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Comfort Systems USA Inc (NYSE:FIX)
Q1 2020 Earnings Call
Apr 28, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome everyone to the Quarter One 2020 Comfort Systems USA Earnings Conference Call hosted by the Comfort Systems USA. My name is Sheila, I'm your operator for today. [Operator Instructions]

And now I'd like to hand over to Julie Shaeff. Please go ahead.

Julie Shaeff -- Senior Vice President & Chief Accounting Officer

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.

Brian E. Lane -- Chief Executive Officer, President & Director

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 the wearing of 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 cancellations. 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 US 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 expectations 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 a same-store basis. We earned $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 and 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 some time 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 and 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 in a 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 augment 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?

William George -- Executive Vice President & Chief Financial Officer

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 was 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 gross 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 costs 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 margins. 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 and 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, worksites are subject to closure and reopening, precautions and adjustment measures create inefficiency 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 job 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 accruals relating to risk, our medical costs, purchasing rebates and our intangibles such as goodwill. As the next few quarters unfold, we will see these effects.

This quarter we've reconsidered certain receivable exposures in light of the effect of COVID-19 on certain of our customers. And as a result, we increased our receivables accrual. As a result, 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 impacts, 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 that our investments in service and our growth in the industrial segments 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 as 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 increased 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 third quarter compared to 14.7% in the first quarter of 2019. And 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 was 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 covenants 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 exceeded 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 a 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 have variable interest rates will bear interest at a roughly 2% fixed rate for the next 30 months and an immediate decrease of about 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've stopped purchases for now. We will reevaluate that action as conditions develop. That's all I have on the financial front.

Brian E. Lane -- Chief Executive Officer, President & Director

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, a same-store increase of $252 million or 22%, compared to March 31 2019, primarily due to the strong reputations in 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 strength 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 buildings. 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 impact 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 for 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 costs 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 State.

Finally, our outlook. We expect to experience the most significant impacts from COVID-19 during the months 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 they are above 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 your hard work and dedication. I'll now turn it back over to Sheila for questions. Thank you.

Questions and Answers:

Operator

Thank you so much. [Operator Instructions] The first question comes from the line of Sean Eastman of KeyBanc Capital. Please proceed.

Sean Eastman -- KeyBanc Capital -- Analyst

Hi, thanks gentlemen. Thanks for taking my questions.

Brian E. Lane -- Chief Executive Officer, President & Director

Hi, Sean.

Sean Eastman -- KeyBanc Capital -- Analyst

I just like to start on the service business, clearly, it seems like the most material near-term disruption. But just curious to get your sense on how you would frame demand recovery once the environment normalizes, I'm just curious on how you would frame what demand looks like on the buildings that have been empty or near empty.

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah.

Sean Eastman -- KeyBanc Capital -- Analyst

And how the business comes back once people get back to work.

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah. Sean, that's a really good question. I'm always optimistic about service. I think, this is just a blip personally. I think, as you see in 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 is going to be opportunity as we go forward. Looking at the way air flows to a building, looking at filters. So, I think, there's going to be opportunities and I think service can come back very quickly. So, we're pretty optimistic going into the summer that that will happen. So, Bill, do you have anything? You're good there. Right.

Sean Eastman -- KeyBanc Capital -- Analyst

Okay, great. Really helpful. Makes 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 are you guys still bidding and booking work at this point?

Brian E. Lane -- Chief Executive Officer, President & Director

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 need some quick build. But I looked at a couple of bonds one this morning, and one last night. So the activity is, as far as I'm concerned, still pretty good. Bill, do you have anything to add to that?

William George -- Executive Vice President & Chief Financial Officer

Yeah, I think, I actually -- so I've made a couple of even phone calls this morning just to double check. There is 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, they are 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 the possibility of air pockets. But I have not yet talked to anybody who’s said they’d see things that were going to happen that aren't going to happen now. That could come but that hasn't come so far.

Brian E. Lane -- Chief Executive Officer, President & Director

And Sean, you take -- like I mentioned in my script about New York, Michigan, New York is I think coming back a little bit and Washington State recently, I think, the other day has started turning it around to add construction. So, I think, we'll be alright. It's just how this is going to play out long-term, so.

Sean Eastman -- KeyBanc Capital -- Analyst

Okay. Helpful. And last one from me, you guys mentioned the pharma, medical, technology opportunity set holding out well a few times in the script. I'm just wondering if there is already signs of strength there or just how you expect these opportunities to play out?

William George -- Executive Vice President & Chief Financial Officer

Sean, on technology, we've had big technology customers contacting us to 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 I do think that maybe America will see some charm in the possibility of having more important pharmacological ingredients prepared in the US rather than far away. So, we're -- 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 -- these have some good fundamental characteristics.

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah. And Sean, we are really, really well positioned in pharmaceutical. And this sector is, I know we mentioned it numerous times is for a reason. So, we're -- I'm pretty optimistic that that's going to come back and there will be a lot of opportunities for us going forward. So, I think, it's pretty exciting actually.

Sean Eastman -- KeyBanc Capital -- Analyst

Excellent. I really appreciate the time. Thanks, guys.

Brian E. Lane -- Chief Executive Officer, President & Director

All right. Have a good day.

Sean Eastman -- KeyBanc Capital -- Analyst

Best of luck out there.

Brian E. Lane -- Chief Executive Officer, President & Director

Thank you.

William George -- Executive Vice President & Chief Financial Officer

Thanks.

Operator

Thank you. And the next question comes from the line of Joe Mondillo of Sidoti & Co. Please go ahead.

Joe Mondillo -- Sidoti & Co. -- Analyst

Hi, guys. Good morning.

Brian E. Lane -- Chief Executive Officer, President & Director

Good morning, Joe.

William George -- Executive Vice President & Chief Financial Officer

Hi.

Brian E. Lane -- Chief Executive Officer, President & Director

How are you?

Joe Mondillo -- Sidoti & Co. -- Analyst

Good, doing well. Hope you are doing well as well.

Brian E. Lane -- Chief Executive Officer, President & Director

We are doing terrific. Thanks.

Joe Mondillo -- Sidoti & Co. -- Analyst

Good to hear. Very good to hear. In terms of your sort of 2Q outlook, could 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 is trending or how you're thinking about that 2Q guidance that you sort of provided?

William George -- Executive Vice President & Chief Financial Officer

Yeah. 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. But 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. Walker's 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 out -- we're talking about out of thousands of jobs. So, that we still have work to do.

We think service will pick back up. rRally 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 awarded the order shut us down. So, there is -- 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.

Brian E. Lane -- Chief Executive Officer, President & Director

It's interesting, Joe, we have an opportunity outside of Syracuse. We get a call last Wednesday, and we're already on the site today. So, there is some opportunities and they're quick and they need someone with a full workforce they can get there quick. So we're well positioned with some of these opportunities, particularly as it relates to some COVID-19 remedies.

Joe Mondillo -- Sidoti & Co. -- Analyst

Okay. And in terms of your comments that you made about sort of COVID impacting even the second half of the year, but...

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah.

Joe Mondillo -- Sidoti & Co. -- Analyst

...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.

William George -- Executive Vice President & Chief Financial Officer

I'll go first.

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah. Okay. Yeah.

William George -- Executive Vice President & Chief Financial Officer

Yeah, Brian, I'm to go first on it. So, there's a couple of things. One, so immediately we have to look at our receivables and say, okay, we got this customer, they're not paying their rent right now. Should we impair their receivables to some extent? Yes. So, you have those kind of immediate impacts, 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 risks are there is productivity and there's air pockets.

Productivity, so at the end of the first quarter and we'll do this again as we closed 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 will play out for the rest of the year. So, we have jobs, we lowered their margin one time, obviously the jobs that are newer are the ones that that's going to have the bigger impact on. The other concern I have and these are just -- these are incremental concerns, but they matter is the 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 for giving 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 the -- 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 these are -- this is the real world and those are real things and they're going to matter a little bit somewhat.

Brian E. Lane -- Chief Executive Officer, President & Director

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 to work remotely and I'm talking about the finance, administration, accounting folks both at corporate and the operating that, 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 were tied up. So, I really want to thank them for all their hard work and how professional and discipline they were, so.

Joe Mondillo -- Sidoti & Co. -- Analyst

Just a follow-up on that question. Are you -- do you, all right, sorry, lost my train of thought. My last question and I'll hop back in queue. Just to 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 in new project work, would it take a little bit of more time, just wondering, 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.

William George -- Executive Vice President & Chief Financial Officer

So, I'll take that question, Joe. So, this is give or take my 60th quarterly call and I will agree – I 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 was multifamily. Today, it's 3% of our revenue. We have tech and pharma that we didn't have then. We made a big investment in service.

So those are big differences that make me feel like this will then roll in a better way. As far as when these events hit, I think there's two things going on, there is the effects of the emergency that’s just happening right now and that will be more in the -- 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 hardest -- 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've been at Comfort Systems for, was when the 9/11 recession hit and 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 -- was less -- 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.

Joe Mondillo -- Sidoti & Co. -- Analyst

Okay. Well, thanks, I'll hop back in queue. Thanks, Brian.

Brian E. Lane -- Chief Executive Officer, President & Director

All right. Thanks, Joe.

Operator

Thank you. And the next question comes from the line of Brent Thielman of D.A. Davidson. Please proceed.

Brent Thielman -- D.A. Davidson -- Analyst

Hey, thanks. Good morning.

Brian E. Lane -- Chief Executive Officer, President & Director

Good morning, Brent. How are you doing?

Brent Thielman -- D.A. Davidson -- Analyst

I'm doing well. Thank you.

Brian E. Lane -- Chief Executive Officer, President & Director

Good.

Brent Thielman -- D.A. Davidson -- Analyst

Bill or Brian, I know you had some work at Walker coming into the quarter that had some lower margin, I think, attached to, it sounds like that might have been amplified by some of the COVID impacts. Are you through that now and I guess any estimate kind of how dilutive that was on the electrical margins this quarter? And I guess to take that a step further, how do we think about and I know there's a lot of variables here in the next couple of quarters, how do we think about that target gross profit margin in the business as we move through 2020?

William George -- Executive Vice President & Chief Financial Officer

So, that is, even if you set aside the uncertainty, that's a period 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 have had -- they've 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've had multiple COVID shut downs, 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 those purchase adjustments coming through. So, I think that this quarter it's 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 costs and its cost of -- its overall cost of sales. So, they will average down our gross margins. So, if we were going to be '20 or '21, I would expect we might be a 100 basis points 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 way because of the certainty of it, but it doesn't give you the opportunity for high gross margins that you get with fixed-price work.

So, that will average us down, where that shakes out. I think that Comfort's long term gross margins were trending up. I think this lower -- they will average us down some, but I think the underlying long-term trend is still good.

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah. And Brent, this is Brian. This is still -- this is a fundamentally sound company, they do very good work. We have 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.

William George -- Executive Vice President & Chief Financial Officer

Yeah, this quarter their biggest job shut down twice.

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah.

William George -- Executive Vice President & Chief Financial Officer

That didn't help for multi-days.

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah.

William George -- Executive Vice President & Chief Financial Officer

It's not...

Brent Thielman -- D.A. Davidson -- Analyst

Okay.

William George -- Executive Vice President & Chief Financial Officer

[Speech Overlap] with their work, it's just event, so.

Brent Thielman -- D.A. Davidson -- Analyst

Yeah, yeah. Got it. But should I -- I mean, should we take from that that you should see sequential improvement in terms of the profitability?

William George -- Executive Vice President & Chief Financial Officer

Yeah, absolutely.

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah, yeah. Well, that's throw out the second -- well, electrical, I would expect there, that 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 impact in the first quarter, right.

William George -- Executive Vice President & Chief Financial Officer

And we got the full load now.

Brian E. Lane -- Chief Executive Officer, President & Director

If we tell you we're going to earn half as much as last year, that obviously includes the lower gross margin.

William George -- Executive Vice President & Chief Financial Officer

Yeah.

Brian E. Lane -- Chief Executive Officer, President & Director

So, if you set aside the second quarter, then I think we start to trend upwards. And I think without COVID you would have -- this would have been a fantastic year.

William George -- Executive Vice President & Chief Financial Officer

Yeah.

Brent Thielman -- D.A. Davidson -- Analyst

Yeah. 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?

Brian E. Lane -- Chief Executive Officer, President & Director

I think, TAS is on track for this year. When we buy a company we develop a conviction about what it will contribute to Comfort Systems over for years to come. We bake into that 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 have very good work for the next couple of quarters.

If there is a big -- if there is a recession of any kind in 2021, there is going to be a recession in 2021, I think, that’d still be profitable. I think we'll still be profitable. But which year we get that return in I don't know, right.

William George -- Executive Vice President & Chief Financial Officer

Yeah. So, Brent, we visited them a little bit ago here, they're still very busy and their prospects are very good if things progress on a normal time. So...

Brian E. Lane -- Chief Executive Officer, President & Director

We feel great about that company.

William George -- Executive Vice President & Chief Financial Officer

...we feel really -- yeah, we really feel good about that company.

Brian E. Lane -- Chief Executive Officer, President & Director

Look, they're going to add to the strength of Comfort Systems because they're going to add EBITDA.

William George -- Executive Vice President & Chief Financial Officer

Yeah.

Brian E. Lane -- Chief Executive Officer, President & Director

Right. And if you listen to what I said about our capital structure, the key to all of those, there are only two covenants of EBITDA.

Brent Thielman -- D.A. Davidson -- Analyst

Okay. And last one from me, you guys, as you said, Bill, you stepped up the accrual on the balance sheet, I guess, it's actually maybe some of the receivables, is that related to concerns in any particular sector or market or maybe even geography?

Brian E. Lane -- Chief Executive Officer, President & Director

So, that is primarily -- we took accruals against many of our receivables for retail businesses. We have a national accounts business, it's based in Indianapolis, but goes nationwide, uses our company 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 BCH 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 had 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.

Brent Thielman -- D.A. Davidson -- Analyst

Okay. Thank you, guys. Appreciate the color.

Brian E. Lane -- Chief Executive Officer, President & Director

Right. Thank you.

Operator

Thank you. And the next question comes from the line of Adam Thalhimer of Thompson Davis. Please go ahead.

Adam Thalhimer -- Thompson Davis -- Analyst

Hey, good morning, guys. I also wanted to ask about the bidding.

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah.

Adam Thalhimer -- Thompson Davis -- Analyst

Is that more varied by geography or is it more varied by end market?

William George -- Executive Vice President & Chief Financial Officer

I would say, geography -- both. I just -- it's too soon to tell in a way because there just hasn't been that much change in bidding.

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah.

William George -- Executive Vice President & Chief Financial Officer

It's going to -- if you talk about sort of delayed interviews for a job, that's really going to be the industrial jobs because they're the big jobs, you don't interview people for an $800,000 job, you interview people for a $10 million, $20 million, $40 million job. So, that particular comment relates to the big industrial work.

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah.

William George -- Executive Vice President & Chief Financial Officer

And maybe big hospitals.

Brian E. Lane -- Chief Executive Officer, President & Director

But just in terms of the geography, it's pretty broad. Even in Michigan, though that thing is shut down like there's no tomorrow, there is still opportunities we're looking at, right. So, no, we're not doing a lot of work there because as state is closed, we are still bidding.

William George -- Executive Vice President & Chief Financial Officer

The Northeast is definitely more traumatized.

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah, no question about it. Night and day is from the Southeast, for example.

Adam Thalhimer -- Thompson Davis -- Analyst

Okay. How material could the COVID remedies be?

William George -- Executive Vice President & Chief Financial Officer

What does that mean?

Brian E. Lane -- Chief Executive Officer, President & Director

You mean in terms of opportunities to build production facilities in pharma.

Adam Thalhimer -- Thompson Davis -- Analyst

Yes.

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah.

William George -- Executive Vice President & Chief Financial Officer

That could help certain of our companies. For Comfort, as a whole, it's not going to turn into the basis of our business, right. I think, more importantly, but is there may be additional emphasis from this experience for people to consider that having more of their supply chain closer than China or something would be good, right. I think that I mentioned earlier, there are senators saying, geez, shouldn't we have at least one manufacturer of all of the most important pharmacological substances. And should we -- so, hopefully, people will sort of -- the underlying trend of reassuring 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 toward like places like the Research Triangle in 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'd be a stretch to say that this experience would make people want less, less data centers or less streaming.

Brian E. Lane -- Chief Executive Officer, President & Director

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.

William George -- Executive Vice President & Chief Financial Officer

They like to hire people who have done the work.

Brian E. Lane -- Chief Executive Officer, President & Director

Who have done the work. Yeah.

William George -- Executive Vice President & Chief Financial Officer

Especially stuff they want to do fast.

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah. And we got some opportunities right now we're working on. And it's -- because they know we can do it, we can do it fast.

Adam Thalhimer -- Thompson Davis -- Analyst

Okay. And then what's the nature of TAS' backlog and their end market mix?

William George -- Executive Vice President & Chief Financial Officer

Did you say TAS?

Adam Thalhimer -- Thompson Davis -- Analyst

TAS, yeah.

Brian E. Lane -- Chief Executive Officer, President & Director

EAS.

Adam Thalhimer -- Thompson Davis -- Analyst

No, TAS. The one you just bought.

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah, yeah, yeah.

William George -- Executive Vice President & Chief Financial Officer

TAS is very, very technology focused, very tech, may be 90-plus-percent technology focused over the last [Speech Overlap]

Adam Thalhimer -- Thompson Davis -- Analyst

Okay.

William George -- Executive Vice President & Chief Financial Officer

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 really 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 we felt [Speech Overlap]

Adam Thalhimer -- Thompson Davis -- Analyst

It sounds like their market mix is perfect right now.

William George -- Executive Vice President & Chief Financial Officer

Yeah.

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah, I mean, they don't have energy exposure, Adam, if that was your question.

Adam Thalhimer -- Thompson Davis -- Analyst

No, I mean, there are no oil price exposure, right?

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah.

William George -- Executive Vice President & Chief Financial Officer

Yeah.

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah.

William George -- Executive Vice President & Chief Financial Officer

So, knock on wood.

Brian E. Lane -- Chief Executive Officer, President & Director

They are just based in Houston, but they ship all over the place.

Adam Thalhimer -- Thompson Davis -- Analyst

Okay. And Bill, what's the -- you gave us the debt balance today, what's the cash balance today?

William George -- Executive Vice President & Chief Financial Officer

Well, so the cash balance today is like $30 million -- some $30 million probably, like actual cash in the bank. If you did a book cash, right, 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 into my bank account, you'd see a little over $30 million. We just try to -- we're keeping about $10 million more of liquid than usual maybe -- maybe a little more than that even just because...

Adam Thalhimer -- Thompson Davis -- Analyst

But the total debt of -- because you're -- you closed TAS April 1.

William George -- Executive Vice President & Chief Financial Officer

Yeah.

Brian E. Lane -- Chief Executive Officer, President & Director

Yes.

Adam Thalhimer -- Thompson Davis -- Analyst

So, you're at $348 million [Phonetic] of debt. It's not even up much from Q1.

William George -- Executive Vice President & Chief Financial Officer

Yeah. So, we had already borrow the money for TAS. If you looked on our balance sheet on March 31, we had over $100 million because we closed on April 1, we had already borrowed the money in March 31. So, that's -- actually we're down, our net debt is down since then slightly.

Adam Thalhimer -- Thompson Davis -- Analyst

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 can your organic sales still be up in Q2?

William George -- Executive Vice President & Chief Financial Officer

Boy, we are so bad at that answering that question.

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah.

William George -- Executive Vice President & Chief Financial Officer

I would be surprised if sequential same-store was up, but I was just surprised in the first quarter when sequential same-store was up. But the over under number I think would be minus a few percent over last year on a same-store.

Brian E. Lane -- Chief Executive Officer, President & Director

Because we are still -- to be honest, we're still busy right now, Adam.

William George -- Executive Vice President & Chief Financial Officer

But we are -- there are places where we are stopped.

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah.

William George -- Executive Vice President & Chief Financial Officer

I mean, I got a job shut down...

Brian E. Lane -- Chief Executive Officer, President & Director

We're not stopped everywhere.

William George -- Executive Vice President & Chief Financial Officer

I got a job shut down for a week in the mid-Atlantic. It's not revenuing, right. It's for one week, but it's not revenuing. So...

Adam Thalhimer -- Thompson Davis -- Analyst

Okay.

William George -- Executive Vice President & Chief Financial Officer

We'll see how we do when they count the chickens, Adam.

Adam Thalhimer -- Thompson Davis -- Analyst

Those are the good call. Thank you very much, both.

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah. Have a good day everybody.

William George -- Executive Vice President & Chief Financial Officer

Thanks.

Adam Thalhimer -- Thompson Davis -- Analyst

Thanks.

Operator

Thank you. And the next question comes from the line of Joe Mondillo of Sidoti & Co. Please go ahead.

Joe Mondillo -- Sidoti & Co. -- Analyst

Hi, guys. Just a few follow-up questions, if you will.

Brian E. Lane -- Chief Executive Officer, President & Director

Okay.

William George -- Executive Vice President & Chief Financial Officer

Go ahead.

Brian E. Lane -- Chief Executive Officer, President & Director

Sure.

Joe Mondillo -- Sidoti & Co. -- Analyst

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.

William George -- Executive Vice President & Chief Financial Officer

I don't think anybody has less exposure to oil and gas in the E&C industry than we do. But if some building we're doing service on got some guy in their trading oil probably.

Brian E. Lane -- Chief Executive Officer, President & Director

But for the most part, Adam, it's not -- sorry, Joe, it's not going to affect your model.

William George -- Executive Vice President & Chief Financial Officer

Yeah, we don't -- I don't, we got very...

Brian E. Lane -- Chief Executive Officer, President & Director

I mean, we buy gasoline stuff at the gas stations.

Joe Mondillo -- Sidoti & Co. -- Analyst

Got you. How about that competition? Could you talk about what you're thinking about maybe your smaller competitors, is there any risk of them going under and that being a positive to your business at all?

William George -- Executive Vice President & Chief Financial Officer

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 think maybe we've seen them 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 70.

So, I think...

Brian E. Lane -- Chief Executive Officer, President & Director

Could be.

William George -- Executive Vice President & Chief Financial Officer

I think you'll see some people actually not like desperately blowing up, I think you'll just see some people choosing to downsize or...

Brian E. Lane -- Chief Executive Officer, President & Director

We've always seen a few, Joe, some guys just calling it a day.

William George -- Executive Vice President & Chief Financial Officer

Just call it a day. Yeah. Yeah. Or there is some of that. It's all some of that. There is a company in Virginia where guy had a nice business, just all this said, it'll also be a good time to...

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah.

William George -- Executive Vice President & Chief Financial Officer

Finish. Especially the guys who have small project work. They can do that very quickly. Sometimes they will just sell it, they'll just have us hire their guys, right. They will just come over and say, hey, buy my equipment for $100,000 and hire my guys. We see some of that.

Joe Mondillo -- Sidoti & Co. -- Analyst

Right. Got it. And you mentioned in your prepared remarks that you're preparing for a wide range of economic scenarios, especially as we head to -- get to the end of the year in 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 to offset the downside?

William George -- Executive Vice President & Chief Financial Officer

There's two parts to answering that question. One is the actual business, our business showed it's a variable cost business. People show up at somebody else's premises. And our business also -- in the construction industry really construction workers make a pretty good wage, but they realize that there are times when there is less work. So, in general, we can scale our costs pretty really very, 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 for ever that you just want to find a way to keep them busy.

So when you see us in our work here 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 costs scale to our revenues pretty quickly. So, then the question is overhead uncovered SG&A and the reality is we -- you have to do what you have to do and this is a thin margin business. Anybody who doesn't control their overhead doesn't hang around for very long.

Brian E. Lane -- Chief Executive Officer, President & Director

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.

William George -- Executive Vice President & Chief Financial Officer

We do what we have to do in bad times and people know we treat them well in good times. So, we can usually do that.

Joe Mondillo -- Sidoti & Co. -- Analyst

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 [Speech Overlap].

William George -- Executive Vice President & Chief Financial Officer

Yeah. So, here's my answer to that. My answer to that is most -- more than half of our jobs. The vast majority of our jobs kind of absorb this out of contingency. You will not see their margins go down, but what won't happen is we were going to make that contingency later...

Brian E. Lane -- Chief Executive Officer, President & Director

Yeah.

William George -- Executive Vice President & Chief Financial Officer

...as the jobs 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've got a fixed price, you might get a little bit of money for like demob and remob in some cases, but you make less money.

Brian E. Lane -- Chief Executive Officer, President & Director

But having said all that, Joe, that's important. But number one is the safety and health and the well-being, we'll do whatever it takes to make sure we protect our people and where they are working.

Joe Mondillo -- Sidoti & Co. -- Analyst

Right.

William George -- Executive Vice President & Chief Financial Officer

Comfort, in bad times, we never try to get the last penny, right. We try to build for the future. We want to come out of a tough time as it even more important for us having a bigger share of our industry and being the people that customers could count on.

Joe Mondillo -- Sidoti & Co. -- Analyst

Okay. Well, I appreciate and good luck through the rest of the year. Thanks a lot, guys.

William George -- Executive Vice President & Chief Financial Officer

Okay.

Brian E. Lane -- Chief Executive Officer, President & Director

All right, Joe. Thanks. Thank you.

Operator

Thank you so much. And I would now like to turn the call back to Brian Lane for closing remarks.

Brian E. Lane -- Chief Executive Officer, President & Director

Okay. Thank you. I want to once again sincerely thank our amazing resilience 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 earned $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 the year progresses, we can continue to improve. We are looking forward to seeing many of you again in person and hopefully in the near term, but in the meanwhile, please be safe and healthy. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Julie Shaeff -- Senior Vice President & Chief Accounting Officer

Brian E. Lane -- Chief Executive Officer, President & Director

William George -- Executive Vice President & Chief Financial Officer

Sean Eastman -- KeyBanc Capital -- Analyst

Joe Mondillo -- Sidoti & Co. -- Analyst

Brent Thielman -- D.A. Davidson -- Analyst

Adam Thalhimer -- Thompson Davis -- Analyst

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