State of the Onion

Blogging is a paradoxical thing. My web master tells me I need to do it often to keep my search engine hit rate high, but to blog takes time and when I am busy, I don’t have time to blog. When I have time to blog, it is because there is not much going on like workshops or consulting gigs. So here I sit today, between gigs with time on my hands, and thinking about a new blog post. So here it is.

I subscribe to a service performed by The Risk Management Association (formerly the Robert Morris and Associates organization). Every year, this group publishes financial data on hundreds of business types in the United States, including in particular the HVAC sector. So I pay a few hundred dollars every year to get 2 pages of data, but it is well worth it. In this blog, I want to report some of the new data I received and the trends it shows.

So let’s peel the HVAC onion. Here’s a snapshot of the data I got. This data is current as of April 30, 2011 and is being compared to the data over the last five years.

• Cash is up 31%. Surprising, but the next few facts explain why this is so.
• Accounts receivable as a percentage of sales is flat compared to prior years.
• Inventories are down 35%! (Having been turned to cash, thus feeding fact #1.)
• Net fixed assets are down 27%. (We are letting things wear out and not replacing them for now.)
• Notes payable are down a whopping 31%! (We are getting rid of debt as fast as possible, getting light on our feet so we can be nimble if another downturn comes along.)
• Current portion of long-term debt is down 22%. (See previous fact.)
• Long-term debt is down 35%! (See previous fact.)
• Total liabilities are down to 24%. (Ditto.)
• Equity up 12%. (Consequence of less liability in the face of nearly constant assets.)

 

• Gross margin is down 20%! (Prices are taking a nose dive.)
• Overhead is down 24%. (We have cut out a lot of fat!)
• Operating profit is up 7%. (But at a high price to the health of our businesses.)

 

• Current ratio is flat. (That’s good news, actually. Although we have not grown more solvent, we have not gotten worse either, and this in a terrible economy.)
• Quick ratio is down a little. (Cause for concern, but not alarm.)
• Sales to receivables is down 7%. (With A/R being down to begin with, this suggests that those jobs that ARE being financed are bigger than the past.)
• Inventory turns are up 140%!! (We are using our suppliers as our barns.)
• Working capital is flat but still under 10%. (Always a concern; when WC is under 15% of sales, cash flow problems arise.)
• Owner compensation as a percentage of sales is down a whopping 37%. (This makes me want to cry; for all the hard work contractors do, to take such a huge cut to survive is repulsive. But I understand their thinking: it’s that or go out of business.)

 

There is much to be mined from this data.

1. Dealers have converted inventory into cash.
2. Assets are not being replaced as they age.
3. Dealers are reining in debt.
4. Pricing is taking a nosedive.  (But we already knew that!)
5. Dealers are squeezing their overhead for every ounce of fat.
6. As a result, the lower profits are actually higher in percentages.
7. Dealers are using their suppliers to manage daily inventories.
8. Owners are taking huge pay cuts to keep the business financially healthy.  In the long run, this will be a disaster. At some point, you have to ask  yourself if the lower pay is worth all the crap. Atlas may yet shrug!

 

The good news is that the recession has knocked a lot of the fluff out of our trade, both in terms of flea bag contractors and in waste in the surviving legitimate shops. The bad news is that this economic nightmare is not over and the signs over the horizon don’t look encouraging.

So if you are a contractor reading this blog, congratulate yourself. You are a survivor! But not get complacent. Stay vigilant. The second shoe has not dropped yet.