Comfort Systems USA, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. The company provides HVAC and related mechanical installation, maintenance, repair, and replacement services, primarily to commercial, industrial, and institutional customers. Unless stated otherwise, amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $329.4 | $282.1 |
| Gross profit / margin | $42.7 / 13.0% | $34.2 / 12.1% |
| SG&A / % of revenue | $46.4 / 14.1% | $42.6 / 15.1% |
| Operating loss | $(3.4) | $(8.3) |
| Net loss attributable to Comfort Systems / diluted loss per share | $(1.0) / $(0.03) | $(5.2) / $(0.14) |
| Cash used in operating activities | $(19.8) | $(19.1) |
| Free cash flow, as defined by the company | $(21.5) | $(21.2) |
Revenue rose 16.8%, including 9.0% same-store growth and 7.8% from the EAS acquisition; EAS contributed approximately $22.1 million of revenue. Gross margin improved, while the company remained loss-making. The consolidated net loss was $2.7 million, including $1.6 million attributable to noncontrolling interests. The income tax benefit was $1.1 million, versus $3.7 million a year earlier.
Cash and cash equivalents were $27.9 million at quarter-end, down from $51.2 million at December 31, 2011. Current assets were $373.5 million and current liabilities $266.2 million (current ratio approximately 1.4). Total debt, including notes to former owners, was $15.3 million. The company had no revolving-credit borrowings, $45.7 million of letters of credit outstanding, and $79.3 million of unused facility capacity. It reported compliance with its financial covenants; leverage and fixed-charge coverage ratios were 0.25 and 20.57, respectively.
Material changes and operating indicators
- Same-store revenue growth was driven principally by a large, short-duration data-center project at ColonialWebb. Backlog was $622.0 million, down 1.8% from December 2011 and up 0.4% year over year; the year-over-year increase from EAS was offset by a same-store decline.
- Gross profit increased 24.9%. Management attributed much of the margin improvement versus Q1 2011 to approximately $2.5 million of prior-year job underperformance in Southern Alabama.
- SG&A increased 8.8% in reported dollars, partly reflecting higher compensation accruals and EAS amortization, but declined as a share of revenue.
- In Q1 2012, the company consolidated one operating location, leaving 37 locations at March 31.
- The company recorded a write-down on a project accelerated by the owner: additional costs exceeded $3 million. It included the costs in its project estimate but had not included additional contract price, while pursuing a claim.
Outlook, risks, and contingencies
Management expected industry activity to remain weak in 2012 and broadly flat over the following 12 months, particularly in new construction. Its stated priorities were project execution, cost control, and maintaining activity and its core workforce; it expected modest profitability for 2012. The company estimated a 2012 annual effective tax rate of 38%–48%. It cautioned that Q1 results are not necessarily indicative of full-year results and that HVAC activity is seasonal, generally stronger in the second and third quarters.
Key risks include intense price competition, fixed-price project cost overruns, and ongoing nonresidential construction weakness. Management noted challenging surety-market conditions; historically, 25%–35% of its business required bonds, and reduced bonding availability could hurt near-term revenue and profit. The company is substantially self-insured for several liability and employee-health risks. Routine litigation was accrued where losses were considered probable; management did not expect those matters to have a material adverse effect, but acknowledged uncertainty.
A plumbing-supply distributor reported that approximately 29,000 gaskets supplied to the company might have been mislabeled as non-asbestos; four of the distributor’s customers had found asbestos above the 1% threshold. The filing states that no reasonable estimate of any potential liability was possible. The company also disclosed $38.9 million of future operating lease obligations and $45.7 million of letters of credit, principally supporting insurance programs.
Important facts for investors to verify
- Whether the project acceleration claim is recoverable, and whether further cost revisions or losses arise on that or other fixed-price jobs.
- Backlog conversion, same-store trends, and the extent to which revenue growth depends on large projects or acquisitions.
- Cash generation and working-capital needs: operating cash use was $19.8 million in the quarter, and quarter-end cash fell by $23.4 million.
- Any developments concerning the potentially mislabeled gaskets, litigation, self-insurance estimates, or availability and cost of surety bonding.
- How to interpret the filing’s business-mix disclosures: the notes say 49% of 2012 revenue came from installation in newly constructed facilities and 51% from maintenance, repair, and replacement, while MD&A describes approximately 86% as project-based and 14% as maintenance and repair. These appear to use different activity definitions; investors should confirm the distinction.