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Watsco reported Q2 FY2026 revenue of $2.1 billion, up 2.06% from a year earlier, when revenue also rounded to $2.1 billion. Diluted earnings per share fell to $4.00 from $4.52.
The company’s filing said residential HVAC equipment sales grew while commercial equipment sales declined. It attributed higher domestic residential unit volume primarily to market stabilization following the A2L product transition in 2025. Acquired locations also contributed to revenue growth, partly offset by closures.
Gross margin fell to 27.5% from 29.3%; the filing attributed the decline primarily to the pass-through of manufacturers’ inflationary pricing actions in 2025. Operating margin fell to 11.3% from 13.2%. Watsco said same-store selling, general and administrative expenses rose primarily because of higher facilities and transportation costs, partly offset by lower salaries.
Free cash flow was −$11.6 million, compared with −$14.0 million a year earlier. The filing attributed lower cash used in operations primarily to the timing of vendor payments and a smaller increase in inventory, partly offset by higher receivables.
| Q2 FY2026 | Q2 FY2025 | Change | |
|---|---|---|---|
| Revenue | $2.1 billion | $2.1 billion | 2.06% |
| Diluted EPS | $4.00 | $4.52 | −11.5% |
| Gross margin | 27.5% | 29.3% | −1.8 percentage points |
| Operating margin | 11.3% | 13.2% | −1.9 percentage points |
| Free cash flow | −$11.6 million | −$14.0 million | — |
What management said on the call
On the available first-quarter call, which preceded the reported second quarter, CEO Albert H. Nahmad said the transition to A2L products had matured and he expected a simpler business environment in 2026. He said it was still early in the summer selling season. Executive Vice President Barry S. Logan said e-commerce activity had increased and customers were buying more higher-efficiency systems.
Asked about early demand, CFO Rick Gomez said the company was not yet in the full selling season and that comparisons would be clearer after the second quarter. Albert Nahmad said he was hopeful about growth but that it was too early to make a longer-range call on market conditions.
On pricing, Albert Nahmad said several manufacturers had announced increases and he expected broader increases because of duties, although he could not quantify them. Executive Vice President Paul W. Johnston said announced increases do not always apply fully to every customer segment, including those with longer-term contracts. President Aaron J. Nahmad said Watsco’s software helps its businesses administer manufacturer price changes across products and customers without the lag associated with manual work.
Albert Nahmad said Watsco had a long-term gross margin target of 30.0% and was using pricing technology and consolidated purchasing to pursue it. Aaron Nahmad said online sales produce higher gross margins and cost less to serve than offline sales; he expected Watsco to continue investing in e-commerce tools and customer adoption to continue.
On inventory, Albert Nahmad expected improved turns to contribute to cash flow during the rest of the year. Aaron Nahmad said the company had bought inventory for the summer season and expected to turn it more efficiently as the supply chain became more stable. Logan said the goal was to carry less inventory on average while maintaining customer service, rather than make a further structural reduction.
Guidance
On the first-quarter call, Albert H. Nahmad said Watsco expected OnCallAir’s gross merchandise value to exceed $2.0 billion in 2026. He also expected improved inventory turns to contribute to cash flow during the rest of the year.
| Metric | For | Guide | Previous guide | Change |
|---|---|---|---|---|
| Units | FY2026 | Watsco expects unit sell-through to be better in FY2026 than in FY2025. | — | — |
| Revenue, Oncallair Gross Merchandise Value | FY2026 | $2.0 billion | — | New |