Comfort Systems USA, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts below are in millions of dollars, except per-share data and percentages. The company provides mechanical and electrical contracting, installation, maintenance, repair and replacement services across the United States.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $713.9 | $743.5 | $1,383.7 | $1,443.6 |
| Gross profit / margin | $126.5 / 17.7% | $145.7 / 19.6% | $249.9 / 18.1% | $262.8 / 18.2% |
| Operating income / margin | $39.4 / 5.5% | $61.0 / 8.2% | $75.0 / 5.4% | $85.7 / 5.9% |
| Net income | $33.0 | $39.5 | $59.5 | $57.2 |
| Diluted EPS | $0.90 | $1.08 | $1.63 | $1.55 |
| Operating cash flow | Not stated separately | Not stated separately | $110.1 | $163.8 |
| Free cash flow | Not stated separately | Not stated separately | $100.8 | $150.6 |
Q2 revenue fell 4.0% year over year, including a 6.2% decline in same-store activity, partly offset by the T E C acquisition. Six-month revenue fell 4.2%, with same-store activity down 9.0%; acquisitions partly offset the decline. Q2 gross profit declined 13.2%, and operating income declined 35.4%, as gross margin contracted and SG&A rose as a share of revenue. Six-month net income increased 3.9% despite lower revenue and operating income, helped in part by a favorable change in contingent earn-out fair value.
By segment, Q2 mechanical revenue was $611.8 million, down 2.4%; electrical revenue was $102.1 million, down 12.6%. Electrical gross profit improved to $14.1 million from $9.0 million, while mechanical gross profit declined to $112.4 million from $136.7 million.
Cash, debt and liquidity
- Cash was $53.7 million at June 30, 2021, compared with $54.9 million at year-end 2020.
- Total debt, net of issuance costs, was $160.5 million, down from $235.7 million at December 31, 2020. This included $15.0 million drawn on the revolver, a $120.0 million term loan and $25.7 million of notes to former owners.
- The company reported $385.5 million of available credit after $49.5 million of letters of credit; the facility expires in January 2025. It was in compliance with all financial covenants at quarter-end.
- Six-month operating cash flow was $110.1 million, down from $163.8 million. Management attributed much of the decline to timing of receivables and noted prior-year benefits from deferred payroll and tax payments. The 2021 period included a $27.5 million cash-flow benefit from billings in excess of costs, which management expected to decline during 2021.
- Six-month capital spending was $10.8 million; free cash flow, as defined by the company, was $100.8 million. Dividends paid were $8.3 million.
Backlog, outlook and management commentary
- Backlog was $1.84 billion at June 30, up 10.9% from March 31 and 20.2% from June 30, 2020. Remaining construction performance obligations were also $1.84 billion; the company expects to recognize approximately 80%–85% over the next 12 months.
- Management said COVID-related business impacts had stabilized and were abating, though sporadic project award and start delays were expected to modestly affect activity for the rest of 2021. It anticipated solid earnings and cash flow for 2021 and supportive industry conditions in 2022. No specific revenue or earnings forecast was provided.
- The company estimated a 2021 effective tax rate of 23%–27%, and expected 25%–30% beginning in 2022, potentially lower if certain R&D tax credits and energy-efficient building deductions are obtained.
- In June, the company agreed to acquire Amteck, an electrical contractor group; closing was expected in Q3 2021. It also completed a mechanical contractor acquisition in Utah during Q1 2021.
Risks, contingencies and unusual items
- A customer dispute involves approximately $15 million in customer claims and approximately $9 million in company claims. Arbitration was scheduled for Q2 2022. The company recorded an accrual, but said the eventual outcome and costs could differ from estimates.
- Project profitability depends on estimates of labor, materials, subcontractor execution, schedules and other costs. Fixed-price work can result in reduced profits or losses if cost overruns cannot be recovered.
- Approximately 15%–25% of business historically required surety bonds. A reduction in bonding capacity could constrain work and reduce near-term revenue and profits.
- Contingent earn-out obligations were $22.6 million at quarter-end and are valued using significant unobservable assumptions. Fair-value changes increased income by $4.6 million in Q2 and $5.8 million in the first half of 2021.
- The company noted impairment sensitivity at its Texas electrical reporting unit, which had $96.8 million of goodwill and a 24% fair-value cushion in the latest quantitative assessment. No impairment was recorded in the current year.
Important facts for investors to verify
- Whether backlog converts to revenue and cash on schedule, and whether same-store demand improves.
- Whether gross margins recover from Q2 levels amid project execution, cost and labor pressures.
- Whether operating cash flow remains adequate as the temporary benefit from excess billings declines and receivables timing normalizes.
- Amteck’s closing, purchase terms and subsequent contribution to results, alongside integration and earn-out obligations from acquisitions.
- Developments in the customer arbitration and the company’s assumptions underlying self-insurance accruals, contingent earn-outs and goodwill valuation.