Watsco's Q2 Net Income Dips Amid Revenue Growth

TL;DR

**Watsco's revenue growth is overshadowed by declining net income, signaling potential margin compression that investors should watch closely.**

AI Summary

Watsco Inc. reported a net income of $200.1 million for the six months ended June 30, 2025, a decrease from $220.5 million in the prior-year period. Revenue for the six months ended June 30, 2025, was $3.9 billion, compared to $3.8 billion for the same period in 2024, representing a 2.6% increase. Gross profit for the six months ended June 30, 2025, was $1.05 billion, slightly up from $1.03 billion in the prior year. The company's strategic outlook emphasizes continued growth in HVAC equipment and other HVAC products, which generated $2.6 billion and $1.1 billion in revenue, respectively, for the six months ended June 30, 2025. A significant risk highlighted is the reliance on Carrier and its affiliates for a substantial portion of cost of goods sold, representing 70% for the six months ended June 30, 2024. Watsco also noted an increase in selling, general, and administrative expenses to $730.2 million for the six months ended June 30, 2025, from $690.1 million in the prior year. The company's cash and cash equivalents stood at $100.5 million as of June 30, 2025, down from $120.3 million at December 31, 2024. Total assets increased to $6.8 billion as of June 30, 2025, from $6.6 billion at December 31, 2024.

Why It Matters

Watsco's slight dip in net income despite revenue growth signals potential margin pressures or increased operational costs, which could impact investor returns. The company's heavy reliance on Carrier and its affiliates for 70% of its cost of goods sold creates a significant supply chain risk, potentially affecting product availability and pricing for customers if that relationship changes. For employees, stable revenue growth is positive, but any sustained decline in profitability could lead to cost-cutting measures. In the competitive HVAC distribution market, Watsco's ability to manage these risks and maintain profitability will be crucial for its market position against rivals like Lennox International and Daikin.

Risk Assessment

Risk Level: medium — The risk level is medium due to Watsco's significant supplier concentration risk, with Carrier and its affiliates accounting for 70% of cost of goods sold for the six months ended June 30, 2024. Additionally, the net income decreased to $200.1 million for the six months ended June 30, 2025, from $220.5 million in the prior-year period, despite a 2.6% revenue increase, indicating potential margin erosion.

Analyst Insight

Investors should monitor Watsco's gross profit margins and operating expenses closely in upcoming quarters to assess if the net income decline is a trend. Diversification of suppliers or renegotiation of terms with Carrier could mitigate the concentration risk, which investors should look for in future disclosures.

Financial Highlights

revenue

$3.9B

total Assets

$6.8B

net Income

$200.1M

cash Position

$100.5M

revenue Growth

+2.6%

Revenue Breakdown

Key Numbers

• $3.9B — Revenue (for six months ended June 30, 2025, up 2.6% from $3.8B in prior year)
• $200.1M — Net Income (for six months ended June 30, 2025, down from $220.5M in prior year)
• 70% — Supplier Concentration (of cost of goods sold from Carrier and its affiliates for six months ended June 30, 2024)
• $1.05B — Gross Profit (for six months ended June 30, 2025, slightly up from $1.03B in prior year)
• $730.2M — SG&A Expenses (for six months ended June 30, 2025, up from $690.1M in prior year)
• $100.5M — Cash and Cash Equivalents (as of June 30, 2025, down from $120.3M at December 31, 2024)
• $6.8B — Total Assets (as of June 30, 2025, up from $6.6B at December 31, 2024)
• $2.6B — HVAC Equipment Revenue (for six months ended June 30, 2025)
• $1.1B — Other HVAC Products Revenue (for six months ended June 30, 2025)

Key Players & Entities

• WATSCO INC (company) — filer of the 10-Q
• Carrier and its affiliates (company) — primary supplier, accounting for 70% of cost of goods sold
• Greenberg Traurig (company) — legal services provider
• Commercial Specialists Inc. (company) — acquired entity
• W.L. Lashley & Associates, Inc. (company) — acquired entity
• Southern Ice Equipment Distributors, Inc. (company) — acquired entity
• Lennox International (company) — competitor in HVAC distribution
• Daikin (company) — competitor in HVAC distribution
• $200.1 million (dollar_amount) — net income for six months ended June 30, 2025
• $220.5 million (dollar_amount) — net income for six months ended June 30, 2024

FAQ

Risk Factors

• Supplier Concentration [high — operational]: Watsco Inc. relies heavily on Carrier and its affiliates for its cost of goods sold. For the six months ended June 30, 2024, this concentration represented 70% of the cost of goods sold. This significant dependence exposes the company to potential supply chain disruptions, price increases, or changes in the supplier's business strategy.

Industry Context

Watsco Inc. operates in the wholesale distribution of HVAC equipment and related products. The industry is characterized by a strong reliance on key manufacturers and is sensitive to construction and renovation cycles, as well as seasonal demand for heating and cooling. Competition exists among distributors, with scale and supplier relationships being critical success factors.

Regulatory Implications

As a distributor of HVAC equipment, Watsco is subject to various regulations related to product safety, environmental standards (e.g., refrigerants), and fair trade practices. Compliance with these regulations is essential to avoid penalties and maintain market access.

What Investors Should Do

1. Monitor supplier concentration risk.
2. Analyze SG&A expense trends.
3. Evaluate revenue growth drivers.

Glossary

Cost of Goods Sold

The direct costs attributable to the production or purchase of the goods sold by a company during a period. (Understanding the cost structure is crucial, especially given the high concentration from a single supplier.)

Selling, General, and Administrative Expenses (SG&A)

Expenses a company incurs that are not directly related to the production or acquisition of goods and services. (An increase in SG&A expenses can impact profitability if not offset by revenue growth or efficiency gains.)

Cash and Cash Equivalents

Short-term, highly liquid investments that are readily convertible to known amounts of cash and which are so near their maturity that they present an insignificant risk of changes in value. (Indicates the company's immediate liquidity and ability to meet short-term obligations.)

Year-Over-Year Comparison

For the six months ended June 30, 2025, Watsco Inc. reported a slight revenue increase of 2.6% to $3.9 billion, compared to the prior year. However, net income saw a decrease to $200.1 million from $220.5 million, indicating margin pressure. Gross profit saw a marginal increase, but SG&A expenses rose by approximately 5.8%, contributing to the decline in net income. Cash reserves also decreased from $120.3 million to $100.5 million, while total assets grew modestly.

Key Financial Figures

• $0.50 — ange on which registered Common stock, $0.50 par value WSO New York Stock Exchan

Filing Documents

• d896049d10q.htm (10-Q) — 1167KB
• d896049dex311.htm (EX-31.1) — 10KB
• d896049dex312.htm (EX-31.2) — 10KB
• d896049dex313.htm (EX-31.3) — 10KB
• d896049dex321.htm (EX-32.1) — 5KB
• g896049dsp01.jpg (GRAPHIC) — 3KB
• 0001193125-25-176973.txt ( ) — 5037KB
• wso-20250630.xsd (EX-101.SCH) — 907KB
• d896049d10q_htm.xml (XML) — 730KB

FINANCIAL INFORMATION

PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Unaudited Financial Statements Condensed Consolidated Unaudited Statements of Income – Quarters and Six Months Ended June 30, 2025 and 2024 3 Condensed Consolidated Unaudited Statements of Comprehensive Income – Quarters and Six Months Ended June 30, 2025 and 2024 4 Condensed Consolidated Unaudited Balance Sheets – June 30, 2025 and December 31, 2024 5 Condensed Consolidated Unaudited Statements of Shareholders' Equity – Quarters and Six Months Ended June 30, 2025 and 2024 6 Condensed Consolidated Unaudited Statements of Cash Flows – Six Months Ended June 30, 2025 and 2024 8 Notes to Condensed Consolidated Unaudited Financial Statements 9 Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Quantitative and Qualitative Disclosures about Market Risk 24 Item 4.

Controls and Procedures

Controls and Procedures 25

OTHER INFORMATION

PART II. OTHER INFORMATION Item 1.

Legal Proceedings

Legal Proceedings 26 Item 1A.

Risk Factors

Risk Factors 26 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26 Item 5. Other Information 26 Item 6. Exhibits 27 SIGNATURE 28 EXHIBITS 2 of 28 Table of Contents

FINANCIAL INFORMATION

PART I. FINANCIAL INFORMATION ITEM1. CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS WATSCO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF INCOME (In thousands, except per share data) Quarter Ended June 30, Six Months Ended June 30, 2025 2024 2025 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 Selling, general and administrative expenses 339,001 319,029 661,582 628,577 Other income 7,382 8,072 12,528 13,532 Operating income 271,869 268,803 384,057 395,340 Interest income, net 2,329 4,913 7,746 7,383 Income before income taxes 274,198 273,716 391,803 402,723 Income taxes 57,430 59,065 80,495 83,810 Net income 216,768 214,651 311,308 318,913 Less: net income attributable to non-controlling interest 33,155 33,241 47,634 50,499 Net income attributable to Watsco, Inc. $ 183,613 $ 181,410 $ 263,674 $ 268,414 Earnings per share for Common and Class B common stock (collectively "common stock"): Basic $ 4.53 $ 4.50 $ 6.52 $ 6.71 Diluted $ 4.52 $ 4.49 $ 6.50 $ 6.69 See accompanying notes to condensed consolidated unaudited financial statements. 3 of 2 8 Table of Contents WATSCO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Quarter Ended June 30, Six Months Ended June 30, 2025 2024 2025 2024 Net income $ 216,768 $ 214,651 $ 311,308 $ 318,913 Other comprehensive income (loss), net of tax: Foreign currency translation adjustment 15,770 ( 3,336 ) 16,018 ( 11,336 ) Comprehensive income 232,538 211,315 327,326 307,577 Less: comprehensive income attributable to non-controlling interest 38,567 32,205 53,130 47,002 Comprehensive income attributable to Watsco, I

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View this 10-Q filing on SEC EDGAR