Watsco's Q3 Revenue, Net Income Dip Amid Rising Costs

TL;DR

**Watsco's Q3 numbers are cooling off, signaling a potential chill for investors as revenue and net income drop while inventory piles up.**

AI Summary

Watsco Inc. reported a decline in both revenue and net income for the quarter and nine months ended September 30, 2025. Quarterly revenues decreased by 4.3% to $2.067 billion from $2.160 billion in the prior year, while net income attributable to Watsco, Inc. fell by 5.5% to $161.575 million from $171.031 million. For the nine-month period, revenues dropped 3.5% to $5.661 billion from $5.864 billion, and net income attributable to Watsco, Inc. decreased 3.2% to $425.249 million from $439.445 million. Despite the revenue decline, gross profit saw a slight increase of 0.5% for the quarter to $568.915 million, and a 1.6% increase for the nine months to $1.602 billion, indicating improved margins. Selling, general and administrative expenses rose by 5.3% quarterly to $343.655 million and by 5.3% for the nine months to $1.005 billion. Cash and cash equivalents significantly decreased to $324.348 million from $526.271 million at December 31, 2024, largely due to a substantial increase in inventories, which grew by $216.350 million to $1.602 billion. The company also paid out $352.085 million in dividends on common stock during the nine months ended September 30, 2025.

Why It Matters

Watsco's Q3 performance, marked by declining revenue and net income, signals potential headwinds for investors in the HVAC/R distribution sector. The increase in inventory levels to $1.602 billion could indicate slowing demand or strategic stocking ahead of new regulations, impacting future cash flow and profitability. For employees, a slowdown could affect growth opportunities, while customers might see stable pricing due to inventory levels. In a competitive landscape with Carrier Global Corporation as a key joint venture partner, Watsco's ability to manage costs and inventory will be crucial for maintaining market share and investor confidence.

Risk Assessment

Risk Level: medium — The risk level is medium due to declining revenues and net income, coupled with a significant increase in inventories to $1.602 billion from $1.385 billion at December 31, 2024. This inventory build-up, alongside a substantial decrease in cash and cash equivalents by $201.923 million, suggests potential working capital strain and exposure to inventory obsolescence or price fluctuations, despite a slight improvement in gross profit margins.

Analyst Insight

Investors should closely monitor Watsco's inventory levels and cash flow in upcoming quarters. Evaluate the company's ability to convert inventory into sales and manage operating expenses, especially given the seasonal nature of its business and rising SG&A costs. Consider if the dividend payout of $352.085 million is sustainable given the decline in net income and cash.

Financial Highlights

revenue

$5.661B

operating Margin

10.9%

total Assets

$4.555B

net Income

$425.249M

eps

$10.48

gross Margin

28.3%

cash Position

$324.348M

revenue Growth

-3.5%

Key Numbers

• $2.067B — Q3 2025 Revenues (Down 4.3% from $2.160B in Q3 2024)
• $161.575M — Q3 2025 Net Income Attributable to Watsco, Inc. (Down 5.5% from $171.031M in Q3 2024)
• $5.661B — Nine Months 2025 Revenues (Down 3.5% from $5.864B in Nine Months 2024)
• $425.249M — Nine Months 2025 Net Income Attributable to Watsco, Inc. (Down 3.2% from $439.445M in Nine Months 2024)
• $1.602B — Inventories, net (Increased by $216.350M from $1.385B at Dec 31, 2024)
• $324.348M — Cash and cash equivalents (Decreased by $201.923M from $526.271M at Dec 31, 2024)
• $352.085M — Dividends on common stock (Paid during the nine months ended September 30, 2025)
• $568.915M — Q3 2025 Gross Profit (Up 0.5% from $566.244M in Q3 2024)
• $1.005B — Nine Months 2025 SG&A Expenses (Up 5.3% from $954.950M in Nine Months 2024)
• $3.98 — Q3 2025 Diluted EPS (Down from $4.22 in Q3 2024)

Key Players & Entities

• WATSCO INC (company) — registrant
• Carrier Global Corporation (company) — joint venture partner
• Russell Sigler, Inc. (company) — equity method investee
• $2.067 billion (dollar_amount) — Q3 2025 revenues
• $2.160 billion (dollar_amount) — Q3 2024 revenues
• $161.575 million (dollar_amount) — Q3 2025 net income attributable to Watsco, Inc.
• $171.031 million (dollar_amount) — Q3 2024 net income attributable to Watsco, Inc.
• $1.602 billion (dollar_amount) — Inventories, net as of September 30, 2025
• $526.271 million (dollar_amount) — Cash and cash equivalents at December 31, 2024
• $324.348 million (dollar_amount) — Cash and cash equivalents at September 30, 2025
• $352.085 million (dollar_amount) — Dividends on common stock paid for nine months ended September 30, 2025

FAQ

Risk Factors

• Economic Downturn and Consumer Spending [medium — market]: A significant portion of Watsco's revenue is derived from residential and commercial customers. Economic downturns or a slowdown in consumer spending could lead to reduced demand for HVAC equipment and services, impacting revenue and profitability. For the nine months ended September 30, 2025, revenues decreased by 3.5% to $5.661 billion, indicating a sensitivity to broader economic conditions.
• Supply Chain Disruptions and Inventory Management [medium — operational]: The company experienced a substantial increase in inventories, growing by $216.350 million to $1.602 billion as of September 30, 2025. This increase, coupled with a significant draw-down in cash and cash equivalents from $526.271 million to $324.348 million, suggests potential supply chain challenges or strategic inventory build-up that could tie up working capital and expose the company to obsolescence risks.
• Interest Rate Sensitivity [low — financial]: While the company reported net interest income of $11.479 million for the nine months ended September 30, 2025, fluctuations in interest rates can impact borrowing costs and investment returns. The company's operating income for the nine months was $618.819 million, and significant interest rate changes could affect its net income.
• Environmental Regulations [low — regulatory]: The HVAC industry is subject to evolving environmental regulations concerning refrigerants and energy efficiency. Non-compliance or the need for significant product redesigns to meet new standards could result in increased costs and potential penalties. The company's ability to adapt to these changes is crucial for long-term sustainability.

Industry Context

Watsco operates in the HVAC (Heating, Ventilation, and Air Conditioning) distribution industry, a sector heavily influenced by new construction, replacement demand, and seasonal weather patterns. The industry is characterized by a fragmented market with numerous distributors and manufacturers. Trends include a growing demand for energy-efficient products and smart home integration, alongside ongoing supply chain complexities and evolving environmental regulations.

Regulatory Implications

The company must navigate environmental regulations related to refrigerants and energy efficiency standards, which can necessitate product adaptation and potentially increase costs. Compliance with financial reporting standards, such as those for leases and revenue recognition, is also critical to ensure accurate financial disclosure.

What Investors Should Do

1. Monitor inventory levels and turnover ratios.
2. Analyze gross margin trends.
3. Evaluate SG&A expense control.
4. Assess the impact of economic conditions on demand.

Key Dates

• 2025-09-30: Quarter and Nine Months Ended — Reporting period for the 10-Q, showing declines in revenue and net income but improved gross margins.
• 2024-12-31: Year-End Balance Sheet — Provides the comparative balance sheet figures for cash and inventories, highlighting significant changes in the current period.

Glossary

Non-controlling interest

Represents the portion of equity in a subsidiary that is not owned by the parent company. It is reported separately on the income statement and balance sheet. (The net income attributable to Watsco, Inc. is calculated after deducting net income attributable to non-controlling interest, which was $75.289 million for the nine months ended September 30, 2025.)

Goodwill

An intangible asset that arises when a company acquires another company for a price greater than the fair value of its net identifiable assets. (Watsco reported $465.063 million in goodwill as of September 30, 2025, indicating past acquisitions that are now part of its asset base.)

Operating lease right-of-use assets

Assets recognized under accounting standards for leases, representing the right to use an asset for a specified period. (Watsco has $430.385 million in operating lease right-of-use assets, reflecting its long-term lease commitments for facilities and equipment.)

Year-Over-Year Comparison

Compared to the prior year, Watsco Inc. reported a decline in both revenue and net income for the nine months ended September 30, 2025. Revenues decreased by 3.5% to $5.661 billion, and net income attributable to Watsco, Inc. fell by 3.2% to $425.249 million. However, gross profit saw a modest increase of 1.6% to $1.602 billion, suggesting improved margins. A significant concern is the substantial decrease in cash and cash equivalents by $201.923 million, largely due to a $216.350 million increase in inventories, indicating a shift in asset composition and potential working capital pressures.

Key Financial Figures

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

Filing Documents

• wso-20250930.htm (10-Q) — 2423KB
• wso-ex31_1.htm (EX-31.1) — 15KB
• wso-ex31_2.htm (EX-31.2) — 15KB
• wso-ex31_3.htm (EX-31.3) — 15KB
• wso-ex32_1.htm (EX-32.1) — 13KB
• img262764065_0.jpg (GRAPHIC) — 8KB
• 0001193125-25-272272.txt ( ) — 7224KB
• wso-20250930.xsd (EX-101.SCH) — 829KB
• wso-20250930_htm.xml (XML) — 1068KB

FINANCIAL INFORMATION

PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Unaudited Financial Statements Condensed Consolidated Unaudited Statements of Income – Quarters and Nine Months Ended September 30, 2025 and 2024 3 Condensed Consolidated Unaudited Statements of Comprehensive Income – Quarters and Nine Months Ended September 30, 2025 and 2024 4 Condensed Consolidated Unaudited Balance Sheets – September 30, 2025 and December 31, 2024 5 Condensed Consolidated Unaudited Statements of Shareholders' Equity – Quarters and Nine Months Ended September 30, 2025 and 2024 6 Condensed Consolidated Unaudited Statements of Cash Flows – Nine Months Ended September 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 16 Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Quantitative and Qualitative Disclosures about Market Risk 26 Item 4.

Controls and Procedures

Controls and Procedures 26

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

FINANCIA L INFORMATION

PART I. FINANCIA L INFORMATION

CONDENSED CONSOLI DATED UNAUDITED FINANCIAL STATEMENTS

ITEM 1. CONDENSED CONSOLI DATED UNAUDITED FINANCIAL STATEMENTS WATSCO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED UNA UDITED STATEMENTS OF INCOME (In thousands, except per share data) Quarter Ended September 30, Nine Months Ended September 30, 2025 2024 2025 2024 Revenues $ 2,067,005 $ 2,160,036 $ 5,660,533 $ 5,864,355 Cost of sales 1,498,090 1,593,792 4,058,507 4,287,726 Gross profit 568,915 566,244 1,602,026 1,576,629 Selling, general and administrative expenses 343,655 326,373 1,005,237 954,950 Other income 9,502 10,376 22,030 23,908 Operating income 234,762 250,247 618,819 645,587 Interest income, net 3,733 6,773 11,479 14,156 Income before income taxes 238,495 257,020 630,298 659,743 Income taxes 49,265 55,373 129,760 139,183 Net income 189,230 201,647 500,538 520,560 Less: net income attributable to non-controlling interest 27,655 30,616 75,289 81,115 Net income attributable to Watsco, Inc. $ 161,575 $ 171,031 $ 425,249 $ 439,445 Earnings per share for Common and Class B common stock (collectively "common stock"): Basic $ 3.98 $ 4.24 $ 10.50 $ 10.95 Diluted $ 3.98 $ 4.22 $ 10.48 $ 10.92 See accompanying notes to condensed consolidated unaudited financial statements. 3 of 28 Table of Contents WATSCO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED UNAUDITED S TATEMENTS OF COMPREHENSIVE INCOME (In thousands) Quarter Ended September 30, Nine Months Ended September 30, 2025 2024 2025 2024 Net income $ 189,230 $ 201,647 $ 500,538 $ 520,560 Other comprehensive income, net of tax: Foreign currency translation adjustment ( 6,366 ) 4,809 9,652 ( 6,527 ) Comprehensive income 182,864 206,456 510,190 514,033 Less: comprehensive income attributable to non-controlling interest 25,448 32,143 78,578 79,145 Com

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