Comfort Systems USA, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited quarterly results, including Q4 2011. The company provides commercial, industrial and institutional HVAC installation, maintenance, repair and replacement services, with related plumbing and building-control activities.
Financial performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $1,240.0 million | $1,108.3 million |
| Gross profit / margin | $181.5 million / 14.6% | $188.7 million / 17.0% |
| Operating income (loss) | $(49.4) million / (4.0)% | $20.0 million / 1.8% |
| Net income (loss) attributable to Comfort Systems | $(36.8) million | $14.7 million |
| Diluted EPS | $(0.99) | $0.39 |
| Cash from operating activities | $29.7 million | $32.1 million |
| Free cash flow (company-defined) | $21.7 million | $33.5 million |
- Revenue increased 11.9%; management attributed 10.3 percentage points to acquisitions and 1.6 points to same-store activity. Same-store growth was led by government-related work.
- Gross margin fell 2.4 percentage points, primarily due to difficult pricing and project write-downs, particularly in Maryland and Southern Alabama. SG&A was $172.1 million, or 13.9% of revenue, versus $163.4 million, or 14.7%.
- Operating results included $58.9 million of goodwill and intangible-asset impairments: $57.3 million goodwill and $1.6 million intangible impairment. The company recorded a $55.1 million goodwill charge in Q3 and additional impairment in Q4.
- Q4 2011 revenue was $317.7 million, gross profit $50.6 million, operating income $0.8 million, and net income attributable to Comfort Systems $1.7 million, or $0.05 per share. Q4 2010 revenue was $314.6 million and net income was $5.8 million, or $0.15 per share.
Liquidity, debt and capital
- At year-end, cash was $51.2 million, down from $86.3 million; working capital was $109.3 million versus $134.7 million.
- Total debt was $15.4 million, down from $29.9 million; there were no revolver borrowings. The $125 million credit facility expires in September 2016. After $42.7 million of letters of credit, $82.3 million remained available.
- The company reported compliance with its debt covenants; its leverage ratio was 0.27 and fixed-charge coverage ratio 18.78. Cash from operations was positive, though lower year over year.
- 2011 investing cash use was $35.8 million, including $30.0 million for acquisitions; financing cash use was $29.0 million. The company repurchased approximately 0.7 million shares for $7.3 million and paid $7.5 million in dividends.
- Year-end backlog was $633.2 million, up 2.5% from year-end 2010. It had 4,425 projects in progress with aggregate contract value of $1.86 billion; backlog is not a guarantee of future revenue or profit.
Material changes and unusual items
- Comfort Systems acquired a 60% interest in Environmental Air Systems (EAS) on November 2, 2011. EAS contributed $18.2 million in revenue and $0.5 million in pretax income attributable to Comfort Systems after acquisition. Purchase price was $30.4 million, including noncontrolling interest and contingent consideration.
- A 2011 agreement resolved a Texas multifamily backcharge matter: the company paid $4.8 million and recorded a $0.2 million recovery; the related year-end accrual was eliminated.
- Other income included a $1.0 million gain from a legal settlement. Changes in fair value of contingent earn-out obligations contributed $5.5 million of income.
- Brian Lane became CEO and President in December 2011.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor excluded EAS from the 2011 internal-control assessment under the acquisition-year allowance.
Outlook, risks and contingencies
- Management expected continued weakness in nonresidential activity and strong price competition in 2012. It anticipated continued profitability, but at lower levels similar to 2011, and emphasized execution, cost discipline and preserving the core workforce. The filing provides no specific 2012 revenue or earnings guidance.
- Key risks include construction cyclicality, project cost overruns and estimate revisions under percentage-of-completion accounting, backlog cancellation or scope changes, competitive pricing, labor availability and the potential for further impairment charges.
- Bonding capacity is important: historically 25%–35% of business required bonds, and surety markets were described as challenging. Reduced bonding availability could limit bidding and pressure revenue and profit.
- The company is substantially self-insured for several casualty and employee-health risks. It also disclosed a December 2011 notice concerning potentially asbestos-containing gaskets; it could not reasonably estimate any related liability.
- Routine claims and lawsuits were accrued where considered probable; management did not expect them, after recorded provisions, to materially affect results or financial condition. Operating leases totaled $41.1 million in future minimum payments; letters of credit totaled $42.7 million.
Important facts for investors to verify
- How much of reported revenue growth and backlog reflects acquisitions versus sustainable same-store demand.
- Whether project margins recover from 2011 pricing pressure and write-downs, and whether future estimate changes could create additional losses.
- The assumptions and sensitivity underlying the $58.9 million impairment charge, particularly for the Virginia, Maryland and North Carolina reporting units.
- Cash conversion, receivable and retainage collection, and the effect of acquisitions, dividends and repurchases on liquidity.
- Any developments in the asbestos-gasket matter, surety capacity, self-insurance reserves, and the company’s 2012 profitability and tax-rate outlook.