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WWW.IBISWORLD.COM Heating & Air Conditioning Wholesaling in the US July 2019 1

IBISWorld Industry Report 42373Heating & Air Conditioning Wholesaling in the USJuly 2019 Gordon Zheng

Be cool: Improving construction markets and rising incomes will likely revive industry demand

2 About this Industry2 Industry Definition

2 Main Activities

2 Similar Industries

3 Additional Resources

4 Industry at a Glance

5 Industry Performance5 Executive Summary

5 Key External Drivers

7 Current Performance

9 Industry Outlook

12 Industry Life Cycle

14 Products and Markets14 Supply Chain

14 Products and Services

16 Demand Determinants

17 Major Markets

19 International Trade

20 Business Locations

23 Competitive Landscape23 Market Share Concentration

23 Key Success Factors

23 Cost Structure Benchmarks

25 Basis of Competition

26 Barriers to Entry

27 Industry Globalization

28 Major Companies28 Watsco Inc.

29 Lennox International Inc.

30 Johnson Controls International PLC

30 Ingersoll-Rand PLC

31 Operating Conditions31 Capital Intensity

32 Technology and Systems

32 Revenue Volatility

33 Regulation and Policy

34 Industry Assistance

35 Key Statistics35 Industry Data

35 Annual Change

35 Key Ratios

36 Industry Financial Ratios

37 Jargon & Glossary

www.ibisworld.com | 1-800-330-3772 | [email protected]

This report was provided toAutobahn Consultants (2134210691)by IBISWorld on 27 October 2019 in accordance with their license agreement with IBISWorld


Industry wholesalers engage in buying, selling and distributing heating, ventilation and air conditioning equipment. This industry excludes in-room and in-window air conditioners and hydronic equipment

(IBISWorld report 42372). Installation is also excluded; however, service and repair work are part of this industry, although this service accounts for only a small portion of industry revenue.

The primary activities of this industry are

Wholesaling of central air conditioners (excluding in-room and in-window units)

Wholesaling forced-air furnaces

Wholesaling registers, grills, duct insulation and preformed ductwork

Wholesaling condensing units for air conditioners

Wholesaling compressors for air conditioners

Wholesaling heat pumps

Wholesaling air-cleaning and filtration systems

Wholesaling electric nonportable baseboard heaters

42362 TV & Appliance Wholesaling in the USEstablishments in this industry wholesale household electrical appliances and room air conditioners.

42372 Plumbing & Heating Supplies Wholesaling in the USEstablishments in this industry wholesale hydronic heating equipment and plumbing equipment.

23822a Heating & Air-Conditioning Contractors in the USContractors in this industry sell and install heating, air conditioning and plumbing equipment.

23822b Plumbers in the USContractors in this industry may sell and install heating and ventilation systems.

Industry Definition

Main Activities

Similar Industries

About this Industry

The major products and services in this industry are

Air cleaning and filtration systems

Central AC

Compressors for air conditioners

Condensing units for air conditioners

Forced-air heating systems

Heat pumps

Registers, grills, duct insulation and preformed ductwork

Other

Provided to: Autobahn Consultants (2134210691) | 27 October 2019


About this Industry

For additional information on this industry

www.hardinet.org Heating, Air-Conditioning Refrigeration Distributors International

www.hvacnews.com HVAC News

www.census.gov US Census Bureau

Additional Resources

IBISWorld writes over 1000 US industry reports, which are updated up to four times a year. To see all reports, go to www.ibisworld.com



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Revenue vs. employment growth

Products and services segmentation (2019)

30.4%Central AC

6.6%Heat pumps

24.1%Other

6.1%Compressors for air conditioners

6.0%Air cleaning and filtration systems

10.7%Registers, grills, duct insulation

and preformed ductwork

9.0%Forced-air heating

systems

7.1%Condensing units for

air conditioners

Key Statistics Snapshot

Industry at a GlanceHeating & Air Conditioning Wholesaling in 2019

Industry Structure Life Cycle Stage Mature

Revenue Volatility Low

Capital Intensity Low

Industry Assistance Low

Concentration Level Low

Regulation Level Medium

Technology Change Medium

Barriers to Entry Medium

Industry Globalization Low

Competition Level High

Revenue

$46.0bnProfit

$1.7bnWages

$4.6bnBusinesses

3,289

Annual Growth 19–24

1.1%Annual Growth 14–19

0.0%

Key External DriversHousing startsValue of private nonresidential constructionDemand from heating and air-conditioning contractorsPrivate spending on home improvementsPrime rate

Market ShareWatsco Inc. 8.8%

p. 28

p. 5

FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 35




Key External Drivers Housing startsThe construction of new residential buildings drives the market for wholesale heating and air conditioning equipment. Housing starts steadily rebounded over the five years to 2019, as lending conditions and the overall economy improved, bolstering demand for the Heating and Air Conditioning Wholesaling

industry. Housing starts are expected to increase in 2019, representing a potential opportunity for the industry.

Value of private nonresidential constructionIncreased nonresidential construction (i.e. commercial, industrial and municipal building) activity bodes well for climate-

Executive Summary The Heating and Air Conditioning Wholesaling industry has remained stagnant over the five years to 2019. Products wholesaled in this industry include central air conditioning systems, components of forced-air heating systems, heat pumps, condensers and compressors. Despite growth in housing starts, nonresidential construction and private spending on home improvements, higher mortgage interest rates have deterred new home purchases and subsequent heating, ventilation and air conditioning (HVAC) installations over the past five years. Accordingly, industry

revenue has remained stagnant at $46.0 billion over the five years to 2019. This includes an anticipated increase of 1.8% in 2019 alone, primarily due to an estimated 5.9% decrease in the conventional mortgage rate this same year.

Operators have also contended with competition from HVAC manufacturers during the current period. An increasing number of manufacturers are expected to acquire distributors or sell directly to manufacturers, bypassing industry operators in the supply chain. Therefore, the subsequent increase in demand for HVAC is expected to be largely fulfilled

by manufacturers instead of wholesalers. Despite increased competition, the average industry profit margin, measured as earnings before interest and taxes, is expected to rise slightly from 3.4% of revenue in 2014 to 3.8% in 2019.

Over the five years to 2024, projected growth in housing starts and private spending on home improvements will likely further boost demand for HVAC equipment wholesaled by operators. The enforcement of several newer environmental regulations is also expected to aid industry growth. For example, the US Environmental Protection Agency’s incremental plan to eliminate hydrochlorofluorocarbons (HCFCs) stipulates a 99.5% reduction of harmful HCFCs by 2020 and a 100.0% reduction by 2030. These mandates are expected to spur demand for HVAC replacement. Moreover, the US Department of Energy’s current energy-efficiency standards place stringent requirements on central air conditioning replacements, which will likely continue to necessitate the replacement of outdated equipment, particularly in states with large populations and warm climates. These factors, combined with other incentives such as tax rebates associated with buying new, energy-efficient equipment, are projected to yield an increase in industry revenue. Industry revenue forecast to increase annualized 1.1% to $48.5 billion over the next five years.

Industry PerformanceExecutive Summary | Key External Drivers | Current Performance Industry Outlook | Life Cycle Stage

Higher mortgage interest rates have deterred new home purchases and heating, ventilation and air conditioning installations



Industry Performance

Key External Driverscontinued

control wholesalers, as most new buildings require air conditioning, heating and other products distributed by this industry. The value of private nonresidential construction is expected to increase in 2019.

Demand from heating and air-conditioning contractorsHeating and air conditioning contractors demand goods from wholesalers to perform new installations, additions, alterations, maintenance and repairs in residential and nonresidential markets. Demand from heating and air conditioning contractors is expected to increase in 2019.

Private spending on home improvementsHome improvement spending on heating and air conditioning

equipment is often financed with credit and is driven by growth in disposable income, which enables consumers to spend more on home renovations. Private spending on home improvements is expected to decrease in 2019.

Prime rateNew or replacement heating and air conditioning equipment is often financed through credit. Low interest rates make credit more accessible to consumers, thereby increasing demand for heating and air conditioning equipment. However, the prime rate is expected to increase in 2019, posing a potential threat to the industry.

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Current Performance

The Heating and Air Conditioning Wholesaling industry heavily depends on the level of building activity in the residential, commercial and industrial construction sectors. Industry revenue comes from the wholesale of central air conditioning systems, registers, grills and duct insulation used in forced-air heating systems, heat pumps, condensers and compressors. Such products are often installed during new building construction or renovation. Wholesalers maintain close business relationships with contractors in these sectors, as new construction requires the installation of heating and air conditioning equipment. Commercial contracting companies are a major downstream market for wholesalers, comprising an estimated 32.3% of industry revenue in 2019. Commercial contractors include businesses that are not only responsible for new work, but also additions, maintenance and repairs to commercial buildings.

Over the five years to 2019, the value of nonresidential construction has increased at an annualized rate of 0.3%. This growth has partly stimulated construction activity, boosting industry demand. However, rising mortgage

interest rates during the latter half of the current period have deterred new home purchases, suppressing demand for heating, ventilation and air conditioning (HVAC) equipment wholesaled by industry operators from the residential construction sector. Additionally, vertical integration by HVAC manufacturers has increasingly displaced wholesalers from the supply chain. Combined, these factors largely balance out; as a result, industry revenue has stagnated at $46.0 billion over the past five years, despite an estimated 1.8% increase in 2019 alone.

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Improving markets Housing starts, the US Census Bureau’s measurement of new, privately owned housing units starting in a given year, robustly expanded during the current period. Over the five years to 2019, housing starts have increased at an annualized rate of 5.0%. Moreover, housing starts are expected to grow 2.4% in 2019 alone, with many of these new residential structures requiring heating or air conditioning equipment, boosting demand for products wholesaled by industry operators.

The Commercial Building Construction industry (IBISWorld report 23622a), a vital downstream market for the

industry, also experienced a jump in demand over the past five years, as investment in nonresidential structures such as office buildings rose. The value of nonresidential construction is anticipated to continue to increase 0.5% in 2019 alone, and IBISWorld expects demand for HVAC products to increase as well. Building, heavy construction and specialty trade contractors are responsible for new work; however, they also undertake additions, maintenance and repairs. The need to replace aging equipment and persisting environmental concerns also contribute to demand for HVAC replacement.




Industry incentives New or replacement HVAC equipment is often financed through credit. A strong economy makes credit more accessible to consumers, thereby sustaining demand for heating and air conditioning equipment wholesaled by industry operators. Access to credit has grown at an annualized rate of 5.6% over the five years to 2019. Additionally, greater disposable income and an increase in overall consumer spending have propelled spending on home improvements. Private spending on home improvements has risen at an annualized rate of 5.0% over the past five years. An outlying decrease is expected to occur in 2019, when private spending on home improvements is expected to decrease 2.4%. This anticipated decrease is largely the result of an estimated 5.9% decline in mortgage rates this same year, heavily incentivizing housing starts. This will likely tie up much of consumers’ disposable income, causing them to put off home improvements.

Moreover, in the short term, changes in interest rates, housing affordability and government policy in the form of

incentives for energy-efficient equipment affect construction activity. As construction activity increases, more HVAC equipment is needed. Over the past five years, energy-efficient products have grown in popularity, as the federal government has promoted energy efficiency through tax rebates for purchases of appliances that receive an Energy Star rating. Further, the US Environmental Protection Agency’s plan to eliminate hydrochlorofluorocarbons included a 99.5% reduction in chlorodifluoromethane product consumption and production by 2020, requiring energy-inefficient HVAC products to be replaced. These economic and regulatory factors are expected to contribute to demand for products wholesaled by industry operators.

Increased downstream demand for HVAC products boosted industry revenue

Industry landscape Despite increased demand, an increasing share of HVAC products are sold directly from manufacturers to retailers, displacing industry wholesalers in the supply chain. Overall, the number of industry enterprises has declined at an annualized rate of 0.4% to 3,289 companies over the five years to 2019. The industry’s leading companies are have remained relatively steady, increasing at an annualized rate of 0.2% to $4.6 billion over the past five years.

Additionally, industry operators often compete directly with heating, ventilation and air conditioning manufacturers. Since many major manufacturers have their own wholesaling operations, these types of vertically integrated companies

have the lowest transaction and purchasing costs in the industry, thereby reducing demand for third-party independent wholesalers. These dynamics deter smaller companies and nonemployers from entering the market. Larger, vertically integrated businesses tend to have higher profit margins compared with smaller wholesaling companies due to their ability to reduce purchase costs.

The average industry profit margin, measured as earnings before interest and taxes, is expected to account for 3.8% of revenue in 2019, up from 3.4% in 2014. Some large wholesalers have boosted profit by forming distributorship agreements with suppliers to help lower




Industry Outlook

Over the five years to 2024, the Heating and Air Conditioning Wholesaling industry is forecast to experience mild growth due to projected growth in housing starts, nonresidential construction and home improvement spending. Housing starts are forecast to grow at an annualized rate of 2.5% over the next five years, while the value of private nonresidential construction is expected to accelerate, rising at an annualized rate of 2.2%. Likewise, private spending on home improvements is projected to increase an annualized 1.6% during the same period. As these downstream markets continue to

grow, demand for heating and cooling products wholesaled by industry operators is expected to increase as well. Growth in industry revenue will likely be mitigated by competition from vertically integrated manufacturers and rising mortgage interest rates. Rising mortgage rates will likely increase the costs of home-buying, reducing demand for domestic heating, ventilation and air conditioning (HVAC) equipment wholesaled by industry operators. Overall, industry revenue is forecast to increase at an annualized rate of 1.1% to $48.5 billion over the five years to 2024.

costs. For example, Watsco Inc. (Watsco), the industry’s largest traditional wholesaling company, has a joint distribution venture with the industry’s largest upstream manufacturer, United Technologies Corporation, to sell Carrier, Bryant, Payne and Totaline products in the northeastern United States. However, many industry operators lack comparable scale and purchasing power to Watsco, so

such distributive partnerships are not possible. Hence, various labor-saving technologies, such as inventory-management software, are a primary form of cost cutting for the industry. Reliance on cost-cutting and labor-saving logistical technologies over the past five years has increased operational efficiencies for customer relation, delivery and product assortment work.

Industry landscape continued

Increasing activity Stable growth in the economy, as indicated by the Federal Reserve’s willingness to further raise the federal funds rate, will likely entice developers and individuals to invest in new housing units. Economic growth has prompted the Federal Reserve to raise the effective federal funds rate since 2016, with further increases anticipated in the remainder of 2019. As a result of the strengthening economy, IBISWorld estimates that housing starts will increase at an annualized rate of 2.5% over the five years to 2024. This increase is important to the industry because home contractors are major purchasers of HVAC equipment. Moreover, as per capita

disposable income is anticipated to rise an annualized 1.5% over the next five years, demand from HVAC contractors is expected to increase as contractors take on more construction projects. This will likely result in an increased need for HVAC products, which in turn is projected result in industry revenue growth during the outlook period.

Demand from heating and air conditioning contractors is expected to increase




Environmental concerns

The industry will likely continue to benefit from recently implemented environmental regulations and increased interest in ecologically conscious products. These trends will likely bolster HVAC replacements and upgrades over the next five years. Specifically, provisions regarding the complete elimination of hydrochlorofluorocarbons by 2030 from the US Environmental Protection Agency (EPA) will likely contribute to the development of new products and the replacement of products that are not compliant with these emission standards. Additionally, new regional minimum-efficiency ratings for central air conditioning units will most likely raise inventory management and recordkeeping costs for HVAC distributors during the outlook period. However, these compliance requirements bode well for the industry, as energy-efficient products include advanced technology that raises selling prices. This, in turn, is projected to lead to increases in both industry revenue and profit. Energy-efficiency standards for central AC units will likely remain unchanged in northern regions of the United States;

however, more stringent standards are expected to be put in place for the South and Southwest regions, which includes states such as Florida, Texas and California. Due to the high concentration of industry establishments in these states, the implementation of new efficiency standards is expected to have a significant effect on industry revenue and profitability.

Furthermore, consumers have an implicit incentive to replace existing HVAC equipment due to tax rebates and cost savings that may be available. Equipment with an Energy Star rating can save households up to $200.00 per year on energy bills, according to the EPA and US Department of Energy. As a result, even price-sensitive consumers are expected to take on the up-front costs of climate system upgrades to reduce future energy costs.

The industry will likely continue to benefit from recently implemented environmental regulations

Stabilizing costs IBISWorld anticipates that industry operators will benefit from stabilizing operating costs over the next five years. In general, cost advantages will likely arise from economies of scale, vertical integration and more efficient technological systems and designs. Inventory control is another important method used to improve efficiency, as excess or insufficient stock can create tangible costs (i.e. unsold products), as well as intangible costs, such as customer dissatisfaction. Hence, the adoption of online ordering systems has eliminated the need for bulk orders far in advance, reducing the amount of excess inventory. These streamlined systems will likely

continue to be crucial to wholesalers’ success over the next five years.

Over the five years to 2024, the number of enterprises in the industry is projected to increase an annualized 0.4% to 3,356 companies. An increase in the number of industry operators heightens price-based competition. Furthermore, industry wages are also projected to increase during the outlook period, rising at an annualized rate of 0.8% to $4.8 billion during the same period as the industry’s largest operators hire more workers to meet growing demand. Increased wage costs are anticipated to place downward pressure on industry profit. Furthermore, manufacturers of




HVAC equipment are expected to contend with increased purchase costs. As a result, manufacturers are forecast to raise the sale prices of HVAC equipment to wholesalers, increasing purchase costs

for industry operators. Overall, the average industry profit margin, measured as earnings before interest and taxes, is projected to stagnate at 3.8% of revenue in 2024.

Stabilizing costs continued



Industry PerformanceIndustry value added is anticipated to rise slower than the overall economy

The industry is forecast to experience a slight decline in the number of enterprises over the 10 years to 2024

The industry is dependent on downstream retail markets and broader economic factors

Life Cycle Stage




Industry Life Cycle The Heating and Air Conditioning Wholesaling industry is in the mature stage of its life cycle. Industry value added (IVA), which measures the industry’s overall contribution to the economy, is forecast to grow at an annualized rate of 0.8% over the 10 years to 2024. By comparison, US GDP is expected to increase at an annualized rate of 2.0% during the same period. The industry’s failure to keep pace with the general economy, few technological developments and susceptibility to general economic factors, such as housing starts and property values, indicate that this industry is in the mature phase of its life cycle.

The industry is well-accepted by its primary downstream markets, and demand is largely driven by residential and nonresidential construction. Consequently, as national employment and disposable incomes increased over the past five years, construction activity increased. Increased construction activity led to increased demand for heating and air conditioning equipment wholesaled by industry operators. These relationships between economic

indicators and industry performance further reflect the industry’s maturity. Other factors that support the industry’s maturity include a growing trend of expansion by major players through acquisition of smaller enterprises. This trend continued in the years following the recession, as larger businesses attempted to improve margins by expanding their client base, increasing their purchasing size and lowering their unit costs.

For example, industry major player Watsco Inc. (Watsco) has signed a series of joint distribution agreements with heating, ventilation and air conditioning manufacturer United Technologies Corporation, the maker of Carrier products. Due to Watsco and other industry operators making strategic acquisitions, consolidation is expected to reduce the number of enterprises in the industry. The total number of operators is expected to stagnate at 3,356 companies over the 10 years to 2024. Stagnation of number of operators and added merger and acquisition activity is further indicative of the industry’s maturity.

This industry is Mature



Products and Services

The heating, ventilation and air conditioning products sold by the Heating and Air Conditioning Wholesaling industry are built to stock and rarely built to order. As a result, products are usually

purchased by contractors from a wholesaler’s inventory. Once purchased, air conditioning (AC) and heating equipment contractors install the products to specification. Physical size, product

Products & MarketsSupply Chain | Products and Services | Demand Determinants Major Markets | International Trade | Business Locations

KEY BUYING INDUSTRIES

23611a Home Builders in the US New single-family homes often require air conditioners and heating equipment supplied by industry wholesalers.

23611b Apartment & Condominium Construction in the US The construction and renovation of multi-family homes often entails the installation of air conditioning and heating equipment supplied by wholesalers.

23621 Industrial Building Construction in the US Industrial buildings demand a variety of ventilation, heating and air conditioning equipment.

23622a Commercial Building Construction in the US Retail stores, office buildings and hotels require ventilation, heating and air conditioning.

23622b Municipal Building Construction in the US Municipal buildings purchase ventilation, heating and air conditioning equipment from wholesalers.

23822a Heating & Air-Conditioning Contractors in the US Heating and air conditioning contractors purchase and install equipment from wholesalers.

23822b Plumbers in the US This industry installs heating appliances and ventilation systems from wholesalers in this industry.

KEY SELLING INDUSTRIES

33341 Heating & Air Conditioning Equipment Manufacturing in the US Companies that manufacture heaters, air conditioners and ventilation systems supply wholesalers with products.

Supply Chain

Products and services segmentation (2019)

Total $46.0bn

30.4%Central AC

6.6%Heat pumps

24.1%Other

6.1%Compressors forair conditioners

6.0%Air cleaning andfiltration systems

10.7%Registers, grills, duct

insulation andpreformed ductwork

9.0%Forced-air heating systems

7.1%Condensing units for

air conditioners




Products & Markets

Products and Servicescontinued

features and performance differences (energy efficiencies) are the bases for product differentiation. Replacement or repaired products go through different downstream value chains and are also different in terms of customers’ price sensitivities, switching costs and required delivery times.

Central ACIn many respects, AC systems are like forced-air heating systems. Heat pumps are used in both types of machinery. A typical central AC system distributes cool air through a duct system, generally into different rooms. The most common types of central AC systems include horizontal and single-package AC, split-system AC condensing units and split-system AC coils with or without a blower. AC energy ratings are defined by the Air Conditioning, Heating and Refrigeration Institute’s standard 210/240 performance rating. The standard uses the seasonal energy-efficiency rating (SEER) to rate an AC unit. Units with more energy efficiency have a higher SEER ratio. As of 2015, central AC units will have regional efficiency standards, with standards increasing to SEER 14 in the Southeastern and Southwestern US regions.

Central AC units are the largest product segment in the industry, accounting for an expected 30.4% of industry sales in 2019. Increased construction activity for commercial structures, multifamily homes and single-unit houses are expected to increase over the next five years. Since many of these new buildings require new AC systems, this product segment’s share of revenue is expected to remain substantial over the five years to 2024.

Registers, grills and duct insulation and preformed ductworkRegisters, grills, duct insulation and preformed ductwork are also part of a forced-air heating system. As a segment,

these products are responsible for an estimated 10.7% of industry revenue in 2019. Air generally flows through conduits or ducts (known as a ductwork) and is dispensed via registers and grills. The size of the ductwork is crucial because it regulates airflow. If the ductwork is too small, rooms can be under-heated; ductwork that is too large can dispense heat unevenly. A forced-air heating system is usually fitted with air-cleaning and filtration systems. Filtration is essential to remove dust and other harmful particles.

Forced-air heating systemsForced-air heating systems (also known as warm-air heating systems) and central AC (also known as unitary AC) refer to climate-control systems that transfer temperate air throughout a structure. In-room AC units (also known as swamp coolers) are considered small appliances and are included in the TV and Appliance Wholesaling industry (IBISWorld report 42362). Forced-air systems generally include a furnace, heat pump, ductwork and thermostat. The furnace is powered by natural gas, oil, electricity or water. Water-powered systems are known as hydronic heating and are classified under the Plumbing and Heating Supplies Wholesaling industry (IBISWorld report 42372). Once powered, a heat pump moves air through ductwork, registers and vents. A low-voltage thermostat is used to control the furnace’s temperature.

Forced-air furnaces are the heart of forced-air heating systems. They are generally made up of a blower, air filter and heating element. Forced-air heating systems are versatile in that they can accommodate other ventilation components if required. For example, a cooling coil can be added to the system for climate cooling. Humidifiers and air filters are also standard features in newer systems. A percentage of annual fuel-utilization efficiency (AFUE) is used to



Products & Markets

Demand Determinants

Factors that influence building activity for residential, commercial and industrial construction ultimately drive demand for heating and air conditioning (HVAC) wholesalers. Contractors are the largest market for the heating and air conditioning wholesale industry, because new buildings generally require new air conditioning and heating equipment. Private spending on nonresidential construction is dependent on economic growth, business optimism and changing interest rates. The construction of

residential homes is tied to job growth, disposable income levels and low interest rates.

Residential demandNew residential construction increases demand for HVAC equipment from wholesalers. Changes in interest rates, housing affordability and government policy affect construction activity in the short term. Over the longer term, population growth, the aging of existing homes and buyer preferences of home design affect demand for residential

Products and Servicescontinued

measure a forced-air furnace’s energy efficiency. More efficient furnaces have higher percentages. The Department of Energy’s minimum AFUE rating is 78.0%, but most new systems installed today are rated at about 90.0%. Older systems typically have a lower AFUE, while newer systems are manufactured with energy-saving features such as electronic pilot-light ignitions, sealed combustion units, vent dampers and two heat exchangers, thus making them more efficient. Forced-air furnaces account for an expected 9.0% of revenue in 2019. As residential and commercial construction continues to expand, demand from this segment is expected to grow in tandem over the next five years.

Heat pumps, condensers and compressorsSales of heat pumps, condensers and compressors represent replacement demand and have been growing over the past five years. New regulations regarding the use of certain chemicals as refrigerants, as well as the government’s recent tax-credit program for environmentally friendly systems, have been fueling these segments. These parts are crucial components within larger heating and AC systems that, in some

cases, can be upgraded without having to replace the entire system. Sales of compressors for air conditioning account for an estimated 6.1% of industry revenue in 2019, while sales of condensing units for air conditioners represent an estimated 7.1% of industry revenue in 2019.

A heat pump extracts heat from the air or the ground. Heat pumps manipulate refrigerants to switch from warm air to cool air and therefore are used in heating and AC systems. Heat pumps are expected to account for 6.6% of industry sales in 2019.

Other equipmentVentilation, pollution-control and air-filtration equipment are usually fitted inside heating and AC systems. Other components include dust-collection equipment, humidifiers and dehumidifiers, which account for a minority of wholesalers’ revenue. Air cleaning and filtration systems account for an estimated 6.0% of industry revenue. Other forms of equipment and supplies include related condensing units and refrigerants. This segment has remained a relatively stable portion of revenue due to steady demand from industrial and food-service companies.



Products & Markets

Major Markets

According to data from the US Census Bureau, major markets for the Heating and Air Conditioning Wholesaling industry include: contractors, other wholesalers, retail markets and a variety of miscellaneous outlets. Buyers generally differ in their purchase patterns regarding sourcing from a

merchant wholesaler or a manufacturer’s sales branch and office (MSBO).

Building, heavy construction and special trade contractorsHeating, ventilation and air conditioning (HVAC) equipment contractors sell,

Demand Determinantscontinued

construction. Location also affects demand for heating and AC equipment. Buildings in the warmer southern states are more likely to be fitted with AC than those built in the cooler northern states, where central heating tends to be more common.

Non-residential demandDemand for HVAC units and components from commercial building is also influenced by nonresidential construction, public infrastructure, need for repairs or maintenance and growth in business confidence. An increase in commercial, industrial and municipal construction activity boosts demand for new HVAC equipment.

Replacement demandDemand for HVAC replacement is affected by the age of existing equipment,

the trade-off between repair and replacement and environmental concerns. For example, older systems are more likely to be replaced than repaired, thus boosting demand for new systems at the wholesale level. The mechanical life of HVAC can range from eight to twenty years. This variation is explained by differences in usage, climate and geography.

Demand for replacement products, repair parts and services generally increase during summer months. Industry sales and profit tend to be seasonally higher in the second and third quarters of the year because summer is the peak season for sales of AC equipment and services in North America. Sales of new equipment, for which demand is less seasonal, mitigate the overall effect of seasonality on this industry.

Major market segmentation (2019)

Total $46.0bn

32.3%Building, heavy construction and

special trade contractors

27.6%Other wholesalers for resale

22.2%Retailers for resale

11.8%All others

6.1%Business users for

consumption




Products & Markets

Major Marketscontinued

install, maintain and repair heating and AC systems. This downstream market largely buys products directly from wholesalers. Contractors are expected to account for 32.3% of total industry revenue in 2019. Building, heavy construction and specialty trade contractors are responsible for HVAC installation in new buildings and structures. They also service and upgrade systems for residential and nonresidential markets. Due to the revival in domestic construction, an increase in housing starts and an increase in private investment in nonresidential real estate, this market has recovered after the recession and is expected to continue to expand over the next five years.

Other wholesalers for resaleIndustry operators commonly distribute HVAC equipment to other wholesalers that specialize in suppling goods to other downstream markets. For example, a major HVAC wholesaling company such as Watsco may sell central air conditioning and ventilation systems and components to a plumbing supply company, which, in turn, distributes a wide line of plumbing supplies and other building equipment to downstream construction and contracting markets. Also included in this segment are sales from manufacturer’s branch offices to other wholesalers. For example, HVAC manufacturers, like Lennox International, have a network of company-owned sales offices and distribution centers that exclusively stock and sell its own products. Other wholesalers outside of this industry’s distribution chain may source HVAC equipment from a Lennox-owned-and-operated wholesaling center. Combined, the other wholesalers segment is expected to account for 27.6% of industry revenue in 2019.

Retailers for resaleRetailers represent another market for HVAC wholesalers. Industry wholesalers sell an estimated 22.2% of their inventory to downstream retailers. Many downstream retailers need to purchase a range of HVAC products from multiple manufacturers. Procuring these items directly from various manufacturers would entail multiple calls and orders. Conversely, industry wholesalers offer a wide assortment of products and the ease of dealing with a single point of contact. This convenience and product diversity will help sustain downstream demand for the Heating and Air Conditioning Wholesaling industry over the five years to 2024, just as it has over the previous five years.

Business users for consumptionBusiness users are another significant market for this industry and comprise an estimated 6.1% of industry revenue in 2019. The market is composed of several different classes of consumers, including manufacturing and mining industrial users that use HVAC equipment as production inputs as well as restaurants, hotels and other food services and other businesses that use HVAC equipment in their operations. The health of many of these businesses is reliant on the health of the general economy. As the economy continues to stabilize and consumer spending rises, these businesses, and their demand for HVAC products, are expected to grow as well.

Additional MarketsThe other markets such as household end users (1.9%), repair shops (1.9%) and other small downstream segments account for the remaining 11.8% of industry revenue in 2019.



Products & Markets

International Trade Imports and exports of the inventory Heating and Air Conditioning Wholesaling industry operators’ stock are accounted for at the manufacturing level. For more information about trade movements related to the heating, ventilation and air conditioning equipment manufacturing,

refer to the Heating and Air Conditioning Equipment Manufacturing industry (IBISWorld report 33341). For an idea of how the largest manufacturers in the industry are expanding their international presence, refer to the Industry Globalization section.



Products & Markets

Business Locations 2019

MO2.2

West

West

West

Rocky Mountains Plains

Southwest

Southeast

New England

VT0.1

MA1.3

RI0.2

NJ2.5

DE0.4

NH0.5

CT0.9

MD2.4

DC0.0

1

5

3

7

2

6

4

8 9

Additional States (as marked on map)

AZ1.8

CA7.5

NV0.7

OR1.0

WA1.8

MT0.4

NE0.9

MN1.3

IA1.1

OH3.6 VA

3.1

FL8.3

KS1.1

CO1.2

UT0.8

ID0.5

TX9.7

OK1.7

NC4.5

AK0.1

WY0.1

TN2.7

KY1.8

GA3.5

IL3.8

ME0.5

ND0.2

WI1.6 MI

2.9 PA4.0

WV0.5

SD0.6

NM0.4

AR1.3

MS0.8

AL2.2

SC2.5

LA2.3

HI0.3

IN2.5

NY3.9 5

67

8

321

4

9


Mid- Atlantic

Establishments (%)

Less than 3% 3% to less than 10% 10% to less than 20% 20% or more

Great Lakes



Products & Markets

Business Locations At the state level, Texas, Florida and California account for the greatest proportion of locations in the Heating and Air Conditioning Wholesaling industry overall, accounting for 9.7%, 8.3% and 7.5% of establishments, respectively. Areas with warmer climates have a higher demand for air conditioning equipment and therefore wholesaling establishments are located in those regions. A significant portion of the industry’s wholesalers also manufacture heating, ventilation and air conditioning equipment. As a result, establishment distribution tracks the spread of establishments in the Heating and Air Conditioning Equipment Manufacturing industry (IBISWorld report 33341). Given this industry’s dependence on construction demand, factors such as population dispersion, general economic activity and construction investment also influence the geographic distribution of industry wholesalers.

SoutheastIndustry establishments are distributed throughout the country, but greatest concentration lies in the Southeast. An expected 33.5% of all industry establishments are in this region. This geographic distribution is consistent with the region’s high share of the population and warmer climate. In general, more populated regions have a greater demand for construction, which in turn, leads to increased wholesale demand and concentration of wholesalers.

Great LakesDespite viciously cold winters, the region also has extremely hot summers, increasing demand for heating, ventilation and air conditioning products and, thus, for wholesale activity. The region’s 14.4% concentration of industry establishments corresponds with the region’s 14.5% share of the total population.

SouthwestThe region’s arid climate yields high demand for industry products. The region is home to 12.6% of the total population and 13.6% of industry establishments, whose business operations are less seasonal than in the Great Lakes and Northeast regions. Due to its warmer climate, the region attracts much of the nation’s growing retiree population, increasing demand for industry products and subsequent wholesaling activity.

Mid-AtlanticThe Mid-Atlantic region is a strong source of demand for the industry, holding 15.2% of the total population and 13.2% of industry establishments. Among the states in the region yielding the most demand is Pennsylvania, which holds both 4.0% of industry establishments and 4.0% of the population.

WestDue to its large share of the total population at 17.3%, the West is an attractive location for wholesalers; accordingly, 11.5% of industry

%

40

0

10

20

30

Sout

hwes

t

Wes

t

Gre

at L

akes

Mid

-Atla

ntic

New

Eng

land

Plai

ns

Rock

y M

ount

ains

Sout

heas

t

EstablishmentsPopulation

Distribution of establishments vs. population




Products & Markets

Business Locationscontinued

establishments are located here. Of all establishments in the United States, California holds 7.5%, the third-most of any state.



Cost Structure Benchmarks

Operators in the Heating and Air Conditioning Wholesaling industry incur most of their costs through purchasing goods from manufacturers, which is typical of wholesaling industries. Wages and other administrative costs are the

next largest categories but are expected to stay relatively stagnant due to this industry being in the mature stage of its life cycle. A very small portion of expenses is paid for rent, utilities, advertising and depreciation, all of which

Key Success Factors Provision of a related range of goods/services (“one-stop shop”)Wholesalers that can provide a range of warm air heating and air conditioning machinery and equipment in one location develop a reputation as one-stop shops and increase their business.

Carrying products with strong brand namesMost heater and air conditioner companies have strong brand name recognition.

Having technology sharing arrangements with major playersAccess to or provision of innovations in supply chain management or other industry-related technologies helps industry operators succeed.

Having links with suppliersSupply links with a diverse range of companies permit industry operators to provide a wider range of products.

Having a good technical knowledge of the productSalespeople should have a good working knowledge of products to answer clients’ questions and encourage sales.

Guaranteed supply of key inputsSuccessful operators develop relationships built on mutual trust and interdependence with their suppliers.

Having technology sharing arrangements with major playersAccess to or provision of innovations in supply chain management helps industry operators succeed.

Market Share Concentration

The Heating and Air Conditioning Wholesaling industry exhibits a low level of concentration. In 2019, IBISWorld estimates that the industry’s largest four companies account for 17.9% of industry revenue. The industry is characterized by many small operations; of all establishments in the industry, an estimated 20.0% are nonemployers. Furthermore, a significant percentage of industry operators are of relatively small size. According to the latest available data from the US Census, 70.5% of industry enterprises employ less than 20 laborers and only 4.1% of industry enterprises employ more than 100 laborers. Many

manufacturers, particularly the largest players, also distribute goods. When manufacturers undertake wholesaling functions themselves, independent wholesalers get bypassed in the process. Industry concentration has increased because the industry’s largest companies have gained market share by bypassing wholesalers or acquiring wholesalers, as exemplified by manufacturer Johnson Control’s acquisition of Air Distribution Technologies. In addition to competition from manufacturers, merger and acquisition activity has further increased the market share concentration.

Competitive LandscapeMarket Share Concentration | Key Success Factors | Cost Structure Benchmarks Basis of Competition | Barriers to Entry | Industry Globalization

Level Concentration in this industry is Low

IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are:



Competitive Landscape

Cost Structure Benchmarkscontinued

are expected to remain steady over the coming years.

WagesWages’ share of revenue has increased slightly over the past five years, rising from 9.9% of total industry revenue in 2014 to 10.0% in 2019. Wages’ share of revenue is expected to remain unchanged over the five years to 2024, as revenue and wage expenses are expected to grow at a similar rate. Automation is becoming an increasingly common trend among wholesalers as they invest in new technologies to cut losses and streamline processes, which may cause a reduction in demand for low skilled workers in the future.

PurchasesLike most wholesaling industries, purchases represent the largest cost for heating and air conditioner wholesalers. In 2019, purchases are expected to

account for 63.1% of industry revenue. Wholesalers typically have written distributorship agreements or supply contracts with their suppliers. Integrated wholesale distributors and vertically integrated manufacturers have the lowest transaction and purchasing costs. Metals are key inputs in manufacturing products wholesaled by industry operators. Although world price of steel declined over the five-year period to 2019, the cost of buying heaters, air conditioners and related equipment for wholesale has remained generally stable. However, the price of steel is expected to increase of the next five years. As manufacturers pass on such increases in input costs to downstream markets, wholesalers could endure higher purchase costs and greater pressure on profit margins.

ProfitIndustry profit has generally stagnated over the five years to 2019, rising only

Sector vs. Industry Costs

n Profi tn Wagesn Purchasesn Depreciationn Marketingn Rent & Utilitiesn Other

Average Costs of all Industries in sector (2019)

Industry Costs (2019)

0

20

40

60

Perc

enta

ge o

f rev

enue

80

100


3.6 3.8

21.0

1.1 0.50.5

63.1

10.0

12.20.70.3 0.6

77.3

5.3




Basis of Competition The Heating and Air Conditioning Wholesaling industry has low profit margins, indicating intense price competition. Price competition and market coverage are of utmost importance in this industry. Proximity to areas of economic development is also important, in that new commercial and

residential construction is a prime source for heating and air conditioning wholesaling revenue. The ongoing nature of construction projects requires that products be available on an immediate or short-term basis and being close to downstream markets lowers equipment delivery and post-sale service costs.

Cost Structure Benchmarkscontinued

minimally. For wholesaling industries in general, costs are often fixed and profit generally moves in line with sales. IBISWorld estimates the average industry profit margin, measured as earnings before interest and taxes, to account for 3.8% of revenue in 2019, up from 3.4% in 2014. Profit growth can be attributed to economies of scale through mergers and acquisitions, as well as an increase in overall construction activity due to lower mortgage rates. Industry profit is typically slim for operators in wholesaling industries, as wholesalers typically compete on the basis of price.

The number of industry enterprises is projected to increase an annualized 0.4% to 3,356 companies over the five years to 2024, which is projected to lead to increased competition. Likewise, wage costs are expected to grow in line with industry revenue during the outlook period. For these reasons, the average industry profit margin is forecast to stagnate over the five years to 2024, comprising 3.8% of revenue in 2024.

DepreciationDepreciation costs fluctuate among operators depending on their size and the number of assets involved. Depreciable assets include storage equipment, machinery used to move products and computer inventory systems. In 2019, depreciation is estimated to account for 0.5% of industry revenue and this percentage has not changed over the past five years.

MarketingMarketing costs in the Heating and Air Conditioning Wholesaling industry is low, which is standard for a wholesaling industry. In 2019, marketing expenses are anticipated to comprise 0.5% of industry revenue. This amount is expected to remain stagnant over the coming years.

RentWholesaling requires warehouses and storage facilities. As a result, rent paid in this industry is mostly for office space and other administrative workspaces. Rent accounts for 0.9% of industry revenue in 2019 and its share of revenue has stagnated over the past five years.

UtilitiesUtility costs include electricity, water and fuels for uses other than transportation. Wholesalers must maintain large and well-organized warehouses to store their inventory, these warehouses and administrative offices consume energy daily. In 2019, utility expenses account for an estimated 0.2% of industry revenue.

OtherOther costs include computer hardware and software, communication services, repairs and maintenance, insurance, freight, equipment maintenance, doubtful debts and administrative costs. Collectively, these expenditures are estimated to account for 21.0% of industry revenue in 2019.

Level & Trend Competition in this industry is High and the trend is Steady




Barriers to Entry The Heating and Air Conditioning industry has a medium level of barriers to entry. In the majority of product and market segments, customers are very aware of brand names. To a certain extent, this gives manufacturers more pricing power as knowledgeable buyers weigh quality and brand name recognition over price considerations.

Large manufacturers of heating and air conditioning equipment and supplies can eliminate mark-ups of the “middleman,” making it more difficult for independent wholesalers to survive. To compete with manufacturers and lower per unit costs, pure heating, ventilation and air conditioning (HVAC) wholesalers have increasingly attempted to achieve economies of scale through mergers, acquisitions and joint ventures with HVAC manufacturers.

Although the industry’s relatively low capital requirements increase the practicality of entering the industry, intangible barriers, such as industry expertise, may also deter entrants; understanding the diverse range of customer needs often requires vocational

schooling or apprenticeship, which limits the number of qualified industry participants. Likewise, many manufacturers may have exclusive contracts with certain wholesalers, deterring new wholesalers from launching viable businesses.

Each state enacts trade regulations that aim to maintain a free and competitive economy. Wholesalers that only sell to other businesses for resale require a wholesaler’s license from the US Department of Revenue. A retail tax license permits businesses to sell wholesale and retail. These licenses and permits are not difficult to obtain with proper legal guidance.

Basis of Competitioncontinued

Heating, ventilation and air conditioning manufacturers are also major competitors to wholesalers. Over the past five years, retailers have been skipping the wholesale link of the supply chain and purchasing from manufacturers directly. Thus, third-party wholesalers have been forced to cut prices to compete with manufacturers who sell directly to retailers. In-house wholesaling effectively reduces demand

for independent wholesalers by offering similar convenience and product variation that wholesalers offer. In effect, wholesalers compete directly with the producers of the merchandise from which they seek to profit. The consequence of such an environment will be an ever-dwindling number of wholesalers, acquisitions of smaller wholesalers by larger wholesaling companies and more joint ventures between wholesalers and manufacturers.

Barriers to Entry checklist

Competition HighConcentration LowLife Cycle Stage MatureCapital Intensity LowTechnology Change MediumRegulation and Policy MediumIndustry Assistance Low


Level & Trend Barriers to Entry in this industry are Medium and Increasing




Industry Globalization

The majority of operators in the domestic Heating and Air Conditioning Wholesaling industry function on a local, regional or national level, meaning the industry experiences a low level of globalization.

However, certain companies have a presence in other countries. Watsco Inc., for example, operates largely within the United States, but has locations in Canada, Mexico and Puerto Rico as well.

Level & Trend Globalization in this industry is Low and the trend is Steady



Player Performance Founded in 1956 and headquartered in Miami, Watsco Inc. (Watsco) is the largest distributor of air conditioning, heating and refrigeration equipment, as well as related parts and supplies, in the United States. With over 560 locations across 37 states, the company serves an estimated 90,000 contractors and dealers in the replacement and new construction markets. Watsco also has operations in Canada, Mexico and Puerto Rico and distributes heating, ventilating and air conditioning units from all major manufacturers. In 2019, Watsco is expected to employ more than 5,200 people and generate $4.1 billion in industry-relevant revenue. The company’s sales of commercial refrigeration products account for an estimated 5.0% of total revenue; however, sales of these products are not relevant to the Heating and Air Conditioning Wholesaling industry.

Watsco is a prime example of the merger and acquisition activity within this industry. Watsco began the process in 2009, when it formed a joint venture with Carrier Corporation (Carrier), now part of United Technologies Corporation. This venture is made up of 95 Carrier-owned locations and 15 Watsco-owned locations that distribute Carrier products. Currently, Watsco owns an 80.0% stake in their venture known as Carrier Enterprise I. Subsequently, the company announced the completion of a second joint venture with Carrier to integrate distribution in the Northeast region of the United States, as well as Mexico. The joint venture is known collectively as Carrier Enterprise II, of which Watsco also owns an 80.0% controlling interest. In June 2017, the Carrier Enterprise joint venture acquired a 35.0% stake in Russell Sigler Inc., a North American distributor.

Major CompaniesWatsco Inc. | Other Companies

91.2%Other

Watsco Inc. 8.8% SOURCE: WWW.IBISWORLD.COM

Major Players(Market Share)

Watsco Inc. Market Share: 8.8% Industry Brand Names Carrier Goodman Rheem Trane

Watsco Inc. (US industry-specifi c segment) - fi nancial performance*

YearRevenue

($ million) (% change)Operating Income

($ million) (% change)

2014 3,348.9 N/C 259.6 N/C

2015 3,525.4 5.3 288.6 11.2

2016 3,622.5 2.8 296.6 2.8

2017 3,723.7 2.8 303.5 2.3

2018 3,929.7 5.5 326.2 7.5

2019 4,058.3 3.3 333.3 2.2

*Estimates SOURCE: ANNUAL REPORT AND IBISWORLD



Major Companies

Other Company Performance

Founded in 1895 and headquartered in Richardson, TX, Lennox International Inc. (Lennox) is a leading provider of climate control products for heating and air conditioning markets and employed 11,350 workers as of 2018 (latest data available). The company operates three primary business segments: residential heating and cooling, commercial heating and cooling and refrigeration. In each operating segment, the company manages a large number of brand names. The aim of this strategy is to service various market segments and gain access to a large number of distribution channels. Through its residential heating and cooling segment, Lennox generated $2.2 billion in net sales in 2018 through 10 subsidiary brand names (latest data

available). The company’s Commercial Heating and Cooling segment generated $1.0 billion in net sales in 2018 with nine subsidiary brands (latest data available). Lastly, the company’s Refrigeration segment accumulated $615.4 million in net sales in 2018 from nine refrigeration brand names. (latest data available).

Through its industry-relevant operations, the company is a global provider of climate control solutions that design, manufacture and market heating, ventilation and air conditioning products. The company’s products and services are sold through a network of about 7,000 independent distributor-installers. IBISWorld estimates the company’s industry-specific revenue will reach $1.9 billion in 2019.

Player Performancecontinued

Financial performanceOver the five years to 2019, Watson’s industry-specific revenue is expected to increase at an annualized rate of 3.9% to $4.1 billion. The company expanded through organic growth and a series of acquisitions, which helped company revenue to expand at a pace exceeding the industry as a whole. Over the past five years, Watsco vastly expanded its distribution base through its partnership with Carrier and other acquisition activities. Heating, ventilation and air conditioning (HVAC) equipment is commonly sold to new construction, commercial renovation and residential renovation companies. During the current period, strong growth in residential construction helped propel demand for

Watsco’s products. Moreover, central air conditioning has been a common technology in the United States for many decades. As a result, many units are old and need replacing, which has led to increased demand for replacement HVAC products and equipment.

Over the five years to 2019, the company has invested in numerous technological initiatives designed to improve customer service and logistical efficiency and lower long-term costs. These investments range from developing mobile applications for downstream customers, improving the company’s e-commerce experience and upgrading business analytics systems. As a result, Watsco’s operating profit is expected to expand to reach $333.3 million in 2019.

Lennox International Inc. Market Share: 4.1%



Major Companies

Johnson Controls International PLC (Johnson) is a technology and industrial company based in Cork, Ireland, operating through its Building Technologies and Solutions and Power Solutions business segments. Within the company’s Building Technologies and Solutions segment, the company manufactures, sells and services heating, ventilation and air conditioning (HVAC), building management, security and mechanical systems, controls and equipment. The segment caters to the residential, light commercial, commercial

and industrial HVAC markets in the United States and overseas. The company is expected to generate $24.0 billion across all operating segments in 2019.

Johnson is an example of a manufacturer that is vertically integrated into retail and is thus able to better protect its profit margin on the sale of HVAC equipment. Since its founding in 1885, the company has expanded its operations to 150 countries, employing about 122,000 people. In 2019, Johnson’s industry-specific revenue is expected to reach $593.9 million.

Johnson Controls International PLC Market Share: 1.3%

Ingersoll-Rand PLC (Ingersoll-Rand) is an Irish company that is divided into four business segments: climate solutions, residential solutions, industrial technologies and security technologies. The Ireland-based company is listed on the New York Stock Exchange, having grown considerably since its founding in 1871 as Ingersoll Rock Drill Company, later merging with Rand Drill Company to form Ingersoll-Rand Company. Ingersoll-Rand uses its ownership of heating, ventilation and air conditioning (HVAC) manufacturer Trane Inc. (Trane) to vertically integrate into the HVAC market, adding Trane’s appliances and distribution centers to its supply chain. The company is expected to generate $16.5 billion across all operating segments in 2019.

The company’s climate and industrial segment manufactures, distributes and services HVAC systems globally under the Trane and American Standard brand names. Ingersoll-Rand also manufactures and sells Thermo King brand transport temperature control components used on ships, trucks and trailers. About one-half of Ingersoll-Rand’s distribution operations are company owned and industry-relevant. As a result, IBISWorld estimates Ingersoll-Rand’s industry-relevant revenue to reach $1.7 billion in 2019. Over the five years to 2019, the company’s distribution revenue was positively influenced by strong construction growth in the United States, which bolstered demand for HVAC equipment upgrades, replacements and installations for new residential and commercial buildings.

Ingersoll-Rand PLC Market Share: 3.6%





Capital Intensity The Heating and Air Conditioning Wholesaling industry exhibits a low level of capital intensity, as measured by the capital to labor ratio, which uses industry wages as a proxy for labor costs and industry depreciation as proxy for capital expenditures. Capital goods and depreciable assets within the industry include facilities for housing inventory, automobiles for transporting heating, ventilation and air conditioning products and various machines for lifting and transporting equipment. As a result, capital costs are generally higher for larger, more scaled operators due to the increased amount of physical infrastructure necessary to maintain a large-scale distribution network. Despite this, capital intensity for the average industry operator

has remained low and unchanged over the period. For this industry, labor intensity comes from customer service, delivery and

Operating ConditionsCapital Intensity | Technology & Systems | Revenue VolatilityRegulation & Policy | Industry Assistance

Capital Intensity

0.5

0.0

0.1

0.2

0.3

0.4

SOURCE: WWW.IBISWORLD.COMDotted line shows a high level of capital intensity

Capital units per labor unit

Heating & Air Conditioning Wholesaling

Wholesale Trade

Economy

Level The level of capital intensity is Low



Operating Conditions

Revenue Volatility The Heating and Air Conditioning Wholesaling industry exhibits a low level of revenue volatility. While the housing

market has strengthened demand for heating, ventilation and air conditioning (HVAC) equipment. However, HVAC

Technology and Systems

The Heating and Air Conditioning Wholesaling industry exhibits a medium level of technological change, and IBISWorld expects this trend to remain steady. In general, wholesalers must be aware of new product developments. For example, the emphasis on energy efficiency has made certain models obsolete as outlined in recent federal legislation. Keeping abreast of industry news enables wholesalers to win new business based on such federal mandates while providing current customers with state-of-the-art products.

More specifically, major capital improvements in the wholesaling industry include upgrading communications technologies. Such technologies have enabled many players

to cut costs and operate more efficiently. Technological change has improved procurement over the past decade, thus permitting players to implement ordering systems that streamline supply chain management between suppliers and customers.

Over the past decade, online ordering systems have been the main technological developments for the industry. Such services permit customers to search inventory lists, check pricing, place orders, print receipts and be billed via e-mail. While the internet provides a cost-efficient alternative for customers to access wholesalers, manufacturers are using the same technology to bypass the wholesale function, presenting another threat for the industry.

Capital Intensitycontinued

inventory management; the industry relies much more on labor as a factor input than it does capital. Overall, for every dollar the average industry

operator spends on labor, IBISWorld estimates that they will spend $0.05 on capital goods. Therefore, this industry exhibits a low level of capital intensity.

Level The level of technology change is Medium

Level The level of volatility is Low




Regulation and Policy Seasonal energy-efficiency rating ratioThe Environmental Protection Agency and Department of Energy include a seasonal energy-efficiency rating (SEER) in their Energy Star ratings, which identify energy- and water-efficient appliances such as unitary air conditioning (AC) systems and heat pumps. The more energy-efficient equipment is, the higher their respective SEER ratings are.

New regional SEER standards for central AC units took effect in January 2015. The previous SEER 13 standards for central AC units increased to SEER 14 in the Southeast and Southwest regions, which include Florida, Texas and California. However, SEER 13 standards for central AC units will remain in Northern regions such as New York, Pennsylvania and Illinois. AC products with lower ratings that were manufactured prior to this regulation can still be legally sold after the legislation, but the availability of service and parts may be scarce, thus encouraging consumers to upgrade. Indeed, replacement demand for sub-SEER 13 systems has bolstered the Heating and Air Conditioning Wholesaling industry’s revenue over the period.

Phasing out HCFCsThe use of hydrochlorofluorocarbons (HCFCs) as a refrigerant in air conditioners is common; however, international and US regulations require certain substances to be phased out because of their ozone-depleting

qualities. Under the Clean Air Act and subsequent amendments, all HCFCs in the United States must be phased out by 2030.

As of January 1, 2010, a ban was implemented on the production and import of HCFC-22 and HCFC-142b except for ongoing servicing needs in equipment manufactured before that date. There is a ban on the introduction into interstate commerce or use of HCFCs except where the HCFCs are used as a refrigerant in appliances manufactured prior to January 1, 2020. Also, there is a ban on production or import of HCFCs except where the HCFCs are used as a refrigerant in appliances manufactured prior to January 1, 2020. By 2030, there will be a ban on the import and production of all HCFCs in the United States.

Customers are not required by law to replace any existing HCFC-22 equipment. Instead, people can use such equipment beyond 2020 as long as it was manufactured prior. Still, as production of HCFC-22 equipment slows to a halt, IBISWorld forecasts fewer contractors and parts will be available to service and maintain existing equipment. In anticipation of a shortage of maintenance services, customers are projected to replace most of their HCFC-22 equipment before the phase out is complete. Environmentally conscious customers will replace their equipment even sooner. Overall, the phase out will create a growth opportunity for the replacement segment of the industry over the coming five years.

Revenue Volatilitycontinued

products have increasingly been sold directly from manufacturers to retailers, displacing industry operators in the supply chain. Therefore, industry revenue is expected to stay stagnant over the

current period, contributing to low revenue volatility. Revenue volatility will likely remain low over the next five years as housing starts and commercial construction continue to fuel demand for industry services.

Level & Trend The level of Regulation is Medium and the trend is Increasing




Industry Assistance No tariffs apply specifically to Heating and Air Conditioning Wholesaling industry players. Despite this, companies that manufacture and wholesale goods are subject to relevant import duties if they import products from other countries. Otherwise, wholesalers in this industry receive assistance through the Heating Air Conditioning and Refrigeration Distributors International (HARDI) trade organization. Two

wholesale trade organizations merged to form HARDI: the North American Heating, Refrigeration and Air Conditioning Wholesalers and Air Conditioning and Refrigeration Wholesalers International. HARDI represents an estimated 500 distributors and provides industry research, continuing education, advocacy, legislative awareness, networking opportunities and monthly publications.

Regulation and Policycontinued

To enforce these regulations, wholesalers are required to keep track of their sales. According to the industry’s trade association, the Heating, Air conditioning and Refrigeration Distributors International (HARDI), by November 2015, all distributors must

maintain records for the sales of outdoor condensing units. Distributors must document the date of sale, the model and serial numbers of all purchased products and to whom the product was sold. This helps keep track of HCFC-22 equipment or low SEER units.

Level & Trend The level of Industry Assistance is Low and the trend is Steady



Key StatisticsRevenue

($m)

Industry Value Added

($m)Establish-

ments Enterprises Employment Exports ImportsWages ($m)

Domestic Demand

Housing starts (Thousands)

2010 38,536.2 4,804.8 6,975 3,721 52,895 -- -- 3,648.7 N/A 586.92011 42,165.7 5,510.5 7,136 3,698 57,214 -- -- 4,034.7 N/A 608.82012 46,069.3 5,975.2 6,663 3,424 60,441 -- -- 4,454.9 N/A 780.62013 46,340.8 6,132.4 6,972 3,425 62,430 -- -- 4,556.9 N/A 924.92014 45,987.5 6,334.7 6,865 3,350 60,549 -- -- 4,541.2 N/A 1,003.32015 46,443.9 6,368.9 6,881 3,337 61,311 -- -- 4,650.5 N/A 1,111.82016 45,840.9 6,335.7 6,838 3,315 60,659 -- -- 4,547.8 N/A 1,173.82017 45,619.2 6,456.2 6,827 3,306 60,605 -- -- 4,540.2 N/A 1,203.02018 45,201.6 6,412.4 6,791 3,285 60,455 -- -- 4,522.9 N/A 1,249.92019 46,017.5 6,517.0 6,814 3,289 61,249 -- -- 4,586.7 N/A 1,279.42020 46,387.8 6,565.4 6,849 3,303 61,635 -- -- 4,617.2 N/A 1,311.22021 47,230.3 6,669.8 6,889 3,318 62,356 -- -- 4,677.2 N/A 1,350.32022 47,653.9 6,725.1 6,916 3,329 62,793 -- -- 4,711.8 N/A 1,387.22023 48,089.8 6,781.6 6,944 3,341 63,232 -- -- 4,746.8 N/A 1,421.22024 48,502.0 6,836.7 6,977 3,356 63,693 -- -- 4,782.6 N/A 1,449.5Sector Rank 43/67 36/67 35/67 51/67 36/67 N/A N/A 32/67 N/A N/AEconomy Rank 222/694 350/694 361/694 401/694 402/694 N/A N/A 303/694 N/A N/A

IVA/Revenue (%)

Imports/Demand

(%)

Exports/Revenue

(%)

Revenue per Employee

($’000)Wages/Revenue

(%)Employees

per Est.Average Wage

($)

Share of the Economy

(%)2010 12.47 N/A N/A 728.54 9.47 7.58 68,980.05 0.032011 13.07 N/A N/A 736.98 9.57 8.02 70,519.45 0.032012 12.97 N/A N/A 762.22 9.67 9.07 73,706.59 0.042013 13.23 N/A N/A 742.28 9.83 8.95 72,992.15 0.042014 13.77 N/A N/A 759.51 9.87 8.82 75,000.41 0.042015 13.71 N/A N/A 757.51 10.01 8.91 75,850.99 0.042016 13.82 N/A N/A 755.71 9.92 8.87 74,973.21 0.042017 14.15 N/A N/A 752.73 9.95 8.88 74,914.61 0.042018 14.19 N/A N/A 747.69 10.01 8.90 74,814.32 0.032019 14.16 N/A N/A 751.32 9.97 8.99 74,886.12 0.032020 14.15 N/A N/A 752.62 9.95 9.00 74,911.98 0.032021 14.12 N/A N/A 757.43 9.90 9.05 75,008.02 0.032022 14.11 N/A N/A 758.90 9.89 9.08 75,037.03 0.032023 14.10 N/A N/A 760.53 9.87 9.11 75,069.59 0.032024 14.10 N/A N/A 761.50 9.86 9.13 75,088.31 0.03Sector Rank 20/67 N/A N/A 43/67 15/67 48/67 16/67 36/67Economy Rank 611/694 N/A N/A 134/694 538/694 377/694 147/694 350/694

Figures are in inflation-adjusted 2019 dollars. Rank refers to 2019 data.

Revenue (%)

Industry Value Added

(%)

Establish-ments

(%)Enterprises

(%)Employment

(%)Exports

(%)Imports

(%)Wages

(%)

Domestic Demand

(%)

Housing starts (%)

2011 9.4 14.7 2.3 -0.6 8.2 N/A N/A 10.6 N/A 3.72012 9.3 8.4 -6.6 -7.4 5.6 N/A N/A 10.4 N/A 28.22013 0.6 2.6 4.6 0.0 3.3 N/A N/A 2.3 N/A 18.52014 -0.8 3.3 -1.5 -2.2 -3.0 N/A N/A -0.3 N/A 8.52015 1.0 0.5 0.2 -0.4 1.3 N/A N/A 2.4 N/A 10.82016 -1.3 -0.5 -0.6 -0.7 -1.1 N/A N/A -2.2 N/A 5.62017 -0.5 1.9 -0.2 -0.3 -0.1 N/A N/A -0.2 N/A 2.52018 -0.9 -0.7 -0.5 -0.6 -0.2 N/A N/A -0.4 N/A 3.92019 1.8 1.6 0.3 0.1 1.3 N/A N/A 1.4 N/A 2.42020 0.8 0.7 0.5 0.4 0.6 N/A N/A 0.7 N/A 2.52021 1.8 1.6 0.6 0.5 1.2 N/A N/A 1.3 N/A 3.02022 0.9 0.8 0.4 0.3 0.7 N/A N/A 0.7 N/A 2.72023 0.9 0.8 0.4 0.4 0.7 N/A N/A 0.7 N/A 2.52024 0.9 0.8 0.5 0.4 0.7 N/A N/A 0.8 N/A 2.0Sector Rank 48/67 49/67 50/67 51/67 45/67 N/A N/A 46/67 N/A N/AEconomy Rank 567/694 562/694 553/694 555/694 550/694 N/A N/A 556/694 N/A N/A

Annual Change

Key Ratios

Industry Data




Apr 2017 - Mar 2018 by company revenueApr 2014 - Apr 2015 - Apr 2016 - Apr 2017 - Small Medium LargeMar 2015 Mar 2016 Mar 2017 Mar 2018 (<$10m) ($10-50m) (>$50m)

Liquidity Ratios

Current Ratio 1.8 1.8 1.7 1.8 2.0 1.7 1.8Quick Ratio 0.9 0.9 0.9 0.9 0.9 0.8 1.0Sales / Receivables (Trade Receivables Turnover) 9.5 8.8 9.2 9.0 10.3 9.0 8.7

Days’ Receivables 38.4 41.5 39.7 40.6 35.4 40.6 42.0Cost of Sales / Inventory (Inventory Turnover) 4.6 5.1 5.1 4.9 5.5 4.9 4.8

Days’ Inventory 79.3 71.6 71.6 74.5 66.4 74.5 76.0Cost of Sales / Payables (Payables Turnover) 11.1 11.7 11.0 12.1 9.1 11.8 14.3

Days’ Payables 32.9 31.2 33.2 30.2 40.1 30.9 25.5Sales / Working Capital 8.2 8.1 9.0 8.5 9.4 8.9 7.7

Coverage Ratios

Earnings Before Interest & Taxes (EBIT) / Interest 10.6 9.6 9.6 8.5 5.2 7.4 11.9

Net Profit + Dep., Depletion, Amort. / Current Maturities LT Debt 4.0 4.0 5.0 5.1 n/a 2.6 5.2

Leverage Ratios

Fixed Assets / Net Worth 0.2 0.2 0.2 0.2 0.2 0.1 0.2Debt / Net Worth 1.6 1.7 1.8 1.7 2.4 1.7 1.7Tangible Net Worth 36.8 35.2 34.2 35.1 26.7 36.0 39.1

Operating Ratios

Profit before Taxes / Net Worth, % 18.8 20.2 22.7 22.9 32.1 21.1 22.9Profit before Taxes / Total Assets, % 7.8 8.0 8.7 9.5 10.0 8.1 9.9Sales / Net Fixed Assets 53.4 58.5 55.6 54.2 52.9 57.5 49.9Sales / Total Assets (Asset Turnover) 2.8 2.9 2.9 2.9 2.8 3.0 2.9

Cash Flow & Debt Service Ratios (% of sales)

Cash from Trading 25.6 25.2 26.3 25.3 29.9 25.5 24.2Cash after Operations 1.9 2.7 2.3 2.7 4.3 1.9 2.8Net Cash after Operations 2.2 2.6 2.7 3.0 4.7 1.9 3.4Cash after Debt Amortization 0.3 0.9 0.7 0.2 1.3 -0.4 0.4Debt Service P&I Coverage 2.5 4.2 3.0 2.5 2.5 1.7 2.9Interest Coverage (Operating Cash) 4.5 7.1 6.0 5.3 7.6 4.4 7.0

Assets, %

Cash & Equivalents 7.1 6.9 6.5 6.6 8.2 5.9 6.8Trade Receivables (net) 34.5 37.6 37.2 36.8 35.0 38.2 36.0Inventory 39.1 36.9 36.5 38.4 39.7 39.4 36.5All Other Current Assets 2.0 2.7 2.5 2.4 0.6 2.5 3.2Total Current Assets 82.7 84.1 82.7 84.3 83.4 86.0 82.4Fixed Assets (net) 8.5 8.3 8.9 8.3 8.3 7.5 9.4Intangibles (net) 3.6 3.5 3.7 3.9 5.4 2.9 4.2All Other Non-Current Assets 5.1 4.1 4.7 3.6 2.8 3.5 4.0Total Assets 100.0 100.0 100.0 100.0 100.0 100.0 100.0Total Assets ($m) 4,639.2 4,562.7 3,843.1 4,408.3 97.3 903.4 3,407.5

Liabilities, %

Notes Payable-Short Term 15.9 16.4 18.0 15.2 14.8 16.3 14.1Current Maturities L/T/D 1.1 1.3 1.4 1.2 1.6 1.2 1.0Trade Payables 21.6 21.5 21.6 21.6 26.9 22.3 17.6Income Taxes Payable 0.2 0.2 0.2 0.2 0.3 0.1 0.1All Other Current Liabilities 9.9 10.5 9.4 11.6 10.7 11.0 13.0Total Current Liabilities 48.8 49.9 50.5 49.8 54.2 50.9 45.8Long Term Debt 6.4 6.7 6.8 7.0 8.5 5.3 8.2Deferred Taxes 0.1 0.3 0.2 0.1 n/a 0.1 0.1All Other Non-Current Liabilities 4.3 4.4 4.6 4.1 5.1 4.8 2.6Net Worth 40.4 38.7 37.9 39.0 32.1 38.9 43.3Total Liabilities & Net Worth ($m) 4,639.2 4,562.7 3,843.1 4,408.3 97.3 903.4 3,407.5

Maximum Number of Statements Used 273 250 220 211 42 97 72

Industry Financial Ratios

Source: RMA Annual Statement Studies, rmahq.org. RMA data for all industries is derived directly from more than 260,000 statements of member financial institutions’ borrowers and prospects.Note: For a full description of the ratios refer to the Key Statistics chapter online.



Jargon & Glossary

BARRIERS TO ENTRY High barriers to entry mean that new companies struggle to enter an industry, while low barriers mean it is easy for new companies to enter an industry.

CAPITAL INTENSITY Compares the amount of money spent on capital (plant, machinery and equipment) with that spent on labor. IBISWorld uses the ratio of depreciation to wages as a proxy for capital intensity. High capital intensity is more than $0.333 of capital to $1 of labor; medium is $0.125 to $0.333 of capital to $1 of labor; low is less than $0.125 of capital for every $1 of labor.

CONSTANT PRICES The dollar figures in the Key Statistics table, including forecasts, are adjusted for inflation using the current year (i.e. year published) as the base year. This removes the impact of changes in the purchasing power of the dollar, leaving only the “real” growth or decline in industry metrics. The inflation adjustments in IBISWorld’s reports are made using the US Bureau of Economic Analysis’ implicit GDP price deflator.

DOMESTIC DEMAND Spending on industry goods and services within the United States, regardless of their country of origin. It is derived by adding imports to industry revenue, and then subtracting exports.

EMPLOYMENT The number of permanent, part-time, temporary and seasonal employees, working proprietors, partners, managers and executives within the industry.

ENTERPRISE A division that is separately managed and keeps management accounts. Each enterprise consists of one or more establishments that are under common ownership or control.

ESTABLISHMENT The smallest type of accounting unit within an enterprise, an establishment is a single physical location where business is conducted or where services or industrial operations are performed. Multiple establishments under common control make up an enterprise.

EXPORTS Total value of industry goods and services sold by US companies to customers abroad.

IMPORTS Total value of industry goods and services brought in from foreign countries to be sold in the United States.

INDUSTRY CONCENTRATION An indicator of the dominance of the top four players in an industry. Concentration is considered high if the top players account for more than 70% of industry revenue. Medium is 40% to 70% of industry revenue. Low is less than 40%.

INDUSTRY REVENUE The total sales of industry goods and services (exclusive of excise and sales tax); subsidies on production; all other operating income from outside the firm (such as commission income, repair and service income, and rent, leasing and hiring income); and capital work done by rental or lease. Receipts from interest royalties, dividends and the sale of fixed tangible assets are excluded.

INDUSTRY VALUE ADDED (IVA) The market value of goods and services produced by the industry minus the cost of goods and services used in production. IVA is also described as the industry’s contribution to GDP, or profit plus wages and depreciation.

INTERNATIONAL TRADE The level of international trade is determined by ratios of exports to revenue and imports to domestic demand. For exports/revenue: low is less than 5%, medium is 5% to 20%, and high is more than 20%. Imports/domestic demand: low is less than 5%, medium is 5% to 35%, and high is more than 35%.

LIFE CYCLE All industries go through periods of growth, maturity and decline. IBISWorld determines an industry’s life cycle by considering its growth rate (measured by IVA) compared with GDP; the growth rate of the number of establishments; the amount of change the industry’s products are undergoing; the rate of technological change; and the level of customer acceptance of industry products and services.

NONEMPLOYING ESTABLISHMENT Businesses with no paid employment or payroll, also known as nonemployers. These are mostly set up by self-employed individuals.

PROFIT IBISWorld uses earnings before interest and tax (EBIT) as an indicator of a company’s profitability. It is calculated as revenue minus expenses, excluding interest and tax.

VOLATILITY The level of volatility is determined by averaging the absolute change in revenue in each of the past five years. Volatility levels: very high is more than ±20%; high volatility is ±10% to ±20%; moderate volatility is ±3% to ±10%; and low volatility is less than ±3%.

WAGES The gross total wages and salaries of all employees in the industry. The cost of benefits is also included in this figure.

Industry Jargon

IBISWorld Glossary

ANNUAL FUEL-UTILIZATION EFFICIENCY (AFUE) Measure of thermal efficiency for furnaces and boilers.

HYDROCHLOROFLUOROCARBONS (HCFCS) Compounds found in refrigerants that harm the environment by rising in the atmosphere and destroying the ozone layer.

REFRIGERANT Substances used to achieve low temperatures in air conditioners and refrigeration equipment.

SEASONAL ENERGY-EFFICIENCY RATIO (SEER) Used to rate the efficiency and performance of unitary air conditioners and heat pumps.


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