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Comfort Systems USA Inc
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Good day and welcome everyone to the Quarter 1, 2020 Comfort Systems USA Earnings Conference hosted by the Comfort Systems USA. My name is Sheila and I will be your operator for today.
During the presentation, your lines will remain on listen-only. [Operator Instructions] I’d also like to advise all participants, this conference is being recorded for replay purposes.
And now I would like to hand over to Julie Shaeff. Please go ahead.
Thanks, Sheila. Good morning. Welcome to Comfort Systems USA's first quarter earnings call. Our comments this morning as well as our press releases contain forward-looking statements, within the meaning of the Private Securities Litigation Act of 1995. What we will say today is based on the current plans and expectations of Comfort Systems USA. Those plans and expectations include risks and uncertainties, that might cause actual future activities and results of our operations to be materially different from those set forth in our comments.
You can read a more detailed listing and commentary concerning our specific risk factors in our most recent Form 10-K, and Form 10-Q as well as in our press release, covering these earnings. A slide presentation has been provided as a companion to our remarks. The presentation is posted on the Investor Relations section of the company's website found at comfortsystemsusa.com.
Joining me on the call today are Brian Lane, President and Chief Executive Officer; and Bill George, Chief Financial Officer. Brian will open our remarks.
Okay. Thanks Julie. Good morning everyone and thank you for joining us on the call today. Let me start by sincerely thanking all of our Comfort Systems USA employees for their work and commitment and especially their incredible courage and resilience during this global pandemic.
As you all know, these are challenging times but Comfort Systems is rising to the occasion and we have been very fortunate so far. COVID-19 began impacting our business at very significant levels in the second half of March. In spite of that we had good earnings and terrific cash flow in the first quarter and our backlog is holding up. We will get into those details in a few minutes but I want to comment a bit more about the immediate challenges we are facing.
Most important, we are working to keep our employees and our communities safe. Our locations have been working to implement CDC and OSHA guidelines to ensure our workforce and our community is kept safe and healthy during COVID-19 and in addition to working to meet these guidelines we are taking many other actions.
In various markets, we have implemented segmenting and designated work zones, staggered start times, temporal scanning and screening, disinfecting equipment and work areas, distancing and wearing a protective face and nose personal protective equipment. As you know, we operate in scores of different markets in dozens of states and our leadership in each location is conforming to the measures that are required locally and seeking the path that will work best to keep our people safe and well. That is a true strength of Comfort Systems.
Our overall business was affected in the closing weeks of the first quarter and of course those effects are continuing. Our service business experienced the most immediate and pronounced negative impacts largely as a result of building closures or decisions made by customers to limit building access. Although our construction activities are considered essential services in most markets, we have also had certain jobs temporarily closed due to government pronouncements due to decisions by owners and when sites reported positive tests for COVID-19. While we have seen some construction jobs delayed so far we have not experienced material cancellation.
In addition to actual stoppages, our project and service work has experienced efficiency challenges as a result of the important precautions that we are taking. But our amazing teams across the U.S. are still managing to accomplish great work and are being productive in light of these circumstances. Our local leadership, project management and especially our field workers have been extraordinarily effective exceeding my high expectation for how they would respond at a time like this.
In the midst of these challenges, we have started 2020 on a very good note. Revenues were $700 million compared to $538 million in the prior year and our growth included a 6% increase on the same store basis. We are in $0.48 per share in the first quarter and that result is despite a direct impact of $0.09 due to COVID-19.
In addition to the directly quantifiable impacts as I described above, we are also impacted by less quantifiable ways by COVID-19 including weakness in service and productivity challenges in project work. As of March 31, 2020 our backlog was strong and is more than $200 million higher than the prior year on a same store basis. We are reporting fantastic first quarter cash flow which is a tribute to our team's focus on cash in a traditionally weak cash flow quarter.
Before I turn sometime over to Bill, I also want to mention our acquisitions. During February we added a strong company in North Carolina, Starr Electric to our Electrical segment. In addition to having a great contracting business in customer list they will strengthen our modular construction business in North Carolina. Starr and our local business already have a long history of successful collaboration.
On April 1, we completed the acquisition of TAS, which we believe will make us the leading modular and off-site construction expert across the growing modular mechanical contracting industry. With TAS, now a part of Comfort Systems USA and when considered in connection with our existing capabilities at EAS in North Carolina, we believe that we now have unmatched capability to complete complex, modular and off-site construction and the growing modular construction industry.
Our off-site construction business is particularly strong in the technology, medical and pharmaceutical industries. This combination gives us a great opportunity to cross-sell our capabilities to our existing customer base at all of our locations and augments our already strong industrial segment, which increased to 39% of total revenue in the first quarter. In the midst of these challenges we continue to invest and we remain optimistic.
I will discuss our business and outlook in more detail in a few minutes but first let me turn this call over to Bill to review the details of our financial performance. Bill?
Thanks Brian. Good morning everyone. So first quarter revenue increased by 30% to $700 million this quarter compared to the same quarter last year which means as Brian said same store revenue also increased by 6%, the rest due to our acquisition.
Quarterly gross profit increased by $10 million to a total of $117 million in the first quarter of 2020 compared to the same quarter last year. The gross profit dollar increase was due to the Walker acquisition. Our first quarter growth margin was 16.7% in 2020 compared to 19.8% in 2019. The decline in gross profit percentage is the continuing result of the addition of our Electrical segment which is weighted to large and complex projects with significant amounts of material and equipment pass through cost and which has a lower percentage of service work combined with the effect of inefficiencies from COVID-19.
Our Electrical segment was added at the start of the second quarter of 2019. So this is the last quarter where that segment will not have been included in the year earlier quarter. Our Electrical segment, in addition to their large project mix and lower service component experienced specific project challenges including the impact of COVID-19 on productivity and certain adjustments that impact our gross margin. With larger projects and less service, our Electrical segment also lowered our SG&A percentage.
Net income for the first quarter of 2020 was $18 million or $0.48 per share as compared to $20 million or $0.53 per share in 2019. As Brian previously mentioned, we had approximately $0.09 of direct COVID-19 impact and we were additionally impacted in less quantifiable ways by COVID-19 including weakness in service and productivity challenges in project work. For the first quarter EBITDA was $37 million compared to $38 million for the prior year. The small decline in EBITDA results from the negative effects of COVID-19 offset by EBITDA that was contributed by Walker.
Now that I've run through our various profit measures before I move on to other aspects of our financials, I want to take a few minutes to comment on potential ramifications for our company from COVID-19 and talk briefly about the mechanics of how and when that is affecting and will affect us.
I'm going to talk about some of the risks we're facing; how they create more potential volatility in our results and judgments and the timing for how they could unfold. The global pandemic brings with it many proximate risks, most of which are fairly obvious. Work sites are subject to closure and reopening. Precautions and adjustment measures create an efficiency that's hard to measure and as you saw this quarter the challenges for our customers can affect the timing of and in some cases their ability to pay for services. Although we have not seen jobs canceled that is a possibility and even the likely deferral of some work can create air pockets and planning challenges.
There are also second-order risks that are less proximate. The most obvious being the effect of these challenges on industry activity and business cycle conditions. The volatility of the results we are suddenly experiencing can also affect judgmental areas and we will need to closely monitor the ramifications for accrual relating to risk or medical cost, purchasing rebates and our intangible such as goodwill. As the next few quarters unfold we will see these effects.
This quarter we reconsidered certain receivables receivable exposures in light of the effect of COVID-19 on certain of our customers. And as a result we increase our receivables accrual. As a result of our bad debt expense for the first quarter was $4.6 million which is a stark increase from last year when our bad debt was only $200,000.
We also reassessed our jobs in light of productivity challenges. We currently believe that the second quarter will see the greatest direct impact especially on revenue as we cope with additional service delays and job stoppages and as we continue to adapt to changes that can affect efficiency during the second half of the year. Although we're optimistic conditions will improve there will still be productivity impacts and we may see some air pockets that arise from delays or the slow return of smaller work.
We feel that we're prepared to confront these challenges and we believe in our investments in Service and our growth in the Industrial segment of Technology, Medical and Pharmaceutical give us a good opportunity to cope with these challenges successfully. We believe that we can face these challenges in 2020 and that we will emerge stronger.
So with that is background let me now comment on a few more areas from the first quarter. SG&A expense was $93 million for the first quarter of 2020 compared to $79 million for the first quarter of 2019. SG&A increase primarily due to SG&A from new acquisitions as well as an increase in bad debt expense of $4 million. The increase in bad debt expense was primarily driven by concerns about collectability of certain receivables due to the business interruption caused by the global pandemic, specifically with respect to receivables with retail, restaurant and entertainment companies.
SG&A as a percentage of revenue was 13.3% in the current quarter compared to 14.7% in the first quarter of 2019. We continue to benefit from SG&A leverage largely due to the Electrical segment which requires lower levels of SG&A.
Our 2020 tax rate was 27.6% compared to 25.9% in 2019. Our prior year tax rate benefited from permanent differences related to stock-based compensation. Cash flow for the quarter was remarkably strong as our free cash flow is a positive $15 million compared to negative $7 million in 2019. This is a traditionally weak cash flow quarter. So this positive cash flow is a notable achievement for our operators. We feel good about our cash prospects despite the ongoing challenges.
As of today our debt balance is $348 million and includes borrowings under our credit facility of $291 million. We have two principal financial cabinets under our facility. The first one is a total leverage ratio which cannot exceed 3.0. The leverage ratio as of March 31, 2020 was 1.5 and today we have very substantial additional capacity of $244 million.
The second financial covenant is the fixed charge coverage ratio which is required to be at least 1.5 and which on March 31 was 10.7. So we have seized that trailing 12-month requirement by more than 700%. Those of you who have been around our company for a long time are well aware that we run our balance sheet in order to be ready for time like this.
During April, we were able to take advantage of our strong balance sheet to enter into a swap agreement to fix the variable portion of our interest calculation for a substantial portion of our debt. As a result of the swaps we executed we expected about 75% of our bank debt, which up to now has variable interest rates will bear interest at a roughly 2% fixed rate for the next 30 months, an immediate decrease of about a 0.5% even from the low rates we were getting.
During the first quarter, we purchased 237,000 of our shares at an average price of $37.85. Late in the first quarter and specifically as the scale of COVID-19 challenges became apparent, we withdrew our automated share repurchase plan and thus we have stopped purchases for now. We will reevaluate that and conditions develop. That's all I have on financial Brian.
Okay. Thanks Bill. I am going to spend a few minutes discussing our backlog in various sectors and markets. I will also comment on our outlook for the second quarter and beyond. Backlog at the end of the first quarter of 2020 was 1.6 billion, the same sort increase of 252 million or 22% compared to March 31, 2019 primarily due to the strong reputations and performance of our many locations. Sequentially, our backlog was roughly flat with a small sequential increase in our Mechanical segment and a sequential decline in our Electrical segment and overall we remain at the high levels that we reported at year-end.
Most sectors have remained strong with particular strengths in industrial. Our Industrial revenue increased to 39% of total revenue in the first quarter. Institutional markets which include government, healthcare and education were 36% of our first quarter revenue, which is consistent with what we saw in 2019. The commercial sector was 25% of our revenue. With the acquisition of TAS and Starr Electric we expect to continue to grow our off-site construction business particularly in the Technology, Medical and Pharmaceutical industries.
For the first quarter of 2020, Construction is 79% of our total revenue with 49% from construction projects for new buildings and 30% from construction projects in existing building. For the first quarter of 2020 Service is 21% of our revenue with service projects providing 8% of revenue and pure service including hourly work providing 13% of revenue.
Beginning in late March, our service business experienced the first and most pronounced negative impacts associated with COVID-19, largely as a result of building closures or decisions by customers to limit building access. Although our construction activities have been classified as essential services in most markets, we have had certain jobs temporarily closed due to government action, decisions by owners or upon positive tests with COVID-19 of workers at various sites. We have also had some delays in the award of new work and we have been informed of instances of delayed starts. Up until now we have not experienced material cancellations in our backlog.
In addition, we have implemented safety precautions and other COVID-19 related guidelines that have added cost or inefficiency as we work to create a safer environment for our team members and our communities. Geographically, COVID-19 has impacted us more in the Northeast and Upper Midwest especially in states where construction has not always been classified as essential, particularly in New York, Michigan and Washington states.
Finally, our outlook. We expect to experience the most significant impacts from COVID-19 during the month of April, May and possibly June. However, that will depend on how national events unfold. We also expect that COVID-19 will affect us for remainder of 2020. Assuming that some relief is evident by June, we currently believe that earnings per share in the second quarter will be considerably positive perhaps achieving levels there about one-half of the same quarter in 2019. We also anticipate improvement from those levels in the second half of 2020.
However, we are preparing for a wide range of economic circumstances in 2020 and beyond. We have a great workforce and we feel confident that we can continue to be profitable. Cash flow positive and that our ongoing investments will continue to pay off and will accelerate our growth when strength returns to our industry. Thank you once again to all our employees for their hard work and dedication.
I'll turn it back over Sheila for questions. Thank you.
Thank you so much. [Operator Instructions] The first question comes from line of Sean Eastman of KeyBanc Capital. Please proceed.
Thanks gentlemen. Thanks for taking my questions. I just like to start on the service business. Clearly, it seems like the most materials near-term disruption but just curious to get your sense on how you'd frame demand recovery once the environment normalizes? I'm just curious on how you'd frame, what demand looks like on the buildings that have been empty or near empty and how the business comes back once people get back to work?
That's a really good question. I'm always optimistic about Service. I think this is just a blip personally. I think as you're seeing some of the warmer weather increase, people still need to take care of their buildings. They just can't let them sit dormant. I mean we're seeing good activity in Service in the Southeast still today. Also, I think there's going to be opportunity as we go forward looking at the way air flows through a building, looking at filters. So I think there's going to be opportunities and I think service can come back very-very quickly. So we're pretty optimistic going into the summer that will happen. So Bill you have anything? You're good there? All right.
Okay. Great. Really helpful. Make sense. And then maybe just broadly if you can comment on what the bidding environment is like currently? Has bidding paused or stopped for new construction in the interim or you guys still bidding and booking work at this point?
That's, so Sean, bidding activity probably surprisingly it's still quite good, maybe a little bit more active in different parts of the country but in general we are seeing a lot of opportunities to look at still, some opportunities like in New York State for example with Abbott both in Maine and facilities in outside of Syracuse that needs some quick build but I looked at a couple of bonds, one this morning one last night, so the activities as far as I'm concerned still pretty good. Bill do you have anything to add to that?
Yes. I think, I actually so I made a couple even phone calls this morning just to double check. There's activity there is, there were in the last month there were going to be job interviews that were canceled or delayed well not canceled delayed. So there's going to be some delay, obviously you shut things down, you did there shutdown. I also think that there may be over the next quarter or two a little bit slow return of the quick turn work.
Our book of business for projects is made up of projects that are developed for a really long time but as you know our average project size is like, I don't know in the hundreds of thousands and a lot of that quick-turn work. So we'll have to wait and see how fast that gets going again. That's one of the reasons we mentioned that the possibility of air pocket but I have not yet talked to anybody who said they see things that were going to happen that aren't going to happen now. That could come but that hasn't come so far.
And Sean, you take like I mentioned in my script about New York, Michigan. New York's I think coming back a little bit. Washington State recently I think the other day has started turning it around to add construction. So I think we'll be all right it just how this is going to play out long term.
Okay. Helpful and last one for me you guys mentioned the Pharma, Medical, Technology opportunity said, holding out well a few times in the script. I'm just wondering if there's already signs of strength there or just how you expect these opportunities to play out?
Sean on technology, we've had big technology customers contacting us, ask us for reassurance that this won't slow us down. So that's encouraging. On pharma, that stuff takes a little while to get going but it I do think that maybe America will see some charm and the possibility of having more important pharmacological ingredients prepared in the U.S. rather than far away. So I think it's pretty, I feel pretty optimistic. I don't think it magically transforms things within a quarter or two but I think these are, this has some good fundamental characteristics.
Sean, we are really-really well-positioned in pharmaceutical and the sectors I know we mentioned that numerous times for a reason. So I am pretty optimistic that that's going to come back and there be a lot of opportunities for us going forward. So I think it's pretty exciting actually
Excellent. I really appreciate the time. Thanks guys.
All right. Have a good day.
Best of luck out there.
Thank you.
Thank you. And the next question comes from the line of Joe Mondillo of Sidoti & Company. Please go ahead.
Hi guys. Good morning.
Morning Joe.
How are you?
Good. Doing well. Hope you are doing well as well.
We are doing terrific. Thanks.
Good to hear. Very good to hear. In terms of your sort of 2Q outlook, would you help us understand how you're thinking about that? You sort of talked about how potentially down 50% but I think there's probably a range. Any other information that you can give us whether it's how April's trending and how you're thinking about that 2Q guidance that you sort of provided?
Yes. So we gave that guidance because it's the best thing that we have but there are going to be facts that develop on the ground. As far as April goes, we have jobs closed down as we speak because of COVID tests. We have jobs that closed for two days. We have jobs that closed for a week. Walkers had probably more job closures than anybody else on some of their bigger jobs. We don't know how that's going to develop but that's still, we're talking about out of thousands of jobs. So with that we still have work to do.
We think Service will pick back up. Really it's what we said in our press release, this is assuming we start to get noticeable relief in June that we're very vulnerable to changes in government pronouncements. We have certain states where we're shut down because the way that the governor worded the order shut us down. So we are subject to facts and circumstances as they develop but right now assuming things trend at these levels for let's say another month and start to get a little better in June that guidance we gave is what we're thinking.
So it's interesting Joe we have an opportunity outside of Syracuse. We get a call last Wednesday we're already on the site today. So there's some opportunities and they're quick and they need someone have worked with they can get the a quick. So we are well-positioned for some of these opportunities particularly if it relates to some COVID-19 remedies.
Okay and in terms of your comments that you made about sort of COVID-19 impacting even the second half of the year but most likely improvement from the 2Q levels. What are the biggest sort of impacts that you're anticipating to the business out once we even start to reopen by June or July?
I will go first. I'm going to go first on that. So there's a couple of things. One so immediately we had to look at our receivables and say okay we got this customer. They're not paying their rent right now. Should we impair their receivable to some extent yes. So as you have those kind of immediate impact. They hit us even by the end of March. Then this quarter you have the actual stoppages, the closed building. Once you get past this quarter, I think your biggest risk are there's productivity and there's air pockets.
Productivity so at the end of the first quarter and we'll do this again as we close March, we have to estimate how much it will cost us to complete a job. We have to take into account when we make that estimate all of the facts and circumstances that we know about. Well, at the end of March we now knew that we could only put four people in an elevator on a vertical job where before we put 10.
We now knew that a scissor lift could only have one guy standing on the platform rather than two. We knew our guys would be backed up getting their temperature taken. So because of that we wrote down some of our jobs. Well, that new margin that they're at is what they'll play out for the rest of the year. So we have jobs. We lowered their margin one time obviously the jobs that are newer the ones that can have the bigger impact on.
The other concern I have and these are just, these are incremental concerns but they matter is air pockets. I really believe that some of this quick-turn work will be slow to come back. We actually think we may have some competitors who are getting these loans and have to have a certain number of people working to be forgiven their loans, may take work cheap here and there especially that last minute quick turn work. We've seen a little bit of evidence that that might happen.
We have concerns that, we may be slow getting some of our labor back because some of these, because of concerns employees have about coming back but also because in some cases they're being paid pretty well not to work. So all of those are what we're baking into those considerations. So overall we feel like we've got a good business our guys are fantastic. They know they want to work hard and they know how to make money but this is the real world and those are real things and they're going to matter a little bit somewhat.
Joe, while we're talking about this topic and we've talked a lot about the field but we are really fortunate here. We've had a work remotely and I'm talking about the finance administration accounting folks both at corporate and the operating that -- Julie leads the charge and she opens up these comments. I can't thank them enough that they were able to meet all the deadlines and get us ready for this call today. It was a lot of hard work. I think Julie spent a few nights here making sure that we would tie it up. So I really want to thank them for all the hard work and how professional and disciplined they were.
Just to follow up on that question. Are you, do you, I’m sorry lost my train of thought. My last question and I'll hop back in queue. Just a follow up on the prior question regarding new project work. Looking back to past sort of occurrences in the economy obviously we've never seen something like this with a pandemic but we have seen some shocks in the system 2008, 2001, 2000. When you look back at those time occurrences, would you anticipate in this time around to feel an impact to new project work six weeks into sort of the shock if you will or would bidding and new project work would it take a little bit more time just wondering what should we expect to feel the effect of new project work being affected by this at this point in time or if it's going to take a little longer if it will happen at all?
So I will take that question Joe. So this is give or take my 60th quarterly call and I will agree with you that we've never seen anything like this. There are some big differences from those prior events you're talking about. The biggest difference to me is Comfort Systems is a very different company today. Our biggest segment going into the most recent the financial crisis with multi-family today at 3% of our revenue, we have tech and pharma that we didn't have then.
We've made a big investment in Service. So those are big differences that make me feel like this will enroll in a better way. As far as when these events hit, I think there's two things going on. There's the effects of the emergency that just happening right now and that will be more in the May, that will be this year. That will be in the nature of some air pockets because of deferrals that lowered productivity and then there is the question of what the impact will be on the business cycle next year.
I would say the biggest difference between the thing that makes it the hardest to calculate for me, one really big difference between this and the other two big recessions that I have been at Comfort Systems for was when the 9/11 recession hit in the financial crisis recession hit we were already in an unbalanced situation. We were already seeing big increases in unemployment in the United States. We had high levels of vacancies that had already happened. So we were at the start of a recession and then we had a shock.
What's different this time is this shock came when the fundamentals were as good as they've ever been, when people were reassuring, when the tax regime was more welcoming let's say when we had cheap and abundant energy, when good things were going on and I think that could make a big difference but I'm going to be honest with you, it's a really hard call about what kind of recession this triggers. We're trying to prepare for all eventualities.
Okay. Well, thanks. I will hop back in queue. Thank you.
All right. Thanks Joe.
Thank you. And the next question comes from the line of Brent Thielman of D.A. Davidson. Please proceed.
Thanks. Good morning.
Good morning Brent, how are you doing?
I am doing well. Thank you. Bill or Brian I know you had some work at Walker coming into the quarter that it had some lower margin, I think attached to it sounds like that might have been amplified by some of the COVID-19 impacts. Are you through that now and I guess any estimate kind of how diluted that was on the electrical margin this quarter? And I guess to take that a step further how do we think about, I know there's a lot of variables here in the next couple quarters, how do we think about that target gross profit margin in the business as we move through to 2020?
So that is even if you set aside the uncertainty that appeared for all of us that's not a super easy question to answer. Let me tell you first about Walker. So Walker historically before we bought them they've had, they really have never made money in the first quarter. That was not culturally something that they had an expectation of and then this quarter they really were punched in the mouth in a lot of ways. They had, I don't know some of it might have been in April but they had multiple COVID-19 shutdowns. They had bad weather on an important project that was, that had challenges. And so this was a quarter that I believe will not even be remotely indicative for them. They also still have a little bit of a purchase adjustment coming through. So I think that this quarter is not at all indicative of what our electrical segment is going to look like. We just added to our electrical segment as well a nice company in North Carolina. So that also adds a variable there.
As far as what our gross margins are going to look like, electrical has less service. Electrical has less overhead and more project work. It has more direct and indirect cost. It is cost – it’s overall cost of sales. So they will leverage down our gross margins. So we were going to be 20 or 21 I would expect we might be a 100 to 300 basis points lower depending on the volumes in that sector.
They also have another factor which is they do a higher proportion of cost plus fee work and cost plus fee work is very attractive in some ways because of the certainty of it but it doesn't give you the opportunity for high gross margins that you could get with fixed price work. So that will average us down. Where that shakes up, I think that Comforts long-term growth margins we're trending up. I think this lower, they will leverage down on some but I think the underlying long term trend it's still good.
Yes, and Brent this is Brian. This is still a, this is fundamentally sound company. They do very good work. We've recently started working with them as we usually do on training, etc. etc. Been derailed a little bit by current circumstances. But on a long-term basis this is going to be a very good company for us.
Yes, this quarter their biggest job shut down twice. That didn't help for multiple days.
It's not just work, it's just event.
Yes, got it. But I mean should we take from that you should be sequential improvement in terms of –
Yes absolutely.
Yes. Throughout the second quarter, yes in electrical I would expect there, I would expect them to have better margins in the second quarter and us to have better margins in electrical in the second quarter, Comfort as a whole the second quarter is when we're really going to, we only have two weeks of COVID-19 impact in the first quarter.
And we got the full load now.
We tell you we're going to earn half as much as last year that obviously includes a lower gross margin. So you set aside the second quarter then I think we start to trend upwards and I think without COVID-19 this would have been a fantastic year.
Okay. And then on TAS, when you guys came out originally I think you'd said $170 million to $190 million in its first year. Is that the still the right ballpark to think about here?
I think TAS is on track for this year. I would lead by a company, we develop a conviction about what it will contribute to Comfort Systems over for years to come. We bake into that there will be recessions and strong markets over that period of time. I am completely comfortable that TAS is still going to provide for us in the years to come the levels of revenue and earnings that we talked about in our press release. I also think they're going to have, they're working hard and we're very good work for the next couple quarters. If there's a recession of any kind in 2021 there's going to be a recession in 2021. I think they'd still be profitable I think we'll still be profitable by which year we give that return and I don't know.
Yes. So Brent, we visited them a little bit ago here. They are still very busy and their prospects are very good if things progress on a normal time. So we really feel good about that company.
Look they are going to add to the strength of Comfort Systems because they're going to add EBITDA. And if you listen to what I said about our capital structure the key to all of those the only two covenants are EBITDA.
Okay and last one for me, you guys as you said Bill you stepped up the accrual on the balance sheet, I guess attached maybe some of the receivables. Is that related to concerns in any particular sector or market or maybe even geography?
So that is primarily, we took accruals against many of our receivables for retail businesses. We have a national account business. It's based in Indianapolis but goes nationwide, uses our companies and other companies to do work. A fair chunk of that work is for retail organizations. We also have a strong similar site based business that's operated out of Tampa Florida that came with BCA when we bought them. We felt like it was prudent in light of circumstances, in light of honestly Wall Street Journal articles to take their entire list of receivables and scrub it top to bottom, get as much intelligence as we could about the various retail companies and try to do everything we could to make sure that whatever concerns we have we address them day one of this situation. And that's what we tried to do and that accrual reflects us doing that. So the vast majority of it is retail.
Okay. Thank you guys. Appreciate the color.
Thank you.
Thank you. And the next question comes from the line of Adam Thalhimer of Thompson Davis. Please go ahead.
Hey good morning guys. I also wanted to ask about the bidding. Is that more varied by geography or is it more varied by end market?
I would say geography both. I think it's too soon to tell in a way because they are just hasn't been that much change in bid. If you talk about sort of delayed interviews for a job that's really going to be the industrial jobs because there's a big job. You don't interview people [per day $100,000] job you interview people for a $10 million, $20 million, $40 million job. So that particular comment relates to the big industrial work and maybe big hospitals.
But if Adam just so in terms of geography it's pretty broad. Even in Michigan you know that thing is shut down like there's no tomorrow. There's still opportunities we're looking at. So we're not doing a lot of work there because it's state closed we're still bidding.
The Northeast is definitely more traumatized.
Yes. No question about it. Night and day from the southeast for example.
Okay. How material could the COVID remedies be?
What does that mean?
You mean in terms of opportunity to build production facilities, pharma?
Yes.
Yes.
That could help certain of our companies. For Comfort as a whole, it's not going to turn into the basis of our business. I think more importantly but is there may be additional impetus from this experience for people to consider that having more their supply chain closer than China or something would be good. I think that, I mentioned earlier there are senators saying gee shouldn't we have at least one manufacturer of all of the most important for pharmacological substances and shouldn't we, so hopefully people sort of there's the underlying trend of re-shoring is reinforced by this and if it is the good news for us it would be most likely right in the sectors we're the best at and it would be in the geographies an awful lot of that I think is coming towards like places like the research triangle and the southeast and the mid-Atlantic and Texas maybe.
I like our geography for that and then the last thing is we do a lot of tech. I think it'd be a hard, it would be a stretch to say that this experience would make people want less data centers or less streaming.
But back to the pharmacy Adam, we got a terrific track record in pharma and that goes a long way in that industry for them to give you more work.
They like to hire people who have done the work especially stuff they want to do fast.
And we got some opportunities right now we're working on it because they know we can do it we can do it fast.
Okay and then what's the nature of TAS's backlog and their end market mix?
Did you say TAS?
TAS, yes.
TAS.
The one you just bought.
Yes. TAS is very, very technology focused, very tech maybe 90 plus percent technology focused over the [indiscernible] and they have some big customers, top 10 tech names, top 5 tech names that they do work repeatedly for. One of the things we hope we can do and are very confident we can do with enough time with TAS is diversify into some of the other industries that we do modular construction and but for now --
It sounds like their market mix is perfect for right now.
Yes. They don't have energy exposure Adam if that was your question.
No, I mean they are no oil price exposure.
Yes. So knock on wood.
They are just based in Houston but they ship all over the place.
Okay. And Bill you gave us the debt balance today. What's the cash balance today?
Well, so the cash balance today is like 30 some $30 million probably like actual cash in the bank. If you did a book cash that would include cash in transit you might add 20 million to 30 million. So if I close my books you'd see 50 million-ish but if you just looked in my bank account you'd see a little over 30 million. We just tried to, we're keeping about $10 million more liquid than usual maybe a little more than that even just because --
But the total debt of because you're -- you closed TAS on April 1.
Yes.
So you're at 348 of debt, it's not even that much from Q1?
Yes. So we had already borrowed the money for TAS. If you look on our balance sheet on
March 31, we had over a $100 million because we closed on April 1, we had already borrowed the money with March 31. So that's actually we're down our net debt is down since then slightly.
Okay. Well, okay. And then, I guess last one for me that, as we think through the Q2, it sounds like the impacts really margins, like in your organic sales still be up in Q2?
We feel so bad at that, answering that question. I would be surprised. I would be surprised if sequential same store was up but I was just surprised in the first quarter with sequential same store was up but as the over-under number I think would be minus a few percent over last year on same store.
Because, to be honest, we are still busy right now Adam.
But there are places where we're stopped, I mean I got a job shut down.
But we are not stopped everywhere.
I got a job shut down for a week in the mid-Atlantic it's not revenue. It's for one week. It's not revenue.
We'll see how we do when they count the chickens, Adam.
This is a good call. Thank you very much both.
You have good day buddy.
Thanks.
Thank you and the next question comes the line of Joe Mondillo of Sidoti & Co. please go ahead.
Hi guys. Just a few follow-up questions if you will.
I’m sure.
Do you have any indirect because I know you really don't have any direct exposure but any indirect exposure to oil and gas? I know your 2016 you did see a downturn in the business but I don't know if that was really related to oil and gas or something else?
I don't think anybody has less exposure to oil and gas in the E&C industry than we do. But if some building were doing service on [indiscernible]. Some guy in there trading oil probably.
But for the most part Joe it's not going to affect the model.
Yes. I know we have got very --
Maybe we buy gasoline stuff at the gas station.
Got you. How about our competition? Could you talk about what you're thinking about maybe your smaller competitors? Is there any risk of them going under and not being a positive to your business at all?
There is two possibilities. One they just got loaned a lot of money they don't have to pay back if they can keep their people working for four months which means I'm very worried and thinking maybe we've seen take some cheap work, cheap quick turn work. So that doesn't help for the next few months. I do think there are a lot of businesses. Remember, I do acquisitions and talk to a lot of people who, I think that a lot of these owners are not going to be real happy to dump a lot of capital back into their businesses right now. A lot of them are in their mid 60s and 70s. So I think you'll see some people actually not like desperately just blowing up. I think you'll just see some people choosing to downsize or --
We've already seen a few, Joe. Some guys just calling it a day.
Just call it a day. [indiscernible] there's a company in Virginia where a guy had a nice business, just called it and said it would be a good time to finish especially the guys who have small project work they can do that very quickly. Sometimes they will just sell us, they'll just have a hire their guys. They'll just come over and say, hey buy my equipment for a hundred grand and hire my guys. We see some of that.
Right. Got it and you mentioned in your prepared remarks that you're preparing for a wide range of economic scenarios especially as we had to get to the end of the year and 2021 who knows where we're going to be. What kind of contingencies do you have and what kind of cost reduction actions can you really make? I know your business is largely people. So what can you do offset the downtime?
So there's two parts to answering that question. One is the actual business. Our business is varied as a variable cost business. People show up at somebody else's premises and our business also is in the construction industry really construction workers make a pretty good wage but they realize that there are times when there's less work. So in general we can scale our costs pretty, really very effectively to the amount of work we can get. That changes at the bottom of a bad recession because you reach a point where you have this core of your business people who work for you forever and you just want to find a way to keep them busy. So when you see us in our worst year like a 2011 and we don't make a lot of money a lot of that is we are deciding rather than make a few a little more money this year and destroy the core of our business we're going to keep our guys but in general in the ranges we're in today our cost scale to our revenues pretty quickly. So then the question is overhead uncovered SG&A and the reality is you have to do what you have to do and this a thin margin business. Anybody who doesn't control their overhead doesn't hang around for very long.
But we've done a variety of cost-cutting things even here at corporate. Many of us have taken pay cuts Joe. So we're doing everything that we think is prudent for the long-term viability of the company.
We do what we have to do in bad times and people know we treat them well in good time. So we could usually do that.
Okay. Just last question following up on sort of the big near-term risk in terms of productivity on these jobs that you're already on and the margins being hit on at these current jobs. What percentage of your jobs would you say are affected by this? I assume some of your jobs productivity you'll be able to maybe meet some of the margins that were in your original bids?
Yes. So here is my answer, my answer to that is, most more than half of our jobs, the vast majority of our jobs can absorb this out of contingency that you will not see their margins go down from but what won't happen is we were going to make that contingency later as the job moved on. We will have some jobs that actually have to write down their margins as well but the reality is if you have to spend money on something and you got a fixed price you might get a little bit of money for like [demobe and remobe] in some cases but you make less money.
But having said all that Joe that's important but number one is a safety and health and the well-being. We will do whatever it takes to make sure we protect our people and where they're working.
Comfort, in bad times we never try to get the last fitting. We try to build for the future. We want to come out of a tough time as an even more important force having a bigger share of our industry and being the people that customers could count on.
Okay. Well, I appreciate and good luck through the rest of the year. Thanks a lot.
All right Joe. Thanks. Take care.
Thank you so much. And I'd like to turn the call back to Brian Lane for closing remarks.
Okay. Thank you. I want to once again sincerely thank our amazing resilient and committed employees. Without COVID-19 we believe 2020 would have been a record year for Comfort Systems. However, with the headwinds we are all facing we still believe we will have a very good year. Last year in the second quarter of 2019 we are in $0.65 per share. Unfortunately at this point we don't feel that is attainable in the second quarter. However, we believe that we will be solidly profitable. We are optimistic that as year progresses we can continue to improve. We're looking forward to seeing many of you again in person hopefully in the near term but in the meanwhile please be safe and healthy. Thank you very much.
Thank you. And everyone that now concludes the call for today. You may now disconnect. Thanks for joining.