Deals

Watsco Sales Hit A Record $2.22 Billion, But Margins Shrink And EPS Slips 5%

The HVAC distributor's gross margin fell to 26.4% from 27.5% as residential unit volumes returned to growth and two acquisitions added scale.

Watsco, which distributes heating, cooling and refrigeration equipment to contractors, reported record third-quarter revenue of $2.22 billion, up 7%, while earnings per share fell 5% to $3.77. The company announced the results Tuesday in an 8-K filed with the SEC.

Sales up, margins down

Revenue rose 4% at stores open at least a year. Gross profit climbed 3% to a record $586 million, but gross margin slid to 26.4% from 27.5% a year earlier. Operating income fell 4% to $225 million, and operating margin dropped to 10.1% from 11.4%.

Selling, general and administrative costs rose 8%, including 30 new and acquired locations, or 5% on a same-store basis.

The company pointed to several drivers of the margin squeeze: customer mix (larger versus smaller customers), end-market mix (replacement versus residential new construction), later and smaller OEM (equipment maker) price increases in 2026 than in 2025, and faster growth in equipment than in non-equipment products.

For the nine months, revenue rose 3% to $5.86 billion, while earnings per share fell 7% to $9.72. Operating cash flow for the nine months rose 79% to $304 million. The third quarter produced $325 million, against $355 million a year earlier.

Residential volumes return to growth

Excluding acquisitions, HVAC equipment sales, 67% of the total, rose 5%. Residential equipment sales grew 7%, including 5% unit growth and a 2% rise in average selling price. Commercial equipment sales fell 5%. Other HVAC products rose 2%, and commercial refrigeration products rose 10%.

The company said residential end-markets continued to stabilize following last year's transition to new A2L refrigerant products, and that same-store growth improved through the selling season, with further momentum so far in the fourth quarter.

Chairman and CEO Albert H. Nahmad said the results and early fourth-quarter trends are "indicative of continued improvement in end-market demand." He said long-range objectives for sales, margin and cash flow "remain fully intact."

Two acquisitions add 107 locations

Watsco bought Jackson Supply Company in June and The Granite Group in October. Together they added 107 locations and $730 million in annualized revenue, Nahmad said, and the company expects them to lift annual revenue by about 10%. Jackson contributed $78 million of third-quarter sales.

Granite, with about 11,000 customers across 82 Northeast locations, is the fourth business Watsco has bought that serves contractors in both HVAC and plumbing. Watsco now has 804 locations, 112 of which sell both.

In October the company also signed a five-year, $750 million unsecured revolving credit facility. In April it raised its annual dividend 10% to $13.20 per share.

Watsco held its earnings call at 10:00 a.m. ET Tuesday.

E-commerce sales rose 10% in the third quarter and reached $2.75 billion over the 12 months ended September 30, or 37% of revenue, the company said.