Key Highlights

  • Revenues rose 7% to a record USD 2.22 billion, including a 4% increase on a same-store basis.
  • Gross profit margin was 26.4% versus 27.5%, and operating income fell 4% to USD 225 million.
  • EPS fell 5% to USD 3.77, while residential equipment sales grew 7%, including 5% unit growth.
  • Nine-month operating cash flow rose 79% to USD 304 million, and two acquisitions add 107 locations.

Residential Demand Stabilizes

Watsco (NYSE:WSO) reported third quarter 2026 results on Tuesday. Revenues rose 7% to a record USD 2.22 billion, with same-store sales up 4%. Gross profit rose 3% to a record USD 586 million, and gross margin was 26.4%, or 26.5% on a same-store basis, versus 27.5% a year earlier. Selling, general and administrative expenses rose 8%, or 5% on a same-store basis, including 30 new and acquired locations. Operating income fell 4% to USD 225 million, a margin of 10.1% versus 11.4%, and EPS fell 5% to USD 3.77.

Excluding acquisitions, HVAC equipment sales, 67% of the total, rose 5%, with residential products up 7% and commercial products down 5%. Other HVAC products, 29% of sales, rose 2%, and commercial refrigeration, 4% of sales, rose 10%. Residential equipment sales included 5% unit growth and a 2% increase in average selling price. Management said same-store growth steadily improved through the selling season with further momentum in the fourth quarter, following the prior-year transition to new A2L products. Jackson Supply's acquired locations contributed USD 78 million in sales.

Margin Drivers

Management attributed the gross margin decline to customer mix, end-market mix between replacement and new construction, the timing and lower magnitude of OEM pricing actions in 2026 versus 2025, and the differing growth of equipment and non-equipment products. It said third quarter margin is more in line with historical seasonality and that year-to-date margin reflects current market conditions. Chairman and Chief Executive Albert H. Nahmad said the quarter and early fourth quarter trends indicate improving end-market demand and that residential unit volumes returned to growth, adding that long-range sales, margin and cash flow objectives remain intact.

Acquisitions and Technology

Watsco acquired Jackson Supply Company in June 2026, a Sunbelt HVAC distributor with annual sales of about USD 230 million, 25 locations and about 5,000 customers. It acquired The Granite Group in October 2026, a Northeast HVAC and plumbing distributor with annual sales of about USD 500 million, 82 locations and about 11,000 customers. Together they add 107 locations and about USD 730 million of annualized revenue, roughly 10% of annual revenue. Granite is the fourth acquired business serving dual-trade HVAC and plumbing contractors, and 112 of Watsco's 804 locations now carry both product lines.

More than 73,000 contractors and technicians engage with the company digitally, and the company is introducing AI-driven initiatives to use its data assets. Management cited a USD 74 billion North American HVAC/R distribution market.

Nine Months and Cash Flow

For the nine months, revenues rose 3% to USD 5.86 billion, gross profit fell 1% to USD 1.59 billion, and gross margin was 27.2% versus 28.3%. Operating income fell 7% to USD 574 million, a 9.8% margin, and EPS fell 7% to USD 9.72. Operating cash flow rose 79% to USD 304 million, with USD 325 million generated in the third quarter versus USD 355 million a year earlier. The stated goal is annual operating cash flow above net income. In April the annual dividend rose 10% to USD 13.20 per share.

HVAC Distribution Markers to Follow

Tracking points include residential unit growth against 5%, gross margin against 26.4%, and commercial equipment sales after the 5% decline. Further items are integration of Jackson Supply and The Granite Group, same-store SG&A growth of 5%, and fourth quarter momentum cited by management.