Comfort Systems USA, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The company provides mechanical and electrical contracting, installation, maintenance, repair and replacement services across the United States.
Financial performance
Dollar amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $1,017.9 | $713.9 | $1,903.2 | $1,383.7 |
| Gross profit | $175.0 | $126.5 | $328.1 | $249.9 |
| Gross margin | 17.2% | 17.7% | 17.2% | 18.1% |
| Operating income | $56.7 | $39.4 | $92.3 | $75.0 |
| Net income | $42.2 | $33.0 | $129.0 | $59.5 |
| Diluted EPS | $1.17 | $0.90 | $3.57 | $1.63 |
- Q2 revenue increased 42.6% year over year, including 24.7% same-store growth and 17.9% from acquisitions. First-half revenue increased 37.5%, including 20.3% same-store growth and 17.2% from acquisitions.
- Q2 gross profit grew 38.4%, but gross margin declined 0.5 percentage point. First-half gross profit grew 31.3%, while gross margin declined 0.9 point. Management attributed lower margins mainly to segment and project mix, including more electrical and new-construction work, and higher materials and equipment costs as a share of costs.
- Q2 SG&A rose 35.6% to $118.7 million; as a share of revenue it fell to 11.7% from 12.3%. Interest expense more than doubled to $3.0 million, reflecting higher average rates and debt balances, as well as a debt-cost write-off.
- First-half net income included a $37.8 million income tax benefit, versus an $18.6 million tax provision in the prior-year period. The benefit reflected IRS approval of prior-year R&D tax credits and the company’s intention to claim credits for 2019–2021; the reported first-half earnings comparison is therefore materially affected by tax items.
Cash flow, liquidity and debt
- First-half operating cash flow was $108.3 million, compared with $110.1 million in 2021. Free cash flow, a company-defined non-GAAP measure, was $89.6 million versus $100.8 million.
- Receivables used $179.9 million of cash in the first half; cash flow was partly supported by higher payables/accruals, tax refunds and earnings. Investing activities used $59.3 million, including $39.4 million for acquisitions and $20.2 million for property and equipment.
- Cash at June 30 was $69.1 million. Total debt principal was $405.6 million, including $360.0 million outstanding on the revolving facility and $45.4 million in notes to former owners. Operating lease liabilities were $134.7 million.
- A May 2022 credit-facility amendment increased revolving capacity to $850 million and extended maturity to July 2027. At quarter-end, $55.6 million of letters of credit were outstanding and $434.4 million was available. The weighted-average revolving borrowing rate was approximately 2.8%; borrowings are floating-rate. The company reported compliance with all financial covenants.
- Current assets were $1,238.2 million and current liabilities were $968.2 million at June 30, 2022. The company also reported $2.8 billion in remaining construction performance obligations, with approximately 80–85% expected to be recognized as revenue over the next 12 months.
Material changes and business indicators
- Backlog reached $2.81 billion, up 52.6% year over year and 2.7% from March 31. Management reported broad-based same-store backlog growth, alongside contributions from acquisitions.
- Electrical services grew to 23.7% of Q2 revenue from 14.3% a year earlier; mechanical services remained the larger segment. Q2 electrical revenue increased 136.2%, reflecting acquisitions and stronger industrial activity.
- The company acquired Atlantic Electric on April 1, 2022, for a preliminary purchase price of $48.1 million. It reported 42 operating locations at quarter-end, up from 41 at year-end.
- During the first half, the company repurchased approximately 0.4 million shares for $32.9 million at an average $84.61 per share and paid $9.7 million in dividends.
Outlook, risks and contingencies
- Management reported strong 2022 demand, a good opportunity pipeline and generally successful materials procurement, and anticipated “solid earnings and cash flow” for 2022. No specific numeric earnings or revenue guidance was provided.
- Management continued to cite supply constraints, material and equipment cost increases, delivery delays, labor shortages and higher labor costs, as well as delayed project starts. The company said it was factoring these conditions into planning and pricing and working with customers to manage supply risks.
- Fixed-price project work exposes the company to cost overruns if estimates, labor productivity, materials availability, subcontractor execution or schedules differ from expectations. Management described construction demand as cyclical and seasonal and noted continuing price competition.
- A customer dispute concerns approximately $12 million in claimed damages and approximately $9 million claimed by the company. Arbitration concluded in Q2, with a decision expected in Q3 2022. An accrual was recorded, but the eventual outcome could differ from estimates.
- The company is substantially self-insured and relies on surety bonds for historically 15–25% of its business. Reduced bonding availability could constrain activity and near-term revenue and profits. Letters of credit and bonds also create contingent reimbursement obligations.
- Goodwill in the Texas electrical reporting operation was $96.8 million; its fair value exceeded carrying value by 32% in the latest quantitative assessment, making it comparatively more susceptible to impairment from adverse conditions. Contingent earn-out obligations are valued using significant unobservable assumptions.
Important facts for investors to verify
- How much of revenue, backlog growth and future earnings is attributable to acquisitions versus sustained same-store demand.
- Whether gross-margin pressure from project mix, labor and material costs persists, and whether pricing and execution can offset it.
- The durability of operating cash flow given the substantial increase in receivables and seasonal working-capital requirements.
- How higher floating interest rates affect interest expense, facility capacity and covenant headroom.
- The outcome and financial impact of the customer arbitration, along with developments in self-insurance, bonding capacity and goodwill valuation.
- The sustainability of first-half earnings after separating recurring operating results from the significant tax benefit.