Watsco, Inc. announced its second quarter 2025 operating results, reporting revenues of $2.06 billion, a 4% decrease year-over-year. Despite the top-line pressure, the company achieved a record gross profit margin of 29.3%, a substantial 220 basis-point improvement from the prior year. Operating income increased 1% to $271.9 million, and net income attributable to Watsco, Inc. rose 1% to $183.6 million, resulting in diluted EPS of $4.52.
The sales decline was primarily attributed to lower unit volumes, influenced by more temperate weather conditions, a 15-20% reduction in residential new construction, and weakness in international markets, particularly Mexico, which impacted Q2 earnings by approximately $0.10 per share. The A2L product transition, affecting 55% of products sold, saw new A2L equipment sales mix at approximately 60% during the second quarter, up from 25% in the first quarter.
For the first half of 2025, revenues decreased 3% to $3.59 billion, with net income down 2% to $263.7 million. Gross profit margin for the six-month period improved 140 basis points to 28.7%. Selling, general, and administrative (SG&A) expenses increased 6% in Q2 and 5% in H1, largely due to increased headcount, facilities, and transportation costs associated with managing the complex A2L product transition and integrating 10 new locations from recent acquisitions.
Operating cash flow for the first half of 2025 was a use of $185.1 million, primarily due to a significant increase in inventory balances to $1.95 billion, driven by the seasonal ramp-up and dual stocking of both 410A and the more expensive A2L products. Watsco maintains a robust liquidity position with $293 million in cash and no outstanding debt as of June 30, 2025.
The company reiterated its "Dream Plan 2" targets of $10 billion in revenue, a 30% gross profit margin, and a 5x inventory turn. While Q2 gross margins reached 29.3%, management projects "27% plus" for the second half of 2025. Watsco continues to invest in its technology platforms, including OnCall Air which generated $1.6 billion in gross merchandise value for contractors, and has launched two AI platforms to enhance customer experience and operating efficiency.
Risks identified include potential "sticker shock" for consumers due to higher costs associated with A2L system replacements, proposed 50% tariffs on copper starting July 2025, and the elimination of Inflation Reduction Act tax credits for HVAC systems after December 31, 2025, which could dampen demand for high-efficiency upgrades.
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