SHARE-BASED COMPENSATION AND BENEFIT PLANS

12 Months Ended

Dec. 31, 2024

SHARE-BASED COMPENSATION AND BENEFIT PLANS

10. SHARE-BASED COMPENSATION AND BENEFIT PLANS

Share-Based Compensation Plans

We have two share-based compensation plans for employees. The 2021 Incentive Compensation Plan (the “2021 Plan”) provides for the award of a broad variety of share-based compensation alternatives such as restricted stock,

non-qualified

stock options, restricted stock units, incentive stock options, performance awards, dividend equivalents, 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 2021 Plan consist of

non-qualified

stock options and restricted stock.

Under the 2021 Plan, the number of shares of common stock available for issuance is (i)

2,500,000

, plus (ii)

7,327

shares of common stock that remained available for grant in connection with awards under the Watsco, Inc. 2014 Incentive Compensation Plan (the “2014 Plan”) on the date on which our shareholders approved the 2021 Plan, plus (iii) shares underlying currently outstanding awards issued under the 2014 Plan, which shares become

reissuable

under

the 2021 Plan to the extent that such underlying shares are not issued due to their forfeiture, expiration, termination or otherwise. A total of

211,957

shares of common stock, net of cancellations, had been awarded under the 2021 Plan as of December 31, 2024. As of December 31, 2024,

2,295,370

shares of common stock were reserved for future grants under the 2021 Plan. Options under the 2021 Plan vest over

two

seven

years

of service and have contractual terms of five and ten years. Awards of 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

or older. Vesting may be accelerated in certain circumstances prior to the original vesting date.

Our second plan, the 2014 Plan, expired in 2021; therefore, no additional options may be granted, but awards remain outstanding in accordance with their respective terms. There were 65,850 options to

urchase

common stock outstanding under the 2014 Plan at December 31, 2024. Options under the 2014 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 2021 Plan and the 2014 Plan as of and for the year ended December 31, 2024:


	Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value

Options outstanding at December 31, 2023		410,865		$	260.82
Granted		41,200			431.36
Exercised		(137,320	)		222.78
Forfeited		(11,250	)		288.67
Expired		(3,000	)		164.30

Options outstanding at December 31, 2024		300,495		$	301.50		2.50	$	51,907

Options exercisable at December 31, 2024		78,102		$	249.19		1.36	$	17,560

The following is a summary of restricted stock activity as of and for the year ended December 31, 2024:


	Shares			Weighted- Average Grant Date Fair Value
Restricted stock outstanding at December 31, 2023		2,736,681		$	124.56
Granted		110,160			428.46
Vested		(199,329	)		33.18
Forfeited		(21,215	)		261.60

Restricted stock outstanding at December 31, 2024		2,626,297		$	143.14

The weighted-average grant date fair value of restricted stock granted during 2024, 2023, and 2022 was $428.46, $302.71, and $290.55, respectively. The fair value of restricted stock that vested during 2024, 2023, and 2022 was $102,328, $5,745, and $271,781, respectively.

During 2024, 78,378 shares of common stock with an aggregate fair market value of $39,613 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of restricted stock. During 2023, 7,585 shares of common stock with an aggregate fair market value of $2,215 were withheld as payment in lieu of cash to satisfy tax withholding obligations in connection with the vesting of restricted stock. During 2022, 320,468 shares of Class B common stock, which include the 311,408 surrendered shares referenced below, with an aggregate fair market value of $87,049 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.

2022 Vesting of Restricted Stock Held by our CEO

On October 15, 2022, 975,622 shares of Class B restricted stock previously granted to our CEO during the period from 1997 to 2011 under various performance-based incentive plans vested. The vested shares had a value of $265,106 based on the closing price of our Class B common stock as of that date, which

s deductible in our 2022 income tax return. The vesting of shares provided a cash benefit of approximately $67,000 in 2022 and reduced

our

provision

for income taxes in 2022 by approximately $

49,000

. This vested value constitute

taxable compensation to our CEO for income tax purposes and was subject to statutory withholding. Upon vesting, we funded $

104,319

in statutory withholding, which, in turn, was satisfied by the CEO through a cash payment to us of $

19,700

and by the surrendering of

311,408

shares of Class B common stock. Accordingly,

664,214

shares of Class B common stock were retained by the CEO, and we retired the surrendered shares.

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

U.S. 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 the historical volatility of our stock.

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


Years Ended December 31,	2024			2023			2022
Expected term in years		5.16			4.25			4.25
Risk-free interest rate		4.17	%		4.11	%		3.04	%
Expected volatility		24.72	%		25.38	%		23.10	%
Expected dividend yield		2.55	%		3.15	%		2.84	%
Grant date fair value	$	93.88		$	67.32		$	46.60

Exercise of Stock Options

The total intrinsic value of stock options exercised during 2024, 2023, and 2022 was $32,481, $30,515, and $13,046, respectively. Cash received from the exercise of stock options during 2024, 2023, and 2022 was $28,791, $26,835, and $18,425, respectively. The tax benefit from stock option exercises during 2024, 2023, and 2022 was $7,040, $6,617, and $2,658, respectively. During 2024, 2023, and 2022, 3,999 shares of Common stock with an aggregate fair market value of $1,860, 17,687 shares of Common stock with an aggregate fair market value of $5,489 and 1,592 shares of Common stock with an aggregate fair market value of $438, 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,	2024		2023		2022
Stock options	$	3,798	$	3,603	$	3,856
Restricted stock		31,224		26,397		24,965

Share-based compensation expense	$	35,022	$	30,000	$	28,821

At December 31, 2024, there was $7,188 of unrecognized

pre-tax

compensation expense related to stock options granted under the 2021 Plan, which is expected to be recognized over a weighted-average period of approximately 2.1 years. The total fair value of stock options that vested during 2024, 2023, and 2022 was $4,022, $2,751, and $2,721, respectively.

At December 31, 2024, there was $

222,387

of unrecognized

pre-tax

compensation expense related to restricted stock, which is expected to be recognized over a weighted-average period of approximately

11.7

years. Of this amount, approximately $

45,000

is related to awards granted to our CEO, of which approximately $

10,000

, $

17,000

, $

13,000

, and $

5,000

vest in approximately

and

years upon his attainment of age

, and

respectively, and approximately $

56,000

is related to awards granted to our President, of which approximately $

55,000

and $

1,000

vest in approximately

and

years upon his attainment of age

and

, 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, 2024, we were obligated to issue

21,597

shares of restricted stock to our CEO that vest in

approximately

years,

19,906

shares of restricted stock to our President that vest in

approximately

years, and an estimated

4,747

shares of restricted stock to various key leaders that vest in

approximately

years in connection with 2024’s performance-based incentive compensation program.

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 2024, 2023, and 2022, employees purchased 2,935, 4,096, and 4,101 shares of Common stock at an average price of $429.60, $306.80, and $262.57 per share, respectively. Cash dividends received by the ESPP were reinvested in Common stock and resulted in the issuance of 2,308, 3,079, and 3,365 additional shares during 2024, 2023, and 2022, respectively. We received proceeds of $2,292, $2,292, and $1,997, respectively, during 2024, 2023, and 2022, for shares of our Common stock purchased and reinvested under the ESPP. At December 31, 2024, 431,061 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, 2024, 2023, and 2022, we issued 20,387, 35,533, and 21,560 shares of Common stock, respectively, to the plan, representing the Common stock discretionary matching contribution of $8,735, $8,862, and $6,746, respectively.

WATSCO INC 10-K