Comfort Systems USA, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. Comfort Systems provides HVAC installation, maintenance, repair and replacement, along with plumbing, building controls and related services. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $351.1 | $353.2 | $676.9 | $680.1 |
| Gross profit / margin | $60.0 / 17.1% | $54.1 / 15.3% | $111.4 / 16.5% | $97.0 / 14.3% |
| Operating income / margin | $14.4 / 4.1% | $7.4 / 2.1% | $19.5 / 2.9% | $4.4 / 0.7% |
| Net income attributable to Comfort Systems | $7.8 | $4.5 | $10.3 | $3.4 |
| Diluted EPS | $0.21 | $0.12 | $0.28 | $0.09 |
| Operating cash flow | $6.7 | $6.8 | $(3.7) | $(13.0) |
| Free cash flow | $3.0 | $2.6 | $(10.4) | $(18.8) |
Q2 revenue declined 0.6% year over year, while gross profit rose 10.9%. First-half revenue fell 0.5%, while gross profit increased 14.8%. First-half free cash flow is the company’s non-GAAP measure, defined as operating cash flow less capital expenditures plus asset-sale proceeds.
Liquidity, debt and balance sheet
- Cash was $23.3 at June 30, down from $40.8 at December 31, 2012. Current assets were $389.2 and current liabilities $275.6; working capital was approximately $113.7 and the current ratio approximately 1.41.
- Total debt was $5.4, including $3.0 in notes to former owners and $2.4 of other debt. There were no borrowings on the main revolving facility. The company reported $121.8 of availability after $53.2 of letters of credit under its $175.0 facility.
- The credit facility was amended in June: capacity increased from $125.0 to $175.0 and maturity extended to July 2018. The company reported compliance with its covenants; leverage and fixed-charge coverage ratios were 0.09 and 21.37, respectively.
- After quarter-end, the company paid $1.0 of former-owner notes and repaid the $2.4 industrial revenue bond balance. The filing states the remaining former-owner notes were $2.0 after the payment.
Drivers, changes and unusual items
- Management attributed revenue weakness largely to the prior-year fast-paced data-center project at its Virginia operation; current-period project activity at EAS partly offset the decline.
- Higher gross profit reflected improved EAS profitability, prior-year Maryland project underperformance, improved Virginia profitability and, in the first half, approximately $1.6 of additional gross profit from a settled claim on a large data-center project.
- SG&A declined year over year, principally because of lower bad-debt expense. Management cited a receivable settlement producing a $0.8 gain in the current quarter; improved operating results also increased compensation accruals.
- Backlog was $590.3 at June 30, down 6.5% from March 31 and 4.4% from June 30, 2012. The filing cautions that backlog covers only contracted installation and replacement work and is not a reliable indicator of results over multiple quarters.
- No acquisitions were completed in the first half of 2013. The Delaware operation, substantially shut down in 2012, had no Q2 2013 discontinued-operations result and a first-half after-tax loss of approximately $0.1.
Outlook, risks and contingencies
- Management expected nonresidential construction weakness to continue affecting revenue for the remainder of 2013, with industry activity likely flat over the next 12 months. It expected revenue to remain at recent lower levels but 2013 profitability to be somewhat better than in 2012. Priorities were execution, cost discipline, efficient project and service performance, and preserving the core workforce.
- Management estimated a 2013 effective tax rate of 38%–42%; the first-half rate was 41.3%, versus 58.1% in the prior-year period.
- Risks include cyclical construction demand, strong price competition, fixed-price project cost overruns, working-capital demands and uncertainty in percentage-of-completion estimates. Bonding conditions remain challenging; historically 25%–35% of business required bonds, and loss of bonding capacity could reduce near-term revenue and profits.
- The company is substantially self-insured for several liability and employee-health risks. Legal claims arise in the ordinary course; management did not expect them, after recorded provisions, to materially affect results or financial condition, but noted outcomes are uncertain.
- Operating lease obligations totaled $43.1. Letters of credit totaled $53.2; most supported insurance programs and were expected to be renewed. The company reported no past letter-of-credit claims resulting in payment and no known surety losses.
Important facts for investors to verify
- Whether stronger gross and operating margins are sustainable, particularly given the approximately $1.6 claim-related gross-profit benefit and the receivable-settlement gain.
- Whether backlog conversion, new bookings and project pricing support the company’s stated revenue and profitability outlook.
- How working-capital movements affect cash generation: first-half operating cash flow and free cash flow remained negative despite higher earnings.
- Whether bonding capacity, self-insurance estimates, project cost estimates and receivable collectability present emerging exposures.
- How the post-quarter debt repayments and facility amendment affect liquidity, financing costs and available borrowing capacity.