Watsco, Inc. (WSO) - Q1 2026 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2026. Watsco, Inc. is the largest distributor of air conditioning, heating, and refrigeration equipment (HVAC/R) in North America. The company operates 693 locations across 43 U.S. states, Canada, Mexico, and Puerto Rico. The business is seasonal, with residential central air conditioning demand typically peaking in the second and third quarters.
Key Financial Metrics
| Metric | Q1 2026 | Q1 2025 |
|---|---|---|
| Revenues | $1,533.0 million | $1,531.1 million |
| Gross Profit | $427.6 million | $429.6 million |
| Gross Margin | 27.9% | 28.1% |
| Operating Income | $110.2 million | $112.2 million |
| Net Income (Total) | $92.9 million | $94.5 million |
| Net Income Attributable to Watsco | $79.1 million | $80.1 million |
| Diluted EPS | $1.87 | $1.93 |
| Cash and Cash Equivalents | $392.7 million | $431.8 million |
| Short-Term Investments | $200.0 million | $255.7 million (maturities) |
| Working Capital | $2,229.3 million | $2,236.8 million (Dec 31, 2025) |
| Debt | $0 (Revolving Credit Facility) | $0 |
Liquidity: The company maintains a $600 million unsecured revolving credit facility with no outstanding balance as of March 31, 2026. It also has a $400 million At-The-Market (ATM) offering program with the full amount available.
Material Changes vs. Prior Period
- Revenue: Flat year-over-year (+0.1%). Growth from new acquisitions ($8.6 million) and opened locations ($0.9 million) was offset by closed locations ($4.2 million). Same-store sales declined 0.2%.
- Profitability: Gross margin compressed by 20 basis points to 27.9%, primarily due to sales mix shifts. Operating income decreased 1.8%.
- Product Mix: HVAC equipment sales declined 2% (driven by an 8% drop in unit volume for residential ducted systems), while commercial refrigeration products grew 11%.
- Cash Flow: Net cash used in operating activities improved significantly to $(18.9) million from $(177.6) million in Q1 2025, largely due to timing of vendor payments and receivables. Net cash provided by investing activities decreased to $93.1 million due to lower proceeds from maturing certificates of deposit.
- Dividends: Quarterly dividend increased to $3.00 per share from $2.70 in the prior year.
Outlook, Risks, and Unusual Items
- Acquisition Activity: On April 23, 2026, Watsco entered an agreement to acquire Jackson Supply Company (approx. $230 million annual sales) for $198 million in stock. Closing is expected in Q2 2026.
- Legal Contingency (Gree): A dispute exists with Gree Electric Appliances regarding the renewal of an exclusive distribution agreement. Gree filed a complaint in March 2026 claiming termination; Watsco filed counterclaims asserting automatic renewal. Gree products represent less than 3% of consolidated revenues.
- Tariffs and Supply Chain: The company is monitoring U.S. trade policies, including recent Supreme Court decisions on tariffs and new rules on steel/aluminum tariffs. Suppliers have implemented price increases, which Watsco is passing through to customers.
- Regulatory Changes: The EPA is transitioning from 410A refrigerants to lower-GWP A2L systems. Watsco has largely transitioned inventory but is monitoring potential regulatory extensions for 410A matching systems.
- Management Commentary: Management cites lingering disruption from the A2L product transition, lower home building activity, and reduced consumer spending as drivers for lower residential unit volumes.
Investor Verification Checklist
- Gree Litigation Status: Verify the timeline and potential financial impact of the dispute with Gree Electric Appliances, specifically regarding the 10-year renewal clause.
- Residential Volume Trends: Monitor Q2 and Q3 data to confirm if the 8% decline in residential ducted unit volumes is a temporary seasonal anomaly or a structural shift in demand.
- Tariff Pass-Through: Assess the effectiveness of pricing actions in offsetting increased costs from new Section 232 tariff rules on copper, steel, and aluminum.
- Jackson Supply Closing: Confirm the closing of the Jackson Supply acquisition and the final share count issued.
- Inventory Levels: Review inventory turnover given the $330 million increase in inventory during the quarter and the transition to A2L systems.