WSO-B · Watsco, Inc.

Performance Summary

Watsco, Inc. delivered solid financial performance in fiscal year 2025 with revenues of $7.24 billion and net income attributable to the company of $497.0 million. The company achieved a gross profit of $2.03 billion, representing a gross margin of 28.0%, and operating income of $720.3 million, resulting in an operating margin of 9.9%. Earnings per share were $12 on both a basic and diluted basis. The company generated strong operating cash flow of $569.6 million, which supported significant capital returns to shareholders including $473.8 million in dividends. Watsco maintained a healthy balance sheet with total assets of $4.41 billion, including $433.3 million in cash and cash equivalents, and shareholders' equity of $3.22 billion.

Revenue Analysis

Revenue composition shows HVAC equipment sales accounted for 67% of total revenues ($4.85 billion), sourced from approximately 20 vendors. Other HVAC products represented 29% of revenues ($2.10 billion), sourced from more than 1,300 vendors. Commercial refrigeration products accounted for the remaining 4% ($289.6 million), sourced from approximately 150 vendors. Geographically, the United States represented 90% of revenues ($6.52 billion) from 637 locations, with Canada contributing 5% ($362.0 million) from 34 locations, and Latin America and the Caribbean contributing 5% ($362.0 million) from 24 locations. The company's joint ventures with Carrier represented 53% of total revenues. Watsco serves more than 130,000 active contractors through its 695 locations.

Margins & Profitability

The company achieved a gross margin of 28.0% on revenues of $7.24 billion, with cost of sales totaling $5.21 billion. Operating expenses, primarily selling, general and administrative expenses of $1.34 billion, resulted in an operating margin of 9.9%. Other income contributed $27.8 million, primarily from the investment in unconsolidated entity. Interest expense net was $17.3 million, and income taxes were $150.1 million, resulting in an effective tax rate of approximately 20.3%. The company's profitability was supported by its scale as the largest HVAC/R distributor in North America and its strategic focus on higher-margin replacement markets.

Cash Flow & Balance Sheet

Operating activities generated $569.6 million in cash flow, driven by net income of $587.6 million adjusted for non-cash items including depreciation and amortization of $43.8 million and share-based compensation of $35.3 million. Investing activities used $98.1 million, primarily for purchases of short-term cash investments ($300.0 million) and capital expenditures ($34.5 million), partially offset by proceeds from maturities of short-term cash investments ($255.7 million). Financing activities used $568.1 million, mainly for dividends ($473.8 million) and distributions to non-controlling interest ($132.2 million). The balance sheet shows strong liquidity with current assets of $2.95 billion and current liabilities of $717.7 million, resulting in a current ratio of approximately 4.1. Total debt is minimal with no borrowings under the revolving credit agreement.

Outlook

The company's strategy focuses on continued growth through its 'buy and build' philosophy, having acquired 72 HVAC/R distribution businesses since 1989. Key strategic priorities include technology innovation with approximately 300 technology employees, expansion of customer-focused digital platforms, and product line expansion. Risk factors include supplier concentration with the top ten suppliers accounting for 85% of purchases, including 62% from Carrier and 8% from Rheem. The company faces competition from both national and local distributors as well as manufacturer-owned distribution networks. Other risks include cybersecurity threats, foreign currency exchange rate fluctuations, seasonality of sales, and dependence on key personnel. The company maintains an ownership culture with approximately 4,200 employees as Watsco shareholders through various stock-based equity plans.