Watsco, Inc. (NYSE:WSO) shares declined on Wednesday after the distributor of heating, ventilation, and air conditioning products reported third-quarter results that missed analyst forecasts, reflecting the impact of ongoing regulatory changes in the HVAC sector.
The stock slipped 2.2% in premarket trading following the release.
Watsco posted earnings per share of $3.98, falling short of the $4.29 consensus estimate. Revenue totaled $2.07 billion, below expectations of $2.15 billion and down 4% year over year from $2.16 billion in the same quarter of 2024. Despite the softer top line, the company achieved a record gross profit margin of 27.5%, an improvement of 130 basis points from the prior year.
The company’s results reflected challenges stemming from a major regulatory transition requiring the adoption of new HVAC systems that use A2L refrigerants. The change has affected about 55% of Watsco’s product portfolio and necessitated the conversion of more than $1 billion in inventory across 650 U.S. locations. Combined with weaker consumer spending and slowing housing activity, these factors have contributed to volatility in industry demand and shipment trends.
“This has been one of the most challenging business environments in recent memory, and I am gratified that we have largely sustained our profitability, improved margins, improved cash flow, and navigated the A2L transition successfully while continuing to invest in long-term growth,” said Albert H. Nahmad, Watsco’s Chairman and CEO.
Operating income fell 6% year over year to $235 million, while operating margin edged down to 11.4% from 11.6% in the prior-year quarter. U.S. sales slipped 3%, and non-U.S. markets experienced a sharper 14% decline. HVAC equipment, which accounts for 67% of total revenue, fell 7% year over year.
Despite the headwinds, Watsco underscored its strong balance sheet, ending the quarter with more than $640 million in cash and investments and no debt. The company also reported record operating cash flow of $355 million for the quarter and reduced inventory by $351 million.