Watsco shares fall 2% as Q3 results miss expectations amid HVAC transition

MIAMI - On Wednesday, Watsco, Inc. (NYSE:WSO) reported third quarter earnings that fell short of analyst expectations as the company navigated a challenging regulatory transition in the HVAC industry.

The company’s shares fell 2.20% in pre-market trading following the announcement.

The distributor of heating, ventilation, and air conditioning products posted earnings per share of $3.98, missing the analyst estimate of $4.29. Revenue came in at $2.07 billion, below the consensus estimate of $2.15 billion and down 4% from $2.16 billion in the same quarter last year. Despite the revenue decline, the company achieved record gross profit margin of 27.5%, expanding 130 basis points from the previous year.

The results reflect ongoing challenges from a significant regulatory transition to new HVAC systems incorporating A2L refrigerants, which has impacted nearly 55% of all products and required converting over $1 billion of inventory across more than 650 U.S. locations. This transition, combined with weaker consumer spending and slower housing-related activities, has created volatility in sales and industry shipments.

"This has been one of the most challenging business environments in recent memory, and I am gratified that we have largely sustained our profitability, improved margins, improved cash flow, and navigated the A2L transition successfully while continuing to invest in long-term growth," said Albert H. Nahmad, Chairman and CEO of Watsco.

The company’s third quarter operating income decreased 6% to $235 million, with operating margin slipping slightly to 11.4% from 11.6% last year. Sales in U.S. markets declined 3%, while non-U.S. markets saw a steeper 14% drop. HVAC equipment sales, which represent 67% of total sales, decreased 7% YoY.

Watsco maintains a strong financial position with over $640 million in cash and investments and no debt. The company generated record third quarter operating cash flow of $355 million and reduced inventory by $351 million during the quarter.

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