PART I. FINANCIAL INFORMATION [Item 1. Condensed Consolidated Unaudited Financial Statements](index=4&type=section&id=Item%201.%20Condensed%20Consolidated%20Unaudited%20Financial%20Statements) The financial statements for Q2 and H1 2025 show mixed revenue and net income trends, with increased assets driven by inventory and negative operating cash flow in H1 [Condensed Consolidated Unaudited Statements of Income](index=4&type=section&id=Condensed%20Consolidated%20Unaudited%20Statements%20of%20Income) Q2 2025 revenues decreased 3.6% to **$2.06 billion** with net income up 1.2%, while H1 2025 revenues fell 3.0% to **$3.59 billion** with net income down 1.8% Consolidated Statements of Income Highlights (In thousands, except per share data) | Metric | Q2 2025 (in thousands) | Q2 2024 (in thousands) | YoY Change | H1 2025 (in thousands) | H1 2024 (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | **Revenues** | $2,062,442 | $2,139,328 | -3.6% | $3,593,528 | $3,704,319 | -3.0% | | **Gross Profit** | $603,488 | $579,760 | +4.1% | $1,033,111 | $1,010,385 | +2.2% | | **Operating Income** | $271,869 | $268,803 | +1.1% | $384,057 | $395,340 | -2.9% | | **Net Income Attributable to Watsco, Inc.** | $183,613 | $181,410 | +1.2% | $263,674 | $268,414 | -1.8% | | **Diluted EPS** | $4.52 | $4.49 | +0.7% | $6.50 | $6.69 | -2.8% | [Condensed Consolidated Unaudited Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Unaudited%20Balance%20Sheets) Total assets increased to **$4.73 billion** by June 30, 2025, primarily due to a significant rise in inventories to **$1.95 billion** Balance Sheet Summary (In thousands) | Account | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :--- | :--- | :--- | | **Total Current Assets** | $3,299,718 | $3,079,981 | | Cash and cash equivalents | $292,978 | $526,271 | | Inventories, net | $1,952,842 | $1,385,436 | | **Total Assets** | **$4,729,513** | **$4,479,523** | | **Total Current Liabilities** | $1,070,916 | $983,901 | | **Total Liabilities** | $1,507,694 | $1,415,285 | | **Total Shareholders' Equity** | $3,221,819 | $3,064,238 | [Condensed Consolidated Unaudited Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Unaudited%20Statements%20of%20Cash%20Flows) H1 2025 saw a **$185.1 million** net cash outflow from operations, primarily due to increased inventories, contrasting with a prior year inflow Cash Flow Summary - Six Months Ended June 30 (In thousands) | Cash Flow Category | 2025 (in thousands) | 2024 (in thousands) | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(185,090) | $161,441 | | Net cash provided by (used in) investing activities | $222,252 | $(217,315) | | Net cash (used in) provided by financing activities | $(274,233) | $73,810 | | **Net (decrease) increase in cash** | **$(233,293)** | **$14,742** | [Notes to Condensed Consolidated Unaudited Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Unaudited%20Financial%20Statements) Notes detail presentation, revenue disaggregation (primarily U.S. and HVAC), recent acquisitions (SIE, Hawkins, Lashley), and significant related party inventory purchases from Carrier - The company operates as the **largest distributor** of HVAC/R equipment in North America and consolidates several joint ventures with Carrier Global Corporation[22](index=22&type=chunk)[23](index=23&type=chunk) Revenue by Geography - Six Months Ended June 30 (In thousands) | Region | 2025 (in thousands) | 2024 (in thousands) | | :--- | :--- | :--- | | United States | $3,252,018 | $3,325,185 | | Canada | $170,120 | $175,495 | | Latin America and the Caribbean | $171,390 | $203,639 | | **Total** | **$3,593,528** | **$3,704,319** | - In the first half of 2025, the company acquired **Southern Ice Equipment Distributors, Inc. (SIE)**, **Hawkins HVAC Distributors, Inc.**, and **W.L. Lashley & Associates, Inc.**[34](index=34&type=chunk)[35](index=35&type=chunk)[36](index=36&type=chunk) - Purchases from Carrier and its affiliates constituted **62%** of all inventory purchases during the first six months of 2025[59](index=59&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=16&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Q2 2025 revenue declined 4% due to lower HVAC unit volumes, yet gross margin improved by 220 basis points, while H1 2025 operating cash flow was significantly impacted by inventory build for the A2L transition [Company Overview and Market Trends](index=16&type=section&id=Company%20Overview%20and%20Market%20Trends) Watsco, North America's largest HVAC/R distributor, manages seasonal demand, trade policies, and the regulatory transition to A2L refrigerants, while promoting energy-efficient systems - Watsco is the **largest distributor** of HVAC/R products in North America, operating from **701 locations** across the U.S., Canada, Mexico, and Puerto Rico as of June 30, 2025[68](index=68&type=chunk) - The company is managing the phasedown of HFC refrigerants, transitioning its inventory to new lower-GWP **A2L Systems** while continuing to sell existing **410A Systems** as permitted by regulations through 2025[76](index=76&type=chunk) - A new law signed on July 4, 2025, **eliminated the IRA's tax credits** for HVAC systems, making them unavailable after **December 31, 2025**[78](index=78&type=chunk) [Results of Operations](index=19&type=section&id=Results%20of%20Operations) Q2 2025 revenues decreased 4% to **$2.06 billion** with gross margin expanding **220 basis points**, while H1 2025 revenues fell 3% to **$3.59 billion** with gross margin up **140 basis points** Q2 2025 vs Q2 2024 Performance (in millions) | Metric | Q2 2025 (in millions) | Q2 2024 (in millions) | Change (in millions) | % Change | | :--- | :--- | :--- | :--- | :--- | | **Revenues** | $2,062.4 | $2,139.3 | $(76.9) | -4% | | **Gross Profit** | $603.5 | $579.8 | $23.7 | 4% | | Gross Margin | 29.3% | 27.1% | +220 bps | - | | **SG&A** | $339.0 | $319.0 | $20.0 | 6% | - Q2 2025 HVAC equipment sales decreased **6%**, reflecting a **7%** drop in residential products and a **5%** drop in commercial products[88](index=88&type=chunk) - Sales of ducted residential systems fell **8%**, driven by a **16%** decrease in unit volume, partially offset by an **8%** increase in average selling price[88](index=88&type=chunk) H1 2025 vs H1 2024 Performance (in millions) | Metric | H1 2025 (in millions) | H1 2024 (in millions) | Change (in millions) | % Change | | :--- | :--- | :--- | :--- | :--- | | **Revenues** | $3,593.5 | $3,704.3 | $(110.8) | -3% | | **Gross Profit** | $1,033.1 | $1,010.4 | $22.7 | 2% | | Gross Margin | 28.7% | 27.3% | +140 bps | - | | **SG&A** | $661.6 | $628.6 | $33.0 | 5% | [Liquidity and Capital Resources](index=22&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity is strong with **$293.0 million** cash and an undrawn **$600 million** credit facility, despite increased working capital due to inventory build for seasonal demand and A2L transition - Primary sources of liquidity are cash from operations and a **$600 million** revolving credit agreement, which had no outstanding balance at June 30, 2025[104](index=104&type=chunk)[115](index=115&type=chunk) Cash Flow Summary - Six Months Ended June 30 (in millions) | Cash Flow Category | 2025 (in millions) | 2024 (in millions) | Change (in millions) | | :--- | :--- | :--- | :--- | | Operating Activities | $(185.1) | $161.4 | $(346.5) | | Investing Activities | $222.3 | $(217.3) | $439.6 | | Financing Activities | $(274.2) | $73.8 | $(348.0) | - The company maintains an At-the-Market (ATM) offering program, with **$400 million** available for sale under the 2024 ATM Program as of June 30, 2025[118](index=118&type=chunk) - Cash dividends of **$5.70 per share** were paid during the six months ended June 30, 2025, compared to **$5.15** in the same period of 2024[129](index=129&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=25&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) No material changes to market risk disclosures were reported compared to the 2024 Annual Report on Form 10-K - There were no material changes to market risk disclosures during the quarter[133](index=133&type=chunk) [Item 4. Controls and Procedures](index=26&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2025, with no material changes to internal control over financial reporting - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[135](index=135&type=chunk) - No changes occurred in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[136](index=136&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=27&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in incidental litigation but does not anticipate a material adverse effect on its financial condition or operations, as detailed in Note 9 - The company refers to Note 9 of its financial statements for information on legal proceedings, stating that it does not expect any material adverse effect from current litigation[138](index=138&type=chunk)[56](index=56&type=chunk) [Item 1A. Risk Factors](index=27&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors were reported compared to the company's 2024 Annual Report on Form 10-K - Risk factors for the quarter ended June 30, 2025, do not differ materially from those in the 2024 Annual Report on Form 10-K[139](index=139&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=27&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) On May 1, 2025, **7,400 shares** of unregistered Common stock were issued as partial consideration for the SIE acquisition, exempt under Section 4(a)(2) of the Securities Act - On May 1, 2025, Watsco issued **7,400 shares** of unregistered Common stock as part of the consideration for the acquisition of SIE[140](index=140&type=chunk) - The issuance was exempt from registration under Section 4(a)(2) of the Securities Act, as the seller was an accredited investor acquiring the shares for investment purposes[141](index=141&type=chunk) [Item 5. Other Information](index=27&type=section&id=Item%205.%20Other%20Information) No officers or directors adopted or terminated Rule 10b5-1 trading plans or other non-Rule 10b5-1 arrangements during Q2 2025 - No officers or directors adopted or terminated any Rule 10b5-1 trading plans during the quarter ended June 30, 2025[142](index=142&type=chunk) [Item 6. Exhibits](index=28&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and Inline XBRL data files - The report includes certifications from the CEO, EVP, and CFO as required by Sections 302 and 906 of the Sarbanes-Oxley Act[144](index=144&type=chunk)

Financial Data and Key Metrics Changes - Sales declined by 4% despite double-digit pricing gains for new equipment, offset by lower volumes [6][7] - Gross profit margins reached record levels, leading to an increase in EBIT and expanded EBIT margins [7][8] - SG&A expenses increased by 6% due to transition costs and the addition of 10 new locations from recent acquisitions [8][9] - The company maintains a strong cash position with no debt [9] Business Line Data and Key Metrics Changes - Residential new construction and international markets remain subdued, with residential new construction down by 15% to 20% [19] - E-commerce sales grew to $2.5 billion, representing 34% of total sales, with mobile app users increasing by 17% year-over-year [9][10] - The annual volume of products sold through OnCallAir increased by 19% to $1.6 billion [10] Market Data and Key Metrics Changes - International sales, particularly in Mexico, were volatile and negatively impacted earnings by approximately $0.10 per share in the quarter [22] - The company expects improvements in July and August, indicating a better market outlook [23] Company Strategy and Development Direction - The company is focused on transitioning to next-generation equipment with A2L refrigerants, affecting about 55% of historical product sales [5][6] - A new technology-driven sales platform is being developed to capture larger national customers, expected to launch in 2026 [10][11] - The company aims to grow the parts and supply segment, which currently represents about 30% of sales [11] Management's Comments on Operating Environment and Future Outlook - Management acknowledges a soft market but remains optimistic about future growth and market share development [25][26] - The company is focused on improving gross margins and inventory turns, with a goal of reaching 30% gross profit margin [11][84] - Management emphasizes the importance of innovation and technology in maintaining competitive advantage [12][93] Other Important Information - The company is actively pursuing M&A opportunities, leveraging its strong balance sheet [55][56] - Management is committed to improving inventory management and reducing excess inventory levels [50][53] Q&A Session Summary Question: What happened to volumes in the quarter? - Management noted that volumes were weaker than expected due to weather patterns and a decline in residential new construction, but saw improvements in July [19][20] Question: How sustainable are the gross margins? - Management indicated that while the current gross margin of 29% is strong, it may not be sustainable in the second half of the year due to the absence of pricing benefits seen in the first half [27][28] Question: What is the impact of the canister shortage? - Management stated that the canister shortage was less of a concern now and that they expect to be off allocation by August [40][41] Question: How is the inventory investment trending? - The company reported a significant inventory investment due to the transition, but is focused on improving inventory turns moving forward [50][52] Question: What are the thoughts on consumer preferences during the product transition? - Management observed that the market remains focused on minimum efficiency products, with no significant shift towards high-efficiency systems [61][62] Question: Are there any incentives being requested by contractors? - Management indicated that contractors are not pushing for lower prices, as there is no elasticity in the market [146]

Financial Data and Key Metrics Changes - Sales declined by 4%, with double-digit pricing gains for new equipment offset by lower volumes [5][6] - Record gross profit margins were achieved, leading to an increase in EBIT and expanded EBIT margins despite lower sales [6][7] - SG&A expenses increased by 6% due to additional costs during the product transition and the addition of 10 new locations from recent acquisitions [7][8] - The company maintains a strong cash position with no debt [8] Business Line Data and Key Metrics Changes - Residential new construction and international markets remain subdued, with residential new construction down by 15% to 20% [18] - The annual volume of products sold through OnCallAir, the digital selling platform, increased by 19% to $1.6 billion [9] - Parts and supply segment, currently about 30% of sales, is expected to grow significantly over time [10] Market Data and Key Metrics Changes - International sales, particularly in Mexico, were volatile and negatively impacted earnings by approximately $0.10 per share for the quarter [21] - The company experienced a late start to the summer season, affecting overall market performance [5] Company Strategy and Development Direction - The company is transitioning to next-generation equipment using A2L refrigerants, affecting about 55% of historical product sales [4] - A new technology-driven sales platform is being developed to capture larger national customers, expected to launch in 2026 [10] - The company aims for a gross profit margin of 30% and is focusing on growing the parts and supply segment [10] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the future, noting that the transition to new products will simplify operations by 2026 [4] - The company is focused on controlling margins and pricing, despite external market challenges [23] - Management acknowledged the current market noise due to various macroeconomic factors but remains confident in the company's ability to grow and take market share [125] Other Important Information - E-commerce sales have grown to $2.5 billion, representing 34% of total sales [8] - The company has launched two AI platforms to enhance data utilization and improve customer experience [11] Q&A Session Summary Question: What happened to volumes in the quarter? - Management noted that April was strong, May was weak due to weather, and June rebounded. Residential new construction was down 15% to 20%, but replacement sales remained strong [18] Question: How sustainable are the gross margins? - Management indicated that while the current gross margin of 29% is strong, it may not be sustainable in the second half due to the absence of pricing benefits seen in the first half [26][28] Question: What is the impact of the cylinder shortage? - Management stated that the refrigerant allocation issue is becoming less of a concern, with expectations to be off allocation by August [40] Question: How is inventory being managed during the transition? - The company has invested more in inventory than anticipated due to lower industry demand, but is focused on improving inventory turnover [48][52] Question: What is the outlook for M&A activity? - Management expressed eagerness for potential M&A opportunities in the current soft market, highlighting a strong balance sheet to support acquisitions [53][55] Question: How are consumer preferences changing during the product transition? - Management noted that the market remains focused on minimum efficiency products, with no significant shift towards high-efficiency systems [60] Question: What are the expectations for pricing in the second half? - Management does not anticipate significant price increases on equipment but expects some inflationary pressures on non-equipment products due to tariffs [118]

Watsco (WSO) came out with quarterly earnings of $4.52 per share, missing the Zacks Consensus Estimate of $4.84 per share. This compares to earnings of $4.49 per share a year ago. These figures are adjusted for non- recurring items. This quarterly report represents an earnings surprise of -6.61%. A quarter ago, it was expected that this heating and cooling company would post earnings of $2.29 per share when it actually produced earnings of $1.93, delivering a surprise of -15.72%. Over the last four quarters ...

[Executive Summary](index=1&type=section&id=Executive%20Summary) Watsco reports Q2 2025 results with record gross margins, expanded operating margins, and strong financial health [Company Overview and Q2 2025 Highlights](index=1&type=section&id=Company%20Overview%20and%20Q2%202025%20Highlights) Watsco, a leading HVAC distributor, achieved earnings growth and an 11% dividend increase in Q2 2025, maintaining a debt-free balance sheet - Watsco is the largest distributor in the **$74 billion** North American HVAC market, achieving an **18% compounded annual total-shareholder return** since 1989[2](index=2&type=chunk) - The company maintains a strong financial position with **$293 million in cash**, **no debt**, and **$3 billion in shareholders' equity** as of June 30, 2025[3](index=3&type=chunk) - The 2025 results are significantly influenced by the regulatory transition to A2L refrigerants, which impacts nearly **$1 billion of inventory** across over 650 U.S. locations[4](index=4&type=chunk) - In April 2025, the annual dividend was increased by **11% to $12.00 per share**, marking the 51st consecutive year of dividends[2](index=2&type=chunk) [Financial Performance](index=1&type=section&id=Financial%20Performance) [Second Quarter 2025 Performance](index=1&type=section&id=Second%20Quarter%202025%20Performance) Q2 2025 revenue declined 4% to $2.06 billion, yet gross profit grew 4% to $603 million with record 29.3% gross margin - Sales trends were impacted by double-digit pricing realization from the A2L product transition, offset by lower unit volumes due to temperate weather, reduced homebuilding, and transition-related installation issues, with the sales mix of new A2L equipment growing from **25% in Q1 to 60% in Q2**[6](index=6&type=chunk) Q2 2025 Key Financial Metrics | Metric | Q2 2025 | Change vs. Q2 2024 | | :--- | :--- | :--- | | Revenues | $2.06 billion | -4% | | Gross Profit | $603 million | +4% | | Gross Profit Margin | 29.3% | +220 bps | | Operating Income | $272 million | +1% | | Operating Margin | 13.2% | +60 bps | | Earnings Per Share | $4.52 | +0.7% | Q2 2025 Sales Performance by Category | Category | % of Sales | YoY Change | | :--- | :--- | :--- | | HVAC Equipment | 68% | -6% | | Other HVAC Products | 28% | Flat | | Commercial Refrigeration | 4% | +3% | | **Region** | | | | Domestic Markets | N/A | -3% | | Non-US Markets | N/A | -12% | [Six-Month 2025 Performance](index=2&type=section&id=Six-Month%202025%20Performance) H1 2025 revenue decreased 3% to $3.59 billion, while gross profit rose 2% to $1.03 billion with a 28.7% gross margin Six-Month 2025 Key Financial Metrics | Metric | H1 2025 | Change vs. H1 2024 | | :--- | :--- | :--- | | Revenues | $3.59 billion | -3% | | Gross Profit | $1.03 billion | +2% | | Gross Profit Margin | 28.7% | +140 bps | | Operating Income | $384 million | -3% | | Operating Margin | 10.7% | Flat | | Earnings Per Share | $6.50 | -2.8% | Six-Month 2025 Sales Performance by Category | Category | % of Sales | YoY Change | | :--- | :--- | :--- | | HVAC Equipment | 68% | -4% | | Other HVAC Products | 28% | -2% | | Commercial Refrigeration | 4% | -1% | | **Region** | | | | Domestic Markets | N/A | -2% | | Non-U.S. Markets | N/A | -10% | [Strategic Initiatives and Growth Drivers](index=2&type=section&id=Strategic%20Initiatives%20and%20Growth%20Drivers) [Innovation & Strategic Technology Initiatives](index=2&type=section&id=Innovation%20%26%20Strategic%20Technology%20Initiatives) Watsco's $250M technology investment drives e-commerce, digital platforms, and AI tools, contributing to record gross margins - The company has invested more than **$250 million in technology** over the last five years, with a current annual run rate of **$60 million**, employing nearly **300 technologists**[11](index=11&type=chunk) [HVAC Pro+ & E-Commerce](index=2&type=section&id=HVAC%20Pro%2B%20%26%20E-Commerce) HVAC Pro+ user community grew 17%, driving e-commerce sales to $2.5 billion, representing 34% of total sales - The authenticated user community for HVAC Pro+ Mobile Apps grew **17% year-over-year** to more than **70,000 users**[11](index=11&type=chunk) - E-commerce sales totaled approximately **$2.5 billion** for the twelve months ended June 30, 2025, comprising **34% of the company's overall sales**[11](index=11&type=chunk) [OnCallAir® Digital Sales Platform](index=3&type=section&id=OnCallAir%C2%AE%20Digital%20Sales%20Platform) OnCallAir® generated $1.6 billion in GMV over 12 months, with H1 2025 GMV up 19% to $886 million - The gross merchandise value (GMV) of products sold through OnCallAir® was approximately **$1.6 billion** for the 12-month period ending June 30, 2025[13](index=13&type=chunk) - In the first half of 2025, contractors using OnCallAir® generated **$886 million in GMV**, a **19% increase** versus the same period last year[13](index=13&type=chunk) [Pricing Optimization and AI Initiatives](index=3&type=section&id=Pricing%20Optimization%20and%20AI%20Initiatives) Pricing optimization and new AI tools enhance gross margins and provide real-time expertise and productivity gains - The pricing optimization platform has been a key contributor to the company's **record gross margin performance in 2025** by applying sophisticated pricing rules and strategies[13](index=13&type=chunk) - Watsco has deployed two AI tools: "Ask.Watsco," an internal engine with over **2,100 users** to enhance productivity, and "AL.watsco," a customer-facing model to provide real-time expertise and recommendations[13](index=13&type=chunk) [Other Growth Initiatives](index=3&type=section&id=Other%20Growth%20Initiatives) New initiatives target non-equipment product sales and large institutional customers with enterprise-wide solutions - The company launched initiatives in 2025 to grow sales of non-equipment products, which represent nearly half of the market and **$1.7 billion in Watsco's purchases** over the last 12 months[13](index=13&type=chunk) - A new strategy, Project "WatscoOne," is being developed to target large institutional customers with enterprise-wide solutions, expected to launch in early 2026[13](index=13&type=chunk) [Buy & Build Acquisition Strategy](index=4&type=section&id=Buy%20%26%20Build%20Acquisition%20Strategy) Watsco continues its "buy and build" strategy, acquiring three distributors in 2025, adding $1.6 billion in annualized sales since 2019 - The North American HVAC/R distribution market is estimated at **$74 billion** and remains highly fragmented with approximately **2,100 independent distributors**[14](index=14&type=chunk) - Since 2019, Watsco has acquired **12 companies** that now represent about **$1.6 billion in annualized sales** and **120 locations**[14](index=14&type=chunk) - **Three distributors** in key Sunbelt markets have been acquired so far in 2025[14](index=14&type=chunk) [Financial Position and Shareholder Returns](index=4&type=section&id=Financial%20Position%20and%20Shareholder%20Returns) [Cash Flow, Financial Strength and Liquidity](index=4&type=section&id=Cash%20Flow%2C%20Financial%20Strength%20and%20Liquidity) Watsco maintains a strong balance sheet, with H1 2025 operating cash flow used for A2L inventory and seasonal buildup - Operating cash flow was a use of **$185 million** for the six months ended June 30, 2025, compared to a source of **$161 million** in the prior year period[16](index=16&type=chunk)[28](index=28&type=chunk) - The use of cash was primarily due to new A2L inventory investments and peak seasonal inventory buildup[16](index=16&type=chunk) - The company's stated goal is to generate annual operating cash flow in excess of net income, consistent with its long-term track record[16](index=16&type=chunk) [Dividend Policy](index=4&type=section&id=Dividend%20Policy) Watsco increased its annual dividend by 11% to $12.00 per share in April 2025, reflecting confidence in future cash flow - In April 2025, Watsco announced an **11% increase** to its annual dividend, raising it to **$12.00 per share**[17](index=17&type=chunk) - The company's philosophy is to share increasing amounts of cash flow via higher dividends while maintaining capacity for network-building investments[17](index=17&type=chunk) [Appendix: Condensed Consolidated Financial Statements](index=6&type=section&id=Appendix%3A%20Condensed%20Consolidated%20Financial%20Statements) [Condensed Consolidated Results of Operations](index=6&type=section&id=Condensed%20Consolidated%20Results%20of%20Operations) Q2 2025 revenue declined 4% to $2.06 billion, but gross margin expanded to 29.3%, with net income largely flat Q2 Financial Summary (in thousands) | Metric | Q2 2025 | Q2 2024 | | :--- | :--- | :--- | | Revenues | $2,062,442 | $2,139,328 | | Gross Profit | $603,488 | $579,760 | | Operating Income | $271,869 | $268,803 | | Net Income (Watsco) | $183,613 | $181,410 | | Diluted EPS | $4.52 | $4.49 | Six-Month Financial Summary (in thousands) | Metric | H1 2025 | H1 2024 | | :--- | :--- | :--- | | Revenues | $3,593,528 | $3,704,319 | | Gross Profit | $1,033,111 | $1,010,385 | | Operating Income | $384,057 | $395,340 | | Net Income (Watsco) | $263,674 | $268,414 | | Diluted EPS | $6.50 | $6.69 | [Condensed Consolidated Balance Sheets](index=7&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of June 30, 2025, total assets reached $4.73 billion, driven by A2L inventory, maintaining a debt-free position Key Balance Sheet Items (in thousands) | Account | June 30, 2025 | Dec 31, 2024 | | :--- | :--- | :--- | | Cash and cash equivalents | $292,978 | $526,271 | | Inventories, net | $1,952,842 | $1,385,436 | | Total current assets | $3,299,718 | $3,079,981 | | Total assets | $4,729,513 | $4,479,523 | | Total liabilities | $1,507,694 | $1,415,285 | | Shareholders' equity | $3,221,819 | $3,064,238 | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) H1 2025 operating cash flow was a use of $185.1 million, primarily due to increased inventory investments Six-Month Cash Flow Summary (in thousands) | Cash Flow Category | H1 2025 | H1 2024 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(185,090) | $161,441 | | Net cash provided by (used in) investing activities | $222,252 | $(217,315) | | Net cash (used in) provided by financing activities | $(274,233) | $73,810 | | **Net (decrease) increase in cash** | **$(233,293)** | **$14,742** |

Core Insights - Watsco, Inc. reported strong operating results for Q2 2025, with record gross profit margins and expanded operating margins amid the transition to A2L products [1][4][7] - The company maintains a robust financial position, with significant cash reserves and no debt, allowing for continued investments in growth and technology [3][14] - The ongoing regulatory transition to next-generation HVAC equipment incorporating A2L refrigerants is expected to impact sales and inventory management [4][6] Financial Performance - Q2 revenues decreased by 4% to $2.06 billion, while gross profit increased by 4% to a record $603 million, resulting in a gross profit margin of 29.3%, up 220 basis points [8][23] - Operating income rose by 1% to $272 million, with an operating margin of 13.2%, reflecting a 60 basis point increase [8][23] - For the first half of 2025, revenues decreased by 3% to $3.59 billion, with gross profit increasing by 2% to $1.03 billion and a gross profit margin of 28.7%, up 140 basis points [11][23] Market Trends and Innovations - The transition to A2L refrigerants is driving double-digit pricing realization, although unit volumes have been affected by weather conditions and lower homebuilding activity [6][9] - Watsco has invested over $250 million in technology over the past five years, enhancing its digital ecosystem and customer experience [11][12] - The company's HVAC Pro+ Mobile Apps and e-commerce platform have significantly improved customer engagement, with e-commerce sales reaching approximately $2.5 billion, accounting for 34% of total sales [11][12] Strategic Initiatives - Watsco's "buy and build" acquisition strategy has led to the acquisition of 12 companies since 2019, contributing approximately $1.6 billion in annualized sales [13] - The company is leveraging AI-driven initiatives to enhance customer experience and operational efficiencies, with tools like "Ask.Watsco" and "AL.watsco" [15][12] - Watsco plans to target institutional customers through Project "WatscoOne," aiming to provide comprehensive solutions across multiple markets and product categories [15]

Core Insights - Watsco, Inc. (WSO) is expected to report second-quarter 2025 results on July 30, with earnings projected at $4.84 per share and revenues at $2.21 billion, indicating year-over-year growth of 7.8% and 3.5% respectively [1][2][7] Earnings Performance - In the last reported quarter, Watsco's earnings missed the Zacks Consensus Estimate by 15.7% and decreased 11.1% year over year, while sales missed by 7.6% and decreased 2.2% year over year [1] - Watsco has topped the consensus mark in one of the last four quarters, with an average negative surprise of 5.7% [1] Estimate Revisions - The Zacks Consensus Estimate for the upcoming quarter's earnings has decreased from $4.91 to $4.84 over the past 30 days [2] Revenue Drivers - Strong HVAC demand and the rollout of A2L-compliant systems are expected to boost Watsco's revenues in the second quarter [3] - The company anticipates a smoother sales cadence and a higher-value product mix, with over 60% of recent equipment sales consisting of 454B-based systems [3] Market Conditions - The core residential replacement market is expected to remain strong due to improved weather trends and high-efficiency product demand [4] - Commercial product sales are projected to stabilize as A2L adoption broadens, while international markets may underperform due to macro uncertainties [4] Sales Projections - HVAC Equipment sales are expected to grow 5% year over year to $1.6 billion, while HVAC Products are projected to grow 1% to $540.3 million [5] - Commercial Refrigeration Products sales are expected to grow 2% to $87.3 million [5] Margin Expectations - Gross margins are expected to improve by 100 basis points to 28.1%, driven by favorable pricing and an improved product mix [6][7] - Management aims for a long-term gross margin goal of 30% [6] Cost Pressures - Some cost pressures related to refrigerant container shortages are noted, but management does not expect a material impact on margins [8] Earnings Prediction Model - The current model does not predict an earnings beat for Watsco, as it lacks a positive Earnings ESP and a favorable Zacks Rank [9] - Watsco currently holds a Zacks Rank of 3 [10]

Company Overview - Watsco, Inc. is the largest distributor of heating, air conditioning, and refrigeration (HVAC/R) products with operations in the United States, Canada, Mexico, Puerto Rico, and exports to Latin America and the Caribbean [4] Market Focus - The company focuses on the replacement market, which has grown due to the aging of installed systems, the introduction of higher energy-efficient models, and the necessity of HVAC products in homes and businesses [5] - Approximately 102 million HVAC systems in the U.S. have been in service for over 10 years, many operating below current minimum efficiency standards [5] Environmental Impact - Watsco plays a significant role in addressing climate change by lowering CO2e emissions through the sale of higher-efficiency HVAC systems [6] - HVAC systems account for roughly half of U.S. household energy consumption, making the replacement of older systems critical for reducing electricity consumption and carbon footprints [6] Emission Reduction Achievements - From January 1, 2020, to June 30, 2025, Watsco is estimated to have averted 24.5 million metric tons of CO2e emissions, equivalent to removing 5.7 million gas-powered vehicles from the road annually [7]

Group 1 - Watsco is the largest HVAC maintenance and repair service provider and distributor in the US, with over 375,000 contractors and technicians [1] - The company is benefiting from the industry transition to A2L refrigerants, which is identified as a key catalyst for growth [1]

Core Points - Watsco, Inc. has declared a quarterly cash dividend of $3.00 per share, marking the 200th consecutive quarter of dividend payments [1][2] - The company has a history of paying dividends for 51 consecutive years, reflecting its commitment to sharing cash flow while maintaining a conservative balance sheet [2] - Watsco focuses on the replacement market for HVAC/R products, which is growing due to aging systems and the need for energy-efficient models [4] Company Overview - Watsco is the largest distributor of heating, air conditioning, and refrigeration products in the U.S., Canada, Mexico, and Puerto Rico, with exports to Latin America and the Caribbean [3] - The company plays a significant role in addressing climate change by promoting the replacement of older HVAC systems with higher efficiency models [5] Market Opportunity - There are approximately 102 million HVAC systems in the U.S. that are over 10 years old, many of which operate below current efficiency standards, presenting a substantial market opportunity for Watsco [4] - From January 1, 2020, to March 31, 2025, Watsco is estimated to have averted 23.7 million metric tons of CO2e emissions through the sale of higher-efficiency HVAC systems, equivalent to removing 5.5 million gas-powered vehicles from the road annually [6]