WSO

Watsco's third quarter was met with a negative market reaction, as the company's non-GAAP earnings per share came in below Wall Street expectations despite revenue growth. Management attributed the quarter's performance to a combination of stronger demand, particularly in residential HVAC equipment, and the effects of recent acquisitions. CEO Albert Nahmad noted, "Demand trends are now normalizing, organic growth is improving, and our digital ecosystem is producing measurable results in driving growth." Operating margin contraction was a focus, with executives citing a shift in customer mix and increased investments in technology as contributing factors. Is now the time to buy WSO? Find out in our full research report (it's free). - Revenue $2.22 billion vs S&P analysts' estimates of $2.21 billion (7.4% year-on-year growth, in line) - Adjusted EPS $3.77 vs S&P analysts' expectations of $4.18 (9.7% miss) - Operating margin 10.1%, down from 11.4% in the same quarter last year - Market capitalization $11.2 billion While we enjoy listening to the management's commentary, our favorite part of earnings calls is the analyst questions. Those are unscripted and can often highlight topics that management teams would rather avoid or topics where the answer is complicated. Here is what has caught our attention. - Tommy Moll (Stephens): asked about the drivers behind the lower operating margin and how customer mix and technology investments are affecting profitability. CFO Barry Logan explained that larger customers using more technology contribute to lower margins but also reduce cost to serve, while technology investments are expected to deliver operating leverage over time. - David Manthey (Baird): questioned the levers available to improve gross margins and the impact of equipment mix, pricing, and customer segments. President A.J. Nahmad responded that pricing optimization and increased adoption of digital tools are expected to drive margin improvement over the long term, though quarter-to-quarter results may fluctuate. - Ryan Merkel (William Blair): asked about recent sales trends and the potential for continued momentum in new construction and side discharge product adoption. Management reported double-digit revenue growth in October, driven by acquisitions and ongoing product expansion, especially in high-efficiency segments. - Steve Volkmann (Jefferies): inquired about pricing expectations from OEMs and inventory management for the coming year. Management said that rising input costs may lead to higher prices in 2027, and inventory will be managed to align with seasonal cash flow and demand trends, with some influence from recent acquisitions. - Mitch Moore (KeyBanc): probed the effect of contractor consolidation on margins and whether smaller contractors are likely to rebound as the market recovers. Management noted that while consolidation brings some margin pressure, it also creates volume opportunities, and recovery among smaller contractors is expected as industry conditions improve. In upcoming quarters, our team will monitor (1) the pace of integration and performance for newly acquired businesses like The Granite Group and Jackson Supply, (2) adoption and incremental revenue contribution from Watsco's digital platforms such as SupplySync and VCR, and (3) progress toward gross margin recovery as industry volumes normalize and product mix evolves. Additional focus will be placed on how customer consolidation and technology investment influence the company's cost structure and competitive positioning. Watsco currently trades at $292.49, down from $305.33 just before the earnings. Is there an opportunity in the stock? Find out in our full research report (it's free for active Edge members). ONE MORE THING: Top 5 Growth Stocks. The biggest stock winners almost always had one thing in common before they ran. Revenue growing like crazy. Meta. CrowdStrike. Broadcom. Our AI flagged all three. They returned 315%, 314%, and 455%, respectively. Find out which 5 stocks it's flagging this month — FREE. Get Our Top 5 Growth Stocks for Free HERE. Stocks that have made our list include now familiar names such as Nvidia (+1,460% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Tecnoglass (+1,552% between June 2020 and June 2025). Find your next big winner with StockStory today.

Watsco just posted its Q3 2026 report with record quarterly sales of US$2.22b and basic earnings per share of US$4.03. The stock slipped about 1.4% to roughly US$301, extending a soft three month stretch, even as the business reported higher revenue and net income than a year ago. The focus is on margins. A 26.4% gross margin and 10.1% operating margin arrived in a market that had been paying a premium P/E for this distributor. Today's price dip appears to reflect a shift in sentiment around what investors are willing to pay for that profit profile. Love Watsco's record Q3 revenue and solid margins but uneasy about paying up for a premium P/E when sentiment turns cautious? Compare this setup against our screener of high quality distributors and industrials in the 29 high quality undervalued stocks. - Revenue (Q3 2026 vs. Q3 2025): US$2,220.4m vs. US$2,067.0m (up about 7%) - Net Income (Excl. Extra Items, Q3 2026 vs. Q3 2025): US$155.4m vs. US$150.9m (up about 3%) - Basic EPS (Earnings Per Share, Q3 2026 vs. Q3 2025): US$4.03 vs. US$3.98 (up about 1%) - Margins (Q3 2026): Gross margin was 26.4%, and operating margin was 10.1% for the quarter (year-on-year comparison not quantified) Earnings tell part of the story, but investors who care about what they are paying often focus on the cash that actually moves through Watsco's business over time. If you line up Watsco's cash flows against its current share price, the stock could be a hefty 46% undervalued. The bullish script argues that Watsco's tech and deal playbook can scale the business and increase profitability over time. "A key factor is that Watsco converts its investments in e-commerce, mobile tools and platforms such as OnCall Air and SupplySync into durable contractor loyalty and higher inventory efficiency as industry conditions normalize." Q3 provides some support for that claim. E-commerce now accounts for about 37% of trailing 12-month sales with growth of roughly 12%. OnCall Air processed about 351,000 proposals tied to around US$2 billion in merchandise value. SupplySync has moved from concept to live pilot and is already transacting. Together with Jackson Supply growing 16% in its first reported quarter, Watsco is checking off early execution milestones that align with the bullish narrative. Not everyone reads the same price the same way. → See the higher figure this Narrative lands on, and how it gets there. Bearish investors worry that Watsco's digital push is not yet strong enough to rebuild profitability toward management's target. The concern centers on whether software usage translates into hard margin dollars. "Although Watsco is investing roughly US$60 million to US$65 million each year in technology and reports rising e-commerce and OnCallAir usage, the recent revenue and EPS miss together with greater than anticipated gross margin contraction suggest these digital tools may not yet be offsetting pricing and cost pressures." Q3's 26.4% gross margin and 10.1% operating margin, while linked to record sales, still sit below the 30% objective. Jackson Supply's lower margin profile and mix toward equipment confirm that the margin rebuild is incomplete, so this quarter does not yet disprove the bearish concern around monetization timing. Watsco just showed how a solid operational story can trade through a cautious mood shift. The real opportunity is finding stocks that could be undervalued before the market corrects them. - Company 1 - 19% below our estimate - targets faster overseas teahouse expansion while seeking to keep franchise and company store costs aligned. - Company 2 - 27% below our estimate - supplies diagnostic equipment and components needed as grid upgrades and defense programs progress. - Company 3 - 34% below our estimate - expands high horsepower engine capacity to address data center power demand while limiting newer zero-emission project losses. That is three of the list. See all 29 potentially undervalued companies → This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Companies discussed in this article include WSO. Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email [email protected]

This article first appeared on GuruFocus. - Revenue: Up 7% to a record $2.22 billion; same-store sales up 4%. - Residential HVAC Equipment: Grew 7% in the quarter, with gains in both unit volume and pricing. - Gross Profit: Record $586 million. - Gross Margin: 26.4%; long-term goal of 30%. - SG&A: Up 5% (excluding Jackson), primarily due to variable expenses. - Operating Income: $225 million, with operating margin of 10.1%. - Earnings Per Share: $3.77. - Operating Cash Flow: Year-to-date up 79% to $304 million. - Fixed Costs: Up 1% year-to-date, excluding technology and other investments. - Balance Sheet: $649 million cash and no debt at quarter end. - Jackson Supply: $230 million in annual sales; 25 Sunbelt locations; grew 16% in the quarter. - Granite Group: Approximately $500 million in annual sales; 82 locations in the Northeast; over 11,000 customers. - HVAC & Plumbing Locations: 112 locations offering both HVAC and plumbing products. - E-Commerce: Sales up 12% year-to-date; 37% of sales over the last 12 months. - OnCall Air: Approximately 351,000 proposals representing $2 billion of gross merchandise value, up 14%. - Warning! GuruFocus has detected 3 Warning Signs with WSO. - Is WSO fairly valued? Test your thesis with our free DCF calculator. Release Date: October 27, 2026 For the complete transcript of the earnings call, please refer to the full earnings call transcript. - Watsco Inc (NYSE:WSO) reported record third-quarter sales of $2.22 billion, up 7% year-over-year, with 4% same-store growth. - Residential HVAC equipment sales grew 7% with gains in both unit volume and pricing, indicating improving demand. - E-commerce sales grew 12% year-to-date and reached 37% of total sales, with digital engagement strong at over 73,000 monthly active users. - The company maintains a pristine balance sheet with $649 million in cash and no debt, enabling continued investments and acquisitions. - Recent acquisitions, Jackson Supply and Granite Group, are performing well, with Jackson growing 16% in the quarter and Granite expanding Watsco Inc (NYSE:WSO)'s plumbing presence. - Gross margin declined to 26.4% in the quarter, impacted by customer mix, lower-margin equipment sales, and the Jackson acquisition, which has not yet reached Watsco Inc (NYSE:WSO)'s margin levels. - SG&A expenses increased 5% (excluding Jackson), with variable expenses up 10% in the quarter, partly due to inflation and higher delivery costs. - Same-store SG&A grew slightly faster than sales, rising 2% versus 4% sales growth, indicating some operating leverage challenges. - Inventory levels increased, including $60-70 million from Jackson, and the company faces the task of reducing inventory by year-end to match prior levels excluding acquisitions. - The company did not provide specific guidance, and management noted that gross margin improvement to the 30% target will be choppy and not a straight line. Q: Tommy Moll of Stephens asked whether the gross margin pressure this quarter was essentially a single factor share gains in new home construction, larger customers, and lower-margin equipment or something more complex. A: Barry Logan, EVP, explained it is a mix of factors: new construction equipment sales swung from down double digits a year ago to up double digits, creating a comparison and mix effect. He noted that "large customers" are mainly multi-truck, multi-market contractors using Watsco's technology (over 50% e-commerce penetration), which carry more moderate margins but also more moderate cost to serve, with pricing jointly set with manufacturers. Rick Gomez, VP of Corporate Development, added that last year's refrigerant shortage aided prior-year margins, and Jackson Supply (not yet at Watsco's 27% margin level) weighed on the Q3 mix. President A.J. Nahmad framed it long term: Watsco has moved from 24%-25% gross margins to 27%-plus year-to-date, with a path to 30%, though not in a straight line. Q: David Manthey of Baird asked which levers customer mix, equipment versus non-equipment, or internal price optimization should drive gross margin from 2026 into 2027. A: A.J. Nahmad, President, said it is all of those, noting Watsco is in early days of pricing optimization with a large runway, and that technology adoption improves customer margins, sales, and retention. He highlighted VCR (vendor consolidation), Hydros, and SupplySync as initiatives that should ultimately drive more parts and supplies sales. Barry Logan, EVP, noted Q4 is seasonally a better margin quarter (roughly 20-30 basis points above trend on a 10-year average) and that OEM pricing actions are expected to be earlier and more conventional over the next 12 months than the volatile tariff-driven years. Rick Gomez added that stabilizing industry volumes are an underappreciated positive for incremental margins. Q: Tommy Moll of Stephens asked how to measure success on operating leverage given same-store SG&A grew slightly faster than sales, and when leverage should appear. A: Barry Logan, EVP, said the simplest measure for a distributor is keeping fixed costs efficient while growing, so incremental sales drop to the bottom line. Year-to-date fixed costs are up just 1%, variable costs up 6%, and same-store SG&A up 2%, while technology spending rose about 13% ($6 million) on new initiatives. For the quarter, fixed costs rose 3% and variable costs about 10%, driven by commissions and bonuses in faster-growing units plus delivery cost inflation, which he views as short term. He characterized 2026 progress as "not optimized, but good progress." Q: Ryan Merkel of William Blair asked about October trends and whether the recovery is broad-based across new construction, commercial, and aftermarket replacement. A: CEO Albert Nahmad said total company revenues are up double digits so far in the quarter, including acquisitions. Barry Logan, EVP, clarified that since May, Watsco has seen improvement every month, with October better than September, and that acquisitions add on top of the organic momentum. Q: Ryan Merkel of William Blair asked about the side-discharge product its size, progress, and pricing versus traditional condensers. A: Paul Johnston, EVP, said side discharge has been a strong growth market, now roughly 8%-10% of the total market, and should keep growing given its variable-speed efficiency and competitive cost. Barry Logan added that it spans good/better/best brands and price points and is an ultra-high-efficiency play rather than a discount strategy, essentially a ductless product adapted for ducted systems. A.J. Nahmad said Watsco is leaning into the innovation as the segment matures. Q: Mitchell Moore of KeyBanc asked whether customer-mix headwinds reflect contractor consolidation into larger accounts or simply larger customers outgrowing smaller peers. A: Paul Johnston, EVP, said both industry consolidation is running about 7%-8% of the market and continuing, driven by medium-sized contractors growing with private equity. Barry Logan, EVP, reframed it as both risk and opportunity: consolidation creates share-gain opportunities, the impact is measured in basis points (10-20 per item), and cost to serve is lower with large customers so EBIT margin is not proportionately affected. He noted Watsco's consolidated-customer business is only about $400-$500 million today, with SupplySync positioned to capitalize on the trend. Q: Mitchell Moore of KeyBanc asked how to parse the 5% residential unit growth between replacement and new construction. A: Rick Gomez, VP of Corporate Development, said add-on replacement was roughly flat in Q2 and up low single digits in Q3, while residential new construction and multifamily was up low double digits for Watsco in the quarter, which bridges to the 5% total. Q: Jeffrey Sprague of Vertical Research asked whether repair and replacement demand has returned to a semblance of normality. A: Paul Johnston, EVP, said there is still room to grow in replacement after pandemic pull-forward, with regional differences between North, South, and West. Rick Gomez added that units remain about 10%-15% below levels of two years ago and AHRI volumes are near mid-2018 levels, so the market is closer to trend line but not fully normal, with an uncertain consumer. Q: Jeffrey Sprague of Vertical Research asked whether plumbing has a structurally different margin profile than legacy HVAC. A: Rick Gomez said not necessarily margin depends on equipment versus non-equipment mix in both categories. The bigger difference is that plumbing contractors are earlier on the technology-adoption and consolidation curve, which he sees as a long-term opportunity. Barry Logan noted Watsco is acquiring businesses like Granite that have done HVAC and plumbing well for decades, and 20 of the top 50 plumbing distributors also sell HVAC, so margins are not structurally different. CEO Albert Nahmad said Watsco is now committed to growing in plumbing, a large market where it has only a few hundred million in sales. Q: Pratap Singh of UBS asked about customers trading down to lower efficiency levels and the potential portfolio impact. A: Paul Johnston, EVP, said trading down to today's baseline efficiency is occurring, but that baseline is high efficiency versus 5-10 years ago, For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Our analysts just identified a stock with the potential to be the next Nvidia. Tell us how you invest and we'll show you why it's our #1 pick. Tap here. - Management attributed record third-quarter sales to normalizing demand trends and the abatement of multi-year headwinds, including pandemic-related disruptions and regulatory transitions. - The 7% growth in residential HVAC equipment was driven by gains in both unit volume and pricing realization. - Strategic expansion into the plumbing sector, highlighted by the Granite Group acquisition, aims to leverage Watsco's technology stack in a fragmented market where contractors are currently less tech-enabled. - Operational efficiency improved significantly, with fixed costs increasing only 1% year-to-date when excluding intentional investments in the company's digital ecosystem. - The digital ecosystem, now representing 37% of sales, is viewed as a primary driver of contractor loyalty and a mechanism to lower the long-term cost to serve at scale. - Management emphasized that the acquisition strategy focuses on 'entrepreneurial culture,' allowing acquired businesses like Jackson and Granite to operate independently with Watsco's financial and tech support. - Management expects the industry-wide A2L refrigerant transition to be largely completed by the end of 2026, leading to simpler operating conditions in the third quarter of 2026. - The company maintains a long-term gross margin target of 30%, with progress dependent on pricing optimization tools and the scaling of the VCR and Hydros initiatives. - OEM pricing actions are anticipated to return to 'ordinary and conventional' patterns over the next 12 months, reducing the volatility experienced during recent high-inflation periods. - SupplySync is positioned for a phased scale-up in the coming months to capture incremental growth from the large institutional customer segment. - Inventory levels are expected to decrease seasonally in the fourth quarter, with a goal of reaching year-end levels comparable to 2025 on an organic basis. - The acquisition of The Granite Group adds approximately $500 million in annual sales and establishes a significant hybrid HVAC-plumbing footprint in the Northeast. - Jackson Supply, acquired in June, contributed $230 million in annual sales and demonstrated 16% growth during its first full quarter under Watsco. - Gross margin comparisons were impacted by a prior-year refrigerant shortage that provided an unusual benefit to 2025 results. - The company ended the quarter with $649 million in cash and no debt, maintaining a 'pristine' balance sheet to fund future M&A opportunities. One stock. Nvidia-level potential. 30M+ investors trust Moby to find it first. Get the pick. Tap here. - Management explained that a shift toward larger customers and a rebound in new construction (up double digits) creates a moderate margin headwind. - They noted that while these segments have lower gross margins, the 'cost to serve' is also lower, resulting in healthy incremental operating income. - Side discharge units now represent 8-10% of the total market and are viewed as the 'future' due to their high efficiency and variable speed capabilities. - Management is 'leading' in this category, offering a 'good, better, best' product stratification to prevent it from becoming a purely value-line segment. - Watsco is targeting established businesses that already successfully distribute both HVAC and plumbing products rather than starting new plumbing operations. - Management believes the plumbing contractor base is in the 'early innings' of technology adoption, providing a long-term opportunity to apply Watsco's digital playbook. - Total company revenues in October are up double digits, continuing a month-over-month improvement trend that began in May. - The growth is broad-based, with residential new construction and multi-family segments showing particular strength.

Watsco (WSO) came out with quarterly earnings of $3.77 per share, missing the Zacks Consensus Estimate of $4.13 per share. This compares to earnings of $3.98 per share a year ago. These figures are adjusted for non-recurring items. This quarterly report represents an earnings surprise of -8.72%. A quarter ago, it was expected that this heating and cooling company would post earnings of $4.38 per share when it actually produced earnings of $4, delivering a surprise of -8.68%. Over the last four quarters, the company has surpassed consensus EPS estimates just once. Watsco, which belongs to the Zacks Manufacturing - General Industrial industry, posted revenues of $2.22 billion for the quarter ended September 2026, surpassing the Zacks Consensus Estimate by 0.28%. This compares to year-ago revenues of $2.07 billion. The company has topped consensus revenue estimates two times over the last four quarters. The sustainability of the stock's immediate price movement based on the recently-released numbers and future earnings expectations will mostly depend on management's commentary on the earnings call. Watsco shares have lost about 9.4% since the beginning of the year versus the S&P 500's gain of 12.1%. While Watsco has underperformed the market so far this year, the question that comes to investors' minds is: what's next for the stock? There are no easy answers to this key question, but one reliable measure that can help investors address this is the company's earnings outlook. Not only does this include current consensus earnings expectations for the coming quarter(s), but also how these expectations have changed lately. Empirical research shows a strong correlation between near-term stock movements and trends in earnings estimate revisions. Investors can track such revisions by themselves or rely on a tried-and-tested rating tool like the Zacks Rank, which has an impressive track record of harnessing the power of earnings estimate revisions. Ahead of this earnings release, the estimate revisions trend for Watsco was mixed. While the magnitude and direction of estimate revisions could change following the company's just-released earnings report, the current status translates into a Zacks Rank #3 (Hold) for the stock. So, the shares are expected to perform in line with the market in the near future. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here. It will be interesting to see how estimates for the coming quarters and the current fiscal year change in the days ahead. The current consensus EPS estimate is $2.13 on $1.74 billion in revenues for the coming quarter and $12.19 on $7.57 billion in revenues for the current fiscal year. Investors should be mindful of the fact that the outlook for the industry can have a material impact on the performance of the stock as well. In terms of the Zacks Industry Rank, Manufacturing - General Industrial is currently in the bottom 36% of the 250 plus Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. Another stock from the same industry, Gates Industrial (GTES), has yet to report results for the quarter ended September 2026. The results are expected to be released on October 30. This manufacturer of power transmission and fluid power systems is expected to post quarterly earnings of $0.45 per share in its upcoming report, which represents a year-over-year change of +15.4%. The consensus EPS estimate for the quarter has been revised 1.6% higher over the last 30 days to the current level. Gates Industrial's revenues are expected to be $903.52 million, up 5.6% from the year-ago quarter. Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Watsco, Inc. (WSO) : Free Stock Analysis Report Gates Industrial Corporation PLC (GTES) : Free Stock Analysis Report This article originally published on Zacks Investment Research (zacks.com). Zacks Investment Research

Image source: The Motley Fool. Tuesday, Oct. 27, 2026 - Chairman and Chief Executive Officer - Albert Nahmad - President - A.J. Nahmad - Executive - Paul Johnston - Executive - Barry Logan - Executive - Rick Gomez Operator: Good day, and welcome to the Watsco third quarter of 2026 earnings call. All participants will be in a listen-only mode for the duration of the call. Should you need assistance today, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, you may press star then two. Also, please be aware that today's call is being recorded. I would now like to turn the call over to Albert Nahmad. Please go ahead. Albert Nahmad: Morning, everyone. Welcome to our third quarter earnings call. This is Al Nahmad, Chairman and CEO. With me is A.J. Nahmad, President, Paul Johnston, Barry Logan, and Rick Gomez. Before we start, a cautionary statement. This conference call has forward-looking statements as defined by SEC laws and regulations that are made pursuant to the safe harbor provisions of these various laws. Ultimate results may differ materially from the forward-looking statements on the report. I am happy to report that Watsco's third quarter results reflect improving demand and simpler operating conditions in our industry and in our business. The last six years brought a pandemic, supply chain disruption, regulatory transitions, and tariff volatility. Through it all, we stayed the course and invested in our business. Demand trends are now normalizing, organic growth is improving, and our digital ecosystem is producing measurable results in driving growth. Our largest and most impactful product group, which is residential HVAC equipment, grew 7% during the quarter, with gains on both unit volume and pricing. We expect the impact from the A2L transition will be largely over by the end of this year. Third quarter reflects Jackson Supply, which was acquired on June 1 of this year. Jackson has $230 million in annual sales and operates from 25 Sunbelt locations. Jackson is performing well and grew 16% during the quarter. We are also pleased to have completed the acquisition of The Granite Group. Granite has annual sales of approximately $500 million and serves over 11,000 customers from 82 locations in the Northeast. Granite marks the fourth business acquired by Watsco that serves both HVAC and plumbing contractors. Today, Watsco has 112 locations that offer both HVAC and plumbing products. Our M&A pipeline has always included companies that have historically distributed both HVAC and plumbing products. We hope to have other similar businesses to join us. As is our culture, Granite will continue to independently operate and grow their business with our full support. They have big ambitions, and we will support their leadership in any way we can. Watsco is a more efficient company this year. We have made investments in technology, SupplySync, VCR, Hydros, and other initiatives that will benefit growth in the years ahead. Excluding these investments, fixed costs have increased 1% so far in 2026. In terms of our balance sheet, we ended the quarter with $649 million cash and no debt. Even after using a portion of our cash to fund the Granite transaction in October, we remain a positive net cash flow position and are committed to maintaining a pristine balance sheet, enabling investments in growth opportunities as they arise. Turning to the third quarter results, sales increased 7% to a record $2.22 billion and 4% on a same-store basis. Gross profit was a record $586 million. Gross margins were 26.4%. SG&A increased 5%, excluding Jackson, primarily due to variable expenses. Operating income was $225 million with an operating margin of 10.1%, and earnings per share came in at $3.77. Gross margins over the last 12 months has been in a narrow range and more in line with historical seasonality and current business conditions. Having said that, we remain focused on reaching our long-term goal of 30% and believe we have the right tools in place to get us there. Year-to-date, operating cash flow has improved 79% to $304 million, reflecting our continued vigilance towards managing our assets. Finally, I am going to hand this call over to A.J. Nahmad, who is our President, to provide an update on Watsco's technology initiatives, and he will be joined by other leaders of Watsco. A.J.? A.J. Nahmad: Thank you, and good morning to everyone. With the complexity of the last few years largely behind us, we believe our technology investments have made us a stronger company with higher growth prospects and a widening competitive moat. Our goals are ambitious and straightforward. First, leverage our industry-leading repository of data, products, market, customer, competitor, pricing, you name it. This underpins and empowers the industry's most advanced technology platforms. Second, revolutionize our customer experience so that contractors, installers, and technicians love doing business and only want to do business with the Watsco companies. Next, transform our supply chain and distribution operations to better serve customers and gain operating efficiencies along the way. Finally, develop and launch technologies that help our customers grow their businesses. Importantly, we see contractor behavior evolving in ways that benefit the technology-enabled distributor long term. Our core technology platforms continue to scale and add value. E-commerce sales have grown 12% year-to-date, while outpacing overall growth and broader industry metrics. E-commerce reached 37% of sales over the last 12 months, with certain markets at 60%-70% penetration. Digital engagement with our mobile app is strong at more than 73,000 active monthly users. OnCallAir continues its growth trajectory. Over the last year, approximately 351,000 proposals were presented to homeowners, generating $2 billion of gross merchandise value, a 14% increase over the comparable period. Simply put, the contractors we serve digitally are growing faster, have greater loyalty, and we believe we can lower our cost to serve at scale over time. Just as exciting, the new initiatives announced late last year are making progress. SupplySync.com, our newest platform to serve the growing segment of large institutional customers, launched earlier this year to great fanfare. We have launched a pilot program and are transacting with customers, with a plan to scale it to more and more customers in the coming months. This is a growing channel with unique customer needs that provides incremental growth opportunity for Watsco while leveraging our existing scale and infrastructure. VCR, which stands for Vendor Consolidation and Rationalization, continues to expand across many of our non-equipment product categories. Relationships with our strategic vendor partners have strengthened, and in many cases, are at all-time highs. Hydros, which is our investment in shared logistics and distribution, has further matured and will continue to scale in 2027 to more locations and more vendors. The transformational use of AI continues to evolve throughout Watsco. I could spend the next few hours just on that subject. These investments, along with our scale, entrepreneurial culture, and capacity to invest, are unmatched in our industry. We view these technology investments as critical to growing our leadership position in the HVAC industry and attractive to the entrepreneurs of companies like Jackson and Granite and many others before them to aid our M&A strategy of acquiring great businesses in our space. We invite you to visit us and learn more about what we consider to be our long-term competitive advantage. In closing, a reminder of our fundamentals. Watsco is the market leader and the technology leader in what remains a highly fragmented HVAC distribution market. The products we sell are a necessity, and the installed base continues to expand. We have deep and collaborative relationships with industry-leading manufacturers and industry partners. We offer the broadest variety of products and operate a large and growing network to serve more and more customers. Our unique ownership culture, shared by more than 8,200 employees, rewards and incentivizes long-term performance. With that, let's turn to Q&A. Operator: We will now begin the question-and-answer session. Again, to ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up the handset before pressing your keys. To withdraw a question, you may press star then two. At this time, we will take our first question, which will come from Tommy Moll with Stephens. Please go ahead. Tommy Moll: Good morning, and thanks for taking my question. Albert Nahmad: Morning, Tommy. Tommy Moll: Morning, Al. Thank you for taking my questions. Albert Nahmad: Of course. Tommy Moll: I want to start on gross margin, which I suspect will dominate this call. I am going to go out on a limb here and try to summarize what we are seeing, and then I would invite anyone to correct me where I am wrong. You threw out a lot of factors that drove the results this quarter, customer mix and market, equipment versus non-equipment. Is it an oversimplification to say that you have taken some share in the new home construction market and that inherently you are dealing with larger customers on lower margin equipment product primarily, and it is kind of all one and the same factor here? Albert Nahmad: I am going to let Barry Logan and Rick Gomez deal with that because they are on top of the data better than I am. Barry Logan: Thank you, Tommy, for the question. I would have worried if it was the second question, by the way, so- Albert Nahmad: I am glad it is the first question. Barry Logan: There is a measure of still kind of comparison reality going on that just should be accounted for. It is not as simple. I want it to be as simple as what you said, but not quite. It is becoming more simple. A year ago, new construction-related equipment sales were down double digits. This year, they are up double digits. That is a mix reality to margin as well. It is also a comparison discussion to last year, and it is also a participation in this year, through some of the inference in your question is gaining some share, but there is still a bit of a comparison discussion in that. When we talk about larger customers, that does not necessarily mean new construction. Not at all. In fact, even in new construction, the builders themselves hire contractors to do the work. They are not necessarily all large contractors. In the case of where we comment about large customers, it is really that more seasoned, call it multi-truck, multi-market, customers that I think have done well, that are using our technology, our penetration of technology in that group is in excess of 50% e-commerce into that channel. You can see our e-commerce revenues are up double digits this year. That tells you something about traction and the affinity of technology in those customers. As you might suspect, the larger the customer, there is a more moderate margin, but there is also more moderate cost with our manufacturers who support that activity. It is not up to us to set the price. We jointly work with our manufacturers and our customers on total margin in that segment. The cost to serve is not as great in that community as it is in, let's say, the small contractor community. That's a component of it. Rick, anything else in there that's important to discuss? Rick Gomez: I would just add a couple of things, Tommy. First, and good morning. First is that this is part of the comparison reality that Barry described, is this time last year, there was a shortage of refrigerant in the market that helped last year's margin, and this year, we have Jackson Supply in our Q3 revenue mix. They're not quite yet at Watsco's 27% range, and therefore, that weighed a little bit. That will abate, obviously, and that's part of the comparison that Barry's describing. I think the other thing that's worth pointing out, though, is that if we look at margins sequentially, Q2 to Q3, this is the type of sequential margin change that we've seen in the last several years as a result of tariff pricing and product transition and other realities of the marketplace. You could go back and look at 2025, 2024, 2023, 2022, and you'll see, I think, similar types of changes from Q2 to Q3 margin, and not wholly unexpected. A.J. Nahmad: Yeah. This is A.J. I'll add- Albert Nahmad: I was just going to call you. A.J. Nahmad: Yeah. Zoom out to the big picture, which is I guess where I like to live most of the time, there's a lot of noise, you have to look for the signal, especially since we're such a long-term focused company, right? Watsco and our arc of maturity, we used to operate at 24%, 25% gross margins. That ran up to 29% gross margins with all the noise, and Barry and Rick just described some of that. But we're at 27% + now year-to-date, and our goal is 30%. And we see a path there, and it will not be a straight line. There will be choppiness, certainly quarter-to-quarter. But our job, what our focus is the long term, the arc of maturity and getting from where we were, 24%, 25%, to where we are, 27%-ish to 30%-ish, is where we're heading. Tommy Moll: Thank you all. As a follow-up, I wanted to ask about SG&A. If we just look at the same store, it ran a little hot versus the sales growth this quarter, maybe about a point more growth in SG&A than sales. Although, Al, you pointed out a lot of the increased expense was around some of these big initiatives that you highlighted as early as your Investor Day last year. Barry Logan: Yeah. Tommy Moll: Just help us parse the trends here. How do we measure success on operating leverage? With these investments, when is it reasonable to expect to see it on an all-in or a same-store basis? Thank you. Albert Nahmad: A.J., Barry, you can jump in. Barry Logan: Yeah, I'll take a shot at that. I like the phrase, Tommy, where you said, how do you measure success? As a distributor, the most simple way to measure success is our fixed costs remaining efficient while growth is going on. Because then the incremental margin, every dollar that you sell drops to the bottom line. We wanted to make a lot of progress this year on fixed cost because we couldn't make a lot of progress in the prior years. Year-to-date, if I isolate fixed costs, they're up 1% this year. Year-to-date, I'll address the quarter in a second. Year-to-date, variable costs are up 6%, which is some measure of business units that are doing well, that are growing, that are growing earnings. They're paying commissions, they're accruing bonuses, and a little bit of freight and fuel and delivery costs, inflation in that number, which is to be expected. Overall, on a same-store basis, SG&A is up 2%. Technology spending, by the way, year-to-date is up about 13% or $6 million. Those are some of the new initiatives that are in those numbers. A.J. Nahmad: Yeah. Barry Logan: Sorry. A.J. Nahmad: You use the word investments. That's the right word for those dollars. Barry Logan: That is correct. That is the big picture for the year-to-date, is to become more efficient, fix costs, and make them as neutral as possible, battle inflation through other initiatives to save. Again, year-to-date, fixed expenses are up 1%. For the quarter, it is 3%. Again, there is some inflation in that for rent and facilities and things like that. But in relative terms, it is kind of in line with inflation. During the quarter, variable expenses were up around 10%. Again, as we see some acceleration, certainly in some business units that are outgrowing what we report, there are accruals and variable type expenses that go with that and some outsized inflation and delivery costs for the quarter, which I consider that a short-term thing. But it is a good question about how do you measure success. I would say this year is progress. Not optimized, but good progress. Tommy Moll: Thank you. I will turn it back. Operator: Our next question will come from David Manthey with Baird. Please go ahead. Albert Nahmad: Morning, David. A.J. Nahmad: Hi. David Manthey: Yeah. Good morning, Al. Good morning, everyone. I will go back to gross margin, of course, here. If we are looking at normal seasonality into the fourth quarter, I guess the implication is probably something in the 27% range, which I think would put you somewhere in the low 27%s for the full year. I believe that you said in the past that excluding the abnormal second quarter in 2025, you would have been somewhere in the 27.5% range. So 27.5%-27%, low 27%s. I am not asking for any guidance here, but I am just trying to think through, as you think about from where we are in 2026, looking ahead to 2027, what are the key levers we should be thinking about moving here in terms of whether that is customer mix or equipment, non-equipment, pricing, price optimization that you are doing internally? What are the factors we should be thinking about to move the needle one way or the other? Albert Nahmad: Anyone want to pick it up from there? A.J. Nahmad: Yeah. That's a pretty good list, Dave. It is a lot of those things. We are certainly still early days in our pricing optimization efforts. I think there's a huge runway there. There is certainly the influence and the impact of the mix of equipment versus non-equipment, of what equipment is sold, when it is sold, of the customers that are showing up and buying every day. It's all those things, and we can't predict or control all of those things. But back to where we're investing, we feel very good about what's in flight, right? We feel good about the technology. We know that the more that customers use more of our technology, the better customers they are, not only in gross margin, but also in sales and stickiness or lack of attrition. We love the VCR initiative, where we're finding ways to buy smarter and help our vendor partners at the same time. It's a win-win for them. We love Hydros, which is helping our business units carry more products on the parts and supply side and expand their offering. We love SupplySync, and SupplySync has got so much opportunity underneath it, and we keep learning about or thinking about new ideas with new partners. But what that should ultimately mean is a lot more sales and a lot more sales of parts and supplies as it matures. Your list is good. We like what's in flight. When does it all show up in every quarter's financials? I can't tell you. Barry Logan: Yeah, just to be helpful, Dave, I think just doing the math, just being objective and just using data and simple math, you're right. The fourth quarter generally is a better margin than the seasonality that preceded it. If I look at the math over a 10-year average, it's about 20, 30 basis points of improvement. That's just something to consider. Again, as you said, I'm not giving guidance, but that's the math over at least a 10-year period. I think it's important to remind everyone for the sake of looking forward, that the OEM pricing actions that are taken, either the amount of those actions or the timing of those actions certainly plays a role in the equation over, let's say, the next 12 months. The expectation is that they'll come early and more conventional and kind of more ordinary, if you will, than what we've seen in the last four or five years, which is different amounts, different by vendor, different timing, with and without tariffs, with and without mega inflation. That volatility is part of what we've had to explain the last four or five years. I can't predict the future, but the expectation is that going into the next 12 months, that will be a more ordinary and conventional feeling than some of the volatility we've seen. Albert Nahmad: Anything to add to this? David Manthey: Sorry. Albert Nahmad: Oh, it is Rick. Sorry. David Manthey: Yeah. Rick Gomez: I was just going to add one item to that, which is, I think somewhat underappreciated in all of this right now is the fact that we are seeing a rebound and stabilization of industry volumes. That is important to any distributor at the end of the day, if you are going to have incrementals, and this goes back to Tommy Moll's question a little bit, if you are going to have incrementals that are good and healthy. If I step back in time, if we go to this call a year ago, same-store sales were down, now they are up. Add-on/replacement was down, now it is up. RNC was down more than 10%, now it is up more than 10%. Equipment sales were down 7% last Q3, now they are up 5%. By the way, we are a 10% bigger company, having made two great acquisitions in the last 120 days. I do think that my point in saying that is that there has to be some base level of industry health and stability in volumes, and we are starting to see that now. That has not been the case over the last three or four quarters. David Manthey: Okay. Albert Nahmad: Love that, Rick. David Manthey: Okay. Yeah, that is helpful. Thank you. All of the things we just went through, those all sound like positive needle movers, with the one exception being the large customer mix that you cited this quarter. Is that a cyclical or a secular thing in terms of larger customers? Certainly with all of the things we talked about, it is not enough customer mix being toward larger customers. That would not be enough to overwhelm all of the other goodness that you are working on. Is that correct? Barry Logan: Yeah. No, we say it this way. No, go ahead. A.J. Nahmad: No, go ahead. Barry Logan: No, I will just take a shot at it. I think the word affordability is in the lexicon now a great deal of the fact that the products are $10,000, $15,000 or whatever to install. I have always said for my career, we have said for our careers, people do not live without these things. So you have immense product change, you have a higher price tag, you have a trickier economy, you have a more tricky consumer, therefore, yet e-commerce sales grew 10%, 12% this year. I would say higher efficiency systems grew 10%, 15% this year-to-date. So does that make sense? I think, again, the larger customer, the one that is using technology, that is affable and going into the home and selling, that wants to move on from the 410A product, that wants to get their business marketing and financing and so on, directed toward the opportunity, and us helping empower them to do that is where we see the benefit from it, Dave. Again, the cost to serve in those customers is lower than, let us say, 50 smaller customers that may do as much volume as five that are considered large customers. So I think it is really a part of the transition, part of the maturation in the A2L products is those customers have done a good job of it, and that our job is how do we help all customers plug along and move along the transition and maturity as well. But that would be some observations, I think. A.J. Nahmad: Yeah. Barry Logan: Without data, but some good observations, I think. A.J. Nahmad: Yeah. I will double down on that, Barry, which is just to be clear, large customers is not a bad thing. We have tools and technology and systems and processes and programs, and we welcome that customer base. Our mission and our goal is to make sure that we are the supply house of choice for all those customers and that we can do so at a profitable level and sell them the full suite of products that we have and with all the services that we provide. But we do not exclusively cater to that segment of customers either. I mean, the small guys with one truck or three trucks, we have wonderful pricing and programs and technology and systems and processes for those guys as well, including helping them go from small to big, because when they do, they drag us along in their growth, and they are very loyal. Like Barry said, our job is to cater to all the customers, and these investments that we keep talking about certainly focus not just on one group, but all groups. Paul Johnston: But if you look at the market that we have out there right now, the market is up, but it has not recovered yet back to what it was. I think at that point, you are going to see the smaller customer become, he is going to become a better customer than what he was this year. This year, the small customers probably suffered more than the large customers. They do not advertise, they do not promote, and they have an issue where everything has to go by word of mouth. I think as the market recovers, I think you are going to see the smaller customer recover with them. David Manthey: That is great detail. Thanks a lot, guys. Operator: Our next question will come from Ryan Merkel with William Blair. Please go ahead. Albert Nahmad: Morning, Ryan. Ryan Merkel: Hey, everyone. Hey, morning. Thanks for the question. Can you comment on October trends quarter-to-date? I think you mentioned further momentum. I am curious on the complexion. Are you seeing the new construction recover further? Comment on commercial, if that is getting better, and then aftermarket replace, if you are seeing a pickup there. Albert Nahmad: That is good news. A.J., you want to share that? A.J. Nahmad: Yeah, I do not have the data in front of me. Rick or Barry, you want to be more explicit. Albert Nahmad: I mean- Ryan Merkel: It's about October sales. A.J. Nahmad: Yeah. October is looking healthy to date, continuing the momentum that we've been alluding to. We hope and expect to carry it through the end of the year, but hard to say. On the RNC details, I don't know, Barry or Rick, if you have that or if you want to share it. Albert Nahmad: Well, in revenues, we're up double digits so far in this quarter, in revenues. Ryan Merkel: Got it. Is that total company revenues or is that organic? Albert Nahmad: Yes. Ryan Merkel: Total company's up double digits. Albert Nahmad: This is the total company, yeah. Ryan Merkel: Okay. Albert Nahmad: I mean, it includes the acquisitions that we've made. Ryan Merkel: Got it. Yeah, okay. Would you say that it's a broad-based recovery? Barry Logan: Yeah, just to say it this way, Ryan, I think just to say it this way so it's careful. We said in the press release that since May, we've seen improvement every month-over-month, in terms of progression and momentum. October is no different. October is better than September. If you add acquisitions on top of that's where you get into the 10%+ on acquired revenue on top of what we're seeing organically. Ryan Merkel: Okay. Got it. That's helpful. I wanted to ask on the side discharge, which is becoming a big topic. I'm curious for you, are you seeing progress on that product? How big is it? If you know, can you comment on the ASPs versus the traditional condensers? Paul Johnston: Yeah, design discharge has been a big growth market for us over the last two years. And what we're seeing is it's probably in the 8%-10% range of the total market today. It's going to continue to grow. It's got a lot of benefits that you don't have with the top discharge. Its variable speed. So it's, it's got a lot of efficiency and the cost of the product is relative to the, to the top discharge. So we feel like we're outperforming. We want to continue to outperform in the side discharge. Side discharge is, we think it's going to be the future of our market. So it's, it's important to us. A.J. Nahmad: Yeah, we are leading by side discharge. We are quite a bit ahead of the product. Barry Logan: Yeah. And obviously the manufacturing community that supports us, it's as diverse as our typical ducted units. I mean, there are branded products, there are more affordable products, there are private label products. In our case, as Watsco, our job is to have the broadest diversity and spectrum of good, better, best across all the products we sell. Inside discharge would be the same. So it's really, to me, not a discounted cheaper product strategy. A.J. Nahmad: No. Barry Logan: It's not. Albert Nahmad: No. Barry Logan: It's a ultra-high efficiency play with a new product that has a lot of diversity in brands and price across the spectrum and all of our partners that are supporting that, we're growing with, and it's fun to sell a new product. As Paul said, it's not necessarily new, but I would say contractor acceptance is where we're seeing traction. As their supplier, we're supporting it. A.J. Nahmad: Right. I think you said it well, Barry, but I would say that segment of the market is maturing, where now it is evolved into a good, better, best offering, where it is not just the best anymore, and it is not just the value line anymore. There is room and the market size for that stratification. Barry Logan: It is a proven product. Basically, what you have done is you have taken the ductless product and you have put ducts on it, as opposed to just having a high wall or a cassette on the inside. So, it is a proven product and it is going to be a great product for us in the future. Ryan Merkel: All right. Great color. Thanks. I am passing on. Operator: Our next question will come from Steve Volkmann with Jefferies. Please go ahead. Albert Nahmad: Morning, Steve. Steve Volkmann: Good morning, guys. That is funny timing. I have two side discharge units and they are awesome. Albert Nahmad: Yeah. Barry Logan: Good job, Steve. Albert Nahmad: Steve, we would be happy to- A.J. Nahmad: You are way ahead. I will sell you a third. See if we can sell you a third by the end of the call. Steve Volkmann: Yeah, I will take it. A.J. Nahmad: Special price. Steve Volkmann: Can we talk a little bit about pricing? I think pricing was up about 2%, I think you said, in the quarter. Sorry, I have a lot of calls going on today. Just curious if you have heard any sort of directionally what we should be thinking going forward, how the OEMs are thinking about price for 2027. Paul Johnston: We are seeing a lot of metal prices are going up. A lot of steel prices are going up right now, and so we are seeing price increases on those. We really do not have a lot of indication yet from the OEMs what direction they are going to be going. But obviously with the cost of freight, with the cost of metal, which is what these products are made of, we expect to have some price increases this fall going into next year. Steve Volkmann: Okay. All right, fair enough. Then maybe just switching, I am curious how you are thinking about inventory. I think last quarter you said you thought it had sort of peaked, but I see it is up a little bit. I assume that includes the acquisitions. Just how are inventory levels? How should we be thinking about that going into 2027 as well? Rick Gomez: Barry, we were just talking about it, so you go ahead. Barry Logan: Yeah. Yeah. Well, first, you are right. Our balance sheet in September this year includes Jackson, $679 inventory that was not in the prior year comparison. Last year at this time, as Ross Perot once said, "A giant sucking sound was going on in terms of unit declines." This year we are seeing unit increases. So a year later, I think inventory is up Rick Gomez: You meant the sales, sorry. Barry Logan: I am sorry, in sales, yes. As we close this quarter, inventory is reflective of that. It is reflective of an increasing demand environment. As we close the year, this is usually and historically our season of reaping cash flow and reducing inventory. There is an opportunity, I am not saying it will happen, but an opportunity to get inventory more or less equal to last year at the year-end, excluding the two acquisitions we have made. Historically, I think sequentially, we have very little reduction in inventory sequentially, second to third quarter. Much of it comes in the fourth quarter, and I would say that is how it looks this year. Steve Volkmann: Thank you very much. Operator: Our next question will come from Mitch Moore with KeyBanc. Please go ahead. Albert Nahmad: Morning. Mitch Moore: Everyone, good morning. Thanks for taking my questions. Maybe just to build on some of the questions around customer mix. I guess my question is, how much, if any, of the customer mix headwinds reflects existing contractors consolidating into larger accounts? Or is it just because the larger customers are outgrowing their smaller peers? Paul Johnston: I think the answer is yes. We are seeing a lot of consolidation. It is just natural. There is a consolidation going on in the industry. Rick Gomez: Are you looking for me? Paul Johnston: It is probably 7%-8% of the market right now. Rick Gomez: I am almost done, yes. Paul Johnston: That is going to continue. It is not the big guys who are already there, it is the growth of the medium-sized guys as they start growing with private equity. Rick Gomez: Can I just maybe attempt to, I think, reframe the narrative around this a little bit, as others have tried. Does it have an implication in margin? Yes. Is it a headwind to the business? No, not necessarily. When this happens, Mitch, when you have customer A buying customer C, usually there is a market share pickup opportunity also, right? It is not just axiomatic risk, it is both risk and opportunity when this happens. I also think we should ground ourselves in the fact that this is a $75 billion industry. 2,000 distributors comprise the landscape. We are by far the best positioned to capitalize on this trend relative to that fragmented distribution network that exists. Is it an irritation in margin? Yes. Can we count it in basis points? Yes. Not even full, nowhere near full percentage points, basis points. And by the way, we're doing this as SupplySync is launching, right? So we're not even yet to market with the product and the platform that we think is going to be game-changing in this space. So we're not in any way thinking about this defensively or, "Gee, what's it going to do to margin next quarter?" We're thinking about this more as an opportunity for growing with customers, growing volumes, and growing share at the end of the day. A.J. Nahmad: Yeah. The industry is dynamic, and we're dynamic. Mr. Operator, our Chairman fell off the call. Could you please get him back on the line? Operator: Absolutely. Barry Logan: I just want to add a data point to the question because I don't want it to be abstract. We said this in our Investor Day when we were developing the technology for SupplySync. The consolidated community today is about a $400 million or $500 million business for us. And if there's outgrowth, let's say 10% in that community, either because they're giving us more business or there's more of them, that's a growth opportunity obviously, that comes at a lower margin. I don't think that's particularly material to the big-picture analysis of Watsco's gross margin. It's a headwind, okay. It's also a growth opportunity, to Rick's point. And overall, I think where we kind of segment out margin impacts in our press release and in this conversation today, we're talking 10, 20 basis points in each one of the discussion items. This is not like a revolution or an evolution that I think has a lot of volatility to it. It is really explaining some of the nuance that we are managing. As I said very carefully, cost to serve is different, meaning SG&A is different in those customer segments also, which means EBIT margin is not necessarily proportionally affected by it. I just think we are getting a lot of color today on these nuances, but I do not think anyone should run with it too far when it is 10, 15, 20 basis point discussion items. Mitch Moore: Great. That was a lot of color. Thank you for that. I guess just my next question, I think residential units were up 5%. Could you just help us parse out how much of that growth was replacement versus new construction? Barry Logan: Yeah. We do not disclose that. Rick Gomez: We have seen AOR trends get better as the years progressed, Mitch, and it was around flat in the second quarter. It was up low single digits in the third quarter, what we consider to be the add-on/replacement universe. Where your volatility, good or bad, can come is in that residential new construction, multi-family side of the market. That was up low double digits for us in the third quarter, and that is how you get to a 5%. Mitch Moore: Great. Thank you. Operator: Our next question will come from Jeffrey Sprague with Vertical Research Partners. Please go ahead. Albert Nahmad: Morning, Jeffrey. Jeffrey Sprague: Hey, good morning, Al. Good morning, everyone. We covered a lot of ground. I did want to just touch on replacement a little bit more. Thanks for the comment a moment ago. So obviously, with the replacement comps are a little bit easier, but when you just kind of stand back here and look at things at an absolute level, have we gotten to what you would call some semblance of just normality between repair and replacement? Albert Nahmad: Good question. Paul Johnston: I think there is still a lot of room to grow in replacement. You had a pull forward that occurred during the pandemic, and I think as those units mature, I think you are going to see the replacement market return to what we call normal. Regionally, it is unique. You have a different replacement market in the north than you do in the south and in the west. We have seen the replacement market change based upon where in the marketplace the change is occurring. Rick Gomez: Yeah, I agree with that, Paul. Just a quick data point there, Jeff, to maybe help you. One is, if I look at just units, I would characterize it as we are closer to a trend line, but we are not quite at the trend line. Units are still, call it 10%-15% below where they were two years ago. AHRI, which you should never anchor on in any given month, but you can look at longer picture trends with AHRI. Those volumes today are where they were around mid-2018. That was a while ago. I think more importantly, we are still dealing with a consumer that is uncertain and unsure about the state of things, and all of that points to we are closer to trend line, but not fully to Paul's point, at some level of normality yet with replacement. Jeffrey Sprague: Thank you. Just want to make sure I am dialed correctly on this inventory for year-end. I think Barry gave us the Jackson inventory. How much comes in for Granite? Barry Logan: It is coming in October, and Rick, maybe handle that. Rick Gomez: Jeff, I will say about $140 million-$150 million of inventory. Jeffrey Sprague: Yeah. Rick Gomez: Now there is going to be some seasonality to that for Granite, but that is what it was, let's say the end of September, which was not on our balance sheet. Jeffrey Sprague: Okay. Then maybe just one other quick one. Plumbing is becoming a little bit more of a strategic focus imperative. Does that fundamentally have a different margin profile than your kind of core legacy HVAC business? Barry Logan: Again, we have already- Rick Gomez: That's a great question. Barry Logan: Go ahead, Rick. Rick Gomez: I was going to say not necessarily. I think what's true in the plumbing space is if you sell a lot of equipment there, you're going to have one margin profile. If you sell a lot of non-equipment, you're going to have a different margin profile. The same is true there in HVAC, by the way. We see that within our portfolio of businesses too. I wouldn't call it structurally different or radically different. What is, I think, different is that their customer curve, if you will, is probably at a different state of maturity than the HVAC contractor, which is to say there's slightly less consolidation going on there. Those customers are slightly less technology-enabled today than as compared to the HVAC contractor. And so we think that there's the same kind of maturity and sophistication curve that we've seen with our HVAC contractor base over the last five or 10 years and how they've adopted technology in their business, we think that it's in the very early innings as it relates to the plumbing contractor. A.J. Nahmad: Which is all opportunity in the long term. Rick Gomez: Right. Barry Logan: I wanted to say this too, Jeff. We get a lot of questions about entering plumbing, and what we've actually entered is acquiring businesses that have done both HVAC and plumbing well for decades. Granite's been around for over 50 years doing both HVAC and plumbing well for that period of time. Gateway a few years ago, same thing. In fact, if you look at the top 50 plumbing distributors in the country, 20 of the 50 also sell HVAC and are in the top 50 list of HVAC companies in the industry. It's not a new thing or a novel thing, it's an ordinary thing. We've known these families for a long time. It's taken us this long to do four of them. That's the approach. To answer your question, again, we don't see a big profile difference in terms of margins because, again, they do both well and the better companies have the higher margin and have figured out how to coexist in those markets with those products. A.J. Nahmad: I also just want to say, I got to say publicly, Bill and Chris and Amir and the whole Granite team are just world-class and as good as it gets. We can't be more excited to have them finally part of this family. Like Barry said, we've known these families for a long time. It took us this long, as we talked about it with them, to get to the starting line. Now they're part of the family and it's all upside from here, and let the fun begin. Paul Johnston: Great. Thanks, Jeff. Albert Nahmad: I would add to that, on the big picture that Watsco is now taking- Paul Johnston: Is now taking Albert Nahmad: -committed. Can you hear me? A.J. Nahmad: Yeah. Paul Johnston: Yes. Albert Nahmad: I say that the big picture for Watsco that we should explain is that we are now committed to growing in the plumbing market, which means that we have enormous opportunities in that distribution business of plumbing as well as the HVAC market. We have two industries that we can play and play hard and get size. The plumbing one, we are just beginning, and it is pretty healthy stuff. We had two other business units before this one that showed us plumbing can add profitability to the business as they already have over the last several years. That is a huge ability now for us to take share in the plumbing market, where we just have a few hundred million dollars worth of sales in a much larger market. Big opportunity is what I am trying to say. Operator: All right. Our next question will come from Pratap Singh with UBS. Please go ahead. Albert Nahmad: Morning. Pratap Singh: Thank you, and good morning, everyone. Yes. We continue to hear about customers trending down more towards lower efficiency levels, but it feels like the scope for the mix down could be limited. Can you give your views on what you are seeing and some sense of portfolio impact for you? Paul Johnston: Yes, we are seeing. When you say low efficiency today, it means that the efficiency is high efficiency compared to what it was five or 10 years ago. As they trade down to the baseline efficiency that we have in the marketplace, that is occurring, and that is why we get very excited about the opportunity to be able to sell the side discharge. I think the side discharge will be a breakthrough where customers will start going back to high efficiency once they see the opportunity. Rick Gomez: Right. Just that one perspective. This is as entry-level as the industry has been in quite a long time. Paul, you've got some great data around that, but if it's 80%-85% entry level today, I think the thrust of your question is right, which is there's more likely a mix-up opportunity over time, particularly now that you have a side discharge product that competes very well from a price perspective and gets you all the efficiency on the high end. It does allow a contractor to deliver more value to that homeowner versus just entry level and traditional top discharge high efficiency. There's now something that can help broaden the industry beyond where it is today. Paul Johnston: But every time there's been an efficiency change, we've seen a compression to the low end, and then it spreads back up. It's not something new that we haven't experienced before. Pratap Singh: That's very helpful. Thank you. Just another on the margin side, you are integrating a couple of big recent acquisitions. Should we expect that to be a headwind to margin in the near term, but with a potential for improvement in the medium term as you scale margins within those businesses? Can you also help size those impact? Barry Logan: Again, I'd just be careful with this. When we acquire a company like Granite or Jackson, we're keeping the people, we're keeping the culture, we're keeping the infrastructure, we're keeping what's made them successful for 50 years. The question is, how do we help them build on that success and build on their networks? Whether it's adding capital or products or technology, whatever it might be. The word synergy does not exist in our mindset. How do we take costs out? How do we tweak margins? That's not a concept for Watsco. We built a very successful company supporting great companies that became part of our family, and the intent is identical to that theory for Jackson and Granite. In terms of your question, I don't think there's any risk or short-term kind of trigger or anything that needs to be worried about. The question is, will they be successful as part of the Watsco family? And the only scorecard I can show you is Jackson Supply is up 16% in its first quarter as part of Watsco. I want to impute that into the future, of course. Albert Nahmad: Right. Barry Logan: But just know that there's no sudden move or sudden synergy or sudden anything relative to these kind of opportunities. It's really how do we build on the great success of these good companies that have been around forever? Albert Nahmad: That's very well said, Barry. Paul Johnston: How do we provide them the technology, the financial resources so they can grow faster? That's the opportunity, and that's the only synergy we have. Albert Nahmad: Another important aspect is that we create an equity culture. We provide equity throughout the organizations that we acquire, which means that they have a stake in the whole company, win or lose. I think that's very important in terms of our culture, providing equity to people that sell us their business, their leaders, so that they act as owners and be very conscious of that. Pratap Singh: Great. Thank you so much. Operator: This concludes our question and answer session. I'd like to- Albert Nahmad: Hey, did you have something? Operator: -Albert, for the closing remarks. A.J. Nahmad: No, I'm all set. Thank you. Albert Nahmad: Okay, thanks very much for your interest in Watsco, and we'll talk again in three months or sooner. Bye-bye. Before you buy stock in Watsco, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Watsco wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. 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As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability. The Motley Fool has positions in and recommends Watsco. The Motley Fool has a disclosure policy. Watsco (WSO) Q3 2026 Earnings Call Transcript was originally published by The Motley Fool

Recent Acquisitions, Entrepreneurial Culture, Strong Balance Sheet and Technology Advantage Position Company for Growth MIAMI, Oct. 27, 2026 (GLOBE NEWSWIRE) -- Watsco, Inc. (NYSE: WSO) announced its operating results for the quarter and nine months ended September 30, 2026. Watsco is the largest distributor in the highly fragmented North American HVAC/R market. Since entering distribution in 1989, Watsco has achieved a 17% compounded annual total shareholder return through a combination of organic growth, driven by the Company's industry-leading technology platforms, and the acquisition of 74 market-leading businesses that have expanded scale, density, OEM relationships and customers. Watsco recently welcomed Jackson Supply Company and The Granite Group to the Watsco family. These legendary companies are expected to bolster annual revenue by approximately 10% and broaden Watsco's geographic reach, product mix, as well as end-market and customer mix. The Company's philosophy is to build upon the success and legacies of successful businesses through investments in growth, continuity of leadership and culture, and through Watsco's equity culture to align and reward long-term growth. As importantly, Jackson Supply and Granite Group expand Watsco's community of talented leaders and provide future scale benefits to Watsco's technology platforms. Highlights of the Company's recent acquisitions include: - Jackson Supply Company, founded in 1972 with annual sales of approximately $230 million, was acquired in June 2026. Jackson is a diversified HVAC distributor providing HVAC equipment, parts and supplies to approximately 5,000 customers from 25 locations in high-growth Sunbelt markets. - The Granite Group, founded in 1971 with annual sales of approximately $500 million, was acquired in October 2026. The Granite Group is a large and growing distributor of HVAC and plumbing products serving approximately 11,000 customers from 82 locations in the Northeast. The Granite Group marks the fourth business acquired by Watsco that serves dual-trade HVAC/plumbing contractors (currently 112 locations out of Watsco's 804 locations offer both HVAC and plumbing products). Watsco's balance sheet remains solid, enabling incremental investments in growth and the Company's industry-leading technology platforms. Today, more than 73,000 contractors and technicians engage with the Company digitally, empowering them to integrate Watsco's innovations into their daily operations. The Company is also introducing AI-driven initiatives to leverage Watsco's extensive data assets and enrich the customer experience. The Company believes its technology ecosystem offers a durable and widening competitive advantage. Importantly, digitally-enabled customers continue to outperform broader industry and customer metrics, strengthening Watsco's leadership position in the highly fragmented $74 billion HVAC/R distribution landscape. Third Quarter Operating Performance - Revenues increased 7% to a record $2.22 billion (4% increase on a same-store basis) - Gross profit increased 3% to a record $586 million - Gross profit margin of 26.4% (26.5% on a same-store basis) versus 27.5% last year - SG&A increased 8%, including 30 new and acquired locations (5% increase on a same-store basis) - Operating income decreased 4% to $225 million (operating margin of 10.1% versus 11.4% last year) - Earnings per share decreased 5% to $3.77 Third Quarter Sales Trends (excluding acquisitions) - 5% increase in HVAC equipment sales (67% of sales), reflecting a 7% increase in residential products and a 5% decline in commercial products - 2% increase in sales of other HVAC products (29% of sales) - 10% increase in commercial refrigeration products (4% of sales) Third quarter sales performance reflects continued stabilization of residential end-markets following the prior year transition to new A2L products. Residential equipment sales grew 7%, including 5% unit growth and a 2% increase in average selling price. Same-store sales growth rates have steadily improved throughout the selling season with further momentum thus far in the fourth quarter. Third quarter sales also reflect $78 million in sales from the acquired locations of Jackson Supply, a 16% increase over the comparable prior-year period. Third quarter gross margin was impacted by customer mix (larger versus smaller customers), end-market mix (replacement versus residential new construction), the timing and lower magnitude OEM pricing actions in 2026 versus 2025 and the differing growth rate of equipment versus non-equipment products. The Company believes third quarter 2026 gross margin is also more in-line with historical seasonality and year to date gross margin levels are reflective of current market conditions (including more conventional OEM pricing actions). The Company further believes that its ongoing investments in technology, pricing optimization and non-equipment growth are supportive of long-term margin objectives. Albert H. Nahmad, Chairman and CEO said: "Third quarter results and early fourth quarter sales trends are indicative of continued improvement in end-market demand. We are encouraged to see residential unit volumes return to growth and steadily improve throughout the season. Our technology-enabled customers also continue to outperform the broader contractor community. Looking ahead, Watsco today is a meaningfully larger company, having added 107 locations and $730 million in annualized revenue to our network through the acquisitions of Jackson and Granite. Our long-range objectives for sales, margin and cash flow generation remain fully intact." Mr. Nahmad added: "We welcome Jackson Supply and The Granite Group to the Watsco family, both high-performing distributors in their respective markets. Jackson Supply had a terrific quarter as part of Watsco, and we are excited that The Granite Group offers extended opportunities for us to expand into the growing community of HVAC and plumbing contractors. Both are wonderful companies that diversify our product mix, extend our reach and broaden our technology advantage. We look forward to supporting their ambitious growth plans." Nine-Month Operating Performance - Revenues increased 3% to $5.86 billion - Gross profit decreased 1% to $1.59 billion (gross profit margin of 27.2% versus 28.3% last year) - SG&A increased 4% (2% increase on a same-store basis) - Operating income decreased 7% to $574 million (operating margin of 9.8% versus 10.9% last year) - Earnings per share decreased 7% to $9.72 - Operating cash flow increased 79% to $304 million Year to Date Sales Trends (excluding acquisitions) - 2% increase in HVAC equipment sales (67% of sales), reflecting a 4% increase in residential products and a 4% decline in commercial products - 1% increase in sales of other HVAC products (29% of sales) - 14% increase in commercial refrigeration products (4% of sales) Cash Flow, Dividends, Financial Strength and Liquidity Operating cash flow increased 79% to $304 million for the nine-month period ended September 30, 2026 ($325 million during the third quarter versus $355 million last year). Watsco's objective is to maintain a healthy balance sheet and ample liquidity to fund virtually any strategic investment. The Company's strong financial position has been key to delivering sustained long-term returns and enabling growth investments regardless of macroeconomic or industry conditions. Watsco's stated goal is to generate annual operating cash flow in excess of net income. In April 2026, the Company increased its annual cash dividend by 10% to $13.20 per share. Watsco has paid dividends to shareholders for 52 consecutive years. The Company's philosophy is to share cash flow through dividends while maintaining a conservative balance sheet with continued capacity to build its distribution network. Future changes in dividends are considered in light of investment opportunities, cash flow, general economic conditions and Watsco's overall financial condition. In October 2026, Watsco announced that it signed a five-year $750 million unsecured senior revolving credit facility. The terms of the new agreement include increased borrowing capacity, covenant flexibility and greater sensitivity to the seasonal nature of our working capital requirements. Innovation and Strategic Technology Initiatives The Company's continued investment in technology reflects a long-term strategic commitment to building capabilities that strengthen customer relationships, extend the Company's competitive advantage, improve operating efficiency and support sustainable growth. Watsco has invested approximately $280 million in its digital platforms over the last five years (a current annual run rate of approximately $64 million). The breadth of those investments spans across customer-engagement and internal platforms to increase the speed and efficiency of our locations and emerging AI capabilities that help customers grow and deliver technical know-how quicker. - Watsco's HVAC Pro+ Mobile Apps and E-Commerce platform have transformed the customer-experience by providing contractors with a seamless digital experience, including sourcing products, accessing technical help, real-time inventory, pricing, product information and more. These tools empower 24/7 self-service that benefit from advanced analytics, AI, technical knowledge and product recommendations. The result is a frictionless buying experience, increased convenience and higher customer satisfaction, which drives greater loyalty and repeat business with lower costs to serve. E-commerce sales increased 12% during the nine-month period ended September 30, 2026 (10% increase during the third quarter), outpacing overall revenue growth, and reached $2.75 billion for the 12-months ended September 30, 2026 (37% of revenues). - OnCallAir® is Watsco's digital sales platform enabling contractors to engage, present and quote solutions to homeowners. The gross merchandise value (GMV) of products sold through OnCallAir® reached $1.6 billion for the nine-months ended September 30, 2026, a 14% increase over the same period last year. For the 12-months ended September 30, 2026, contractors presented approximately 351,000 quotes and generated $2.0 billion GMV, a 14% increase versus the prior comparable 12-month period. - Watsco's pricing optimization platform has contributed to the Company's gross margin performance since its launch in 2020. The platform is designed to manage and optimize the vast number of pricing records across our business. Examples include the sophisticated pricing rules and strategies for specific products, across various geographic markets and for a variety of customer segments. This data-driven approach also enables Watsco to react swiftly to changing market conditions and efficiently administer the multitude of vendor cost changes to sustain market pricing and underlying gross margins. - Artificial Intelligence (AI) tools are gaining traction to further enhance the customer-experience, drive efficiency and extend our competitive advantage. These tools leverage Watsco's industry leading data sets around customers, products and vendors that have been curated over the last 15 years. Highlights include: - Watsco's AI platform is anchored by "Ask.Watsco", an internally focused AI engine designed to enhance productivity, decision-making and customer service. The platform integrates robust HVAC knowledge and streamlines processes for more than 2,700 current internal users. The platform's rapid adoption and consistent engagement highlight its potential, providing opportunities to achieve efficiency gains and further enhance customer satisfaction at scale. - Complementing its internal platform, Watsco has developed "AL.watsco", a customer-facing AI model that delivers HVAC expertise directly to customers and partners. AL.watsco is trained on Watsco's extensive pools of data, enabling it to provide accurate, real-time answers and recommendations on a vast array of HVAC products and solutions. The potential is to deliver highly customized, data driven customer service at scale, enhance customer loyalty and engagement and attract new customers to Watsco's ecosystem. - SupplySync is an innovative platform targeting the institutional channel for HVAC/R products. In recent years, large institutional customers have emerged, offering an incremental growth opportunity by further leveraging our market-leading scale, product depth, customer-facing technologies and financial strength. Watsco has launched a pilot program for SupplySync, which offers enterprise-wide solutions to institutional customers designed to deliver a seamless experience across sales, marketing, pricing, product assortment and order management. SupplySync is designed to provide a new level of service and expertise to institutional customers in a single platform across multiple markets and product categories. - Initiatives to enhance sales of non-equipment products and enhance gross margins were launched in 2026. The Company estimates that 40% of the products sold in the HVAC/R marketplace represent non-equipment products. For the 12 months ended September 30, 2026, Watsco's non-equipment purchases were approximately $1.7 billion from more than 1,500 vendors (30% of total purchases). Watsco is leveraging its product and pricing data to optimize and streamline sourcing across its supplier network. The Company is also investing in advanced logistics and distribution capabilities designed to improve inventory service levels, improve attachment rates, drive operating efficiency, enhance margins and increase inventory turns. A.J. Nahmad, Watsco's President, added: "We believe that the growth in e-commerce, OnCallAir® and overall digital engagement across our network reflects the value these tools deliver to our customers. We have also progressed nicely with the various initiatives introduced at last year's investor day, including the formal launch of SupplySync and the early scaling of the other initiatives. Our focus remains on advancing these unique capabilities – with AI enabling better and faster speed to market – in ways that help our customers grow." Use of Non-GAAP Financial Information and References to "Unit" Data In this release, the Company discloses non-GAAP measures on a "same-store basis", which exclude the effects of locations closed, acquired, or locations opened, in each case during the immediately preceding 12 months, unless such locations are within close geographical proximity to existing locations. The Company believes that this information provides greater comparability regarding its ongoing operating performance. These measures should not be considered an alternative to measurements presented in accordance with U.S. GAAP. In addition, the Company references "unit" data, a key performance measure, in analyzing its results. For purposes of this analysis, a "unit" is a compressor-bearing air conditioning unit or heat pump (also generally referred to as "outdoor units"), a standard industry convention consistent with data published by the Air-Conditioning Heating and Refrigeration Institute (AHRI). More information is available at www.ahri.org. Third Quarter Earnings Conference Call Information Date and time: October 27, 2026 at 10:00 a.m. (EDT) Webcast: http://investors.watsco.com (a replay will be available on the Company's website) Dial-in number: United States (844) 883-3908 / International (412) 317-9254 About Watsco Watsco is the largest distributor in the highly fragmented North American HVAC/R market. Watsco's solid financial position and culture of innovation has enabled investments in long-term growth, including the Company's industry-leading technology platforms. Today, more than 73,000 contractors, installers and technicians engage digitally with the Company, resulting in improved growth and lower attrition. The Company is now advancing AI-driven initiatives to leverage its extensive data assets to enhance the customer experience and improve efficiencies. These investments position Watsco to capture market share as contractors increasingly adopt digital tools and incorporate data-driven solutions in their businesses. This document includes certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may address, among other things, our expected financial and operational results and the related assumptions underlying our expected results. These forward-looking statements are distinguished by use of words such as "will," "would," "anticipate," "expect," "believe," "designed," "plan," or "intend," the negative of these terms, and similar references to future periods. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in economic, business, competitive market, new housing starts and completions, capital spending in commercial construction, consumer spending and debt levels, regulatory and other factors, including, without limitation, the effects of supplier concentration, competitive conditions within Watsco's industry, the seasonal nature of sales of Watsco's products, the ability of the Company to expand its business, insurance coverage risks and final GAAP adjustments. Detailed information about these factors and additional important factors can be found in the documents that Watsco files with the Securities and Exchange Commission, such as Form 10-K, Form 10-Q and Form 8-K. Forward-looking statements speak only as of the date the statements were made. Watsco assumes no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except as required by applicable law. WATSCO, INC. Condensed Consolidated Results of Operations (In thousands, except share and per share data) (Unaudited) | | Quarters Ended September 30, | | Nine Months Ended September 30, | | 2026 | | 2025 | | 2026 | | 2025 Revenues | | $ | 2,220,358 | | $ | 2,067,005 | | $ | 5,858,227 | | $ | 5,660,533 | Cost of sales | | | 1,634,071 | | | 1,498,090 | | | 4,265,456 | | | 4,058,507 | Gross profit | | | 586,287 | | | 568,915 | | | 1,592,771 | | | 1,602,026 | Gross profit margin | | | 26.4% | | | 27.5% | | | 27.2% | | | 28.3% | Selling, general and administrative expenses | | | 370,746 | | | 343,655 | | | 1,042,583 | | | 1,005,237 | Other income | | | 9,667 | | | 9,502 | | | 23,576 | | | 22,030 | Operating income | | | 225,208 | | | 234,762 | | | 573,764 | | | 618,819 | Operating margin | | | 10.1% | | | 11.4% | | | 9.8% | | | 10.9% | Interest income, net | | | 4,596 | | | 3,733 | | | 14,552 | | | 11,479 | Income before income taxes | | | 229,804 | | | 238,495 | | | 588,316 | | | 630,298 | Income taxes | | | 46,961 | | | 49,265 | | | 121,230 | | | 129,760 | Net income | | | 182,843 | | | 189,230 | | | 467,086 | | | 500,538 | Less: net income attributable to non-controlling interest | | | 27,474 | | | 27,655 | | | 69,307 | | | 75,289 | Net income attributable to Watsco, Inc. | | $ | 155,369 | | $ | 161,575 | | $ | 397,779 | | $ | 425,249 | Diluted earnings per share: | | | | | | | | Net income attributable to Watsco, Inc. shareholders | | $ | 155,369 | | $ | 161,575 | | $ | 397,779 | | $ | 425,249 | Less: distributed and undistributed earnings allocated to restricted common stock | | | 10,197 | | | 10,703 | | | 26,166 | | | 28,109 | Earnings allocated to Watsco, Inc. shareholders | | $ | 145,172 | | $ | 150,872 | | $ | 371,613 | | $ | 397,140 | Weighted-average Common and Class B common shares and equivalent shares used to calculate diluted earnings per share | | | 38,558,158 | | | 37,918,392 | | | 38,240,651 | | | 37,890,597 | Diluted earnings per share for Common and Class B common stock | | | $3.77 | | | $3.98 | | | $9.72 | | | $10.48 | WATSCO, INC. Condensed Consolidated Balance Sheets (Unaudited, in thousands) | September 30, 2026 | | December 31, 2025 Cash and cash equivalents | $ | 498,698 | | $ | 433,283 | Short-term cash investments | | 150,000 | | | 300,000 | Accounts receivable, net | | 1,008,554 | | | 796,181 | Inventories, net | | 1,841,814 | | | 1,386,317 | Other current assets | | 51,895 | | | 38,725 | Total current assets | | 3,550,961 | | | 2,954,506 | Property and equipment, net | | 148,709 | | | 136,012 | Operating lease right-of-use assets | | 533,536 | | | 452,547 | Goodwill, intangibles, net and other | | 1,000,606 | | | 871,740 | Total assets | $ | 5,233,812 | | $ | 4,414,805 | Accounts payable and accrued expenses | $ | 1,002,091 | | $ | 600,589 | Current portion of lease liabilities | | 124,449 | | | 117,153 | Total current liabilities | | 1,126,540 | | | 717,742 | Operating lease liabilities, net of current portion | | 429,269 | | | 350,616 | Deferred income taxes and other liabilities | | 142,522 | | | 124,386 | Total liabilities | | 1,698,331 | | | 1,192,744 | Watsco, Inc. shareholders' equity | | 3,029,082 | | | 2,781,376 | Non-controlling interest | | 506,399 | | | 440,685 | Total shareholders' equity | | 3,535,481 | | | 3,222,061 | Total liabilities and shareholders' equity | $ | 5,233,812 | | $ | 4,414,805 | WATSCO, INC. Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands) | Nine Months Ended September 30, | | 2026 | | | 2025 | Cash flows from operating activities: | | | Net income | $ | 467,086 | | $ | 500,538 | Adjustments to reconcile net income to net cash provided by operating activities: | | | Depreciation and amortization | | 33,973 | | | 32,680 | Non-cash contribution to 401(k) plan | | 9,267 | | | 8,743 | Share-based compensation | | 25,826 | | | 26,683 | Provision for doubtful accounts | | 5,274 | | | 2,550 | Other income from investment in unconsolidated entity | | (23,576) | | | (22,030) | Other, net | | 5,270 | | | 5,639 | Changes in operating assets and liabilities, net of effects of acquisitions: | | | Accounts receivable, net | | (195,892) | | | (60,234) | Inventories, net | | (396,782) | | | (204,479) | Accounts payable and other liabilities | | 382,700 | | | (108,318) | Other, net | | (9,487) | | | (11,925) | Net cash provided by operating activities | | 303,659 | | | 169,847 | Cash flows from investing activities: | | | Net proceeds from short-term cash investments | | 150,000 | | | 55,669 | Business acquisitions, net of cash acquired | | 7,663 | | | (19,303) | Capital expenditures, net | | (25,616) | | | (22,887) | Net cash provided by investing activities | | 132,047 | | | 13,479 | Cash flows from financing activities: | | | Dividends on common stock | | (392,013) | | | (352,085) | Distributions to non-controlling interest | | - | | | (69,829) | Proceeds from dividend reinvestment plan | | 11,388 | | | 21,661 | Other, net | | 11,865 | | | 12,450 | Net cash used in financing activities | | (368,760) | | | (387,803) | Effect of foreign exchange rate changes on cash and cash equivalents | | (1,531) | | | 2,554 | Net increase (decrease) in cash and cash equivalents | | 65,415 | | | (201,923) | Cash and cash equivalents at beginning of period | | 433,283 | | | 526,271 | Cash and cash equivalents at end of period | $ | 498,698 | | $ | 324,348 | Barry S. Logan Executive Vice President (305) 714-4102 e-mail: [email protected]