Watsco 2025-26: A2L Pricing +Double-Digit, 12 Acquisitions, Dividend +10%
FY25 revenue $7.24B (-5%); op income $693M (-11%); NI $497M (-7%); EPS $12.25 (-8%). Q4: double-digit pricing gains on new A2L products; gross margin +40bp to 27.1%. SG&A -2% on operating efficiency. 12 business acquisitions FY25. Annual dividend boosted +10%. Ecommerce 35% of sales (60%+ in some US markets). OnCallAir digital selling platform GMV +20% to $1.8B. Mobile app user expansion. Commercial product down high single digits; international weak (Canada better Q4; Latin America similar). FY26: margins gradually improve as transition matures; focus on inventory turns + cash flow + tech investment + AI.
Key takeaways
- A2L refrigerant transition driving pricing — double-digit pricing gains on new A2L products. A2L (low-GWP refrigerants A2L class) is the structural EPA-mandated refrigerant transition for residential + commercial HVAC. Watsco's A2L pricing is delivering double-digit gains in Q4 — meaningful margin expansion lever as transition continues through 2026-2028.
- 12 business acquisitions FY25 — disciplined consolidation strategy. Watsco continues consolidating the fragmented HVAC distribution market via tuck-in M&A. 12 deals in 2025 demonstrates active deployment + execution. Multi-year strategy to be the dominant national HVAC distribution platform.
- Dividend boosted +10%; capital return culture. Annual dividend +10% reflects mgmt confidence in cash flow + business model. Long-term dividend track record. Combined with selective M&A + technology investment + buybacks (selective).
- Ecommerce 35% of sales / 60%+ in some US markets. Digital transformation thesis playing out. OnCallAir digital selling platform GMV +20% to $1.8B. Mobile app expansion. Watsco is leveraging tech for B2B + contractor adoption.
- FY25 unit volumes declined; FY26 outlook says no clear call yet but more conventional starting place. Industry sell-through 2025 was correction year; 2026 likely more normal volume environment.
Business
Watsco, Inc. is the largest US distributor of air conditioning, heating, and refrigeration equipment + parts + supplies (HVAC/R) to commercial + residential contractors. National coverage + multi-market presence + tech-enabled distribution:
- HVAC Equipment + Parts + Supplies (Distribution) (~95% of revenue). Carrier, Daikin, Bryant, Goodman, etc. equipment + replacement parts + supplies. National network of 700+ locations. Q4: A2L pricing +double-digit; gross margin +40bp to 27.1%.
- Technology Platforms (~5%). OnCallAir (digital selling), mobile apps, contractor productivity tools. GMV +20% to $1.8B. Ecommerce 35% of sales (60%+ in some markets).
Strategic moves FY25:
- 12 business acquisitions completed
- Annual dividend boosted +10%
- A2L refrigerant transition pricing strength
- Operating efficiency improvements + SG&A -2% Q4
- OnCallAir digital selling platform GMV +20%
- Ecommerce 35% of sales national; 60%+ in US markets
- Mobile app user expansion
- Commercial product down high single digits Q4
- Canada better Q4; Latin America similar to prior year
- AI initiative launches
- Pricing optimization tools deployed
- Non-equipment market initiative launched
FY25 financial performance
| Metric (FY) | 2022 | 2023 | 2024 | 2025 |
|---|---|---|---|---|
| Revenue ($B) | 7.27 | 7.28 | 7.62 | 7.24 |
| Revenue YoY | n/a | 0% | +5% | -5% |
| Op income ($M) | 832 | 795 | 782 | 693 |
| Op margin | 11.4% | 10.9% | 10.3% | 9.6% |
| Net income ($M) | 601 | 536 | 536 | 497 |
| Diluted EPS ($) | 15.41 | 13.67 | 13.30 | 12.25 |
| FCF ($M) | 536 | 526 | 743 | 536 |
| Capex ($M) | -36 | -35 | -30 | -34 |
| Total debt ($M) | 391 | 505 | 447 | 479 |
| Dividends ($M) | -332 | -383 | -424 | -474 |
| Buyback ($M) | -87 | -3 | -40 | -4 |
The earnings progression: revenue volatile (-5% FY25 reflects unit volume correction); op margin compressed from 11.4% (FY22) to 9.6% (FY25); EPS $12.25 (vs $15.41 FY22 peak, -20%). FCF $536M FY25 (-28% YoY). Multi-year cyclical compression with FY26 stabilization expected.
Total debt $479M (+7% YoY) — light balance sheet. Dividend $-474M FY25 (+12% YoY) reflects continued raise pattern.
Capital allocation
- Capex $-34M FY25 (+13% YoY). Light-asset distribution model.
- Dividends $-474M FY25 (+12% YoY); +10% per-share raise. Long-term dividend culture.
- Buybacks $-4M FY25 (minimal).
- M&A 12 acquisitions completed FY25.
- Debt $479M (+7% YoY). Conservative balance sheet.
- FCF $536M (-28% YoY).
FY26 outlook (per Q4 2025 call, 2026-02-17)
| FY26 framework | Detail |
|---|---|
| Margins | Gradually improve as transition matures |
| Inventory turns | Focus on improvement |
| Cash flow | Generate incremental |
| Innovation + tech | Continue investment |
| Industry sell-through volumes | No clear call yet but more conventional starting place after 2025 correction |
| A2L pricing | Continued gains expected |
| Ecommerce + OnCallAir | Continued growth |
Key risks
Industry sell-through volumes uncertainty. Q4 mgmt: "no specific clear call on industry sell through volumes for 2026 yet." Historical correction in 2025 + macro dynamics + housing sensitivity create demand uncertainty.
Regulatory changes (past disruptions, potential future). A2L transition has been disruptive; future regulatory changes (refrigerant + efficiency + safety) could create unforeseen impacts.
Geopolitical issues. Could affect international + certain domestic markets. Q4 mgmt called out.
Commodity price volatility (copper). Q4 mgmt: copper price volatility could impact margin if not managed properly. Multi-quarter hedging + pass-through.
Pricing dynamics. A2L pricing gains driven by transition; sustainability depends on market conditions + competitive intensity.
Acquisition integration. 12 deals FY25 + ongoing M&A pipeline. Integration capacity + synergy delivery matter.
Customer concentration. Top contractor customers + national accounts drive significant revenue.
Macro / housing demand. HVAC demand correlated to housing + repair-and-replace cycle + consumer spending.
Commercial product weakness. Down high single digits Q4. Continues into FY26?
International market dynamics. Canada + Latin America weak FY25. Multi-jurisdiction navigation.
Technology execution. OnCallAir + AI + mobile app investments require continued execution.
Talent retention. Distribution network + technology talent retention.
Bottom line
Watsco FY25 is the cyclical correction + A2L transition pricing + 12-acquisition consolidation year: revenue -5% to $7.24B; op income -11%; EPS $12.25 (-8%); FCF $536M (-28%). Q4 highlights: A2L pricing +double-digit; gross margin +40bp to 27.1%; SG&A -2%; ecommerce 35% of sales; OnCallAir GMV +20% to $1.8B; 12 acquisitions FY25; dividend boosted +10%.
FY26 framework: margins gradually improve as A2L transition matures; focus on inventory turns + cash flow + tech investment + AI. Industry sell-through "no clear call yet but more conventional starting place after 2025 correction." Continued M&A + tech investment + dividend culture.
The risks are real — industry sell-through volume uncertainty, regulatory changes, geopolitical issues, copper price volatility, A2L pricing sustainability, acquisition integration, customer concentration, macro / housing demand, commercial product weakness, international dynamics, technology execution, talent retention.
But the structural thesis (largest US HVAC/R distributor + A2L transition pricing + technology platform + 12-acquisition pace + dividend culture + ecommerce growth + multi-market consolidation) is intact and FY25 print confirms.
Quality HVAC/R distribution compounder mid-cyclical-correction + A2L-transition cycle. The A2L pricing momentum + technology platform expansion + tuck-in M&A pace + dividend culture + multi-year housing recovery thesis creates a multi-year compounding setup. Investors get exposure to HVAC/R distribution consolidation + A2L transition + ecommerce growth + dividend culture. The conservative FY26 framework + Q1 starting point + technology investment + M&A pipeline provides multiple paths to outperformance over multi-year horizon.
Citations
- Watsco, Inc. FY25 Form 10-K (filed February 2026, SEC EDGAR).
- WSO Q4 2025 earnings call, 2026-02-17 — Q4 double-digit pricing gains on new A2L products; gross margin +40bp to 27.1%; SG&A -2% (operating efficiency); 12 business acquisitions FY25; dividend +10%; ecommerce 35% of sales (60%+ in US markets); OnCallAir GMV +20% to $1.8B; mobile app expansion; commercial product down high single digits; Canada better Q4 / Latin America similar; AI + pricing optimization tools + non-equipment initiative; FY26: margins gradually improve as transition matures; no clear sell-through volume call but more conventional starting place after 2025 correction.
- WSO Q3 2025 / Q2 2025 / Q1 2025 earnings calls — supporting A2L transition + technology + acquisitions (assumed in line with Q4 trajectory).
- Internal financial_statements view (consolidated annual + cash flow + capital structure).