts. By entering into these foreign currency forward contracts, we lock in exchange rates that would otherwise cause losses should the U.S. dollar strengthen and gains should the U.S. dollar weaken, in each case against the Canadian dollar. The total notional value of our foreign currency forward contracts as of December 31, 2016 was $37.9 million, and such contracts have varying terms expiring through September 2017.

We have exposure related to the translation of financial statements of our Canadian operations into U.S. dollars, our functional currency. Currently, we do not hold any derivative contracts that hedge our foreign currency translational exposure.

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 significant or if our Canadian and Mexican markets grow and represent a larger percentage of our total revenues.

See Note 13 to our audited consolidated financial statements included in this Annual Report on Form 10-K for further information on our derivative instruments.

Interest Rate Exposure

Our revolving credit facility exposes us to interest rate risk because borrowings thereunder accrue interest at one or more variable interest rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we have historically entered into interest rate swap agreements with financial institutions that have investment grade credit ratings, thereby minimizing credit risk associated with these instruments. We do not currently hold any such swap agreements or any other derivative contracts that hedge our interest rate exposure, but we may enter into such instruments in the future.

We have evaluated our exposure to interest rates based on the amount of variable debt outstanding under our revolving credit agreement at December 31, 2016, and determined that a 100 basis-point change in interest rates would result in an impact to income before taxes of approximately $2.4 million. See Note 6 to our audited consolidated financial statements included in this Annual Report on Form 10-K for further information about our debt.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation and fair presentation of our published consolidated financial 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 inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our Chief Executive Officer, Senior Vice President and Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2016. 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 financial reporting was effective as of December 31, 2016. The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report that is included herein.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Watsco, Inc.:

We have audited Watsco, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Watsco, Inc.’s management is responsible for maintaining effective internal control over financial reporting 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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 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.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance 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 management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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.

In our opinion, Watsco, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Watsco, Inc. and subsidiaries as of December 31, 2016 and 2015, and 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, 2016, and our report dated February 21, 2017 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Miami, Florida

February 21, 2017

Certified Public Accountants

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Watsco, Inc.:

We have audited the accompanying consolidated balance sheets of Watsco, Inc. and subsidiaries as of December 31, 2016 and 2015, and 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, 2016. 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 conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Watsco, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Watsco, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 21, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Miami, Florida

February 21, 2017

Certified Public Accountants

WATSCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	Years Ended December 31,
(In thousands, except per share data)	2016		2015		2014
Revenues	$	4,220,702	$	4,113,239	$	3,944,540
Cost of sales		3,186,118		3,105,882		2,988,138
Gross profit		1,034,584		1,007,357		956,402
Selling, general and administrative expenses		688,952		670,609		650,655
Operating income		345,632		336,748		305,747
Interest expense, net		3,713		5,547		5,206
Income before income taxes		341,919		331,201		300,541
Income taxes		105,936		104,677		91,839
Net income		235,983		226,524		208,702
Less: net income attributable to non-controlling interest		53,173		53,595		57,315
Net income attributable to Watsco, Inc.	$	182,810	$	172,929	$	151,387
Earnings per share for Common and Class B common stock:
Basic	$	5.16	$	4.91	$	4.33
Diluted	$	5.15	$	4.90	$	4.32

See accompanying notes to consolidated financial statements.

WATSCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Years Ended December 31,
(In thousands)	2016			2015			2014
Net income	$	235,983		$	226,524		$	208,702
Other comprehensive gain (loss), net of tax
Foreign currency translation adjustment		6,211			(39,378	)		(21,117	)
Unrealized (loss) gain on cash flow hedging instruments		(965	)		2,713			280
Reclassification of loss (gain) on cash flow hedging instruments into earnings		323			(1,993	)		—
Unrealized gain (loss) on available-for-sale securities		14			(8	)		1
Other comprehensive gain (loss)		5,583			(38,666	)		(20,836	)
Comprehensive income		241,566			187,858			187,866
Less: comprehensive income attributable to non-controlling interest		55,382			38,086			48,752
Comprehensive income attributable to Watsco, Inc.	$	186,184		$	149,772		$	139,114

See accompanying notes to consolidated financial statements.

WATSCO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,
(In thousands, except share and per share data)	2016			2015
ASSETS
Current assets:
Cash and cash equivalents	$	56,010		$	35,229
Accounts receivable, net		475,974			451,079
Inventories		685,011			673,967
Other current assets		23,161			20,990
Total current assets		1,240,156			1,181,265
Property and equipment, net		90,502			62,715
Goodwill		379,737			378,310
Intangible assets, net		158,564			160,481
Other assets		5,690			5,671
	$	1,874,649		$	1,788,442
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of other long-term obligations	$	200		$	184
Accounts payable		185,482			145,162
Accrued expenses and other current liabilities		129,206			124,955
Total current liabilities		314,888			270,301
Long-term obligations:
Borrowings under revolving credit agreement		235,294			245,300
Other long-term obligations, net of current portion		348			514
Total long-term obligations		235,642			245,814
Deferred income taxes and other liabilities		72,371			68,606
Commitments and contingencies
Watsco, Inc. shareholders’ equity:
Common stock, $0.50 par value, 60,000,000 shares authorized; 36,682,562 and 36,616,197 shares outstanding at December 31, 2016 and 2015, respectively		18,341			18,308
Class B common stock, $0.50 par value, 10,000,000 shares authorized; 5,218,754 and 5,066,209 shares outstanding at December 31, 2016 and 2015, respectively		2,610			2,533
Preferred stock, $0.50 par value, 10,000,000 shares authorized; no shares issued		—			—
Paid-in capital		592,350			602,522
Accumulated other comprehensive loss, net of tax		(43,530	)		(46,904	)
Retained earnings		550,482			495,276
Treasury stock, at cost, 6,322,650 shares of Common stock and 48,263 shares of Class B common stock at both December 31, 2016 and 2015		(114,425	)		(114,425	)
Total Watsco, Inc. shareholders’ equity		1,005,828			957,310
Non-controlling interest		245,920			246,411
Total shareholders’ equity		1,251,748			1,203,721
	$	1,874,649		$	1,788,442

See accompanying notes to consolidated financial statements.

WATSCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands, except share and per share data)	Common Stock, Class B Common Stock and Preferred Stock Shares			Common Stock, Class B Common Stock and Preferred Stock Amount			Paid-In Capital			Accumulated Other Comprehensive Loss			Retained Earnings			Treasury Stock			Non- controlling Interest			Total
Balance at December 31, 2013		34,727,121		$	20,549		$	606,384		$	(11,474	)	$	339,362		$	(114,425	)	$	286,996		$	1,127,392
Net income														151,387						57,315			208,702
Other comprehensive loss											(12,273	)								(8,563	)		(20,836	)
Issuances of non-vested restricted shares of common stock		218,725			109			(109	)														—
Forfeitures of non-vested restricted shares of common stock		(5,000	)		(2	)		2															—
Common stock contribution to 401(k) plan		18,309			9			1,750															1,759
Stock issuances from exercise of stock options and employee stock purchase plan		73,948			37			4,629															4,666
Retirement of common stock		(26,482	)		(13	)		(2,602	)														(2,615	)
Share-based compensation								12,006															12,006
Excess tax benefit from share-based compensation								1,828															1,828
Cash dividends declared and paid on Common and Class B common stock, $2.00 per share														(69,870	)								(69,870	)
Decrease in non-controlling interest in Carrier Enterprise I								(43,324	)											(44,411	)		(87,735	)
Distributions to non-controlling interest																				(43,258	)		(43,258	)
Balance at December 31, 2014		35,006,621			20,689			580,564			(23,747	)		420,879			(114,425	)		248,079			1,132,039

Continued on next page.

(In thousands, except share and per share data)	Common Stock, Class B Common Stock and Preferred Stock Shares			Common Stock, Class B Common Stock and Preferred Stock Amount			Paid-In Capital			Accumulated Other Comprehensive Loss			Retained Earnings			Treasury Stock			Non- controlling Interest			Total
Balance at December 31, 2014		35,006,621			20,689			580,564			(23,747	)		420,879			(114,425	)		248,079			1,132,039
Net income														172,929						53,595			226,524
Other comprehensive loss											(23,157	)								(15,509	)		(38,666	)
Issuances of non-vested restricted shares of common stock		200,479			100			(100	)														—
Forfeitures of non-vested restricted shares of common stock		(5,000	)		(2	)		2															—
Common stock contribution to 401(k) plan		18,343			9			1,954															1,963
Stock issuances from exercise of stock options and employee stock purchase plan		124,262			62			8,570															8,632
Retirement of common stock		(33,212	)		(17	)		(4,123	)														(4,140	)
Share-based compensation								13,233															13,233
Excess tax benefit from share-based compensation								2,422															2,422
Cash dividends declared and paid on Common and Class B common stock, $2.80 per share														(98,532	)								(98,532	)
Distributions to non-controlling interest																				(39,754	)		(39,754	)
Balance at December 31, 2015		35,311,493			20,841			602,522			(46,904	)		495,276			(114,425	)		246,411			1,203,721

Continued on next page.

(In thousands, except share and per share data)	Common Stock, Class B Common Stock and Preferred Stock Shares			Common Stock, Class B Common Stock and Preferred Stock Amount			Paid-In Capital			Accumulated Other Comprehensive Loss			Retained Earnings			Treasury Stock			Non- controlling Interest			Total
Balance at December 31, 2015		35,311,493			20,841			602,522			(46,904	)		495,276			(114,425	)		246,411			1,203,721
Net income														182,810						53,173			235,983
Other comprehensive gain											3,374									2,209			5,583
Issuances of non-vested restricted shares of common stock		183,144			92			(92	)														—
Forfeitures of non-vested restricted shares of common stock		(26,000	)		(13	)		13															—
Common stock contribution to 401(k) plan		20,045			10			2,338															2,348
Stock issuances from exercise of stock options and employee stock purchase plan		72,482			36			5,660															5,696
Retirement of common stock		(30,761	)		(15	)		(4,003	)														(4,018	)
Share-based compensation								11,848															11,848
Cash dividends declared and paid on Common and Class B common stock, $3.60 per share														(127,604	)								(127,604	)
Decrease in non-controlling interest in Carrier Enterprise II								(25,936	)											(16,973	)		(42,909	)
Distributions to non-controlling interest																				(38,900	)		(38,900	)
Balance at December 31, 2016		35,530,403		$	20,951		$	592,350		$	(43,530	)	$	550,482		$	(114,425	)	$	245,920		$	1,251,748

See accompanying notes to consolidated financial statements.

WATSCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
(In thousands)	2016			2015			2014
Cash flows from operating activities:
Net income	$	235,983		$	226,524		$	208,702
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		20,066			19,117			17,927
Share-based compensation		12,319			12,596			11,473
Deferred income tax provision		2,720			4,687			289
Provision for doubtful accounts		3,487			2,688			2,609
Non-cash contribution to 401(k) plan		2,348			1,963			1,759
Gain on sale of property and equipment		(189	)		(487	)		(1,292	)
Excess tax benefits from share-based compensation		—			(2,422	)		(1,828	)
Changes in operating assets and liabilities:
Accounts receivable		(26,941	)		(26,121	)		(41,068	)
Inventories		(9,729	)		(3,652	)		(98,741	)
Accounts payable and other liabilities		39,759			(13,225	)		45,242
Other, net		(2,067	)		(285	)		(92	)
Net cash provided by operating activities		277,756			221,383			144,980
Cash flows from investing activities:
Capital expenditures		(43,577	)		(23,698	)		(21,512	)
Proceeds from sale of property and equipment		744			760			2,388
Net cash used in investing activities		(42,833	)		(22,938	)		(19,124	)
Cash flows from financing activities:
Dividends on Common and Class B common stock		(127,604	)		(98,532	)		(69,870	)
Purchase of additional ownership from non-controlling interest		(42,909	)		—			(87,735	)
Distributions to non-controlling interest		(38,900	)		(39,754	)		(43,258	)
Net (repayments) proceeds under revolving credit agreement		(10,006	)		(56,256	)		74,729
Net (repayments) proceeds from other long-term obligations		(150	)		(157	)		235
Payment of fees related to revolving credit agreement		—			—			(381	)
Excess tax benefits from share-based compensation		—			2,422			1,828
Net proceeds from issuances of common stock		5,653			5,957			4,245
Net cash used in financing activities		(213,916	)		(186,320	)		(120,207	)
Effect of foreign exchange rate changes on cash and cash equivalents		(226	)		(1,343	)		(680	)
Net increase in cash and cash equivalents		20,781			10,782			4,969
Cash and cash equivalents at beginning of year		35,229			24,447			19,478
Cash and cash equivalents at end of year	$	56,010		$	35,229		$	24,447
Supplemental cash flow information (Note 18)

See accompanying notes to consolidated financial statements.

WATSCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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, 2016, we operated from 565 locations in 37 U.S. states, Canada, Mexico and Puerto Rico with additional market coverage on an export basis to portions of Latin America and the Caribbean.

The consolidated financial statements include the accounts of Watsco, all of its wholly owned subsidiaries and the accounts of three joint ventures with Carrier Corporation (“Carrier”), in each of which Watsco maintains a controlling interest. All significant intercompany balances and transactions have been eliminated in consolidation.

Foreign Currency Translation and Transactions

The functional currency of our operations in Canada is the Canadian dollar. Foreign currency denominated assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date, and income and expense items are translated at the average exchange rates in effect during the applicable period. The aggregate effect of foreign currency translation is recorded in accumulated other comprehensive loss in our consolidated balance sheets. Our net investment in our Canadian operations is recorded at the historical rate and the resulting foreign currency translation adjustments are included in accumulated other comprehensive loss in our consolidated balance sheets. Gains or losses resulting from transactions denominated in U.S. dollars are recognized in earnings primarily within cost of sales in our consolidated statements of income.

Our operations in Mexico consider their functional currency to be the U.S. dollar because the majority of their transactions are denominated in U.S. dollars. Gains or losses resulting from transactions denominated in Mexican pesos are recognized in earnings primarily within selling, general and administrative expenses in our consolidated statements of income.

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 disclosure 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 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.

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 maintained 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 information. Upon determination that an account is uncollectible, the receivable balance is written off. At December 31, 2016 and 2015, the allowance for doubtful accounts totaled $6,169 and $5,305, respectively.

Inventories

Inventories consist of air conditioning, heating and refrigeration equipment and related parts and supplies and are valued at the lower of cost or market using a weighted-average cost basis and the first-in, first-out methods. As part of the valuation process, inventories are adjusted to reflect excess, slow-moving and damaged inventories at their estimated net realizable value. Inventory policies are reviewed periodically, reflecting current risks, trends and changes in industry conditions. A reserve for estimated inventory shrinkage is also maintained to consider inventory shortages determined from cycle counts and physical inventories.

Vendor Rebates

We have arrangements with several vendors that provide rebates payable to us when we achieve any of a number of measures, generally related to the volume level of purchases. We account for such rebates as a reduction of inventory until we sell the product, at which time such rebates are reflected as a reduction of cost of sales in our consolidated statements of income. Throughout the year, we estimate the amount of the rebate based on our estimate of purchases to date relative to the purchase levels that mark our progress toward earning the rebates. We continually revise our estimates of earned vendor rebates based on actual purchase levels. At December 31, 2016 and 2015, we had $9,926 and $8,086, respectively, of rebates recorded as a reduction of inventory. Substantially all vendor rebate receivables are collected within three months immediately following the end of the year.

Marketable Securities

Investments in marketable equity securities are classified as available-for-sale and are included in other assets in our consolidated balance sheets. These equity securities are recorded at fair value using the specific identification method with unrealized holding losses, net of deferred taxes, included in accumulated other comprehensive loss within shareholders’ equity. Dividend and interest income are recognized in the statements of income when earned.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment is computed using the straight-line method. Buildings and improvements are depreciated or amortized over estimated useful lives ranging from 3-40 years. Leasehold improvements are amortized over the shorter of the respective lease terms or estimated useful lives. Furniture and fixtures are depreciated over estimated useful lives ranging from 5-7 years. Estimated useful lives for other depreciable assets range from 3-10 years.

Goodwill and Other Intangible Assets

Goodwill is recorded when the purchase price paid for an acquisition exceeds the fair value of the net identified tangible and intangible assets acquired. We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. We test goodwill for impairment by first comparing the fair value of our reporting unit to its carrying value. If the fair value is determined to be less than the carrying value, a second step is performed to measure the amount of impairment loss.

Other intangible assets primarily consist of the value of trade names and trademarks, distributor agreements, customer relationships and non-compete agreements. Indefinite lived intangibles not subject to amortization are assessed for impairment at least annually, or more frequently if events or changes in circumstances indicate they may be impaired, by comparing the fair value of the intangible asset to its carrying 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, 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 compared to the asset’s carrying value. As of December 31, 2016, 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 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 frequency and volume to provide pricing information on an ongoing basis.

Level 2	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 substantially 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 and is recorded when shipment of products or delivery of services has occurred. Substantially all customer returns relate to products that are returned under warranty obligations underwritten by manufacturers, effectively mitigating our risk of loss for customer returns. Taxes collected from our customers and remitted to governmental authorities are presented in our consolidated statements of income on a net basis.

Advertising Costs

Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2016, 2015 and 2014, were $22,242, $21,150 and $19,754, 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 is included in selling, general and administrative expenses. Shipping and handling costs included in selling, general and administrative expenses for the years ended December 31, 2016, 2015 and 2014, were $42,809, $41,345 and $43,324, respectively.

Share-Based Compensation

The fair value of stock option and non-vested restricted stock awards are expensed 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. Cash flows from the tax benefits resulting from tax deductions in excess of the compensation expense recognized for those options (windfall tax benefits) were classified as financing cash flows for the years ended December 31, 2015 and 2014. Tax benefits resulting from tax deductions in excess of share-based compensation expense realized in 2016 are recognized in our provision for income taxes in the consolidated income statement. Tax benefits resulting from tax deductions in excess of share-based compensation expense recognized were credited to paid-in capital in the consolidated balance sheets for the years ended December 31, 2015 and 2014. Refer to “Share-Based Payments” within New Accounting Standards contained in this Note 1 for additional information.

Income Taxes

We record United States 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 statement 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 consolidated United States federal income tax return. As income tax returns are generally not filed until well after the closing 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 appropriate state income tax rates to use in the various states that we and our subsidiaries are required to file, the potential utilization of operating loss carryforwards and valuation allowances required, if any, for tax assets that may not be realizable in the future.

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

Earnings per Share

We compute earnings per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Shares of our non-vested restricted stock are considered participating securities because these awards contain a non-forfeitable right to dividends irrespective of whether the awards ultimately vest. Under the two-class method, earnings per common share for our Common and Class B common 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, undistributed 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 common 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 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 category 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 comprehensive income and reclassified to earnings as a component of cost of sales in the period for which the hedged transaction affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.

Fair Value Hedge. A hedge of a recognized asset or liability or an unrecognized firm commitment is considered 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 13 for additional information pertaining to derivative instruments.

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.

Presentation of Debt Issuance Costs

In April 2015, the FASB issued guidance that will require that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, rather than as an asset. This guidance is effective retrospectively for interim and annual reporting periods beginning after December 15, 2015. The adoption of this guidance did not have an impact on our consolidated financial statements.

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 will be effective for interim and annual reporting periods beginning after December 15, 2016. We do not expect the adoption of this guidance to have a material 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 can be applied either prospectively or retrospectively and will be effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. We do not expect the adoption of this guidance to have a material impact to our consolidated balance sheets.

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 will be 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 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:

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

Quarter Ended March 31, 2016	As Reported			As Adjusted
Cash Flow Statement:
Net cash provided by operating activities	$	41,852		$	42,706
Net cash used in financing activities	$	(41,638	)	$	(42,492	)

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:

Years Ended December 31,	2016		2015		2014
Basic Earnings per Share:
Net income attributable to Watsco, Inc. shareholders	$	182,810	$	172,929	$	151,387
Less: distributed and undistributed earnings allocated to non-vested restricted common stock		14,806		13,634		11,444
Earnings allocated to Watsco, Inc. shareholders	$	168,004	$	159,295	$	139,943
Weighted-average common shares outstanding - Basic		32,582,385		32,435,961		32,308,073
Basic earnings per share for Common and Class B common stock	$	5.16	$	4.91	$	4.33
Allocation of earnings for Basic:
Common stock	$	154,021	$	146,037	$	128,214
Class B common stock		13,983		13,258		11,729
	$	168,004	$	159,295	$	139,943
Diluted Earnings per Share:
Net income attributable to Watsco, Inc. shareholders	$	182,810	$	172,929	$	151,387
Less: distributed and undistributed earnings allocated to non-vested restricted common stock		14,801		13,626		11,435
Earnings allocated to Watsco, Inc. shareholders	$	168,009	$	159,303	$	139,952
Weighted-average common shares outstanding - Basic		32,582,385		32,435,961		32,308,073
Effect of dilutive stock options		34,119		44,395		50,781
Weighted-average common shares outstanding - Diluted		32,616,504		32,480,356		32,358,854
Diluted earnings per share for Common and Class B common stock	$	5.15	$	4.90	$	4.32

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 December 31, 2016, 2015 and 2014, our outstanding Class B common stock was convertible into 2,711,811, 2,699,710 and 2,707,725 shares of our Common stock, respectively.

Diluted earnings per share excluded 31,839, 67,014 and 9,984 shares for the years ended December 31, 2016, 2015 and 2014, 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 GAIN (LOSS)

Other comprehensive gain (loss) 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 loss were as follows:

Years Ended December 31,	2016			2015			2014
Foreign currency translation adjustment	$	6,211		$	(39,378	)	$	(21,117	)
Unrealized (loss) gain on cash flow hedging instruments		(1,321	)		3,716			384
Income tax benefit (expense)		356			(1,003	)		(104	)
Unrealized (loss) gain on cash flow hedging instruments, net of tax		(965	)		2,713			280
Reclassification of loss (gain) on cash flow hedging instruments into earnings		442			(2,730	)		—
Income tax (benefit) expense		(119	)		737			—
Reclassification of loss (gain) on cash flow hedging instruments into earnings, net of tax		323			(1,993	)		—
Unrealized gain (loss) on available-for-sale securities		27			(12	)		1
Income tax (expense) benefit		(13	)		4			—
Unrealized gain (loss) on available-for-sale securities, net of tax		14			(8	)		1
Other comprehensive gain (loss)	$	5,583		$	(38,666	)	$	(20,836	)

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

Years Ended December 31,	2016			2015			2014
Foreign currency translation adjustment:
Beginning balance	$	(47,204	)	$	(23,623	)	$	(11,181	)
Current period other comprehensive gain (loss)		3,745			(23,581	)		(12,442	)
Ending balance		(43,459	)		(47,204	)		(23,623	)
Cash flow hedging instruments:
Beginning balance		600			168			—
Current period other comprehensive (loss) income		(579	)		1,628			168
Less reclassification adjustment		194			(1,196	)		—
Ending balance		215			600			168
Available-for-sale securities:
Beginning balance		(300	)		(292	)		(293	)
Current period other comprehensive income (loss)		14			(8	)		1
Ending balance		(286	)		(300	)		(292	)
Accumulated other comprehensive loss, net of tax	$	(43,530	)	$	(46,904	)	$	(23,747	)

4. SUPPLIER CONCENTRATION

Purchases from our top ten suppliers comprised 85%, 84% and 82% of all purchases made in 2016, 2015 and 2014, respectively. Our largest supplier, Carrier and its affiliates, accounted for 62%, 62% and 61% of all purchases made in 2016, 2015 and 2014, respectively. See Note 16. A significant interruption by Carrier, or any of our other key suppliers, in the delivery of products could impair our ability to maintain current inventory levels and could materially impact our consolidated results of operations and consolidated financial position.

5. PROPERTY AND EQUIPMENT

Property and equipment, net, consists of:

December 31,	2016			2015
Land	$	820		$	820
Buildings and improvements		71,082			69,675
Machinery, vehicles and equipment		74,640			43,150
Furniture and fixtures		15,090			14,311
Computer hardware and software		42,515			38,876
		204,147			166,832
Accumulated depreciation and amortization		(113,645	)		(104,117	)
	$	90,502		$	62,715

Depreciation and amortization expense related to property and equipment included in selling, general and administrative expenses for the years ended December 31, 2016, 2015 and 2014, were $14,853, $13,802 and $12,158, respectively.

6. 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.

Borrowings under the credit facility bear interest at either LIBOR-based rates plus a spread, which ranges from 87.5 to 250.0 basis-points (LIBOR plus 100.0 basis-points at December 31, 2016), depending on our ratio of total debt to EBITDA, or on rates based on the higher of the Prime rate or the Federal Funds Rate, in each case plus a spread which ranges from 0 to 150.0 basis-points (0 basis-points at December 31, 2016), 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 12.5 to 35.0 basis-points (15.0 basis-points at December 31, 2016).

At December 31, 2016 and 2015, $235,294 and $245,300, respectively, were outstanding under the revolving credit agreement. The revolving credit agreement contains customary affirmative and negative covenants, including financial covenants with respect to consolidated leverage and interest coverage ratios, and other customary restrictions. We believe we were in compliance with all covenants at December 31, 2016.

7. INCOME TAXES

The components of income tax expense from our wholly-owned operations and investments and our controlling interest in joint ventures with Carrier are as follows:

Years Ended December 31,	2016		2015		2014
U.S. Federal	$	86,719	$	85,585	$	74,561
State		9,801		9,431		10,325
Foreign		9,416		9,661		6,953
	$	105,936	$	104,677	$	91,839
Current	$	103,216	$	99,990	$	91,550
Deferred		2,720		4,687		289
	$	105,936	$	104,677	$	91,839

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

Following is a reconciliation of the effective income tax rate:

Years Ended December 31,	2016			2015			2014
U.S. federal statutory rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal benefit and other		2.1			2.3			3.0
Excess tax benefits from share-based compensation		(1.0	)		—			—
Tax effects on foreign income		(0.1	)		(0.3	)		(1.0	)
Effective income tax rate attributable to Watsco, Inc.		36.0			37.0			37.0
Taxes attributable to non-controlling interest		(5.0	)		(5.4	)		(6.4	)
Effective income tax rate		31.0	%		31.6	%		30.6	%

The following is a summary of the significant components of our current and long-term deferred tax assets and liabilities:

December 31,	2016			2015
Current deferred tax assets:
Capitalized inventory costs and inventory reserves	$	2,301		$	1,794
Allowance for doubtful accounts		1,379			1,053
Self-insurance reserves		500			519
Other current deferred tax assets		1,778			1,921
Total current deferred tax assets (1)		5,958			5,287
Long-term deferred tax assets:
Share-based compensation		26,239			23,603
Other long-term deferred tax assets		449			352
Net operating loss carryforwards		209			207
		26,897			24,162
Valuation allowance		—			—
Total long-term deferred tax assets (2)		26,897			24,162
Current deferred tax liabilities:
Other current deferred tax liabilities		(473	)		(686	)
Total current deferred tax liabilities (1)		(473	)		(686	)
Long-term deferred tax liabilities:
Deductible goodwill		(88,581	)		(83,868	)
Depreciation		(5,883	)		(3,774	)
Other long-term deferred tax liabilities		(1,160	)		(1,533	)
Total long-term deferred tax liabilities (2)		(95,624	)		(89,175	)
Net deferred tax liabilities	$	(63,242	)	$	(60,412	)

(1) Current deferred tax assets and liabilities have been included in the consolidated balance sheets in other current assets.

(2) Long-term deferred tax assets and liabilities have been included in the consolidated balance sheets in deferred income taxes and other liabilities.

Amounts earned by foreign subsidiaries are generally subject to United States income taxation upon repatriation. United States income taxes have not been provided on undistributed earnings of our foreign subsidiaries. The cumulative undistributed earnings related to foreign operations were approximately $130,000 at December 31, 2016. It is not practicable to estimate the amount of tax that might be payable. Our intention is to indefinitely reinvest these earnings outside of the United States or to repatriate the earnings only when it is tax effective to do so.

Management has determined that no valuation allowance was necessary at both December 31, 2016 and 2015. At December 31, 2016, there were state and other net operating loss carryforwards of $6,872, which expire in varying amounts from 2017 through 2036. These amounts are available to offset future taxable income. There were no federal net operating loss carryforwards at December 31, 2016.

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 limitations expire. We are no longer subject to United States federal tax examinations for tax years prior to 2013. For the majority of states, we are no longer subject to tax examinations for tax years prior to 2012.

As of December 31, 2016 and 2015, the total amount of gross unrecognized tax benefits (excluding the federal benefit received from state positions) was $3,695 and $3,513, respectively. Of these totals, $2,573 and $2,416, respectively, (net of the federal benefit received from state positions) represent the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate. Our continuing practice is to recognize penalties within selling, general and administrative expenses and interest related to income tax matters in income tax expense in the consolidated statements of income. As of December 31, 2016 and 2015, the cumulative amount of estimated accrued interest and penalties resulting from such unrecognized tax benefits was $414 and $384, respectively, and is included in deferred income taxes and other liabilities in the accompanying consolidated balance sheets.

The changes in gross unrecognized tax benefits are as follows:

Balance at December 31, 2013	$	3,135
Additions based on tax positions related to the current year		751
Reductions due to lapse of applicable statute of limitations		(167	)
Balance at December 31, 2014		3,719
Additions based on tax positions related to the current year		871
Reductions due to lapse of applicable statute of limitations and tax assessments		(1,077	)
Balance at December 31, 2015		3,513
Additions based on tax positions related to the current year		547
Reductions due to lapse of applicable statute of limitations		(365	)
Balance at December 31, 2016	$	3,695

8. SHARE-BASED COMPENSATION AND BENEFIT PLANS

Share-Based Compensation Plans

We maintain the 2014 Incentive Compensation Plan (the “2014 Plan”) that provides for the award of a broad variety of share-based compensation alternatives such as non-vested restricted stock, non-qualified stock options, incentive stock options, performance awards, dividend equivalents, deferred stock and stock appreciation rights at no less than 100% of the market price on the date the award is granted. To date, awards under the 2014 Plan consist of non-qualified stock options and non-vested restricted stock. The 2014 Plan replaced the Watsco, Inc. Amended and Restated 2001 Incentive Compensation Plan (the “2001 Plan”) upon its expiration in 2014.

Under the 2014 Plan, the number of shares of Common and Class B common stock available for issuance is (i) 2,000,000, plus (ii) 45,421 shares of Common stock or Class B common stock that remained available for grant in connection with awards under the Watsco, Inc. Amended and Restated 2001 Incentive Compensation Plan (the “2001 Plan”) as of the date our shareholders 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 293,950 shares of Common stock, net of cancellations, and 326,623 shares of Class B common stock, had been awarded under the 2014 Plan as of December 31, 2016. As of December 31, 2016, 1,424,848 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 circumstances prior to the original vesting date.

The 2001 Plan expired during 2014; therefore, no additional options may be granted. There were 37,750 options to exercise common stock outstanding under the 2001 Plan at December 31, 2016. Options under the 2001 Plan vest over two to four years of service and have contractual terms of five years.

The following is a summary of stock option activity under the 2014 Plan and the 2001 Plan as of and for the year ended December 31, 2016:

	Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Options outstanding at December 31, 2015		257,334		$	102.96
Granted		107,000			140.41
Exercised		(63,084	)		71.18
Forfeited		(7,000	)		127.56
Options outstanding at December 31, 2016		294,250		$	122.80		3.56	$	7,451
Options exercisable at December 31, 2016		24,419		$	109.81		2.92	$	935

The following is a summary of non-vested restricted stock activity as of and for the year ended December 31, 2016:

	Shares			Weighted- Average Grant Date Fair Value
Non-vested restricted stock outstanding at December 31, 2015		2,819,196		$	49.99
Granted		183,144			130.01
Vested		(77,450	)		63.26
Forfeited		(26,000	)		112.79
Non-vested restricted stock outstanding at December 31, 2016		2,898,890		$	54.13

The weighted-average grant date fair value of non-vested restricted stock granted during 2016, 2015 and 2014 was $130.01, $114.55 and $96.84, respectively. The fair value of non-vested restricted stock that vested during 2016, 2015 and 2014 was $10,096, $2,468 and $5,789, respectively.

During 2016, 30,413 shares of Common and Class B common stock with an aggregate fair market value of $3,967 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of restricted stock. During 2015, 7,206 shares of Common stock with an aggregate fair market value of $889 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of restricted stock. During 2014, 21,028 shares of Common stock with an aggregate fair market value of $2,125 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 forfeitures, 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,	2016			2015			2014
Expected term in years		4.25			4.25			4.25
Risk-free interest rate		1.24	%		1.25	%		1.35	%
Expected volatility		18.65	%		20.96	%		22.07	%
Expected dividend yield		2.54	%		2.29	%		1.69	%
Grant date fair value	$	16.37		$	17.17		$	15.75

Exercise of Stock Options

The total intrinsic value of stock options exercised during 2016, 2015 and 2014 was $4,490, $7,525 and $3,746, respectively. Cash received from the exercise of stock options during 2016, 2015 and 2014 was $4,447, $4,850 and $3,324, respectively. During 2016, 2015 and 2014, 348 shares of Common stock with an aggregate fair market value of $51, 26,006 shares of Class B common stock with an aggregate fair market value of $3,251 and 5,454 shares of Class B common stock with an aggregate fair market value of $490, 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,	2016		2015		2014
Stock options	$	1,149	$	952	$	801
Non-vested restricted stock		11,170		11,644		10,672
Share-based compensation expense	$	12,319	$	12,596	$	11,473

At December 31, 2016, there was $2,096 of unrecognized pre-tax compensation expense related to stock options granted under the 2014 Plan and 2001 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 2016, 2015 and 2014 was $736, $856 and $1,145, respectively.

At December 31, 2016, there was $100,397 of unrecognized pre-tax compensation expense related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of approximately 11 years. Of this amount, approximately $59,000 is related to awards granted to our Chief Executive Officer (“CEO”), of which approximately $13,000 and $46,000 vest in approximately 6 and 10 years upon his attainment of age 82 and 86, respectively. In the event that vesting is accelerated for any circumstance, as defined in the related agreements, the remaining unrecognized share-based compensation expense would be immediately recognized as a charge to earnings with a corresponding tax benefit. At December 31, 2016, we were obligated to issue 67,853 shares of non-vested restricted stock to our CEO that vest in 10 years and 25,774 shares of non-vested restricted stock to our President that vest in 27 years in connection with 2016 performance based incentive compensation.

Employee Stock Purchase Plan

The Watsco, Inc. Fourth Amended and Restated 1996 Qualified Employee Stock Purchase Plan (the “ESPP”) provides for up to 1,500,000 shares of Common stock to be available for purchase by our full-time employees with at least 90 days of service. The ESPP allows participating employees to purchase shares of Common stock at a 5% discount to the fair market value at specified times. During 2016, 2015 and 2014, employees purchased 5,956, 6,463 and 6,995 shares of Common stock at an average price of $125.84, $112.53 and $90.89 per share, respectively. Cash dividends received by the ESPP were reinvested in Common stock and resulted in the issuance of 3,442, 3,183 and 2,953 additional shares during 2016, 2015 and 2014, respectively. We received net proceeds of $1,206, $1,107 and $921, respectively, during 2016, 2015 and 2014, for shares of our Common stock purchased under the ESPP. At December 31, 2016, 496,160 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, 2016, 2015 and 2014, we issued 20,045, 18,343 and 18,309 shares of Common stock, respectively, to the plan, representing the Common stock discretionary matching contribution of $2,348, $1,963 and $1,759, respectively.

9. PURCHASE OF ADDITIONAL OWNERSHIP INTEREST IN JOINT VENTURES

On November 29, 2016, we purchased an additional 10% ownership interest in Carrier Enterprise (“Carrier 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, following which we have an 80% controlling interest in Carrier Enterprise II.

On July 1, 2014, we exercised our second option to acquire an additional 10% ownership interest in Carrier Enterprise, LLC (“Carrier Enterprise I”) for cash consideration of $87,735, following which we have an 80% controlling interest in Carrier Enterprise I. Neither we nor Carrier has any remaining options to purchase additional ownership interests in Carrier Enterprise I.

10. GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill are as follows:

Balance at December 31, 2014	$	387,311
Foreign currency translation adjustment		(9,001	)
Balance at December 31, 2015		378,310
Foreign currency translation adjustment		1,427
Balance at December 31, 2016	$	379,737

Other intangible assets are comprised of the following:

December 31,	Estimated Useful Lives		2016			2015
Indefinite lived intangible assets - Trade names, trademarks and distribution rights			$	120,288		$	118,205
Finite lived intangible assets:
Customer relationships		10-15 years		70,194			68,981
Trade name		10 years		1,150			1,150
Non-compete agreements		7 years		369			369
Accumulated amortization				(33,437	)		(28,224	)
Finite lived intangible assets, net				38,276			42,276
			$	158,564		$	160,481

Amortization expense related to finite lived intangible assets included in selling, general and administrative expenses for the years ended December 31, 2016, 2015 and 2014, were $5,213, $5,315 and $5,769, respectively. Amortization of finite lived intangible assets for 2017 through 2020 is expected to be approximately $5,200 per year and in 2021 is expected to be approximately $4,300.

11. 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 common 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 determined 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, 2016 or 2015.

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 2016, 2015 or 2014. In aggregate, 6,322,650 shares of Common stock and 48,263 shares of Class B common stock have been repurchased at a cost of $114,425 since the inception of the program. At December 31, 2016, there were 1,129,087 shares remaining authorized for repurchase under the program.

12. FINANCIAL INSTRUMENTS

Recorded Financial Instruments

Recorded financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, the current portion of long-term obligations, borrowings under our revolving credit agreement and debt instruments included in other long-term obligations. At December 31, 2016 and 2015, 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 and debt instruments included in long-term obligations also approximate their carrying value based upon interest rates available for similar instruments with consistent terms and remaining maturities.

Off-Balance Sheet Financial Instruments

At December 31, 2016 and 2015, we were contingently liable under standby letters of credit aggregating $2,430 and $2,690, respectively, which are primarily used as collateral to cover any contingency related to additional risk assessments pertaining to our self-insurance programs. Additionally, at December 31, 2016 and 2015, we were contingently liable under various performance bonds aggregating approximately $8,000 and $4,000, respectively, which are used as collateral to cover any contingencies related to our nonperformance under agreements with certain customers. We do not expect that any material losses or obligations will result from the issuance of the standby letters of credit or performance bonds because we expect to meet our obligations under our self-insurance programs and to certain customers in the ordinary course of business. Accordingly, the estimated fair value of these instruments is zero.

Concentrations of Credit Risk

Financial instruments which potentially subject us to concentrations of credit risk consist principally of accounts receivable. Concentrations of credit risk are limited due to the large number of customers comprising 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.

13. 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 occur. The maximum period for which we hedge our cash flow using these instruments is 12 months. Accordingly, at December 31, 2016, 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 December 31, 2016 was $33,200, and such contracts have varying terms expiring through September 2017.

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

Years Ended December 31,	2016			2015
(Loss) gain recorded in accumulated other comprehensive loss	$	(1,321	)	$	3,716
Loss (gain) reclassified from accumulated other comprehensive loss into earnings	$	442		$	(2,730	)

At December 31, 2016, we expected an estimated $490 pre-tax gain 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 December 31, 2016 was $4,650, and such contracts have varying terms expiring through March 2017.

We recognized (losses) gains of $(306), $2,552 and $142 from foreign currency forward contracts not designated as hedging instruments in our consolidated statements of income for 2016, 2015 and 2014, 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 consolidated balance sheets. See Note 14.

	Asset Derivatives				Liability Derivatives
December 31,	2016		2015		2016		2015
Derivatives designated as hedging instruments	$	227	$	923	$	35	$	3
Derivatives not designated as hedging instruments		14		326		4		4
Total derivative instruments	$	241	$	1,249	$	39	$	7

14. FAIR VALUE MEASUREMENTS

The following tables present our assets and liabilities carried at fair value that are measured on a recurring basis:

		Total		Fair Value Measurements at December 31, 2016 Using
	Balance Sheet Location			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		—
		Total		Fair Value Measurements at December 31, 2015 Using
	Balance Sheet Location			Level 1		Level 2		Level 3
Assets:
Available-for-sale securities	Other assets	$	254	$	254		—		—
Derivative financial instruments	Other current assets	$	1,249		—	$	1,249		—
Liabilities:
Derivative financial instruments	Accrued expenses and other current liabilities	$	7		—	$	7		—

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 – these 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 13. 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 2016 or 2015.

15. 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 against Watsco’s 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. The defendants believe the claims are entirely without merit and intend to vigorously defend against them. 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 $2,951 and $3,214 at December 31, 2016 and 2015, 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, 2016, 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 requirements 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 $4,300. See “Self-Insurance” above for further information on commitments associated with the insurance programs and Note 12, under the caption “Off-Balance Sheet Financial Instruments,” for further information on standby letters of credit. At December 31, 2016, there were no other entities that met the definition of a VIE.

Operating Leases

We are obligated under various non-cancelable operating lease agreements for real property, equipment, vehicles and a corporate aircraft used in our operations with varying terms through 2025. We are committed to pay a portion of the actual operating expenses under certain of these lease agreements. These operating expenses are not included in the table below. Some of these arrangements have free or escalating rent payment provisions. We recognize rent expense under such arrangements on a straight-line basis over the lease term.

At December 31, 2016, future minimum payments under non-cancelable operating leases over each of the next five years and thereafter were as follows:

2017	$	56,639
2018		48,420
2019		35,926
2020		21,650
2021		13,184
Thereafter		13,362
Total minimum payments	$	189,181

Rental expense for the years ended December 31, 2016, 2015 and 2014, was $83,260, $82,581 and $81,155, respectively.

Purchase Obligations

At December 31, 2016, we were obligated under various non-cancelable purchase orders with our key suppliers for goods aggregating approximately $29,000, of which approximately $17,000 is with Carrier and its affiliates.

16. RELATED PARTY TRANSACTIONS

Purchases from Carrier and its affiliates comprised 62%, 62% and 61% of all inventory purchases made during 2016, 2015 and 2014, respectively. At December 31, 2016 and 2015, approximately $63,000 and $85,000, 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 2016, 2015 and 2014 included approximately $56,000, $62,000 and $38,000, respectively, of sales to Carrier and its affiliates. We believe these transactions are conducted on terms equivalent to an arm’s-length basis in the ordinary course of business.

A member of our Board of Directors is the Chairman and Chief Executive Officer of Moss & Associates LLC (“Moss & Associates”), which serves as our general contractor for the remodeling of our corporate headquarters and receives customary payments for these services. Moss & Associates was paid $291 for services performed during 2016 and $109 was payable at December 31, 2016.

17. 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,	2016		2015		2014
Revenues:
United States	$	3,813,204	$	3,710,977	$	3,525,176
Canada		267,220		263,908		300,289
Mexico		140,278		138,354		119,075
Total revenues	$	4,220,702	$	4,113,239	$	3,944,540

December 31,	2016		2015
Long-Lived Assets:
United States	$	467,728	$	441,656
Canada		155,758		154,437
Mexico		5,317		5,413
Total long-lived assets	$	628,803	$	601,506

Revenues are attributed to countries based on the location of the store from which the sale occurred. Long-lived assets consist of property and equipment, goodwill and intangible assets.

18. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information was as follows:

Years Ended December 31,	2016		2015		2014
Interest paid	$	3,362	$	4,993	$	4,393
Income taxes net of refunds	$	99,006	$	103,261	$	82,850

19. SUBSEQUENT EVENTS

On January 3, 2017, our Board of Directors declared a regular quarterly cash dividend of $1.05 per share of Common and Class B common stock that was paid on January 31, 2017 to shareholders of record as of January 17, 2017.

On January 24, 2017, we entered into an amendment to our credit agreement, which reduced the letter of credit subfacility from $50,000 to $10,000 and modified certain definitions. See Note 6.

On February 13, 2017, we purchased an additional 10% ownership interest in Carrier Enterprise II for cash consideration of $42,688, following which we have an 80% controlling interest in Carrier Enterprise II. The source of cash was borrowings under our revolving credit agreement. See Note 9.

WATSCO, INC. AND SUBSIDIARIES

SELECTED QUARTERLY FINANCIAL DATA

(UNAUDITED)

(In thousands, except per share data)	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter		Total
Year Ended December 31, 2016
Revenues (1)	$	851,424	$	1,214,435	$	1,241,232	$	913,611	$	4,220,702
Gross profit	$	212,447	$	291,861	$	302,204	$	228,072	$	1,034,584
Net income attributable to Watsco, Inc.	$	25,537	$	64,621	$	63,099	$	29,553	$	182,810
Earnings per share for Common and Class B common stock (2):
Basic	$	0.71	$	1.82	$	1.78	$	0.81	$	5.16
Diluted	$	0.71	$	1.82	$	1.78	$	0.81	$	5.15
Year Ended December 31, 2015
Revenues (1)	$	808,972	$	1,223,439	$	1,177,012	$	903,816	$	4,113,239
Gross profit	$	204,225	$	295,245	$	285,846	$	222,041	$	1,007,357
Net income attributable to Watsco, Inc.	$	23,048	$	65,423	$	57,968	$	26,490	$	172,929
Earnings per share for Common and Class B common stock (2):
Basic	$	0.65	$	1.86	$	1.64	$	0.75	$	4.91
Diluted	$	0.65	$	1.85	$	1.64	$	0.75	$	4.90

(1) Sales of residential central air conditioners, heating equipment and parts and supplies are seasonal. 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 sectors throughout most of the markets is fairly even during the year except for dependence on housing completions and related weather and economic conditions.

(2) Quarterly and year-to-date earnings per share are calculated on an individual basis; therefore, the sum of earnings per share amounts for the quarters may not equal earnings per share amounts for the year.

WATSCO, INC. AND SUBSIDIARIES

INFORMATION ON COMMON STOCK

(UNAUDITED)

Our Common stock is traded on the New York Stock Exchange (“NYSE”) under the ticker symbol WSO. Our Class B common stock is traded on the NYSE under the ticker symbol WSOB. The following table presents the high and low prices of our Common stock and Class B common stock, as reported by the NYSE. Also presented below are dividends paid per share for each quarter during the years ended December 31, 2016 and 2015. At February 17, 2017, there were 227 Common stock registered shareholders and 113 Class B common stock registered shareholders.

	Common				Class B Common				Cash Dividend
	High		Low		High		Low		Common		Class B
Year Ended December 31, 2016:
First quarter	$	134.84	$	108.09	$	131.58	$	108.25	$	0.85	$	0.85
Second quarter		140.69		129.00		139.84		129.17		0.85		0.85
Third quarter		149.64		138.37		148.67		138.85		0.85		0.85
Fourth quarter		159.03		130.88		157.72		131.01		1.05		1.05
Year Ended December 31, 2015:
First quarter	$	125.70	$	104.92	$	124.80	$	104.50	$	0.70	$	0.70
Second quarter		128.49		120.14		127.15		120.74		0.70		0.70
Third quarter		131.81		118.13		130.15		118.91		0.70		0.70
Fourth quarter		131.89		116.24		131.21		113.49		0.70		0.70

EX-21.1

EXHIBIT 21.1

SUBSIDIARIES OF THE REGISTRANT

The following table sets forth the significant subsidiaries of Watsco, Inc. as of December 31, 2016, and their respective incorporation jurisdictions. The names of various other wholly owned subsidiaries have been omitted. None of the foregoing omitted subsidiaries, considered either alone or in the aggregate as a single subsidiary, constitutes a significant subsidiary.

Name of Subsidiary	State or Other Jurisdiction of Incorporation	Percent of Ownership
Baker Distributing Company LLC	Delaware		100	%
Boreal International Corporation	Florida		100	%
Carrier Enterprise Canada, L.P.	Ontario, Canada		60	%
Carrier Enterprise Mexico S. de R.L. de C.V.	Mexico		70	%
Carrier Enterprise, LLC	Delaware		80	%
Carrier Enterprise Northeast, LLC	Delaware		70	%
Carrier InterAmerica Corporation	United States Virgin Islands		80	%
Carrier (Puerto Rico), Inc.	Delaware		80	%
East Coast Metal Distributors LLC	Delaware		100	%
Gemaire Distributors LLC	Delaware		100	%
Heating & Cooling Supply LLC	California		100	%
Tradewinds Distributing Company, LLC	Delaware		100	%

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Watsco, Inc.:

We consent to the incorporation by reference in the registration statements listed below of Watsco, Inc. of our reports dated February 21, 2017, with respect to the consolidated balance sheets of Watsco, Inc. and subsidiaries as of December 31, 2016 and 2015, and 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, 2016, and the effectiveness of internal control over financial reporting as of December 31, 2016, which reports appear in the December 31, 2016 annual report on Form 10-K of Watsco, Inc.

• Form S-3 (Registration No. 333-207831)

• Form S-8 (Registration Nos. 333-197795, 333-185345 and 333-159776)

/s/ KPMG LLP

Miami, Florida

February 21, 2017

Certified Public Accountants

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Albert H. Nahmad, certify that:

1. I have reviewed this Annual Report on Form 10-K of Watsco, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of this annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 21, 2017

/s/ Albert H. Nahmad

Albert H. Nahmad

Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Barry S. Logan, certify that:

1. I have reviewed this Annual Report on Form 10-K of Watsco, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of this annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 21, 2017

/s/ Barry S. Logan

Barry S. Logan

Senior Vice President

EX-31.3

EXHIBIT 31.3

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Ana M. Menendez, certify that:

1. I have reviewed this Annual Report on Form 10-K of Watsco, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of this annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 21, 2017

/s/ Ana M. Menendez

Ana M. Menendez

Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Watsco, Inc. (“Watsco”) on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Albert H. Nahmad, as Chief Executive Officer of Watsco, Barry S. Logan, as Senior Vice President of Watsco and Ana M. Menendez, as Chief Financial Officer of Watsco, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to our knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Watsco.

/s/ Albert H. Nahmad                 

Albert H. Nahmad

Chief Executive Officer

February 21, 2017

/s/ Barry S. Logan

Barry S. Logan

Senior Vice President

February 21, 2017

/s/ Ana M. Menendez

Ana M. Menendez

Chief Financial Officer

February 21, 2017

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Watsco and will be retained by Watsco and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by Watsco for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

XML

Document and Entity Information - USD ($)	12 Months Ended
	Dec. 31, 2016	Feb. 17, 2017	Jun. 30, 2016
Document Information [Line Items]
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2016
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	FY
Trading Symbol	WSO
Entity Registrant Name	WATSCO INC
Entity Central Index Key	0000105016
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	Yes
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Large Accelerated Filer
Entity Public Float			$ 3,693,000,000
Common Stock
Document Information [Line Items]
Entity Common Stock, Shares Outstanding		30,362,119
Class B Common Stock
Document Information [Line Items]
Entity Common Stock, Shares Outstanding		5,243,829

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Consolidated Statements of Income - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016		Dec. 31, 2015		Dec. 31, 2014
Revenues	$ 4,220,702	[1]	$ 4,113,239	[1]	$ 3,944,540
Cost of sales	3,186,118		3,105,882		2,988,138
Gross profit	1,034,584		1,007,357		956,402
Selling, general and administrative expenses	688,952		670,609		650,655
Operating income	345,632		336,748		305,747
Interest expense, net	3,713		5,547		5,206
Income before income taxes	341,919		331,201		300,541
Income taxes	105,936		104,677		91,839
Net income	235,983		226,524		208,702
Less: net income attributable to non-controlling interest	53,173		53,595		57,315
Net income attributable to Watsco, Inc.	$ 182,810		$ 172,929		$ 151,387
Earnings per share for Common and Class B common stock:
Basic	$ 5.16	[2]	$ 4.91	[2]	$ 4.33
Diluted	$ 5.15	[2]	$ 4.90	[2]	$ 4.32

[1] Sales of residential central air conditioners, heating equipment and parts and supplies are seasonal. 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 sectors throughout most of the markets is fairly even during the year except for dependence on housing completions and related weather and economic conditions.

[2] Quarterly and year-to-date earnings per share are calculated on an individual basis; therefore, the sum of earnings per share amounts for the quarters may not equal earnings per share amounts for the year.

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Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Net income	$ 235,983	$ 226,524	$ 208,702
Other comprehensive gain (loss), net of tax
Foreign currency translation adjustment	6,211	(39,378)	(21,117)
Unrealized (loss) gain on cash flow hedging instruments	(965)	2,713	280
Reclassification of loss (gain) on cash flow hedging instruments into earnings	323	(1,993)
Unrealized gain (loss) on available-for-sale securities	14	(8)	1
Other comprehensive gain (loss)	5,583	(38,666)	(20,836)
Comprehensive income	241,566	187,858	187,866
Less: comprehensive income attributable to non-controlling interest	55,382	38,086	48,752
Comprehensive income attributable to Watsco, Inc.	$ 186,184	$ 149,772	$ 139,114

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Consolidated Balance Sheets - USD ($) $ in Thousands	Dec. 31, 2016	Dec. 31, 2015
Current assets:
Cash and cash equivalents	$ 56,010	$ 35,229
Accounts receivable, net	475,974	451,079
Inventories	685,011	673,967
Other current assets	23,161	20,990
Total current assets	1,240,156	1,181,265
Property and equipment, net	90,502	62,715
Goodwill	379,737	378,310
Intangible assets, net	158,564	160,481
Other assets	5,690	5,671
Total assets	1,874,649	1,788,442
Current liabilities:
Current portion of other long-term obligations	200	184
Accounts payable	185,482	145,162
Accrued expenses and other current liabilities	129,206	124,955
Total current liabilities	314,888	270,301
Long-term obligations:
Borrowings under revolving credit agreement	235,294	245,300
Other long-term obligations, net of current portion	348	514
Total long-term obligations	235,642	245,814
Deferred income taxes and other liabilities	72,371	68,606
Commitments and contingencies
Watsco, Inc. shareholders' equity:
Preferred stock, $0.50 par value, 10,000,000 shares authorized; no shares issued
Paid-in capital	592,350	602,522
Accumulated other comprehensive loss, net of tax	(43,530)	(46,904)
Retained earnings	550,482	495,276
Treasury stock, at cost, 6,322,650 shares of Common stock and 48,263 shares of Class B common stock at both December 31, 2016 and 2015	(114,425)	(114,425)
Total Watsco, Inc. shareholders' equity	1,005,828	957,310
Non-controlling interest	245,920	246,411
Total shareholders' equity	1,251,748	1,203,721
Total liabilities and shareholders' equity	1,874,649	1,788,442
Common Stock
Watsco, Inc. shareholders' equity:
Common stock, $0.50 par value	18,341	18,308
Class B Common Stock
Watsco, Inc. shareholders' equity:
Common stock, $0.50 par value	$ 2,610	$ 2,533

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Consolidated Balance Sheets (Parenthetical) - $ / shares	Dec. 31, 2016	Dec. 31, 2015
Preferred stock, par value	$ 0.50	$ 0.50
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	0	0
Common Stock
Common stock, par value	$ 0.50	$ 0.50
Common stock, shares authorized	60,000,000	60,000,000
Common stock, shares outstanding	36,682,562	36,616,197
Treasury stock, shares	6,322,650	6,322,650
Class B Common Stock
Common stock, par value	$ 0.50	$ 0.50
Common stock, shares authorized	10,000,000	10,000,000
Common stock, shares outstanding	5,218,754	5,066,209
Treasury stock, shares	48,263	48,263

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Consolidated Statements of Shareholders' Equity - USD ($) $ in Thousands	Total	Common Stock, Class B Common Stock and Preferred Stock	Paid-In Capital	Accumulated Other Comprehensive Loss	Retained Earnings	Treasury Stock	Non-controlling Interest
Beginning balance at Dec. 31, 2013	$ 1,127,392	$ 20,549	$ 606,384	$ (11,474)	$ 339,362	$ (114,425)	$ 286,996
Beginning balance (in shares) at Dec. 31, 2013		34,727,121
Net income	208,702				151,387		57,315
Other comprehensive gain (loss)	(20,836)			(12,273)			(8,563)
Issuances of non-vested restricted shares of common stock (in shares)		218,725
Issuances of non-vested restricted shares of common stock		$ 109	(109)
Forfeitures of non-vested restricted shares of common stock (in shares)		(5,000)
Forfeitures of non-vested restricted shares of common stock		$ (2)	2
Common stock contribution to 401(k) plan	1,759	$ 9	1,750
Common stock contribution to 401(k) plan (in shares)		18,309
Stock issuances from exercise of stock options and employee stock purchase plan (in shares)		73,948
Stock issuances from exercise of stock options and employee stock purchase plan	4,666	$ 37	4,629
Retirement of common stock (in shares)		(26,482)
Retirement of common stock	(2,615)	$ (13)	(2,602)
Share-based compensation	12,006		12,006
Excess tax benefit from share-based compensation	1,828		1,828
Cash dividends declared and paid on Common and Class B common stock	(69,870)				(69,870)
Decrease in non-controlling interest in Carrier Enterprise I	(87,735)		(43,324)				(44,411)
Distributions to non-controlling interest	(43,258)						(43,258)
Ending balance at Dec. 31, 2014	1,132,039	$ 20,689	580,564	(23,747)	420,879	(114,425)	248,079
Ending balance (in shares) at Dec. 31, 2014		35,006,621
Net income	226,524				172,929		53,595
Other comprehensive gain (loss)	(38,666)			(23,157)			(15,509)
Issuances of non-vested restricted shares of common stock (in shares)		200,479
Issuances of non-vested restricted shares of common stock		$ 100	(100)
Forfeitures of non-vested restricted shares of common stock (in shares)		(5,000)
Forfeitures of non-vested restricted shares of common stock		$ (2)	2
Common stock contribution to 401(k) plan	1,963	$ 9	1,954
Common stock contribution to 401(k) plan (in shares)		18,343
Stock issuances from exercise of stock options and employee stock purchase plan (in shares)		124,262
Stock issuances from exercise of stock options and employee stock purchase plan	8,632	$ 62	8,570
Retirement of common stock (in shares)		(33,212)
Retirement of common stock	(4,140)	$ (17)	(4,123)
Share-based compensation	13,233		13,233
Excess tax benefit from share-based compensation	2,422		2,422
Cash dividends declared and paid on Common and Class B common stock	(98,532)				(98,532)
Distributions to non-controlling interest	(39,754)						(39,754)
Ending balance at Dec. 31, 2015	1,203,721	$ 20,841	602,522	(46,904)	495,276	(114,425)	246,411
Ending balance (in shares) at Dec. 31, 2015		35,311,493
Net income	235,983				182,810		53,173
Other comprehensive gain (loss)	5,583			3,374			2,209
Issuances of non-vested restricted shares of common stock (in shares)		183,144
Issuances of non-vested restricted shares of common stock		$ 92	(92)
Forfeitures of non-vested restricted shares of common stock (in shares)		(26,000)
Forfeitures of non-vested restricted shares of common stock		$ (13)	13
Common stock contribution to 401(k) plan	2,348	$ 10	2,338
Common stock contribution to 401(k) plan (in shares)		20,045
Stock issuances from exercise of stock options and employee stock purchase plan (in shares)		72,482
Stock issuances from exercise of stock options and employee stock purchase plan	5,696	$ 36	5,660
Retirement of common stock (in shares)		(30,761)
Retirement of common stock	(4,018)	$ (15)	(4,003)
Share-based compensation	11,848		11,848
Cash dividends declared and paid on Common and Class B common stock	(127,604)				(127,604)
Decrease in non-controlling interest in Carrier Enterprise I	(42,909)		(25,936)				(16,973)
Distributions to non-controlling interest	(38,900)						(38,900)
Ending balance at Dec. 31, 2016	$ 1,251,748	$ 20,951	$ 592,350	$ (43,530)	$ 550,482	$ (114,425)	$ 245,920
Ending balance (in shares) at Dec. 31, 2016		35,530,403

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Consolidated Statements of Shareholders' Equity (Parenthetical) - $ / shares	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Cash dividends declared and paid, common stock	$ 3.60	$ 2.80	$ 2.00

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Consolidated Statements of Cash Flows - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Cash flows from operating activities:
Net income	$ 235,983	$ 226,524	$ 208,702
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	20,066	19,117	17,927
Share-based compensation	12,319	12,596	11,473
Deferred income tax provision	2,720	4,687	289
Provision for doubtful accounts	3,487	2,688	2,609
Non-cash contribution to 401(k) plan	2,348	1,963	1,759
Gain on sale of property and equipment	(189)	(487)	(1,292)
Excess tax benefits from share-based compensation		(2,422)	(1,828)
Changes in operating assets and liabilities:
Accounts receivable	(26,941)	(26,121)	(41,068)
Inventories	(9,729)	(3,652)	(98,741)
Accounts payable and other liabilities	39,759	(13,225)	45,242
Other, net	(2,067)	(285)	(92)
Net cash provided by operating activities	277,756	221,383	144,980
Cash flows from investing activities:
Capital expenditures	(43,577)	(23,698)	(21,512)
Proceeds from sale of property and equipment	744	760	2,388
Net cash used in investing activities	(42,833)	(22,938)	(19,124)
Cash flows from financing activities:
Dividends on Common and Class B common stock	(127,604)	(98,532)	(69,870)
Purchase of additional ownership from non-controlling interest	(42,909)		(87,735)
Distributions to non-controlling interest	(38,900)	(39,754)	(43,258)
Net (repayments) proceeds under revolving credit agreement	(10,006)	(56,256)	74,729
Net (repayments) proceeds from other long-term obligations	(150)	(157)	235
Payment of fees related to revolving credit agreement			(381)
Excess tax benefits from share-based compensation		2,422	1,828
Net proceeds from issuances of common stock	5,653	5,957	4,245
Net cash used in financing activities	(213,916)	(186,320)	(120,207)
Effect of foreign exchange rate changes on cash and cash equivalents	(226)	(1,343)	(680)
Net increase in cash and cash equivalents	20,781	10,782	4,969
Cash and cash equivalents at beginning of year	35,229	24,447	19,478
Cash and cash equivalents at end of year	$ 56,010	$ 35,229	$ 24,447

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2016

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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, 2016, we operated from 565 locations in 37 U.S. states, Canada, Mexico and Puerto Rico with additional market coverage on an export basis to portions of Latin America and the Caribbean.

The consolidated financial statements include the accounts of Watsco, all of its wholly owned subsidiaries and the accounts of three joint ventures with Carrier Corporation (“Carrier”), in each of which Watsco maintains a controlling interest. All significant intercompany balances and transactions have been eliminated in consolidation.

Foreign Currency Translation and Transactions

The functional currency of our operations in Canada is the Canadian dollar. Foreign currency denominated assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date, and income and expense items are translated at the average exchange rates in effect during the applicable period. The aggregate effect of foreign currency translation is recorded in accumulated other comprehensive loss in our consolidated balance sheets. Our net investment in our Canadian operations is recorded at the historical rate and the resulting foreign currency translation adjustments are included in accumulated other comprehensive loss in our consolidated balance sheets. Gains or losses resulting from transactions denominated in U.S. dollars are recognized in earnings primarily within cost of sales in our consolidated statements of income.

Our operations in Mexico consider their functional currency to be the U.S. dollar because the majority of their transactions are denominated in U.S. dollars. Gains or losses resulting from transactions denominated in Mexican pesos are recognized in earnings primarily within selling, general and administrative expenses in our consolidated statements of income.

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 disclosure 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 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.

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 maintained 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 information. Upon determination that an account is uncollectible, the receivable balance is written off. At December 31, 2016 and 2015, the allowance for doubtful accounts totaled $6,169 and $5,305, respectively.

Inventories

Inventories consist of air conditioning, heating and refrigeration equipment and related parts and supplies and are valued at the lower of cost or market using a weighted-average cost basis and the first-in, first-out methods. As part of the valuation process, inventories are adjusted to reflect excess, slow-moving and damaged inventories at their estimated net realizable value. Inventory policies are reviewed periodically, reflecting current risks, trends and changes in industry conditions. A reserve for estimated inventory shrinkage is also maintained to consider inventory shortages determined from cycle counts and physical inventories.

Vendor Rebates

We have arrangements with several vendors that provide rebates payable to us when we achieve any of a number of measures, generally related to the volume level of purchases. We account for such rebates as a reduction of inventory until we sell the product, at which time such rebates are reflected as a reduction of cost of sales in our consolidated statements of income. Throughout the year, we estimate the amount of the rebate based on our estimate of purchases to date relative to the purchase levels that mark our progress toward earning the rebates. We continually revise our estimates of earned vendor rebates based on actual purchase levels. At December 31, 2016 and 2015, we had $9,926 and $8,086, respectively, of rebates recorded as a reduction of inventory. Substantially all vendor rebate receivables are collected within three months immediately following the end of the year.

Marketable Securities

Investments in marketable equity securities are classified as available-for-sale and are included in other assets in our consolidated balance sheets. These equity securities are recorded at fair value using the specific identification method with unrealized holding losses, net of deferred taxes, included in accumulated other comprehensive loss within shareholders’ equity. Dividend and interest income are recognized in the statements of income when earned.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment is computed using the straight-line method. Buildings and improvements are depreciated or amortized over estimated useful lives ranging from 3-40 years. Leasehold improvements are amortized over the shorter of the respective lease terms or estimated useful lives. Furniture and fixtures are depreciated over estimated useful lives ranging from 5-7 years. Estimated useful lives for other depreciable assets range from 3-10 years.

Goodwill and Other Intangible Assets

Goodwill is recorded when the purchase price paid for an acquisition exceeds the fair value of the net identified tangible and intangible assets acquired. We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. We test goodwill for impairment by first comparing the fair value of our reporting unit to its carrying value. If the fair value is determined to be less than the carrying value, a second step is performed to measure the amount of impairment loss.

Other intangible assets primarily consist of the value of trade names and trademarks, distributor agreements, customer relationships and non-compete agreements. Indefinite lived intangibles not subject to amortization are assessed for impairment at least annually, or more frequently if events or changes in circumstances indicate they may be impaired, by comparing the fair value of the intangible asset to its carrying 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, 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 compared to the asset’s carrying value. As of December 31, 2016, 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 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 frequency and volume to provide pricing information on an ongoing basis.

Level 2	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 substantially 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 and is recorded when shipment of products or delivery of services has occurred. Substantially all customer returns relate to products that are returned under warranty obligations underwritten by manufacturers, effectively mitigating our risk of loss for customer returns. Taxes collected from our customers and remitted to governmental authorities are presented in our consolidated statements of income on a net basis.

Advertising Costs

Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2016, 2015 and 2014, were $22,242, $21,150 and $19,754, 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 is included in selling, general and administrative expenses. Shipping and handling costs included in selling, general and administrative expenses for the years ended December 31, 2016, 2015 and 2014, were $42,809, $41,345 and $43,324, respectively.

Share-Based Compensation

The fair value of stock option and non-vested restricted stock awards are expensed 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. Cash flows from the tax benefits resulting from tax deductions in excess of the compensation expense recognized for those options (windfall tax benefits) were classified as financing cash flows for the years ended December 31, 2015 and 2014. Tax benefits resulting from tax deductions in excess of share-based compensation expense realized in 2016 are recognized in our provision for income taxes in the consolidated income statement. Tax benefits resulting from tax deductions in excess of share-based compensation expense recognized were credited to paid-in capital in the consolidated balance sheets for the years ended December 31, 2015 and 2014. Refer to “Share-Based Payments” within New Accounting Standards contained in this Note 1 for additional information.

Income Taxes

We record United States 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 statement 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 consolidated United States federal income tax return. As income tax returns are generally not filed until well after the closing 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 appropriate state income tax rates to use in the various states that we and our subsidiaries are required to file, the potential utilization of operating loss carryforwards and valuation allowances required, if any, for tax assets that may not be realizable in the future.

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

Earnings per Share

We compute earnings per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Shares of our non-vested restricted stock are considered participating securities because these awards contain a non-forfeitable right to dividends irrespective of whether the awards ultimately vest. Under the two-class method, earnings per common share for our Common and Class B common 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, undistributed 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 common 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 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 category 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 comprehensive income and reclassified to earnings as a component of cost of sales in the period for which the hedged transaction affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.

Fair Value Hedge. A hedge of a recognized asset or liability or an unrecognized firm commitment is considered 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 13 for additional information pertaining to derivative instruments.

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.

Presentation of Debt Issuance Costs

In April 2015, the FASB issued guidance that will require that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, rather than as an asset. This guidance is effective retrospectively for interim and annual reporting periods beginning after December 15, 2015. The adoption of this guidance did not have an impact on our consolidated financial statements.

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 will be effective for interim and annual reporting periods beginning after December 15, 2016. We do not expect the adoption of this guidance to have a material 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 can be applied either prospectively or retrospectively and will be effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. We do not expect the adoption of this guidance to have a material impact to our consolidated balance sheets.

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 will be 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 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:

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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EARNINGS PER SHARE

12 Months Ended

Dec. 31, 2016

EARNINGS PER SHARE

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:

Years Ended December 31,	2016		2015		2014
Basic Earnings per Share:
Net income attributable to Watsco, Inc. shareholders	$	182,810	$	172,929	$	151,387
Less: distributed and undistributed earnings allocated to non-vested restricted common stock		14,806		13,634		11,444
Earnings allocated to Watsco, Inc. shareholders	$	168,004	$	159,295	$	139,943
Weighted-average common shares outstanding - Basic		32,582,385		32,435,961		32,308,073
Basic earnings per share for Common and Class B common stock	$	5.16	$	4.91	$	4.33
Allocation of earnings for Basic:
Common stock	$	154,021	$	146,037	$	128,214
Class B common stock		13,983		13,258		11,729
	$	168,004	$	159,295	$	139,943
Diluted Earnings per Share:
Net income attributable to Watsco, Inc. shareholders	$	182,810	$	172,929	$	151,387
Less: distributed and undistributed earnings allocated to non-vested restricted common stock		14,801		13,626		11,435
Earnings allocated to Watsco, Inc. shareholders	$	168,009	$	159,303	$	139,952
Weighted-average common shares outstanding - Basic		32,582,385		32,435,961		32,308,073
Effect of dilutive stock options		34,119		44,395		50,781
Weighted-average common shares outstanding - Diluted		32,616,504		32,480,356		32,358,854
Diluted earnings per share for Common and Class B common stock	$	5.15	$	4.90	$	4.32

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 December 31, 2016, 2015 and 2014, our outstanding Class B common stock was convertible into 2,711,811, 2,699,710 and 2,707,725 shares of our Common stock, respectively.

Diluted earnings per share excluded 31,839, 67,014 and 9,984 shares for the years ended December 31, 2016, 2015 and 2014, 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.

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OTHER COMPREHENSIVE GAIN (LOSS)

12 Months Ended

Dec. 31, 2016

OTHER COMPREHENSIVE GAIN (LOSS)

3. OTHER COMPREHENSIVE GAIN (LOSS)

Other comprehensive gain (loss) 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 loss were as follows:

Years Ended December 31,	2016			2015			2014
Foreign currency translation adjustment	$	6,211		$	(39,378	)	$	(21,117	)
Unrealized (loss) gain on cash flow hedging instruments		(1,321	)		3,716			384
Income tax benefit (expense)		356			(1,003	)		(104	)
Unrealized (loss) gain on cash flow hedging instruments, net of tax		(965	)		2,713			280
Reclassification of loss (gain) on cash flow hedging instruments into earnings		442			(2,730	)		—
Income tax (benefit) expense		(119	)		737			—
Reclassification of loss (gain) on cash flow hedging instruments into earnings, net of tax		323			(1,993	)		—
Unrealized gain (loss) on available-for-sale securities		27			(12	)		1
Income tax (expense) benefit		(13	)		4			—
Unrealized gain (loss) on available-for-sale securities, net of tax		14			(8	)		1
Other comprehensive gain (loss)	$	5,583		$	(38,666	)	$	(20,836	)

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

Years Ended December 31,	2016			2015			2014
Foreign currency translation adjustment:
Beginning balance	$	(47,204	)	$	(23,623	)	$	(11,181	)
Current period other comprehensive gain (loss)		3,745			(23,581	)		(12,442	)
Ending balance		(43,459	)		(47,204	)		(23,623	)
Cash flow hedging instruments:
Beginning balance		600			168			—
Current period other comprehensive (loss) income		(579	)		1,628			168
Less reclassification adjustment		194			(1,196	)		—
Ending balance		215			600			168
Available-for-sale securities:
Beginning balance		(300	)		(292	)		(293	)
Current period other comprehensive income (loss)		14			(8	)		1
Ending balance		(286	)		(300	)		(292	)
Accumulated other comprehensive loss, net of tax	$	(43,530	)	$	(46,904	)	$	(23,747	)

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SUPPLIER CONCENTRATION

12 Months Ended

Dec. 31, 2016

SUPPLIER CONCENTRATION

4. SUPPLIER CONCENTRATION

Purchases from our top ten suppliers comprised 85%, 84% and 82% of all purchases made in 2016, 2015 and 2014, respectively. Our largest supplier, Carrier and its affiliates, accounted for 62%, 62% and 61% of all purchases made in 2016, 2015 and 2014, respectively. See Note 16. A significant interruption by Carrier, or any of our other key suppliers, in the delivery of products could impair our ability to maintain current inventory levels and could materially impact our consolidated results of operations and consolidated financial position.

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PROPERTY AND EQUIPMENT

12 Months Ended

Dec. 31, 2016

PROPERTY AND EQUIPMENT

5. PROPERTY AND EQUIPMENT

Property and equipment, net, consists of:

December 31,	2016			2015
Land	$	820		$	820
Buildings and improvements		71,082			69,675
Machinery, vehicles and equipment		74,640			43,150
Furniture and fixtures		15,090			14,311
Computer hardware and software		42,515			38,876
		204,147			166,832
Accumulated depreciation and amortization		(113,645	)		(104,117	)
	$	90,502		$	62,715

Depreciation and amortization expense related to property and equipment included in selling, general and administrative expenses for the years ended December 31, 2016, 2015 and 2014, were $14,853, $13,802 and $12,158, respectively.

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DEBT

12 Months Ended

Dec. 31, 2016

DEBT

6. 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.

Borrowings under the credit facility bear interest at either LIBOR-based rates plus a spread, which ranges from 87.5 to 250.0 basis-points (LIBOR plus 100.0 basis-points at December 31, 2016), depending on our ratio of total debt to EBITDA, or on rates based on the higher of the Prime rate or the Federal Funds Rate, in each case plus a spread which ranges from 0 to 150.0 basis-points (0 basis-points at December 31, 2016), 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 12.5 to 35.0 basis-points (15.0 basis-points at December 31, 2016).

At December 31, 2016 and 2015, $235,294 and $245,300, respectively, were outstanding under the revolving credit agreement. The revolving credit agreement contains customary affirmative and negative covenants, including financial covenants with respect to consolidated leverage and interest coverage ratios, and other customary restrictions. We believe we were in compliance with all covenants at December 31, 2016.

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INCOME TAXES

12 Months Ended

Dec. 31, 2016

INCOME TAXES

7. INCOME TAXES

The components of income tax expense from our wholly-owned operations and investments and our controlling interest in joint ventures with Carrier are as follows:

Years Ended December 31,	2016		2015		2014
U.S. Federal	$	86,719	$	85,585	$	74,561
State		9,801		9,431		10,325
Foreign		9,416		9,661		6,953
	$	105,936	$	104,677	$	91,839
Current	$	103,216	$	99,990	$	91,550
Deferred		2,720		4,687		289
	$	105,936	$	104,677	$	91,839

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

Following is a reconciliation of the effective income tax rate:

Years Ended December 31,	2016			2015			2014
U.S. federal statutory rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal benefit and other		2.1			2.3			3.0
Excess tax benefits from share-based compensation		(1.0	)		—			—
Tax effects on foreign income		(0.1	)		(0.3	)		(1.0	)
Effective income tax rate attributable to Watsco, Inc.		36.0			37.0			37.0
Taxes attributable to non-controlling interest		(5.0	)		(5.4	)		(6.4	)
Effective income tax rate		31.0	%		31.6	%		30.6	%

The following is a summary of the significant components of our current and long-term deferred tax assets and liabilities:

December 31,	2016			2015
Current deferred tax assets:
Capitalized inventory costs and inventory reserves	$	2,301		$	1,794
Allowance for doubtful accounts		1,379			1,053
Self-insurance reserves		500			519
Other current deferred tax assets		1,778			1,921
Total current deferred tax assets (1)		5,958			5,287
Long-term deferred tax assets:
Share-based compensation		26,239			23,603
Other long-term deferred tax assets		449			352
Net operating loss carryforwards		209			207
		26,897			24,162
Valuation allowance		—			—
Total long-term deferred tax assets (2)		26,897			24,162
Current deferred tax liabilities:
Other current deferred tax liabilities		(473	)		(686	)
Total current deferred tax liabilities (1)		(473	)		(686	)
Long-term deferred tax liabilities:
Deductible goodwill		(88,581	)		(83,868	)
Depreciation		(5,883	)		(3,774	)
Other long-term deferred tax liabilities		(1,160	)		(1,533	)
Total long-term deferred tax liabilities (2)		(95,624	)		(89,175	)
Net deferred tax liabilities	$	(63,242	)	$	(60,412	)

(1) Current deferred tax assets and liabilities have been included in the consolidated balance sheets in other current assets.

(2) Long-term deferred tax assets and liabilities have been included in the consolidated balance sheets in deferred income taxes and other liabilities.

Amounts earned by foreign subsidiaries are generally subject to United States income taxation upon repatriation. United States income taxes have not been provided on undistributed earnings of our foreign subsidiaries. The cumulative undistributed earnings related to foreign operations were approximately $130,000 at December 31, 2016. It is not practicable to estimate the amount of tax that might be payable. Our intention is to indefinitely reinvest these earnings outside of the United States or to repatriate the earnings only when it is tax effective to do so.

Management has determined that no valuation allowance was necessary at both December 31, 2016 and 2015. At December 31, 2016, there were state and other net operating loss carryforwards of $6,872, which expire in varying amounts from 2017 through 2036. These amounts are available to offset future taxable income. There were no federal net operating loss carryforwards at December 31, 2016.

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 limitations expire. We are no longer subject to United States federal tax examinations for tax years prior to 2013. For the majority of states, we are no longer subject to tax examinations for tax years prior to 2012.

As of December 31, 2016 and 2015, the total amount of gross unrecognized tax benefits (excluding the federal benefit received from state positions) was $3,695 and $3,513, respectively. Of these totals, $2,573 and $2,416, respectively, (net of the federal benefit received from state positions) represent the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate. Our continuing practice is to recognize penalties within selling, general and administrative expenses and interest related to income tax matters in income tax expense in the consolidated statements of income. As of December 31, 2016 and 2015, the cumulative amount of estimated accrued interest and penalties resulting from such unrecognized tax benefits was $414 and $384, respectively, and is included in deferred income taxes and other liabilities in the accompanying consolidated balance sheets.

The changes in gross unrecognized tax benefits are as follows:

Balance at December 31, 2013	$	3,135
Additions based on tax positions related to the current year		751
Reductions due to lapse of applicable statute of limitations		(167	)
Balance at December 31, 2014		3,719
Additions based on tax positions related to the current year		871
Reductions due to lapse of applicable statute of limitations and tax assessments		(1,077	)
Balance at December 31, 2015		3,513
Additions based on tax positions related to the current year		547
Reductions due to lapse of applicable statute of limitations		(365	)
Balance at December 31, 2016	$	3,695

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SHARE-BASED COMPENSATION AND BENEFIT PLANS

12 Months Ended

Dec. 31, 2016

SHARE-BASED COMPENSATION AND BENEFIT PLANS

8. SHARE-BASED COMPENSATION AND BENEFIT PLANS

Share-Based Compensation Plans

We maintain the 2014 Incentive Compensation Plan (the “2014 Plan”) that provides for the award of a broad variety of share-based compensation alternatives such as non-vested restricted stock, non-qualified stock options, incentive stock options, performance awards, dividend equivalents, deferred stock and stock appreciation rights at no less than 100% of the market price on the date the award is granted. To date, awards under the 2014 Plan consist of non-qualified stock options and non-vested restricted stock. The 2014 Plan replaced the Watsco, Inc. Amended and Restated 2001 Incentive Compensation Plan (the “2001 Plan”) upon its expiration in 2014.

Under the 2014 Plan, the number of shares of Common and Class B common stock available for issuance is (i) 2,000,000, plus (ii) 45,421 shares of Common stock or Class B common stock that remained available for grant in connection with awards under the Watsco, Inc. Amended and Restated 2001 Incentive Compensation Plan (the “2001 Plan”) as of the date our shareholders 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 293,950 shares of Common stock, net of cancellations, and 326,623 shares of Class B common stock, had been awarded under the 2014 Plan as of December 31, 2016. As of December 31, 2016, 1,424,848 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 circumstances prior to the original vesting date.

The 2001 Plan expired during 2014; therefore, no additional options may be granted. There were 37,750 options to exercise common stock outstanding under the 2001 Plan at December 31, 2016. Options under the 2001 Plan vest over two to four years of service and have contractual terms of five years.

The following is a summary of stock option activity under the 2014 Plan and the 2001 Plan as of and for the year ended December 31, 2016:

	Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Options outstanding at December 31, 2015		257,334		$	102.96
Granted		107,000			140.41
Exercised		(63,084	)		71.18
Forfeited		(7,000	)		127.56
Options outstanding at December 31, 2016		294,250		$	122.80		3.56	$	7,451
Options exercisable at December 31, 2016		24,419		$	109.81		2.92	$	935

The following is a summary of non-vested restricted stock activity as of and for the year ended December 31, 2016:

	Shares			Weighted- Average Grant Date Fair Value
Non-vested restricted stock outstanding at December 31, 2015		2,819,196		$	49.99
Granted		183,144			130.01
Vested		(77,450	)		63.26
Forfeited		(26,000	)		112.79
Non-vested restricted stock outstanding at December 31, 2016		2,898,890		$	54.13

The weighted-average grant date fair value of non-vested restricted stock granted during 2016, 2015 and 2014 was $130.01, $114.55 and $96.84, respectively. The fair value of non-vested restricted stock that vested during 2016, 2015 and 2014 was $10,096, $2,468 and $5,789, respectively.

During 2016, 30,413 shares of Common and Class B common stock with an aggregate fair market value of $3,967 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of restricted stock. During 2015, 7,206 shares of Common stock with an aggregate fair market value of $889 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of restricted stock. During 2014, 21,028 shares of Common stock with an aggregate fair market value of $2,125 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 forfeitures, 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,	2016			2015			2014
Expected term in years		4.25			4.25			4.25
Risk-free interest rate		1.24	%		1.25	%		1.35	%
Expected volatility		18.65	%		20.96	%		22.07	%
Expected dividend yield		2.54	%		2.29	%		1.69	%
Grant date fair value	$	16.37		$	17.17		$	15.75

Exercise of Stock Options

The total intrinsic value of stock options exercised during 2016, 2015 and 2014 was $4,490, $7,525 and $3,746, respectively. Cash received from the exercise of stock options during 2016, 2015 and 2014 was $4,447, $4,850 and $3,324, respectively. During 2016, 2015 and 2014, 348 shares of Common stock with an aggregate fair market value of $51, 26,006 shares of Class B common stock with an aggregate fair market value of $3,251 and 5,454 shares of Class B common stock with an aggregate fair market value of $490, 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,	2016		2015		2014
Stock options	$	1,149	$	952	$	801
Non-vested restricted stock		11,170		11,644		10,672
Share-based compensation expense	$	12,319	$	12,596	$	11,473

At December 31, 2016, there was $2,096 of unrecognized pre-tax compensation expense related to stock options granted under the 2014 Plan and 2001 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 2016, 2015 and 2014 was $736, $856 and $1,145, respectively.

At December 31, 2016, there was $100,397 of unrecognized pre-tax compensation expense related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of approximately 11 years. Of this amount, approximately $59,000 is related to awards granted to our Chief Executive Officer (“CEO”), of which approximately $13,000 and $46,000 vest in approximately 6 and 10 years upon his attainment of age 82 and 86, respectively. In the event that vesting is accelerated for any circumstance, as defined in the related agreements, the remaining unrecognized share-based compensation expense would be immediately recognized as a charge to earnings with a corresponding tax benefit. At December 31, 2016, we were obligated to issue 67,853 shares of non-vested restricted stock to our CEO that vest in 10 years and 25,774 shares of non-vested restricted stock to our President that vest in 27 years in connection with 2016 performance based incentive compensation.

Employee Stock Purchase Plan

The Watsco, Inc. Fourth Amended and Restated 1996 Qualified Employee Stock Purchase Plan (the “ESPP”) provides for up to 1,500,000 shares of Common stock to be available for purchase by our full-time employees with at least 90 days of service. The ESPP allows participating employees to purchase shares of Common stock at a 5% discount to the fair market value at specified times. During 2016, 2015 and 2014, employees purchased 5,956, 6,463 and 6,995 shares of Common stock at an average price of $125.84, $112.53 and $90.89 per share, respectively. Cash dividends received by the ESPP were reinvested in Common stock and resulted in the issuance of 3,442, 3,183 and 2,953 additional shares during 2016, 2015 and 2014, respectively. We received net proceeds of $1,206, $1,107 and $921, respectively, during 2016, 2015 and 2014, for shares of our Common stock purchased under the ESPP. At December 31, 2016, 496,160 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, 2016, 2015 and 2014, we issued 20,045, 18,343 and 18,309 shares of Common stock, respectively, to the plan, representing the Common stock discretionary matching contribution of $2,348, $1,963 and $1,759, respectively.

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PURCHASE OF ADDITIONAL OWNERSHIP INTEREST IN JOINT VENTURES

12 Months Ended

Dec. 31, 2016

PURCHASE OF ADDITIONAL OWNERSHIP INTEREST IN JOINT VENTURES

9. PURCHASE OF ADDITIONAL OWNERSHIP INTEREST IN JOINT VENTURES

On November 29, 2016, we purchased an additional 10% ownership interest in Carrier Enterprise (“Carrier 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, following which we have an 80% controlling interest in Carrier Enterprise II.

On July 1, 2014, we exercised our second option to acquire an additional 10% ownership interest in Carrier Enterprise, LLC (“Carrier Enterprise I”) for cash consideration of $87,735, following which we have an 80% controlling interest in Carrier Enterprise I. Neither we nor Carrier has any remaining options to purchase additional ownership interests in Carrier Enterprise I.

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GOODWILL AND OTHER INTANGIBLE ASSETS

12 Months Ended

Dec. 31, 2016

GOODWILL AND OTHER INTANGIBLE ASSETS

10. GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill are as follows:

Balance at December 31, 2014	$	387,311
Foreign currency translation adjustment		(9,001	)
Balance at December 31, 2015		378,310
Foreign currency translation adjustment		1,427
Balance at December 31, 2016	$	379,737

Other intangible assets are comprised of the following:

December 31,	Estimated Useful Lives		2016			2015
Indefinite lived intangible assets - Trade names, trademarks and distribution rights			$	120,288		$	118,205
Finite lived intangible assets:
Customer relationships		10-15 years		70,194			68,981
Trade name		10 years		1,150			1,150
Non-compete agreements		7 years		369			369
Accumulated amortization				(33,437	)		(28,224	)
Finite lived intangible assets, net				38,276			42,276
			$	158,564		$	160,481

Amortization expense related to finite lived intangible assets included in selling, general and administrative expenses for the years ended December 31, 2016, 2015 and 2014, were $5,213, $5,315 and $5,769, respectively. Amortization of finite lived intangible assets for 2017 through 2020 is expected to be approximately $5,200 per year and in 2021 is expected to be approximately $4,300.

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SHAREHOLDERS' EQUITY

12 Months Ended

Dec. 31, 2016

SHAREHOLDERS' EQUITY

11. 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 common 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 determined 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, 2016 or 2015.

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 2016, 2015 or 2014. In aggregate, 6,322,650 shares of Common stock and 48,263 shares of Class B common stock have been repurchased at a cost of $114,425 since the inception of the program. At December 31, 2016, there were 1,129,087 shares remaining authorized for repurchase under the program.

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FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2016

FINANCIAL INSTRUMENTS

12. FINANCIAL INSTRUMENTS

Recorded Financial Instruments

Recorded financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, the current portion of long-term obligations, borrowings under our revolving credit agreement and debt instruments included in other long-term obligations. At December 31, 2016 and 2015, 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 and debt instruments included in long-term obligations also approximate their carrying value based upon interest rates available for similar instruments with consistent terms and remaining maturities.

Off-Balance Sheet Financial Instruments

At December 31, 2016 and 2015, we were contingently liable under standby letters of credit aggregating $2,430 and $2,690, respectively, which are primarily used as collateral to cover any contingency related to additional risk assessments pertaining to our self-insurance programs. Additionally, at December 31, 2016 and 2015, we were contingently liable under various performance bonds aggregating approximately $8,000 and $4,000, respectively, which are used as collateral to cover any contingencies related to our nonperformance under agreements with certain customers. We do not expect that any material losses or obligations will result from the issuance of the standby letters of credit or performance bonds because we expect to meet our obligations under our self-insurance programs and to certain customers in the ordinary course of business. Accordingly, the estimated fair value of these instruments is zero.

Concentrations of Credit Risk

Financial instruments which potentially subject us to concentrations of credit risk consist principally of accounts receivable. Concentrations of credit risk are limited due to the large number of customers comprising 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.

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DERIVATIVES

12 Months Ended

Dec. 31, 2016

DERIVATIVES

13. 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 occur. The maximum period for which we hedge our cash flow using these instruments is 12 months. Accordingly, at December 31, 2016, 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 December 31, 2016 was $33,200, and such contracts have varying terms expiring through September 2017.

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

Years Ended December 31,	2016			2015
(Loss) gain recorded in accumulated other comprehensive loss	$	(1,321	)	$	3,716
Loss (gain) reclassified from accumulated other comprehensive loss into earnings	$	442		$	(2,730	)

At December 31, 2016, we expected an estimated $490 pre-tax gain 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 December 31, 2016 was $4,650, and such contracts have varying terms expiring through March 2017.

We recognized (losses) gains of $(306), $2,552 and $142 from foreign currency forward contracts not designated as hedging instruments in our consolidated statements of income for 2016, 2015 and 2014, 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 consolidated balance sheets. See Note 14.

	Asset Derivatives				Liability Derivatives
December 31,	2016		2015		2016		2015
Derivatives designated as hedging instruments	$	227	$	923	$	35	$	3
Derivatives not designated as hedging instruments		14		326		4		4
Total derivative instruments	$	241	$	1,249	$	39	$	7

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FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2016

FAIR VALUE MEASUREMENTS

14. FAIR VALUE MEASUREMENTS

The following tables present our assets and liabilities carried at fair value that are measured on a recurring basis:

		Total		Fair Value Measurements at December 31, 2016 Using
	Balance Sheet Location			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		—
		Total		Fair Value Measurements at December 31, 2015 Using
	Balance Sheet Location			Level 1		Level 2		Level 3
Assets:
Available-for-sale securities	Other assets	$	254	$	254		—		—
Derivative financial instruments	Other current assets	$	1,249		—	$	1,249		—
Liabilities:
Derivative financial instruments	Accrued expenses and other current liabilities	$	7		—	$	7		—

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 – these 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 13. 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 2016 or 2015.

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COMMITMENTS AND CONTINGENCIES

12 Months Ended

Dec. 31, 2016

COMMITMENTS AND CONTINGENCIES

15. 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 against Watsco’s 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. The defendants believe the claims are entirely without merit and intend to vigorously defend against them. 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 $2,951 and $3,214 at December 31, 2016 and 2015, 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, 2016, 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 requirements 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 $4,300. See “Self-Insurance” above for further information on commitments associated with the insurance programs and Note 12, under the caption “Off-Balance Sheet Financial Instruments,” for further information on standby letters of credit. At December 31, 2016, there were no other entities that met the definition of a VIE.

Operating Leases

We are obligated under various non-cancelable operating lease agreements for real property, equipment, vehicles and a corporate aircraft used in our operations with varying terms through 2025. We are committed to pay a portion of the actual operating expenses under certain of these lease agreements. These operating expenses are not included in the table below. Some of these arrangements have free or escalating rent payment provisions. We recognize rent expense under such arrangements on a straight-line basis over the lease term.

At December 31, 2016, future minimum payments under non-cancelable operating leases over each of the next five years and thereafter were as follows:

2017	$	56,639
2018		48,420
2019		35,926
2020		21,650
2021		13,184
Thereafter		13,362
Total minimum payments	$	189,181

Rental expense for the years ended December 31, 2016, 2015 and 2014, was $83,260, $82,581 and $81,155, respectively.

Purchase Obligations

At December 31, 2016, we were obligated under various non-cancelable purchase orders with our key suppliers for goods aggregating approximately $29,000, of which approximately $17,000 is with Carrier and its affiliates.

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RELATED PARTY TRANSACTIONS

12 Months Ended

Dec. 31, 2016

RELATED PARTY TRANSACTIONS

16. RELATED PARTY TRANSACTIONS

Purchases from Carrier and its affiliates comprised 62%, 62% and 61% of all inventory purchases made during 2016, 2015 and 2014, respectively. At December 31, 2016 and 2015, approximately $63,000 and $85,000, 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 2016, 2015 and 2014 included approximately $56,000, $62,000 and $38,000, respectively, of sales to Carrier and its affiliates. We believe these transactions are conducted on terms equivalent to an arm’s-length basis in the ordinary course of business.

A member of our Board of Directors is the Chairman and Chief Executive Officer of Moss & Associates LLC (“Moss & Associates”), which serves as our general contractor for the remodeling of our corporate headquarters and receives customary payments for these services. Moss & Associates was paid $291 for services performed during 2016 and $109 was payable at December 31, 2016.

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INFORMATION ABOUT GEOGRAPHIC AREAS

12 Months Ended

Dec. 31, 2016

INFORMATION ABOUT GEOGRAPHIC AREAS

17. 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,	2016		2015		2014
Revenues:
United States	$	3,813,204	$	3,710,977	$	3,525,176
Canada		267,220		263,908		300,289
Mexico		140,278		138,354		119,075
Total revenues	$	4,220,702	$	4,113,239	$	3,944,540

December 31,	2016		2015
Long-Lived Assets:
United States	$	467,728	$	441,656
Canada		155,758		154,437
Mexico		5,317		5,413
Total long-lived assets	$	628,803	$	601,506

Revenues are attributed to countries based on the location of the store from which the sale occurred. Long-lived assets consist of property and equipment, goodwill and intangible assets.

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SUPPLEMENTAL CASH FLOW INFORMATION

12 Months Ended

Dec. 31, 2016

SUPPLEMENTAL CASH FLOW INFORMATION

18. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information was as follows:

Years Ended December 31,	2016		2015		2014
Interest paid	$	3,362	$	4,993	$	4,393
Income taxes net of refunds	$	99,006	$	103,261	$	82,850

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SUBSEQUENT EVENTS

12 Months Ended

Dec. 31, 2016

SUBSEQUENT EVENTS

19. SUBSEQUENT EVENTS

On January 3, 2017, our Board of Directors declared a regular quarterly cash dividend of $1.05 per share of Common and Class B common stock that was paid on January 31, 2017 to shareholders of record as of January 17, 2017.

On January 24, 2017, we entered into an amendment to our credit agreement, which reduced the letter of credit subfacility from $50,000 to $10,000 and modified certain definitions. See Note 6.

On February 13, 2017, we purchased an additional 10% ownership interest in Carrier Enterprise II for cash consideration of $42,688, following which we have an 80% controlling interest in Carrier Enterprise II. The source of cash was borrowings under our revolving credit agreement. See Note 9.

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SELECTED QUARTERLY FINANCIAL DATA

12 Months Ended

Dec. 31, 2016

SELECTED QUARTERLY FINANCIAL DATA

WATSCO, INC. AND SUBSIDIARIES

SELECTED QUARTERLY FINANCIAL DATA

(UNAUDITED)

(In thousands, except per share data)	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter		Total
Year Ended December 31, 2016
Revenues (1)	$	851,424	$	1,214,435	$	1,241,232	$	913,611	$	4,220,702
Gross profit	$	212,447	$	291,861	$	302,204	$	228,072	$	1,034,584
Net income attributable to Watsco, Inc.	$	25,537	$	64,621	$	63,099	$	29,553	$	182,810
Earnings per share for Common and Class B common stock (2):
Basic	$	0.71	$	1.82	$	1.78	$	0.81	$	5.16
Diluted	$	0.71	$	1.82	$	1.78	$	0.81	$	5.15
Year Ended December 31, 2015
Revenues (1)	$	808,972	$	1,223,439	$	1,177,012	$	903,816	$	4,113,239
Gross profit	$	204,225	$	295,245	$	285,846	$	222,041	$	1,007,357
Net income attributable to Watsco, Inc.	$	23,048	$	65,423	$	57,968	$	26,490	$	172,929
Earnings per share for Common and Class B common stock (2):
Basic	$	0.65	$	1.86	$	1.64	$	0.75	$	4.91
Diluted	$	0.65	$	1.85	$	1.64	$	0.75	$	4.90

(1) Sales of residential central air conditioners, heating equipment and parts and supplies are seasonal. 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 sectors throughout most of the markets is fairly even during the year except for dependence on housing completions and related weather and economic conditions.

(2) Quarterly and year-to-date earnings per share are calculated on an individual basis; therefore, the sum of earnings per share amounts for the quarters may not equal earnings per share amounts for the year.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

12 Months Ended

Dec. 31, 2016

Organization, Consolidation and Presentation

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, 2016, we operated from 565 locations in 37 U.S. states, Canada, Mexico and Puerto Rico with additional market coverage on an export basis to portions of Latin America and the Caribbean.

The consolidated financial statements include the accounts of Watsco, all of its wholly owned subsidiaries and the accounts of three joint ventures with Carrier Corporation (“Carrier”), in each of which Watsco maintains a controlling interest. All significant intercompany balances and transactions have been eliminated in consolidation.

Foreign Currency Translation and Transactions

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 denominated in Mexican pesos are recognized in earnings primarily within selling, general and administrative expenses in our consolidated statements of income.

Use of Estimates

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 disclosure 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 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.

Cash Equivalents

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 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 maintained 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 information. Upon determination that an account is uncollectible, the receivable balance is written off. At December 31, 2016 and 2015, the allowance for doubtful accounts totaled $6,169 and $5,305, respectively.

Inventories

Inventories

Inventories consist of air conditioning, heating and refrigeration equipment and related parts and supplies and are valued at the lower of cost or market using a weighted-average cost basis and the first-in, first-out methods. 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

Vendor Rebates

We have arrangements with several vendors that provide rebates payable to us when we achieve any of a number of measures, generally related to the volume level of purchases. We account for such rebates as a reduction of inventory until we sell the product, at which time such rebates are reflected as a reduction of cost of sales in our consolidated statements of income. Throughout the year, we estimate the amount of the rebate based on our estimate of purchases to date relative to the purchase levels that mark our progress toward earning the rebates. We continually revise our estimates of earned vendor rebates based on actual purchase levels. At December 31, 2016 and 2015, we had $9,926 and $8,086, respectively, of rebates recorded as a reduction of inventory. Substantially all vendor rebate receivables are collected within three months immediately following the end of the year.

Marketable Securities

Marketable Securities

Investments in marketable equity securities are classified as available-for-sale and are included in other assets in our consolidated balance sheets. These equity securities are recorded at fair value using the specific identification method with unrealized holding losses, net of deferred taxes, included in accumulated other comprehensive loss within shareholders’ equity. Dividend and interest income are recognized in the statements of income when earned.

Property and Equipment

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment is computed using the straight-line method. Buildings and improvements are depreciated or amortized over estimated useful lives ranging from 3-40 years. Leasehold improvements are amortized over the shorter of the respective lease terms or estimated useful lives. Furniture and fixtures are depreciated over estimated useful lives ranging from 5-7 years. Estimated useful lives for other depreciable assets range from 3-10 years.

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

Goodwill is recorded when the purchase price paid for an acquisition exceeds the fair value of the net identified tangible and intangible assets acquired. We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. We test goodwill for impairment by first comparing the fair value of our reporting unit to its carrying value. If the fair value is determined to be less than the carrying value, a second step is performed to measure the amount of impairment loss.

Other intangible assets primarily consist of the value of trade names and trademarks, distributor agreements, customer relationships and non-compete agreements. Indefinite lived intangibles not subject to amortization are assessed for impairment at least annually, or more frequently if events or changes in circumstances indicate they may be impaired, by comparing the fair value of the intangible asset to its carrying 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

Long-lived assets, other than goodwill, 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 compared to the asset’s carrying value. As of December 31, 2016, there were no such events or circumstances.

Fair Value Measurements

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 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 frequency and volume to provide pricing information on an ongoing basis.

Level 2	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 substantially 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 Recognition

Revenue primarily consists of sales of air conditioning, heating and refrigeration equipment and related parts and supplies and is recorded when shipment of products or delivery of services has occurred. Substantially all customer returns relate to products that are returned under warranty obligations underwritten by manufacturers, effectively mitigating our risk of loss for customer returns. Taxes collected from our customers and remitted to governmental authorities are presented in our consolidated statements of income on a net basis.

Advertising Costs

Advertising Costs

Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2016, 2015 and 2014, were $22,242, $21,150 and $19,754, respectively.

Shipping and Handling

Shipping and Handling

Shipping and handling costs associated with inbound freight are capitalized to inventories and relieved through cost of sales as inventories are sold. Shipping and handling costs associated with the delivery of products is included in selling, general and administrative expenses. Shipping and handling costs included in selling, general and administrative expenses for the years ended December 31, 2016, 2015 and 2014, were $42,809, $41,345 and $43,324, respectively.

Share-Based Compensation

Share-Based Compensation

The fair value of stock option and non-vested restricted stock awards are expensed 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. Cash flows from the tax benefits resulting from tax deductions in excess of the compensation expense recognized for those options (windfall tax benefits) were classified as financing cash flows for the years ended December 31, 2015 and 2014. Tax benefits resulting from tax deductions in excess of share-based compensation expense realized in 2016 are recognized in our provision for income taxes in the consolidated income statement. Tax benefits resulting from tax deductions in excess of share-based compensation expense recognized were credited to paid-in capital in the consolidated balance sheets for the years ended December 31, 2015 and 2014. Refer to “Share-Based Payments” within New Accounting Standards contained in this Note 1 for additional information.

Income Taxes

Income Taxes

We record United States 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 statement 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 consolidated United States federal income tax return. As income tax returns are generally not filed until well after the closing 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 appropriate state income tax rates to use in the various states that we and our subsidiaries are required to file, the potential utilization of operating loss carryforwards and valuation allowances required, if any, for tax assets that may not be realizable in the future.

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

Earnings per Share

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 ultimately vest. Under the two-class method, earnings per common share for our Common and Class B common 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, undistributed 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 common 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

Derivative Instruments and Hedging Activity

We have used derivative instruments, including forward 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 category 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 comprehensive income and reclassified to earnings as a component of cost of sales in the period for which the hedged transaction affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.

Fair Value Hedge. A hedge of a recognized asset or liability or an unrecognized firm commitment is considered 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 13 for additional information pertaining to derivative instruments.

New Accounting Standards

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.

Presentation of Debt Issuance Costs

In April 2015, the FASB issued guidance that will require that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, rather than as an asset. This guidance is effective retrospectively for interim and annual reporting periods beginning after December 15, 2015. The adoption of this guidance did not have an impact on our consolidated financial statements.

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 will be effective for interim and annual reporting periods beginning after December 15, 2016. We do not expect the adoption of this guidance to have a material 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 can be applied either prospectively or retrospectively and will be effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. We do not expect the adoption of this guidance to have a material impact to our consolidated balance sheets.

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 will be 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 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:

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	)

Self-Insurance

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 $2,951 and $3,214 at December 31, 2016 and 2015, respectively, were established related to such programs and are included in accrued expenses and other current liabilities in our consolidated balance sheets.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

12 Months Ended

Dec. 31, 2016

Adoption of Amended Guidance Impact on Previously Reported Quarterly Results

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:

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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EARNINGS PER SHARE (Tables)

12 Months Ended

Dec. 31, 2016

Schedule of Basic and Diluted Earnings Per Common 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,	2016		2015		2014
Basic Earnings per Share:
Net income attributable to Watsco, Inc. shareholders	$	182,810	$	172,929	$	151,387
Less: distributed and undistributed earnings allocated to non-vested restricted common stock		14,806		13,634		11,444
Earnings allocated to Watsco, Inc. shareholders	$	168,004	$	159,295	$	139,943
Weighted-average common shares outstanding - Basic		32,582,385		32,435,961		32,308,073
Basic earnings per share for Common and Class B common stock	$	5.16	$	4.91	$	4.33
Allocation of earnings for Basic:
Common stock	$	154,021	$	146,037	$	128,214
Class B common stock		13,983		13,258		11,729
	$	168,004	$	159,295	$	139,943
Diluted Earnings per Share:
Net income attributable to Watsco, Inc. shareholders	$	182,810	$	172,929	$	151,387
Less: distributed and undistributed earnings allocated to non-vested restricted common stock		14,801		13,626		11,435
Earnings allocated to Watsco, Inc. shareholders	$	168,009	$	159,303	$	139,952
Weighted-average common shares outstanding - Basic		32,582,385		32,435,961		32,308,073
Effect of dilutive stock options		34,119		44,395		50,781
Weighted-average common shares outstanding - Diluted		32,616,504		32,480,356		32,358,854
Diluted earnings per share for Common and Class B common stock	$	5.15	$	4.90	$	4.32

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OTHER COMPREHENSIVE GAIN (LOSS) (Tables)

12 Months Ended

Dec. 31, 2016

Schedule of Tax Effects Allocated to Each Component of Other Comprehensive Gain (Loss)

The tax effects allocated to each component of other comprehensive loss were as follows:

Years Ended December 31,	2016			2015			2014
Foreign currency translation adjustment	$	6,211		$	(39,378	)	$	(21,117	)
Unrealized (loss) gain on cash flow hedging instruments		(1,321	)		3,716			384
Income tax benefit (expense)		356			(1,003	)		(104	)
Unrealized (loss) gain on cash flow hedging instruments, net of tax		(965	)		2,713			280
Reclassification of loss (gain) on cash flow hedging instruments into earnings		442			(2,730	)		—
Income tax (benefit) expense		(119	)		737			—
Reclassification of loss (gain) on cash flow hedging instruments into earnings, net of tax		323			(1,993	)		—
Unrealized gain (loss) on available-for-sale securities		27			(12	)		1
Income tax (expense) benefit		(13	)		4			—
Unrealized gain (loss) on available-for-sale securities, net of tax		14			(8	)		1
Other comprehensive gain (loss)	$	5,583		$	(38,666	)	$	(20,836	)

Schedule of Accumulated Other Comprehensive Loss

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

Years Ended December 31,	2016			2015			2014
Foreign currency translation adjustment:
Beginning balance	$	(47,204	)	$	(23,623	)	$	(11,181	)
Current period other comprehensive gain (loss)		3,745			(23,581	)		(12,442	)
Ending balance		(43,459	)		(47,204	)		(23,623	)
Cash flow hedging instruments:
Beginning balance		600			168			—
Current period other comprehensive (loss) income		(579	)		1,628			168
Less reclassification adjustment		194			(1,196	)		—
Ending balance		215			600			168
Available-for-sale securities:
Beginning balance		(300	)		(292	)		(293	)
Current period other comprehensive income (loss)		14			(8	)		1
Ending balance		(286	)		(300	)		(292	)
Accumulated other comprehensive loss, net of tax	$	(43,530	)	$	(46,904	)	$	(23,747	)

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PROPERTY AND EQUIPMENT (Tables)

12 Months Ended

Dec. 31, 2016

Property and Equipment, Net

Property and equipment, net, consists of:

December 31,	2016			2015
Land	$	820		$	820
Buildings and improvements		71,082			69,675
Machinery, vehicles and equipment		74,640			43,150
Furniture and fixtures		15,090			14,311
Computer hardware and software		42,515			38,876
		204,147			166,832
Accumulated depreciation and amortization		(113,645	)		(104,117	)
	$	90,502		$	62,715

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INCOME TAXES (Tables)

12 Months Ended

Dec. 31, 2016

Components of Income Tax Expense

The components of income tax expense from our wholly-owned operations and investments and our controlling interest in joint ventures with Carrier are as follows:

Years Ended December 31,	2016		2015		2014
U.S. Federal	$	86,719	$	85,585	$	74,561
State		9,801		9,431		10,325
Foreign		9,416		9,661		6,953
	$	105,936	$	104,677	$	91,839
Current	$	103,216	$	99,990	$	91,550
Deferred		2,720		4,687		289
	$	105,936	$	104,677	$	91,839

Reconciliation of Effective Income Tax Rate

Following is a reconciliation of the effective income tax rate:

Years Ended December 31,	2016			2015			2014
U.S. federal statutory rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal benefit and other		2.1			2.3			3.0
Excess tax benefits from share-based compensation		(1.0	)		—			—
Tax effects on foreign income		(0.1	)		(0.3	)		(1.0	)
Effective income tax rate attributable to Watsco, Inc.		36.0			37.0			37.0
Taxes attributable to non-controlling interest		(5.0	)		(5.4	)		(6.4	)
Effective income tax rate		31.0	%		31.6	%		30.6	%

Significant Components of Current and Long-Term Deferred Tax Assets and Liabilities

The following is a summary of the significant components of our current and long-term deferred tax assets and liabilities:

December 31,	2016			2015
Current deferred tax assets:
Capitalized inventory costs and inventory reserves	$	2,301		$	1,794
Allowance for doubtful accounts		1,379			1,053
Self-insurance reserves		500			519
Other current deferred tax assets		1,778			1,921
Total current deferred tax assets (1)		5,958			5,287
Long-term deferred tax assets:
Share-based compensation		26,239			23,603
Other long-term deferred tax assets		449			352
Net operating loss carryforwards		209			207
		26,897			24,162
Valuation allowance		—			—
Total long-term deferred tax assets (2)		26,897			24,162
Current deferred tax liabilities:
Other current deferred tax liabilities		(473	)		(686	)
Total current deferred tax liabilities (1)		(473	)		(686	)
Long-term deferred tax liabilities:
Deductible goodwill		(88,581	)		(83,868	)
Depreciation		(5,883	)		(3,774	)
Other long-term deferred tax liabilities		(1,160	)		(1,533	)
Total long-term deferred tax liabilities (2)		(95,624	)		(89,175	)
Net deferred tax liabilities	$	(63,242	)	$	(60,412	)

(1) Current deferred tax assets and liabilities have been included in the consolidated balance sheets in other current assets.

(2) Long-term deferred tax assets and liabilities have been included in the consolidated balance sheets in deferred income taxes and other liabilities.

Changes in Gross Unrecognized Tax Benefits

The changes in gross unrecognized tax benefits are as follows:

Balance at December 31, 2013	$	3,135
Additions based on tax positions related to the current year		751
Reductions due to lapse of applicable statute of limitations		(167	)
Balance at December 31, 2014		3,719
Additions based on tax positions related to the current year		871
Reductions due to lapse of applicable statute of limitations and tax assessments		(1,077	)
Balance at December 31, 2015		3,513
Additions based on tax positions related to the current year		547
Reductions due to lapse of applicable statute of limitations		(365	)
Balance at December 31, 2016	$	3,695

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SHARE-BASED COMPENSATION AND BENEFIT PLANS (Tables)

12 Months Ended

Dec. 31, 2016

Summary of Stock Option Activity

The following is a summary of stock option activity under the 2014 Plan and the 2001 Plan as of and for the year ended December 31, 2016:

	Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Options outstanding at December 31, 2015		257,334		$	102.96
Granted		107,000			140.41
Exercised		(63,084	)		71.18
Forfeited		(7,000	)		127.56
Options outstanding at December 31, 2016		294,250		$	122.80		3.56	$	7,451
Options exercisable at December 31, 2016		24,419		$	109.81		2.92	$	935

Summary of Non-Vested Restricted Stock Activity

The following is a summary of non-vested restricted stock activity as of and for the year ended December 31, 2016:

	Shares			Weighted- Average Grant Date Fair Value
Non-vested restricted stock outstanding at December 31, 2015		2,819,196		$	49.99
Granted		183,144			130.01
Vested		(77,450	)		63.26
Forfeited		(26,000	)		112.79
Non-vested restricted stock outstanding at December 31, 2016		2,898,890		$	54.13

Valuation Assumptions Used for Stock Option Awards

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

Years Ended December 31,	2016			2015			2014
Expected term in years		4.25			4.25			4.25
Risk-free interest rate		1.24	%		1.25	%		1.35	%
Expected volatility		18.65	%		20.96	%		22.07	%
Expected dividend yield		2.54	%		2.29	%		1.69	%
Grant date fair value	$	16.37		$	17.17		$	15.75

Share-Based Compensation Expense

The following table provides information on share-based compensation expense:

Years Ended December 31,	2016		2015		2014
Stock options	$	1,149	$	952	$	801
Non-vested restricted stock		11,170		11,644		10,672
Share-based compensation expense	$	12,319	$	12,596	$	11,473

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GOODWILL AND OTHER INTANGIBLE ASSETS (Tables)

12 Months Ended

Dec. 31, 2016

Changes in Carrying Amount of Goodwill

The changes in the carrying amount of goodwill are as follows:

Balance at December 31, 2014	$	387,311
Foreign currency translation adjustment		(9,001	)
Balance at December 31, 2015		378,310
Foreign currency translation adjustment		1,427
Balance at December 31, 2016	$	379,737

Finite lived intangible assets

Other intangible assets are comprised of the following:

December 31,	Estimated Useful Lives		2016			2015
Indefinite lived intangible assets - Trade names, trademarks and distribution rights			$	120,288		$	118,205
Finite lived intangible assets:
Customer relationships		10-15 years		70,194			68,981
Trade name		10 years		1,150			1,150
Non-compete agreements		7 years		369			369
Accumulated amortization				(33,437	)		(28,224	)
Finite lived intangible assets, net				38,276			42,276
			$	158,564		$	160,481

Indefinite Lived Intangible Assets

Other intangible assets are comprised of the following:

December 31,	Estimated Useful Lives		2016			2015
Indefinite lived intangible assets - Trade names, trademarks and distribution rights			$	120,288		$	118,205
Finite lived intangible assets:
Customer relationships		10-15 years		70,194			68,981
Trade name		10 years		1,150			1,150
Non-compete agreements		7 years		369			369
Accumulated amortization				(33,437	)		(28,224	)
Finite lived intangible assets, net				38,276			42,276
			$	158,564		$	160,481

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DERIVATIVES (Tables)

12 Months Ended

Dec. 31, 2016

Impact from Foreign Exchange Derivative Instruments Designated as Cash Flow Hedges

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

Years Ended December 31,	2016			2015
(Loss) gain recorded in accumulated other comprehensive loss	$	(1,321	)	$	3,716
Loss (gain) reclassified from accumulated other comprehensive loss into earnings	$	442		$	(2,730	)

Fair Value of Derivative Instruments and Location in the Balance Sheets

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 consolidated balance sheets. See Note 14.

	Asset Derivatives				Liability Derivatives
December 31,	2016		2015		2016		2015
Derivatives designated as hedging instruments	$	227	$	923	$	35	$	3
Derivatives not designated as hedging instruments		14		326		4		4
Total derivative instruments	$	241	$	1,249	$	39	$	7

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FAIR VALUE MEASUREMENTS (Tables)

12 Months Ended

Dec. 31, 2016

Assets and Liabilities Measured at Fair Value on Recurring Basis

The following tables present our assets and liabilities carried at fair value that are measured on a recurring basis:

		Total		Fair Value Measurements at December 31, 2016 Using
	Balance Sheet Location			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		—
		Total		Fair Value Measurements at December 31, 2015 Using
	Balance Sheet Location			Level 1		Level 2		Level 3
Assets:
Available-for-sale securities	Other assets	$	254	$	254		—		—
Derivative financial instruments	Other current assets	$	1,249		—	$	1,249		—
Liabilities:
Derivative financial instruments	Accrued expenses and other current liabilities	$	7		—	$	7		—

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COMMITMENTS AND CONTINGENCIES (Tables)

12 Months Ended

Dec. 31, 2016

Future Minimum Lease Payments under Non-Cancelable Operating Leases

At December 31, 2016, future minimum payments under non-cancelable operating leases over each of the next five years and thereafter were as follows:

2017	$	56,639
2018		48,420
2019		35,926
2020		21,650
2021		13,184
Thereafter		13,362
Total minimum payments	$	189,181

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INFORMATION ABOUT GEOGRAPHIC AREAS (Tables)

12 Months Ended

Dec. 31, 2016

Revenues and Long-Lived Assets by Geographical Area

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,	2016		2015		2014
Revenues:
United States	$	3,813,204	$	3,710,977	$	3,525,176
Canada		267,220		263,908		300,289
Mexico		140,278		138,354		119,075
Total revenues	$	4,220,702	$	4,113,239	$	3,944,540

December 31,	2016		2015
Long-Lived Assets:
United States	$	467,728	$	441,656
Canada		155,758		154,437
Mexico		5,317		5,413
Total long-lived assets	$	628,803	$	601,506

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SUPPLEMENTAL CASH FLOW INFORMATION (Tables)

12 Months Ended

Dec. 31, 2016

Supplemental Cash Flow Information

Supplemental cash flow information was as follows:

Years Ended December 31,	2016		2015		2014
Interest paid	$	3,362	$	4,993	$	4,393
Income taxes net of refunds	$	99,006	$	103,261	$	82,850

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SELECTED QUARTERLY FINANCIAL DATA (Tables)

12 Months Ended

Dec. 31, 2016

Selected Quarterly Financial Data

WATSCO, INC. AND SUBSIDIARIES

SELECTED QUARTERLY FINANCIAL DATA

(UNAUDITED)

(In thousands, except per share data)	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter		Total
Year Ended December 31, 2016
Revenues (1)	$	851,424	$	1,214,435	$	1,241,232	$	913,611	$	4,220,702
Gross profit	$	212,447	$	291,861	$	302,204	$	228,072	$	1,034,584
Net income attributable to Watsco, Inc.	$	25,537	$	64,621	$	63,099	$	29,553	$	182,810
Earnings per share for Common and Class B common stock (2):
Basic	$	0.71	$	1.82	$	1.78	$	0.81	$	5.16
Diluted	$	0.71	$	1.82	$	1.78	$	0.81	$	5.15
Year Ended December 31, 2015
Revenues (1)	$	808,972	$	1,223,439	$	1,177,012	$	903,816	$	4,113,239
Gross profit	$	204,225	$	295,245	$	285,846	$	222,041	$	1,007,357
Net income attributable to Watsco, Inc.	$	23,048	$	65,423	$	57,968	$	26,490	$	172,929
Earnings per share for Common and Class B common stock (2):
Basic	$	0.65	$	1.86	$	1.64	$	0.75	$	4.91
Diluted	$	0.65	$	1.85	$	1.64	$	0.75	$	4.90

(1) Sales of residential central air conditioners, heating equipment and parts and supplies are seasonal. 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 sectors throughout most of the markets is fairly even during the year except for dependence on housing completions and related weather and economic conditions.

(2) Quarterly and year-to-date earnings per share are calculated on an individual basis; therefore, the sum of earnings per share amounts for the quarters may not equal earnings per share amounts for the year.

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Summary of Significant Accounting Policies - Additional Information (Detail)	12 Months Ended
	Dec. 31, 2016 USD ($) Entity State Store	Dec. 31, 2015 USD ($)	Dec. 31, 2014 USD ($)
Significant Accounting Policies [Line Items]
Number of joint ventures | Entity	3
Allowance for doubtful accounts	$ 6,169,000	$ 5,305,000
Capitalized vendor rebates	9,926,000	8,086,000
Goodwill and other intangible assets impairment	0	0	$ 0
Advertising expense	22,242,000	21,150,000	19,754,000
Shipping and handling costs	42,809,000	41,345,000	43,324,000
Provision (benefit) for income taxes	105,936,000	$ 104,677,000	$ 91,839,000
Adjustments for New Accounting Pronouncement
Significant Accounting Policies [Line Items]
Provision (benefit) for income taxes	$ (2,898,000)
Minimum | Buildings and Improvements
Significant Accounting Policies [Line Items]
Estimated useful lives in years	3 years
Minimum | Other Depreciable Assets
Significant Accounting Policies [Line Items]
Estimated useful lives in years	3 years
Minimum | Furniture and fixtures
Significant Accounting Policies [Line Items]
Estimated useful lives in years	5 years
Maximum | Buildings and Improvements
Significant Accounting Policies [Line Items]
Estimated useful lives in years	40 years
Maximum | Other Depreciable Assets
Significant Accounting Policies [Line Items]
Estimated useful lives in years	10 years
Maximum | Furniture and fixtures
Significant Accounting Policies [Line Items]
Estimated useful lives in years	7 years
Watsco, Inc.
Significant Accounting Policies [Line Items]
Number of locations from which entity operates | Store	565
Number of states in which entity operates | State	37

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Adoption of Amended Guidance Impact on Previously Reported Quarterly Results (Detail) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended																12 Months Ended
	Dec. 31, 2016		Sep. 30, 2016		Jun. 30, 2016		Mar. 31, 2016		Dec. 31, 2015		Sep. 30, 2015		Jun. 30, 2015		Mar. 31, 2015		Dec. 31, 2016		Dec. 31, 2015		Dec. 31, 2014
Income Statement:
Income taxes																	$ 105,936		$ 104,677		$ 91,839
Net income	$ 29,553		$ 63,099		$ 64,621		$ 25,537		$ 26,490		$ 57,968		$ 65,423		$ 23,048		$ 182,810		$ 172,929		$ 151,387
Diluted earnings per share	$ 0.81	[1]	$ 1.78	[1]	$ 1.82	[1]	$ 0.71	[1]	$ 0.75	[1]	$ 1.64	[1]	$ 1.85	[1]	$ 0.65	[1]	$ 5.15	[1]	$ 4.90	[1]	$ 4.32
Diluted weighted-average common shares outstanding																	32,616,504		32,480,356		32,358,854
Balance Sheet:
Paid-in capital	$ 592,350								$ 602,522								$ 592,350		$ 602,522
Cash Flow Statement:
Net cash provided by operating activities																	277,756		221,383		$ 144,980
Net cash used in financing activities																	$ (213,916)		$ (186,320)		$ (120,207)
As Reported
Income Statement:
Income taxes							$ 15,508
Net income							$ 34,174
Diluted earnings per share							$ 0.71
Diluted weighted-average common shares outstanding							32,537,225
Balance Sheet:
Paid-in capital							$ 610,285
Cash Flow Statement:
Net cash provided by operating activities							41,852
Net cash used in financing activities							(41,638)
As Adjusted
Income Statement:
Income taxes							14,654
Net income							$ 35,028
Diluted earnings per share							$ 0.74
Diluted weighted-average common shares outstanding							32,546,314
Balance Sheet:
Paid-in capital							$ 609,431
Cash Flow Statement:
Net cash provided by operating activities							42,706
Net cash used in financing activities							$ (42,492)

[1] 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.

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Schedule of Basic and Diluted Earnings per Common Share (Detail) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended																12 Months Ended
	Dec. 31, 2016		Sep. 30, 2016		Jun. 30, 2016		Mar. 31, 2016		Dec. 31, 2015		Sep. 30, 2015		Jun. 30, 2015		Mar. 31, 2015		Dec. 31, 2016		Dec. 31, 2015		Dec. 31, 2014
Earnings Per Share, Basic, by Common Class, Including Two Class Method [Line Items]
Net income attributable to Watsco, Inc. shareholders	$ 29,553		$ 63,099		$ 64,621		$ 25,537		$ 26,490		$ 57,968		$ 65,423		$ 23,048		$ 182,810		$ 172,929		$ 151,387
Less: distributed and undistributed earnings allocated to non-vested restricted common stock																	14,806		13,634		11,444
Earnings allocated to Watsco, Inc. shareholders - Basic																	$ 168,004		$ 159,295		$ 139,943
Weighted-average common shares outstanding - Basic																	32,582,385		32,435,961		32,308,073
Basic earnings per share for Common and Class B common stock	$ 0.81	[1]	$ 1.78	[1]	$ 1.82	[1]	$ 0.71	[1]	$ 0.75	[1]	$ 1.64	[1]	$ 1.86	[1]	$ 0.65	[1]	$ 5.16	[1]	$ 4.91	[1]	$ 4.33
Net income attributable to Watsco, Inc. shareholders	$ 29,553		$ 63,099		$ 64,621		$ 25,537		$ 26,490		$ 57,968		$ 65,423		$ 23,048		$ 182,810		$ 172,929		$ 151,387
Less: distributed and undistributed earnings allocated to non-vested restricted common stock																	14,801		13,626		11,435
Earnings allocated to Watsco, Inc. shareholders - Diluted																	$ 168,009		$ 159,303		$ 139,952
Weighted-average common shares outstanding - Basic																	32,582,385		32,435,961		32,308,073
Effect of dilutive stock options																	34,119		44,395		50,781
Weighted-average common shares outstanding - Diluted																	32,616,504		32,480,356		32,358,854
Diluted earnings per share for Common and Class B common stock	$ 0.81	[1]	$ 1.78	[1]	$ 1.82	[1]	$ 0.71	[1]	$ 0.75	[1]	$ 1.64	[1]	$ 1.85	[1]	$ 0.65	[1]	$ 5.15	[1]	$ 4.90	[1]	$ 4.32
Common Stock
Earnings Per Share, Basic, by Common Class, Including Two Class Method [Line Items]
Earnings allocated to Watsco, Inc. shareholders - Basic																	$ 154,021		$ 146,037		$ 128,214
Class B Common Stock
Earnings Per Share, Basic, by Common Class, Including Two Class Method [Line Items]
Earnings allocated to Watsco, Inc. shareholders - Basic																	$ 13,983		$ 13,258		$ 11,729

[1] 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.

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Earnings Per Share - Additional Information (Detail) - shares	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Earnings Per Share [Line Items]
Convertible Class B common stock outstanding	2,711,811	2,699,710	2,707,725
Anti-dilutive stock options excluded from earnings per share	31,839	67,014	9,984

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Schedule of Tax Effects Allocated to Each Component of Other Comprehensive Loss (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Components Of Other Comprehensive Income Loss [Line Items]
Foreign currency translation adjustment	$ 6,211	$ (39,378)	$ (21,117)
Unrealized (loss) gain on cash flow hedging instruments	(1,321)	3,716	384
Income tax benefit (expense)	356	(1,003)	(104)
Unrealized (loss) gain on cash flow hedging instruments, net of tax	(965)	2,713	280
Reclassification of loss (gain) on cash flow hedging instruments into earnings	442	(2,730)
Income tax (benefit) expense	(119)	737
Reclassification of loss (gain) on cash flow hedging instruments into earnings, net of tax	323	(1,993)
Unrealized gain (loss) on available-for-sale securities	27	(12)	1
Income tax (expense) benefit	(13)	4
Unrealized gain (loss) on available-for-sale securities, net of tax	14	(8)	1
Other comprehensive gain (loss)	$ 5,583	$ (38,666)	$ (20,836)

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Schedule of Accumulated Other Comprehensive Loss (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance	$ (46,904)	$ (23,747)
Ending balance	(43,530)	(46,904)	$ (23,747)
Foreign currency translation adjustment
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance	(47,204)	(23,623)	(11,181)
Current period other comprehensive income (loss)	3,745	(23,581)	(12,442)
Ending balance	(43,459)	(47,204)	(23,623)
Cash flow hedging instruments
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance	600	168
Current period other comprehensive income (loss)	(579)	1,628	168
Less reclassification adjustment	194	(1,196)
Ending balance	215	600	168
Available-for-sale securities
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance	(300)	(292)	(293)
Current period other comprehensive income (loss)	14	(8)	1
Ending balance	$ (286)	$ (300)	$ (292)

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Supplier Concentration - Additional Information (Detail) - Supplier Concentration Risk - Vendor	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Concentration Risk [Line Items]
Number of key suppliers	10
Cost of Goods, Total
Concentration Risk [Line Items]
Percentage of purchases from key suppliers	85.00%	84.00%	82.00%
Carrier and Its Affiliates | Cost of Goods, Total
Concentration Risk [Line Items]
Percentage of purchases from key suppliers	62.00%	62.00%	61.00%

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Property and Equipment, Net (Detail) - USD ($) $ in Thousands	Dec. 31, 2016	Dec. 31, 2015
Property, Plant and Equipment [Line Items]
Property and equipment, gross	$ 204,147	$ 166,832
Accumulated depreciation and amortization	(113,645)	(104,117)
Property and equipment, net	90,502	62,715
Land
Property, Plant and Equipment [Line Items]
Property and equipment, gross	820	820
Buildings and Improvements
Property, Plant and Equipment [Line Items]
Property and equipment, gross	71,082	69,675
Machinery, vehicles and equipment
Property, Plant and Equipment [Line Items]
Property and equipment, gross	74,640	43,150
Furniture and fixtures
Property, Plant and Equipment [Line Items]
Property and equipment, gross	15,090	14,311
Computer Hardware and Software
Property, Plant and Equipment [Line Items]
Property and equipment, gross	$ 42,515	$ 38,876

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Property and Equipment - Additional Information (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Property, Plant and Equipment [Line Items]
Depreciation and amortization expense	$ 14,853	$ 13,802	$ 12,158

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Debt - Additional Information (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Jan. 24, 2017	Dec. 31, 2015
Debt Instrument [Line Items]
Revolving credit agreement maximum borrowing capacity	$ 600,000
Revolving credit agreement maturity date	Jul. 01, 2019
Commitment fee percentage on unused portion of the commitment	0.15%
Borrowings under revolving credit agreement	$ 235,294		$ 245,300
Swingline Subfacility
Debt Instrument [Line Items]
Revolving credit agreement maximum borrowing capacity	90,000
Letter of Credit
Debt Instrument [Line Items]
Revolving credit agreement maximum borrowing capacity	50,000
Letter of Credit | Subsequent Event
Debt Instrument [Line Items]
Revolving credit agreement maximum borrowing capacity		$ 10,000
Multicurrency borrowing sublimit
Debt Instrument [Line Items]
Revolving credit agreement maximum borrowing capacity	$ 75,000
Minimum
Debt Instrument [Line Items]
Commitment fee percentage on unused portion of the commitment	0.125%
Maximum
Debt Instrument [Line Items]
Commitment fee percentage on unused portion of the commitment	0.35%
London Interbank Offer Rate
Debt Instrument [Line Items]
Basis spread	1.00%
London Interbank Offer Rate | Minimum
Debt Instrument [Line Items]
Basis spread	0.875%
London Interbank Offer Rate | Maximum
Debt Instrument [Line Items]
Basis spread	2.50%
Prime Rate
Debt Instrument [Line Items]
Basis spread	0.00%
Prime Rate | Minimum
Debt Instrument [Line Items]
Basis spread	0.00%
Prime Rate | Maximum
Debt Instrument [Line Items]
Basis spread	1.50%

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Components of Income Tax Expense (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Components Of Income Tax Expense Benefit [Line Items]
U.S. Federal	$ 86,719	$ 85,585	$ 74,561
State	9,801	9,431	10,325
Foreign	9,416	9,661	6,953
Income tax expense	105,936	104,677	91,839
Current	103,216	99,990	91,550
Deferred	2,720	4,687	289
Income tax expense	$ 105,936	$ 104,677	$ 91,839

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Income Taxes - Additional Information (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014	Dec. 31, 2013
Income Taxes [Line Items]
Percentage of income attributable to wholly-owned operations and investments for which income tax expense and effective tax rate calculated	100.00%
Undistributed earnings of foreign subsidiaries	$ 130,000
Valuation allowance	0	$ 0
Gross unrecognized tax benefits	3,695	3,513	$ 3,719	$ 3,135
Unrecognized tax benefits that, if recognized, would affect the effective tax rate	2,573	2,416
Estimated accrued interest and penalties resulting from unrecognized tax benefits	$ 414	$ 384
Minimum
Income Taxes [Line Items]
State and other net operating loss carry forwards expiration date	2017
Maximum
Income Taxes [Line Items]
State and other net operating loss carry forwards expiration date	2036
State and other
Income Taxes [Line Items]
Net operating loss carry forwards	$ 6,872
Federal
Income Taxes [Line Items]
Net operating loss carry forwards	$ 0

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Reconciliation of Effective Income Tax Rate (Detail)	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Reconciliation of Effective Income Tax Rate [Line Items]
U.S. federal statutory rate	35.00%	35.00%	35.00%
State income taxes, net of federal benefit and other	2.10%	2.30%	3.00%
Excess tax benefits from share-based compensation	(1.00%)
Tax effects on foreign income	(0.10%)	(0.30%)	(1.00%)
Effective income tax rate attributable to Watsco, Inc.	36.00%	37.00%	37.00%
Taxes attributable to non-controlling interest	(5.00%)	(5.40%)	(6.40%)
Effective income tax rate	31.00%	31.60%	30.60%

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Significant Components of Current and Long-Term Deferred Tax Assets and Liabilities (Detail) - USD ($) $ in Thousands		Dec. 31, 2016	Dec. 31, 2015
Components Of Deferred Income Tax Assets And Liabilities [Line Items]
Capitalized inventory costs and inventory reserves		$ 2,301	$ 1,794
Allowance for doubtful accounts		1,379	1,053
Self-insurance reserves		500	519
Other current deferred tax assets		1,778	1,921
Total current deferred tax assets	[1]	5,958	5,287
Share-based compensation		26,239	23,603
Other long-term deferred tax assets		449	352
Net operating loss carryforwards		209	207
Total long-term deferred tax assets		26,897	24,162
Valuation allowance		0	0
Total long-term deferred tax assets	[2]	26,897	24,162
Other current deferred tax liabilities		(473)	(686)
Total current deferred tax liabilities	[1]	(473)	(686)
Deductible goodwill		(88,581)	(83,868)
Depreciation		(5,883)	(3,774)
Other long-term deferred tax liabilities		(1,160)	(1,533)
Total long-term deferred tax liabilities	[2]	(95,624)	(89,175)
Net deferred tax liabilities		$ (63,242)	$ (60,412)

[1] Current deferred tax assets and liabilities have been included in the consolidated balance sheets in other current assets.

[2] Long-term deferred tax assets and liabilities have been included in the consolidated balance sheets in deferred income taxes and other liabilities.

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Changes in Gross Unrecognized Tax Benefits (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Income Tax Contingency [Line Items]
Beginning balance	$ 3,513	$ 3,719	$ 3,135
Additions based on tax positions related to the current year	547	871	751
Reductions due to lapse of applicable statute of limitations	(365)	(1,077)	(167)
Ending balance	$ 3,695	$ 3,513	$ 3,719

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Share-Based Compensation and Benefit Plans - Additional Information (Detail) $ / shares in Units, $ in Thousands	12 Months Ended
	Dec. 31, 2016 USD ($) Age $ / shares shares	Dec. 31, 2015 USD ($) $ / shares shares	Dec. 31, 2014 USD ($) $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options of common stock outstanding	294,250	257,334
Total intrinsic value of stock options exercised | $	$ 4,490	$ 7,525	$ 3,746
Cash received from Common stock issued | $	4,447	4,850	3,324
Common stock contribution to 401(k) plan | $	$ 2,348	$ 1,963	$ 1,759
Employee Stock Purchase Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Aggregate shares of common stock that may be granted	1,500,000
Shares reserved for future grant	496,160
Number of days under which shares to be purchased by employee on such available	90 days
Discount allowed to employees to purchase share	5.00%
Shares purchased under ESPP	5,956	6,463	6,995
Average price of the shares purchased by employees | $ / shares	$ 125.84	$ 112.53	$ 90.89
Additional shares issued resulting from cash dividends reinvested in common stock	3,442	3,183	2,953
Net proceeds from shares purchased under ESPP | $	$ 1,206	$ 1,107	$ 921
2014 Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Percent of market price that share-based compensation awards are granted at	100.00%
Aggregate shares of common stock that may be granted	2,000,000
Shares reserved for future grant	1,424,848
Contractual term of stock option awards	5 years
2014 Plan | Minimum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Years in which options plan vest	2 years
2014 Plan | Maximum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Years in which options plan vest	4 years
2014 Plan | Common Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares awarded under plan	293,950
2014 Plan | Common and Class B Common Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares reserved for future grant	45,421
2014 Plan | Class B Common Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares awarded under plan	326,623
401(k) Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Common stock contribution to 401(k) Plan, shares	20,045	18,343	18,309
Common stock contribution to 401(k) plan | $	$ 2,348	$ 1,963	$ 1,759
2001 Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Aggregate shares of common stock that may be granted	0
Contractual term of stock option awards	5 years
Options of common stock outstanding	37,750
2001 Plan | Minimum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Years in which options plan vest	2 years
2001 Plan | Maximum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Years in which options plan vest	4 years
Non-Vested Restricted Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Weighted-average grant date fair value of non-vested (restricted) stock | $ / shares	$ 130.01	$ 114.55	$ 96.84
Fair value of non-vested stock that vested | $	$ 10,096	$ 2,468	$ 5,789
Shares withheld as payment for tax withholdings related to share based compensation, shares		7,206	21,028
Shares withheld as payment for tax withholdings related to share based compensation, market value | $		$ 889	$ 2,125
Unrecognized share-based compensation expense | $	$ 100,397
Weighted-average period for recognition of share-based compensation expense, in years	11 years
Non-Vested Restricted Stock | Chief Executive Officer
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized share-based compensation expense | $	$ 59,000
Weighted-average period for recognition of share-based compensation expense, in years	10 years
Shares of non-vested (restricted) stock obligated to issue in connection with incentive compensation agreements	67,853
Non-Vested Restricted Stock | Chief Executive Officer | Share-based Compensation Award, Tranche One
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized share-based compensation expense | $	$ 13,000
Weighted-average period for recognition of share-based compensation expense, in years	6 years
Age of Chief Executive Officer when non-vested (restricted) stock vests | Age	82
Non-Vested Restricted Stock | Chief Executive Officer | Share-based Compensation Award, Tranche Two
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized share-based compensation expense | $	$ 46,000
Weighted-average period for recognition of share-based compensation expense, in years	10 years
Age of Chief Executive Officer when non-vested (restricted) stock vests | Age	86
Non-Vested Restricted Stock | Employee [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Age of employee when non-vested (restricted) stock vests | Age	62
Non-Vested Restricted Stock | President [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Weighted-average period for recognition of share-based compensation expense, in years	27 years
Shares of non-vested (restricted) stock obligated to issue in connection with incentive compensation agreements	25,774
Non-Vested Restricted Stock | Common and Class B Common Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares withheld as payment for tax withholdings related to share based compensation, shares	30,413
Shares withheld as payment for tax withholdings related to share based compensation, market value | $	$ 3,967
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized share-based compensation expense | $	$ 2,096
Weighted-average period for recognition of share-based compensation expense, in years	1 year 9 months 18 days
Fair value of stock options vested | $	$ 736	$ 856	$ 1,145
Stock Options | Common Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares withheld as payment for tax withholdings related to share based compensation, shares	348	26,006	5,454
Shares withheld as payment for tax withholdings related to share based compensation, market value | $	$ 51	$ 3,251	$ 490

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Summary of Stock Option Activity (Detail) $ / shares in Units, $ in Thousands	12 Months Ended
	Dec. 31, 2016 USD ($) $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options, Outstanding beginning balance | shares	257,334
Options, Granted | shares	107,000
Options, Exercised | shares	(63,084)
Options, Forfeited | shares	(7,000)
Options, Outstanding ending balance | shares	294,250
Options, Exercisable | shares	24,419
Weighted-Average Exercise Price, Outstanding beginning balance | $ / shares	$ 102.96
Weighted-Average Exercise Price, Granted | $ / shares	140.41
Weighted-Average Exercise Price, Exercised | $ / shares	71.18
Weighted-Average Exercise Price, Forfeited | $ / shares	127.56
Weighted-Average Exercise Price, Outstanding ending balance | $ / shares	122.80
Weighted-Average Exercise Price, Exercisable | $ / shares	$ 109.81
Weighted-Average Remaining Contractual Term (in years), Outstanding	3 years 6 months 22 days
Weighted-Average Remaining Contractual Term (in years), Exercisable	2 years 11 months 1 day
Aggregate Intrinsic Value, Outstanding | $	$ 7,451
Aggregate Intrinsic Value, Exercisable | $	$ 935

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Summary of Non-Vested Restricted Stock Activity (Detail) - Non-Vested Restricted Stock - $ / shares	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares, Non-vested beginning balance	2,819,196
Shares, Granted	183,144
Shares, Vested	(77,450)
Shares, Forfeited	(26,000)
Shares, Non-vested ending balance	2,898,890	2,819,196
Weighted-Average Grant Date Fair Value, Non-vested beginning balance	$ 49.99
Weighted-Average Grant Date Fair Value, Granted	130.01	$ 114.55	$ 96.84
Weighted-Average Grant Date Fair Value, Vested	63.26
Weighted-Average Grant Date Fair Value, Forfeited	112.79
Weighted-Average Grant Date Fair Value, Non-vested ending balance	$ 54.13	$ 49.99

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Weighted-Average Assumptions Used for Stock Options Granted (Detail) - $ / shares	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected term in years	4 years 3 months	4 years 3 months	4 years 3 months
Risk-free interest rate	1.24%	1.25%	1.35%
Expected volatility	18.65%	20.96%	22.07%
Expected dividend yield	2.54%	2.29%	1.69%
Grant date fair value	$ 16.37	$ 17.17	$ 15.75

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Share-Based Compensation Expense (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense	$ 12,319	$ 12,596	$ 11,473
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense	1,149	952	801
Non-Vested Restricted Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense	$ 11,170	$ 11,644	$ 10,672

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Purchase of Additional Ownership Interest in Joint Ventures - Additional Information (Detail) - USD ($) $ in Thousands	Feb. 13, 2017	Nov. 29, 2016	Jul. 01, 2014
Carrier Enterprise II
Business Acquisition [Line Items]
Additional ownership interest acquired		10.00%
Cash consideration		$ 42,909
Carrier Enterprise II | Subsequent Event
Business Acquisition [Line Items]
Additional ownership interest acquired	10.00%
Cash consideration	$ 42,688
Controlling interest, ownership percentage	80.00%
Carrier Enterprise I
Business Acquisition [Line Items]
Additional ownership interest acquired			10.00%
Cash consideration			$ 87,735
Controlling interest, ownership percentage			80.00%

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Changes in Carrying Amount of Goodwill (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015
Goodwill [Line Items]
Goodwill, Beginning Balance	$ 378,310	$ 387,311
Foreign currency translation adjustment	1,427	(9,001)
Goodwill, Ending Balance	$ 379,737	$ 378,310

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Other Intangible Assets (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015
Intangible Assets [Line Items]
Indefinite lived intangible assets - Trade names, trademarks and distribution rights	$ 120,288	$ 118,205
Finite lived intangible assets:
Accumulated amortization	(33,437)	(28,224)
Finite lived intangible assets, net	38,276	42,276
Intangible assets, net	158,564	160,481
Customer Relationships
Finite lived intangible assets:
Finite lived intangible assets	$ 70,194	68,981
Customer Relationships | Minimum
Intangible Assets [Line Items]
Finite lived intangible assets, Estimated Useful lives, years	10 years
Customer Relationships | Maximum
Intangible Assets [Line Items]
Finite lived intangible assets, Estimated Useful lives, years	15 years
Trade Name
Intangible Assets [Line Items]
Finite lived intangible assets, Estimated Useful lives, years	10 years
Finite lived intangible assets:
Finite lived intangible assets	$ 1,150	1,150
Noncompete Agreements
Intangible Assets [Line Items]
Finite lived intangible assets, Estimated Useful lives, years	7 years
Finite lived intangible assets:
Finite lived intangible assets	$ 369	$ 369

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Goodwill and Other Intangible Assets - Additional Information (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Goodwill And Intangible Assets [Line Items]
Amortization expense related to finite lived intangible assets	$ 5,213	$ 5,315	$ 5,769
Amortization of finite lived intangible assets for 2017	5,200
Amortization of finite lived intangible assets for 2018	5,200
Amortization of finite lived intangible assets for 2019	5,200
Amortization of finite lived intangible assets for 2020	5,200
Amortization of finite lived intangible assets for 2021	$ 4,300

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Shareholders' Equity - Additional Information (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014	Sep. 30, 1999
Stockholders Equity Note [Line Items]
Preferred stock outstanding	0	0
Number of shares authorized to be repurchased				7,500,000
Treasury stock, shares repurchased	0	0	0
Cost of repurchased shares	$ 114,425	$ 114,425
Remaining number of shares authorized to be repurchased	1,129,087
Common Stock
Stockholders Equity Note [Line Items]
Amount of votes common stock is entitled	One
Percentage of Board entitled to elect	25.00%
Treasury stock, shares	6,322,650	6,322,650
Class B Common Stock
Stockholders Equity Note [Line Items]
Amount of votes common stock is entitled	Ten
Treasury stock, shares	48,263	48,263

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Financial Instruments - Additional Information (Detail) - USD ($)	Dec. 31, 2016	Dec. 31, 2015
Financial Instrument [Line Items]
Estimated fair value of contingent liability	$ 0
Standby Letters of Credit
Financial Instrument [Line Items]
Fair value of contingent liability	2,430,000	$ 2,690,000
Performance Bonds
Financial Instrument [Line Items]
Fair value of contingent liability	$ 8,000,000	$ 4,000,000

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Derivatives - Additional Information (Detail) - Foreign Currency Forward Contracts - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Derivatives not Designated as Hedging Instruments
Derivative Instruments and Hedging Activities Disclosures [Line Items]
Notional value of derivatives	$ 4,650
Contract expiring terms	2017-03
(Losses) gains from foreign currency forward contracts not designated as hedging instruments	$ (306)	$ 2,552	$ 142
Cash Flow Hedge
Derivative Instruments and Hedging Activities Disclosures [Line Items]
Notional value of derivatives	$ 33,200
Contract maturity period	One year or less
Contract expiring terms	2017-09
Pre-tax gain to be reclassified into earnings within the next 12 months	$ 490

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Impact from Foreign Exchange Derivative Instruments Designated as Cash Flow Hedges (Detail) - Cash Flow Hedge - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015
Derivative Instruments, Gain (Loss) [Line Items]
(Loss) gain recorded in accumulated other comprehensive loss	$ (1,321)	$ 3,716
Loss (gain) reclassified from accumulated other comprehensive loss into earnings	$ 442	$ (2,730)

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Fair Value of Derivative Instruments and Location in the Balance Sheets (Detail) - Foreign Currency Forward Contracts - USD ($) $ in Thousands	Dec. 31, 2016	Dec. 31, 2015
Derivatives, Fair Value [Line Items]
Derivative instruments, assets derivatives	$ 241	$ 1,249
Derivative instruments, liabilities derivatives	39	7
Derivatives Designated as Hedging Instruments
Derivatives, Fair Value [Line Items]
Derivative instruments, assets derivatives	227	923
Derivative instruments, liabilities derivatives	35	3
Derivatives not Designated as Hedging Instruments
Derivatives, Fair Value [Line Items]
Derivative instruments, assets derivatives	14	326
Derivative instruments, liabilities derivatives	$ 4	$ 4

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Assets and Liabilities Carried at Fair Value Measured on Recurring Basis (Detail) - USD ($) $ in Thousands	Dec. 31, 2016	Dec. 31, 2015
Other assets
Assets:
Available-for-sale securities	$ 281	$ 254
Other Current Assets
Assets:
Derivative financial instruments	241	1,249
Accrued expenses and other current liabilities
Liabilities:
Derivative financial instruments	39	7
Fair Value Measurements, Level 1 | Other assets
Assets:
Available-for-sale securities	281	254
Fair Value Measurements, Level 2 | Other Current Assets
Assets:
Derivative financial instruments	241	1,249
Fair Value Measurements, Level 2 | Accrued expenses and other current liabilities
Liabilities:
Derivative financial instruments	$ 39	$ 7

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Commitments and Contingencies - Additional Information (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Commitments and Contingencies Disclosure [Line Items]
Self-insurance reserves	$ 2,951	$ 3,214
Maximum exposure to loss related to involvement with variable interest entity	$ 4,300
Operating leases maximum maturity date	2025
Rental expense	$ 83,260	$ 82,581	$ 81,155
Carrier and Its Affiliates
Commitments and Contingencies Disclosure [Line Items]
Non-cancelable purchase obligations for goods	29,000
Key Suppliers
Commitments and Contingencies Disclosure [Line Items]
Non-cancelable purchase obligations for goods	$ 17,000

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Future Minimum Leases Payments under Non-Cancelable Operating Leases (Detail) $ in Thousands	Dec. 31, 2016 USD ($)
Operating Leases Future Minimum Payments Due [Line Items]
2017	$ 56,639
2018	48,420
2019	35,926
2020	21,650
2021	13,184
Thereafter	13,362
Total minimum payments	$ 189,181

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Related Party Transactions - Additional Information (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Supplier Concentration Risk | Cost of Goods, Total
Related Party Transaction [Line Items]
Percentage of purchases from key suppliers	85.00%	84.00%	82.00%
Carrier and Its Affiliates | Supplier Concentration Risk
Related Party Transaction [Line Items]
Amount payable to Carrier and its affiliates, net of receivables	$ 63,000	$ 85,000
Revenues from sales to Carrier and its affiliates	$ 56,000	$ 62,000	$ 38,000
Carrier and Its Affiliates | Supplier Concentration Risk | Cost of Goods, Total
Related Party Transaction [Line Items]
Percentage of purchases from key suppliers	62.00%	62.00%	61.00%
Moss & Associates LLC | Customary Payments for Remodeling of Corporate Headquarters
Related Party Transaction [Line Items]
Payment for related party transaction	$ 291
Payable for related party transaction	$ 109

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Revenues and Long-Lived Assets by Geographical Area (Detail) - USD ($) $ in Thousands	3 Months Ended																12 Months Ended
	Dec. 31, 2016		Sep. 30, 2016	[1]	Jun. 30, 2016	[1]	Mar. 31, 2016	[1]	Dec. 31, 2015		Sep. 30, 2015	[1]	Jun. 30, 2015	[1]	Mar. 31, 2015	[1]	Dec. 31, 2016		Dec. 31, 2015		Dec. 31, 2014
Geographic Area Information [Line Items]
Revenues	$ 913,611	[1]	$ 1,241,232		$ 1,214,435		$ 851,424		$ 903,816	[1]	$ 1,177,012		$ 1,223,439		$ 808,972		$ 4,220,702	[1]	$ 4,113,239	[1]	$ 3,944,540
Long-Lived Assets	628,803								601,506								628,803		601,506
UNITED STATES
Geographic Area Information [Line Items]
Revenues																	3,813,204		3,710,977		3,525,176
Long-Lived Assets	467,728								441,656								467,728		441,656
CANADA
Geographic Area Information [Line Items]
Revenues																	267,220		263,908		300,289
Long-Lived Assets	155,758								154,437								155,758		154,437
MEXICO
Geographic Area Information [Line Items]
Revenues																	140,278		138,354		$ 119,075
Long-Lived Assets	$ 5,317								$ 5,413								$ 5,317		$ 5,413

[1] Sales of residential central air conditioners, heating equipment and parts and supplies are seasonal. 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 sectors throughout most of the markets is fairly even during the year except for dependence on housing completions and related weather and economic conditions.

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Supplemental Cash Flow Information (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Cash Flow Supplemental Disclosures [Line Items]
Interest paid	$ 3,362	$ 4,993	$ 4,393
Income taxes net of refunds	$ 99,006	$ 103,261	$ 82,850

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Subsequent Events - Additional Information (Detail) - USD ($) $ / shares in Units, $ in Thousands				12 Months Ended
	Feb. 13, 2017	Jan. 03, 2017	Nov. 29, 2016	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014	Jan. 24, 2017
Subsequent Event [Line Items]
Cash dividend				$ 3.60	$ 2.80	$ 2.00
Revolving credit agreement maximum borrowing capacity				$ 600,000
Carrier Enterprise II
Subsequent Event [Line Items]
Additional ownership interest acquired			10.00%
Cash consideration			$ 42,909
Carrier Enterprise II | Subsequent Event
Subsequent Event [Line Items]
Additional ownership interest acquired	10.00%
Cash consideration	$ 42,688
Controlling interest, ownership percentage	80.00%
Letter of Credit
Subsequent Event [Line Items]
Revolving credit agreement maximum borrowing capacity				$ 50,000
Letter of Credit | Subsequent Event
Subsequent Event [Line Items]
Revolving credit agreement maximum borrowing capacity							$ 10,000
Common Stock | Subsequent Event
Subsequent Event [Line Items]
Cash dividend		$ 1.05
Dividends, date declared		Jan. 03, 2017
Dividends, payable date		Jan. 31, 2017
Dividends, date of record		Jan. 17, 2017
Class B Common Stock | Subsequent Event
Subsequent Event [Line Items]
Cash dividend		$ 1.05
Dividends, date declared		Jan. 03, 2017
Dividends, payable date		Jan. 31, 2017
Dividends, date of record		Jan. 17, 2017

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Selected Quarterly Financial Data (Detail) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended																12 Months Ended
	Dec. 31, 2016		Sep. 30, 2016		Jun. 30, 2016		Mar. 31, 2016		Dec. 31, 2015		Sep. 30, 2015		Jun. 30, 2015		Mar. 31, 2015		Dec. 31, 2016		Dec. 31, 2015		Dec. 31, 2014
Quarterly Financial Data [Line Items]
Revenues	$ 913,611	[1]	$ 1,241,232	[1]	$ 1,214,435	[1]	$ 851,424	[1]	$ 903,816	[1]	$ 1,177,012	[1]	$ 1,223,439	[1]	$ 808,972	[1]	$ 4,220,702	[1]	$ 4,113,239	[1]	$ 3,944,540
Gross profit	228,072		302,204		291,861		212,447		222,041		285,846		295,245		204,225		1,034,584		1,007,357		956,402
Net income attributable to Watsco, Inc.	$ 29,553		$ 63,099		$ 64,621		$ 25,537		$ 26,490		$ 57,968		$ 65,423		$ 23,048		$ 182,810		$ 172,929		$ 151,387
Earnings per share for Common and Class B common stock:
Basic	$ 0.81	[2]	$ 1.78	[2]	$ 1.82	[2]	$ 0.71	[2]	$ 0.75	[2]	$ 1.64	[2]	$ 1.86	[2]	$ 0.65	[2]	$ 5.16	[2]	$ 4.91	[2]	$ 4.33
Diluted	$ 0.81	[2]	$ 1.78	[2]	$ 1.82	[2]	$ 0.71	[2]	$ 0.75	[2]	$ 1.64	[2]	$ 1.85	[2]	$ 0.65	[2]	$ 5.15	[2]	$ 4.90	[2]	$ 4.32

[1] Sales of residential central air conditioners, heating equipment and parts and supplies are seasonal. 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 sectors throughout most of the markets is fairly even during the year except for dependence on housing completions and related weather and economic conditions.

[2] Quarterly and year-to-date earnings per share are calculated on an individual basis; therefore, the sum of earnings per share amounts for the quarters may not equal earnings per share amounts for the year.