WSO 10-K & 10-Q changes, risk factors and insider trading

The Company’s top ten suppliers accounted for 85% of our purchases during 2024,2025, including 62% from Carrier and 9%8% from Rheem. Products supplied by Carrier providesinclude a diverse variety of brands of HVAC systemsequipment including Carrier, Bryant, Payne, Tempstar, Heil, Comfortmaker, and Grandaire (a private label product created by the Company), along with complimentary replacement parts. Rheem provides Rheem-brand HVAC systemssystems, as well as Freidrich and AireVantage (a private label product created by Nordyne, a subsidiary of Rheem), along with complimentary replacement parts. Given the significant concentration of our supply chain, particularly with Carrier and Rheem, any significant interruption by any of the key manufacturers or suppliers or a termination of a relationship could temporarily disrupt the operations of certain of our subsidiaries. Additionally, our operations are materially dependent upon the continued market acceptance and quality of these manufacturers’ and suppliers’ products and their ability to continue to manufacture and supply products that are competitive, that comply with laws relating to environmental and efficiency standards, and that keep up with shifting consumer preferences. Our inability to obtain products from one or more of these manufacturers or a decline in market acceptance of these manufacturers’ products, including new HVAC systems that use refrigerants with a lower GWP, could have a material adverse effect on our results of operations, cash flows, and liquidity.

We maintain trade name and distribution agreements with Carrier, Rheem, and Mitsubishi that provide us with distribution rights on an exclusive basis in specified territories. Such agreements are not subject to a stated term or expiration date. We also maintain other distribution agreements with various other suppliers, either on an exclusive or non-exclusive basis, for various terms ranging from one to ten years. Certain distribution agreements for particular branded products contain provisions that restrict or limit the sale of competitive products in the locations that sell such branded products. Other than where such location-level restrictions apply, we may distribute other manufacturers’ lines of air conditioning or heating equipment in other locations in the same territories.

We operate in highly competitive environments.environments and, in larger markets, often compete with both national and local distributors. We compete with other distributors and several air conditioning and heating equipment manufacturers that distribute a significant portion of their products through their own distribution organizations in certain markets. Competition within any given geographic market is based upon product availability, customer service, price, and quality. Competitive pressures or other factors could cause our products or services to lose market acceptance or result in significant price erosion, all of which would have a material adverse effect on our results of operations, cash flows, and liquidity.

Much of our success has depended on the skills and experience of senior management personnel.personnel and key operators within our regions. The loss of any of our executive officers or other key senior management personnel could harm our business. We must continuously recruit, retain, and motivate management and other employees to both maintain our current business and to execute our strategic initiatives. Our success has also depended on the contributions and abilities of our store employees upon whom we rely on to give customers a superior in-store experience. Accordingly, our performance depends on our ability to recruit and retain high quality employees to work in and manage our stores. If we are unable to adequately recruit, retain, and motivate employees our projected growth and expansion, and our business and financial performance may be adversely affected.

Our international sales and operations, as well as sourcing of products from suppliers with international operations, are subject to various risks associated with changes in local laws, regulations, and policies, including those related to tariffs, trade restrictions and trade agreements, investments, taxation, capital controls, employment regulations, different liability standards, and limitations on the repatriation of funds due to foreign currency controls. Our international sales and operations, as well as sourcing of products from suppliers with international operations, are also sensitive to changes in foreign national priorities, including government budgets, as well as political and economic instability. In addition, post-pandemic delays and closures in China may disrupt the operations of certain of our suppliers, which could negatively impact our business. Unfavorable changes in any of the foregoing could adversely affect our results of operations or could cause a disruption in our supply chain for products sourced internationally. Additionally, failure to comply with the United States Foreign Corrupt Practices Act could subject us to, among other things, penalties and legal expenses that could harm our reputation and have a material adverse effect on our business, financial condition, and results of operations.

The amount of any future dividends that we will pay, if any, will depend upon a number of factors. Future dividends will be declared and paid at the sole discretion of the Board of Directors and will depend upon such factors as cash flow generated by operations, profitability, financial condition, cash requirements, potential dilution related to our dividend reinvestment plan, prospects, and other factors deemed relevant by our Board of Directors. The right of our Board of Directors to declare dividends, however, is subject to the availability of sufficient funds under Florida law to pay dividends. In addition, our ability to pay dividends depends on certain restrictions in our credit agreement.

Information about risk factors for the quarter ended MarchJune 31,30, 2026 does not differ materially from that set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2025.

the impact of trade policies and tariffs both in the United States and in the international markets we serve;

Watsco, Inc. was incorporated in Florida in 1956, and, together with its subsidiaries (collectively, “Watsco,” the “Company,” or “we,” “us,” or “our”) is the largest distributor of air conditioning, heating, and refrigeration equipment, and related parts and supplies (“HVAC/R”) in the HVAC/R distribution industry in North America. At MarchJune 31,30, 2026, we operated from 693723 locations in 43 U.S. States, Canada, Mexico, and Puerto Rico with additional market coverage on an export basis to portions of Latin America and the Caribbean.

We continue to monitor macroeconomic conditions and recentdevelopments in U.S. trade policy announcements,policy, which have implications for the various OEMs and vendors that comprise our supply chain. Many HVAC equipment and component manufacturers, including Carrier Global Corporation (“Carrier”) and Rheem Manufacturing Company, source component parts from China and Mexico or assemble significant portions of residential and light-commercial products in Mexico, exposing them to tarifftariffs and inflationary pressures. In February 2026, the U.S. Supreme Court issued a decision invalidating the broad-based tariffs imposed under the International Emergency Economic Powers Act, providing potential relief from the certain tariff pressures. However, significant uncertainty exists regarding the timing, amount, and scope of any potential tariff refunds following the Supreme Court decision, as well as the possibility of alternative trade policy measures. Additionally, on April 6, 2026, the Section 232 steel and aluminum tariffs were adjusted under a new rule that will change how tariffs are calculated on imported copper, steel, and aluminum products. Under the new rule, tariff rates on most imported copper, steel, and aluminum products will now be calculated on the full value of the imported products, which in some cases will increase the amount of tariff due by the OEMs.

In response, ourOur OEM partners and suppliers havecontinue announcedto orevaluate implementedand implement various pricing actions that increaseimpact the pricecost of the products we procure. To mitigate these effects, we have takenimplemented pricing actions,actions leveragingwhere appropriate to respond to changes in the cost of the products we procure and continue to leverage our technology platforms and operating capabilities to respond efficiently adapt to changing conditions.market conditions; however, it may not be possible to pass all of our OEM’s pricing actions through to our customers. While the long-term impact of tariffs and related trade measures remains uncertain, we believe that our focus on the HVAC replacement market remains a stabilizing factor, given the essential rolenature of these products in providing comfort and healthy environments for homeowners and businesses. However, if additional tariffs, trade restrictions, amendments to existing trade agreements, such as the United States-Mexico-Canada Agreement, or further tariff increases on goods sourced from or assembled in Mexico and China, significantly raise our product costs, then we may need to increase our prices further, which could lead to reduced sales, customer loss, and potential harm to our business. We will continue to actively monitor these developments and their implications for our supply chainchain, costsproduct costs, pricing strategy, and pricingoverall strategy.operations.

The American Innovation and Manufacturing Act of 2020 granted the U.S. Environmental Protection Agency (the “EPA”) the authority to regulate hydrofluorocarbon (“HFC”) refrigerants. Although HFCs were introduced as alternatives to ozone-depleting substances like chlorofluorocarbons and hydrochlorofluorocarbons, they are now recognized greenhouse gases that impact climate change due to their high global warming potential (“GWP”). Consequently, a required 85% phasedown of HFC production and consumption over a 15-year period commenced on January 1, 2022 (40% of which was completed in 2024). Further regulations were implemented that (1) restricted the use of high-GWP refrigerants in new HVAC systems manufactured after December 31, 2024 (the “410A Systems”) manufactured after December 31, 2024 and (2) established a timeline over whichgoverning the salessale and installation of 410A Systems by distributors and contractors were permitted.contractors. Beginning in late 2024, the Company, in collaboration with its OEMs and in anticipation of thethese change,regulatory changes, began to transitiontransitioning its inventory to the new lower-GWP HVAC systems (the “A2L Systems”) andwhile phase-outphasing theout its inventory of 410A Systems. The regulations permitted the sale and installation of matching 410A HVAC Systems (i.e., outdoor and indoor components that are installed together) through December 31, 2025, after which the outdoor and indoor components maycould be separately sold and installed thereafter without limitation or expiration. On October 3, 2025, the EPA proposed changes to this regulation that would eliminate or extend the December 31, 2025 sale and installation deadline of matching 410A Systems beyond that date, thus allowing the continued sale of such matching systems. On May 26, 2026, the EPA issued the final rule which eliminated the prior deadline for the sale and installation of matching 410A Systems effective July 26, 2026, thereby permitting the continued sale and installation of such systems. As of the date of this filing, a final rule has not been issued. On December 23, 2025, the EPA issued an enforcement statement deprioritizing enforcement of the installation ban for affected 410A Systems that became effective on January 1, 2026. The Company continues to sell components of 410A Systems separately as permitted under the regulations and will assess its ability of offering matching 410A Systems onceand therelated EPA finalizes the rule change, which is expected in 2026.components.

We offer a broad variety of systems that operate above the minimum SEER standards, ranging from base-level efficiency to systems that exceed 20 SEER. Based on estimates validated by independent sources, we averted an estimated 26.927.7 million metric tons of CO2e emissions from January 1, 2020 to MarchJune 31,30, 2026 through the sale of replacement residential HVAC systems at higher-efficiency standards.

We continue to purchase Gree-branded products from Gree, and Gree has continued to sell products to us despite the unresolved status of the dispute and the Agreement. Any future material interruption of the business arrangement with Gree under the Agreement could temporarily affect certain of our subsidiaries and may have an adverse impact on our consolidated financial results. For the 12-month period ended MarchJune 31,30, 2026, less than 3% of our consolidated revenues were from the sale of Gree-branded products.

Our critical accounting estimates are included in our Annual Report on Form 10-K for the year ended December 31, 2025, as filed with the SEC on February 27, 2026. We believe that there have been no significant changes during the quarter ended MarchJune 31,30, 2026 to the critical accounting estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2025.

The following table summarizes information derived from our condensed consolidated unaudited statements of income, expressed as a percentage of revenues, for the quarters and six months ended MarchJune 31,30, 2026 and 2025:

The following narratives reflect our acquisitions of Jackson Supply Company (“Jackson”) in June 2026, Southern Ice Equipment Distributors, Inc. (“SIE”) in May 2025, Hawkins HVAC Distributors, Inc. (“Hawkins”) in April 2025, and W.L. Lashley & Associates, Inc. (“Lashley”) in January 2025. We did not acquire any businesses during the quarter ended March 31, 2026.

In the following narratives, computations and other information referring to “same-store basis” exclude the effects of locations closed, acquired, or opened, in each case during the immediately preceding 12 months, unless such locations are within close geographical proximity to existing locations. At bothJune March 31,30, 2026 and 2025, five and two locationslocations, respectively, that we opened during the immediately preceding 12 months were near existing locations and were therefore included in “same-store basis” information.

The table below summarizes the changes in our locations for the 12 months ended MarchJune 31,30, 2026:

The increase in revenues for the firstsecond quarter of 2026 included $8.6$29.7 million attributable to new locations acquired and $0.9$0.7 million from other locations opened during the preceding 12 months, offset by $4.2$2.5 million from locations closed.

The following table presents our revenues (excluding acquisitions) for the firstsecond quarter of 2026, as a percentage of sales,sales by major product lineslines, and the related percentage change in revenues from the prior period:

HVAC equipment sales comprise various products including, but not limited to, residential ducted and ductless systems, furnaces, and other indoor components, as well as commercial HVAC systems. Within HVAC equipment, sales of residential products declinedincreased 2%5% (reflecting a 1%5% increase in U.S. markets and a 30%1% decreaseincrease in international markets) and sales of commercial products weredecreased flat8% (reflecting aan 2%8% decrease in U.S. markets and a 7% increasedecrease in international markets). The largest component of residentialDomestic sales are ducted compressor-bearing systems produced by a variety of OEMs. Sales of ducted residential compressor-bearing systems decreased(ducted 1%and duringductless) thereflect firsta quarter2% of 2026, reflecting an 8% decreaseincrease in unit volumeunits and a 7%2% increase in average selling price. The lowerincrease in unit volumesvolume was primarily resulteddue fromto lingeringstabilization disruptionof fromthe lastHVAC year'sequipment market after A2L product transition,transition-related lowerimpacts homeexperienced buildingduring activity, and reduced consumer spending for replacement systems and upgrades.2025.

Gross profit margin declined 20180 basis-points primarily due to the salespass mixthrough of HVACsignificant equipmentinflationary pricing actions by our OEMs in 2025. Pricing actions in 2026 aswere comparedmore toconsistent 2025.with historical levels.

On a same-store basis, selling, general and administrative expenses wereincreased flat2% as compared to 2025.2025 primarily due to higher facilities and transportation costs, partially offset by lower salaries.

Other income of $5.5$8.4 million and $5.1$7.4 million for the firstsecond quarterquarters of 2026 and 2025, respectively, represented our share of the net income of Russell Sigler, Inc. (“RSI”), in which Carrier Enterprise I has a 38.4% equity interest. Carrier Enterprise I is one of our joint ventures with Carrier, in which we have an 80% controlling interest.

Interest income, net for the firstsecond quarter of 2026 increased $1.0$1.2 million, or 19%,50%, primarily due to higher cash and short-term cash investment balances on hand partially offset by lower interest rates earned on the balances for the 2026 period as compared to the same period in 2025.

Income taxes represent a composite of the income taxes attributable to our wholly owned operations and income taxes attributable to our joint ventures with Carrier, which are primarily taxed as partnerships for income tax purposes; therefore, Carrier is responsible for its proportionate share of income taxes attributable to its share of earnings from these joint ventures. The increasedecrease in the effective income tax rate was primarily due to lowerhigher share-basedproportional compensationearnings deductions andin lower tax credits, including purchased tax credits, combined with lower earningsjurisdictions in 2026 as compared to 2025.

Net income attributable to Watsco, Inc. for the quarter ended MarchJune 31,30, 2026 decreased $1.0$20.3 million, or 1%,11%, compared to the same period in 2025.2025, primarily due to lower gross profit and higher selling, general and administrative expenses, partially offset by lower income taxes and a decrease in the net income attributable to the non-controlling interest.

As of MarchJune 31,30, 2026, we had $392.7$364.2 million of cash and cash equivalents, of which $119.7$108.8 million was held by foreign subsidiaries. The repatriation of cash balances from our foreign subsidiaries could have adverse tax impacts or be subject to capital controls; however, these balances are generally available to fund the ordinary business operations of our foreign subsidiaries without legal restrictions. We also had $200.0$100.0 million of short-term cash investments as of MarchJune 31,30, 20262026, consistingwhich consisted of certificatesa certificate of deposit withthat varyingmatures maturities throughin September 2026.

The following table summarizes our cash flow activity for the quarterssix months ended MarchJune 31,30, 2026 and 2025 (in millions):

Net cash used in operating activities was lower primarily due to the timing of vendor payments and a lower increase in inventory, which were partially offset by an increase in accounts receivable due to higher sales in 2026 as compared to 2025.2025 .

We maintain an unsecured, five-year $600.0 million syndicated multicurrency revolving credit agreement, which may be used for, among other things, funding seasonal working capital needs and for other general corporate purposes, including acquisitions, dividends (if and as declared by our Board of Directors), capital expenditures, stock repurchases, and issuances of letters of credit. The revolving credit facility has a seasonal component from October 1 to March 31, during which the borrowing capacity may be reduced to $500.0 23 of 28 million at our discretion (which effectively reduces fees payable in respect of the unused portion of the commitment), and we effected this reduction on October 1, 2025.. Included in the revolving credit facility are a $125.0 million swing line loan sublimit, a $10.0 million letter of credit sublimit, a $75.0 million alternative currency borrowing sublimit, and a $10.0 million Mexican borrowing subfacility. The revolving credit agreement matures on March 16, 2028.

At MarchJune 31,30, 2026 and December 31, 2025, there was no outstanding balance under the revolving credit agreement. The revolving credit agreement contains customary affirmative and negative covenants, including financial covenants with respect to consolidated leverage and interest coverage ratios, and other customary restrictions. We believe we were in compliance with all covenants at MarchJune 31,30, 2026.

OnIn May 3, 2024, we entered into an amended and restated sales agreement with Robert W. Baird & Co. Inc. (the “2024 ATM Program”), which enables the issuance and sale of Common stock for a maximum aggregate offering amount of up to $400.0 million. At MarchJune 31,30, 2026, $400.0 million was available for sale under the 2024 ATM Program. The offer and sale of shares under the 2024 ATM Program have been registered under the Securities Act pursuant to our automatically effective shelf registration statement on Form S-3 (File No. 333-282975).

Carrier Enterprise I is a party to a shareholders’ agreement with RSI and its shareholders (the “RSI Shareholders’AgreementShareholders’ Agreement”), consisting of five Sigler second generation family siblings and their affiliates, who collectively own 55.4% of RSI (the “RSI Majority Holders”) and certain next-generation Sigler family members and a RSI employee, who collectively own 6.2% of RSI (the “RSI Minority Holders” and, together with the RSI Majority Holders, the “RSI Shareholders”). Pursuant to the RSI Shareholders’ Agreement, the RSI Shareholders have the right to sell, and Carrier Enterprise I has the obligation to purchase, their respective shares of RSI for a purchase price determined based on the higher of book value or a multiple of EBIT, the latter of which Carrier Enterprise I used to calculate the price for its 38.4% investment held in RSI. The RSI Shareholders may transfer their respective shares of RSI common stock only to members of the Sigler family or to Carrier Enterprise I, and, at any time from and after the date on which Carrier Enterprise I owns 85% or more of RSI’s outstanding common stock, it has the right, but not the obligation, to purchase from the RSI Shareholders the remaining outstanding shares of RSI common stock. At MarchJune 31,30, 2026, using the criteria set forth in the RSI Shareholders’ Agreement, the valuation of the RSI Shareholders’ RSI common stock was approximately $469.0$472.0 million.

Jackson Supply Company, Inc.Company