Watsco, Inc. (WSO) - Q2 2026 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2026. Watsco, Inc. is the largest distributor of air conditioning, heating, and refrigeration equipment (HVAC/R) in North America. The company operates 723 locations across 43 U.S. states, Canada, Mexico, and Puerto Rico. The business is seasonal, with peak demand for residential central air conditioning in the second and third quarters.
Key Financial Metrics
| Metric | Q2 2026 | Q2 2025 | 6 Months 2026 | 6 Months 2025 |
|---|---|---|---|---|
| Revenues | $2,104.9 million | $2,062.4 million | $3,637.9 million | $3,593.5 million |
| Gross Profit | $578.9 million | $603.5 million | $1,006.5 million | $1,033.1 million |
| Gross Margin | 27.5% | 29.3% | 27.7% | 28.7% |
| Operating Income | $238.4 million | $271.9 million | $348.6 million | $384.1 million |
| Net Income (Watsco) | $163.3 million | $183.6 million | $242.4 million | $263.7 million |
| Diluted EPS | $4.00 | $4.52 | $5.92 | $6.50 |
| Cash & Equivalents | $364.2 million | $293.0 million (Q2 2025) | Balance Sheet: $364.2M (Jun 30, 2026) | |
| Working Capital | $2,374.3 million | Increased from $2,236.8M (Dec 31, 2025) |
Liquidity & Debt: The company maintains a $600 million revolving credit facility with no outstanding balance as of June 30, 2026. Short-term cash investments totaled $100 million. The company has a $400 million At-The-Market (ATM) equity offering program available.
Material Changes vs. Prior Period
- Revenue Growth: Q2 2026 revenue increased 2% year-over-year, driven by $29.7 million from new acquisitions (primarily Jackson Supply Company) and $0.7 million from new locations. Same-store sales increased 1%.
- Margin Compression: Gross margin declined 180 basis points to 27.5% in Q2 2026. Management attributed this to the pass-through of significant inflationary pricing actions by OEMs in 2025, with 2026 pricing actions returning to historical levels.
- Profitability: Net income attributable to Watsco decreased 11% in Q2 and 8% for the six-month period, primarily due to lower gross profit and higher selling, general, and administrative (SG&A) expenses.
- Acquisitions: On June 1, 2026, Watsco acquired Jackson Supply Company for approximately $186.2 million in stock, adding 25 locations and $63.8 million in working capital.
Outlook, Risks, and Contingencies
- Legal Proceedings (Gree Dispute): A dispute exists with Gree Electric Appliances regarding the automatic renewal of a 2009 distribution agreement. Gree filed a complaint in March 2026 claiming termination; Watsco filed counterclaims asserting the agreement renewed for 10 years. Gree products represent less than 3% of consolidated revenues.
- Trade Policy & Tariffs: The company monitors U.S. trade policy impacts on supply chains. Recent changes to Section 232 tariffs on aluminum, steel, and copper, and temporary reductions on certain residential HVAC systems, create a dynamic cost environment. OEMs continue to implement pricing actions to offset these costs.
- Regulatory Changes (Refrigerants): The EPA eliminated the December 31, 2025 deadline for selling matching 410A HVAC systems, allowing continued sales. Watsco continues to transition inventory to lower-GWP A2L systems.
- Dividends: The Board declared a quarterly dividend of $3.30 per share, payable July 31, 2026. Total dividends paid in the first half of 2026 were $255.9 million.
Investor Verification Checklist
- Acquisition Integration: Verify the financial contribution and integration progress of the Jackson Supply Company acquisition (closed June 1, 2026).
- Gree Litigation Status: Monitor the outcome of the legal dispute with Gree Electric Appliances, as a material interruption could impact specific subsidiaries.
- Margin Recovery: Assess whether gross margins stabilize or improve in subsequent quarters as OEM pricing actions normalize.
- Working Capital Seasonality: Confirm that the increase in working capital ($2.37 billion) aligns with seasonal inventory build-up for the summer peak and does not indicate collection issues.
- Refrigerant Transition: Track the inventory mix shift from 410A to A2L systems and the impact on average selling prices.