# Watsco Inc. (WSO) — Financial Analysis

**Exchange:** NYSE  
**Coverage as of:** 2026-Q2  
**Updated:** 2026-05-29  
**Tier:** Free primer (step 2 of 19)  
**Sibling pages:** /stocks/WSO/thesis · /stocks/WSO/memo

## Financial Snapshot

---
source: coverage-next-full
ticker: WSO
step: "04"
title: Financial Snapshot — Three-Year P&L and Key Metrics
created: 2026-05-29
---

### Step 04 — Financial Snapshot

#### Three-Year Income Statement Summary

| Metric | FY2021 | FY2022 | FY2023 | FY2024E |
|--------|--------|--------|--------|---------|
| Revenue ($M) | $5,623 | $6,857 | $7,259 | ~$7,000–7,200 |
| YoY Growth | +26.1% | +21.9% | +5.9% | ~(1–4%) |
| Gross Profit ($M) | $1,404 | $1,721 | $1,867 | ~$1,750–1,820 |
| Gross Margin | 25.0% | 25.1% | 25.7% | ~24.5–25.5% |
| SG&A ($M) | $782 | $916 | $991 | ~$960–990 |
| SG&A % Revenue | 13.9% | 13.4% | 13.6% | ~13.5–14.0% |
| Operating Income ($M) | $622 | $805 | $876 | ~$790–840 |
| Operating Margin | 11.1% | 11.7% | 12.1% | ~11.0–12.0% |
| Net Income (excl. NCI) ($M) | $461 | $598 | $659 | ~$590–640 |
| EPS (diluted) | ~$9.38 | ~$12.22 | ~$13.49 | ~$12.00–13.00 |
| EBITDA ($M) | ~$680 | ~$870 | ~$960 | ~$860–920 |
| EBITDA Margin | ~12.1% | ~12.7% | ~13.2% | ~12.0–13.0% |

*Note: FY2024E = analyst consensus estimates; NCI = non-controlling interest (Carrier's ~20% in JV entities)*

#### Key Observations on the Three-Year Trend

##### FY2021–FY2023: A Period of Exceptional Growth

The 2021–2023 period was characterized by extraordinary tailwinds that pushed Watsco's financials well above normalized run-rate:

1. **Post-COVID construction boom (2021)**: Pent-up demand, stimulus spending, and a hot housing market drove high HVAC unit volumes. Revenue surged 26% as prices recovered and volumes jumped.

2. **Pricing inflation (2022)**: Equipment and component price inflation (driven by supply chain disruptions, raw material costs) flowed through the income statement. Revenue grew another 22%, though gross margin was roughly stable as cost increases were passed through.

3. **R-410A pre-buy surge (2023)**: The most significant distortion. Watsco's contractors accelerated purchases of R-410A equipment (primarily residential air conditioning) ahead of the EPA's January 1, 2025 manufacturing ban. This inflated 2023 revenue by an estimated **$500–800M** above a "normalized" baseline. Gross margins expanded slightly as the mix shifted toward higher-margin refrigerants.

##### FY2024: Normalization

FY2024 represents the first year of normalization post-pre-buy. Key dynamics:
- **Volume headwinds**: Contractors drawing down pre-built inventory rather than buying new units
- **Refrigerant normalization**: R-410A refrigerant revenue declining sharply as pre-buy inventory is consumed
- **Modest offset**: R-454B equipment ramp beginning, with higher ASPs providing partial support
- **Revenue likely declined ~2–5%** from the peak FY2023 level

Importantly, this normalization was **widely anticipated** by the market. The question is whether FY2025 represents the trough and the beginning of a new growth cycle driven by R-454B adoption.

#### Margin Structure Analysis

##### Gross Margin (~24–26%)

Watsco's gross margin has been remarkably stable at 24–26% for the past decade, demonstrating:
- Consistent pricing power (passing cost increases to contractors)
- Mix stability (equipment/parts split hasn't shifted dramatically)
- No material margin pressure from competition despite Amazon's presence in parts

The gross margin is structurally limited by the distribution business model — Watsco does not manufacture anything, so its value-add is logistics, inventory management, and relationships, not manufacturing IP.

##### Operating Margin (~10–13%)

Operating leverage is modest. SG&A is roughly 13–14% of revenue and does not scale down dramatically with revenue decline. Key SG&A components:
- **People** (~60% of SG&A): ~7,200 employees, primarily in sales, branch management, and warehousing
- **Technology** (~10–12% of SG&A): eCommerce platform investment (increasing)
- **Facilities** (~15–20% of SG&A): 700+ branch locations, mostly leased

Operating margin expanded from ~11% to ~12% in recent years as revenue growth outpaced fixed cost growth. In a revenue decline scenario, operating margin can compress 100–200 bps.

##### Net Margin (~7–9%)

Net margin is impacted by:
- **Interest expense**: Minimal (Watsco maintains modest debt levels)
- **Non-controlling interest**: Carrier's ~20% minority stake in JV earnings reduces consolidated net income attributable to Watsco
- **Tax rate**: ~26–28% effective tax rate
- **Other income**: Minor JV equity income from smaller ventures

#### Balance Sheet Highlights (See Step 06 for detail)

| Metric | FY2023 |
|--------|--------|
| Cash & Equivalents | ~$190M |
| Inventory | ~$1.1B |
| Total Current Assets | ~$1.7B |
| Total Assets | ~$3.2B |
| Total Debt | ~$600M |
| Net Debt | ~$410M |
| Shareholders' Equity | ~$1.8B |
| Book Value per Share | ~$37–38 |

**Debt context**: Watsco's debt is modest relative to EBITDA (~0.4–0.5x Net Debt/EBITDA). The company could carry significantly more leverage given its cash flow generation but deliberately maintains a conservative balance sheet.

#### Cash Flow Highlights

| Metric | FY2022 | FY2023 | FY2024E |
|--------|--------|--------|---------|
| Operating Cash Flow ($M) | ~$800 | ~$750 | ~$700–750 |
| CapEx ($M) | ~($60) | ~($65) | ~($65–70) |
| Free Cash Flow ($M) | ~$740 | ~$685 | ~$635–680 |
| FCF Margin | ~10.8% | ~9.4% | ~9–10% |
| Dividends Paid ($M) | ~($380) | ~($440) | ~($460) |
| FCF Payout Ratio | ~51% | ~64% | ~68–72% |

**Key insight**: Watsco is an extraordinary cash generator given its asset-light distribution model. CapEx is minimal (~1% of revenue) — no factories, no heavy manufacturing equipment. The business essentially converts operating earnings into cash at very high rates.

Note: FY2023 operating cash flow was slightly lower than FY2022 despite higher earnings due to elevated working capital building into the pre-buy cycle. FY2024 should see working capital release as inventory normalizes.

#### R-410A Pre-Buy: Magnitude and Normalization

**Estimated impact**: Management and analyst commentary suggest the R-410A pre-buy inflated FY2023 revenue by approximately:
- ~$500–800M above normalized run-rate
- Concentrated in Q2–Q3 2023 (peak buying season)
- Primarily in residential split-system A/C equipment and R-410A refrigerant
- Equipment inventory pre-bought by contractors typically works off over ~12–24 months

**Normalized FY2023 revenue**: ~$6.5–6.8B (ex-pre-buy distortion)
**FY2024 trough**: ~$7.0B reported, but with ~$500–700M of contractor destocking headwind partially offset by R-454B equipment adoption beginning

The key analytical question for FY2025–2026 is whether Watsco's earnings can recover to and exceed the FY2023 peak as the equipment mix fully shifts to R-454B (higher ASPs) and volumes normalize.

## Deeper Financial Analysis

The fundamental tier ($1.00) adds 8 dimensions not included here:

- Revenue Breakdown — segment revenue, geographic mix, product-line margins
- Financial Trends — QoQ momentum, leading indicators, inflection points
- Balance Sheet — debt structure, dilution risk, working capital dynamics
- Capital Allocation — ROIC, buyback cadence, reinvestment efficiency
- Earnings Analysis — beats/misses, guidance vs actuals, transcript highlights
- Competitive Positioning — market share, pricing power, peer benchmarks
- Industry Context — TAM, sector tailwinds/headwinds, regulatory backdrop

**API endpoint:** GET /api/v1/research/WSO/fundamental

## Navigation

- Overview: /stocks/WSO
- Financials (this page): /stocks/WSO/financials
- Thesis: /stocks/WSO/thesis
- Investment Memo: /stocks/WSO/memo
- Coverage universe: /stocks