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, 2018

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 every Interactive Data File required to be submitted 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 such files).    YES  ☒    NO  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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 29, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $5,768 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 29, 2018 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 25, 2019 comprised (i) 32,137,525 shares of Common stock, excluding 4,823,988 treasury shares, and (ii) 5,397,345 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 2018 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 2019 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, 2018

INDEX

		Page
PART I
Item 1.	Business		3
Item 1A.	Risk Factors		11
Item 1B.	Unresolved Staff Comments		15
Item 2.	Properties		15
Item 3.	Legal Proceedings		15
Item 4.	Mine Safety Disclosures		16
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		16
Item 6.	Selected Financial Data		17
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		18
Item 8.	Financial Statements and Supplementary Data		18
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		18
Item 9A.	Controls and Procedures		18
Item 9B.	Other Information		18
PART III
PART IV
Item 15.	Exhibits, Financial Statement Schedules		19
Item 16.	Form 10-K Summary		21
SIGNATURES			22

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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,” “goal,” “designed,” 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 and investments in unconsolidated entities, (iv) financing plans, and (v) industry, demographic, and other trends affecting our financial condition or results of operations. These forward-looking statements are based on management’s current expectations, are not guarantees of future performance and are subject to a number of risks, uncertainties, and changes in circumstances, certain of which are beyond our control. Actual results could differ materially from these forward-looking statements as a result of several factors, including, but not limited to:

• general economic conditions, both in the U.S. and in international markets served;

• competitive factors within the HVAC/R industry;

• effects of supplier concentration;

• fluctuations in certain commodity costs;

• consumer spending;

• consumer debt levels;

• new housing starts and completions;

• capital spending in the commercial construction market;

• access to liquidity needed for operations;

• seasonal nature of product sales;

• weather patterns and conditions;

• insurance coverage risks;

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

• prevailing interest rates;

• foreign currency exchange rate fluctuations;

• international 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, 2018, we operated from 571 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 90,000 active contractors and dealers that service the replacement and

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new construction markets. Our revenues in HVAC/R distribution have increased from $64.1 million in 1989 to $4.5 billion in 2018, 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.

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 2019 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 $96.0 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 (“UTC”); 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 locations and independent distributors who, in turn, supply the equipment and related parts and supplies to contractors and dealers 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 to address both regulatory mandates as well as consumer optionality, 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 2018 there are approximately 91 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 long-term provides a growing and stable replacement market.

Additionally, we sell a variety of non-equipment products, representing approximately 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

Watsco began its HVAC/R distribution strategy in 1989 and has grown by using a “buy and build” philosophy, resulting in substantial long-term growth in revenues and profits. The “buy” component of the strategy has focused on acquiring or investing in 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 encouraging growth at acquired companies, by adding products and locations to better serve customers, investing in scalable technologies, and exchanging ideas and business concepts amongst leadership teams. Newly acquired businesses have access to our capital resources and established vendor relationships to provide their customers with an expanded array

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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.

Culture of Innovation & Technology Strategy

In recent years, we have established a strong culture of innovation, whereby people, processes and technology have rapidly evolved to modernize and digitize our business. With this digital evolution in mind, our efforts have addressed how customers are served, how internal processes and practices can be improved, and how data and analytics can be created and used to enhance long-term performance. Investments include the addition of more than 200 technology employees along with investments in our locations and infrastructure to enable these technologies.

To that end, several scalable technology platforms have been launched with the largest focus on customer-obsessed technologies, which are improving and transforming the customer experience at all of our locations. Specific initiatives include: (i) mobile applications for iOS and Android devices to help customers operate more efficiently and interact with our locations more easily; (ii) e-commerce between our customers and our subsidiaries; (iii) supply chain optimization; (iv) building and maintaining the largest source of digitized HVAC/R product information; and (v) the development of business intelligence systems and related data sets, which provide enhanced management tools. In addition, through our subsidiary Watsco Ventures LLC (“Watsco Ventures”), we have developed (internally and through external collaboration) a variety of early-stage technologies with the goal of helping contractor customers grow and become more profitable, and otherwise compliment the initiatives set forth above.

To further extend our technology reach, in August 2018, we acquired Alert Labs Inc., a company based in Kitchener, Ontario, Canada that develops, designs and builds “internet of things,” or IoT, hardware and software, including cloud-based and mobile solutions aimed at protecting homes and businesses from property damage and unnecessary expenses. Alert Labs has also furthered the development of Sentree, an IoT device developed by Watsco Ventures. Sentree attaches to an existing HVAC system and, through a proprietary cloud-based software platform, remotely measures, collects and analyzes vital performance analytics.

Strategy in Existing Markets

Our strategy for growth in existing markets focuses on customer service, product expansion, and the implementation of technology 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, (v) collaborating with customers to advertise and market their business and services in local markets, and (vi) 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, allows us to compete effectively in these markets.

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.

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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 our 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 and investing in businesses that either complement our current presence in existing markets or establish a presence in new geographic markets. Since 1989, we have acquired 60 HVAC/R distribution businesses, six of which currently operate as primary operating subsidiaries. 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, investments and/or joint ventures to allow further penetration in existing markets and expansion into new geographic markets.

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 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 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 67% of our revenues for both the years ended December 31, 2018 and 2017. Sales of other HVAC products, which we currently source from approximately 1,200 vendors, comprised 29% and 28% of our revenues for the years ended December 31, 2018 and 2017, respectively. Sales of commercial refrigeration products, which we currently source from approximately 150 vendors, accounted for 4% and 5% of our revenues for the years ended December 31, 2018 and 2017, respectively.

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Distribution and Sales

At December 31, 2018, we operated from 571 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 950 salespeople, averaging 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, 2018			Number of Locations as of December 31, 2018
United States		88	%		509
Canada		6	%		36
Latin America and the Caribbean		6	%		26
Total		100	%		571

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 significant 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, 2018:

Florida	103
Texas	83
North Carolina	45
California	36
Georgia	34
South Carolina	31
Virginia	22
Tennessee	21
Louisiana	18
New York	13
Alabama	10
Arizona	8
Massachusetts	8
Mississippi	8
Missouri	8
Connecticut	6
Maryland	6
Kansas	5
New Jersey	5
Oklahoma	5
Utah	5
Arkansas	4
Pennsylvania	3
Indiana	2
Iowa	2
Kentucky	2
Maine	2
Nebraska	2
Nevada	2
South Dakota	2
West Virginia	2
Colorado	1
New Hampshire	1
New Mexico	1
North Dakota	1
Rhode Island	1
Vermont	1
United States	509
Canada	36
Mexico	14
Puerto Rico	12
Total	571

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 the Northeast U.S. and we contributed 14 locations in the Northeast U.S. 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, 2018. 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 90,000 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 2018, 2017 or 2016 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 based on 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, 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 84% of our purchases, including 62% from Carrier, and 9% 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 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 and 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 for particular branded products 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 manufacturers’ 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 weather patterns, particularly during 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 sectors throughout most of the markets we serve tends to be fairly evenly distributed throughout the year and depends largely on housing completions and related weather and economic conditions.

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 5,200 employees as of December 31, 2018, substantially all of whom are non-union employees. Most of our 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, but not limited to, the Occupational, Safety and Health Act. We believe that we operate our business in compliance with all applicable federal, state and local laws, 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 effected changes to the minimum required efficiency of HVAC systems. The DOE 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, the national minimum standard for energy efficiency was 13 SEER (seasonal energy efficiency rating, the metric used to measure energy efficiency) for all HVAC 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, we began transitioning our 13 SEER inventory in the effected regions to the higher-efficiency 14 SEER inventory, and we completed this transition in 2016 in accordance with the timeline required by the mandate.

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 84% of our purchases during 2018, including 62% from Carrier, and 9% from Rheem. Carrier provides a diverse variety of brands of HVAC systems including, Carrier, Bryant, Payne, Tempstar, Heil, Comfortmaker and Grandaire, along with complimentary replacement parts. Rheem provides Rheem-brand HVAC systems along with complimentary replacement parts. 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.

Many HVAC equipment and component manufacturers, including Carrier and Rheem, source component parts from China 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 and China as a result of amendments to existing trade agreements, 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.

On November 26, 2018, the parent company of Carrier, UTC, announced that it intends to separate into three independent companies consisting of its aerospace business, its elevator business, Otis, and Carrier. UTC indicated the proposed separation is expected to be effected through tax-free spin-offs of Otis and Carrier, subject to the completion of financing and satisfaction of customary conditions, and is expected to be completed in 2020, with separation activities occurring over 18-24 months. It is too early to determine whether the proposed spin-off of Carrier will have any impact on us and our results of operations nor can there be assurances regarding the ultimate timing of the separation or that the separation will be completed.

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Risks Inherent in Acquisitions

As part of our strategy, we intend to pursue additional acquisitions of complementary businesses, including through joint ventures and investments in unconsolidated entities. If we complete future acquisitions, including investments in unconsolidated entities, 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 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 and investments made in unconsolidated entities may have liabilities that we failed or were unable to discover while 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 other distributors and 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.

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 evenly distributed throughout the year and depends largely on housing completions and related weather and economic conditions.

Dependence on Key Personnel

Much of our success has depended on the skills and experience of senior management personnel. The loss of any of our executive officers or other key senior management personnel could harm our business. We must continuously recruit, retain, and motivate management and other employees to both maintain our current business and to execute our strategic initiatives. Our success has also depended on the contributions and abilities of our store employees upon whom we rely 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 adequately recruit, retain, and motivate employees our projected growth and expansion, and our business and financial performance may be adversely affected.

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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. 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 us to 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 other 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 extend us credit, 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 for working capital, acquisitions, capital expenditures, and other corporate purposes.

Cybersecurity Risks

In addition to the disruptions that may occur from interruptions in our information technology systems, cybersecurity threats and sophisticated and targeted cyberattacks pose a risk to our information technology systems. We have established security policies, processes and defenses designed to help identify and protect against intentional and unintentional misappropriation or corruption of our information technology systems and information and disruption of our operations. Despite these efforts, our information technology systems may be damaged, disrupted or shut down due to attacks by unauthorized access, malicious software, computer viruses, undetected intrusion, hardware failures or other events, and in these circumstances our disaster recovery plans may be ineffective or inadequate. These breaches or intrusions could lead to business interruption, exposure of proprietary or confidential information, data corruption, damage to our reputation, exposure to legal and regulatory proceedings and other costs. Such events could have a material adverse impact on our financial condition, results of operations and cash flows. In addition, we could be adversely affected if any of our significant customers or suppliers experiences any similar events that disrupt their business operations or damage their reputation.

We maintain monitoring practices and protections of our information technology to reduce these risks and test our systems on an ongoing basis for potential threats. We carry cybersecurity insurance to help mitigate the financial exposure and related notification procedures in the event of intentional intrusion. There can be no assurance, however, that our efforts will prevent the risk of a security breach of our databases or systems that could adversely affect our business.

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, Intangibles and Long-Lived Assets

At December 31, 2018, goodwill, intangibles, and long-lived assets represented approximately 29% of our total assets. The recoverability of goodwill, indefinite lived intangibles, and long-lived assets 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, indefinite lived intangibles, and long-lived assets are based on the best information available as of the date of the assessment and incorporates management’s assumptions about expected future cash flows and contemplates other valuation techniques. Future cash flows can be affected by changes in the industry, a declining economic environment, or market conditions. We cannot assure you that we will not suffer material impairments to goodwill, intangibles, or long-lived assets in the future.

Risks Related to Loss Contingencies

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 at reasonable premiums. There can be no assurance that the coverage limits and related premiums of such policies will be adequate to cover claims, losses and expenses for lawsuits which have been, or 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.

Risks Related to our Common Stock

Class B Common Stock and Insider Ownership

As of December 31, 2018, 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 52% 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.

Our Class B common stock is substantially identical to our Common stock except: (i) Common stock is entitled to one vote on all matters submitted to a vote of our shareholders, and each share of Class B common stock is entitled to ten votes; (ii) shareholders of Common stock are entitled to elect 25% of our 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.

Future Sales

In 2017, we issued and sold an aggregate of approximately $250.0 million of our Common stock under our previously reported “at the market” offering program. We are not restricted from issuing additional shares of our Common stock or Class B common stock (which we refer to together as common stock), including securities that are convertible into or exchangeable for, or that represent the right to receive, our common stock or any substantially similar securities in the future. We may issue shares of our common stock or other securities in one or more registered or unregistered offerings, and we may also issue our securities in connection with investments or acquisitions. The number of shares of our common stock issued in connection with any of the foregoing may result in dilution to holders of our common stock.

Volatility

The market price of our common stock may be highly volatile and could be subject to wide fluctuations. Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of shares of our common stock in spite of our operating performance. The trading price of our common stock may be adversely affected due to a number of factors, most of which we cannot predict or control, such as the following:

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• fluctuations in our operating results;

• a decision by the Board of Directors to reduce or eliminate cash dividends on our common stock;

• changes in recommendations or earnings estimates by securities analysts;

• general market conditions in our industry or in the economy as a whole; and

• political instability, natural disasters, war and/or events of terrorism.

Trading Liquidity

The trading market for our common stock is limited, and there can be no assurance that a more liquid trading market for our common stock will develop. There can be no assurance as to the liquidity of any market for our common stock, the ability of the holders of our common stock to sell any of their securities and the price at which the holders of our common stock will be able to sell such securities.

Payment of Dividends

The amount of any future dividends that we will pay, if any, will depend upon a number of factors. 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. The right of our Board of Directors to declare dividends, however, is subject to the availability of sufficient funds under Florida law to pay dividends. In addition, our ability to pay dividends depends on certain restrictions in our credit agreement.

Securities Analyst Research and Reports

The trading markets for our common stock rely in part on the research and reports that industry or financial analysts publish about us or our business or industry. If one or more of the analysts who cover us downgrade our stock or our industry, or the stock of any of our competitors, or publish negative or unfavorable research about our business, the price of our stock could decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.

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, 2018, we operated 571 warehousing and distribution facilities across 37 U.S. states, Canada, Mexico, and Puerto Rico, having an aggregate of approximately 12.2 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, 2018, we operated 592 ground transport vehicles, including delivery and pick-up trucks, vans, and tractors. Of this number, 382 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 Facilities

Senior management and support staff are located at various administrative offices in approximately 0.2 million square feet of space.

ITEM 3. LEGAL PROCEEDINGS

Information with respect to this item may be found in Note 18 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.

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ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

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

Market Information

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.

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 Russell 2000 index, the S&P MidCap 400 index, and the S&P 500 index. Given our position as the largest distributor of HVAC/R equipment, parts and supplies in North America, our unique, sole line of business, the nature of our customers (air conditioning and heating contractors), and the products and markets we serve, we cannot reasonably identify an appropriate peer group; therefore, we have included in the graph below the performance of the Russell 2000 index, the S&P MidCap 400 index, and the S&P 500 index, which contain 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, 2013 and its relative performance is tracked through December 31, 2018.

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.

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	12/31/13		12/31/14		12/31/15		12/31/16		12/31/17		12/31/18
Watsco, Inc.		100.00		113.80		127.50		165.74		196.18		165.72
Watsco Class B		100.00		113.23		128.59		165.41		193.71		160.00
Russell 2000 Index		100.00		104.89		100.26		121.63		139.44		124.09
S&P MidCap 400 Index		100.00		109.77		107.38		129.65		150.71		134.01
S&P 500 Index		100.00		113.69		115.26		129.05		157.22		150.33

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 during 2018, 2017 or 2016. 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, 2018, there were 1,129,087 shares remaining authorized for repurchase under this plan. Shares were last repurchased by the Company in 2008; thus, we did not otherwise repurchase any of our common stock during the quarter ended December 31, 2018.

ITEM 6. SELECTED FINANCIAL DATA

Our 2018 Annual Report contains “Selected Consolidated Financial Data,” which section is incorporated herein by reference.

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

Our 2018 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 2018 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 2018 and 2017 Consolidated Balance Sheets and other consolidated financial statements for the years ended December 31, 2018, 2017 and 2016, together with the report thereon of KPMG LLP dated February 28, 2019, included in our 2018 Annual Report are incorporated herein by reference.

The 2018 and 2017 unaudited Selected Quarterly Financial Data appearing in our 2018 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, as of such date.

Management’s Report on Internal Control over Financial Reporting

Our 2018 Annual Report contains “Management’s Report on Internal Control over Financial Reporting” and the report thereon of KPMG LLP dated February 28, 2019, 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, 2018, 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.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1) Financial Statements. Our consolidated financial statements are incorporated by reference from our 2018 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.

INDEX TO EXHIBITS

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). (P)
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). (P)
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). *

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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). *
10.1(s)	Eighteenth Amendment dated January 1, 2017 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, 2017 and incorporated herein by reference). *
10.1(t)	Nineteenth Amendment dated January 1, 2018 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, 2018 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	Credit Agreement dated as of December  5, 2018, by and among Watsco, Inc., Watsco Canada, Inc. and Carrier Enterprise Mexico, S. de R.L. de C.V., as Borrowers, the Other Lenders From Time to Time Party Thereto, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, JPMorgan Chase Bank, N.A. as Syndication Agent and Branch Banking and Trust Company, U.S. Bank National Association and Wells Fargo Bank, National Association as Co-Documentation Agents (filed as Exhibit 10.1 to the Current Report on Form 8-K on December 11, 2018 and incorporated herein by reference).

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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	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).
10.8	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	2018 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 2018 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. #

# filed herewith.

+ furnished herewith.

* Management contract or compensation plan or arrangement.

ITEM 16. FORM 10-K SUMMARY

None.

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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 28, 2019	By:	/s/ Albert H. Nahmad
		Albert H. Nahmad, Chief Executive Officer
February 28, 2019	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 28, 2019
/S/ ANA M. MENENDEZ                 Ana M. Menendez	Chief Financial Officer (principal accounting officer and principal financial officer)	February 28, 2019
/S/ CESAR L. ALVAREZ                 Cesar L. Alvarez	Director	February 28, 2019
/S/ J. MICHAEL CUSTER                 J. Michael Custer	Director	February 28, 2019
/S/ DENISE DICKINS                 Denise Dickins	Director	February 28, 2019
/S/ BRIAN E. KEELEY                  Brian E. Keeley	Director	February 28, 2019
/S/ BOB L. MOSS                 Bob L. Moss	Director	February 28, 2019
/S/ AARON J. NAHMAD                 Aaron J. Nahmad	Director and President	February 28, 2019
/S/ STEVEN RUBIN                 Steven Rubin	Director	February 28, 2019
/S/ GEORGE P. SAPE                 George P. Sape	Director	February 28, 2019

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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, 2018.

(In thousands, except per share data)	2018		2017		2016		2015		2014
FOR THE YEAR
Revenues	$	4,546,653	$	4,341,955	$	4,220,702	$	4,113,239	$	3,944,540
Gross profit		1,120,252		1,065,659		1,034,584		1,007,357		956,402
Operating income		372,082		353,874		345,632		336,748		305,747
Net income		296,529		257,290		235,983		226,524		208,702
Less: net income attributable to non-controlling interest		53,597		49,069		53,173		53,595		57,315
Net income attributable to Watsco, Inc.	$	242,932	$	208,221	$	182,810	$	172,929	$	151,387
Diluted earnings per share for Common and Class B common stock	$	6.49	$	5.81	$	5.15	$	4.90	$	4.32
Cash dividends per share:
Common stock	$	5.60	$	4.60	$	3.60	$	2.80	$	2.00
Class B common stock	$	5.60	$	4.60	$	3.60	$	2.80	$	2.00
Weighted-average Common and Class B common shares outstanding - Diluted		34,374		32,863		32,617		32,480		32,359
AT YEAR END
Total assets	$	2,161,033	$	2,046,877	$	1,874,649	$	1,788,442	$	1,791,067
Total long-term obligations	$	135,752	$	22,085	$	235,642	$	245,814	$	303,885
Total shareholders’ equity	$	1,601,713	$	1,550,977	$	1,251,748	$	1,203,721	$	1,132,039
Number of employees		5,200		5,200		5,050		4,950		4,950

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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,” “goal,” “designed,” 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 and investments in unconsolidated entities, (iv) financing plans, and (v) industry, demographic and other trends affecting our financial condition or results of operations. These forward-looking statements are based on management’s current expectations, are not guarantees of future performance and are subject to a number of risks, uncertainties, and changes in circumstances, certain of which are beyond our control. Actual results could differ materially from these forward-looking statements as a result of several factors, including, but not limited to:

• general economic conditions, both in the U.S. and in international markets served;

• competitive factors within the HVAC/R industry;

• effects of supplier concentration;

• fluctuations in certain commodity costs;

• consumer spending;

• consumer debt levels;

• new housing starts and completions;

• capital spending in the commercial construction market;

• access to liquidity needed for operations;

• seasonal nature of product sales;

• weather patterns and conditions;

• insurance coverage risks;

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

• prevailing interest rates;

• foreign currency exchange rate fluctuations;

• international 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, 2018.

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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, 2018, we operated from 571 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, a majority of which we operate under non-cancelable operating leases.

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

Joint Ventures with Carrier Corporation

In 2009, we formed a joint venture with Carrier Corporation (“Carrier”), which we refer to as Carrier Enterprise I, in which Carrier contributed 95 of its company-owned locations in 13 Sun Belt states and Puerto Rico, and its export division in Miami, Florida, and we contributed 15 locations that distributed Carrier products. 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 the Northeast U.S., and we contributed 14 locations in the Northeast U.S. 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

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these estimates, management considers several 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 $6.5 million and $6.1 million at December 31, 2018 and 2017, respectively, an increase of $0.4 million. Accounts receivable balances greater than 90 days past due as a percent of accounts receivable at December 31, 2018 increased to 1.7% from 1.3% at December 31, 2017 primarily due to an 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 requiring additional allowances 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 to report inventories at the lower of cost using the weighted-average and the first-in, first-out methods, or net realizable value. As part of the valuation process, inventories are adjusted to reflect excess, slow-moving, and damaged goods. The valuation process contains uncertainty because management must make estimates and use judgment to determine the future 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, Indefinite Lived Intangible Assets and Long-Lived Assets

The recoverability of goodwill is evaluated at least annually and when events or changes in circumstances indicate that the carrying amount may not be recoverable. We have one reporting unit that is subject to goodwill impairment testing. In performing the goodwill impairment test, we use a two-step approach. The first step compares the reporting unit’s fair value to its carrying value. If the carrying value exceeds the fair value, a second step is performed to measure the amount of impairment loss, if any. The 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, 2019, we performed our annual evaluation of goodwill impairment and determined that the estimated fair value of our reporting unit significantly exceeded its carrying value.

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

The estimates of fair value of our reporting unit, indefinite lived intangibles, and long-lived assets are based on the best information available as of the date of the assessment and incorporates management’s assumptions about expected future cash flows and contemplates other valuation techniques. Future cash flows can be affected by changes in the industry, a declining economic environment, or market 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, intangibles, and long-lived assets were $620.0 million and $611.3 million at December 31, 2018 and 2017, respectively. Although no impairment losses have been recorded to date, there can be no assurance that impairments will not occur in the future. An adjustment to the carrying value of goodwill, intangibles, and long-lived assets could materially adversely impact the consolidated results of operations.

Loss Contingencies

Accruals are recorded for various contingencies including self-insurance, legal proceedings, environmental matters, and other claims that arise in the normal course of business. The estimation process contains uncertainty because accruals are based on judgment, the probability of losses and, where applicable, the consideration of opinions of external legal counsel and actuarially determined estimates. Additionally, we record receivables from third party insurers when recovery has been determined to be probable.

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Self-insurance reserves are maintained relative to company-wide casualty insurance and health benefit programs. The level of exposure from catastrophic events is limited by the purchase of stop-loss and aggregate liability reinsurance coverage. When estimating the self-insurance liabilities and related reserves, management considers several factors, which include historical claims experience, demographic factors, severity factors, and valuations provided by independent third-party actuaries. Management reviews its assumptions with its independent third-party actuaries to evaluate whether self-insurance reserves are adequate. If actual claims or adverse development of loss reserves occur and exceed these estimates, additional reserves may be required and could materially impact the consolidated results of operations. The estimation process contains uncertainty since management must use judgment to 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 $2.3 million at both December 31, 2018 and 2017, 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, 2018 or 2017. The valuation allowance is based on estimates of future taxable income by jurisdiction in which the deferred tax assets will be recoverable. These estimates can be affected by several factors, including changes to tax laws, or possible tax audits, or general economic conditions, or competitive pressures that could affect future 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 recently adopted and to be adopted accounting standards.

Results of Operations

The following table summarizes information derived from our audited consolidated statements of income, expressed as a percentage of revenues, for the years ended December 31, 2018, 2017 and 2016.

	2018			2017			2016
Revenues		100.0	%		100.0	%		100.0	%
Cost of sales		75.4			75.5			75.5
Gross profit		24.6			24.5			24.5
Selling, general and administrative expenses		16.7			16.5			16.3
Other income		0.2			0.1			—
Operating income		8.2			8.2			8.2
Interest expense, net		0.1			0.1			0.1
Income before income taxes		8.1			8.0			8.1
Income taxes		1.6			2.1			2.5
Net income		6.5			5.9			5.6
Less: net income attributable to non-controlling interest		1.2			1.1			1.3
Net income attributable to Watsco, Inc.		5.3	%		4.8	%		4.3	%

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

The following narratives reflect the acquisition of Alert Labs Inc. in August 2018 and the acquisition of an HVAC distributor in November 2018 as well as our ownership interest in Russell Sigler, Inc. (“RSI”), in which we purchased a 34.9% ownership interest in June 2017 and an additional 1.4% ownership interest in June 2018, our additional 10% ownership interest in Carrier Enterprise II, which became effective in February 2017, and our additional 10% ownership interest in Carrier Enterprise II, which became effective in November 2016.

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In the following narratives, computations and other information referring to “same-store basis” exclude the effects of locations closed, acquired, or locations opened, unless they are within close geographical proximity to existing locations, during the immediately preceding 12 months. At December 31, 2018 and 2017, 8 and 3 locations opened, respectively, were near existing locations and were therefore excluded from “same-store basis” information.

The table below summarizes the changes in our locations for 2018 and 2017:

	Number of Locations
December 31, 2016		565
Opened		15
Closed		(20	)
December 31, 2017		560
Opened		13
Acquired		3
Closed		(5	)
December 31, 2018		571

2018 Compared to 2017

Revenues

Revenues for 2018 increased $204.7 million, or 5%, to $4,546.7 million, including $18.8 million from locations opened and acquired during the preceding 12 months, offset by $11.0 million from locations closed. On a same-store basis, revenues increased $196.9 million, or 5%, as compared to 2017, reflecting a 6% increase in sales of HVAC equipment (67% of sales), which included both a 6% increase in residential HVAC equipment and commercial HVAC equipment, a 5% increase in sales of other HVAC products (29% of sales), and flat sales of commercial refrigeration products (4% of sales). The increase in same-store revenues was primarily due to realization of price increases, demand for the replacement of residential and commercial HVAC equipment and a higher mix of high-efficiency air conditioning and heating systems, which sell at higher unit prices.

Gross Profit

Gross profit for 2018 increased $54.6 million, or 5%, to $1,120.3 million, primarily as a result of increased revenues. Gross profit margin improved 10 basis-points to 24.6% in 2018 versus 24.5% in 2017, primarily due to an improvement in selling margins for HVAC equipment.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for 2018 increased $41.8 million, or 6%, to $757.5 million, primarily due to increased revenues, as well as due to increased costs related to incentive compensation, health-related costs, and ongoing technology initiatives. Selling, general and administrative expenses as a percentage of revenues for 2018 increased to 16.7% versus 16.5% in 2017. On a same-store basis, selling, general and administrative expenses increased 6% as compared to the same period in 2017. The increase in selling, general and administrative expenses as a percentage of revenues was primarily due to our inability to leverage fixed operating costs to the same extent as in 2017.

Other Income

Other income of $9.3 million and $3.9 million for the years ended December 31, 2018 and 2017, respectively, represents our share of the net income of RSI.

Operating Income

Operating income for 2018 increased $18.2 million, or 5%, to $372.1 million. Operating margin remained consistent at 8.2% in 2018 as compared to 2017.

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Interest Expense, Net

Interest expense, net, for 2018 decreased $3.6 million, or 57%, to $2.7 million, primarily as a result of a decrease in average outstanding borrowings, partially offset by a higher effective interest rate in 2018, in each case under our revolving credit facility, as compared to 2017.

Income Taxes

Income taxes decreased 19% to $72.8 million and represent a composite of the income taxes attributable to our wholly owned operations and income taxes attributable to the Carrier joint ventures, which are primarily taxed as partnerships for income tax purposes; therefore, Carrier is responsible for its proportionate share of income taxes attributable to its share of earnings. The effective income tax rates attributable to Watsco were 22.8% and 29.8% for 2018 and 2017, respectively. The decrease was primarily due to the reduction of the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018 as a result of the Tax Cuts and Jobs Act of 2017 (the “TCJA”).

Net Income Attributable to Watsco, Inc.

Net income attributable to Watsco in 2018 increased $34.7 million, or 17%, to $242.9 million. The increase was primarily driven by higher revenues and other income, expanded gross margin, lower interest expense, net, and lower income taxes, partially offset by higher selling, general and administrative expenses as a percentage of revenues, as discussed above.

2017 Compared to 2016

Revenues

Revenues for 2017 increased $121.3 million, or 3%, to $4,342.0 million, including $5.7 million from locations opened during the preceding 12 months, offset by $24.5 million from locations closed. On a same-store basis, revenues increased $140.1 million, or 3%, as compared to 2016, reflecting a 4% increase in sales of HVAC equipment (67% of sales), which included a 5% increase in residential HVAC equipment and a 2% increase in commercial HVAC equipment, a 1% increase in sales of other HVAC products (28% of sales), and flat sales of commercial refrigeration products (5% of sales). The increase in revenues was primarily due to demand for the replacement of residential HVAC equipment.

Gross Profit

Gross profit for 2017 increased $31.1 million, or 3%, to $1,065.7 million, primarily as a result of increased revenues. Gross profit margin remained consistent at 24.5% in 2017 as compared to 2016.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for 2017 increased $26.7 million, or 4%, to $715.7 million, primarily due to increased revenues, additional sales and service-related headcount, and increased costs related to ongoing technology initiatives. Selling, general and administrative expenses as a percentage of revenues for 2017 increased to 16.5% versus 16.3% in 2016.

Other Income

Other income of $3.9 million for 2017 represents our 34.9% share of the net income of RSI, purchased in June 2017.

Operating Income

Operating income for 2017 increased $8.2 million, or 2%, to $353.9 million. Operating margin remained consistent at 8.2% in 2017 as compared to 2016.

Interest Expense, Net

Interest expense, net, for 2017 increased $2.7 million, or 71%, to $6.4 million, primarily as a result of an increase in average outstanding borrowings and a higher effective interest rate in 2017, in each case as compared to 2016.

Income Taxes

Income taxes decreased 15% to $90.2 million and represent a composite of the income taxes attributable to our wholly owned operations and income taxes attributable to the Carrier joint ventures, which are primarily taxed as partnerships for income tax purposes; therefore, Carrier is responsible for its proportionate share of income taxes attributable to its share of earnings. The effective income tax rates attributable to Watsco were 29.8% and 36.0% for 2017 and 2016, respectively. The 2017 effective income tax rate attributable to us reflects a decrease in income taxes due to the revaluation of our U.S. deferred income taxes, partially offset by an increase in income taxes related to previously undistributed earnings of our foreign subsidiaries because of the TCJA, which was enacted on December 22, 2017. The decrease in 2017’s effective rate also reflects higher share-based payment deductions in 2017 as compared to 2016.

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Net Income Attributable to Watsco, Inc.

Net income attributable to Watsco in 2017 increased $25.4 million, or 14%, to $208.2 million. The increase was primarily driven by higher revenues and other income, as discussed above, a reduction in income taxes, and increase in net income attributable to the non-controlling interest related to Carrier Enterprise II following our purchases of additional 10% ownership interests in both November 2016 and February 2017.

Liquidity and Capital Resources

We assess our liquidity in terms of our ability to generate cash to execute our business strategy and fund operating and investing activities, taking into consideration the seasonal demand for HVAC/R products, which peaks in the months of May through August. Significant factors that could affect our liquidity include the following:

• cash needed to fund our business (primarily working capital requirements);

• borrowing capacity under our revolving credit facility;

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

• acquisitions, including joint ventures and investments in unconsolidated entities;

• dividend payments;

• capital expenditures; and

• the timing and extent of common stock repurchases.

Sources and Uses of Cash

We rely on cash flows from operations and borrowing capacity under our revolving credit agreement to fund seasonal working capital needs and for other general corporate purposes, including dividend payments (to the extent declared by our Board of Directors), capital expenditures, business acquisitions, and development of our long-term operating and technology strategies. Additionally, we may also generate cash through the issuance and sale of our Common stock.

As of December 31, 2018, we had $82.9 million of cash and cash equivalents, of which $75.5 million was held by foreign subsidiaries. The repatriation of cash balances from our foreign subsidiaries could have adverse tax costs or be subject to capital controls; however, these balances are generally available without legal restrictions to fund the ordinary business operations of our foreign subsidiaries.

We believe that our operating cash flows, cash on hand, and funds available for borrowing under our revolving credit agreement are sufficient to meet our liquidity needs in the foreseeable future. However, there can be no assurance that our current sources of available funds will be sufficient to meet our cash requirements.

Our access to funds under our revolving credit agreement depends on the ability of the syndicate banks to meet their respective funding commitments. Disruptions in the credit and capital markets could adversely affect our ability to draw on our revolving credit agreement and may also adversely affect the determination of interest rates, particularly rates based on LIBOR, which is one of the base rates under our revolving credit agreement. LIBOR is the subject of recent proposals for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The consequences of these developments with respect to LIBOR cannot be entirely predicted but could result in an increase in the cost of our debt. Disruptions in the credit and capital markets, including a transition away from LIBOR, could also result in increased borrowing costs and/or reduced borrowing capacity under our revolving credit agreement.

Working Capital

Working capital increased 18% to $1,084.2 million at December 31, 2018 from $920.9 million at December 31, 2017, reflecting lower levels of accounts payable and accrued expenses and higher levels of inventories and accounts receivable.

Cash Flows

The following table summarizes our cash flow activity for 2018 and 2017 (in millions):

8

	2018			2017			Change
Cash flows provided by operating activities	$	170.6		$	306.5		$	(135.9	)
Cash flows used in investing activities	$	(26.3	)	$	(81.3	)	$	55.0
Cash flows used in financing activities	$	(139.6	)	$	(202.1	)	$	62.5

The individual items contributing to cash flow changes for the years presented are detailed in the audited consolidated statements of cash flows contained in this Annual Report on Form 10-K.

Operating Activities

The decrease in net cash provided by operating activities was primarily due to the timing of payments for accrued expenses and other current liabilities and higher accounts receivable driven by increased sales, partially offset by higher net income in 2018.

Investing Activities

Net cash used in investing activities was lower due to the purchase of an ownership interest in RSI for $63.6 million in 2017, partially offset by cash consideration for acquisitions and the purchase of an additional ownership interest in RSI in 2018.

Financing Activities

The decrease in net cash used in financing activities was primarily attributable to proceeds borrowed under our revolving credit agreement in 2018 and the purchase of an additional 10% interest in Carrier Enterprise II for $42.7 million in 2017, partially offset by an increase in dividends paid in 2018.

At-the-Market Offering Program

On August 23, 2017, we entered into a sales agreement with Robert W. Baird & Co. Inc., which enabled the Company to issue and sell shares of Common stock in one or more negotiated transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), for a maximum aggregate offering amount of up to $250.0 million (the “ATM Program”). The offer and sale of our Common stock pursuant to the ATM Program was registered under the Securities Act pursuant to our automatically effective shelf registration statement on Form S-3 (File No. 333-207831).

During 2017, we sold 1,498,662 shares of Common stock under the ATM Program for net proceeds of $247.7 million. Direct costs of $0.3 million incurred in connection with the offering were charged against the proceeds from the sale of Common stock and reflected as a reduction of paid-in capital. As of December 31, 2017, we had completed the offering of shares under the ATM Program. The net proceeds were primarily used to repay outstanding debt and for general corporate purposes.

Revolving Credit Agreement

On December 5, 2018, we entered into an unsecured, five-year $500.0 million syndicated multicurrency revolving credit agreement, which replaced in its entirety our prior five-year $300.0 million revolving credit agreement, which was nearing maturity. Proceeds from the new facility were used to repay an aggregate of approximately $54.7 million outstanding under the prior facility. Additional proceeds may be used for, among other things, funding seasonal working capital needs and 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 facility has a seasonal component from October 1 to March 31, during which the borrowing capacity may be reduced to $400.0 million at our discretion (which would effectively reduce fees payable in respect of the unused portion of the commitment, as described below). Included in the credit facility are a $100.0 million swingline subfacility, a $10.0 million letter of credit subfacility, a $75.0 million alternative currency borrowing sublimit and an $8.0 million Mexican borrowing sublimit. The credit agreement matures on December 5, 2023.

Borrowings under the credit facility bear interest at either LIBOR-based rates plus a spread, which ranges from 87.5 to 150.0 basis-points (LIBOR plus 87.5 basis-points at December 31, 2018), depending on our ratio of total debt to EBITDA, or on rates based on the highest of the Federal Funds Effective Rate plus 0.5%, the Prime Rate or the Eurocurrency Rate plus 1.0%, in each case plus a spread which ranges from 0 to 50.0 basis-points (0 basis-points at December 31, 2018), depending on our ratio of total debt to EBITDA. We pay a variable commitment fee on the unused portion of the commitment under the revolving credit agreement, ranging from 7.5 to 20.0 basis-points (7.5 basis-points at December 31, 2018). We paid fees of $0.8 million in connection with entering into the revolving credit agreement, which are being amortized ratably through the maturity of the facility in December 2023.

9

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

Contractual Obligations

As of December 31, 2018, our significant contractual obligations were as follows (in millions):

	Payments due by Period
Contractual Obligations	2019		2020		2021		2022		2023		Thereafter		Total
Operating leases (1)	$	70.4	$	55.1	$	41.3	$	28.5	$	15.7	$	8.3	$	219.3
Purchase obligations (2)		35.0		—		—		—		—		—		35.0
Total	$	105.4	$	55.1	$	41.3	$	28.5	$	15.7	$	8.3	$	254.3

(1) Represents future minimum payments associated with real property, vehicles, and equipment under non-cancelable operating leases. Operating expenses that are separate from rental expense that we are committed to pay under certain of these lease agreements 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.

We have not included in the contractual obligations table above approximately $4.0 million of net liabilities for unrecognized tax benefits relating to various tax positions we have taken, the timing of which is uncertain.

Commercial obligations outstanding at December 31, 2018 under our revolving credit agreement consisted of borrowings totaling $135.2 million with revolving maturities of seven days.

Off-Balance Sheet Arrangements

Refer to Note 15 to our audited consolidated financial statements contained in this Annual Report on Form 10-K, under the caption “Off-Balance Sheet Financial Instruments,” for a discussion of standby letters of credit and performance bonds for which we were contingently liable at December 31, 2018. Such discussion is incorporated herein by reference.

Purchase of Additional Ownership Interest in Joint Venture

On February 13, 2017, we purchased an additional 10% ownership interest in Carrier Enterprise II for cash consideration of $42.7 million, which increased our controlling interest in Carrier Enterprise II to 80%. We used borrowings under our revolving credit agreement to finance this acquisition, which we subsequently repaid using a portion of the proceeds from the ATM program.

Investment in Unconsolidated Entity

On June 21, 2017, Carrier Enterprise I acquired a 34.9% ownership interest in RSI, an HVAC distributor operating from 30 locations in the Western U.S. for cash consideration of $63.6 million, of which we contributed $50.9 million, and Carrier contributed $12.7 million. Effective June 29, 2018, Carrier Enterprise I acquired an additional 1.4% ownership interest in RSI, which increased Carrier Enterprise I’s ownership interest in RSI to 36.3%. Total cash consideration of $3.8 million was paid on July 5, 2018, of which we contributed $3.0 million and Carrier contributed $0.8 million. Carrier Enterprise I is a party to a shareholders agreement (the “Shareholders Agreement”) with RSI and its shareholders. Pursuant to the Shareholders Agreement, RSI’s shareholders have the right to sell, and Carrier Enterprise I has the obligation to purchase, their respective shares of RSI for a purchase price determined based on either book value or a multiple of EBIT, the latter of which Carrier Enterprise I used to calculate the price paid for its investment in RSI. RSI’s shareholders may transfer their respective shares of RSI common stock only to members of the Sigler family or to Carrier Enterprise I, and, at any time from and after the date on which Carrier Enterprise I owns 85% or more of RSI’s outstanding common stock, it has the right, but not the obligation, to purchase from RSI’s shareholders the remaining outstanding shares of RSI common stock. At December 31, 2018, the estimated purchase amount we would be contingently liable for is approximately $135.0 million. We believe that our operating cash flows, cash on hand, and funds available for borrowing under our revolving credit agreement will be sufficient to purchase any additional ownership interests in RSI.

10

Acquisitions

On August 23, 2018, one of our wholly owned subsidiaries acquired Alert Labs Inc., a technology company based in Ontario, Canada for cash consideration of $5.9 million and the issuance of 23,873 shares of Common stock having a fair value of $4.0 million, net of a discount for lack of marketability, less $0.2 million related to our previously held equity interest. In addition, 23,230 shares of Common stock having a fair value of $3.0 million were issued into escrow as contingent consideration, all of which are subject to certain performance metrics within a three-year measurement period.

On November 30, 2018, one of our wholly owned subsidiaries acquired certain assets and assumed certain liabilities of a wholesale distributor of air conditioning and heating products operating from three locations in North Carolina.

We continually evaluate potential acquisitions, including joint ventures and investments in unconsolidated entities, 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 $5.60, $4.60 and $3.60 per share of Common stock and Class B common stock in 2018, 2017 and 2016, respectively. On January 2, 2019, our Board of Directors declared a regular quarterly cash dividend of $1.60 per share of Common and Class B common stock that was paid on January 31, 2019 to shareholders of record as of January 16, 2019. Future dividends and/or changes in dividend rates are at the sole discretion of the Board of Directors and depend upon factors including, but not limited to, cash flow generated by operations, profitability, financial condition, cash requirements, and future prospects.

Company Share Repurchase Program

In September 1999, our Board of Directors authorized the repurchase, at management’s discretion, of up to 7,500,000 shares of common stock in the open market or via private transactions. Shares repurchased under the program are accounted for using the cost method and result in a reduction of shareholders’ equity. We last repurchased shares under this plan during 2008. In aggregate, 6,370,913 shares of Common and Class B common stock have been repurchased at a cost of $114.4 million since the inception of the program. At December 31, 2018, there were 1,129,087 shares remaining authorized for repurchase under the program.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks, including fluctuations in foreign currency exchange rates and interest rates. To manage certain of these exposures, we use derivative instruments, including forward and option 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 2018.

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 exchange contracts as of December 31, 2018 was $46.8 million, and such contracts have varying terms expiring through September 2019. For the year ended December 31, 2018, foreign currency transaction gains and losses did not have a material impact on our results of operations.

We have exposure related to the translation of financial statements of our Canadian operations into U.S. dollars, our functional currency. We do not currently hold any derivative contracts that hedge our foreign currency translational exposure. A 10% change in the Canadian dollar would have had an estimated $1.9 million impact to net income for the year ended December 31, 2018.

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.

11

See Note 16 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, 2018 and determined that a 100 basis-point change in interest rates would result in an impact to income before taxes of approximately $1.4 million. See Note 7 to our audited consolidated financial statements included in this Annual Report on Form 10-K for further information about our debt.

12

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, 2018. 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, 2018. The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report that is included herein.

F-1

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors

Watsco, Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited Watsco, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, 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, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated February 28, 2019 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable 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.

/s/ KPMG LLP

Miami, Florida

February 28, 2019

F-2

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors

Watsco, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Watsco, Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, 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, 2018, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, 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) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

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

Miami, Florida

February 28, 2019

F-3

WATSCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	Years Ended December 31,
(In thousands, except per share data)	2018		2017		2016
Revenues	$	4,546,653	$	4,341,955	$	4,220,702
Cost of sales		3,426,401		3,276,296		3,186,118
Gross profit		1,120,252		1,065,659		1,034,584
Selling, general and administrative expenses		757,452		715,671		688,952
Other income		9,282		3,886		—
Operating income		372,082		353,874		345,632
Interest expense, net		2,740		6,363		3,713
Income before income taxes		369,342		347,511		341,919
Income taxes		72,813		90,221		105,936
Net income		296,529		257,290		235,983
Less: net income attributable to non-controlling interest		53,597		49,069		53,173
Net income attributable to Watsco, Inc.	$	242,932	$	208,221	$	182,810
Earnings per share for Common and Class B common stock:
Basic	$	6.50	$	5.81	$	5.16
Diluted	$	6.49	$	5.81	$	5.15

See accompanying notes to consolidated financial statements.

F-4

WATSCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Years Ended December 31,
(In thousands)	2018			2017			2016
Net income	$	296,529		$	257,290		$	235,983
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustment		(20,493	)		15,993			6,211
Unrealized gain (loss) on cash flow hedging instruments		1,918			(702	)		(965	)
Reclassification of (gain) loss on cash flow hedging instruments into earnings		(157	)		(358	)		323
Unrealized (loss) gain on equity securities		—			(15	)		14
Other comprehensive (loss) income		(18,732	)		14,918			5,583
Comprehensive income		277,797			272,208			241,566
Less: comprehensive income attributable to non-controlling interest		46,913			54,678			55,382
Comprehensive income attributable to Watsco, Inc.	$	230,884		$	217,530		$	186,184

See accompanying notes to consolidated financial statements.

F-5

WATSCO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,
(In thousands, except share and per share data)	2018			2017
ASSETS
Current assets:
Cash and cash equivalents	$	82,894		$	80,496
Accounts receivable, net		501,908			478,133
Inventories		837,129			761,314
Other current assets		19,875			17,454
Total current assets		1,441,806			1,337,397
Property and equipment, net		91,046			91,198
Goodwill		391,998			382,729
Intangible assets, net		147,851			161,065
Other assets		88,332			74,488
	$	2,161,033		$	2,046,877
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of other long-term obligations	$	246		$	244
Accounts payable		200,229			230,476
Accrued expenses and other current liabilities		157,091			185,757
Total current liabilities		357,566			416,477
Long-term obligations:
Borrowings under revolving credit agreement		135,200			21,800
Other long-term obligations, net of current portion		552			285
Total long-term obligations		135,752			22,085
Deferred income taxes and other liabilities		66,002			57,338
Commitments and contingencies
Watsco, Inc. shareholders’ equity:
Common stock, $0.50 par value, 60,000,000 shares authorized; 36,952,762 and 36,825,128 shares outstanding at December 31, 2018 and 2017, respectively		18,476			18,412
Class B common stock, $0.50 par value, 10,000,000 shares authorized; 5,381,132 and 5,275,838 shares outstanding at December 31, 2018 and 2017, respectively		2,691			2,638
Preferred stock, $0.50 par value, 10,000,000 shares authorized; no shares issued		—			—
Paid-in capital		832,121			804,008
Accumulated other comprehensive loss, net of tax		(45,968	)		(34,221	)
Retained earnings		627,969			594,556
Treasury stock, at cost, 4,823,988 shares of Common stock and 48,263 shares of Class B common stock at both December 31, 2018 and 2017, respectively		(87,440	)		(87,440	)
Total Watsco, Inc. shareholders’ equity		1,347,849			1,297,953
Non-controlling interest		253,864			253,024
Total shareholders’ equity		1,601,713			1,550,977
	$	2,161,033		$	2,046,877

See accompanying notes to consolidated financial statements.

F-6

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, 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

Continued on next page.

F-7

(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, 2016		35,530,403			20,951			592,350			(43,530	)		550,482			(114,425	)		245,920			1,251,748
Net income														208,221						49,069			257,290
Other comprehensive gain											9,309									5,609			14,918
Issuances of non-vested restricted shares of common stock		176,899			88			(88	)														—
Forfeitures of non-vested restricted shares of common stock		(10,000	)		(5	)		5															—
Common stock contribution to 401(k) plan		16,389			8			2,420															2,428
Stock issuances from exercise of stock options and employee stock purchase plan		49,166			24			5,263															5,287
Retirement of common stock		(32,804	)		(16	)		(4,701	)														(4,717	)
Share-based compensation								13,536															13,536
Net proceeds from the sale of Common stock		1,498,662						220,448									26,985						247,433
Cash dividends declared and paid on Common and Class B common stock, $4.60 per share														(164,147	)								(164,147	)
Investment in unconsolidated entity																				12,720			12,720
Decrease in non-controlling interest in Carrier Enterprise II								(25,225	)											(17,463	)		(42,688	)
Distributions to non-controlling interest																				(42,831	)		(42,831	)
Balance at December 31, 2017		37,228,715			21,050			804,008			(34,221	)		594,556			(87,440	)		253,024			1,550,977

Continued on next page.

F-8

(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, 2017		37,228,715			21,050			804,008			(34,221	)		594,556			(87,440	)		253,024			1,550,977
Cumulative-effect adjustment											301			(301	)								—
Net income														242,932						53,597			296,529
Other comprehensive loss											(12,048	)								(6,684	)		(18,732	)
Issuances of non-vested restricted shares of common stock		142,865			71			(71	)														—
Forfeitures of non-vested restricted shares of common stock		(10,000	)		(5	)		5															—
Common stock contribution to 401(k) plan		17,318			9			2,936															2,945
Stock issuances from exercise of stock options and employee stock purchase plan		64,423			32			7,820															7,852
Retirement of common stock		(28,781	)		(14	)		(5,030	)														(5,044	)
Share-based compensation								15,631															15,631
Cash dividends declared and paid on Common and Class B common stock, $5.60 per share														(209,218	)								(209,218	)
Common stock issued for Alert Labs Inc.		47,103			24			6,822															6,846
Investment in unconsolidated entity																				752			752
Distributions to non-controlling interest																				(46,825	)		(46,825	)
Balance at December 31, 2018		37,461,643		$	21,167		$	832,121		$	(45,968	)	$	627,969		$	(87,440	)	$	253,864		$	1,601,713

See accompanying notes to consolidated financial statements.

F-9

WATSCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
(In thousands)	2018			2017			2016
Cash flows from operating activities:
Net income	$	296,529		$	257,290		$	235,983
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		22,095			22,033			20,066
Share-based compensation		15,508			13,293			12,319
Deferred income tax provision (benefit)		8,290			(10,735	)		2,720
Non-cash contribution to 401(k) plan		2,945			2,428			2,348
Provision for doubtful accounts		2,619			1,991			3,487
Loss (gain) on sale of property and equipment		27			115			(189	)
Other income from investment in unconsolidated entity		(9,282	)		(3,886	)		—
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		(28,831	)		(1,676	)		(26,941	)
Inventories		(78,954	)		(73,403	)		(9,729	)
Accounts payable and other liabilities		(57,398	)		99,956			43,734
Other, net		(2,991	)		(886	)		(2,067	)
Net cash provided by operating activities		170,557			306,520			281,731
Cash flows from investing activities:
Capital expenditures		(17,153	)		(17,876	)		(43,577	)
Business acquisitions, net of cash acquired		(5,626	)		—			—
Investment in unconsolidated entity		(3,760	)		(63,600	)		—
Proceeds from sale of property and equipment		228			168			744
Net cash used in investing activities		(26,311	)		(81,308	)		(42,833	)
Cash flows from financing activities:
Dividends on Common and Class B common stock		(209,218	)		(164,147	)		(127,604	)
Distributions to non-controlling interest		(46,825	)		(42,831	)		(38,900	)
Net repayments under prior revolving credit agreement		(21,800	)		(213,494	)		(10,006	)
Repurchases of common stock to satisfy employee withholding tax obligations		(3,782	)		(4,674	)		(3,975	)
Payment of fees related to revolving credit agreement		(790	)		—			—
Net proceeds from the sale of Common stock		—			247,744			—
Purchase of additional ownership from non-controlling interest		—			(42,688	)		(42,909	)
Net proceeds (repayments) of other long-term obligations		269			(19	)		(150	)
Proceeds from non-controlling interest for investment in unconsolidated entity		752			12,720			—
Net proceeds from issuances of common stock		6,591			5,244			5,653
Net proceeds under current revolving credit agreement		135,200			—			—
Net cash used in financing activities		(139,603	)		(202,145	)		(217,891	)
Effect of foreign exchange rate changes on cash and cash equivalents		(2,245	)		1,419			(226	)
Net increase in cash and cash equivalents		2,398			24,486			20,781
Cash and cash equivalents at beginning of year		80,496			56,010			35,229
Cash and cash equivalents at end of year	$	82,894		$	80,496		$	56,010
Supplemental cash flow information (Note 21)

See accompanying notes to consolidated financial statements.

F-10

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, 2018, we operated from 571 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.

Equity Method Investments

Investments in which we have the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in other assets in our consolidated balance sheets. Under this method of accounting, our proportionate share of the net income or loss of the investee is included in other income in our consolidated statements of income. The excess, if any, of the carrying amount of our investment over our ownership percentage in the underlying net assets of the investee is attributed to certain fair value adjustments with the remaining portion recognized as goodwill.

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 loss contingencies and the valuation of goodwill, indefinite lived intangible assets and long-lived assets. While we believe that these estimates are reasonable, actual results could differ from such estimates.

Cash Equivalents

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

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable primarily consist of trade receivables due from customers and are stated at the invoiced amount less an allowance for doubtful accounts. An allowance for doubtful accounts is 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, 2018 and 2017, the allowance for doubtful accounts totaled $6,503 and $6,049, respectively.

F-11

Inventories

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

Vendor Rebates

We have arrangements with several vendors that provide rebates payable to us when we achieve any of a number of measures, generally related to the volume level of purchases. We account for such rebates as a reduction of inventory until we sell the product, at which time such rebates are reflected as a reduction of cost of sales in our consolidated statements of income. Throughout the year, we estimate the amount of the rebate based on our estimate of purchases to date relative to the purchase levels that mark our progress toward earning the rebates. We continually revise our estimates of earned vendor rebates based on actual purchase levels. At December 31, 2018 and 2017, we had $11,603 and $11,621, 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.

Equity Securities

Investments in equity securities are recorded at fair value using the specific identification method and are included in other assets in our consolidated balance sheets. Unrealized holding gains and losses, net of deferred taxes, were included in accumulated other comprehensive loss within shareholders’ equity for 2017 and 2016. For 2018, changes in the fair value of equity securities were recognized through income rather than comprehensive income. Dividend and interest income are recognized in the statements of income when earned.

Property and Equipment

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

Goodwill and Intangible Assets

Goodwill is recorded when the purchase price paid for an acquisition exceeds the fair value of the net identified tangible and intangible assets acquired. We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. We test goodwill for impairment by first comparing the fair value of our reporting unit to its carrying value. If the fair value is determined to be less than the carrying value, a second step is performed to measure the amount of impairment loss. On January 1, 2019, we performed our annual evaluation of goodwill impairment and determined that the estimated fair value of our reporting unit significantly exceeded its carrying value.

Intangible assets primarily consist of the value of trade names and trademarks, distributor agreements, customer relationships and patented and unpatented technology. Indefinite lived intangibles not subject to amortization are assessed for impairment at least annually, or more frequently if events or changes in 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 and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability is evaluated by determining whether the amortization of the balance over its remaining life can be recovered through undiscounted future operating cash flows. We measure the impairment loss based on projected discounted cash flows using a discount rate reflecting the average cost of funds and compared to the asset’s carrying value. As of December 31, 2018 there were no such events or circumstances.

F-12

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. We generate our revenue primarily from the sale of finished products to customers; therefore, the significant majority of our contracts are short-term in nature and have only a single performance obligation to deliver products; therefore, we satisfy our performance obligation under such contracts when we transfer control of the product to the customer. Some contracts contain a combination of product sales and services, the latter of which is distinct and accounted for as a separate performance obligation. We satisfy our performance obligations for services when we render the services within the agreed-upon service period. Total service revenue is not material and accounted for less than 1% of our consolidated revenues for 2018.

Revenue is recognized when control transfers to our customers when products are picked up or via shipment of products or delivery of services. We measure revenue as the amount of consideration we expect to be entitled to receive in exchange for those goods or services, net of any variable considerations (e.g., rights to return product, sales incentives, others) and any taxes collected from customers and subsequently remitted to governmental authorities. Revenue for shipping and handling charges is recognized when products are delivered to the customer.

Product Returns

We estimate product returns based on historical experience and record them on a gross basis on our balance sheet. Substantially all customer returns relate to products that are returned under manufacturers’ warranty obligations. Accrued sales returns of $11,275 at December 31, 2018 were included in accrued expenses and other current liabilities in our consolidated balance sheet.

Sales Incentives

We estimate sales incentives expected to be paid over the term of the program based on the most likely amounts. Sales incentives are accounted for as a reduction in the transaction price and are generally paid on an annual basis.

Advertising Costs

Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2018, 2017 and 2016, were $16,520, $24,677 and $22,242, respectively. See Note 2.

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, 2018, 2017 and 2016, were $51,741, $47,670 and $42,809, respectively.

F-13

Share-Based Compensation

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

Income Taxes

We record U.S. federal, state and foreign income taxes currently payable, as well as deferred taxes due to temporary differences between reporting income and expenses for financial statement purposes versus tax purposes. Deferred tax assets and liabilities reflect the temporary differences between the financial 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 U.S. 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 and option contracts and swaps, to manage our exposure to fluctuations in foreign currency exchange rates and interest rates. The use of these derivative instruments modifies the exposure of these risks with the intent to reduce the risk or cost to us. We use derivative instruments as risk management tools and not for trading purposes. All derivatives, whether designated as hedging relationships or not, are recorded on the balance sheet at fair value. Cash flows from derivative instruments are classified in the consolidated statements of cash flows in the same 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.

F-14

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 16 for additional information pertaining to derivative instruments.

Loss Contingencies

Accruals are recorded for various contingencies including self-insurance, legal proceedings, environmental matters, and other claims that arise in the normal course of business. The estimation process contains uncertainty because accruals are based on judgment, the probability of losses and, where applicable, the consideration of opinions of external legal counsel and actuarially determined estimates. Additionally, we record receivables from third party insurers when recovery has been determined to be probable.

Recently Adopted Accounting Standards

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. In 2015 and 2016, the FASB issued several updates to this standard. The adoption of this standard and its related amendments (collectively, the “New Revenue Standard”) on January 1, 2018 did not result in the recognition of a cumulative adjustment to opening retained earnings under the modified retrospective approach, nor did it have a significant impact on our consolidated net income, balance sheet or cash flow. See Note 2.

Financial Instruments

In January 2016, the FASB issued guidance related to certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Most prominent among the changes to the standard is the requirement that changes in the fair value of equity investments, with certain exceptions, be recognized through net income rather than other comprehensive income. This guidance must be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings and became effective for interim and annual periods beginning after December 15, 2017. The adoption of this guidance did not have a material impact on our consolidated financial statements. A cumulative-effect adjustment captured the previously held unrealized losses of $301 related to our equity securities carried at fair value. See Note 4.

Stock Compensation

In May 2017, the FASB issued guidance to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. This guidance must be applied prospectively and became effective for interim and annual periods beginning after December 15, 2017. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Derivatives and Hedging

In August 2017, the FASB issued guidance to simplify the accounting for hedging derivatives. This guidance is effective prospectively and is effective for interim and annual periods beginning after December 15, 2018 with early adoption permitted. We elected to adopt this guidance during the quarter ended June 30, 2018, which did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Standards Not Yet Adopted

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. In July 2018, updated guidance was issued which provides an additional transition method of adoption that allows entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. We adopted this standard and its related amendments (collectively, the “New Lease Standard”) on January 1, 2019, using this additional transition method, and we have elected the available practical expedients upon adoption.

Although we continue to evaluate the impact of the New Lease Standard on our consolidated balance sheet, we do not expect that it will have a material impact on our consolidated statements of income. Following adoption of the New Lease Standard, we record a right-of-use (“ROU”) asset and lease liability, representing our obligation to make lease payments for operating leases greater than one year in duration, measured on a discounted basis. We expect that the ROU asset and lease liability recorded will be approximately 10% of our total assets. In preparation for the adoption, we are implementing business processes and controls over the financial reporting of leases, which will facilitate our reporting under the New Lease Standard in the first quarter of 2019. See Note 18, under the caption “Operating Leases,” for our minimum lease commitments at December 31, 2018.

F-15

Intangibles—Goodwill and Other

In January 2017, the FASB issued guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this updated standard, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity also should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if any. This guidance is effective prospectively and is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

Disclosure Update and Simplification

In August 2018, the Securities and Exchange Commission (“SEC”) issued the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification,” that amends certain of its disclosure requirements that have become redundant, duplicative, overlapping, outdated or superseded. The amendments include removing the requirement to disclose information on geographic regions from the Description of Business section of Form 10-K and replacing the requirement that a registrant disclose the high and low trading prices of entity’s ordinary shares with a requirement to disclose the ticker symbol of its shares. Additionally, the final rule extends to interim periods the annual disclosure requirement of presenting changes in each caption of stockholders’ equity and the amount of dividends per share. These disclosures are required to be provided for the current and comparative year-to-date interim periods. The final rule is effective for all filings on or after November 5, 2018. We have adopted all relevant disclosure requirements for our Annual Report on Form 10-K for the year ended December 31, 2018.

2. REVENUES

We adopted the New Revenue Standard on January 1, 2018 using the modified retrospective approach. The New Revenue Standard did not have an impact on the amount or timing of our revenue recognition; however, certain payments to customers were reclassified from advertising expenses to a reduction from revenues, resulting in an immaterial impact to the individual financial statement line items of our consolidated statements of income. Results for reporting periods beginning on and after January 1, 2018 are presented under the New Revenue Standard, while prior period results have not been adjusted and continue to be reported under the accounting standards in effect for those periods.

Disaggregation of Revenues

The following table presents our revenues disaggregated by primary geographical regions and major product lines within our single reporting segment:

Years Ended December 31,	2018			2017(1)			2016(1)
Primary Geographical Regions:
United States	$	4,126,639		$	3,919,684		$	3,813,204
Canada		291,685			269,603			267,220
Mexico		128,329			152,668			140,278
	$	4,546,653		$	4,341,955		$	4,220,702
Major Product Lines:
HVAC equipment		67	%		67	%		66	%
Other HVAC products		29	%		28	%		29	%
Commercial refrigeration products		4	%		5	%		5	%
		100	%		100	%		100	%

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

F-16

Practical Expedients

We generally expense sales commissions when incurred because the amortization period is one year or less. These costs are recorded within selling, general and administrative expenses. We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

3. 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,	2018		2017		2016
Basic Earnings per Share:
Net income attributable to Watsco, Inc. shareholders	$	242,932	$	208,221	$	182,810
Less: distributed and undistributed earnings allocated to non-vested restricted common stock		19,792		17,430		14,806
Earnings allocated to Watsco, Inc. shareholders	$	223,140	$	190,791	$	168,004
Weighted-average common shares outstanding - Basic		34,319,890		32,824,947		32,582,385
Basic earnings per share for Common and Class B common stock	$	6.50	$	5.81	$	5.16
Allocation of earnings for Basic:
Common stock	$	206,355	$	175,667	$	154,021
Class B common stock		16,785		15,124		13,983
	$	223,140	$	190,791	$	168,004
Diluted Earnings per Share:
Net income attributable to Watsco, Inc. shareholders	$	242,932	$	208,221	$	182,810
Less: distributed and undistributed earnings allocated to non-vested restricted common stock		19,788		17,427		14,801
Earnings allocated to Watsco, Inc. shareholders	$	223,144	$	190,794	$	168,009
Weighted-average common shares outstanding - Basic		34,319,890		32,824,947		32,582,385
Effect of dilutive stock options		54,379		37,686		34,119
Weighted-average common shares outstanding - Diluted		34,374,269		32,862,633		32,616,504
Diluted earnings per share for Common and Class B common stock	$	6.49	$	5.81	$	5.15

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, 2018, 2017 and 2016, our outstanding Class B common stock was convertible into 2,581,627, 2,601,996 and 2,711,811 shares of our Common stock, respectively.

Diluted earnings per share excluded 74,270, 11,664 and 31,839 shares for the years ended December 31, 2018, 2017 and 2016, respectively, related to stock options with an exercise price per share greater than the average market value, resulting in an anti-dilutive effect on diluted earnings per share.

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4. OTHER COMPREHENSIVE (LOSS) INCOME

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

Years Ended December 31,	2018			2017			2016
Foreign currency translation adjustment	$	(20,493	)	$	15,993		$	6,211
Unrealized gain (loss) on cash flow hedging instruments		2,627			(961	)		(1,321	)
Income tax (expense) benefit		(709	)		259			356
Unrealized gain (loss) on cash flow hedging instruments, net of tax		1,918			(702	)		(965	)
Reclassification of (gain) loss on cash flow hedging instruments into earnings		(215	)		(491	)		442
Income tax expense (benefit)		58			133			(119	)
Reclassification of (gain) loss on cash flow hedging instruments into earnings, net of tax		(157	)		(358	)		323
Unrealized gain on equity securities		—			51			27
Income tax expense		—			(66	)		(13	)
Unrealized (loss) gain on equity securities, net of tax		—			(15	)		14
Other comprehensive (loss) income	$	(18,732	)	$	14,918		$	5,583

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

Years Ended December 31,	2018			2017			2016
Foreign currency translation adjustment:
Beginning balance	$	(33,499	)	$	(43,459	)	$	(47,204	)
Current period other comprehensive (loss) income		(13,105	)		9,960			3,745
Ending balance		(46,604	)		(33,499	)		(43,459	)
Cash flow hedging instruments:
Beginning balance		(421	)		215			600
Current period other comprehensive income (loss)		1,151			(421	)		(579	)
Reclassification adjustment		(94	)		(215	)		194
Ending balance		636			(421	)		215
Equity securities:
Beginning balance		(301	)		(286	)		(300	)
Cumulative-effect adjustment to retained earnings		301			—			—
Current period other comprehensive (loss) income		—			(15	)		14
Ending balance		—			(301	)		(286	)
Accumulated other comprehensive loss, net of tax	$	(45,968	)	$	(34,221	)	$	(43,530	)

5. SUPPLIER CONCENTRATION

Purchases from our top ten suppliers comprised 84%, 84% and 85% of all purchases made in 2018, 2017 and 2016, respectively. Our largest supplier, Carrier and its affiliates, accounted for 62% of all purchases made in 2018, 2017 and 2016. See Note 19. 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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6. PROPERTY AND EQUIPMENT

Property and equipment, net, consists of:

December 31,	2018			2017
Land	$	820		$	820
Buildings and improvements		75,308			74,486
Machinery, vehicles and equipment		79,002			76,117
Furniture and fixtures		16,782			15,282
Computer hardware and software		50,853			47,377
		222,765			214,082
Accumulated depreciation and amortization		(131,719	)		(122,884	)
	$	91,046		$	91,198

Depreciation and amortization expense related to property and equipment included in selling, general and administrative expenses for the years ended December 31, 2018, 2017 and 2016, were $16,747, $16,770 and $14,853, respectively.

7. DEBT

On December 5, 2018, we entered into an unsecured, five-year $500,000 syndicated multicurrency revolving credit agreement, which replaced in its entirety our prior five-year $300,000 revolving credit agreement, which was nearing maturity. Proceeds from the new facility were used to repay an aggregate of approximately $54,700 outstanding under the prior facility. Additional proceeds may be used for, among other things, funding seasonal working capital needs and 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 facility has a seasonal component from October 1 to March 31, during which the borrowing capacity may be reduced to $400,000 at our discretion (which would effectively reduce fees payable in respect of the unused portion of the commitment, as described below). Included in the credit facility are a $100,000 swingline subfacility, a $10,000 letter of credit subfacility, a $75,000 alternative currency borrowing sublimit and an $8,000 Mexican borrowing sublimit. The credit agreement matures on December 5, 2023.

Borrowings under the credit facility bear interest at either LIBOR-based rates plus a spread, which ranges from 87.5 to 150.0 basis-points (LIBOR plus 87.5 basis-points at December 31, 2018), depending on our ratio of total debt to EBITDA, or on rates based on the highest of the Federal Funds Effective Rate plus 0.5%, the Prime Rate or the Eurocurrency Rate plus 1.0%, in each case plus a spread which ranges from 0 to 50.0 basis-points (0 basis-points at December 31, 2018), depending on our ratio of total debt to EBITDA. We pay a variable commitment fee on the unused portion of the commitment under the revolving credit agreement, ranging from 7.5 to 20.0 basis-points (7.5 basis-points at December 31, 2018). We paid fees of $790 in connection with entering into the revolving credit agreement, which are being amortized ratably through the maturity of the facility in December 2023.

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

8. INCOME TAXES

On December 22, 2017, Public Law 115-97 “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” was enacted. This law is commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “TCJA”). The TCJA made broad and complex changes to the U.S. tax code including but not limited to, reducing the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018 and requiring a one-time repatriation transition tax on certain undistributed earnings of foreign subsidiaries. The TCJA also put in place new tax laws that applied prospectively, which included, but were not limited to, generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries and a new provision designed to tax U.S. allocated expenses as well as currently taxing certain global intangible low-taxed income (“GILTI”) of foreign subsidiaries. GILTI is a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. We have elected to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense.

F-19

U.S. GAAP requires the impact of tax legislation to be recorded in the period of enactment. We recognized the tax effects of the TCJA for the year ended December 31, 2017 and recorded a provisional net income tax benefit of $9,955. This amount included an income tax benefit from the revaluation of U.S. deferred income taxes, partially offset by an estimate for income tax expense to record U.S. federal, state and foreign withholding tax on previously undistributed earnings of our foreign subsidiaries. We applied the guidance in Staff Accounting Bulletin 118 when accounting for the enactment-date effects of the TCJA. As of December 31, 2018, we have completed our accounting for all the enactment-date income tax effects of the TCJA. In 2018, we increased our previously estimated net income tax benefit by $1,819 to $11,774, following the refinement of estimated U.S. federal and state income taxes on previously undistributed earnings of our foreign subsidiaries.

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,	2018		2017			2016
U.S. Federal	$	54,345	$	69,079		$	86,719
State		11,631		10,643			9,801
Foreign		6,837		10,499			9,416
	$	72,813	$	90,221		$	105,936
Current	$	64,523	$	100,956		$	103,216
Deferred		8,290		(10,735	)		2,720
	$	72,813	$	90,221		$	105,936

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,	2018			2017			2016
U.S. federal statutory rate		21.0	%		35.0	%		35.0	%
State income taxes, net of federal benefit and other		3.6			2.4			2.3
Excess tax benefits from share-based compensation		(2.0	)		(2.7	)		(1.0	)
Tax effects on foreign income		0.5			(1.0	)		(0.1	)
GILTI		0.3			—			—
Tax credits and other		—			(0.6	)		(0.2	)
Repatriation transition tax		(0.9	)		3.0			—
Deferred tax impact of enacted tax rate changes		0.3			(6.3	)		—
Effective income tax rate attributable to Watsco, Inc.		22.8			29.8			36.0
Taxes attributable to non-controlling interest		(3.1	)		(3.8	)		(5.0	)
Effective income tax rate		19.7	%		26.0	%		31.0	%

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The following is a summary of the significant components of our net deferred tax liabilities:

December 31,	2018			2017
Deferred tax assets:
Share-based compensation	$	21,517		$	18,977
Capitalized inventory costs and inventory reserves		2,151			2,107
Allowance for doubtful accounts		1,057			929
Self-insurance reserves		206			153
Other		2,486			2,423
Net operating loss carryforwards		484			291
	27,901			24,880
Valuation allowance		—			—
Total deferred tax assets		27,901			24,880
Deferred tax liabilities:
Deductible goodwill		(69,600	)		(67,246	)
Depreciation		(10,695	)		(5,519	)
Other		(8,516	)		(5,189	)
Total deferred tax liabilities		(88,811	)		(77,954	)
Net deferred tax liabilities (1)	$	(60,910	)	$	(53,074	)

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

Prior to enactment of the TCJA, U.S. income taxes had not been provided on undistributed earnings of our foreign subsidiaries as we had intended to reinvest such earnings permanently outside the U.S. or to repatriate such earnings only when it was tax effective to do so. The TCJA one-time repatriation transition tax and GILTI liabilities effectively taxed the undistributed earnings previously deferred from U.S. Federal income taxes. As of December 31, 2018, we have accumulated undistributed earnings generated by our foreign subsidiaries of approximately $93,000. Any additional taxes due with respect to such previously-taxed earnings, if repatriated, would generally be limited to foreign withholding. Deferred taxes have been recorded for foreign withholding taxes on certain earnings of our foreign consolidated subsidiaries expected to be repatriated. We do not intend to distribute the remaining previously-taxed foreign earnings and therefore have not recorded deferred taxes for foreign withholding on such earnings. The amount of foreign withholding that might be payable on the remaining amounts at December 31, 2018 is not material.

Valuation allowances are provided to reduce the related deferred income tax assets to an amount which will, more likely than not, be realized. As a result of our assessment of the realization of deferred income tax assets, we have concluded that it is more likely than not that all of our deferred income tax assets will be realized and thus no valuation allowance was necessary at both December 31, 2018 and 2017. At December 31, 2018, there were state net operating loss carryforwards of $8,263, which expire in varying amounts from 2019 through 2038. These amounts are available to offset future taxable income. There were no federal net operating loss carryforwards at December 31, 2018.

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 2015. For the majority of states and foreign jurisdictions, we are no longer subject to tax examinations for tax years prior to 2014.

As of December 31, 2018 and 2017, the total amount of gross unrecognized tax benefits (excluding the federal benefit received from state positions) was $4,902 and $4,225, respectively. Of these totals, $3,997 and $3,457, 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, 2018 and 2017, the cumulative amount of estimated accrued interest and penalties resulting from such unrecognized tax benefits was $755 and $540, respectively, and is included in deferred income taxes and other current liabilities in the accompanying consolidated balance sheets.

F-21

The changes in gross unrecognized tax benefits are as follows:

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 and tax assessments		(365	)
Balance at December 31, 2016		3,695
Additions based on tax positions related to the current year		801
Reductions due to lapse of applicable statute of limitations		(271	)
Balance at December 31, 2017		4,225
Additions based on tax positions related to the current year		960
Reductions due to lapse of applicable statute of limitations		(283	)
Balance at December 31, 2018	$	4,902

9. SHARE-BASED COMPENSATION AND BENEFIT PLANS

Share-Based Compensation Plans

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

Under the 2014 Plan, the number of shares of Common and Class B common stock available for issuance is (i) 2,000,000, plus (ii) 45,421 shares of Common stock or Class B common stock that remained available for grant in connection with awards under the 2001 Plan as of the date our 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 601,252 shares of Common stock, net of cancellations, and 626,387 shares of Class B common stock, had been awarded under the 2014 Plan as of December 31, 2018. As of December 31, 2018, 817,782 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 1,000 options to exercise common stock outstanding under the 2001 Plan at December 31, 2018. 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, 2018:

	Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Options outstanding at December 31, 2017		398,833		$	136.44
Granted		188,550			173.48
Exercised		(54,934	)		114.09
Forfeited		(26,832	)		155.83
Expired		(1,000	)		122.62
Options outstanding at December 31, 2018		504,617		$	151.71		3.31	$	1,733
Options exercisable at December 31, 2018		71,487		$	135.89		2.13	$	826

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The following is a summary of non-vested restricted stock activity as of and for the year ended December 31, 2018:

	Shares			Weighted- Average Grant Date Fair Value
Non-vested restricted stock outstanding at December 31, 2017		2,985,239		$	51.22
Granted		142,865			167.06
Vested		(55,502	)		66.52
Forfeited		(10,000	)		142.52
Non-vested restricted stock outstanding at December 31, 2018		3,062,602		$	48.72

The weighted-average grant date fair value of non-vested restricted stock granted during 2018, 2017 and 2016 was $167.06, $149.47 and $130.01, respectively. The fair value of non-vested restricted stock that vested during 2018, 2017 and 2016 was $9,637, $11,580 and $10,096, respectively.

During 2018, 21,754 shares of Common and Class B common stock with an aggregate fair market value of $3,775 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of restricted stock. During 2017, 32,454 shares of Common stock with an aggregate fair market value of $4,664 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of restricted stock. 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. 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,	2018			2017			2016
Expected term in years		4.25			4.25			4.25
Risk-free interest rate		2.69	%		1.77	%		1.24	%
Expected volatility		17.11	%		17.41	%		18.65	%
Expected dividend yield		3.13	%		2.82	%		2.54	%
Grant date fair value	$	20.05		$	17.23		$	16.37

Exercise of Stock Options

The total intrinsic value of stock options exercised during 2018, 2017 and 2016 was $3,500, $2,296 and $4,123, respectively. Cash received from the exercise of stock options during 2018, 2017 and 2016 was $5,006, $3,855 and $4,447, respectively. During 2018, 2017 and 2016, 7,027 shares of Common stock with an aggregate fair market value of $1,269, 350 shares of Common stock with an aggregate fair market value of $53 and 348 shares of Common stock with an aggregate fair market value of $51, 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:

F-23

Years Ended December 31,	2018		2017		2016
Stock options	$	2,014	$	1,451	$	1,149
Non-vested restricted stock		13,494		11,842		11,170
Share-based compensation expense	$	15,508	$	13,293	$	12,319

At December 31, 2018, there was $3,598 of unrecognized pre-tax compensation expense related to stock options granted under the 2014 Plan, which is expected to be recognized over a weighted-average period of approximately 1.8 years. The total fair value of stock options that vested during 2018, 2017 and 2016 was $1,607, $754 and $736, respectively.

At December 31, 2018, there was $118,124 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 11.2 years. Of this amount, approximately $56,000 is related to awards granted to our Chief Executive Officer (“CEO”), of which approximately $9,000, $42,000 and $5,000 vest in approximately 4, 8 and 10 years upon his attainment of age 82, 86 and 88, respectively, and approximately $13,000 is related to awards granted to our President, of which approximately $12,000 and $1,000 vest in approximately 25 and 27 years upon his attainment of age 62 and 64, respectively. In the event that vesting is accelerated for any circumstance, as defined in the related agreements, the remaining unrecognized share-based compensation expense would be immediately recognized as a charge to earnings with a corresponding tax benefit. At December 31, 2018, we were obligated to issue 45,752 shares of non-vested restricted stock to our CEO that vest in 10 years and 23,297 shares of non-vested restricted stock to our President that vest in 25 years in connection with performance based incentive compensation.

Employee Stock Purchase Plan

The Watsco, Inc. Fourth Amended and Restated 1996 Qualified Employee Stock Purchase Plan (the “ESPP”) provides for up to 1,500,000 shares of Common stock to be available for purchase by our full-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 2018, 2017 and 2016, employees purchased 5,151, 5,571 and 5,956 shares of Common stock at an average price of $168.21, $144.58 and $125.84 per share, respectively. Cash dividends received by the ESPP were reinvested in Common stock and resulted in the issuance of 4,338, 3,844 and 3,442 additional shares during 2018, 2017 and 2016, respectively. We received net proceeds of $1,585, $1,389 and $1,206, respectively, during 2018, 2017 and 2016, for shares of our Common stock purchased under the ESPP. At December 31, 2018, 477,256 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, 2018, 2017 and 2016, we issued 17,318, 16,389 and 20,045 shares of Common stock, respectively, to the plan, representing the Common stock discretionary matching contribution of $2,945, $2,428 and $2,348, respectively.

10. PURCHASE OF ADDITIONAL OWNERSHIP INTEREST IN JOINT VENTURE

In 2011, we formed a joint venture with Carrier, Carrier Enterprise Northeast LLC, which we refer to as Carrier Enterprise II. We initially owned a 60% controlling interest in Carrier Enterprise II. On November 29, 2016, we purchased an additional 10% ownership interest for cash consideration of $42,909, and, on February 13, 2017, we purchased an additional 10% ownership interest for cash consideration of $42,688, which together increased our controlling interest in Carrier Enterprise II to 80%.

11. INVESTMENT IN UNCONSOLIDATED ENTITY

On June 21, 2017, our first joint venture with Carrier, Carrier Enterprise, LLC, which we refer to as Carrier Enterprise I, acquired a 34.9% ownership interest in Russell Sigler, Inc. (“RSI”), an HVAC distributor with 2018 sales of approximately $770,000, operating from 30 locations in the Western U.S. We have an 80% controlling interest in Carrier Enterprise I, and Carrier has a 20% non-controlling interest. Carrier Enterprise I acquired its ownership interest in RSI for cash consideration of $63,600, of which we contributed $50,880, and Carrier contributed $12,720. Effective June 29, 2018, Carrier Enterprise I acquired an additional 1.4% ownership interest in RSI, which increased Carrier Enterprise I’s ownership interest in RSI to 36.3% for cash consideration of $3,760, of which we contributed $3,008 and Carrier contributed $752. Carrier Enterprise I is a party to a shareholders agreement (the “Shareholders Agreement”) with RSI and its shareholders. Pursuant to the Shareholders Agreement, RSI’s shareholders have the right to sell, and Carrier Enterprise I has the obligation to purchase,

F-24

their respective shares of RSI for a purchase price determined based on either book value or a multiple of EBIT, the latter of which Carrier Enterprise I used to calculate the price paid for its investment in RSI. RSI’s shareholders may transfer their respective shares of RSI common stock only to members of the Sigler family or to Carrier Enterprise I, and, at any time from and after the date on which Carrier Enterprise I owns 85% or more of RSI’s outstanding common stock, it has the right, but not the obligation, to purchase from RSI’s shareholders the remaining outstanding shares of RSI common stock. Additionally, Carrier Enterprise I has the right to appoint two of RSI’s six board members. Given Carrier Enterprise I’s 36.3% ownership interest in RSI and its right to appoint two out of RSI’s six board members, this investment in RSI is accounted for under the equity method.

12. ACQUISITIONS

On August 23, 2018, one of our wholly owned subsidiaries acquired Alert Labs Inc., a technology company based in Ontario, Canada for cash consideration of $5,889 and the issuance of 23,873 shares of Common stock having a fair value of $3,991, net of a discount for lack of marketability, less $171 related to our previously held equity interest. In addition, 23,230 shares of Common stock having a fair value of $3,026 were issued into escrow as contingent consideration, all of which are subject to certain performance metrics within a three-year measurement period. The purchase price resulted in the recognition of $14,941 in goodwill and intangibles. The fair value of the identified intangible assets was $1,640 and consisted of $1,600 in patented and unpatented technologies and $40 in customer relationships to be amortized over a seven year period. The tax basis of the acquired goodwill recognized is not deductible for income tax purposes.

On November 30, 2018, one of our wholly owned subsidiaries acquired certain assets and assumed certain liabilities of a wholesale distributor of air conditioning and heating products operating from three locations in North Carolina.

The results of operations of these acquisitions have been included in the consolidated financial statements from their respective dates of acquisition. The pro forma effect of the acquisitions were not deemed significant to the consolidated financial statements.

13. GOODWILL AND INTANGIBLE ASSETS

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

Balance at December 31, 2016	$	379,737
Foreign currency translation adjustment		2,992
Balance at December 31, 2017		382,729
Acquired goodwill		13,301
Foreign currency translation adjustment		(4,032	)
Balance at December 31, 2018	$	391,998

Intangible assets are comprised of the following:

December 31,	Estimated Useful Lives		2018			2017
Indefinite lived intangible assets - Trade names, trademarks and distribution rights			$	119,188		$	125,194
Finite lived intangible assets:
Customer relationships		10-15 years		69,593			73,053
Patented and unpatented technology		7 years		1,600			—
Trade name		10 years		1,150			1,150
Accumulated amortization				(43,680	)		(38,332	)
Finite lived intangible assets, net				28,663			35,871
			$	147,851		$	161,065

Amortization expense related to finite lived intangible assets included in selling, general and administrative expenses for the years ended December 31, 2018, 2017 and 2016, were $5,348, $5,263 and $5,213, respectively. Annual amortization of finite lived intangible assets for the next five years is expected to approximate the following:

F-25

2019	$	5,000
2020	$	5,000
2021	$	4,200
2022	$	3,400
2023	$	2,800

14. 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, 2018 or 2017.

At-the-Market Offering Program

On August 23, 2017, we entered into a sales agreement with Robert W. Baird & Co. Inc., which enabled the Company to issue and sell shares of Common stock in one or more negotiated transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), for a maximum aggregate offering amount of up to $250,000 (the “ATM Program”). The offer and sale of our Common stock pursuant to the ATM Program was registered under the Securities Act pursuant to our automatically effective shelf registration statement on Form S-3 (File No. 333-207831).

During 2017, we sold 1,498,662 shares of Common stock under the ATM Program for net proceeds of $247,744. Direct costs of $311 incurred in connection with the offering were charged against the proceeds from the sale of Common stock and reflected as a reduction of paid-in capital. As of December 31, 2017, we had completed the offering of shares under the ATM Program. The net proceeds were primarily used to repay outstanding debt and for general corporate purposes.

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 2018, 2017 or 2016. We last repurchased shares under this plan during 2008. In aggregate, 6,322,650 shares of Common stock and 48,263 shares of Class B common stock have been repurchased at a cost of $114,425 since the inception of the program. At December 31, 2018, there were 1,129,087 shares remaining authorized for repurchase under the program.

15. 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, 2018 and 2017, 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.

F-26

Off-Balance Sheet Financial Instruments

At December 31, 2018 and 2017, we were contingently liable under standby letters of credit aggregating $1,222 and $2,430, 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, 2018 and 2017, we were contingently liable under various performance bonds aggregating approximately $3,600 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.

16. DERIVATIVES

We enter into foreign currency forward and option contracts to offset the earnings impact that foreign exchange rate fluctuations would otherwise have on certain monetary liabilities that are denominated in nonfunctional currencies.

Cash Flow Hedging Instruments

We enter into foreign currency forward contracts that are designated as cash flow hedges. The settlement of these derivatives results in reclassifications from accumulated other comprehensive loss to earnings for the period in which the settlement of these instruments occurs. The maximum period for which we hedge our cash flow using these instruments is 12 months. Accordingly, at December 31, 2018, 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, 2018 was $40,000, and such contracts have varying terms expiring through September 2019.

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

Years Ended December 31,	2018			2017
Gain (loss) recorded in accumulated other comprehensive loss	$	2,627		$	(961	)
(Gain) loss reclassified from accumulated other comprehensive loss into earnings	$	(215	)	$	(491	)

At December 31, 2018, we expected an estimated $1,450 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 and option contracts that are either not designated as hedges or did not qualify for hedge accounting. These derivative instruments were effective economic hedges for all of the periods presented. The fair value gains and losses on these contracts are recognized in earnings as a component of selling, general and administrative expenses. The total notional value of our foreign currency exchange contracts not designated as hedging instruments at December 31, 2018 was $6,800, and such contracts have varying terms expiring through February 2019.

We recognized gains (losses) of $129, $(829) and $(306) from foreign currency forward and option contracts not designated as hedging instruments in our consolidated statements of income for 2018, 2017 and 2016, respectively.

The following table summarizes the fair value of derivative instruments, which consist solely of foreign exchange contracts, included in other current assets and accrued expenses and other current liabilities in our consolidated balance sheets. See Note 17.

	Asset Derivatives				Liability Derivatives
December 31,	2018		2017		2018		2017
Derivatives designated as hedging instruments	$	1,262	$	70	$	3	$	773
Derivatives not designated as hedging instruments		58		180		11		184
Total derivative instruments	$	1,320	$	250	$	14	$	957

F-27

17. 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, 2018 Using
	Balance Sheet Location			Level 1		Level 2		Level 3
Assets:
Derivative financial instruments	Other current assets	$	1,320		—	$	1,320		—
Equity securities	Other assets	$	279	$	279		—		—
Liabilities:
Derivative financial instruments	Accrued expenses and other current liabilities	$	14		—	$	14		—

			Total		Fair Value Measurements at December 31, 2017 Using
	Balance Sheet Location				Level 1		Level 2		Level 3
Assets:
Derivative financial instruments		Other current assets	$	250		—	$	250		—
Equity securities		Other assets	$	332	$	332		—		—
Liabilities:
Derivative financial instruments		Accrued expenses and other current liabilities	$	957		—	$	957		—

The following is a description of the valuation techniques used for these assets and liabilities, as well as the level of input used to measure fair value:

Equity securities – these investments are exchange-traded equity securities. Fair values for these 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 and option contracts. See Note 16. 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 2018 or 2017.

18. COMMITMENTS AND CONTINGENCIES

Litigation, Claims and Assessments

We are involved in litigation incidental to the operation of our business. We vigorously defend all matters in which we or our subsidiaries are named defendants and, for insurable losses, maintain significant 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 and could materially impact the consolidated results of operations. 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 $2,311 and $2,344 at December 31, 2018 and 2017, respectively, were established related to such programs and are included in accrued expenses and other current liabilities in our consolidated balance sheets.

F-28

Variable Interest Entity

As of December 31, 2018, 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 $3,900. See “Self-Insurance” above for further information on commitments associated with the insurance programs and Note 15, under the caption “Off-Balance Sheet Financial Instruments,” for further information on standby letters of credit. At December 31, 2018, 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, vehicles and equipment used in our operations with varying terms through 2028. Operating expenses that are separate from rental expense that we are committed to pay under certain of these lease agreements 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, 2018, future minimum payments under non-cancelable operating leases over each of the next five years and thereafter were as follows:

2019	$	70,388
2020		55,102
2021		41,321
2022		28,482
2023		15,712
Thereafter		8,245
Total minimum payments	$	219,250

Rental expense for the years ended December 31, 2018, 2017 and 2016, was $84,537, $84,076 and $83,260, respectively.

Purchase Obligations

At December 31, 2018, we were obligated under various non-cancelable purchase orders with our key suppliers for goods aggregating approximately $35,000, of which approximately $22,000 is with Carrier and its affiliates.

19. RELATED PARTY TRANSACTIONS

Purchases from Carrier and its affiliates comprised 62% of all inventory purchases made during each of 2018, 2017 and 2016. At December 31, 2018 and 2017, approximately $71,000 and $75,000, 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 2018, 2017 and 2016 included approximately $84,000, $64,000 and $56,000, 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, which served as general contractor for the remodeling of our Miami headquarters that was completed in 2018. We paid Moss & Associates LLC $124, $951 and $291 for construction services performed during 2018, 2017 and 2016, respectively, and no amount was payable at December 31, 2018.

A member of our Board of Directors is the Senior Chairman of Greenberg Traurig, P.A., which serves as our principal outside counsel and receives customary fees for legal services. During 2018 and 2017, we paid this firm $131 and $475, respectively, for services performed, and no amount was payable at December 31, 2018.

F-29

20. 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,	2018		2017		2016
Revenues:
United States	$	4,126,639	$	3,919,684	$	3,813,204
Canada		291,685		269,603		267,220
Mexico		128,329		152,668		140,278
Total revenues	$	4,546,653	$	4,341,955	$	4,220,702

December 31,	2018		2017
Long-Lived Assets:
United States	$	550,939	$	540,136
Canada		162,648		163,944
Mexico		5,640		5,400
Total long-lived assets	$	719,227	$	709,480

Revenues are attributed to countries based on the location of the store from which the sale occurred. Long-lived assets consist primarily of goodwill and intangible assets, property and equipment, and our investment in an unconsolidated entity.

21. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information was as follows:

Years Ended December 31,	2018		2017		2016
Interest paid	$	3,065	$	5,773	$	3,362
Income taxes net of refunds	$	115,301	$	48,056	$	99,006
Common stock issued for Alert Labs Inc.	$	6,846		—		—

F-30

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, 2018
Revenues (1)	$	926,577	$	1,332,743	$	1,296,007	$	991,326	$	4,546,653
Gross profit	$	230,833	$	320,766	$	319,009	$	249,644	$	1,120,252
Net income attributable to Watsco, Inc.	$	34,219	$	89,957	$	79,163	$	39,593	$	242,932
Earnings per share for Common and Class B common stock (2):
Basic	$	0.89	$	2.41	$	2.12	$	1.02	$	6.50
Diluted	$	0.89	$	2.40	$	2.11	$	1.02	$	6.49
Year Ended December 31, 2017
Revenues (1)	$	872,095	$	1,275,924	$	1,229,591	$	964,345	$	4,341,955
Gross profit	$	218,556	$	310,278	$	295,895	$	240,930	$	1,065,659
Net income attributable to Watsco, Inc.	$	26,181	$	73,756	$	65,029	$	43,255	$	208,221
Earnings per share for Common and Class B common stock (2):
Basic	$	0.71	$	2.07	$	1.82	$	1.19	$	5.81
Diluted	$	0.71	$	2.07	$	1.82	$	1.19	$	5.81

(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 evenly distributed throughout the year except for dependence on housing completions and related weather and economic conditions.

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

F-31

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, 2018, 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
Alert Labs Inc.	Ontario, Canada		100	%
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		80	%
Carrier Enterprise, LLC	Delaware		80	%
Carrier Enterprise Northeast, LLC	Delaware		80	%
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 (No. 333-228269) on Form S-3 and (No. 333-197795, 333-185345 and 333-159776) on Form S-8 of Watsco, Inc. of our reports dated February 28, 2019 with respect to the consolidated balance sheets of Watsco, Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, 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, 2018, and the related notes, and the effectiveness of internal control over financial reporting as of December 31, 2018, which reports appear in the December 31, 2018 annual report on Form 10-K of the Company.

/s/ KPMG LLP

Miami, Florida

February 28, 2019

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 28, 2019

/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 28, 2019

/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 28, 2019

/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, 2018, 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 28, 2019

/s/ Barry S. Logan

Barry S. Logan

Senior Vice President

February 28, 2019

/s/ Ana M. Menendez

Ana M. Menendez

Chief Financial Officer

February 28, 2019

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 ($) $ in Millions	12 Months Ended
	Dec. 31, 2018	Feb. 25, 2019	Jun. 29, 2018
Document Information [Line Items]
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2018
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	FY
Entity Registrant Name	WATSCO INC
Entity Central Index Key	0000105016
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	Yes
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Public Float			$ 5,768
Trading Symbol	WSO
Entity Shell Company	false
Entity Emerging Growth Company	false
Entity Small Business	false
Common Stock [Member]
Document Information [Line Items]
Entity Common Stock, Shares Outstanding		32,137,525
Common Class B [Member]
Document Information [Line Items]
Entity Common Stock, Shares Outstanding		5,397,345

XML

Consolidated Statements of Income - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018		Dec. 31, 2017		Dec. 31, 2016
Revenues	$ 4,546,653		$ 4,341,955		$ 4,220,702
Cost of sales	3,426,401		3,276,296		3,186,118
Gross profit	1,120,252		1,065,659		1,034,584
Selling, general and administrative expenses	757,452		715,671		688,952
Other income	9,282		3,886
Operating income	372,082		353,874		345,632
Interest expense, net	2,740		6,363		3,713
Income before income taxes	369,342		347,511		341,919
Income taxes	72,813		90,221		105,936
Net income	296,529		257,290		235,983
Less: net income attributable to non-controlling interest	53,597		49,069		53,173
Net income attributable to Watsco, Inc.	$ 242,932		$ 208,221		$ 182,810
Earnings per share for Common and Class B common stock:
Basic	$ 6.50	[1]	$ 5.81	[1]	$ 5.16
Diluted	$ 6.49	[1]	$ 5.81	[1]	$ 5.15

[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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Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Net income	$ 296,529	$ 257,290	$ 235,983
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustment	(20,493)	15,993	6,211
Unrealized gain (loss) on cash flow hedging instruments	1,918	(702)	(965)
Reclassification of (gain) loss on cash flow hedging instruments into earnings	(157)	(358)	323
Unrealized (loss) gain on equity securities		(15)	14
Other comprehensive (loss) income	(18,732)	14,918	5,583
Comprehensive income	277,797	272,208	241,566
Less: comprehensive income attributable to non-controlling interest	46,913	54,678	55,382
Comprehensive income attributable to Watsco, Inc.	$ 230,884	$ 217,530	$ 186,184

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Consolidated Balance Sheets - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Current assets:
Cash and cash equivalents	$ 82,894	$ 80,496
Accounts receivable, net	501,908	478,133
Inventories	837,129	761,314
Other current assets	19,875	17,454
Total current assets	1,441,806	1,337,397
Property and equipment, net	91,046	91,198
Goodwill	391,998	382,729
Intangible assets, net	147,851	161,065
Other assets	88,332	74,488
Total assets	2,161,033	2,046,877
Current liabilities:
Current portion of other long-term obligations	246	244
Accounts payable	200,229	230,476
Accrued expenses and other current liabilities	157,091	185,757
Total current liabilities	357,566	416,477
Long-term obligations:
Borrowings under revolving credit agreement	135,200	21,800
Other long-term obligations, net of current portion	552	285
Total long-term obligations	135,752	22,085
Deferred income taxes and other liabilities	66,002	57,338
Commitments and contingencies
Watsco, Inc. shareholders' equity:
Preferred stock, $0.50 par value, 10,000,000 shares authorized; no shares issued
Paid-in capital	832,121	804,008
Accumulated other comprehensive loss, net of tax	(45,968)	(34,221)
Retained earnings	627,969	594,556
Treasury stock, at cost, 4,823,988 shares of Common stock and 48,263 shares of Class B common stock at both December 31, 2018 and 2017, respectively	(87,440)	(87,440)
Total Watsco, Inc. shareholders' equity	1,347,849	1,297,953
Non-controlling interest	253,864	253,024
Total shareholders' equity	1,601,713	1,550,977
Total liabilities and shareholders' equity	2,161,033	2,046,877
Common Stock
Watsco, Inc. shareholders' equity:
Common stock, $0.50 par value	18,476	18,412
Class B Common Stock
Watsco, Inc. shareholders' equity:
Common stock, $0.50 par value	$ 2,691	$ 2,638

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Consolidated Balance Sheets (Parenthetical) - $ / shares	Dec. 31, 2018	Dec. 31, 2017
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	36,952,762	36,825,128
Treasury stock, shares	4,823,988	4,823,988
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	5,381,132	5,275,838
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, 2015	$ 1,203,721	$ 20,841	$ 602,522	$ (46,904)	$ 495,276	$ (114,425)	$ 246,411
Beginning 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 II	(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
Net income	257,290				208,221		49,069
Other comprehensive gain (loss)	14,918			9,309			5,609
Issuances of non-vested restricted shares of common stock (in shares)		176,899
Issuances of non-vested restricted shares of common stock		$ 88	(88)
Forfeitures of non-vested restricted shares of common stock (in shares)		(10,000)
Forfeitures of non-vested restricted shares of common stock		$ (5)	5
Common stock contribution to 401(k) plan	2,428	$ 8	2,420
Common stock contribution to 401(k) plan (in shares)		16,389
Stock issuances from exercise of stock options and employee stock purchase plan (in shares)		49,166
Stock issuances from exercise of stock options and employee stock purchase plan	5,287	$ 24	5,263
Retirement of common stock (in shares)		(32,804)
Retirement of common stock	(4,717)	$ (16)	(4,701)
Share-based compensation	13,536		13,536
Net proceeds from the sale of Common stock	247,433		220,448			26,985
Net proceeds from the sale of Common stock (in shares)		1,498,662
Cash dividends declared and paid on Common and Class B common stock	(164,147)				(164,147)
Investment in unconsolidated entity	12,720						12,720
Decrease in non-controlling interest in Carrier Enterprise II	(42,688)		(25,225)				(17,463)
Distributions to non-controlling interest	(42,831)						(42,831)
Ending balance at Dec. 31, 2017	1,550,977	$ 21,050	804,008	(34,221)	594,556	(87,440)	253,024
Ending balance (in shares) at Dec. 31, 2017		37,228,715
Cumulative-effect adjustment at Dec. 31, 2017				301	(301)
Net income	296,529				242,932		53,597
Other comprehensive gain (loss)	(18,732)			(12,048)			(6,684)
Issuances of non-vested restricted shares of common stock (in shares)		142,865
Issuances of non-vested restricted shares of common stock		$ 71	(71)
Forfeitures of non-vested restricted shares of common stock (in shares)		(10,000)
Forfeitures of non-vested restricted shares of common stock		$ (5)	5
Common stock contribution to 401(k) plan	2,945	$ 9	2,936
Common stock contribution to 401(k) plan (in shares)		17,318
Stock issuances from exercise of stock options and employee stock purchase plan (in shares)		64,423
Stock issuances from exercise of stock options and employee stock purchase plan	7,852	$ 32	7,820
Retirement of common stock (in shares)		(28,781)
Retirement of common stock	(5,044)	$ (14)	(5,030)
Share-based compensation	15,631		15,631
Cash dividends declared and paid on Common and Class B common stock	(209,218)				(209,218)
Common stock issued for Alert Labs Inc. (in shares)		47,103
Common stock issued for Alert Labs Inc.	6,846	$ 24	6,822
Investment in unconsolidated entity	752						752
Distributions to non-controlling interest	(46,825)						(46,825)
Ending balance at Dec. 31, 2018	$ 1,601,713	$ 21,167	$ 832,121	$ (45,968)	$ 627,969	$ (87,440)	$ 253,864
Ending balance (in shares) at Dec. 31, 2018		37,461,643

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Consolidated Statements of Shareholders' Equity (Parenthetical) - $ / shares	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Cash dividends declared and paid, common stock	$ 5.60	$ 4.60	$ 3.60

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Consolidated Statements of Cash Flows - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Cash flows from operating activities:
Net income	$ 296,529	$ 257,290	$ 235,983
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	22,095	22,033	20,066
Share-based compensation	15,508	13,293	12,319
Deferred income tax provision (benefit)	8,290	(10,735)	2,720
Non-cash contribution to 401(k) plan	2,945	2,428	2,348
Provision for doubtful accounts	2,619	1,991	3,487
Loss (gain) on sale of property and equipment	27	115	(189)
Other income from investment in unconsolidated entity	(9,282)	(3,886)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	(28,831)	(1,676)	(26,941)
Inventories	(78,954)	(73,403)	(9,729)
Accounts payable and other liabilities	(57,398)	99,956	43,734
Other, net	(2,991)	(886)	(2,067)
Net cash provided by operating activities	170,557	306,520	281,731
Cash flows from investing activities:
Capital expenditures	(17,153)	(17,876)	(43,577)
Business acquisitions, net of cash acquired	(5,626)
Investment in unconsolidated entity	(3,760)	(63,600)
Proceeds from sale of property and equipment	228	168	744
Net cash used in investing activities	(26,311)	(81,308)	(42,833)
Cash flows from financing activities:
Dividends on Common and Class B common stock	(209,218)	(164,147)	(127,604)
Distributions to non-controlling interest	(46,825)	(42,831)	(38,900)
Repurchases of common stock to satisfy employee withholding tax obligations	(3,782)	(4,674)	(3,975)
Payment of fees related to revolving credit agreement	(790)
Net proceeds from the sale of Common stock		247,744
Purchase of additional ownership from non-controlling interest		(42,688)	(42,909)
Net proceeds (repayments) of other long-term obligations	269	(19)	(150)
Proceeds from non-controlling interest for investment in unconsolidated entity	752	12,720
Net proceeds from issuances of common stock	6,591	5,244	5,653
Net cash used in financing activities	(139,603)	(202,145)	(217,891)
Effect of foreign exchange rate changes on cash and cash equivalents	(2,245)	1,419	(226)
Net increase in cash and cash equivalents	2,398	24,486	20,781
Cash and cash equivalents at beginning of year	80,496	56,010	35,229
Cash and cash equivalents at end of year	82,894	80,496	56,010
Prior Revolving Credit Agreement [Member]
Cash flows from financing activities:
Net repayments under revolving credit agreement	(21,800)	$ (213,494)	$ (10,006)
Revolving Credit Agreement [Member]
Cash flows from financing activities:
Net repayments under revolving credit agreement	$ 135,200

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2018

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, 2018, we operated from 571 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.

Equity Method Investments

Investments in which we have the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in other assets in our consolidated balance sheets. Under this method of accounting, our proportionate share of the net income or loss of the investee is included in other income in our consolidated statements of income. The excess, if any, of the carrying amount of our investment over our ownership percentage in the underlying net assets of the investee is attributed to certain fair value adjustments with the remaining portion recognized as goodwill.

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 loss contingencies and the valuation of goodwill, indefinite lived intangible assets and long-lived assets. While we believe that these estimates are reasonable, actual results could differ from such estimates.

Cash Equivalents

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

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable primarily consist of trade receivables due from customers and are stated at the invoiced amount less an allowance for doubtful accounts. An allowance for doubtful accounts is 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, 2018 and 2017, the allowance for doubtful accounts totaled $6,503 and $6,049, respectively.

Inventories

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

Vendor Rebates

We have arrangements with several vendors that provide rebates payable to us when we achieve any of a number of measures, generally related to the volume level of purchases. We account for such rebates as a reduction of inventory until we sell the product, at which time such rebates are reflected as a reduction of cost of sales in our consolidated statements of income. Throughout the year, we estimate the amount of the rebate based on our estimate of purchases to date relative to the purchase levels that mark our progress toward earning the rebates. We continually revise our estimates of earned vendor rebates based on actual purchase levels. At December 31, 2018 and 2017, we had $11,603 and $11,621, 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.

Equity Securities

Investments in equity securities are recorded at fair value using the specific identification method and are included in other assets in our consolidated balance sheets. Unrealized holding gains and losses, net of deferred taxes, were included in accumulated other comprehensive loss within shareholders’ equity for 2017 and 2016. For 2018, changes in the fair value of equity securities were recognized through income rather than comprehensive income. Dividend and interest income are recognized in the statements of income when earned.

Property and Equipment

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

Goodwill and Intangible Assets

Goodwill is recorded when the purchase price paid for an acquisition exceeds the fair value of the net identified tangible and intangible assets acquired. We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. We test goodwill for impairment by first comparing the fair value of our reporting unit to its carrying value. If the fair value is determined to be less than the carrying value, a second step is performed to measure the amount of impairment loss. On January 1, 2019, we performed our annual evaluation of goodwill impairment and determined that the estimated fair value of our reporting unit significantly exceeded its carrying value.

Intangible assets primarily consist of the value of trade names and trademarks, distributor agreements, customer relationships and patented and unpatented technology. Indefinite lived intangibles not subject to amortization are assessed for impairment at least annually, or more frequently if events or changes in 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 and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability is evaluated by determining whether the amortization of the balance over its remaining life can be recovered through undiscounted future operating cash flows. We measure the impairment loss based on projected discounted cash flows using a discount rate reflecting the average cost of funds and compared to the asset’s carrying value. As of December 31, 2018 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. We generate our revenue primarily from the sale of finished products to customers; therefore, the significant majority of our contracts are short-term in nature and have only a single performance obligation to deliver products; therefore, we satisfy our performance obligation under such contracts when we transfer control of the product to the customer. Some contracts contain a combination of product sales and services, the latter of which is distinct and accounted for as a separate performance obligation. We satisfy our performance obligations for services when we render the services within the agreed-upon service period. Total service revenue is not material and accounted for less than 1% of our consolidated revenues for 2018.

Revenue is recognized when control transfers to our customers when products are picked up or via shipment of products or delivery of services. We measure revenue as the amount of consideration we expect to be entitled to receive in exchange for those goods or services, net of any variable considerations (e.g., rights to return product, sales incentives, others) and any taxes collected from customers and subsequently remitted to governmental authorities. Revenue for shipping and handling charges is recognized when products are delivered to the customer.

Product Returns

We estimate product returns based on historical experience and record them on a gross basis on our balance sheet. Substantially all customer returns relate to products that are returned under manufacturers’ warranty obligations. Accrued sales returns of $11,275 at December 31, 2018 were included in accrued expenses and other current liabilities in our consolidated balance sheet.

Sales Incentives

We estimate sales incentives expected to be paid over the term of the program based on the most likely amounts. Sales incentives are accounted for as a reduction in the transaction price and are generally paid on an annual basis.

Advertising Costs

Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2018, 2017 and 2016, were $16,520, $24,677 and $22,242, respectively. See Note 2.

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, 2018, 2017 and 2016, were $51,741, $47,670 and $42,809, respectively. 

Share-Based Compensation

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

Income Taxes

We record U.S. federal, state and foreign income taxes currently payable, as well as deferred taxes due to temporary differences between reporting income and expenses for financial statement purposes versus tax purposes. Deferred tax assets and liabilities reflect the temporary differences between the financial 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 U.S. 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 and option contracts and swaps, to manage our exposure to fluctuations in foreign currency exchange rates and interest rates. The use of these derivative instruments modifies the exposure of these risks with the intent to reduce the risk or cost to us. We use derivative instruments as risk management tools and not for trading purposes. All derivatives, whether designated as hedging relationships or not, are recorded on the balance sheet at fair value. Cash flows from derivative instruments are classified in the consolidated statements of cash flows in the same 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 16 for additional information pertaining to derivative instruments.

Loss Contingencies

Accruals are recorded for various contingencies including self-insurance, legal proceedings, environmental matters, and other claims that arise in the normal course of business. The estimation process contains uncertainty because accruals are based on judgment, the probability of losses and, where applicable, the consideration of opinions of external legal counsel and actuarially determined estimates. Additionally, we record receivables from third party insurers when recovery has been determined to be probable.

Recently Adopted Accounting Standards

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. In 2015 and 2016, the FASB issued several updates to this standard. The adoption of this standard and its related amendments (collectively, the “New Revenue Standard”) on January 1, 2018 did not result in the recognition of a cumulative adjustment to opening retained earnings under the modified retrospective approach, nor did it have a significant impact on our consolidated net income, balance sheet or cash flow. See Note 2.

Financial Instruments

In January 2016, the FASB issued guidance related to certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Most prominent among the changes to the standard is the requirement that changes in the fair value of equity investments, with certain exceptions, be recognized through net income rather than other comprehensive income. This guidance must be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings and became effective for interim and annual periods beginning after December 15, 2017. The adoption of this guidance did not have a material impact on our consolidated financial statements. A cumulative-effect adjustment captured the previously held unrealized losses of $301 related to our equity securities carried at fair value. See Note 4.

Stock Compensation

In May 2017, the FASB issued guidance to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. This guidance must be applied prospectively and became effective for interim and annual periods beginning after December 15, 2017. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Derivatives and Hedging

In August 2017, the FASB issued guidance to simplify the accounting for hedging derivatives. This guidance is effective prospectively and is effective for interim and annual periods beginning after December 15, 2018 with early adoption permitted. We elected to adopt this guidance during the quarter ended June 30, 2018, which did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Standards Not Yet Adopted

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. In July 2018, updated guidance was issued which provides an additional transition method of adoption that allows entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. We adopted this standard and its related amendments (collectively, the “New Lease Standard”) on January 1, 2019, using this additional transition method, and we have elected the available practical expedients upon adoption.

Although we continue to evaluate the impact of the New Lease Standard on our consolidated balance sheet, we do not expect that it will have a material impact on our consolidated statements of income. Following adoption of the New Lease Standard, we record a right-of-use (“ROU”) asset and lease liability, representing our obligation to make lease payments for operating leases greater than one year in duration, measured on a discounted basis. We expect that the ROU asset and lease liability recorded will be approximately 10% of our total assets. In preparation for the adoption, we are implementing business processes and controls over the financial reporting of leases, which will facilitate our reporting under the New Lease Standard in the first quarter of 2019. See Note 18, under the caption “Operating Leases,” for our minimum lease commitments at December 31, 2018.

Intangibles—Goodwill and Other

In January 2017, the FASB issued guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this updated standard, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity also should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if any. This guidance is effective prospectively and is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

Disclosure Update and Simplification

In August 2018, the Securities and Exchange Commission (“SEC”) issued the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification,” that amends certain of its disclosure requirements that have become redundant, duplicative, overlapping, outdated or superseded. The amendments include removing the requirement to disclose information on geographic regions from the Description of Business section of Form 10-K and replacing the requirement that a registrant disclose the high and low trading prices of entity’s ordinary shares with a requirement to disclose the ticker symbol of its shares. Additionally, the final rule extends to interim periods the annual disclosure requirement of presenting changes in each caption of stockholders’ equity and the amount of dividends per share. These disclosures are required to be provided for the current and comparative year-to-date interim periods. The final rule is effective for all filings on or after November 5, 2018. We have adopted all relevant disclosure requirements for our Annual Report on Form 10-K for the year ended December 31, 2018.

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REVENUES

12 Months Ended

Dec. 31, 2018

REVENUES

2. REVENUES

We adopted the New Revenue Standard on January 1, 2018 using the modified retrospective approach. The New Revenue Standard did not have an impact on the amount or timing of our revenue recognition; however, certain payments to customers were reclassified from advertising expenses to a reduction from revenues, resulting in an immaterial impact to the individual financial statement line items of our consolidated statements of income. Results for reporting periods beginning on and after January 1, 2018 are presented under the New Revenue Standard, while prior period results have not been adjusted and continue to be reported under the accounting standards in effect for those periods.

Disaggregation of Revenues

The following table presents our revenues disaggregated by primary geographical regions and major product lines within our single reporting segment:

Years Ended December 31,	2018			2017(1)			2016(1)
Primary Geographical Regions:
United States	$	4,126,639		$	3,919,684		$	3,813,204
Canada		291,685			269,603			267,220
Mexico		128,329			152,668			140,278
	$	4,546,653		$	4,341,955		$	4,220,702
Major Product Lines:
HVAC equipment		67	%		67	%		66	%
Other HVAC products		29	%		28	%		29	%
Commercial refrigeration products		4	%		5	%		5	%
		100	%		100	%		100	%

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

Practical Expedients

We generally expense sales commissions when incurred because the amortization period is one year or less. These costs are recorded within selling, general and administrative expenses. We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

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EARNINGS PER SHARE

12 Months Ended

Dec. 31, 2018

EARNINGS PER SHARE

3. 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,	2018		2017		2016
Basic Earnings per Share:
Net income attributable to Watsco, Inc. shareholders	$	242,932	$	208,221	$	182,810
Less: distributed and undistributed earnings allocated to non-vested restricted common stock		19,792		17,430		14,806
Earnings allocated to Watsco, Inc. shareholders	$	223,140	$	190,791	$	168,004
Weighted-average common shares outstanding - Basic		34,319,890		32,824,947		32,582,385
Basic earnings per share for Common and Class B common stock	$	6.50	$	5.81	$	5.16
Allocation of earnings for Basic:
Common stock	$	206,355	$	175,667	$	154,021
Class B common stock		16,785		15,124		13,983
	$	223,140	$	190,791	$	168,004
Diluted Earnings per Share:
Net income attributable to Watsco, Inc. shareholders	$	242,932	$	208,221	$	182,810
Less: distributed and undistributed earnings allocated to non-vested restricted common stock		19,788		17,427		14,801
Earnings allocated to Watsco, Inc. shareholders	$	223,144	$	190,794	$	168,009
Weighted-average common shares outstanding - Basic		34,319,890		32,824,947		32,582,385
Effect of dilutive stock options		54,379		37,686		34,119
Weighted-average common shares outstanding - Diluted		34,374,269		32,862,633		32,616,504
Diluted earnings per share for Common and Class B common stock	$	6.49	$	5.81	$	5.15

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, 2018, 2017 and 2016, our outstanding Class B common stock was convertible into 2,581,627, 2,601,996 and 2,711,811 shares of our Common stock, respectively.

Diluted earnings per share excluded 74,270, 11,664 and 31,839 shares for the years ended December 31, 2018, 2017 and 2016, respectively, related to stock options with an exercise price per share greater than the average market value, resulting in an anti-dilutive effect on diluted earnings per share.

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OTHER COMPREHENSIVE (LOSS) INCOME

12 Months Ended

Dec. 31, 2018

OTHER COMPREHENSIVE INCOME (LOSS)

4. OTHER COMPREHENSIVE (LOSS) INCOME

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

Years Ended December 31,	2018			2017			2016
Foreign currency translation adjustment	$	(20,493	)	$	15,993		$	6,211
Unrealized gain (loss) on cash flow hedging instruments		2,627			(961	)		(1,321	)
Income tax (expense) benefit		(709	)		259			356
Unrealized gain (loss) on cash flow hedging instruments, net of tax		1,918			(702	)		(965	)
Reclassification of (gain) loss on cash flow hedging instruments into earnings		(215	)		(491	)		442
Income tax expense (benefit)		58			133			(119	)
Reclassification of (gain) loss on cash flow hedging instruments into earnings, net of tax		(157	)		(358	)		323
Unrealized gain on equity securities		—			51			27
Income tax expense		—			(66	)		(13	)
Unrealized (loss) gain on equity securities, net of tax		—			(15	)		14
Other comprehensive (loss) income	$	(18,732	)	$	14,918		$	5,583

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

Years Ended December 31,	2018			2017			2016
Foreign currency translation adjustment:
Beginning balance	$	(33,499	)	$	(43,459	)	$	(47,204	)
Current period other comprehensive (loss) income		(13,105	)		9,960			3,745
Ending balance		(46,604	)		(33,499	)		(43,459	)
Cash flow hedging instruments:
Beginning balance		(421	)		215			600
Current period other comprehensive income (loss)		1,151			(421	)		(579	)
Reclassification adjustment		(94	)		(215	)		194
Ending balance		636			(421	)		215
Equity securities:
Beginning balance		(301	)		(286	)		(300	)
Cumulative-effect adjustment to retained earnings		301			—			—
Current period other comprehensive (loss) income		—			(15	)		14
Ending balance		—			(301	)		(286	)
Accumulated other comprehensive loss, net of tax	$	(45,968	)	$	(34,221	)	$	(43,530	)

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SUPPLIER CONCENTRATION

12 Months Ended

Dec. 31, 2018

SUPPLIER CONCENTRATION

5. SUPPLIER CONCENTRATION

Purchases from our top ten suppliers comprised 84%, 84% and 85% of all purchases made in 2018, 2017 and 2016, respectively. Our largest supplier, Carrier and its affiliates, accounted for 62% of all purchases made in 2018, 2017 and 2016. See Note 19. 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, 2018

PROPERTY AND EQUIPMENT

6. PROPERTY AND EQUIPMENT

Property and equipment, net, consists of:

December 31,	2018			2017
Land	$	820		$	820
Buildings and improvements		75,308			74,486
Machinery, vehicles and equipment		79,002			76,117
Furniture and fixtures		16,782			15,282
Computer hardware and software		50,853			47,377
		222,765			214,082
Accumulated depreciation and amortization		(131,719	)		(122,884	)
	$	91,046		$	91,198

Depreciation and amortization expense related to property and equipment included in selling, general and administrative expenses for the years ended December 31, 2018, 2017 and 2016, were $16,747, $16,770 and $14,853, respectively.

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DEBT

12 Months Ended

Dec. 31, 2018

DEBT

7. DEBT

On December 5, 2018, we entered into an unsecured, five-year $500,000 syndicated multicurrency revolving credit agreement, which replaced in its entirety our prior five-year $300,000 revolving credit agreement, which was nearing maturity. Proceeds from the new facility were used to repay an aggregate of approximately $54,700 outstanding under the prior facility. Additional proceeds may be used for, among other things, funding seasonal working capital needs and 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 facility has a seasonal component from October 1 to March 31, during which the borrowing capacity may be reduced to $400,000 at our discretion (which would effectively reduce fees payable in respect of the unused portion of the commitment, as described below). Included in the credit facility are a $100,000 swingline subfacility, a $10,000 letter of credit subfacility, a $75,000 alternative currency borrowing sublimit and an $8,000 Mexican borrowing sublimit. The credit agreement matures on December 5, 2023.

Borrowings under the credit facility bear interest at either LIBOR-based rates plus a spread, which ranges from 87.5 to 150.0 basis-points (LIBOR plus 87.5 basis-points at December 31, 2018), depending on our ratio of total debt to EBITDA, or on rates based on the highest of the Federal Funds Effective Rate plus 0.5%, the Prime Rate or the Eurocurrency Rate plus 1.0%, in each case plus a spread which ranges from 0 to 50.0 basis-points (0 basis-points at December 31, 2018), depending on our ratio of total debt to EBITDA. We pay a variable commitment fee on the unused portion of the commitment under the revolving credit agreement, ranging from 7.5 to 20.0 basis-points (7.5 basis-points at December 31, 2018). We paid fees of $790 in connection with entering into the revolving credit agreement, which are being amortized ratably through the maturity of the facility in December 2023.

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

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INCOME TAXES

12 Months Ended

Dec. 31, 2018

INCOME TAXES

8. INCOME TAXES

On December 22, 2017, Public Law 115-97 “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” was enacted. This law is commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “TCJA”). The TCJA made broad and complex changes to the U.S. tax code including but not limited to, reducing the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018 and requiring a one-time repatriation transition tax on certain undistributed earnings of foreign subsidiaries. The TCJA also put in place new tax laws that applied prospectively, which included, but were not limited to, generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries and a new provision designed to tax U.S. allocated expenses as well as currently taxing certain global intangible low-taxed income (“GILTI”) of foreign subsidiaries. GILTI is a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. We have elected to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense.

U.S. GAAP requires the impact of tax legislation to be recorded in the period of enactment. We recognized the tax effects of the TCJA for the year ended December 31, 2017 and recorded a provisional net income tax benefit of $9,955. This amount included an income tax benefit from the revaluation of U.S. deferred income taxes, partially offset by an estimate for income tax expense to record U.S. federal, state and foreign withholding tax on previously undistributed earnings of our foreign subsidiaries. We applied the guidance in Staff Accounting Bulletin 118 when accounting for the enactment-date effects of the TCJA. As of December 31, 2018, we have completed our accounting for all the enactment-date income tax effects of the TCJA. In 2018, we increased our previously estimated net income tax benefit by $1,819 to $11,774, following the refinement of estimated U.S. federal and state income taxes on previously undistributed earnings of our foreign subsidiaries.  

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,	2018		2017			2016
U.S. Federal	$	54,345	$	69,079		$	86,719
State		11,631		10,643			9,801
Foreign		6,837		10,499			9,416
	$	72,813	$	90,221		$	105,936
Current	$	64,523	$	100,956		$	103,216
Deferred		8,290		(10,735	)		2,720
	$	72,813	$	90,221		$	105,936

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,	2018			2017			2016
U.S. federal statutory rate		21.0	%		35.0	%		35.0	%
State income taxes, net of federal benefit and other		3.6			2.4			2.3
Excess tax benefits from share-based compensation		(2.0	)		(2.7	)		(1.0	)
Tax effects on foreign income		0.5			(1.0	)		(0.1	)
GILTI		0.3			—			—
Tax credits and other		—			(0.6	)		(0.2	)
Repatriation transition tax		(0.9	)		3.0			—
Deferred tax impact of enacted tax rate changes		0.3			(6.3	)		—
Effective income tax rate attributable to Watsco, Inc.		22.8			29.8			36.0
Taxes attributable to non-controlling interest		(3.1	)		(3.8	)		(5.0	)
Effective income tax rate		19.7	%		26.0	%		31.0	%

The following is a summary of the significant components of our net deferred tax liabilities:

December 31,	2018			2017
Deferred tax assets:
Share-based compensation	$	21,517		$	18,977
Capitalized inventory costs and inventory reserves		2,151			2,107
Allowance for doubtful accounts		1,057			929
Self-insurance reserves		206			153
Other		2,486			2,423
Net operating loss carryforwards		484			291
		27,901			24,880
Valuation allowance		—			—
Total deferred tax assets		27,901			24,880
Deferred tax liabilities:
Deductible goodwill		(69,600	)		(67,246	)
Depreciation		(10,695	)		(5,519	)
Other		(8,516	)		(5,189	)
Total deferred tax liabilities		(88,811	)		(77,954	)
Net deferred tax liabilities (1)	$	(60,910	)	$	(53,074	)

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

Prior to enactment of the TCJA, U.S. income taxes had not been provided on undistributed earnings of our foreign subsidiaries as we had intended to reinvest such earnings permanently outside the U.S. or to repatriate such earnings only when it was tax effective to do so. The TCJA one-time repatriation transition tax and GILTI liabilities effectively taxed the undistributed earnings previously deferred from U.S. Federal income taxes. As of December 31, 2018, we have accumulated undistributed earnings generated by our foreign subsidiaries of approximately $93,000. Any additional taxes due with respect to such previously-taxed earnings, if repatriated, would generally be limited to foreign withholding. Deferred taxes have been recorded for foreign withholding taxes on certain earnings of our foreign consolidated subsidiaries expected to be repatriated. We do not intend to distribute the remaining previously-taxed foreign earnings and therefore have not recorded deferred taxes for foreign withholding on such earnings. The amount of foreign withholding that might be payable on the remaining amounts at December 31, 2018 is not material.

Valuation allowances are provided to reduce the related deferred income tax assets to an amount which will, more likely than not, be realized. As a result of our assessment of the realization of deferred income tax assets, we have concluded that it is more likely than not that all of our deferred income tax assets will be realized and thus no valuation allowance was necessary at both December 31, 2018 and 2017. At December 31, 2018, there were state net operating loss carryforwards of $8,263, which expire in varying amounts from 2019 through 2038. These amounts are available to offset future taxable income. There were no federal net operating loss carryforwards at December 31, 2018.

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 2015. For the majority of states and foreign jurisdictions, we are no longer subject to tax examinations for tax years prior to 2014.

As of December 31, 2018 and 2017, the total amount of gross unrecognized tax benefits (excluding the federal benefit received from state positions) was $4,902 and $4,225, respectively. Of these totals, $3,997 and $3,457, 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, 2018 and 2017, the cumulative amount of estimated accrued interest and penalties resulting from such unrecognized tax benefits was $755 and $540, respectively, and is included in deferred income taxes and other current liabilities in the accompanying consolidated balance sheets.

The changes in gross unrecognized tax benefits are as follows:

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 and tax assessments		(365	)
Balance at December 31, 2016		3,695
Additions based on tax positions related to the current year		801
Reductions due to lapse of applicable statute of limitations		(271	)
Balance at December 31, 2017		4,225
Additions based on tax positions related to the current year		960
Reductions due to lapse of applicable statute of limitations		(283	)
Balance at December 31, 2018	$	4,902

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SHARE-BASED COMPENSATION AND BENEFIT PLANS

12 Months Ended

Dec. 31, 2018

SHARE-BASED COMPENSATION AND BENEFIT PLANS

9. SHARE-BASED COMPENSATION AND BENEFIT PLANS

Share-Based Compensation Plans

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

Under the 2014 Plan, the number of shares of Common and Class B common stock available for issuance is (i) 2,000,000, plus (ii) 45,421 shares of Common stock or Class B common stock that remained available for grant in connection with awards under the 2001 Plan as of the date our 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 601,252 shares of Common stock, net of cancellations, and 626,387 shares of Class B common stock, had been awarded under the 2014 Plan as of December 31, 2018. As of December 31, 2018, 817,782 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 1,000 options to exercise common stock outstanding under the 2001 Plan at December 31, 2018. 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, 2018:

	Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Options outstanding at December 31, 2017		398,833		$	136.44
Granted		188,550			173.48
Exercised		(54,934	)		114.09
Forfeited		(26,832	)		155.83
Expired		(1,000	)		122.62
Options outstanding at December 31, 2018		504,617		$	151.71		3.31	$	1,733
Options exercisable at December 31, 2018		71,487		$	135.89		2.13	$	826

The following is a summary of non-vested restricted stock activity as of and for the year ended December 31, 2018:

	Shares			Weighted- Average Grant Date Fair Value
Non-vested restricted stock outstanding at December 31, 2017		2,985,239		$	51.22
Granted		142,865			167.06
Vested		(55,502	)		66.52
Forfeited		(10,000	)		142.52
Non-vested restricted stock outstanding at December 31, 2018		3,062,602		$	48.72

The weighted-average grant date fair value of non-vested restricted stock granted during 2018, 2017 and 2016 was $167.06, $149.47 and $130.01, respectively. The fair value of non-vested restricted stock that vested during 2018, 2017 and 2016 was $9,637, $11,580 and $10,096, respectively.

During 2018, 21,754 shares of Common and Class B common stock with an aggregate fair market value of $3,775 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of restricted stock. During 2017, 32,454 shares of Common stock with an aggregate fair market value of $4,664 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of restricted stock. 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. 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,	2018			2017			2016
Expected term in years		4.25			4.25			4.25
Risk-free interest rate		2.69	%		1.77	%		1.24	%
Expected volatility		17.11	%		17.41	%		18.65	%
Expected dividend yield		3.13	%		2.82	%		2.54	%
Grant date fair value	$	20.05		$	17.23		$	16.37

Exercise of Stock Options

The total intrinsic value of stock options exercised during 2018, 2017 and 2016 was $3,500, $2,296 and $4,123, respectively. Cash received from the exercise of stock options during 2018, 2017 and 2016 was $5,006, $3,855 and $4,447, respectively. During 2018, 2017 and 2016, 7,027 shares of Common stock with an aggregate fair market value of $1,269, 350 shares of Common stock with an aggregate fair market value of $53 and 348 shares of Common stock with an aggregate fair market value of $51, 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,	2018		2017		2016
Stock options	$	2,014	$	1,451	$	1,149
Non-vested restricted stock		13,494		11,842		11,170
Share-based compensation expense	$	15,508	$	13,293	$	12,319

At December 31, 2018, there was $3,598 of unrecognized pre-tax compensation expense related to stock options granted under the 2014 Plan, which is expected to be recognized over a weighted-average period of approximately 1.8 years. The total fair value of stock options that vested during 2018, 2017 and 2016 was $1,607, $754 and $736, respectively.

At December 31, 2018, there was $118,124 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 11.2 years. Of this amount, approximately $56,000 is related to awards granted to our Chief Executive Officer (“CEO”), of which approximately $9,000, $42,000 and $5,000 vest in approximately 4, 8 and 10 years upon his attainment of age 82, 86 and 88, respectively, and approximately $13,000 is related to awards granted to our President, of which approximately $12,000 and $1,000 vest in approximately 25 and 27 years upon his attainment of age 62 and 64, respectively. In the event that vesting is accelerated for any circumstance, as defined in the related agreements, the remaining unrecognized share-based compensation expense would be immediately recognized as a charge to earnings with a corresponding tax benefit. At December 31, 2018, we were obligated to issue 45,752 shares of non-vested restricted stock to our CEO that vest in 10 years and 23,297 shares of non-vested restricted stock to our President that vest in 25 years in connection with performance based incentive compensation.

Employee Stock Purchase Plan

The Watsco, Inc. Fourth Amended and Restated 1996 Qualified Employee Stock Purchase Plan (the “ESPP”) provides for up to 1,500,000 shares of Common stock to be available for purchase by our full-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 2018, 2017 and 2016, employees purchased 5,151, 5,571 and 5,956 shares of Common stock at an average price of $168.21, $144.58 and $125.84 per share, respectively. Cash dividends received by the ESPP were reinvested in Common stock and resulted in the issuance of 4,338, 3,844 and 3,442 additional shares during 2018, 2017 and 2016, respectively. We received net proceeds of $1,585, $1,389 and $1,206, respectively, during 2018, 2017 and 2016, for shares of our Common stock purchased under the ESPP. At December 31, 2018, 477,256 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, 2018, 2017 and 2016, we issued 17,318, 16,389 and 20,045 shares of Common stock, respectively, to the plan, representing the Common stock discretionary matching contribution of $2,945, $2,428 and $2,348, respectively.

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PURCHASE OF ADDITIONAL OWNERSHIP INTEREST IN JOINT VENTURE

12 Months Ended

Dec. 31, 2018

PURCHASE OF ADDITIONAL OWNERSHIP INTEREST IN JOINT VENTURE

10. PURCHASE OF ADDITIONAL OWNERSHIP INTEREST IN JOINT VENTURE

In 2011, we formed a joint venture with Carrier, Carrier Enterprise Northeast LLC, which we refer to as Carrier Enterprise II. We initially owned a 60% controlling interest in Carrier Enterprise II. On November 29, 2016, we purchased an additional 10% ownership interest for cash consideration of $42,909, and, on February 13, 2017, we purchased an additional 10% ownership interest for cash consideration of $42,688, which together increased our controlling interest in Carrier Enterprise II to 80%.

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INVESTMENT IN UNCONSOLIDATED ENTITY

12 Months Ended

Dec. 31, 2018

INVESTMENT IN UNCONSOLIDATED ENTITY

11. INVESTMENT IN UNCONSOLIDATED ENTITY

On June 21, 2017, our first joint venture with Carrier, Carrier Enterprise, LLC, which we refer to as Carrier Enterprise I, acquired a 34.9% ownership interest in Russell Sigler, Inc. (“RSI”), an HVAC distributor with 2018 sales of approximately $770,000, operating from 30 locations in the Western U.S. We have an 80% controlling interest in Carrier Enterprise I, and Carrier has a 20% non-controlling interest. Carrier Enterprise I acquired its ownership interest in RSI for cash consideration of $63,600, of which we contributed $50,880, and Carrier contributed $12,720. Effective June 29, 2018, Carrier Enterprise I acquired an additional 1.4% ownership interest in RSI, which increased Carrier Enterprise I’s ownership interest in RSI to 36.3% for cash consideration of $3,760, of which we contributed $3,008 and Carrier contributed $752. Carrier Enterprise I is a party to a shareholders agreement (the “Shareholders Agreement”) with RSI and its shareholders. Pursuant to the Shareholders Agreement, RSI’s shareholders have the right to sell, and Carrier Enterprise I has the obligation to purchase, their respective shares of RSI for a purchase price determined based on either book value or a multiple of EBIT, the latter of which Carrier Enterprise I used to calculate the price paid for its investment in RSI. RSI’s shareholders may transfer their respective shares of RSI common stock only to members of the Sigler family or to Carrier Enterprise I, and, at any time from and after the date on which Carrier Enterprise I owns 85% or more of RSI’s outstanding common stock, it has the right, but not the obligation, to purchase from RSI’s shareholders the remaining outstanding shares of RSI common stock. Additionally, Carrier Enterprise I has the right to appoint two of RSI’s six board members. Given Carrier Enterprise I’s 36.3% ownership interest in RSI and its right to appoint two out of RSI’s six board members, this investment in RSI is accounted for under the equity method.

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ACQUISITION

12 Months Ended

Dec. 31, 2018

ACQUISITION

12. ACQUISITIONS

On August 23, 2018, one of our wholly owned subsidiaries acquired Alert Labs Inc., a technology company based in Ontario, Canada for cash consideration of $5,889 and the issuance of 23,873 shares of Common stock having a fair value of $3,991, net of a discount for lack of marketability, less $171 related to our previously held equity interest. In addition, 23,230 shares of Common stock having a fair value of $3,026 were issued into escrow as contingent consideration, all of which are subject to certain performance metrics within a three-year measurement period. The purchase price resulted in the recognition of $14,941 in goodwill and intangibles. The fair value of the identified intangible assets was $1,640 and consisted of $1,600 in patented and unpatented technologies and $40 in customer relationships to be amortized over a seven year period. The tax basis of the acquired goodwill recognized is not deductible for income tax purposes.

On November 30, 2018, one of our wholly owned subsidiaries acquired certain assets and assumed certain liabilities of a wholesale distributor of air conditioning and heating products operating from three locations in North Carolina.

The results of operations of these acquisitions have been included in the consolidated financial statements from their respective dates of acquisition. The pro forma effect of the acquisitions were not deemed significant to the consolidated financial statements.

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GOODWILL AND INTANGIBLE ASSETS

12 Months Ended

Dec. 31, 2018

GOODWILL AND INTANGIBLE ASSETS

13. GOODWILL AND INTANGIBLE ASSETS

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

Balance at December 31, 2016	$	379,737
Foreign currency translation adjustment		2,992
Balance at December 31, 2017		382,729
Acquired goodwill		13,301
Foreign currency translation adjustment		(4,032	)
Balance at December 31, 2018	$	391,998

Intangible assets are comprised of the following:

December 31,	Estimated Useful Lives		2018			2017
Indefinite lived intangible assets - Trade names, trademarks and distribution rights			$	119,188		$	125,194
Finite lived intangible assets:
Customer relationships		10-15 years		69,593			73,053
Patented and unpatented technology		7 years		1,600			—
Trade name		10 years		1,150			1,150
Accumulated amortization				(43,680	)		(38,332	)
Finite lived intangible assets, net				28,663			35,871
			$	147,851		$	161,065

Amortization expense related to finite lived intangible assets included in selling, general and administrative expenses for the years ended December 31, 2018, 2017 and 2016, were $5,348, $5,263 and $5,213, respectively. Annual amortization of finite lived intangible assets for the next five years is expected to approximate the following:

2019	$	5,000
2020	$	5,000
2021	$	4,200
2022	$	3,400
2023	$	2,800

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SHAREHOLDERS' EQUITY

12 Months Ended

Dec. 31, 2018

SHAREHOLDERS' EQUITY

14. 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, 2018 or 2017.

At-the-Market Offering Program

On August 23, 2017, we entered into a sales agreement with Robert W. Baird & Co. Inc., which enabled the Company to issue and sell shares of Common stock in one or more negotiated transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), for a maximum aggregate offering amount of up to $250,000 (the “ATM Program”). The offer and sale of our Common stock pursuant to the ATM Program was registered under the Securities Act pursuant to our automatically effective shelf registration statement on Form S-3 (File No. 333-207831).

During 2017, we sold 1,498,662 shares of Common stock under the ATM Program for net proceeds of $247,744. Direct costs of $311 incurred in connection with the offering were charged against the proceeds from the sale of Common stock and reflected as a reduction of paid-in capital. As of December 31, 2017, we had completed the offering of shares under the ATM Program. The net proceeds were primarily used to repay outstanding debt and for general corporate purposes.

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 2018, 2017 or 2016. We last repurchased shares under this plan during 2008. In aggregate, 6,322,650 shares of Common stock and 48,263 shares of Class B common stock have been repurchased at a cost of $114,425 since the inception of the program. At December 31, 2018, there were 1,129,087 shares remaining authorized for repurchase under the program.

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FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2018

FINANCIAL INSTRUMENTS

15. 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, 2018 and 2017, 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, 2018 and 2017, we were contingently liable under standby letters of credit aggregating $1,222 and $2,430, 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, 2018 and 2017, we were contingently liable under various performance bonds aggregating approximately $3,600 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, 2018

DERIVATIVES

16. DERIVATIVES

We enter into foreign currency forward and option contracts to offset the earnings impact that foreign exchange rate fluctuations would otherwise have on certain monetary liabilities that are denominated in nonfunctional currencies.

Cash Flow Hedging Instruments

We enter into foreign currency forward contracts that are designated as cash flow hedges. The settlement of these derivatives results in reclassifications from accumulated other comprehensive loss to earnings for the period in which the settlement of these instruments occurs. The maximum period for which we hedge our cash flow using these instruments is 12 months. Accordingly, at December 31, 2018, 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, 2018 was $40,000, and such contracts have varying terms expiring through September 2019.

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

Years Ended December 31,	2018			2017
Gain (loss) recorded in accumulated other comprehensive loss	$	2,627		$	(961	)
(Gain) loss reclassified from accumulated other comprehensive loss into earnings	$	(215	)	$	(491	)

At December 31, 2018, we expected an estimated $1,450 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 and option contracts that are either not designated as hedges or did not qualify for hedge accounting. These derivative instruments were effective economic hedges for all of the periods presented. The fair value gains and losses on these contracts are recognized in earnings as a component of selling, general and administrative expenses. The total notional value of our foreign currency exchange contracts not designated as hedging instruments at December 31, 2018 was $6,800, and such contracts have varying terms expiring through February 2019.

We recognized gains (losses) of $129, $(829) and $(306) from foreign currency forward and option contracts not designated as hedging instruments in our consolidated statements of income for 2018, 2017 and 2016, respectively.

The following table summarizes the fair value of derivative instruments, which consist solely of foreign exchange contracts, included in other current assets and accrued expenses and other current liabilities in our consolidated balance sheets. See Note 17.

	Asset Derivatives				Liability Derivatives
December 31,	2018		2017		2018		2017
Derivatives designated as hedging instruments	$	1,262	$	70	$	3	$	773
Derivatives not designated as hedging instruments		58		180		11		184
Total derivative instruments	$	1,320	$	250	$	14	$	957

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FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2018

FAIR VALUE MEASUREMENTS

17. FAIR VALUE MEASUREMENTS

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

				Fair Value Measurements at December 31, 2018 Using
	Balance Sheet Location	Total		Level 1		Level 2		Level 3
Assets:
Derivative financial instruments	Other current assets	$	1,320		—	$	1,320		—
Equity securities	Other assets	$	279	$	279		—		—
Liabilities:
Derivative financial instruments	Accrued expenses and other current liabilities	$	14		—	$	14		—

				Fair Value Measurements at December 31, 2017 Using
	Balance Sheet Location	Total		Level 1		Level 2		Level 3
Assets:
Derivative financial instruments	Other current assets	$	250		—	$	250		—
Equity securities	Other assets	$	332	$	332		—		—
Liabilities:
Derivative financial instruments	Accrued expenses and other current liabilities	$	957		—	$	957		—

The following is a description of the valuation techniques used for these assets and liabilities, as well as the level of input used to measure fair value:

Equity securities – these investments are exchange-traded equity securities. Fair values for these 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 and option contracts. See Note 16. 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 2018 or 2017.

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COMMITMENTS AND CONTINGENCIES

12 Months Ended

Dec. 31, 2018

COMMITMENTS AND CONTINGENCIES

18. COMMITMENTS AND CONTINGENCIES

Litigation, Claims and Assessments

We are involved in litigation incidental to the operation of our business. We vigorously defend all matters in which we or our subsidiaries are named defendants and, for insurable losses, maintain significant 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 and could materially impact the consolidated results of operations. 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 $2,311 and $2,344 at December 31, 2018 and 2017, 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, 2018, 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 $3,900. See “Self-Insurance” above for further information on commitments associated with the insurance programs and Note 15, under the caption “Off-Balance Sheet Financial Instruments,” for further information on standby letters of credit. At December 31, 2018, 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, vehicles and equipment used in our operations with varying terms through 2028. Operating expenses that are separate from rental expense that we are committed to pay under certain of these lease agreements 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, 2018, future minimum payments under non-cancelable operating leases over each of the next five years and thereafter were as follows:

2019	$	70,388
2020		55,102
2021		41,321
2022		28,482
2023		15,712
Thereafter		8,245
Total minimum payments	$	219,250

Rental expense for the years ended December 31, 2018, 2017 and 2016, was $84,537, $84,076 and $83,260, respectively.

Purchase Obligations

At December 31, 2018, we were obligated under various non-cancelable purchase orders with our key suppliers for goods aggregating approximately $35,000, of which approximately $22,000 is with Carrier and its affiliates.

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RELATED PARTY TRANSACTIONS

12 Months Ended

Dec. 31, 2018

RELATED PARTY TRANSACTIONS

19. RELATED PARTY TRANSACTIONS

Purchases from Carrier and its affiliates comprised 62% of all inventory purchases made during each of 2018, 2017 and 2016. At December 31, 2018 and 2017, approximately $71,000 and $75,000, 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 2018, 2017 and 2016 included approximately $84,000, $64,000 and $56,000, 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, which served as general contractor for the remodeling of our Miami headquarters that was completed in 2018. We paid Moss & Associates LLC $124, $951 and $291 for construction services performed during 2018, 2017 and 2016, respectively, and no amount was payable at December 31, 2018.

A member of our Board of Directors is the Senior Chairman of Greenberg Traurig, P.A., which serves as our principal outside counsel and receives customary fees for legal services. During 2018 and 2017, we paid this firm $131 and $475, respectively, for services performed, and no amount was payable at December 31, 2018.

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INFORMATION ABOUT GEOGRAPHIC AREAS

12 Months Ended

Dec. 31, 2018

INFORMATION ABOUT GEOGRAPHIC AREAS

20. 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,	2018		2017		2016
Revenues:
United States	$	4,126,639	$	3,919,684	$	3,813,204
Canada		291,685		269,603		267,220
Mexico		128,329		152,668		140,278
Total revenues	$	4,546,653	$	4,341,955	$	4,220,702

December 31,	2018		2017
Long-Lived Assets:
United States	$	550,939	$	540,136
Canada		162,648		163,944
Mexico		5,640		5,400
Total long-lived assets	$	719,227	$	709,480

Revenues are attributed to countries based on the location of the store from which the sale occurred. Long-lived assets consist primarily of goodwill and intangible assets, property and equipment, and our investment in an unconsolidated entity.

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SUPPLEMENTAL CASH FLOW INFORMATION

12 Months Ended

Dec. 31, 2018

SUPPLEMENTAL CASH FLOW INFORMATION

21. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information was as follows:

Years Ended December 31,	2018		2017		2016
Interest paid	$	3,065	$	5,773	$	3,362
Income taxes net of refunds	$	115,301	$	48,056	$	99,006
Common stock issued for Alert Labs Inc.	$	6,846		—		—

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SELECTED QUARTERLY FINANCIAL DATA

12 Months Ended

Dec. 31, 2018

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, 2018
Revenues (1)	$	926,577	$	1,332,743	$	1,296,007	$	991,326	$	4,546,653
Gross profit	$	230,833	$	320,766	$	319,009	$	249,644	$	1,120,252
Net income attributable to Watsco, Inc.	$	34,219	$	89,957	$	79,163	$	39,593	$	242,932
Earnings per share for Common and Class B common stock (2):
Basic	$	0.89	$	2.41	$	2.12	$	1.02	$	6.50
Diluted	$	0.89	$	2.40	$	2.11	$	1.02	$	6.49
Year Ended December 31, 2017
Revenues (1)	$	872,095	$	1,275,924	$	1,229,591	$	964,345	$	4,341,955
Gross profit	$	218,556	$	310,278	$	295,895	$	240,930	$	1,065,659
Net income attributable to Watsco, Inc.	$	26,181	$	73,756	$	65,029	$	43,255	$	208,221
Earnings per share for Common and Class B common stock (2):
Basic	$	0.71	$	2.07	$	1.82	$	1.19	$	5.81
Diluted	$	0.71	$	2.07	$	1.82	$	1.19	$	5.81

(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 evenly distributed throughout the year except for dependence on housing completions and related weather and economic conditions.

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

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

12 Months Ended

Dec. 31, 2018

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, 2018, we operated from 571 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.

Equity Method Investments

Equity Method Investments

Investments in which we have the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in other assets in our consolidated balance sheets. Under this method of accounting, our proportionate share of the net income or loss of the investee is included in other income in our consolidated statements of income. The excess, if any, of the carrying amount of our investment over our ownership percentage in the underlying net assets of the investee is attributed to certain fair value adjustments with the remaining portion recognized as goodwill.

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 loss contingencies and the valuation of goodwill, indefinite lived intangible assets and long-lived assets. While we believe that these estimates are reasonable, actual results could differ from such estimates.

Cash Equivalents

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, 2018 and 2017, the allowance for doubtful accounts totaled $6,503 and $6,049, 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 using the weighted-average cost basis and the first-in, first-out methods, or net realizable value. As part of the valuation process, inventories are adjusted to reflect excess, slow-moving and damaged inventories at their estimated net realizable value. Inventory policies are reviewed periodically, reflecting current risks, trends and changes in industry conditions. A reserve for estimated inventory shrinkage is also maintained to consider inventory shortages determined from cycle counts and physical inventories.

Vendor Rebates

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, 2018 and 2017, we had $11,603 and $11,621, 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.

Equity Securities

Equity Securities

Investments in equity securities are recorded at fair value using the specific identification method and are included in other assets in our consolidated balance sheets. Unrealized holding gains and losses, net of deferred taxes, were included in accumulated other comprehensive loss within shareholders’ equity for 2017 and 2016. For 2018, changes in the fair value of equity securities were recognized through income rather than comprehensive income. Dividend and interest income are recognized in the statements of income when earned.

Property and Equipment

Property and Equipment

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 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. On January 1, 2019, we performed our annual evaluation of goodwill impairment and determined that the estimated fair value of our reporting unit significantly exceeded its carrying value.

Intangible assets primarily consist of the value of trade names and trademarks, distributor agreements, customer relationships and patented and unpatented technology. Indefinite lived intangibles not subject to amortization are assessed for impairment at least annually, or more frequently if events or changes in 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 and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability is evaluated by determining whether the amortization of the balance over its remaining life can be recovered through undiscounted future operating cash flows. We measure the impairment loss based on projected discounted cash flows using a discount rate reflecting the average cost of funds and compared to the asset’s carrying value. As of December 31, 2018 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. We generate our revenue primarily from the sale of finished products to customers; therefore, the significant majority of our contracts are short-term in nature and have only a single performance obligation to deliver products; therefore, we satisfy our performance obligation under such contracts when we transfer control of the product to the customer. Some contracts contain a combination of product sales and services, the latter of which is distinct and accounted for as a separate performance obligation. We satisfy our performance obligations for services when we render the services within the agreed-upon service period. Total service revenue is not material and accounted for less than 1% of our consolidated revenues for 2018.

Revenue is recognized when control transfers to our customers when products are picked up or via shipment of products or delivery of services. We measure revenue as the amount of consideration we expect to be entitled to receive in exchange for those goods or services, net of any variable considerations (e.g., rights to return product, sales incentives, others) and any taxes collected from customers and subsequently remitted to governmental authorities. Revenue for shipping and handling charges is recognized when products are delivered to the customer.

Product Returns

We estimate product returns based on historical experience and record them on a gross basis on our balance sheet. Substantially all customer returns relate to products that are returned under manufacturers’ warranty obligations. Accrued sales returns of $11,275 at December 31, 2018 were included in accrued expenses and other current liabilities in our consolidated balance sheet.

Sales Incentives

We estimate sales incentives expected to be paid over the term of the program based on the most likely amounts. Sales incentives are accounted for as a reduction in the transaction price and are generally paid on an annual basis.

Advertising Costs

Advertising Costs

Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2018, 2017 and 2016, were $16,520, $24,677 and $22,242, respectively. See Note 2.

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, 2018, 2017 and 2016, were $51,741, $47,670 and $42,809, respectively. 

Share-Based Compensation

Share-Based Compensation

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

Income Taxes

Income Taxes

We record U.S. federal, state and foreign income taxes currently payable, as well as deferred taxes due to temporary differences between reporting income and expenses for financial statement purposes versus tax purposes. Deferred tax assets and liabilities reflect the temporary differences between the financial 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 U.S. 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 and option contracts and swaps, to manage our exposure to fluctuations in foreign currency exchange rates and interest rates. The use of these derivative instruments modifies the exposure of these risks with the intent to reduce the risk or cost to us. We use derivative instruments as risk management tools and not for trading purposes. All derivatives, whether designated as hedging relationships or not, are recorded on the balance sheet at fair value. Cash flows from derivative instruments are classified in the consolidated statements of cash flows in the same 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 16 for additional information pertaining to derivative instruments.

Loss Contingencies

Loss Contingencies

Accruals are recorded for various contingencies including self-insurance, legal proceedings, environmental matters, and other claims that arise in the normal course of business. The estimation process contains uncertainty because accruals are based on judgment, the probability of losses and, where applicable, the consideration of opinions of external legal counsel and actuarially determined estimates. Additionally, we record receivables from third party insurers when recovery has been determined to be probable.

Recently Adopted Accounting Standards and Recently Issued Accounting Standards Not Yet Adopted

Recently Adopted 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. In 2015 and 2016, the FASB issued several updates to this standard. The adoption of this standard and its related amendments (collectively, the “New Revenue Standard”) on January 1, 2018 did not result in the recognition of a cumulative adjustment to opening retained earnings under the modified retrospective approach, nor did it have a significant impact on our consolidated net income, balance sheet or cash flow. See Note 2.

Financial Instruments

In January 2016, the FASB issued guidance related to certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Most prominent among the changes to the standard is the requirement that changes in the fair value of equity investments, with certain exceptions, be recognized through net income rather than other comprehensive income. This guidance must be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings and became effective for interim and annual periods beginning after December 15, 2017. The adoption of this guidance did not have a material impact on our consolidated financial statements. A cumulative-effect adjustment captured the previously held unrealized losses of $301 related to our equity securities carried at fair value. See Note 4.

Stock Compensation

In May 2017, the FASB issued guidance to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. This guidance must be applied prospectively and became effective for interim and annual periods beginning after December 15, 2017. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Derivatives and Hedging

In August 2017, the FASB issued guidance to simplify the accounting for hedging derivatives. This guidance is effective prospectively and is effective for interim and annual periods beginning after December 15, 2018 with early adoption permitted. We elected to adopt this guidance during the quarter ended June 30, 2018, which did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Standards Not Yet Adopted

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. In July 2018, updated guidance was issued which provides an additional transition method of adoption that allows entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. We adopted this standard and its related amendments (collectively, the “New Lease Standard”) on January 1, 2019, using this additional transition method, and we have elected the available practical expedients upon adoption.

Although we continue to evaluate the impact of the New Lease Standard on our consolidated balance sheet, we do not expect that it will have a material impact on our consolidated statements of income. Following adoption of the New Lease Standard, we record a right-of-use (“ROU”) asset and lease liability, representing our obligation to make lease payments for operating leases greater than one year in duration, measured on a discounted basis. We expect that the ROU asset and lease liability recorded will be approximately 10% of our total assets. In preparation for the adoption, we are implementing business processes and controls over the financial reporting of leases, which will facilitate our reporting under the New Lease Standard in the first quarter of 2019. See Note 18, under the caption “Operating Leases,” for our minimum lease commitments at December 31, 2018.

Intangibles—Goodwill and Other

In January 2017, the FASB issued guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this updated standard, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity also should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if any. This guidance is effective prospectively and is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

Disclosure Update and Simplification

In August 2018, the Securities and Exchange Commission (“SEC”) issued the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification,” that amends certain of its disclosure requirements that have become redundant, duplicative, overlapping, outdated or superseded. The amendments include removing the requirement to disclose information on geographic regions from the Description of Business section of Form 10-K and replacing the requirement that a registrant disclose the high and low trading prices of entity’s ordinary shares with a requirement to disclose the ticker symbol of its shares. Additionally, the final rule extends to interim periods the annual disclosure requirement of presenting changes in each caption of stockholders’ equity and the amount of dividends per share. These disclosures are required to be provided for the current and comparative year-to-date interim periods. The final rule is effective for all filings on or after November 5, 2018. We have adopted all relevant disclosure requirements for our Annual Report on Form 10-K for the year ended December 31, 2018.

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REVENUES (Tables)

12 Months Ended

Dec. 31, 2018

Summary of Disaggregated Revenue

The following table presents our revenues disaggregated by primary geographical regions and major product lines within our single reporting segment:

Years Ended December 31,	2018			2017(1)			2016(1)
Primary Geographical Regions:
United States	$	4,126,639		$	3,919,684		$	3,813,204
Canada		291,685			269,603			267,220
Mexico		128,329			152,668			140,278
	$	4,546,653		$	4,341,955		$	4,220,702
Major Product Lines:
HVAC equipment		67	%		67	%		66	%
Other HVAC products		29	%		28	%		29	%
Commercial refrigeration products		4	%		5	%		5	%
		100	%		100	%		100	%

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

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EARNINGS PER SHARE (Tables)

12 Months Ended

Dec. 31, 2018

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,	2018		2017		2016
Basic Earnings per Share:
Net income attributable to Watsco, Inc. shareholders	$	242,932	$	208,221	$	182,810
Less: distributed and undistributed earnings allocated to non-vested restricted common stock		19,792		17,430		14,806
Earnings allocated to Watsco, Inc. shareholders	$	223,140	$	190,791	$	168,004
Weighted-average common shares outstanding - Basic		34,319,890		32,824,947		32,582,385
Basic earnings per share for Common and Class B common stock	$	6.50	$	5.81	$	5.16
Allocation of earnings for Basic:
Common stock	$	206,355	$	175,667	$	154,021
Class B common stock		16,785		15,124		13,983
	$	223,140	$	190,791	$	168,004
Diluted Earnings per Share:
Net income attributable to Watsco, Inc. shareholders	$	242,932	$	208,221	$	182,810
Less: distributed and undistributed earnings allocated to non-vested restricted common stock		19,788		17,427		14,801
Earnings allocated to Watsco, Inc. shareholders	$	223,144	$	190,794	$	168,009
Weighted-average common shares outstanding - Basic		34,319,890		32,824,947		32,582,385
Effect of dilutive stock options		54,379		37,686		34,119
Weighted-average common shares outstanding - Diluted		34,374,269		32,862,633		32,616,504
Diluted earnings per share for Common and Class B common stock	$	6.49	$	5.81	$	5.15

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OTHER COMPREHENSIVE (LOSS) INCOME (Tables)

12 Months Ended

Dec. 31, 2018

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

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

Years Ended December 31,	2018			2017			2016
Foreign currency translation adjustment	$	(20,493	)	$	15,993		$	6,211
Unrealized gain (loss) on cash flow hedging instruments		2,627			(961	)		(1,321	)
Income tax (expense) benefit		(709	)		259			356
Unrealized gain (loss) on cash flow hedging instruments, net of tax		1,918			(702	)		(965	)
Reclassification of (gain) loss on cash flow hedging instruments into earnings		(215	)		(491	)		442
Income tax expense (benefit)		58			133			(119	)
Reclassification of (gain) loss on cash flow hedging instruments into earnings, net of tax		(157	)		(358	)		323
Unrealized gain on equity securities		—			51			27
Income tax expense		—			(66	)		(13	)
Unrealized (loss) gain on equity securities, net of tax		—			(15	)		14
Other comprehensive (loss) income	$	(18,732	)	$	14,918		$	5,583

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,	2018			2017			2016
Foreign currency translation adjustment:
Beginning balance	$	(33,499	)	$	(43,459	)	$	(47,204	)
Current period other comprehensive (loss) income		(13,105	)		9,960			3,745
Ending balance		(46,604	)		(33,499	)		(43,459	)
Cash flow hedging instruments:
Beginning balance		(421	)		215			600
Current period other comprehensive income (loss)		1,151			(421	)		(579	)
Reclassification adjustment		(94	)		(215	)		194
Ending balance		636			(421	)		215
Equity securities:
Beginning balance		(301	)		(286	)		(300	)
Cumulative-effect adjustment to retained earnings		301			—			—
Current period other comprehensive (loss) income		—			(15	)		14
Ending balance		—			(301	)		(286	)
Accumulated other comprehensive loss, net of tax	$	(45,968	)	$	(34,221	)	$	(43,530	)

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PROPERTY AND EQUIPMENT (Tables)

12 Months Ended

Dec. 31, 2018

Property and Equipment, Net

Property and equipment, net, consists of:

December 31,	2018			2017
Land	$	820		$	820
Buildings and improvements		75,308			74,486
Machinery, vehicles and equipment		79,002			76,117
Furniture and fixtures		16,782			15,282
Computer hardware and software		50,853			47,377
		222,765			214,082
Accumulated depreciation and amortization		(131,719	)		(122,884	)
	$	91,046		$	91,198

Depreciation and amortization expense related to property and equipment included in selling, general and administrative expenses for the years ended December 31, 2018, 2017 and 2016, were $16,747, $16,770 and $14,853, respectively.

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INCOME TAXES (Tables)

12 Months Ended

Dec. 31, 2018

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,	2018		2017			2016
U.S. Federal	$	54,345	$	69,079		$	86,719
State		11,631		10,643			9,801
Foreign		6,837		10,499			9,416
	$	72,813	$	90,221		$	105,936
Current	$	64,523	$	100,956		$	103,216
Deferred		8,290		(10,735	)		2,720
	$	72,813	$	90,221		$	105,936

Reconciliation of Effective Income Tax Rate

Following is a reconciliation of the effective income tax rate:

Years Ended December 31,	2018			2017			2016
U.S. federal statutory rate		21.0	%		35.0	%		35.0	%
State income taxes, net of federal benefit and other		3.6			2.4			2.3
Excess tax benefits from share-based compensation		(2.0	)		(2.7	)		(1.0	)
Tax effects on foreign income		0.5			(1.0	)		(0.1	)
GILTI		0.3			—			—
Tax credits and other		—			(0.6	)		(0.2	)
Repatriation transition tax		(0.9	)		3.0			—
Deferred tax impact of enacted tax rate changes		0.3			(6.3	)		—
Effective income tax rate attributable to Watsco, Inc.		22.8			29.8			36.0
Taxes attributable to non-controlling interest		(3.1	)		(3.8	)		(5.0	)
Effective income tax rate		19.7	%		26.0	%		31.0	%

Significant Components of Net Deferred Tax Liabilities

The following is a summary of the significant components of our net deferred tax liabilities:

December 31,	2018			2017
Deferred tax assets:
Share-based compensation	$	21,517		$	18,977
Capitalized inventory costs and inventory reserves		2,151			2,107
Allowance for doubtful accounts		1,057			929
Self-insurance reserves		206			153
Other		2,486			2,423
Net operating loss carryforwards		484			291
		27,901			24,880
Valuation allowance		—			—
Total deferred tax assets		27,901			24,880
Deferred tax liabilities:
Deductible goodwill		(69,600	)		(67,246	)
Depreciation		(10,695	)		(5,519	)
Other		(8,516	)		(5,189	)
Total deferred tax liabilities		(88,811	)		(77,954	)
Net deferred tax liabilities (1)	$	(60,910	)	$	(53,074	)

(1) Net deferred tax 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, 2015	$	3,513
Additions based on tax positions related to the current year		547
Reductions due to lapse of applicable statute of limitations and tax assessments		(365	)
Balance at December 31, 2016		3,695
Additions based on tax positions related to the current year		801
Reductions due to lapse of applicable statute of limitations		(271	)
Balance at December 31, 2017		4,225
Additions based on tax positions related to the current year		960
Reductions due to lapse of applicable statute of limitations		(283	)
Balance at December 31, 2018	$	4,902

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SHARE-BASED COMPENSATION AND BENEFIT PLANS (Tables)

12 Months Ended

Dec. 31, 2018

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, 2018:

	Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Options outstanding at December 31, 2017		398,833		$	136.44
Granted		188,550			173.48
Exercised		(54,934	)		114.09
Forfeited		(26,832	)		155.83
Expired		(1,000	)		122.62
Options outstanding at December 31, 2018		504,617		$	151.71		3.31	$	1,733
Options exercisable at December 31, 2018		71,487		$	135.89		2.13	$	826

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, 2018:

	Shares			Weighted- Average Grant Date Fair Value
Non-vested restricted stock outstanding at December 31, 2017		2,985,239		$	51.22
Granted		142,865			167.06
Vested		(55,502	)		66.52
Forfeited		(10,000	)		142.52
Non-vested restricted stock outstanding at December 31, 2018		3,062,602		$	48.72

Valuation Assumptions Used for Stock Option Awards

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

Years Ended December 31,	2018			2017			2016
Expected term in years		4.25			4.25			4.25
Risk-free interest rate		2.69	%		1.77	%		1.24	%
Expected volatility		17.11	%		17.41	%		18.65	%
Expected dividend yield		3.13	%		2.82	%		2.54	%
Grant date fair value	$	20.05		$	17.23		$	16.37

Share-Based Compensation Expense

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

Years Ended December 31,	2018		2017		2016
Stock options	$	2,014	$	1,451	$	1,149
Non-vested restricted stock		13,494		11,842		11,170
Share-based compensation expense	$	15,508	$	13,293	$	12,319

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GOODWILL AND INTANGIBLE ASSETS (Tables)

12 Months Ended

Dec. 31, 2018

Changes in Carrying Amount of Goodwill

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

Balance at December 31, 2016	$	379,737
Foreign currency translation adjustment		2,992
Balance at December 31, 2017		382,729
Acquired goodwill		13,301
Foreign currency translation adjustment		(4,032	)
Balance at December 31, 2018	$	391,998

Indefinite Lived Intangible Assets

Intangible assets are comprised of the following:

December 31,	Estimated Useful Lives		2018			2017
Indefinite lived intangible assets - Trade names, trademarks and distribution rights			$	119,188		$	125,194
Finite lived intangible assets:
Customer relationships		10-15 years		69,593			73,053
Patented and unpatented technology		7 years		1,600			—
Trade name		10 years		1,150			1,150
Accumulated amortization				(43,680	)		(38,332	)
Finite lived intangible assets, net				28,663			35,871
			$	147,851		$	161,065

Finite lived intangible assets

Intangible assets are comprised of the following:

December 31,	Estimated Useful Lives		2018			2017
Indefinite lived intangible assets - Trade names, trademarks and distribution rights			$	119,188		$	125,194
Finite lived intangible assets:
Customer relationships		10-15 years		69,593			73,053
Patented and unpatented technology		7 years		1,600			—
Trade name		10 years		1,150			1,150
Accumulated amortization				(43,680	)		(38,332	)
Finite lived intangible assets, net				28,663			35,871
			$	147,851		$	161,065

Amortization Expense Related to Finite Lived Intangible Assets

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

2019	$	5,000
2020	$	5,000
2021	$	4,200
2022	$	3,400
2023	$	2,800

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DERIVATIVES (Tables)

12 Months Ended

Dec. 31, 2018

Impact from Foreign Exchange Derivative Instruments Designated as Cash Flow Hedges

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

Years Ended December 31,	2018			2017
Gain (loss) recorded in accumulated other comprehensive loss	$	2,627		$	(961	)
(Gain) loss reclassified from accumulated other comprehensive loss into earnings	$	(215	)	$	(491	)

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 exchange contracts, included in other current assets and accrued expenses and other current liabilities in our consolidated balance sheets. See Note 17.

	Asset Derivatives				Liability Derivatives
December 31,	2018		2017		2018		2017
Derivatives designated as hedging instruments	$	1,262	$	70	$	3	$	773
Derivatives not designated as hedging instruments		58		180		11		184
Total derivative instruments	$	1,320	$	250	$	14	$	957

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FAIR VALUE MEASUREMENTS (Tables)

12 Months Ended

Dec. 31, 2018

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:

				Fair Value Measurements at December 31, 2018 Using
	Balance Sheet Location	Total		Level 1		Level 2		Level 3
Assets:
Derivative financial instruments	Other current assets	$	1,320		—	$	1,320		—
Equity securities	Other assets	$	279	$	279		—		—
Liabilities:
Derivative financial instruments	Accrued expenses and other current liabilities	$	14		—	$	14		—

				Fair Value Measurements at December 31, 2017 Using
	Balance Sheet Location	Total		Level 1		Level 2		Level 3
Assets:
Derivative financial instruments	Other current assets	$	250		—	$	250		—
Equity securities	Other assets	$	332	$	332		—		—
Liabilities:
Derivative financial instruments	Accrued expenses and other current liabilities	$	957		—	$	957		—

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COMMITMENTS AND CONTINGENCIES (Tables)

12 Months Ended

Dec. 31, 2018

Future Minimum Lease Payments under Non-Cancelable Operating Leases

At December 31, 2018, future minimum payments under non-cancelable operating leases over each of the next five years and thereafter were as follows:

2019	$	70,388
2020		55,102
2021		41,321
2022		28,482
2023		15,712
Thereafter		8,245
Total minimum payments	$	219,250

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INFORMATION ABOUT GEOGRAPHIC AREAS (Tables)

12 Months Ended

Dec. 31, 2018

Revenues and Long-Lived Assets by Geographical Area

The following tables set forth revenues and long-lived assets by geographical area:

Years Ended December 31,	2018		2017		2016
Revenues:
United States	$	4,126,639	$	3,919,684	$	3,813,204
Canada		291,685		269,603		267,220
Mexico		128,329		152,668		140,278
Total revenues	$	4,546,653	$	4,341,955	$	4,220,702

December 31,	2018		2017
Long-Lived Assets:
United States	$	550,939	$	540,136
Canada		162,648		163,944
Mexico		5,640		5,400
Total long-lived assets	$	719,227	$	709,480

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SUPPLEMENTAL CASH FLOW INFORMATION (Tables)

12 Months Ended

Dec. 31, 2018

Supplemental Cash Flow Information

Supplemental cash flow information was as follows:

Years Ended December 31,	2018		2017		2016
Interest paid	$	3,065	$	5,773	$	3,362
Income taxes net of refunds	$	115,301	$	48,056	$	99,006
Common stock issued for Alert Labs Inc.	$	6,846		—		—

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SELECTED QUARTERLY FINANCIAL DATA (Tables)

12 Months Ended

Dec. 31, 2018

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, 2018
Revenues (1)	$	926,577	$	1,332,743	$	1,296,007	$	991,326	$	4,546,653
Gross profit	$	230,833	$	320,766	$	319,009	$	249,644	$	1,120,252
Net income attributable to Watsco, Inc.	$	34,219	$	89,957	$	79,163	$	39,593	$	242,932
Earnings per share for Common and Class B common stock (2):
Basic	$	0.89	$	2.41	$	2.12	$	1.02	$	6.50
Diluted	$	0.89	$	2.40	$	2.11	$	1.02	$	6.49
Year Ended December 31, 2017
Revenues (1)	$	872,095	$	1,275,924	$	1,229,591	$	964,345	$	4,341,955
Gross profit	$	218,556	$	310,278	$	295,895	$	240,930	$	1,065,659
Net income attributable to Watsco, Inc.	$	26,181	$	73,756	$	65,029	$	43,255	$	208,221
Earnings per share for Common and Class B common stock (2):
Basic	$	0.71	$	2.07	$	1.82	$	1.19	$	5.81
Diluted	$	0.71	$	2.07	$	1.82	$	1.19	$	5.81

(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 evenly distributed throughout the year except for dependence on housing completions and related weather and economic conditions.

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

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Summary of Significant Accounting Policies - Additional Information (Detail)	12 Months Ended
	Dec. 31, 2018 USD ($) Store State Entity	Dec. 31, 2017 USD ($)	Dec. 31, 2016 USD ($)
Significant Accounting Policies [Line Items]
Number of joint ventures | Entity	3
Allowance for doubtful accounts	$ 6,503,000	$ 6,049,000
Capitalized vendor rebates	11,603,000	11,621,000
Goodwill and intangible assets impairment	0	0	$ 0
Accrued sales returns included in accrued expenses and other current liabilities	11,275,000
Cumulative-effect adjustment to retained earnings	301,000
Selling, general and administrative expense	$ 757,452,000	715,671,000	688,952,000
Assets, Total [Member]
Significant Accounting Policies [Line Items]
Percentage of Right Of Use Assets and Lease Liability	10.00%
Shipping and Handling [Member]
Significant Accounting Policies [Line Items]
Selling, general and administrative expense	$ 51,741,000	47,670,000	42,809,000
Advertising Expense [Member]
Significant Accounting Policies [Line Items]
Selling, general and administrative expense	$ 16,520,000	$ 24,677,000	$ 22,242,000
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 | Sales Revenue, Net [Member] | Product Concentration Risk
Significant Accounting Policies [Line Items]
Percentage of Service Revenue	1.00%
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	571
Number of states in which entity operates | State	37

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Summary of Disaggregated Revenue (Detail) - USD ($) $ in Thousands	3 Months Ended																12 Months Ended
	Dec. 31, 2018	[1]	Sep. 30, 2018	[1]	Jun. 30, 2018	[1]	Mar. 31, 2018	[1]	Dec. 31, 2017	[1]	Sep. 30, 2017	[1]	Jun. 30, 2017	[1]	Mar. 31, 2017	[1]	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Disaggregation of Revenue [Line Items]
Revenues from product lines, percentage																	100.00%	100.00%	100.00%
Revenues	$ 991,326		$ 1,296,007		$ 1,332,743		$ 926,577		$ 964,345		$ 1,229,591		$ 1,275,924		$ 872,095		$ 4,546,653	$ 4,341,955	$ 4,220,702
United States
Disaggregation of Revenue [Line Items]
Revenues																	4,126,639	3,919,684	3,813,204
Canada
Disaggregation of Revenue [Line Items]
Revenues																	291,685	269,603	267,220
Mexico
Disaggregation of Revenue [Line Items]
Revenues																	$ 128,329	$ 152,668	$ 140,278
HVAC Equipment
Disaggregation of Revenue [Line Items]
Revenues from product lines, percentage																	67.00%	67.00%	66.00%
Other HVAC Products
Disaggregation of Revenue [Line Items]
Revenues from product lines, percentage																	29.00%	28.00%	29.00%
Commercial Refrigeration Products
Disaggregation of Revenue [Line Items]
Revenues from product lines, percentage																	4.00%	5.00%	5.00%

[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 evenly distributed throughout the year except for dependence on housing completions and related weather and economic conditions.

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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, 2018		Sep. 30, 2018		Jun. 30, 2018		Mar. 31, 2018		Dec. 31, 2017		Sep. 30, 2017		Jun. 30, 2017		Mar. 31, 2017		Dec. 31, 2018		Dec. 31, 2017		Dec. 31, 2016
Earnings Per Share, Basic, by Common Class, Including Two Class Method [Line Items]
Net income attributable to Watsco, Inc. shareholders	$ 39,593		$ 79,163		$ 89,957		$ 34,219		$ 43,255		$ 65,029		$ 73,756		$ 26,181		$ 242,932		$ 208,221		$ 182,810
Less: distributed and undistributed earnings allocated to non-vested restricted common stock - Basic																	19,792		17,430		14,806
Earnings allocated to Watsco, Inc. shareholders - Basic																	$ 223,140		$ 190,791		$ 168,004
Weighted-average common shares outstanding - Basic																	34,319,890		32,824,947		32,582,385
Basic earnings per share for Common and Class B common stock	$ 1.02	[1]	$ 2.12	[1]	$ 2.41	[1]	$ 0.89	[1]	$ 1.19	[1]	$ 1.82	[1]	$ 2.07	[1]	$ 0.71	[1]	$ 6.50	[1]	$ 5.81	[1]	$ 5.16
Net income attributable to Watsco, Inc. shareholders	$ 39,593		$ 79,163		$ 89,957		$ 34,219		$ 43,255		$ 65,029		$ 73,756		$ 26,181		$ 242,932		$ 208,221		$ 182,810
Less: distributed and undistributed earnings allocated to non-vested restricted common stock - Diluted																	19,788		17,427		14,801
Earnings allocated to Watsco, Inc. shareholders - Diluted																	$ 223,144		$ 190,794		$ 168,009
Weighted-average common shares outstanding - Basic																	34,319,890		32,824,947		32,582,385
Effect of dilutive stock options																	54,379		37,686		34,119
Weighted-average common shares outstanding - Diluted																	34,374,269		32,862,633		32,616,504
Diluted earnings per share for Common and Class B common stock	$ 1.02	[1]	$ 2.11	[1]	$ 2.40	[1]	$ 0.89	[1]	$ 1.19	[1]	$ 1.82	[1]	$ 2.07	[1]	$ 0.71	[1]	$ 6.49	[1]	$ 5.81	[1]	$ 5.15
Common Stock
Earnings Per Share, Basic, by Common Class, Including Two Class Method [Line Items]
Earnings allocated to Watsco, Inc. shareholders - Basic																	$ 206,355		$ 175,667		$ 154,021
Class B Common Stock
Earnings Per Share, Basic, by Common Class, Including Two Class Method [Line Items]
Earnings allocated to Watsco, Inc. shareholders - Basic																	$ 16,785		$ 15,124		$ 13,983

[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, 2018	Dec. 31, 2017	Dec. 31, 2016
Earnings Per Share [Line Items]
Class B common stock conversion, number of shares	2,581,627	2,601,996	2,711,811
Anti-dilutive stock options excluded from earnings per share	74,270	11,664	31,839

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Schedule of Tax Effects Allocated to Each Component of Other Comprehensive (Loss) Income (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Components Of Other Comprehensive Income Loss [Line Items]
Foreign currency translation adjustment	$ (20,493)	$ 15,993	$ 6,211
Unrealized gain (loss) on cash flow hedging instruments	2,627	(961)	(1,321)
Income tax (expense) benefit	(709)	259	356
Unrealized gain (loss) on cash flow hedging instruments, net of tax	1,918	(702)	(965)
Reclassification of (gain) loss on cash flow hedging instruments into earnings	(215)	(491)	442
Income tax expense (benefit)	58	133	(119)
Reclassification of (gain) loss on cash flow hedging instruments into earnings, net of tax	(157)	(358)	323
Unrealized gain on equity securities		51	27
Income tax expense		(66)	(13)
Unrealized (loss) gain on equity securities, net of tax		(15)	14
Other comprehensive (loss) income	$ (18,732)	$ 14,918	$ 5,583

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Schedule of Accumulated Other Comprehensive Loss (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance	$ (34,221)	$ (43,530)
Cumulative-effect adjustment to retained earnings	301
Ending balance	(45,968)	(34,221)	$ (43,530)
Foreign Currency Translation Adjustment
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance	(33,499)	(43,459)	(47,204)
Current period other comprehensive income (loss)	(13,105)	9,960	3,745
Ending balance	(46,604)	(33,499)	(43,459)
Cash Flow Hedging Instruments
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance	(421)	215	600
Current period other comprehensive income (loss)	1,151	(421)	(579)
Reclassification adjustment	(94)	(215)	194
Ending balance	636	(421)	215
Equity Securities
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance	(301)	(286)	(300)
Cumulative-effect adjustment to retained earnings	$ 301
Current period other comprehensive income (loss)		(15)	14
Ending balance		$ (301)	$ (286)

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Supplier Concentration - Additional Information (Detail) - Supplier Concentration Risk - Vendor	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Concentration Risk [Line Items]
Number of key suppliers	10
Cost of Goods, Total
Concentration Risk [Line Items]
Percentage of purchases from key suppliers	84.00%	84.00%	85.00%
Carrier and Its Affiliates | Cost of Goods, Total
Concentration Risk [Line Items]
Percentage of purchases from key suppliers	62.00%	62.00%	62.00%

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Property and Equipment, Net (Detail) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Property, Plant and Equipment [Line Items]
Property and equipment, gross	$ 222,765	$ 214,082
Accumulated depreciation and amortization	(131,719)	(122,884)
Property and equipment, net	91,046	91,198
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	75,308	74,486
Machinery, Vehicles and Equipment
Property, Plant and Equipment [Line Items]
Property and equipment, gross	79,002	76,117
Furniture and Fixtures
Property, Plant and Equipment [Line Items]
Property and equipment, gross	16,782	15,282
Computer Hardware and Software
Property, Plant and Equipment [Line Items]
Property and equipment, gross	$ 50,853	$ 47,377

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Property and Equipment - Additional Information (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Property, Plant and Equipment [Line Items]
Depreciation and amortization expense	$ 16,747	$ 16,770	$ 14,853

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Debt - Additional Information (Detail) - USD ($)		6 Months Ended	12 Months Ended
	Dec. 05, 2018	Mar. 31, 2018	Dec. 31, 2018	Dec. 31, 2017
Debt Instrument [Line Items]
Revolving credit agreement, maturity date	Dec. 05, 2023
Proceeds from credit facility	$ 54,700,000
Payment of fees related to revolving credit agreement			$ 790,000
Borrowings under revolving credit agreement			135,200,000	$ 21,800,000
Swingline Subfacility
Debt Instrument [Line Items]
Maximum capacity under revolving credit agreement			100,000,000
Letter of Credit
Debt Instrument [Line Items]
Maximum capacity under revolving credit agreement			10,000,000
Revolving Credit Facility
Debt Instrument [Line Items]
Payment of fees related to revolving credit agreement			790,000
Maximum capacity under revolving credit agreement	$ 500,000,000			$ 300,000,000
Maturing Term	5 years			5 years
Seasonal discretionary maximum borrowing capacity under revolving credit agreement		$ 400,000,000
Alternative Currency Sublimit
Debt Instrument [Line Items]
Maximum capacity under revolving credit agreement			75,000,000
Mexican Borrowing Sublimit
Debt Instrument [Line Items]
Maximum capacity under revolving credit agreement			$ 8,000,000
London Interbank Offer Rate
Debt Instrument [Line Items]
Basis spread			87.50%
London Interbank Offer Rate | Minimum
Debt Instrument [Line Items]
Basis spread			87.50%
London Interbank Offer Rate | Maximum
Debt Instrument [Line Items]
Basis spread			150.00%
Federal Funds Effective Rate [Member]
Debt Instrument [Line Items]
Basis spread			0.50%
Federal Funds Effective Rate [Member] | Minimum
Debt Instrument [Line Items]
Basis spread			0.00%
Federal Funds Effective Rate [Member] | Maximum
Debt Instrument [Line Items]
Basis spread			0.50%
Eurocurrency Rate
Debt Instrument [Line Items]
Basis spread			1.00%
Eurocurrency Rate | Minimum
Debt Instrument [Line Items]
Basis spread			0.00%
Eurocurrency Rate | Maximum
Debt Instrument [Line Items]
Basis spread			50.00%
Commitment Fee
Debt Instrument [Line Items]
Basis spread			7.50%
Commitment Fee | Minimum
Debt Instrument [Line Items]
Basis spread			7.50%
Commitment Fee | Maximum
Debt Instrument [Line Items]
Basis spread			20.00%

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Income Taxes - Additional Information (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Income Taxes [Line Items]
U.S. federal statutory rate		21.00%	35.00%	35.00%
Percentage of income attributable to wholly-owned operations and investments for which income tax expense and effective tax rate calculated		100.00%
Valuation allowance	$ 0	$ 0	$ 0
Gross unrecognized tax benefits	4,902	4,902	4,225	$ 3,695	$ 3,513
Unrecognized tax benefits that, if recognized, would affect the effective tax rate	3,997	3,997	3,457
Estimated accrued interest and penalties resulting from unrecognized tax benefits	755	755	540
Foreign subsidiaries earnings	93,000	93,000
Provisional net income tax benefit			$ 9,955
Measurement period estimated net income tax benefit		$ 1,819
Total net income tax benefit attributable to passage of the TCJA	11,774
Minimum
Income Taxes [Line Items]
State and other net operating loss carry forwards expiration date		2019
Maximum
Income Taxes [Line Items]
State and other net operating loss carry forwards expiration date		2038
State and other
Income Taxes [Line Items]
Net operating loss carry forwards	8,263	$ 8,263
Federal
Income Taxes [Line Items]
Net operating loss carry forwards	$ 0	$ 0

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Components of Income Tax Expense (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Components Of Income Tax Expense Benefit [Line Items]
U.S. Federal	$ 54,345	$ 69,079	$ 86,719
State	11,631	10,643	9,801
Foreign	6,837	10,499	9,416
Income tax expense	72,813	90,221	105,936
Current	64,523	100,956	103,216
Deferred	8,290	(10,735)	2,720
Income tax expense	$ 72,813	$ 90,221	$ 105,936

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Reconciliation of Effective Income Tax Rate (Detail)	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Reconciliation of Effective Income Tax Rate [Line Items]
U.S. federal statutory rate	21.00%	35.00%	35.00%
State income taxes, net of federal benefit and other	3.60%	2.40%	2.30%
Excess tax benefits from share-based compensation	(2.00%)	(2.70%)	(1.00%)
Tax effects on foreign income	0.50%	(1.00%)	(0.10%)
GILTI	0.30%
Tax credits and other		(0.60%)	(0.20%)
Repatriation transition tax	(0.90%)	3.00%
Deferred tax impact of enacted tax rate changes	0.30%	(6.30%)
Effective income tax rate attributable to Watsco, Inc.	22.80%	29.80%	36.00%
Taxes attributable to non-controlling interest	(3.10%)	(3.80%)	(5.00%)
Effective income tax rate	19.70%	26.00%	31.00%

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Significant Components of Net Deferred Tax Liabilities (Detail) - USD ($) $ in Thousands		Dec. 31, 2018	Dec. 31, 2017
Components of Net Deferred Tax Liabilities [Line Items]
Share-based compensation		$ 21,517	$ 18,977
Capitalized inventory costs and inventory reserves		2,151	2,107
Allowance for doubtful accounts		1,057	929
Self-insurance reserves		206	153
Other		2,486	2,423
Net operating loss carryforwards		484	291
Total deferred tax assets, gross		27,901	24,880
Valuation allowance		0	0
Total deferred tax assets		27,901	24,880
Deductible goodwill		(69,600)	(67,246)
Depreciation		(10,695)	(5,519)
Other		(8,516)	(5,189)
Total deferred tax liabilities		(88,811)	(77,954)
Net deferred tax liabilities	[1]	$ (60,910)	$ (53,074)

[1] Net deferred tax 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, 2018	Dec. 31, 2017	Dec. 31, 2016
Income Tax Contingency [Line Items]
Beginning balance	$ 4,225	$ 3,695	$ 3,513
Additions based on tax positions related to the current year	960	801	547
Reductions due to lapse of applicable statute of limitations and tax assessments	(283)	(271)	(365)
Ending balance	$ 4,902	$ 4,225	$ 3,695

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Share-Based Compensation and Benefit Plans - Additional Information (Detail) $ / shares in Units, $ in Thousands	12 Months Ended
	Dec. 31, 2018 USD ($) Age $ / shares shares	Dec. 31, 2017 USD ($) $ / shares shares	Dec. 31, 2016 USD ($) $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options of common stock outstanding | shares	504,617	398,833
Shares withheld as payment for tax withholdings related to share based compensation, market value	$ 3,782	$ 4,674	$ 3,975
Total intrinsic value of stock options exercised	3,500	2,296	4,123
Cash received from Common stock issued	5,006	3,855	4,447
Common stock contribution to 401(k) plan	$ 2,945	$ 2,428	$ 2,348
Employee Stock Purchase Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Aggregate shares of common stock that may be granted | shares	1,500,000
Shares reserved for future grant | shares	477,256
Number of days of service required for an employee to purchase shares	90 days
Discount to employees to purchase shares	5.00%
Shares purchased under ESPP | shares	5,151	5,571	5,956
Average price of the shares purchased by employees | $ / shares	$ 168.21	$ 144.58	$ 125.84
Additional shares issued resulting from cash dividends reinvested in common stock | shares	4,338	3,844	3,442
Net proceeds from shares purchased under ESPP	$ 1,585	$ 1,389	$ 1,206
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 | shares	2,000,000
Shares of common stock remaining under the 2001 Plan available for issuance under the 2014 Plan | shares	45,421
Shares reserved for future grant | shares	817,782
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 | shares	601,252
2014 Plan | Class B Common Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares awarded under plan | shares	626,387
401(k) Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Common stock contribution to 401(k) Plan, shares | shares	17,318	16,389	20,045
Common stock contribution to 401(k) plan	$ 2,945	$ 2,428	$ 2,348
2001 Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Aggregate shares of common stock that may be granted | shares	0
Contractual term of stock option awards	5 years
Options of common stock outstanding | shares	1,000
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	$ 167.06	$ 149.47	$ 130.01
Fair value of non-vested stock that vested	$ 9,637	$ 11,580	$ 10,096
Unrecognized share-based compensation expense	$ 118,124
Vesting period related to shares obligated to issue in connection with incentive compensation agreement	11 years 2 months 12 days
Non-Vested Restricted Stock | Chief Executive Officer
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized share-based compensation expense	$ 56,000
Vesting period related to shares obligated to issue in connection with incentive compensation agreement	10 years
Vesting period related to shares obligated to issue in connection with incentive compensation agreement | shares	45,752
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	$ 9,000
Vesting period related to shares obligated to issue in connection with incentive compensation agreement	4 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	$ 42,000
Vesting period related to shares obligated to issue in connection with incentive compensation agreement	8 years
Age of Chief Executive Officer when non-vested (restricted) stock vests | Age	86
Non-Vested Restricted Stock | Chief Executive Officer | Share-based Compensation Award, Tranche Three
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized share-based compensation expense	$ 5,000
Vesting period related to shares obligated to issue in connection with incentive compensation agreement	10 years
Age of Chief Executive Officer when non-vested (restricted) stock vests | Age	88
Non-Vested Restricted Stock | President
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized share-based compensation expense	$ 13,000
Vesting period related to shares obligated to issue in connection with incentive compensation agreement	25 years
Vesting period related to shares obligated to issue in connection with incentive compensation agreement | shares	23,297
Non-Vested Restricted Stock | President | Share-based Compensation Award, Tranche One
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized share-based compensation expense	$ 12,000
Vesting period related to shares obligated to issue in connection with incentive compensation agreement	25 years
Age of president when non vested restricted shares vests | Age	62
Non-Vested Restricted Stock | President | Share-based Compensation Award, Tranche Two
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized share-based compensation expense	$ 1,000
Vesting period related to shares obligated to issue in connection with incentive compensation agreement	27 years
Age of president when non vested restricted shares vests | Age	64
Non-Vested Restricted Stock | Employee
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 | 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 | shares		32,454
Shares withheld as payment for tax withholdings related to share based compensation, market value		$ 4,664
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 | shares	21,754		30,413
Shares withheld as payment for tax withholdings related to share based compensation, market value	$ 3,775		$ 3,967
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized share-based compensation expense	$ 3,598
Vesting period related to shares obligated to issue in connection with incentive compensation agreement	1 year 9 months 18 days
Fair value of stock options vested	$ 1,607	$ 754	$ 736
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 | shares	7,027	350	348
Shares withheld as payment for tax withholdings related to share based compensation, market value	$ 1,269	$ 53	$ 51

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Summary of Stock Option Activity (Detail) $ / shares in Units, $ in Thousands	12 Months Ended
	Dec. 31, 2018 USD ($) $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options, Outstanding beginning balance | shares	398,833
Options, Granted | shares	188,550
Options, Exercised | shares	(54,934)
Options, Forfeited | shares	(26,832)
Options, Expired | shares	(1,000)
Options, Outstanding ending balance | shares	504,617
Options, Exercisable | shares	71,487
Weighted-Average Exercise Price, Outstanding beginning balance | $ / shares	$ 136.44
Weighted-Average Exercise Price, Granted | $ / shares	173.48
Weighted-Average Exercise Price, Exercised | $ / shares	114.09
Weighted-Average Exercise Price, Forfeited | $ / shares	155.83
Weighted-Average Exercise Price, Expired | $ / shares	122.62
Weighted-Average Exercise Price, Outstanding ending balance | $ / shares	151.71
Weighted-Average Exercise Price, Exercisable | $ / shares	$ 135.89
Weighted-Average Remaining Contractual Term (in years), Outstanding	3 years 3 months 22 days
Weighted-Average Remaining Contractual Term (in years), Exercisable	2 years 1 month 17 days
Aggregate Intrinsic Value, Outstanding | $	$ 1,733
Aggregate Intrinsic Value, Exercisable | $	$ 826

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Summary of Non-Vested Restricted Stock Activity (Detail) - Non-Vested Restricted Stock - $ / shares	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares, Non-vested beginning balance	2,985,239
Shares, Granted	142,865
Shares, Vested	(55,502)
Shares, Forfeited	(10,000)
Shares, Non-vested ending balance	3,062,602	2,985,239
Weighted-Average Grant Date Fair Value, Non-vested beginning balance	$ 51.22
Weighted-Average Grant Date Fair Value, Granted	167.06	$ 149.47	$ 130.01
Weighted-Average Grant Date Fair Value, Vested	66.52
Weighted-Average Grant Date Fair Value, Forfeited	142.52
Weighted-Average Grant Date Fair Value, Non-vested ending balance	$ 48.72	$ 51.22

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Weighted-Average Assumptions Used for Stock Options Granted (Detail) - $ / shares	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
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	2.69%	1.77%	1.24%
Expected volatility	17.11%	17.41%	18.65%
Expected dividend yield	3.13%	2.82%	2.54%
Grant date fair value	$ 20.05	$ 17.23	$ 16.37

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Share-Based Compensation Expense (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense	$ 15,508	$ 13,293	$ 12,319
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense	2,014	1,451	1,149
Non-Vested Restricted Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense	$ 13,494	$ 11,842	$ 11,170

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Purchase of Additional Ownership Interest in Joint Ventures - Additional Information (Detail) - Carrier Enterprise II - USD ($) $ in Thousands	Feb. 13, 2017	Nov. 29, 2016	Jul. 31, 2011
Business Acquisition [Line Items]
Additional ownership interest acquired	10.00%	10.00%
Cash consideration	$ 42,688	$ 42,909
Controlling interest, ownership percentage	80.00%		60.00%

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Investment in Unconsolidated Entity - Additional Information (Detail) $ in Thousands			12 Months Ended
	Jul. 05, 2018 USD ($)	Jun. 21, 2017 USD ($) Location board-member	Dec. 31, 2018 USD ($)	Dec. 31, 2017 USD ($)	Jun. 29, 2018
Schedule of Equity Method Investments [Line Items]
Investment in unconsolidated entity			$ 3,760	$ 63,600
Proceeds from non-controlling interest for investment in unconsolidated entity			$ 752	$ 12,720
Carrier Enterprise I
Schedule of Equity Method Investments [Line Items]
Ownership percentage by parent		80.00%
Ownership percentage, by non-controlling owners		20.00%
Russell Sigler Inc
Schedule of Equity Method Investments [Line Items]
Ownership interest acquired		34.90%	36.30%
Investment in unconsolidated entity	$ 3,760	$ 63,600
Contribution to investment in unconsolidated entity by controlling interest	3,008	50,880
Proceeds from non-controlling interest for investment in unconsolidated entity	$ 752	$ 12,720
Ownership percentage needed for right to purchase up to 100%		85.00%
Total number of board members | board-member		6
Number of board members that can be appointed based on ownership | board-member		2
Equity method investment, additional ownership interest acquired					1.40%
Russell Sigler Inc | Western United States
Schedule of Equity Method Investments [Line Items]
Number of locations | Location		30
Russell Sigler sales			$ 770,000

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Acquisition - Additional Information (Detail) - USD ($) $ in Thousands		12 Months Ended
	Aug. 23, 2018	Dec. 31, 2018
Business Acquisition [Line Items]
Business acquisition, fair value of common stock		$ 6,846
Alert Labs Inc
Business Acquisition [Line Items]
Business acquisition, cash consideration	$ 5,889
Business acquisition, fair value of common stock	3,991
Adjustment related to previously held equity interest	171
Contingent consideration	$ 3,026
Contingent consideration performance measurement period	3 years
Intangibles and goodwill acquired	$ 14,941
Fair value of intangible assets	1,640
Alert Labs Inc | Patented And Unpatented Technology [Member]
Business Acquisition [Line Items]
Fair value of intangible assets	1,600
Alert Labs Inc | Customer Relationships [Member]
Business Acquisition [Line Items]
Fair value of intangible assets	$ 40
Stock consideration [Member] | Alert Labs Inc
Business Acquisition [Line Items]
Business acquisition, issuance of shares of common stock	23,873
Contingent consideration [Member] | Alert Labs Inc
Business Acquisition [Line Items]
Common stock shares issued	23,230

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Changes in Carrying Amount of Goodwill (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017
Goodwill [Line Items]
Goodwill, Beginning Balance	$ 382,729	$ 379,737
Acquired goodwill	13,301
Foreign currency translation adjustment	(4,032)	2,992
Goodwill, Ending Balance	$ 391,998	$ 382,729

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Goodwill and Intangible Assets - Additional Information (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Goodwill And Intangible Assets [Line Items]
Amortization expense related to finite lived intangible assets	$ 5,348	$ 5,263	$ 5,213

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Intangible Assets (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017
Intangible Assets [Line Items]
Indefinite lived intangible assets - Trade names, trademarks and distribution rights	$ 119,188	$ 125,194
Finite lived intangible assets:
Accumulated amortization	(43,680)	(38,332)
Finite lived intangible assets, net	28,663	35,871
Intangible assets, net	147,851	161,065
Customer Relationships
Finite lived intangible assets:
Finite lived intangible assets	$ 69,593	73,053
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
Patented And Unpatented Technology [Member]
Intangible Assets [Line Items]
Finite lived intangible assets, Estimated Useful lives, years	7 years
Finite lived intangible assets:
Finite lived intangible assets	$ 1,600

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Amortization Expense Related to Finite Lived Intangible Assets (Detail) $ in Thousands	Dec. 31, 2018 USD ($)
2019	$ 5,000
2020	5,000
2021	4,200
2022	3,400
2023	$ 2,800

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Shareholders' Equity - Additional Information (Detail) - USD ($)	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016	Aug. 23, 2017	Sep. 30, 1999
Stockholders Equity Note [Line Items]
Preferred stock outstanding	0	0
Maximum aggregate offering price under sales agreement				$ 250,000,000
Net proceeds from the sale of Common stock		$ 247,744,000
Direct stock issuance costs		$ 311,000
Number of shares authorized to be repurchased					7,500,000
Treasury stock, shares repurchased	0	0	0
Cost of repurchased shares	$ 114,425,000	$ 114,425,000
Remaining number of shares authorized to be repurchased	1,129,087
Common Stock
Stockholders Equity Note [Line Items]
Sale of common stock, shares		1,498,662
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	4,823,988	4,823,988
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, 2018	Dec. 31, 2017
Financial Instrument [Line Items]
Estimated fair value of contingent liability	$ 0
Standby Letters of Credit
Financial Instrument [Line Items]
Fair value of contingent liability	1,222,000	$ 2,430,000
Performance Bonds
Financial Instrument [Line Items]
Fair value of contingent liability	$ 3,600,000	$ 4,000,000

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Derivatives - Additional Information (Detail) - USD ($)	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Foreign Currency Forward Contracts | Cash Flow Hedge
Derivative Instruments and Hedging Activities Disclosures [Line Items]
Notional value of derivatives	$ 40,000,000
Contract maturity period	One year or less
Contract expiring terms	2019-09
Maximum length of time hedged in cash flow hedge	12 months
Pre-tax loss to be reclassified into earnings within the next 12 months	$ 1,450,000
Foreign Exchange Forward And Option Contracts [Member] | Not Designated as Hedging Instrument, Economic Hedge [Member]
Derivative Instruments and Hedging Activities Disclosures [Line Items]
Notional value of derivatives	$ 6,800,000
Contract expiring terms	2019-02
(Loss) gain from foreign currency forward and option contracts not designated as hedging instruments	$ 129,000	$ (829,000)	$ (306,000)

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Impact from Foreign Exchange Derivative Instruments Designated as Cash Flow Hedges (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Derivative Instruments, Gain (Loss) [Line Items]
Gain (loss) recorded in accumulated other comprehensive loss	$ 2,627	$ (961)	$ (1,321)
Foreign Currency Forward Contracts | Cash Flow Hedge
Derivative Instruments, Gain (Loss) [Line Items]
Gain (loss) recorded in accumulated other comprehensive loss	2,627	(961)
(Gain) loss reclassified from accumulated other comprehensive loss into earnings	$ (215)	$ (491)

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Fair Value of Derivative Instruments and Location in the Balance Sheets (Detail) - Foreign Exchange Forward And Option Contracts [Member] - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Derivatives, Fair Value [Line Items]
Derivative instruments, assets derivatives	$ 1,320	$ 250
Derivative instruments, liabilities derivatives	14	957
Derivatives Designated as Hedging Instruments
Derivatives, Fair Value [Line Items]
Derivative instruments, assets derivatives	1,262	70
Derivative instruments, liabilities derivatives	3	773
Not Designated as Hedging Instrument, Economic Hedge [Member]
Derivatives, Fair Value [Line Items]
Derivative instruments, assets derivatives	58	180
Derivative instruments, liabilities derivatives	$ 11	$ 184

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Assets and Liabilities Carried at Fair Value Measured on Recurring Basis (Detail) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Other assets
Assets:
Equity securities	$ 279	$ 332
Other Current Assets
Assets:
Derivative financial instruments	1,320	250
Accrued expenses and other current liabilities
Liabilities:
Derivative financial instruments	14	957
Fair Value Measurements, Level 1 | Other assets
Assets:
Equity securities	279	332
Fair Value Measurements, Level 2 | Other Current Assets
Assets:
Derivative financial instruments	1,320	250
Fair Value Measurements, Level 2 | Accrued expenses and other current liabilities
Liabilities:
Derivative financial instruments	$ 14	$ 957

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Commitments and Contingencies - Additional Information (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Commitments and Contingencies Disclosure [Line Items]
Self-insurance reserves	$ 2,311	$ 2,344
Maximum exposure to loss related to involvement with variable interest entity	$ 3,900
Operating leases maximum maturity date	2028
Rental expense	$ 84,537	$ 84,076	$ 83,260
Non-cancelable purchase obligations for goods	35,000
Carrier and Its Affiliates [Member]
Commitments and Contingencies Disclosure [Line Items]
Non-cancelable purchase obligations for goods	$ 22,000

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Future Minimum Leases Payments under Non-Cancelable Operating Leases (Detail) $ in Thousands	Dec. 31, 2018 USD ($)
Operating Leases Future Minimum Payments Due [Line Items]
2019	$ 70,388
2020	55,102
2021	41,321
2022	28,482
2023	15,712
Thereafter	8,245
Total minimum payments	$ 219,250

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Related Party Transactions - Additional Information (Detail) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Supplier Concentration Risk | Cost of Goods, Total
Related Party Transaction [Line Items]
Percentage of purchases from key suppliers	84.00%	84.00%	85.00%
Moss & Associates LLC | Customary Payments for Remodeling of Corporate Headquarters
Related Party Transaction [Line Items]
Payment for related party transaction	$ 124	$ 951	$ 291
Amount payable to related party	0
Greenberg Traurig, P.A. | Customary Fees for Legal Services
Related Party Transaction [Line Items]
Payment for related party transaction	131	475
Amount payable to related party	0
Carrier and Its Affiliates | Supplier Concentration Risk
Related Party Transaction [Line Items]
Amount payable to Carrier and its affiliates, net of receivables	71,000	75,000
Revenues from sales to Carrier and its affiliates	$ 84,000	$ 64,000	$ 56,000
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%	62.00%

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Revenues and Long-Lived Assets by Geographical Area (Detail) - USD ($) $ in Thousands	3 Months Ended																12 Months Ended
	Dec. 31, 2018		Sep. 30, 2018	[1]	Jun. 30, 2018	[1]	Mar. 31, 2018	[1]	Dec. 31, 2017		Sep. 30, 2017	[1]	Jun. 30, 2017	[1]	Mar. 31, 2017	[1]	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Geographic Area Information [Line Items]
Revenues	$ 991,326	[1]	$ 1,296,007		$ 1,332,743		$ 926,577		$ 964,345	[1]	$ 1,229,591		$ 1,275,924		$ 872,095		$ 4,546,653	$ 4,341,955	$ 4,220,702
Long-Lived Assets	719,227								709,480								719,227	709,480
United States
Geographic Area Information [Line Items]
Revenues																	4,126,639	3,919,684	3,813,204
Long-Lived Assets	550,939								540,136								550,939	540,136
Canada
Geographic Area Information [Line Items]
Revenues																	291,685	269,603	267,220
Long-Lived Assets	162,648								163,944								162,648	163,944
Mexico
Geographic Area Information [Line Items]
Revenues																	128,329	152,668	$ 140,278
Long-Lived Assets	$ 5,640								$ 5,400								$ 5,640	$ 5,400

[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 evenly distributed throughout 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, 2018	Dec. 31, 2017	Dec. 31, 2016
Cash Flow Supplemental Disclosures [Line Items]
Interest paid	$ 3,065	$ 5,773	$ 3,362
Income taxes net of refunds	115,301	$ 48,056	$ 99,006
Common stock issued for Alert Labs Inc.	$ 6,846

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Selected Quarterly Financial Data (Detail) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended																12 Months Ended
	Dec. 31, 2018		Sep. 30, 2018		Jun. 30, 2018		Mar. 31, 2018		Dec. 31, 2017		Sep. 30, 2017		Jun. 30, 2017		Mar. 31, 2017		Dec. 31, 2018		Dec. 31, 2017		Dec. 31, 2016
Quarterly Financial Data [Line Items]
Revenues	$ 991,326	[1]	$ 1,296,007	[1]	$ 1,332,743	[1]	$ 926,577	[1]	$ 964,345	[1]	$ 1,229,591	[1]	$ 1,275,924	[1]	$ 872,095	[1]	$ 4,546,653		$ 4,341,955		$ 4,220,702
Gross profit	249,644		319,009		320,766		230,833		240,930		295,895		310,278		218,556		1,120,252		1,065,659		1,034,584
Net income attributable to Watsco, Inc.	$ 39,593		$ 79,163		$ 89,957		$ 34,219		$ 43,255		$ 65,029		$ 73,756		$ 26,181		$ 242,932		$ 208,221		$ 182,810
Earnings per share for Common and Class B common stock:
Basic	$ 1.02	[2]	$ 2.12	[2]	$ 2.41	[2]	$ 0.89	[2]	$ 1.19	[2]	$ 1.82	[2]	$ 2.07	[2]	$ 0.71	[2]	$ 6.50	[2]	$ 5.81	[2]	$ 5.16
Diluted	$ 1.02	[2]	$ 2.11	[2]	$ 2.40	[2]	$ 0.89	[2]	$ 1.19	[2]	$ 1.82	[2]	$ 2.07	[2]	$ 0.71	[2]	$ 6.49	[2]	$ 5.81	[2]	$ 5.15

[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 evenly distributed throughout the year except for dependence on housing completions and related weather and economic conditions.

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