The first quarter of 2022 proved a lot like the fourth quarter of 2021 for publicly traded HVAC companies. Revenue continued to set records, but rising input costs ate up a good share of the increase. The good news is that several manufacturers reported an increase in organic growth.

Lennox International Inc. reported record first-quarter revenue of $1.01 billion. Both the company’s residential and refrigeration divisions set new first-quarter highs for revenue and profit. Residential revenue was up 13%, led by double-digit growth in both replacement and new construction business. Segment profit rose 12% as segment margin was down slightly to 15.8%. Refrigeration revenue was up more than 20% in North America.

Interim CEO Todd Teske said demand for commercial equipment remained strong, but the business continued to be hit the hardest on the production front. Commercial revenue was down 6% and profit was down 77% in the first quarter as segment margin contracted to 3.4%. 

“The commercial team continues to take aggressive actions to resolve tight labor market, supply chain, and production challenges, and we are seeing signs of improvement from these initiatives,” Teske said.

Trane Technologies PLC reported similar challenges to its operations in the Americas. Trane’s operating margin was down despite volume growth and price increases. Company executives said this was due to negative impacts on productivity arising from supply chain, freight, and logistics challenges.

Trane’s Americas segment delivered record first-quarter revenue and bookings. Americas reported organic bookings and revenues were up 6% and 13%, respectively. Americas also delivered record backlog at the end of the first quarter.

Carrier Global Corp. reported double-digit organic sales growth in the first quarter. Overall, Carrier’s first quarter sales of $4.7 billion were down 1% compared to the prior year, due in large part of the sale of its Chubb fire and security business. Residential and light commercial HVAC, and controls were all up over 20% in the quarter.

“Demand for our innovative solutions was strong in the first quarter as customers leveraged

our differentiated offerings to improve indoor environments and achieve their sustainability goals,”

said Carrier CEO Dave Gitlin. “We are encouraged by this momentum and confident that key secular trends and our differentiated life cycle solutions will drive continued strong growth.”

Inflation Impacts Results

Burnham Holdings Inc. reported that sales were up $8.4 million to $52.4 million. Burnham executives attributed the increase to continued strong demand for residential and commercial heating equipment. Sales of residential products increased by 17.6% compared to the same period a year ago.

Sales to the commercial market are making a comeback as well. Burnham reports that sales of commercial products increased by 25.1% as numerous COVID-19-delayed projects restarted in several key markets. Although incoming orders for commercial products remain below pre-pandemic levels, they are 62% higher versus the first quarter of 2021.

However, Burnham executives warned in the release about upcoming challenges. Higher interest rates, along with higher debt levels due to inflationary pressures, are affecting working capital. The release stated that the company faces significant difficulties in hiring and retaining qualified employees. In addition, price inflation on purchased materials remains a headwind, particularly metals, freight costs, and resin-based materials such as plastics, paint, and glue.

Distributors, Contractors Report Similar Experiences

The success and challenges facing manufacturers flow down to distributors and contractors.

Watsco Inc. reported record sales growth in the first quarter. Sales grew 35% to $1.52 billion. Commercial refrigeration products saw the biggest growth in sales, increasing by 35%, but these products make up only 4% of Watsco’s total sales. HVAC equipment, which makes up two-thirds of total sales, grew by 26%. HVAC product sales increased by 24%.

Albert H. Nahmad, Watsco’s CEO, attributed the company’s success to the company’s technology platforms. Nahmad said these platforms enable contractors to sell more high-efficiency HVAC systems. The community of active users on Watsco’s platforms grew sales 30% faster than Watsco’s overall sales growth rate over the 12 months ended March 31 and experienced 70% less sales attrition year over year. Watsco has boosted its annual technology spending by $10 million to $46 million in the same period.

“As the digital age influences how HVACR products and services are sold, we believe that Watsco’s customer-focused technologies, scale, and leadership position offer significant long-term value,” Nahmad said.

Passing On Price Increases

The Watsco earnings release does also point out that much of the sales growth came from passing on price increases from the manufacturers. That 26% increase in HVAC equipment sales comprised of an 8% increase in unit sales and an 18% increase in average unit selling prices. Some of that price increase came from selling more high-end units.

Supply chain issues created increased costs for Watsco. The company’s freight and delivery costs increased 23% or $7 million during the quarter, reflecting higher-than-normal inventory movement within Watsco’s network to meet customer demand. Company executives expect incremental costs to moderate as OEM supply chains normalize.

The backlog for Comfort Systems USA Inc., a publicly-traded HVAC contractor, show the impact of supply chain issues. Backlog as of March 31 was $2.73 billion as compared to $2.31 billion as of December 31, 2021, and $1.66 billion as of March 31, 2021. On a same-store basis, backlog increased from $1.66 billion as of March 31, 2021 to $2.50 billion as of March 31, 2022.

Comfort Systems’ revenue rose steeply in the first quarter. Revenue was $885.2 million compared to $669.8 million in 2021. The company reported operating cash flow of $63.7 million, compared to $84.6 million in 2021.

The question facing the industry is how long supply will remain an issue and how long demand will remain strong. There are some reasons for being hopeful when it comes to supply, but many issues linger. As for demand, Watsco executives stated in their earnings release that several factors point toward that continuing, including continued consumer interest in investing in their HVAC systems and the move toward electrification. Brian Lane, Comfort Systems USA’s president and CEO, said there’s still plenty of demand right now.

“Bookings once again increased significantly, providing further evidence of solid underlying demand for our services,” Lane said.