Watsco, Inc.

What they do

Watsco distributes air conditioning, heating and refrigeration equipment and related parts and supplies through 723 locations in 43 U.S. states, Canada, Mexico and Puerto Rico, with export coverage into Latin America and the Caribbean. It serves more than 130,000 active contractors who sell to and install products for the replacement and new construction markets. Revenue is primarily equipment sales, supplemented by parts and supplies, and supported by distribution agreements with major OEMs.

Revenue drivers

• HVAC equipment — About 68% of same-store second quarter sales; domestic residential HVAC equipment increased 5% on 2% unit volume growth and 2% higher average selling prices.
• Other HVAC products (parts and supplies) — About 28% of same-store second quarter sales and declined 1% year over year.
• Commercial refrigeration — About 4% of same-store second quarter sales; grew 19% year over year.

Recent performance

For the quarter ended June 30, 2026, revenues rose 2% to $2.1 billion, or 1% on a same-store basis. Gross profit fell 4% to $579 million, a 27.5% margin versus 29.3% a year earlier, and SG&A rose 3% to $349 million, or 16.6% of sales. Operating income declined 12% to $238 million (11.3% operating margin versus 13.2%), and earnings per share fell 12% to $4.00. Management attributed roughly 130 basis points of the prior-year margin benefit to 2025 pricing actions tied to inflation and tariffs as well as A2L transition effects.

Strategy

Watsco is focused on growth with existing customers, adding new customers, improving operating efficiencies and optimizing inventory now that the A2L refrigerant transition is largely complete. It closed the acquisition of Jackson Supply Company, an HVAC distributor with roughly $230 million of annualized sales across 25 Sunbelt locations, adding density in key markets. The company invests in its technology ecosystem, which it says engages more than 70,000 contractors and technicians digitally, and is introducing AI-driven initiatives using its data assets. It reports a debt-free balance sheet with $464 million in cash and cash investments at the time of the second quarter release.

Risks

• Supplier concentration — The top ten suppliers were 85% of 2025 purchases, including 62% from Carrier and 8% from Rheem, so an interruption with either could disrupt operations.
• Tariffs and sourcing — Carrier and Rheem source components from China and Mexico and assemble many residential and light-commercial products in Mexico, so new tariffs could raise product costs and require price increases.
• Gross margin normalization — Second quarter gross margin fell to 27.5% from 29.3% as 2025's tariff- and inflation-driven OEM pricing actions gave way to more normalized 2026 pricing.
• Weather and seasonality — Residential cooling demand peaks in the second and third quarters and heating in the first and fourth, and profitability can swing with weather patterns.

Outlook

Management said second quarter results reflect stabilizing end-market demand after last year's transition to A2L refrigerant systems and the pricing actions that accompanied it. The company describes current gross margin levels, largely consistent with the trailing twelve months ended June 30, 2026, as more representative of underlying market conditions. It expects to pursue growth with existing and new customers, operating efficiency and inventory optimization in what it calls a more conventional operating environment.