Watsco(US:WSO)2025-08-08 20:01PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Unaudited Financial Statements 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 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 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 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 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 Corporation2223 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.343536 - Purchases from Carrier and its affiliates constituted 62% of all inventory purchases during the first six months of 202559 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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, 202568 - 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 202576 - A new law signed on July 4, 2025, eliminated the IRA's tax credits for HVAC systems, making them unavailable after December 31, 202578 Results of Operations 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 products88 - Sales of ducted residential systems fell 8%, driven by a 16% decrease in unit volume, partially offset by an 8% increase in average selling price88 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 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, 2025104115 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, 2025118 - 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 2024129 Item 3. Quantitative and Qualitative Disclosures about Market Risk 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 quarter133 Item 4. Controls and Procedures 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 report135 - No changes occurred in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls136 PART II. OTHER INFORMATION Item 1. Legal Proceedings 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 litigation13856 Item 1A. Risk Factors 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-K139 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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 SIE140 - 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 purposes141 Item 5. Other Information 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, 2025142 Item 6. Exhibits 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 Act144