Watsco(WSO_B) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Unaudited Financial Statements This section presents Watsco, Inc.'s condensed consolidated unaudited financial statements, including statements of income, comprehensive income, balance sheets, shareholders' equity, and cash flows, along with detailed notes Condensed Consolidated Unaudited Statements of Income Condensed Consolidated Unaudited Statements of Income (Q2 & H1 2025 vs 2024, in thousands) | Metric | Q2 2025 | Q2 2024 | H1 2025 | H1 2024 | | :-------------------- | :------ | :------ | :------ | :------ | | Revenues | $2,062,442 | $2,139,328 | $3,593,528 | $3,704,319 | | Cost of sales | $1,458,954 | $1,559,568 | $2,560,417 | $2,693,934 | | Gross profit | $603,488 | $579,760 | $1,033,111 | $1,010,385 | | Operating income | $271,869 | $268,803 | $384,057 | $395,340 | | Net income | $216,768 | $214,651 | $311,308 | $318,913 | | Net income attributable to Watsco, Inc. | $183,613 | $181,410 | $263,674 | $268,414 | | Basic EPS | $4.53 | $4.50 | $6.52 | $6.71 | | Diluted EPS | $4.52 | $4.49 | $6.50 | $6.69 | Condensed Consolidated Unaudited Statements of Comprehensive Income Condensed Consolidated Unaudited Statements of Comprehensive Income (Q2 & H1 2025 vs 2024, in thousands) | Metric | Q2 2025 | Q2 2024 | H1 2025 | H1 2024 | | :-------------------- | :------ | :------ | :------ | :------ | | Net income | $216,768 | $214,651 | $311,308 | $318,913 | | Foreign currency translation adjustment | $15,770 | $(3,336) | $16,018 | $(11,336) | | Comprehensive income | $232,538 | $211,315 | $327,326 | $307,577 | | Comprehensive income attributable to Watsco, Inc. | $193,971 | $179,110 | $274,196 | $260,575 | Condensed Consolidated Unaudited Balance Sheets Condensed Consolidated Unaudited Balance Sheets (June 30, 2025 vs Dec 31, 2024, in thousands) | Metric | June 30, 2025 | December 31, 2024 | | :-------------------- | :------------ | :---------------- | | ASSETS | | | | Cash and cash equivalents | $292,978 | $526,271 | | Short-term cash investments | — | $255,669 | | Accounts receivable, net | $1,015,738 | $877,935 | | 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 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Total current liabilities | $1,070,916 | $983,901 | | Total long-term obligations | $338,669 | $337,190 | | Total Watsco, Inc. shareholders' equity | $2,760,442 | $2,656,990 | | Total shareholders' equity | $3,221,819 | $3,064,238 | Condensed Consolidated Unaudited Statements of Shareholders' Equity Key Changes in Shareholders' Equity (H1 2025 vs 2024, in thousands) | Metric | H1 2025 | H1 2024 | | :-------------------- | :------ | :------ | | Net income | $263,674 | $268,414 | | Other comprehensive income (loss) | $10,522 | $(7,839) | | Dividends declared and paid on common stock | $(230,497) | $(205,568) | | Share-based compensation | $18,900 | $18,857 | | Total Shareholders' Equity (End of Period) | $3,221,819 | $3,044,190 | Condensed Consolidated Unaudited Statements of Cash Flows Condensed Consolidated Unaudited Statements of Cash Flows (H1 2025 vs 2024, in thousands) | Metric | 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 and cash equivalents | $(233,293) | $14,742 | | Cash and cash equivalents at end of period | $292,978 | $224,854 | Notes to Condensed Consolidated Unaudited Financial Statements 1. BASIS OF PRESENTATION Watsco, Inc. is the largest HVAC/R distributor in North America, incorporated in Florida in 1956, with financial statements prepared under U.S. GAAP, reflecting seasonal sales and equity method investments - Watsco, Inc. is the largest distributor of air conditioning, heating, and refrigeration equipment and related parts and supplies (HVAC/R) in North America[22] - The condensed consolidated unaudited financial statements include Watsco and its wholly owned subsidiaries, five U.S. joint ventures (80% controlling interest) and one Canadian joint venture (60% controlling interest) with Carrier Global Corporation, and a 38.4% equity method investment in Russell Sigler, Inc. (RSI)[23] - Sales of residential central air conditioners, heating equipment, and parts and supplies are seasonal, with demand for AC highest in Q2/Q3 and heating equipment in Q1/Q4, influenced by weather patterns[24] 2. REVENUES Revenues are disaggregated by primary geographical regions and major product lines, with the United States accounting for the majority and HVAC equipment consistently representing 68% of sales Revenues Disaggregated by Region and Product Line (Q2 & H1 2025 vs 2024) | Category | Q2 2025 | Q2 2024 | H1 2025 | H1 2024 | | :-------------------------- | :------ | :------ | :------ | :------ | | Primary Geographical Regions: | | | | | | United States | $1,874,385 | $1,926,499 | $3,252,018 | $3,325,185 | | Canada | $93,707 | $95,697 | $170,120 | $175,495 | | Latin America and the Caribbean | $94,350 | $117,132 | $171,390 | $203,639 | | Major Product Lines (% of Sales): | | | | | | HVAC equipment | 68% | 70% | 68% | 68% | | Other HVAC products | 28% | 26% | 28% | 28% | | Commercial refrigeration products | 4% | 4% | 4% | 4% | 3. EARNINGS PER SHARE Basic and diluted earnings per share calculations are provided for common stock, showing a slight decrease in H1 2025 compared to the prior year Basic and Diluted Earnings Per Share (Q2 & H1 2025 vs 2024) | Metric | Q2 2025 | Q2 2024 | H1 2025 | H1 2024 | | :------------------------------------ | :------ | :------ | :------ | :------ | | Net income attributable to Watsco, Inc. shareholders | $183,613 | $181,410 | $263,674 | $268,414 | | Weighted-average common shares outstanding - Basic | 37,825,623 | 37,512,105 | 37,789,116 | 37,193,827 | | Basic earnings per share for common stock | $4.53 | $4.50 | $6.52 | $6.71 | | Weighted-average common shares outstanding - Diluted | 37,899,430 | 37,627,637 | 37,876,470 | 37,313,593 | | Diluted earnings per share for common stock | $4.52 | $4.49 | $6.50 | $6.69 | 4. OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) primarily consists of foreign currency translation adjustments, showing a positive adjustment of $10,522 thousand in H1 2025, a significant improvement from the prior year's loss Foreign Currency Translation Adjustment (H1 2025 vs 2024, in thousands) | Metric | H1 2025 | H1 2024 | | :-------------------- | :------ | :------ | | Beginning balance | $(59,893) | $(42,331) | | Current period other comprehensive income (loss) | $10,522 | $(7,839) | | Ending balance | $(49,371) | $(50,170) | 5. ACQUISITIONS Watsco completed three acquisitions in the first half of 2025, including Southern Ice Equipment Distributors, Inc., Hawkins HVAC Distributors, Inc., and W.L. Lashley & Associates, Inc., involving cash and common stock consideration and resulting in goodwill recognition - On May 1, 2025, acquired Southern Ice Equipment Distributors, Inc. (SIE) for $14.25 million cash and 7,400 shares of Common stock ($3.413 million fair value), recognizing $7.832 million in goodwill[34] - On April 1, 2025, acquired Hawkins HVAC Distributors, Inc. (Hawkins) for $2.53 million cash[35] - On January 3, 2025, Carrier Enterprise I acquired W.L. Lashley & Associates, Inc. (Lashley) for $3.662 million cash, 1,036 shares of Common stock ($0.493 million fair value), and $0.838 million for debt repayment, recognizing $3.064 million in goodwill[36] 6. DERIVATIVES Watsco uses foreign currency forward and option contracts as economic hedges, recognizing a $(743) thousand loss in H1 2025 compared to a $1,596 thousand gain in H1 2024 - Recognized (losses) gains from foreign currency forward and option contracts not designated as hedging instruments[41] - Q2 2025: $(590) thousand loss[41] - Q2 2024: $1,743 thousand gain[41] - H1 2025: $(743) thousand loss[41] - H1 2024: $1,596 thousand gain[41] 7. FAIR VALUE MEASUREMENTS The company measures certain assets and liabilities at fair value, categorizing them into Level 1, Level 2, and Level 3 based on input observability, with private equity securities totaling $2.906 million and derivative financial instrument liabilities at $51 thousand as of June 30, 2025 Fair Value Measurements at June 30, 2025 (in thousands) | Balance Sheet Location | Total | Level 1 | Level 2 | Level 3 | | :--------------------- | :---- | :------ | :------ | :------ | | Assets: | | | | | | Equity securities | $1,714 | $1,714 | — | — | | Private equity securities | $2,906 | — | — | $2,906 | | Liabilities: | | | | | | Derivative financial instruments (Accrued expenses & other current liabilities) | $51 | — | $51 | — | 8. SHAREHOLDERS' EQUITY Watsco operates a Dividend Reinvestment Plan (DRIP) and an At-the-Market (ATM) Offering Program, with cash dividends of $3.00 per share in Q2 2025 and $5.70 per share for H1 2025 - Dividend Reinvestment Plan (DRIP) was implemented on March 29, 2024, allowing shareholders to reinvest cash dividends, with 30,495 shares issued under DRIP during the six months ended June 30, 2025[45][47] - The 2024 At-the-Market (ATM) Program allows for the issuance and sale of Common stock up to $400.0 million, with $400.0 million available at June 30, 2025[50] - Cash dividends paid on common stock[51] - Q2 2025: $3.00 per share[51] - H1 2025: $5.70 per share[51] 9. COMMITMENTS AND CONTINGENCIES Watsco is involved in incidental litigation and maintains self-insurance reserves for casualty and health benefit programs, with reserves totaling $5.450 million at June 30, 2025 - Self-insurance reserves for casualty and health benefit programs were $5.450 million at June 30, 2025, and $6.247 million at December 31, 2024[58] 10. RELATED PARTY TRANSACTIONS The company has significant related party transactions, primarily with Carrier and its affiliates, accounting for 59% of inventory purchases in Q2 2025 and 62% for H1 2025 - Purchases from Carrier and its affiliates comprised 59% of inventory purchases in Q2 2025 and 62% for H1 2025[59] - Sales to Carrier and its affiliates were approximately $6 million for Q2 2025 and $25 million for H1 2025[59] - Legal fees paid to Greenberg Traurig, P.A., where a Board member is a Senior Chairman, were $87 thousand for Q2 2025 and $109 thousand for H1 2025[60] 11. SEGMENT REPORTING Watsco operates as a single operating and reporting segment, focusing exclusively on HVAC/R distribution - Watsco has one operating and reporting segment: HVAC/R distribution, focusing exclusively on the distribution of air conditioning, heating, and refrigeration equipment and related parts and supplies[61] 12. SUBSEQUENT EVENT The "One Big Beautiful Bill" was signed into law on July 4, 2025, introducing significant federal tax law changes, which Watsco is evaluating for potential impacts - The 'One Big Beautiful Bill' was signed into law on July 4, 2025, including significant changes to federal tax law, such as the permanent extension of certain Tax Cuts and Jobs Act provisions and modifications to the international tax framework[63] - Watsco is evaluating the provisions of the new law and potential impacts on its consolidated financial statements, but does not expect any material impacts[63] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Watsco's financial condition and results of operations, including forward-looking statements, company overview, industry and regulatory factors, critical accounting estimates, and a detailed analysis of financial performance and liquidity Forward-Looking Statements Forward-looking statements are subject to various risks and uncertainties, including economic conditions, competitive factors, supply chain issues, and regulatory changes - Forward-looking statements are subject to risks and uncertainties, including general economic conditions, competitive factors, supplier concentration, commodity costs, consumer spending, housing activity, liquidity access, seasonality, weather patterns, regulatory changes, interest rates, inflation, foreign currency fluctuations, international risks, and cybersecurity[65][69] Company Overview Watsco is North America's largest HVAC/R equipment and supplies distributor, operating from 701 locations, with revenues primarily from HVAC/R sales and seasonal demand patterns - Watsco is the largest distributor of HVAC/R equipment and supplies in North America, operating from 701 locations in 43 U.S. States, Canada, Mexico, and Puerto Rico as of June 30, 2025[68][85] - Revenues primarily consist of sales of HVAC/R equipment and related parts and supplies, with selling, general and administrative expenses largely variable and correlating to sales[70] - Sales of residential central air conditioners, heating equipment, and parts and supplies are seasonal, with demand for AC highest in Q2/Q3 and heating equipment in Q1/Q4, influenced by weather and economic conditions[71] Industry and Regulatory Factors The company faces inflationary pressures from tariffs and is transitioning to lower-GWP refrigerants due to the AIM Act, while the "One Big Beautiful Bill" eliminated IRA tax credits for HVAC systems after December 31, 2025 - Tariffs on HVAC equipment and components sourced from China and Mexico expose the company to inflationary pressures, mitigated by pricing actions and focus on the replacement market[72] - The American Innovation and Manufacturing Act of 2020 (AIM Act) mandates an 85% phasedown of HFC refrigerants over 15 years, restricting high-GWP refrigerants in new HVAC systems after December 31, 2024, prompting Watsco to transition inventory to lower-GWP A2L Systems[76] - The 'One Big Beautiful Bill,' signed July 4, 2025, eliminated the U.S. Inflation Reduction Act of 2022 (IRA) tax credits for HVAC systems after December 31, 2025[78] Critical Accounting Estimates No significant changes occurred during the quarter ended June 30, 2025, to the critical accounting estimates previously disclosed - No significant changes occurred during the quarter ended June 30, 2025, to the critical accounting estimates disclosed in the 2024 Annual Report on Form 10-K[80] New Accounting Standards Refer to Note 1 for a discussion of recently adopted and to be adopted accounting standards - Refer to Note 1 to the condensed consolidated unaudited financial statements for a discussion of recently adopted and to be adopted accounting standards[81] Results of Operations Income Statement as a Percentage of Revenues (Q2 & H1 2025 vs 2024) | Metric | Q2 2025 | Q2 2024 | H1 2025 | H1 2024 | | :------------------------------------ | :------ | :------ | :------ | :------ | | Revenues | 100.0% | 100.0% | 100.0% | 100.0% | | Cost of sales | 70.7% | 72.9% | 71.3% | 72.7% | | Gross profit | 29.3% | 27.1% | 28.7% | 27.3% | | Selling, general and administrative expenses | 16.4% | 14.9% | 18.4% | 17.0% | | Operating income | 13.2% | 12.6% | 10.7% | 10.7% | | Net income attributable to Watsco, Inc. | 8.9% | 8.5% | 7.3% | 7.2% | Second Quarter of 2025 Compared to Second Quarter of 2024 In Q2 2025, revenues decreased by 4% to $2,062.4 million, with HVAC equipment sales declining 6% due to temperate weather and A2L product transition impacts, while gross profit improved by 4% to $603.5 million and net income attributable to Watsco, Inc. increased 1% to $183.6 million Q2 2025 Revenue Performance (in millions) | Metric | 2025 | 2024 | Change | % Change | | :---------------- | :----- | :----- | :----- | :------- | | Revenues | $2,062.4 | $2,139.3 | $(76.9) | (4%) | | Same-store sales | $2,044.7 | $2,132.2 | $(87.5) | (4%) | - HVAC equipment sales decreased 6% in Q2 2025, reflecting a 7% decrease in residential products (6% U.S., 20% international) and a 5% decrease in commercial HVAC equipment (5% U.S., 4% international)[88] - Sales of ducted residential compressor-bearing systems decreased 8%, driven by a 16% decrease in unit volume and an 8% increase in average selling price, primarily due to temperate weather, lower home building activity, and A2L product transition impacts[88] Q2 2025 Gross Profit and SG&A (in millions) | Metric | 2025 | 2024 | Change | % Change | | :------------------------------------ | :----- | :----- | :----- | :------- | | Gross profit | $603.5 | $579.8 | $23.7 | 4% | | Gross margin | 29.3% | 27.1% | | | | Selling, general and administrative expenses | $339.0 | $319.0 | $20.0 | 6% | | SG&A as a percentage of revenues | 16.4% | 14.9% | | | - Net income attributable to Watsco, Inc. for Q2 2025 increased $2.2 million, or 1%, compared to Q2 2024[94] First Half of 2025 Compared to First Half of 2024 For H1 2025, revenues decreased by 3% to $3,593.5 million, with HVAC equipment sales down 4%, while gross profit increased 2% to $1,033.1 million and net income attributable to Watsco, Inc. decreased 2% to $263.7 million H1 2025 Revenue Performance (in millions) | Metric | 2025 | 2024 | Change | % Change | | :---------------- | :------- | :------- | :------- | :------- | | Revenues | $3,593.5 | $3,704.3 | $(110.8) | (3%) | | Same-store sales | $3,567.4 | $3,691.9 | $(124.5) | (3%) | - HVAC equipment sales decreased 4% in H1 2025, reflecting a 3% decrease in residential products (3% U.S., 13% international) and an 8% decrease in commercial HVAC equipment (7% U.S., 9% international)[96] - Sales of ducted residential compressor-bearing systems decreased 5%, reflecting a 12% decrease in unit volume and a 7% increase in average selling price[96] H1 2025 Gross Profit and SG&A (in millions) | Metric | 2025 | 2024 | Change | % Change | | :------------------------------------ | :------- | :------- | :------- | :------- | | Gross profit | $1,033.1 | $1,010.4 | $22.7 | 2% | | Gross margin | 28.7% | 27.3% | | | | Selling, general and administrative expenses | $661.6 | $628.6 | $33.0 | 5% | | SG&A as a percentage of revenues | 18.4% | 17.0% | | | - Net income attributable to Watsco, Inc. for H1 2025 decreased $4.7 million, or 2%, compared to H1 2024[103] Liquidity and Capital Resources Watsco had $293.0 million in cash and cash equivalents as of June 30, 2025, with working capital increasing to $2,228.8 million due to higher inventory and accounts receivable, while operating cash flow decreased significantly - As of June 30, 2025, Watsco had $293.0 million in cash and cash equivalents, with $94.8 million held by foreign subsidiaries[106] - Working capital increased to $2,228.8 million at June 30, 2025, from $2,096.1 million at December 31, 2024, driven by higher inventory balances (seasonal ramp-up and A2L product transition) and accounts receivable, offset by lower cash and short-term investments[109] Cash Flow Activity (H1 2025 vs 2024, in millions) | Cash Flow Activity | 2025 | 2024 | Change | | :------------------------------------ | :----- | :----- | :----- | | Operating activities | $(185.1) | $161.4 | $(346.5) | | Investing activities | $222.3 | $(217.3) | $439.6 | | Financing activities | $(274.2) | $73.8 | $(348.0) | - Net cash used in operating activities was higher primarily due to increased inventory balances (seasonal ramp-up and A2L product transition) and timing of vendor payments[111] - Net cash provided by investing activities increased due to proceeds from matured certificates of deposit[112] - Net cash used in financing activities increased due to $281.8 million net proceeds from Common stock sale in March 2024 (under 2021 ATM Program) and distributions to non-controlling interest in 2025[113][117] - The company maintains an unsecured, five-year $600.0 million syndicated multicurrency revolving credit agreement, with no outstanding balance at June 30, 2025[114][115] - The 2024 ATM Program allows for the issuance and sale of Common stock up to $400.0 million, with the full amount available at June 30, 2025[118] - Watsco's joint venture, Carrier Enterprise I, has a 38.4% ownership in RSI, with the valuation of RSI Shareholders' common stock approximately $460.0 million at June 30, 2025, and Carrier Enterprise I having the obligation to purchase these shares under certain conditions[119][120] - Acquisitions in H1 2025 included Southern Ice Equipment Distributors, Inc. ($14.3 million cash + 7,400 shares), Hawkins HVAC Distributors, Inc. ($2.5 million cash), and W.L. Lashley & Associates, Inc. ($3.7 million cash + 1,036 shares + debt repayment)[123][124][125] - Cash dividends of $5.70 per share were paid on common stock during the six months ended June 30, 2025, with a quarterly dividend of $3.00 per share declared on July 1, 2025[129] Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes to the information regarding market risk from the company's Annual Report on Form 10-K for the year ended December 31, 2024 - No material changes to market risk information compared to the Annual Report on Form 10-K for the year ended December 31, 2024[133] Item 4. Controls and Procedures Management evaluated the effectiveness of disclosure controls and procedures as of June 30, 2025, concluding they were effective, with no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of June 30, 2025[135] - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the quarter ended June 30, 2025[136] PART II. OTHER INFORMATION Item 1. Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 9 to the condensed consolidated unaudited financial statements - Information on legal proceedings is incorporated by reference from Note 9 of the financial statements[138] Item 1A. Risk Factors There have been no material changes to the risk factors disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2024 - No material changes to risk factors compared to the Annual Report on Form 10-K for the year ended December 31, 2024[139] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds On May 1, 2025, Watsco issued 7,400 shares of Common stock as partial consideration for the acquisition of Southern Ice Equipment Distributors, Inc. (SIE), relying on the exemption from registration contained in Section 4(a)(2) of the Securities Act - On May 1, 2025, 7,400 shares of Common stock were issued to the seller as partial consideration for the acquisition of Southern Ice Equipment Distributors, Inc. (SIE)[140] - The shares were issued under the exemption from registration in Section 4(a)(2) of the Securities Act, with the seller representing itself as an 'accredited investor' acquiring shares for investment[141] Item 5. Other Information During the quarter ended June 30, 2025, no officers or directors adopted or terminated any Rule 10b5-1 trading arrangements - No officers or directors adopted or terminated any Rule 10b5-1 trading arrangements during the quarter ended June 30, 2025[142] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications from the CEO, EVP, and CFO, as well as Inline XBRL documents - Exhibits include certifications (31.1, 31.2, 31.3, 32.1) and Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[144] SIGNATURE The report is formally signed on behalf of Watsco, Inc. by Ana M. Menendez, Chief Financial Officer, on August 8, 2025 - The report was signed by Ana M. Menendez, Chief Financial Officer, on behalf of Watsco, Inc. on August 8, 2025[146]