OPERATING PHILOSOPHY

Acquired subsidiaries operate in a manner that builds upon the long-term relationships they have established between their suppliers and customers. Typically, Watsco seeks to maintain the identity and culture of acquired businesses by retaining their historical trade names, management teams and sales organizations and by continuing their product brand-name offerings. Watsco believes this strategy allows the Company 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 companies that are acquired.

Watsco maintains a specialized functional support staff at its corporate headquarters in Miami, Florida to support the subsidiaries’ strategies for growth in their respective markets. Certain general and administrative expenses are targeted for cost savings by leveraging the overall business volume and improving operating efficiencies.

Products

Watsco sells an expansive line of products and maintains a diverse mix of inventory to meet its customers’ immediate needs and seeks 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 the Company distributes consist of: (i) equipment, including residential central air conditioners ranging from 1-1/2 to 5 tons, gas, electric and oil furnaces ranging from 50,000 to 150,000 BTUs, commercial air conditioning and heating equipment and systems ranging from 1-1/2 to 25 tons and other specialized equipment, (ii) parts, including replacement compressors, evaporator coils, motors and other component parts and (iii) supplies, including thermostats, insulation material, refrigerants, ductwork, grills, registers, sheet metal, tools, copper tubing, concrete pads, tape, adhesives and other ancillary supplies. The refrigeration products Watsco distributes include condensing units, compressors, evaporators, valves, refrigerant, walk-in coolers and ice machines for industrial and commercial applications.

Distribution and Sales

The largest market Watsco serves is the U.S. In the U.S., the most significant markets for HVAC/R products are in the U.S. Sun Belt. Accordingly, the majority of Watsco’s distribution locations are in the U.S. Sun Belt, with the highest concentration in Florida and Texas. These markets have been a strategic focus of the Company given their size, the reliance by homeowners and businesses on HVAC/R products to maintain a comfortable indoor environment and the population growth over the last 40 years, which has led to a substantial installed base requiring replacement, a shorter useful life for equipment given the hours of operation and the focus by electrical utilities on consumer incentives designed to promote replacement of HVAC/R equipment in an effort to improve energy efficiency. In the U.S., cooling and heating accounts for approximately half of the energy consumed in a typical home.

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. Watsco serves more than 50,000 contractors and dealers who service the replacement and new construction markets for residential and light commercial central air conditioning, heating and refrigeration systems. Watsco focuses 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 their 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. Watsco believes they compete successfully with other distributors primarily on the basis of an experienced sales organization, strong service support, maintenance of well-stocked inventories, and density of warehouse locations, high quality reputation, broad product lines and the ability to foresee customer demand for new products.

Key Suppliers

Watsco has significant relationships with Carrier, Rheem, Goodman, Nordyne, Emerson, Manitowoc and DuPont, each of which is a leading manufacturer of HVAC/R products in the U.S. Each manufacturer has a well-established reputation of producing high-quality, competitively-priced products. The manufacturers’ current product offerings, quality, serviceability and brand-name recognition allows Watsco to operate favorably relative to their competitors. To maintain brand-name recognition, the manufacturers of air conditioning and heating equipment provide national advertising and participate with Watsco in cooperative advertising programs and promotional incentives that are targeted to both dealers and end-users.