A maker of heating and air-conditioning gear, Watsco is the largest HVAC/R distributor in North America, running nearly seven hundred locations that supply contractors with equipment and parts for home replacement jobs. It began in 1947 as Wagner Tool & Supply Corp in New York — the name "Watsco" is a portmanteau of that original title — then in 1989 pivoted from manufacturing to distribution and grew by buying up dozens of smaller dealers. Its joint ventures with Carrier (under the Carrier Enterprise name) anchor much of its business, and it sells through its own OnCall Air digital platform.
Watsco's Q2 gross margin fell 180 bps to 27.5% as OEM price pass-through reversed a year of expansion.
The margin story reversed. rose 2% to $2.1 billion on higher equipment pricing and the Jackson Supply acquisition, but contracted 180 to 27.5% as OEM inflationary costs passed through to Watsco's cost of goods, and fell 11% to $163.3 million. The company is now absorbing supplier price increases that previously lifted its margins, leaving profitability lower even as the top line grows.
Key takeaways
fell 180 to 27.5% in Q2 2026, a direct reversal of the 220-basis-point expansion in Q2 2025, as OEM inflationary pricing actions taken in 2025 passed through to Watsco's cost of goods sold.
rose 2.1% to $2,104.9 million, with up 1%; HVAC equipment sales grew 3% and commercial refrigeration sales rose 19%, while the Jackson Supply Company acquisition, closed June 1, 2026, added 25 locations and approximately $230 million in annual sales.
Section summaries
Management's Discussion and Analysis
Q2 2026 revenue rose 2% to $2.1B but net income fell 11% as gross margin contracted 180 bps on OEM pricing pass-through.
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Total revenues grew 2% to $2.1B, with up 1%; HVAC equipment sales rose 3% while commercial refrigeration surged 19%.
declined 180 to 27.5%, driven by the pass-through of significant OEM inflationary pricing actions taken in 2025.
fell 11.0% to $163.3 million and fell 11.5% to $4.00, as the decline and a 3% increase in SG&A to $349 million outpaced the gain.
fell 12.3% to $238.4 million, with contracting 1.9 points to 11.3%, as the compression flowed through to the .
was a $2.5 million use in Q2, an improvement from the $7.4 million use a year earlier, while was a $11.5 million use; the company held $364.2 million in cash and $100 million in short-term investments with no balance drawn on its $600 million .
What changed
The expansion that defined 2025 — peaking at 29.3% in Q2 2025 — ended in Q2 2026 as OEM pricing actions that had lifted Watsco's selling prices now passed through to its cost of goods, compressing margin to 27.5%.
Residential HVAC unit volumes, which fell 16% in Q2 2025 and 20% in Q3 2025, were not explicitly disclosed in this filing's narrative, but growth of 2% with up 1% suggests the steep volume declines flagged in prior quarters have moderated.
The Jackson Supply Company acquisition, flagged in Q1 2026 as pending, closed on June 1, 2026, contributing to reported and adding 25 locations.
improved from a $7.4 million use in Q2 2025 to a $2.5 million use in Q2 2026, a smaller seasonal drag than the $185.1 million first-half use in 2025, suggesting the A2L refrigerant transition build is normalizing.
What to watch
Q3 2026 to see if the OEM cost pass-through continues to compress margins or stabilizes, with the 27.5% Q2 reading facing a 27.5% comparison from Q3 2025.
Residential HVAC equipment unit volumes in Q3 2026 to assess whether demand has stabilized after the 16-20% declines in 2025, now that the A2L refrigerant transition is further along.
Integration of Jackson Supply Company and its effect on SG&A and growth in Q3 2026, the first full quarter with the acquisition.
in Q3 2026 to confirm whether the seasonal build normalizes, after the $169.8 million first-nine-months inflow in 2025.
SG&A rose 3% to $349M (16.6% of sales), with same-store costs up 2% on higher facilities and transportation expenses, partly offset by lower salaries.
attributable to Watsco decreased 11% to $164.2M, pressured by lower and higher operating expenses.
Liquidity remains strong with $364M in cash, $100M in short-term investments, and no outstanding borrowings on the $600M .
The company acquired Jackson Supply Company on June 1, 2026, adding 25 locations and approximately $230M in annual sales.
Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the information regarding market risk provided in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the year ended December 31, 2025.
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There have been no material changes to the information regarding market risk provided in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the year ended December 31, 2025.
Information with respect to this item may be found in Note 9 to our condensed consolidated unaudited financial statements contained in this Quarterly Report on Form 10-Q under the caption “Litigation, Claims, and Assessments,” which information is incorporated by reference in th…
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Information with respect to this item may be found in Note 9 to our condensed consolidated unaudited financial statements contained in this Quarterly Report on Form 10-Q under the caption “Litigation, Claims, and Assessments,” which information is incorporated by reference in this Item 1 of Part II of this Quarterly Report on Form 10-Q.
Information about risk factors for the quarter ended June 30, 2026 does not differ materially from that set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2025.
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Information about risk factors for the quarter ended June 30, 2026 does not differ materially from that set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2025.