Comfort Systems USA, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. The company provides mechanical contracting services, principally HVAC, plumbing, piping and building controls, across 35 operating units. About 40% of 2016 revenue came from new construction and 60% from work on existing buildings.
Financial performance and position
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $1,634.3 million | $1,580.5 million | +3.4% |
| Gross profit / margin | $344.0 million / 21.0% | $318.1 million / 20.1% | +8.1%; +0.9 percentage points |
| Operating income / margin | $101.6 million / 6.2% | $90.0 million / 5.7% | +12.8%; +0.5 percentage points |
| Net income attributable to Comfort Systems USA | $64.9 million | $49.4 million | +31.5% |
| Diluted EPS | $1.72 | $1.30 | +32.3% |
| Cash from operations / free cash flow | $91.2 million / $69.0 million | $97.9 million / $78.4 million | Lower year over year |
| Cash / working capital at year-end | $32.1 million / $98.3 million | $56.5 million / $118.9 million | Both decreased |
| Total debt | $2.8 million | $11.5 million | Decreased |
| Backlog at year-end | $763.4 million | $711.6 million | +7.3% |
Fourth-quarter 2016 revenue was $392.1 million versus $383.8 million in Q4 2015; gross profit was $88.3 million versus $83.9 million; and net income attributable to the company was $16.9 million versus $13.2 million.
Gross-margin improvement reflected broadly better project execution and higher volumes at several locations. Annual revenue growth included a 4.6% contribution from the Shoffner acquisition, partly offset by a 1.1% same-store decline, primarily from reduced large-project work at Environmental Air Systems (EAS). SG&A increased 6.2% to $243.2 million, and rose to 14.9% of revenue from 14.5%.
At year-end, the company had no borrowings under its $325 million revolving facility, $41.5 million of letters of credit outstanding and $283.5 million of available capacity. The facility expires in February 2021. The reported leverage ratio was 0.02 and fixed-charge coverage ratio was 27.84; the company reported compliance with all covenants. The $2.8 million total debt includes notes and other debt, as well as capital leases.
Changes, outlook and risks
- The company acquired the remaining 40% interest in EAS for $46.6 million, ending noncontrolling-interest allocations from that business, and acquired Shoffner for approximately $19.8 million. Shoffner contributed $71.9 million of 2016 revenue. Acquisition-related cash outflows contributed to investing cash use of $79.3 million.
- Operating cash flow declined $6.7 million, mainly reflecting lower billings in excess of costs and higher prepaid expenses and other current assets. The company continued dividends and repurchases; 2016 repurchases totaled approximately $13.1 million.
- Management expected 2017 revenue and profitability to be similar to or above 2016 levels, citing improved industry activity and backlog. Priorities included execution, cost control, workforce development and investment in service and small-project growth. Management estimated a 2017 effective tax rate of 35%–40%.
- After year-end, the company agreed to acquire BCH Holdings for $100 million, plus a potential earn-out and working-capital adjustment; closing was expected around the beginning of Q2 2017.
- Unusual items included a $0.6 million fourth-quarter gain from a BP Deepwater Horizon claim settlement; other subsidiary claims remained outstanding, with no assurance of further recovery. There was no goodwill impairment in 2016. The filing says ordinary-course litigation, after recorded accruals, was not expected to have a material effect.
- Key risks include cyclical construction demand and price competition; fixed-price project cost overruns and percentage-of-completion estimation risk; backlog cancellation or scope changes; skilled-labor availability and utilization; customer collection delays; reliance on subcontractors, suppliers, surety bonding and high-deductible self-insurance; and acquisition integration. The company noted that backlog is not a guarantee of future revenue or profit.
Important facts for investors to verify
- Whether margin gains and the 2017 outlook are supported by project execution, same-store demand and conversion of backlog, rather than acquisition contributions alone.
- Project cost estimates, change orders, retainage and customer collections, including the effects of percentage-of-completion accounting on reported earnings and working capital.
- Cash generation and liquidity after acquisitions, dividends, share repurchases and the proposed BCH transaction; also confirm debt, letter-of-credit use and covenant headroom.
- Integration and performance of EAS, Shoffner and BCH, including contingent earn-out obligations and any further acquisition funding needs.
- Developments in outstanding BP claims, litigation, self-insurance reserves and access to surety bonds.