Watsco announced its operating results for the third quarter and nine-month period ended September 30, 2025. The Company also provided updates related to innovation and technology, business trends and long-term growth opportunities.

Watsco is a large distributor in the highly-fragmented $74 billion North American market for HVAC products. Since entering distribution in 1989, Watsco has achieved an 18% compounded annual total-shareholder return through a combination of organic growth and the acquisition of more than 70 market-leading businesses.

The Company maintains a solid financial position with currently more than $640 million in cash and investments and no debt, enabling sustained investments in growth, particularly the Company’s industry-leading technology platforms. Today, more than 72,000 contractors, installers and technicians engage with the Company’s various platforms, which contribute to customer growth and reduced attrition. The Company is now advancing AI-driven initiatives to further enhance the customer experience and improve efficiencies. These investments position Watsco to capture market share as contractors increasingly adopt digital tools and incorporate data-driven solutions in their businesses.

Industry product transition

2025 results reflect a significant regulatory transition to new HVAC systems that incorporates A2L refrigerants. The regulatory mandate impacted nearly 55% of all products and required the conversion of over $1 billion of inventory across more than 650 U.S. locations. The transition, which began in September 2024 and will conclude in early 2026, has created volatility in sales, industry shipments, distributor inventories and further compounded by overall weaker consumer spending and slower housing-related activities.

Recent industry shipment data published by AHRI show meaningful declines in unit shipments, while distributor volumes have been comparatively less volatile. Watsco third quarter revenues declined 4% (3% domestically) as the decline in units was substantially offset by double-digit pricing for A2L products, 2% sales growth of non-equipment products and 4% sales growth in commercial refrigeration products. Price realization for the new A2L products has averaged approximately 15% inclusive of mid-year OEM price actions.

Over the twelve-month period ended September 30, 2025, which encompasses the transition period, Watsco’s operating profit remained flat and operating margins improved 10 basis-points on a 1% decrease in sales and a 130 basis-point improvement in gross margin. The Company believes this relative performance in the context of the transition and other macroeconomic headwinds speaks well of its business model and overall execution.

Watsco made substantial investments in training, technology and logistics to effect the transition, the incremental costs of which are reflected in 2025 operating expenses. These costs are not expected to recur in 2026, offering anticipated improvements to operating efficiency moving forward. In addition, Watsco invested meaningfully in working capital to ramp-up inventory during the first half of 2025 in support of customers during the transition. Peak inventory investment reached $2.1 billion during 2025 and declined to $1.6 billion at September 30, 2025 (third quarter inventory reduction of $351 million). The Company is targeting further reductions during the fourth quarter and expects more conventional working capital trends going forward, providing the opportunity for improved inventory turns and enhanced returns on invested capital.

Albert H. Nahmad, Chairman and CEO, remarked: “We are in a wonderful industry, our balance sheet has never been stronger and our technology advantage remains immense. Although short-term market conditions remain fluid, we operate a resilient business in a resilient industry and our focus on the long-term has been, and will be, far more consequential as we build our network, scale our technologies to delight customers and partner with our OEMs to grow and gain share.”

Mr. Nahmad added: “This has been one of the most challenging business environments in recent memory, and I am gratified that we have largely sustained our profitability, improved margins, improved cash flow, and navigated the A2L transition successfully while continuing to invest in long-term growth. Gross profit, gross margin and operating cash flow for the quarter established new records, reflecting substantial progress toward optimizing inventories and positioning the Company to invest in growth alongside its OEM partners.”

Third Quarter Performance

• Revenues decreased 4% to $2.07 billion
• Gross profit of $569 million was flat compared to last year
• Gross profit margin expanded 130 basis-points to a record 27.5%
• SG&A expenses increased 5%
• Operating income decreased 6% to $235 million (operating margin of 11.4% versus 11.6% last year)
• Earnings per share $3.98 compared to $4.22 last year

Sales trends

• 3% overall sales decline in U.S. markets and a 14% decline in non-U.S. markets
• 7% decrease in HVAC equipment (67% of sales)
• 2% increase in sales for other HVAC products (29% of sales)
• 4% increase in commercial refrigeration products (4% of sales)

Third-quarter sales were impacted by the business and economic factors discussed above. Gross profit margin expanded 130 basis-points to a third-quarter record of 27.5%, driven by further scaling of Watsco’s pricing technologies, as well as OEM pricing actions implemented earlier in 2025. Operating expenses increased due to higher labor, facilities and transportation costs partially associated with the A2L product transition, as well as the acquisition of three businesses thus far in 2025. The Company expects that its fourth quarter 2025 results will be affected by the factors that impacted third quarter results, especially in light of the strong sales and earnings comparisons reported in 2024.   

Nine-month performance

• Revenues decreased 3% to $5.66 billion
• Gross profit increased 2% to $1.60 billion
• Gross profit margin expanded 140 basis-points to a record 28.3%
• SG&A expenses increased 5%
• Operating income declined 4% to $619 million with a 10 basis-point decline in operating margins to 10.9%
• Earnings per share decrease of 4% to $10.48

Sales trends

• 2% overall sales decline in U.S. markets and an 11% decline in non-U.S. markets
• 5% decrease in HVAC equipment (67% of sales)
• Flat sales for other HVAC products (29% of sales)
• 2% decrease in commercial refrigeration products (4% of sales)