project strategic

US INDUSTRY (NAICS) REPORT 23822a

Heating & Air-Conditioning Contractors in the US

Chilled out: Government energy efficiency incentives are projected to benefit industry operators Kevin Kennedy | July 2020

IBISWorld.com +1-800-330-3772 [email protected]

Contents

About This Industry...........................................5

Industry Definition.......................................................... 5 Major Players................................................................. 5 Main Activities................................................................5 Supply Chain...................................................................6 Similar Industries........................................................... 6 Related International Industries.................................... 6

Industry at a Glance.......................................... 7

Executive Summary....................................................... 9

Industry Performance..................................... 10

Key External Drivers..................................................... 10 Current Performance................................................... 12

Industry Outlook............................................. 15

Outlook......................................................................... 15 Performance Outlook Data......................................... 17 Industry Life Cycle....................................................... 17

Products and Markets..................................... 19

Supply Chain................................................................ 19 Products and Services.................................................19 Demand Determinants................................................ 20 Major Markets.............................................................. 21 International Trade.......................................................23 Business Locations..................................................... 23

Competitive Landscape...................................27

Market Share Concentration....................................... 27 Key Success Factors................................................... 27 Cost Structure Benchmarks........................................ 28 Basis of Competition................................................... 32 Barriers to Entry........................................................... 33 Industry Globalization..................................................34

Major Companies............................................ 35

Major Players............................................................... 35 Other Players................................................................35

Operating Conditions...................................... 37

Capital Intensity........................................................... 37 Technology And Systems........................................... 38 Revenue Volatility........................................................ 40 Regulation & Policy...................................................... 41 Industry Assistance..................................................... 42

Key Statistics.................................................. 44

Industry Data................................................................ 44 Annual Change.............................................................44 Key Ratios.................................................................... 44 Industry Financial Ratios............................................. 45

Additional Resources...................................... 46

Additional Resources.................................................. 46 Industry Jargon............................................................ 46 Glossary Terms............................................................ 47

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About IBISWorld IBISWorld specializes in industry research with coverage on thousands of global industries. Our comprehensive data and in-depth analysis help businesses of all types gain quick and actionable insights on industries around the world. Busy professionals can spend less time researching and preparing for meetings, and more time focused on making strategic business decisions that benefit you,your company and your clients. We offer research on industries in the US, Canada, Australia, New Zealand, Germany, the UK, Ireland, China and Mexico, as well as industries that are truly global in nature.

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Covid-19 Coronavirus Impact Update

IBISWorld's analysts constantly monitor the industry impacts of current events in real-time – here is an update of how this industry is likely to be impacted as a result of the global COVID-19 pandemic:

· Industry demand is forecast to decline significantly in 2020, as constrained household income levels taper private investment in home improvement projects. Please see the Current Performance chapter for more information.

· Negative economic effects of the COVID-19 (coronavirus) pandemic are expected to be predominantly felt by small-scale operators, especially those who specialize in residential projects. Please see the Current Performance chapter for more information.

· A significant demand decline from the COVID-19 (coronavirus) outbreak is expected to contribute to heightened revenue volatility over the five years to 2020.

Note: The content in this report is currently being updated to reflect the trends outlined above.

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About This Industry Industry Definition This industry comprises companies that primarily install and service heating,

ventilation, air-conditioning (HVAC) and refrigeration equipment. Operators perform tasks that include new installations, additions, alterations, maintenance and repairs. Plumbing and related activities are not included in this report.

Major Players There are no major players in this industry

Main Activities The primary activities of this industry: Air-conditioning system installation (except window units)

Air vent installation

Furnace conversions (i.e. from one fuel to another)

Refrigeration system (e.g. commercial, industrial or scientific) installation

Heating, ventilation and air-conditioning (HVAC) contractors

Furnace humidifier installation

Natural gas fireplace installation

Duct work (e.g. cooling, dust collection, exhaust, heating and ventilation) installation

Ventilation equipment installation

Heating and ventilation system component (e.g. air registers, diffusers and filters)

installation

The major products and services in this industry:

New construction HVAC installations

Existing structure HVAC installations

HVAC maintenance and repairs

Refrigeration system installations, maintenance and repairs

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Supply Chain

SIMILAR INDUSTRIES

Electricians in the US Heating & Air Conditioning Wholesaling in the US

Refrigeration Equipment Wholesaling in the US

Plumbers in the US

RELATED INTERNATIONAL INDUSTRIES

None

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Industry at a Glance Key Statistics

$84.5bn Revenue

Annual Growth Annual Growth Annual Growth

2015-2020 2020-2025 2015-2025

-0.8% 3.4%

$4.6bn Profit

Annual Growth Annual Growth 2015-2020 2015-2025

-0.5%

5.4% Profit Margin

Annual Growth Annual Growth 2015-2020 2015-2025

0.1%

106k Businesses

Annual Growth Annual Growth Annual Growth

2015-2020 2020-2025 2015-2025

0.8% 2.0%

505k Employment

Annual Growth Annual Growth Annual Growth

2015-2020 2020-2025 2015-2025

1.9% 3.0%

$28.6bn Wages

Annual Growth Annual Growth Annual Growth

2015-2020 2020-2025 2015-2025

2.6% 3.1%

Key External Drivers % = 2015-2020 Annual Growth

2.8% Per capita disposable income

1.5% Value of residential construction

-2.1% Value of private nonresidential construction

-0.8% 30-year conventional mortgage rate

2.2% Housing starts

1.4% Private spending on home improvements

Industry Structure

POSITIVE IMPACT

Revenue Volatility Low

Capital Intensity Low

Concentration Low

Globalization Low

MIXED IMPACT

Life Cycle Mature

Regulation Medium

Technology Change Medium

Barriers to Entry Medium

NEGATIVE IMPACT

Industry Assistance Low

Competition High

Key Trends

The negative economic effects of the pandemic are expected to result in declining industry employment

Demand for repair work is expected to help stabilize industry revenue volatility

Over the past five years, industry profit has expanded due to rapid growth in downstream markets

Consumer spending is expected to improve, benefiting residential and nonresidential construction activity

External competition from the retail and manufacturing sectors is also anticipated to increase

More consumers will likely upgrade their systems due to increased disposable income

Industry revenue has expanded alongside broad construction trends over the past five years

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Products & Services Segmentation

New construction HVAC installations

50.8%

Existing structure HVAC installations

10.8%

HVAC maintenance and repairs

32.5%

Refrigeration system installations, maintenance and repairs

5.9%

Heating & Air-Conditioning Contractors Source: IBISWorld

Major Players % = share of industry revenue SWOT

STRENGTHS

Low Volatility Low Imports Low Customer Class Concentration Low Capital Requirements

WEAKNESSES

Low & Steady Level of Assistance High Competition Low Profit vs. Sector Average High Product/Service Concentration Low Revenue per Employee

OPPORTUNITIES

High Revenue Growth (2020-2025) Value of residential construction

THREATS

Low Revenue Growth (2005-2020) Low Revenue Growth (2015-2020) Low Outlier Growth Low Performance Drivers Value of private nonresidential construction

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Executive Summary

Over most of the five years to 2020, revenue for the Heating and Air-Conditioning Contractors industry has expanded alongside broad construction trends.

This industry includes operators that primarily install and service heating, ventilation, air-conditioning (HVAC) and refrigeration equipment. Accordingly, the industry is heavily influenced by activity in the construction sector. Nonetheless, a substantial decrease in industry activity amid the COVID-19 (coronavirus) outbreak and ensuing economic fallout is expected to offset industry revenue gains generated during the period. Overall, IBISWorld expects industry revenue to marginally decline, falling at an annualized rate of 0.8% to $84.5 billion over the five years to 2020, including a decline of 8.2% in 2020 alone.

During most of the period, a healthy housing market, combined with favorable macroeconomic conditions, accelerated home improvements and new construction, particularly in cities. As a result of higher disposable income levels, private spending on home improvements, which included equipment upgrades, increased an annualized 2.7% over the five years to 2020. New residential construction projects and housing starts climbed during the period, with the latter growing an annualized 3.7% over the five years to 2020. This consistent demand growth has enabled industry profit, measured as earnings before interest and taxes, to increase over the past five years, accounting for 5.4% of revenue in 2020. Nonetheless, expected declines in 2020 due to the pandemic is expected to be generally felt by smaller-scale operators, particularly those specialized in local residential projects. In 2020, per capita disposable income is forecast to decline 1.1%, precipitating significant declines in private investment in home improvement projects.

Industry revenue is forecast to increase, accelerating at an annualized rate of 3.4% to $100.1 billion over the five years to 2025. Key downstream construction markets are expected to stabilize, bolstering demand. Most notably, the value of private nonresidential construction is expected to reverse its decline trend, increasing at an annualized rate of 4.8% over the five years to 2025. In addition, federal and state government energy efficiency incentives are projected to benefit HVAC contractors. As the national standards for energy efficiency increase, demand for updated systems often grows as well.

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Industry Performance

Key External Drivers

Housing starts Industry contractors derive a substantial share of revenue from installing HVAC equipment and ducting in new residential buildings and structures, which include single-family homes and multifamily residences, such as apartment buildings. Consequently, growth in housing starts will likely benefit the industry. Therefore, the rebound of the residential construction market in recent years has helped industry operators. Housing starts are expected to increase in 2020, representing a potential opportunity for the industry.

Value of private nonresidential construction Private investment in nonresidential structures consists of new construction and renovations associated with nonresidential buildings, including commercial, industrial, educational and religious structures. This industry derives a substantial share of its revenue by installing, maintaining and repairing air-conditioning, climate-control and refrigeration systems in nonresidential buildings. As a result, the industry benefits from increases in private investment in nonresidential structures. The value of private nonresidential construction is expected to decrease significantly in 2020, posing a potential threat to the industry.

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Per capita disposable income Per capita disposable income represents an individual's ability to purchase goods or services. This is an important driver of industry demand due to the industry's reliance on homeowners for upgrades, renovations and maintenance activity. Therefore, operators benefit from increases in per capita disposable income because consumers have more income to spend on housing renovations and additions. Per capita disposable income is expected to decrease in 2020.

Private spending on home improvements Private spending on home improvements includes investment by homeowners and residential building owners on property upgrades and maintenance, such as the repair and installation of HVAC equipment. Since heating and air-conditioning is typically considered essential to a household's quality of life, the maintenance of working HVAC systems is more resistant to economic downturns than other types of home improvement activities. Private spending on home improvements is forecast to decrease in 2020.

30-year conventional mortgage rate The 30-year conventional mortgage rate measures the average interest rate for the most common loan home purchasers use. As the 30-year conventional mortgage rate increases, so does the borrowing cost associated with buying a home. In 2020, the 30-year conventional mortgage rate is expected to decrease.

Value of residential construction The value of residential construction consists of construction for new residential buildings. As the value of residential construction increases, demand for industry services increases in tandem. In 2020, the value of residential construction is expected to decline.

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Current Performance

The Heating and Air-Conditioning Contractors industry has expanded for the majority of the five years to 2020, however, a substantial contraction in 2020 is forecast to offset revenue gains.

This industry includes companies that primarily install and service heating, ventilation, air-conditioning (HVAC) and refrigeration equipment. Favorable interest rates resulted in increased new residential housing projects. Further, growth in per capita disposable income has enabled consumers to upgrade HVAC systems, while industry operators have also benefited from repair and maintenance demand, which generally must be addressed immediately. Nonetheless, industry revenue has marginally declined, falling at an annualized rate of 0.8% to $84.5 billion over the five years to 2020, including a decline of 8.2% in 2020 alone.

COVID-19 (coronavirus)

In 2020 alone, industry revenue is forecast to decrease substantially, representing the largest industry decline since the financial crisis in 2008 and 2009.

Overall, the negative economic effects of the COVID-19 (coronavirus) pandemic will likely affect smaller scale operators that rely on residential projects the most. Overall, demand for these types of industry operators is largely influenced by consumer spending habits. While HVAC services can be nondiscretionary in terms of required maintenance or repair, new purchases will likely experience the largest negative effects as consumers taper frivolous spending in favor of savings. For

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example, in 2020 alone, per capita disposable income is expected to decline 1.1% in 2020 alone due to heightened unemployment and stagnant business activity amid shelter-in-place guidelines. As a result, private spending on home improvement projects is forecast to decline 2.8% in 2020 as well. Overall, the negative economic effects of the pandemic are expected to result in declines in the number of industry enterprises and employment in 2020.

Strong downstream demand

While the coronavirus pandemic will likely offset industry revenue gains made during the period, positive trends have driven growth in many areas of the industry.

Industry technicians service various buildings and structures because nearly every building in the United States uses some type of HVAC or refrigeration system. Industry contractors generate the largest share of revenue from installing systems in new buildings across the construction sector. Early during the current period, the residential construction market began to rebound and pick up steam. In 2015, housing starts expanded an estimated 10.9%, followed by increasing 5.6% in 2016. Mirroring this residential upswing, shipments of central heat and air-conditioning units also increased.

Repair work is typically more resistant to economic fluctuations because keeping air-conditioning and heating systems in working order is considered essential to the quality of life for households, particularly in the summer and winter months. Overall, as both US economy and the residential construction sector strengthened during most of the period, private spending on home improvements increased at an annualized rate of 2.8% over the five years to 2020. Demand for repair work is expected to help stabilize industry revenue volatility during the period.

Effective incentives

The industry has benefited from government-sponsored incentives intended to encourage households and businesses to refurbish or upgrade HVAC systems.

These incentives have typically been in the form of tax credits, which are provided if the new HVAC system met certain energy efficiency ratings (EERs). These energy- efficient units and systems are typically more expensive than less advanced models; however, the tax credit has encouraged consumers to consider upgrading to higher EER systems. For example, federal tax credits are available for HVAC systems that meet Energy Star certifications. Accordingly, the long-term savings that consumers can generate from upgrading systems likely supported demand for industry services over the past five years. As a result, industry operators have received more contracts for replacing and upgrading HVAC systems in existing structures. These incentives are expected to continue encouraging new HVAC installations, fueling steady industry growth.

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Industry landscape

The majority of industry operators are small companies and nonemployers that specialize in specific regions or localized markets.

As the increase in construction activity boosted demand for industry services, the number of industry operators has increased, rising at an annualized rate of 0.8% to 106,434 companies over the five years to 2020. According to the US Census Bureau and IBISWorld estimates, 60.3% of industry establishments employ between one and four workers, indicating a high level of participation by nonemployer enterprises in this industry. In particular, the industry employs heating, air-conditioning and refrigeration mechanics and installers, and office staff, management, transportation and other workers.

Over the past five years, industry profit has expanded due to rapid growth in construction markets, which has enabled HVAC companies to raise prices and compete less with each other as the pool of available contracts increased sharply. Industry profit, measured as earnings before interest and taxes, is expected to account for 5.4% of revenue in 2020, up marginally from 5.3% in 2015. Encouraged by a stronger industry profit margin and continued growing demand, many industry operators have been expanding labor forces during the current period. Many nonemployers have also entered the industry in recent years, generally seeking a foothold in smaller markets. As a result, industry employment has increased at an annualized rate of 1.9% to 505,385 workers over the five years to 2020.

Historical Performance Data Year Revenue IVA Estab. Enterprises Employment Exports Imports Wages Domestic

Demand Housing

Starts ($m) ($m) (Units) (Units) (People) ($m) ($m) ($m) ($m) (Thousands

) 2011 73,582 21,566 97,792 92,358 367,338 N/A N/A 18,844 N/A 609 2012 81,406 24,825 98,688 98,041 401,936 N/A N/A 21,080 N/A 781 2013 84,015 25,817 99,599 98,850 417,682 N/A N/A 21,952 N/A 925 2014 86,938 28,253 102,110 101,004 440,315 N/A N/A 23,472 N/A 1,003 2015 88,125 30,631 102,540 102,029 461,068 N/A N/A 25,168 N/A 1,112 2016 89,733 32,663 104,864 103,910 485,795 N/A N/A 27,099 N/A 1,174 2017 91,558 34,357 106,543 105,722 502,131 N/A N/A 28,314 N/A 1,203 2018 91,652 35,833 108,214 107,372 521,950 N/A N/A 29,784 N/A 1,250 2019 92,049 36,136 109,349 108,621 529,790 N/A N/A 30,167 N/A 1,300 2020 84,481 33,863 106,724 106,434 505,385 N/A N/A 28,560 N/A 1,333

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Industry Outlook Outlook Demand for Heating and Air-Conditioning Contractors industry

services is anticipated to increase over the five years to 2025 as the broader domestic economy rebounds following the COVID-19 (coronavirus) pandemic.

Accelerating construction activity in both residential and nonresidential markets is forecast to continue boosting demand for new heating, ventilation and air-conditioning (HVAC) installations, the industry's primary service segment. Expanding per capita disposable income and the growing popularity of energy- efficient systems, which also lower operating costs for businesses and households, is expected to drive demand for installations in existing structures. Growing demand for automated systems from commercial clients is projected to be a crucial revenue driver over the next five years, especially for larger industry players. Consequently, industry revenue is forecast to increase at an annualized rate of 3.4% to $100.1 billion over the five years to 2025.

Industry landscape

Consumer spending power is expected to improve over the coming years, benefiting both residential and nonresidential construction activity.

Housing starts is forecast to increase at an annualized rate of 1.6% over the five years to 2025, while the value of private nonresidential construction is expected to rebound significantly, increasing at an annualized rate of 4.8% during the same period. Furthermore, per capita disposable income is projected to increase at an annualized rate of 2.1% over the five years to 2025, enabling consumers to upgrade to newer, more expensive energy-efficient HVAC units and related maintenance services. Further, as demand improves, industry profit is expected to increase. Overall, IBISWorld anticipates profit, measured as earnings before interest and taxes, will account for 5.9% of revenue in 2025, up from 5.4% in 2020.

Additionally, improving demand and favorable macroeconomic conditions are expected to attract new operators into the industry. Thus, the number of industry enterprises is forecast to rise at an annualized rate of 2.0% to 117,440 companies over the five years to 2025. As a result of new entrants, industry employment is projected to increase, rising at an annualized rate of 3.0% to 584,767 workers during the same period. Much of this growth is expected to be a result of independent

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contractors finding increasing work in the single-family housing market. Meanwhile, the industry's largest companies are expected to benefit from a trend toward customization among commercial clients, which are projected to seek out efficient and automated systems designed for particular structures. Operators across the industry will likely be better able to raise prices due to favorable economic conditions among downstream clients.

Nonetheless, external competition from the retail and manufacturing sectors is also anticipated to increase over the coming years. In 2020, HVAC maintenance and repair is expected to account for 32.5% of industry revenue. This segment generates sustained demand for industry services, enabling industry operators to rely on consistent revenue from this segment. HVAC system manufacturers often include warranty and maintenance service as a part of the sale price. Although retailers usually outsource consumer-grade HVAC and refrigeration system installation and maintenance to industry contractors, some retailers use in-house workers to perform these services to diversify operations and open additional revenue streams. Industry operators that can specialize in certain products or boast knowledge of modern, digitized systems will likely be less affected by this trend over the coming years.

New standard practices

Households and businesses are expected to begin replacing outdated and less efficient HVAC systems with newer models that provide additional heating and cooling output while requiring less power.

The combination of increased disposable income and corporate profit, as well as adherence to government-mandated seasonal energy efficiency ratios (SEERs), will likely raise demand for these energy-efficient systems. Additionally, growing public concern over greenhouse gas emissions and climate change will likely make these systems more attractive to consumers seeking more environmentally friendly, contributing to this growing trend toward replacements.

Increases in disposable income and corporate profit are projected to support the trend toward upgrading systems during the outlook period. Therefore, consumers and companies are anticipated to invest in systems that will likely either lower or smooth out volatility in monthly costs, such as energy payments. Heating and air- conditioning system manufacturers will likely capitalize on this development, and on widespread concerns about energy efficiency and environmental stewardship. According to 2016 data from Contracting Business, a leading industry publication, adding variable-speed technology to new home HVAC systems can yield an increase of between four and five SEER points because it can reduce a system's environmental footprint by up to 40.0% (latest data available).

Improving a heating and air-conditioning system's SEER rating is projected to become more essential to consumers and businesses over the next five years. Just prior to the five years to 2020, the US Department of Energy announced the creation of regional SEER requirements, which take into account the various climatic conditions in the United States. However, as more efficient models become standardized, technicians will likely be needed to upgrade and replace these premium systems over the next five years.

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Performance Outlook Data Year Revenue IVA Estab. Enterprises Employment Exports Imports Wages Domestic

Demand Housing

Starts ($m) ($m) (Units) (Units) (People) ($m) ($m) ($m) ($m) (Thousands

) 2020 84,481 33,863 106,724 106,434 505,385 N/A N/A 28,560 N/A 1,333 2021 86,420 34,713 108,346 108,004 516,725 N/A N/A 29,203 N/A 1,351 2022 93,177 37,225 112,294 111,650 547,172 N/A N/A 31,037 N/A 1,375 2023 96,045 38,387 114,567 113,830 562,262 N/A N/A 31,912 N/A 1,390 2024 97,876 39,156 116,325 115,553 572,843 N/A N/A 32,514 N/A 1,402 2025 100,091 40,018 118,269 117,440 584,767 N/A N/A 33,203 N/A 1,440

Industry Life Cycle The life cycle stage of this industry is Mature

LIFE CYCLE REASONS

IVA is projected to grow at a faster rate than US GDP

Industry products are used in nearly every structure in the United States

Energy-efficient HVAC systems are driving technological change in the industry

The Heating and Air-Conditioning Contractors industry is in the mature phase of its life cycle. Industry value added (IVA), which measures an industry's contribution to the overall economy, is expected to grow at an annualized rate of 2.7% over the 10 years to 2025. Comparatively, US GDP is projected to rise at an annualized rate of 1.4% during the same period. While this growth is typically characteristic of an industry in the growth phase of its life cycle, the industry has only recently

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expanded. Due to a significant increase in demand from downstream construction markets, IVA has reached a higher level than normal. Similarly, US GDP growth has been largely subdued due to the COVID-19 (coronavirus) outbreak and ensuing economic fallout.

In particular, some kind of heating, ventilation and air-conditioning (HVAC) systems are present in nearly every structure in the United States; regardless of climate, nearly every home and building has some basic heating or cooling system installed. This complete market saturation strongly reflects the industry's maturity. However, this industry is expected to outpace growth in the economy due to the strong rebound occurring across construction markets that are anticipated to continue over the five years to 2025, especially in the housing sector.

Although technological change and innovation have led to more energy efficient industry products, the techniques employed by HVAC technicians have not changed significantly. Finally, the industry is characterized by high levels of local competition, in which several contractors or small businesses compete for projects in a narrow regional market. Though rapidly increasing, demand due to rebounding construction markets is anticipated to bring strong revenue growth over the next five years, and these opposing factors are expected to keep the industry in a mature phase for the near future.

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Products and Markets Supply Chain KEY BUYING INDUSTRIES

1st Tier Home Builders in the US

Consumers in the US

Property Management in the US

Commercial Building Construction in the US

2nd Tier Refrigerated Storage in the US

Industrial Building Construction in the US

Municipal Building Construction in the US

Apartment & Condominium Construction in the US

KEY SELLING INDUSTRIES

1st Tier Plumbing & Heating Supplies Wholesaling in the US

Heating & Air Conditioning Wholesaling in the US

Refrigeration Equipment Wholesaling in the US

2nd Tier Construction in the US

Heating & Air Conditioning Equipment Manufacturing in the US

Metal Pipe & Tube Manufacturing in the US

Products and Services

HVAC installations

New construction heating, ventilation and air-conditioning (HVAC) installations are expected to account for 50.8% of revenue for the Heating and Air-Conditioning Contractors industry in 2020.

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The rebound in new construction activity has led HVAC installation work to expand as a share of revenue over the five years to 2020. Conversely, maintenance services that has to be undertaken regardless of economic conditions decreased as a share of revenue.

The increase in installation activity has been driven by the rebound and growth of the real estate market over the past five years. Most installation projects are associated with new building construction. In addition, existing structure HVAC installations are expected to account for 10.8% of revenue in 2020. Businesses and individuals generally replace existing units to cut back on monthly electricity expenses that have been rising. Over the past five years, the price of electric power has decrease. Alongside cost saving incentives at the individual level, the government has also promoted this activity through tax credits and other incentive programs as it tries to reduce energy consumption and greenhouse gas emissions.

HVAC maintenance and repairs

After an HVAC unit has been installed, technicians often perform routine maintenance and repair work to keep systems operating efficiently.

In this process, technicians adjust burners and blowers and check the system for leaks. HVAC maintenance and repair are expected to account for 32.5% of industry revenue in 2020. Over the past five years, this segment has increased as a share of industry revenue, alongside an increase in private spending on home improvements. Over the past five years, per capita disposable income increased, giving consumers increased cash flow. Accordingly, some consumers sought to fix or repair their current systems at a higher rate, since having the available means to do so.

Refrigeration system installations

Refrigeration system installations, maintenance and repairs are expected to account for 5.9% of industry revenue in 2020.

These systems are used by a variety of companies and organizations, including restaurants, hospitals, laboratories and manufacturers. Energy efficiency has been particularly important over the past five years due to the green movement, which has emphasized the need to reduce energy consumption and greenhouse gases. In addition to environmental purposes, demand for new energy-efficient refrigeration systems has been supported by the desire to reduce monthly electricity bills.

Demand Determinants

Demand for the Heating and Air-Conditioning Contractors industry is largely dependent on the type of service being offered, such as installation, maintenance or repair.

Demand for services is also heavily reliant on the building's structure, as heating, ventilation, air-conditioning (HVAC) and refrigeration systems differ between residential and nonresidential properties. For both markets, installation activity is

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driven by construction trends, as most installations are related to new buildings and homes.

Most businesses and consumers replace existing HVAC and refrigerator systems on a need-only basis due to substantial costs. Due to improvements in technology, however, newer systems are more reliable and energy efficient than their older counterparts. As a result, installation activity is increasingly influenced by a variety of other factors, including energy prices, tax incentives, interest rates, property prices, consumer sentiment and environmental concerns; all of which can encourage consumers and businesses to replace HVAC systems in existing buildings.

As energy prices rise, there is greater incentive to replace existing systems with newer energy-efficient units. Similarly, with tax credits installing new HVAC and refrigeration systems becomes less costly, and therefore, demand for upgrade services increases. Demand is also influenced by real estate and economic conditions, as most HVAC and refrigerator upgrades are unnecessary. Typically, as incomes are repressed, businesses and individuals cut back on unnecessary expenditures, including HVAC and refrigeration system upgrades, to save money.

Demand for maintenance and repair services is steadier than that of installations, providing industry operators a cushion in economic downturns. This segment does not rely on new construction activity for business and it benefits little from improvements in technology such as upgrades. Instead, repair demand exists on a need-only basis. Similarly, maintenance occurs on a prescheduled basis, as it is necessary to ensure systems run properly.

Demand for heating and air-conditioning services is also influenced by the home or building's location. New houses built in warmer climates are more likely to be fitted with air-conditioning than those built in the cooler regions of the Unites States, such as the Mid-Atlantic and New England regions during the winter season. Similarly, central heating systems are much more important in the summer, driving demand for industry services. However, unlike air-conditioning, some type of central heating system can be found in most homes, whether or not they are located in warmer climates.

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Major Markets

New and existing residential construction

New and existing residential construction, including single-family homes, apartment buildings, multifamily homes, dormitories and barracks, are expected to account for 37.4% of revenue for the Heating and Air-Conditioning Contractors industry in 2020. Over the five years to 2020, these segments as a share of revenue have increased. In particular, the expansion of new construction benefited demand for installations, as most services are associated with new homes and apartments. During the current period, interest rates remained lower than historical norms, which kept the rate of borrowing relatively low for consumers. Furthermore, per capita disposable income has expanded at an annualized rate of 1.6% over the five years to 2020. Accordingly, with an increase in cash flow and relatively low borrowing costs for new homes, housing starts have increased at an annualized rate of 3.7% during the same period. As a result of these trends, these segments have also increased due to the increase in replacement and upgrade activities undertaken by households.

Manufacturing, industrial and office buildings

The manufacturing and industrial buildings segment is expected to account for 11.8% of industry revenue in 2020. Over the past five years, this segment has improved due to strong government incentives. In 2020, the office buildings market is expected to account for 9.1% of industry revenue, which has also increased as a share of revenue during the period as business activity and the number of new businesses increased.

Healthcare, public safety and educational buildings

Healthcare, education and institutional buildings include hospitals, medical complexes, courts, prisons, police stations and schools. This segment is expected account for 20.2% of revenue in 2020, declining slightly as a share of revenue during the period. This decline has been driven by a slower level of construction activity than in the commercial and residential sectors.

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Retail and storage spaces

The retail market is composed of a diverse set of buildings and companies, including restaurants, automobile service stations, boutique stores, grocers and big- box retailers. Additionally, this segment includes distribution centers and mini- storage units. Similar to the office market, demand for services by retailers has been increasing alongside higher economic activity and in particular an expansion in consumer spending. Over the past five years, consumer spending has increased, which has resulted in an increasing pool of potential customers for retail establishments. Accordingly, commercial building activity increased during the period, resulting in demand for industry services. As a result, the retail market has increased as a share of revenue over the past five years, accounting for an estimated 11.1% in 2020.

Other

Contractors in this industry also serve nonbuilding construction facilities, which account for an estimated 10.6% of revenue in 2020. Other building construction facilities this industry serves include religious buildings, social and recreational buildings, hotels and motels. This segment is expected to decline over the coming years amid constricted state and federal budgets for social projects and construction from the COVID-19 (coronavirus) outbreak.

International Trade

Exports in this industry are Low and Steady

Imports in this industry are Low and Steady

The Heating and Air-Conditioning Contractors industry is a service-oriented industry with no international trade, as goods are not passed from one country to another. The majority of industry participants are domestic, small- or medium-sized operators. However, there are some multinational companies that offer heating, ventilation and air-conditioning and refrigeration services in a wide variety of markets, including industrial, municipal, multifamily and commercial. Multinational construction companies include both foreign-owned operators in the United States and domestically owned companies offering services abroad. For more information on international trends, refer to the Globalization section.

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Business Locations

Business Concentration in the United States

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Percentage of Establishments (%)

Heating & Air-Conditioning Contractors in the US Source: IBISWorld

The geographic distribution of establishments in the Heating and Air-Conditioning Contractors industry generally corresponds with the distribution of population and economic activity, reflecting the small-scale and localized nature of most industry contractors. The distribution of heating and air-conditioning servicers is also influenced by the home or building's location. New houses built in the warmer southern states, such as Florida and Alabama, are more likely to be fitted with air- conditioning than those built in the cooler northern states. Similarly, central heating systems are much more important in northern states or areas prone to low temperatures and harsh winters. However, unlike air-conditioning, most homes have some sort of central heating system regardless of local climate.

Southeast

The Southeast region is home to the largest share of both industry locations and United States residents. In 2020, the region accounts for 25.5% of industry establishments, which closely corresponds with the region's share of the population at 25.7%. States in the Southeast have mostly temperate climates, though buildings in states such as Florida have a greater need for air-conditioning systems. Florida is home to 7.8% of industry establishments in 2020. Likewise, states in the northern

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part of the region, such as West Virginia, have colder winters and more need for heating systems. Overall, the region's large population drives the high concentration of industry establishments located there.

Mid-Atlantic

The Mid-Atlantic region, which includes major cities, such as New York City, Philadelphia and New Jersey, accounts for 16.6% of industry establishments in 2020, which corresponds with the region's share of the national population (15.1%). The Mid-Atlantic region features a higher concentration of multifamily residential buildings due to its metropolitan areas; the region is also subject to very distinct seasonal changes in temperature, which require robust heating systems in the winter and efficient air-conditioning in the summer. New York State is home to 6.9% of industry establishments in 2020.

West

The West region accounts for a disproportionately low share of industry locations relative to the region's share of the national population. In 2020, the West region accounts for 14.7% of industry establishments, while it represents 17.2% of the United States population. The number of industry locations is partly subdued by the presence of several large-scale construction contractors in the region, which have an in-house capacity to undertake specialist air-conditioning and climate control installation services. The largest state in this region, California, holds 10.0% of industry establishments in 2020.

Great Lakes

In 2020, the Great Lakes region accounts for 13.2% of industry establishments corresponding with the region's share of the national population (14.4%). This high share principally reflects the concentration of manufacturing infrastructure in this region, notably refrigeration for food processing, transport and warehousing, and the greater demand for heating services in commercial and residential buildings due to the region's low winter temperatures. The Great Lakes region is estimated to contain a higher share of contractors with specialized skills required in industrial and commercial applications.

Other

In 2020, the Southwest region accounts for 11.5% of industry establishments, which corresponds with the region's share of the national population (12.7%). The Plains region is estimated to account for 7.1% establishments and 6.5% of the United States population in 2020. Low population density in the Plains region means that more establishments are required to serve a given number of households or businesses, whereas in densely populated urban areas, one establishment can serve more consumers in a smaller locale.

The New England and Rocky Mountains regions' share of establishments exceeds respective shares of the population. While New England and the Rocky Mountains account for 6.3% and 4.6% of industry establishments, respectively, the two regions account for a respective 4.6% and 3.7% of population in 2020. Harsh winters common to these regions mean heating repair work for operators there.

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Competitive Landscape Market Share Concentration

Concentration in this industry is Low

The Heating and Air-Conditioning Contractors industry has a low level of market share concentration, as no industry operator accounts for more than 5.0% of industry revenue in 2020. The majority of industry operators are smaller companies that specialize in specific regions or types of heating, ventilation and air-conditioning (HVAC) systems. According to the US Census and IBISWorld estimates, 60.6% of establishments in the industry employ one to four people. Conversely, only 1.2% of operators employ 100 or more people. Additionally, about 9.0% of HVAC contractors are self-employed, according to the Bureau of Labor Statistics Occupational Handbook.

The industry's low concentration is expected to continue over the coming years. More operators are expected to enter the market as the construction sector improves, but most of these operators will likely be smaller companies and nonemployers. This trend is similar to other sectors that are dominated by small operators because these entities often enter and exit an industry depending on changes in demand. While this trend will likely be hampered in 2020, as small operators must close down amid the economic fallout from the COVID-19 (coronavirus) outbreak, the general dynamic of being dominated by nonemploying companies is forecast to persist.

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Key Success Factors

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

Having a good reputation: Contractors need to establish a reputation for quality, timeliness, price and fiscal accountability within their local market.

Management of seasonal production: Managing a steady workflow despite wide seasonal fluctuations is important for industry success. Operators must also be capable of

reading construction cycles and adapting their workflow accordingly.

Ability to compete on tender: Operators must have the capacity to contest and hold ongoing maintenance contracts to generate a stable revenue base. Larger operators must

also be able to compete for contracts in lucrative commercial building markets.

Ability to quickly adopt new technology: Operators must adapt quickly and keep up to speed with changing technology, particularly regarding energy efficient and smart climate

control systems.

Ability to vary services to suit different needs: The capacity to supply total facilities management enhances the prospects of success in this industry.

Cost Structure Benchmarks

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Profit

The average industry profit margin, measured as earnings before interest and taxes, is expected to comprise 5.4% of revenue in 2020, up from 5.3% in 2015. Heating, ventilation and air- conditioning (HVAC) contractors benefit from relatively low fixed costs. Other than transportation and basic tools, operators are able to alter purchase costs according to the job and both increase and decrease expenses in line with demand. Over the five years to 2020, industry profit has benefited from a rebound in construction demand. As the pool of potential work expanded, operators were able to compete less with each other on prices to gain contracts, enabling industry profit to expand.

Wages

This industry is highly labor-intensive. IBISWorld estimates that wages costs are expected to account for 33.8% of industry revenue in 2020, up from 28.6% in 2015. Similar to most of the service sector, the industry relies heavily on the skills and knowledge of its technicians. Purchase costs can generally be altered in accordance with a given job's needs, but wages costs are much less flexible, as full-time employees are paid a salary regardless of demand levels.

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Purchases

IBISWorld estimates that purchases costs account for 38.9% of industry revenue in 2020. Purchases include costs of materials, components and supplies used for installation, maintenance, repair services and subcontracted work. Purchase expenses generally fluctuate with demand, as most costs are associated with HVAC and refrigerator installation, maintenance and repair services. To a lesser extent, purchases are also influenced by changes in commodity prices, particularly aluminum and other metals, since these are used for ducting in HVAC installations. In addition to material purchases, industry participants also buy tools and other equipment that is used to install and repair HVAC and refrigeration systems. The purchase of gasoline is also included in this segment and represents a key expense for operators, since contractors travel to worksites.

Depreciation

Depreciation costs account for an estimated 0.9% of industry revenue in 2020. Depreciation costs primarily involve the depreciation of company equipment or transportation vehicles, such as a worker van. HVAC contractors use little to no heavy or depreciable equipment or machinery in the line of work.

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Marketing

Marketing costs are generally low in the industry, comprising an estimated 0.5% of revenue in 2020, since most work is gained through recommendations and relationships with general contractors.

Rent

Rent costs are also low in the industry, accounting for an estimated 1.3% of revenue in 2020 because work is done on-site.

Utilities

Rental costs are also low in the industry, accounting for an estimated 1.3% of revenue in 2020 because work is done on-site.

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Other Costs

Other miscellaneous costs, including licensing fees, legal bills, insurance payments and administrative costs, combine to make up 17.6% of industry revenue in 2020.

Basis of Competition

Competition in this industry is High and Increasing

The majority of companies in the Heating and Air-Conditioning Contractors industry are small operators that specialize in specific regions or markets.

Operators benefit from local knowledge and relationships with local general contractors. Though very few companies are able to operate on an interstate scale, let alone a national scale, competition within a company's immediate locale can be intense. Heating, ventilation and air-conditioning contractors and businesses compete on the bases of price, quality, timeliness, professionalism and breadth of services offered. Moreover, a principal basis for competition in this industry is an established reputation for delivering satisfactory service.

Networking with property managers and developers, appliance manufacturers or retailers can prove vital in providing intelligence about upcoming contracts. Retailers typically maintain a list of preferred installers of domestic air-conditioning systems and heating units, in addition to taking a commission on the sale, requiring the contractor to meet high standards of service.

Recurring commercial maintenance contract work usually demands competitive pricing and requires the staff and resources to service larger structures. Therefore, lucrative nonresidential contracts are particularly suited to larger companies that benefit from economies of scale. Larger contractors are becoming more involved in

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highly technical arrangements involving monitoring and adjustment, tailoring systems to suit specific requirements and providing system maintenance contracts.

The emerging trend toward building automation in large-scale commercial buildings, such as using computer-controlled equipment to manage such services as heating, lifts, security, lighting, ventilation and room pressurization, has led to a blurring of activities in the facilities management sector. Historically, a clear line existed between companies that provided, for example, elevator installation and servicing and other operators that distinctly handled such functions as security systems installation or fire alarms and sprinklers. Over the past decade, large-scale facilities management companies that design and provide total building automation and maintenance packages have integrated a range of previously distinct specialty work. This has made it harder for smaller operators to compete for outstanding contracts in the commercial real-estate sector.

Furthermore, an emerging area of product differentiation is on the basis of environmental awareness through the Leadership in Energy and Environmental Design (LEED) accreditation initiative developed by the United States Green Building Council. This and similar initiatives seek to train industry operators in skills and knowledge of environmental considerations for construction, most notably the use of heating/cooling efficiency techniques and products.

Due to the specialized nature of industry services, the industry experiences some external competition. However, industry operators compete with various sectors because several industries, including manufacturers, electricians, general contractors and retailers, offer some heating, ventilation and air-conditioning installation and maintenance services.

Barriers to Entry Barriers to entry in this industry are Medium and Steady

The Heating and Air-Conditioning Contractors industry is characterized by moderate barriers to entry. Barriers include completing an apprenticeship and gaining a license, contending with intense competition from established industry contractors in local areas, as well as establishing working relationships with property managers, general contractors and local retailers.

The increasing complexity of heating, ventilation, air-conditioning (HVAC) and refrigeration systems has led employers and clients to prefer technicians with postsecondary or formal apprenticeship training. Trade schools and community colleges typically offer six-month certificates and two-year associate's degree programs tailored to industry work. Overall, on-the-job training has become less common. In lieu of postsecondary classes or certification, contractors are able to secure apprenticeship programs with experienced HVAC technicians. Moreover, various industry associations, such as Air Conditioning Contractors of America, administer these programs. While training is necessary to win contracts or employment with a large company, some

Barriers to entry checklist Competition High

Concentration Low

Life Cycle Stage Mature

Technology Change Medium

Regulation & Policy Medium

Industry Assistance Low

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states also require HVAC contractors to be licensed, the requirements for which vary by state. Refrigeration installation and maintenance work requires a separate Environmental Protection Agency certification.

Once licensed and trained, industry operators must compete with the entrenched contractors of a given area, which benefit from name recognition and a record of service. Word-of-mouth recommendations from past customers and personal relationships with property managers and general contractors are an essential component to winning business in the industry. Contractors must also be able to win business from appliance retailers that outsource installation service to third- party contractors in the industry.

However, prospective entrants do benefit from certain industry characteristics. Starting an HVAC services business requires very little capital investment, besides transportation, basic tools and safety equipment. Start-up costs are largely limited to the training required. Though technology change occurs at a medium pace, new entrants that have recently completed a training program may be better able to offer the latest techniques or technologies, such as smart automation and climate control systems, with which older contractors may be less familiar.

Industry Globalization

Globalization in this industry Low and Steady

As a service-based industry that focuses on local markets, the Heating and Air- Conditioning Contractors industry has a low level of globalization. The industry features no imports or exports and the vast majority of companies operate within small or specific regions. Emcor Group Inc., one of the largest facilities management companies that provide heating, ventilation and air-conditioning work, has operations abroad, including the United Kingdom and Canada. However, foreign companies have little to no presence in the US market.

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Major Companies Major Players THERE ARE NO MAJOR PLAYERS IN THIS INDUSTRY

Other Players The Heating and Air-Conditioning Contractors industry is highly fragmented and the majority of companies are small operators that specialize in various regions or markets. Consequently, the industry has no true major player because these operators do not generate enough income from industry-relevant tasks to account for more than 5.0% of the market in 2020. Industry operators compete with various sectors because several industries, including manufacturers, electricians, general contractors and retailers, offer some heating, ventilation and air-conditioning (HVAC) installation and maintenance services.

Most manufacturers of HVAC equipment rely on industry operators to install and service these devices; however, some manufacturing companies also operate service divisions, such as Lennox International Inc. Similarly, the industry contends with general contractors that specialize in services offered by the Home Builders (IBISWorld report 23611a), Apartment and Condominium Construction (23611b), Commercial Building Construction (23622a) and Municipal Building Construction (23622b) industries. Generally, these industries use HVAC and refrigerator technicians to install HVAC and refrigerator equipment. However, these companies occasionally use in-house workers to conduct such services. Electrical contractors also sometimes participate in HVAC installations and repair.

Within the retail market, most services are associated with residential structures because HVAC and refrigeration equipment is largely standardized and easy to install. Conversely, commercial HVAC and refrigeration products are often costly because they can be both complex and customizable. As a result, most retailers do not offer any industry-related services.

COMFORT SYSTEMS USA INC.

Founded in 1997 and headquartered in Houston, Comfort Systems USA Inc. (Comfort Systems) is a leading provider of installation, maintenance, repair and replacement services within the Heating and Air-Conditioning Contractors industry. The company employs more than 12,000 workers and has operations in 115 cities and 134 locations across the United States. Comfort Systems generated $2.6 billion in total revenue in 2019 (latest data available). The company's industry- relevant revenue, which comprises 38.0% installation services in newly constructed facilities and 62.0% maintenance and repair of existing facilities, has been steadily climbing upward over the five years to 2020. Thus, IBISWorld expects Comfort Systems to generate an estimated $1.8 billion in industry-relevant revenue in 2020, capturing an estimated 2.1% of the market. Overall, continued strategic acquisition activity and consistent organic contract revenue has enable the company to increase revenue during the period.

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EMCOR GROUP INC.

Founded in 1994 and headquartered in Norwalk, CT, Emcor Group Inc. (Emcor) is a global leader in mechanical and electrical construction, energy infrastructure, Leadership in Energy and Environmental Design (LEED) construction and facilities services. Among the many services it provides, Emcor installs and maintains HVAC systems. The company is organized into four main operating segments, which includes electrical construction and facilities services, mechanical construction and facilities service, building services and industrial services.

The company generated $9.2 billion in total company revenue in 2019 (latest data available) and currently maintains more than 170 locations. Emcor employs an estimated 36,000 workers and is publicly traded on the New York Stock Exchange. The company is part of the Fortune 500 and has been cited as one of the "World's Most Admired" and "Best Managed" companies by Fortune magazine. Over the five years to 2020, Engineering News-Record ranked Emcor as one of the top specialty contractors. In 2020, IBISWorld estimates that Emcor will generate $1.6 billion in industry-relevant revenue, capturing an estimated 1.8% of the market.

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Operating Conditions

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Capital Intensity The level of capital intensity is Low

The Heating and Air-Conditioning Contractors industry, similar to other service industries, is characterized by a low level of capital intensity. For every $1.00 spent on wages, the average heating, ventilation and air- conditioning (HVAC) contractor is expected to spend $0.03 on capital investment in 2020. Wages are the primary expense for contractors; little to no heavy equipment is used in the installation and maintenance of industry refrigeration systems, and purchase costs are mostly limited to job-specific materials. Overall, IBISWorld estimates that depreciation expenses only account for 0.9% of revenue in 2020, while wage-related costs, excluding subcontracted labor, make up 33.8% of revenue.

Capital intensity has remained largely unchanged over the five years to 2020, as wage expenses in proportion to revenue have increased while depreciation has stagnated. The increasing sophistication of HVAC systems, including smart climate control controls and digital automation systems, has led to marginal increases in capital requirements, such as software and other computer equipment. The nature of industry work remains focused on employees' skills and knowledge; therefore, capital intensity is forecast to remain very low over the coming years.

Technology And Systems

Potential Disruptive Innovation: Factors Driving Threat of Change

Level Factor Disruption Description

High Rate of Innovation

Likely

A ranked measure for the number of patents assigned to an industry. A faster rate of new patent additions to the industry increases the likelihood of a disruptive innovation occurring.

High Rate of Entry Likely

Annualized growth in the number of enterprises in the industry, ranked against all other industries. A greater intensity of companies entering an industry increases the pool of potential disruptors.

Moderate Innovation Concentration

Potential

A measure for the mix of patent classes assigned to the industry. A greater concentration of patents in one area increases the likelihood of technological disruption of incumbent operators.

Moderate Ease of Entry Potential A qualitative measure of barriers to entry. Fewer barriers to entry increases the likelihood that new entrants can disrupt

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Level Factor Disruption Description

incumbents by putting new technologies to use.

Very Low Market Concentration

Very Unlikely

A ranked measure of the largest core market for the industry. Concentrated core markets present a low-end market or new market entry point for disruptive technologies to capture market share.

The industry has a high rate of new patent technologies combined with moderately concentrated focus of patent types. New technology entering the industry increases the likelihood of discontinuous innovations. This presents a technology focus whereby new activity has a moderate potential to enter through less high-end areas.

The industry structure creates a moderate level of entry barriers, which is coinciding with a high rate of new competitors entering the industry. This high rate of entry creates a significant pool of potentially disruptive entities and the industry structure does not significantly affect their growth potential.

Major market segments for industry operators are relatively diversified. The spread of market segments suggests that there are limited entry points other than those already served my incumbent operators.

The Heating and Air-Conditioning Contractors industry is not significantly affected by technological advancements.

While industry operators that primarily offer residential repair services are being partially disrupted by the rising presence of do-it-yourself (DIY) videos and trainings, the fundamental market structure of this industry is not being significantly disrupted. These DIY videos and trainings provide consumers, primarily residential homeowners, with working knowledge on how to address and fix certain problems with heating and air-conditioning systems. However, the need for professional heating and air-conditioning contracting services is still demanded by a variety of downstream construction markets, which limits the potential negative effects of any technological disruption.

The level of technology change is Medium

The Heating and Air-Conditioning Contractors industry has undergone a moderate degree of technological change over the five years to 2020, largely owing to the rising proliferation of energy- efficient and smart or automated heating, ventilation and air- conditioning (HVAC) systems.

The increasing sophistication of systems has led to greater customization for large building contracts, with systems being tailored to a given structure's specific needs. Even single-family home contracts, which previously demonstrated a degree of uniformity, are becoming much more customized in response to the variety of automation technologies available. The influence from the trend toward specialized,

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tailored systems has been to segregate the industry into those contractors capable of meeting demands of large project developers seeking advanced building environmental systems and those contractors whose capacity is exceeded by such demands.

Technological change largely occurs at the manufacturing level, with contractors' techniques and knowledge then catching up to handle new developments. Smart home climate control systems make use of digital technology and interfaces and are able to self-diagnose problems, easing technicians' work but also mandating familiarity with digital systems. Consumers are able to use applications on mobile devices to interact with heating and air-conditioning systems as well. For instance, manufacturer Aprilaire's Home Comfort Control system, uses a touchscreen interface that integrates humidifier, dehumidifier, ventilation and temperature controls in one place. Such systems are highly user friendly and increase a household's control over its air quality and HVAC operations. As these developments become more standard over the five years to 2025, industry technicians will likely need to widen knowledge bases to include more electrical and computer skills to better maintain modern climate control systems.

Revenue Volatility The level of volatility is Low

Note: Revenue growth and decline reflective of 5-year annualized trend. Y-axis is in logarithmic scale. Y-axis crosses at long-run GDP. X-axis crosses at high volatility threshold.

The Heating and Air-Conditioning Contractors industry has exhibited a low level of revenue volatility over the five years to 2020, even amid an estimated decline in 2020 amid the COVID-19 (coronavirus) outbreak.

This contraction represents the largest anticipated dip in industry revenue in recent decades, posing similar losses to the financial crisis in 2008. Nonetheless, demand for industry services closely follows general trends in the economy, such as

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residential and commercial construction activity. Since construction tends to experience little fluctuation, industry demand volatility is inherently subdued.

Further, industry demand within the residential construction sector is influenced by economic factors that affect household income levels. Thus, during periods of economic growth, industry operators experience heightened contract volume amid increasing levels of per capita disposable income. Conversely, industry demand might falter in recessionary periods, especially those that precipitate income contraction. Over the past five years, industry revenue increased as much as 2.0% in 2017 and is expected to decline 8.2% in 2020 as the economic fallout from the coronavirus pandemic tapers demand from both the residential and commercial industry market segments. Nonetheless, general volatility is expected to remain low, moving forward.

Regulation & Policy

The level of regulation is Medium and is Increasing

The Heating and Air-Conditioning Contractors industry operates under a medium level of regulation, much of which relates to contractor certification.

Operators in the Heating and Air Conditioning Equipment Manufacturing industry (IBISWorld report 33341) are coming under ever-stricter environmental oversight regarding the efficiency of industry products. However, contractors that perform heating, ventilation and air-conditioning (HVAC) installation and maintenance are less closely regulated.

Licensing and training

Apprenticeship training or postsecondary or trade school education is mandatory to obtain various qualifications and operate in the industry.

Industry associations also certify competency across a range of specialized fields. Compliance with industry regulations, construction standards and licensing requirements adds to the cost of operating in this industry but also prevents the entry to the industry of unqualified competitors.

Industry activities are subject to various federal, state and local laws and regulations, including permitting and licensing requirements applicable to HVAC contractors; building, mechanical and plumbing codes and zoning ordinances; laws and regulations relating to consumer protection, including laws and regulations governing service contracts for residential services; and laws and regulations relating to worker safety. Failure to comply with the applicable regulations could result in substantial fines or revocation of operating permits.

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Environmental regulations

Contractors are subject to numerous federal, state and local environmental laws and regulations, including those governing vehicle emissions as well as the use and handling of refrigerants.

The Environmental Protection Agency and state and local governmental agencies administer these regulations. The federal government's Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), widely known as Superfund, can impose strict liabilities on past and present owners or operators of facilities and transportation that release hazardous substances. Many states have adopted statutes that are often more stringent than CERCLA.

Contractors are also subject to the Clean Air Act, Title VI, which governs air emissions and imposes specific requirements on the use and handling of substances known or suspected to cause harmful effects on the stratospheric ozone layer, such as chlorofluorocarbons (CFCs) and certain other refrigerants. Clean Air Act regulations require the certification of service technicians involved in the service or repair of systems, equipment and appliances containing these refrigerants and also regulate the containment and recycling of these refrigerants. The Clean Air Act is intended to eliminate the use of CFCs.

Over the next five years, the Department of Energy (DOE) efficiency standards for furnaces, air conditioners and heat pumps will come into effect. The standards establish different efficiency requirements for differing climates across the country, particularly for air-conditioning (AC) units, which are measured by a rating system called the Seasonal Energy Efficiency Ratio (SEER). AC units with higher SEER ratings (current maximum is 25) are more effective and use less energy. The new DOE rules require certain SEER ratings in different regions; in the South, for example, the minimum SEER required will be 14. Manufacturers will be most affected by the new requirements; however, the newer models encouraged by the rules are typically more easily installed in new construction than existing structures, according to Contracting Business magazine. This factor can alter contractors' bid times for projects and may require retraining with more focus on electronics or computer technology to correctly install digital interfaces often packaged with newer HVAC systems.

Industry standards and codes

Installation and maintenance services are subject to industry-based standards that are approved by the American National Standards Institute (ANSI).

The Air Conditioning, Heating and Refrigeration Institute, along with the American Society of Heating, Refrigerating and Air Conditioning Engineers, provides guidance and sets ANSI-approved standards that industry operators follow. In addition, the International Association of Plumbing and Mechanical Officials also set requirements for the installation and maintenance of industry systems.

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Industry Assistance

The level of industry assistance is Low and is Steady

The Heating and Air-Conditioning Contractors industry does not benefit from direct government subsidies or tariff protection.

Tariff protections do not apply to service-based industries. However, operators are somewhat protected by the stringent qualifications and licensing prerequisites needed to operate in each individual state. These requirements create a barrier to entry for companies seeking to enter the industry.

Moreover, homeowners and households have received substantial tax incentives to install energy-efficient HVAC systems over the five years to 2020, which has raised demand for professional industry technicians with the expertise to install more modern systems. In particular, a federal tax credit of 10.0% of cost up to $500.00 for homeowners that purchased central air conditioners, air source heat pumps, furnaces and boilers of certain energy efficiency ratings (EERs) was available through December 31, 2016. In 2017, the only federal tax credit available is for solar energy systems; homeowners may receive a tax credit of 30.0% with no upper limit through December 31, 2019, then decreasing to 26.0% through December 31, 2020, decreasing to 22.0% through December 31, 2021, before finally declining to 10.0% through December 31, 2022.

The industry also benefits from the support of associations and trade organizations, including the Air Conditioning Contractors of America, the Air- Conditioning, Heating and Refrigeration Institute, the Sheet Metal and Air Conditioning Contractors' National Association and the American Society of Heating, Refrigerating and Air Conditioning Engineers. In addition, the federal government along with municipalities provide indirect industry assistance through government contracts.

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Key Statistics Industry Data

Year Revenue IVA Estab. Enterprises Employment Exports Imports Wages Domestic Demand

Housing Starts

($m) ($m) (Units) (Units) (People) ($m) ($m) ($m) ($m) (Thousands )

2011 73,582 21,566 97,792 92,358 367,338 N/A N/A 18,844 N/A 609 2012 81,406 24,825 98,688 98,041 401,936 N/A N/A 21,080 N/A 781 2013 84,015 25,817 99,599 98,850 417,682 N/A N/A 21,952 N/A 925 2014 86,938 28,253 102,110 101,004 440,315 N/A N/A 23,472 N/A 1,003 2015 88,125 30,631 102,540 102,029 461,068 N/A N/A 25,168 N/A 1,112 2016 89,733 32,663 104,864 103,910 485,795 N/A N/A 27,099 N/A 1,174 2017 91,558 34,357 106,543 105,722 502,131 N/A N/A 28,314 N/A 1,203 2018 91,652 35,833 108,214 107,372 521,950 N/A N/A 29,784 N/A 1,250 2019 92,049 36,136 109,349 108,621 529,790 N/A N/A 30,167 N/A 1,300 2020 84,481 33,863 106,724 106,434 505,385 N/A N/A 28,560 N/A 1,333 2021 86,420 34,713 108,346 108,004 516,725 N/A N/A 29,203 N/A 1,351 2022 93,177 37,225 112,294 111,650 547,172 N/A N/A 31,037 N/A 1,375 2023 96,045 38,387 114,567 113,830 562,262 N/A N/A 31,912 N/A 1,390 2024 97,876 39,156 116,325 115,553 572,843 N/A N/A 32,514 N/A 1,402 2025 100,091 40,018 118,269 117,440 584,767 N/A N/A 33,203 N/A 1,440

Annual Change Year Revenue IVA Estab. Enterprises Employment Exports Imports Wages Domestic

Demand Housing

Starts (%) (%) (%) (%) (%) (%) (%) (%) (%) (%)

2011 0.12 2.33 0 -1 1 N/A N/A 0.64 N/A 3.74 2012 10.6 15.1 1 6 9 N/A N/A 11.9 N/A 28.2 2013 3.20 3.99 1 1 4 N/A N/A 4.13 N/A 18.4 2014 3.47 9.43 3 2 5 N/A N/A 6.92 N/A 8.43 2015 1.36 8.41 0 1 5 N/A N/A 7.22 N/A 10.9 2016 1.82 6.63 2 2 5 N/A N/A 7.67 N/A 5.57 2017 2.03 5.18 2 2 3 N/A N/A 4.48 N/A 2.47 2018 0.10 4.29 2 2 4 N/A N/A 5.19 N/A 3.90 2019 0.43 0.84 1 1 2 N/A N/A 1.28 N/A 4.00 2020 -8.23 -6.30 -2 -2 -5 N/A N/A -5.33 N/A 2.53 2021 2.29 2.50 2 1 2 N/A N/A 2.25 N/A 1.35 2022 7.81 7.23 4 3 6 N/A N/A 6.27 N/A 1.77 2023 3.07 3.12 2 2 3 N/A N/A 2.82 N/A 1.09 2024 1.90 2.00 2 2 2 N/A N/A 1.88 N/A 0.86 2025 2.26 2.20 2 2 2 N/A N/A 2.11 N/A 2.71

Key Ratios Year IVA/Revenue Imports/Demand Exports/Revenue Revenue per

Employee Wages/Revenue Employees per

estab. Average Wage

(%) (%) (%) ($'000) (%) 2011 29.3 N/A N/A 200 25.6 3.76 51,299 2012 30.5 N/A N/A 203 25.9 4.07 52,447 2013 30.7 N/A N/A 201 26.1 4.19 52,557 2014 32.5 N/A N/A 197 27.0 4.31 53,307 2015 34.8 N/A N/A 191 28.6 4.50 54,586 2016 36.4 N/A N/A 185 30.2 4.63 55,783 2017 37.5 N/A N/A 182 30.9 4.71 56,388 2018 39.1 N/A N/A 176 32.5 4.82 57,062 2019 39.3 N/A N/A 174 32.8 4.84 56,942 2020 40.1 N/A N/A 167 33.8 4.74 56,510 2021 40.2 N/A N/A 167 33.8 4.77 56,516 2022 40.0 N/A N/A 170 33.3 4.87 56,722 2023 40.0 N/A N/A 171 33.2 4.91 56,757 2024 40.0 N/A N/A 171 33.2 4.92 56,760 2025 40.0 N/A N/A 171 33.2 4.94 56,780

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Industry Financial Ratios April 2018 - March 2019 by company revenue Liquidity Ratios April 2015 -

March 2016 April 2016 - March 2017

April 2017 - March 2018

April 2018 - March 2019

Small (< $10m)

Medium ($10m-50m)

Large (> $50m)

Current Ratio 1.6 1.6 1.6 1.6 1.6 1.6 1.5 Quick Ratio 1.3 1.3 1.3 1.3 1.4 1.3 1.3 Sales / Receivables (Trade Receivables Turnover) 7.2 7.1 7.0 7.1 11.1 5.7 5.4 Days' Receivables 50.7 51.4 52.1 Cost of Sales / Inventory (Inventory Turnover) 140.2 136.1 167.8 150.8 185.7 128.3 156.1 Days' Inventory 2.6 2.7 2.2 Cost of Sales / Payables (Payables Turnover) 13.9 13.7 13.7 13.5 17.0 11.7 10.9 Days' Payables 26.3 26.6 26.6 Sales / Working Capital 12.1 12.2 12.1 12.4 16.4 10.4 10.2

Coverage Ratios Earnings Before Interest & Taxes (EBIT) / Interest 14.7 15.3 14.4 13.1 10.9 15.0 22.1 Net Profit + Dep., Depletion, Amort. / Current Maturities LT Debt

4.2 5.4 4.7 5.3 4.0 5.2 7.2

Leverage Ratios Fixed Assets / Net Worth 0.3 0.4 0.3 0.4 0.6 0.3 0.3 Debt / Net Worth 1.7 1.8 1.7 1.7 1.9 1.5 1.9 Tangible Net Worth 31.4 30.1 29.6 29.2 25.0 34.8 29.2

Operating Ratios Profit before Taxes / Net Worth, % 36.1 35.7 35.6 38.3 46.0 33.3 37.6 Profit before Taxes / Total Assets, % 12.6 13.0 12.4 13.8 16.8 11.3 12.7 Sales / Net Fixed Assets 29.7 28.7 27.3 28.3 23.5 32.2 33.6 Sales / Total Assets (Asset Turnover) 3.2 3.2 3.2 3.2 3.5 3.0 2.8

Cash Flow & Debt Service Ratios (% of sales) Cash from Trading 28.0 29.5 30.9 29.8 39.9 22.8 18.2 Cash after Operations 4.6 5.3 4.4 4.8 5.6 4.1 4.8 Net Cash after Operations 4.7 5.3 4.6 4.7 5.4 4.0 4.3 Cash after Debt Amortization 1.5 1.9 1.2 1.3 1.5 0.8 1.7 Debt Service P&I Coverage 4.2 4.4 4.0 3.5 3.5 3.4 5.0 Interest Coverage (Operating Cash) 13.3 14.1 12.0 10.6 10.0 10.3 19.7

Assets, % Cash & Equivalents 18.2 18.5 18.2 18.6 21.1 16.4 14.7 Trade Receivables (net) 42.1 41.7 41.8 40.8 33.3 48.6 48.8 Inventory 6.7 6.7 6.2 6.4 7.3 5.4 5.7 All Other Current Assets 6.1 5.8 5.8 5.9 3.7 7.6 9.8 Total Current Assets 73.2 72.7 72.0 71.6 65.3 78.0 78.9 Fixed Assets (net) 17.1 17.6 18.1 18.0 23.3 12.8 11.3 Intangibles (net) 3.4 3.4 3.7 4.3 4.4 3.7 5.9 All Other Non-Current Assets 6.3 6.2 6.1 6.1 7.0 5.5 3.9 Total Assets 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Total Assets ($m) 12,660.7 11,134.1 14,085.3 13,843.8 980.7 4,276.2 8,587.0

Liabilities, % Notes Payable-Short Term 8.5 8.7 8.4 9.0 11.3 6.9 5.1 Current Maturities L/T/D 2.8 3.2 3.1 3.4 4.2 2.6 2.2 Trade Payables 19.1 19.1 19.2 18.8 15.8 21.9 21.8 Income Taxes Payable 0.3 0.3 0.2 0.2 0.2 0.3 0.1 All Other Current Liabilities 16.3 16.8 16.5 16.5 13.4 18.2 24.5 Total Current Liabilities 47.0 48.2 47.4 47.8 45.0 49.9 53.7 Long Term Debt 13.4 14.4 15.5 14.8 20.9 8.4 8.1 Deferred Taxes 0.2 0.3 0.2 0.2 0.2 0.3 0.1 All Other Non-Current Liabilities 4.5 3.6 3.6 3.7 4.5 2.8 3.0 Net Worth 34.8 33.5 33.3 33.5 29.4 38.5 35.1 Total Liabilities & Net Worth ($m) 12,660.7 11,134.1 14,085.3 13,843.8 980.7 4,276.2 8,587.0

Maximum No. of Statements Used 1,472.0 1,336.0 1,360.0 1,373.0 705.0 506.0 162.0

Source: RMA Annual Statement Studies, rmahq.org. RMA data for all industries is derived directly from more than 260,000 statements of member financial institution's borrowers and prospects.

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Additional Resources Additional Resources

Air Conditioning Contractors of America Association http://www.acca.org

Sheet Metal & Air Conditioning Contractors' National Association http://www.smacna.org

Air-Conditioning, Heating and Refrigeration Institute http://www.ahrinet.org

American Society of Heating, Refrigerating and Air-Conditioning Engineers http://www.ashrae.org

Contracting Business http://www.contractingbusiness.com

US Environmental Protection Agency http://www.epa.gov

Industry Jargon GREEN A category that includes goods, services, laws, guidelines and policies that have little to no

effect on the natural environment; also referred to as eco-friendly or environmentally

friendly.

HEATING, VENTILATION AND AIR-CONDITIONING (HVAC) A system used to control the temperature, humidity and air quality in buildings.

LEADERSHIP IN ENERGY AND ENVIRONMENTAL DESIGN Also known as LEED, an environmental building certificate program that was established

under the US Green Building Council and certifies buildings that meet energy-efficiency and

green requirements.

NONEMPLOYER An operator without payroll employees, typically a sole proprietorship or partnership.

REFRIGERATION A system used to store perishable items, such as food, medicine and chemicals.

SEASONAL ENERGY EFFICIENCY RATIO (SEER) Rating system that measures efficiency of HVAC systems. Calculated by dividing cooling

output for a typical system by total electric energy input for a given period. Higher ratings

best.

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Glossary Terms 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.

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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.

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REGIONS West | CA, NV, OR, WA, HI, AK

Great Lakes | OH, IN, IL, WI, MI

Mid-Atlantic | NY, NJ, PA, DE, MD

New England | ME, NH, VT, MA, CT, RI

Plains | MN, IA, MO, KS, NE, SD, ND

Rocky Mountains | CO, UT, WY, ID, MT

Southeast | VA, WV, KY, TN, AR, LA, MS, AL, GA, FL, SC, NC

Southwest | OK, TX, NM, AZ

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.

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