Comfort Systems USA, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 22, 2018. The company provides mechanical contracting services, principally HVAC and plumbing, across commercial, industrial and institutional markets. Approximately 62% of 2017 revenue came from work on existing buildings and 38% from new construction.
Financial performance
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $1.788 billion | $1.634 billion | +9.4% |
| Gross profit / margin | $366.3 million / 20.5% | $344.0 million / 21.0% | Profit +6.5%; margin down 0.5 percentage points |
| Operating income / margin | $99.3 million / 5.6% | $101.6 million / 6.2% | Down 2.3% |
| Net income | $55.3 million | $64.9 million | Down 14.8% |
| Diluted EPS | $1.47 | $1.72 | Down 14.5% |
| Operating cash flow | $114.1 million | $91.2 million | +$22.9 million |
| Free cash flow | $80.0 million | $69.0 million | +$11.0 million |
Revenue growth included a 6.4% contribution from acquisitions, chiefly BCH and Shoffner, and 3.0% same-store growth. Gross margin eased partly because of higher amortization, including BCH-related expense, and operating income also reflected a $1.1 million goodwill impairment charge. Net income was affected by the 45.2% effective tax rate, including a $9.5 million charge to remeasure deferred tax assets after the federal corporate tax rate reduction was enacted.
Liquidity, debt and operating indicators
- Year-end cash was $36.5 million; working capital was $115.6 million, compared with $98.3 million a year earlier.
- Total debt was $60.5 million, up from $2.8 million, including $45.0 million drawn on the revolving facility and $15.3 million in notes to former owners. The facility had $240.4 million of availability after outstanding letters of credit.
- The company reported a 0.4 leverage ratio and 21.8 fixed-charge coverage ratio at year-end and stated it complied with all credit covenants.
- Year-end backlog was $948.4 million, up 24.2% year over year; management cautions backlog is only a partial and limited indicator of near-term revenue.
- The company acquired BCH on April 1, 2017 for stated total consideration of $121.3 million. Investing cash outflow included $94.9 million for acquisitions, net of cash acquired.
Outlook, commentary and key risks
Management expected improved industry activity to continue in 2018 and forecast improvement in revenue and net earnings, citing backlog and economic conditions. Priorities included cost discipline, project execution, workforce development, and investment in service and small projects. Management estimated a 2018 effective tax rate of 22%–27% and, beginning in 2019, 25%–30%; these are estimates, not guaranteed results.
- Results are exposed to construction cyclicality, seasonal variation, competitive pricing, labor availability and utilization, and project delays or cancellations.
- Fixed-price project work and percentage-of-completion accounting depend on cost estimates; overruns or revised estimates may reduce or reverse previously recorded profits.
- Customer payment delays, subcontractor or supplier performance, and changing commodity or labor costs may pressure working capital and margins.
- Bonding capacity and insurance availability matter to project execution. The company is substantially self-insured for several major risks and faces claim-estimation uncertainty.
- Legal claims arise in the ordinary course; management did not expect recorded matters to have a material adverse effect. BP settlements generated $1.0 million of other income in Q4 2017; other related claims remained outstanding, with no assured recovery.
- The company recorded $8.9 million of unrecognized tax benefits at year-end and expected a potential decrease of up to $8.7 million within twelve months, subject to an accounting-method application. Tax-law effects were provisional.
Important facts for investors to verify
- Whether 2018 revenue and earnings improved as forecast, and whether the 24.2% backlog increase converted to profitable completed work.
- Whether gross margins recovered from 20.5%, given labor, project execution and acquisition-related amortization pressures.
- The final tax impact of the Tax Cuts and Jobs Act, the expected tax-benefit recognition, and the company’s stated future effective tax-rate ranges.
- BCH integration and performance, including earn-out revisions and the reported effect of Hurricane Irma and lower project activity on its contingent obligation.
- Debt, revolving-facility utilization, cash generation, and capacity to fund acquisitions, dividends and repurchases while maintaining covenant compliance.
- Developments in self-insurance claims, surety and insurance availability, project estimates, customer collections, and outstanding BP-related claims.