Comfort Systems USA, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. The company provides HVAC and related mechanical installation, maintenance, repair and replacement services. Results include ColonialWebb, acquired in July 2010; the company had 37 operating locations at quarter-end.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $312.1m | $249.6m | $594.2m | $486.1m |
| Gross profit / margin | $47.5m / 15.2% | $42.0m / 16.8% | $81.7m / 13.8% | $81.5m / 16.8% |
| Operating income (loss) | $5.6m | $2.4m | $(2.7)m | $4.5m |
| Net income (loss) | $3.2m | $1.6m | $(2.0)m | $3.6m |
| Diluted EPS | $0.08 | $0.08 | $(0.05) | $0.09 |
| Cash from operations | $(4.4)m | $0.8m | $(23.4)m | $(10.7)m |
Q2 revenue rose 25.1%; management attributed 16.9 percentage points to ColonialWebb and 8.2% to same-store growth. First-half revenue increased 22.2%, including 17.1% from the acquisition and 5.1% same-store growth. ColonialWebb contributed approximately $42.1m of Q2 revenue and $82.9m for the six months.
Despite revenue growth, gross margin fell in both comparisons. Management cited a difficult pricing environment, particularly in Maryland, where prior-year profitable job close-outs benefited results, and approximately $3.6m of job write-downs at Southern Alabama in the first half. SG&A was 13.4% of Q2 revenue and 14.2% year to date, down from 14.3% and 15.0%, respectively.
Cash, debt and liquidity
- Cash and cash equivalents were $50.1m at June 30, down from $86.3m at December 31, 2010. First-half operating cash use was $23.4m; management attributed the deterioration principally to the net loss and working-capital investment, including higher receivables.
- Total debt was $28.4m, including $25.4m in notes to former owners and $3.0m of other debt; there were no revolver borrowings. The $125m credit facility had $77.2m of availability after $43.0m of letters of credit.
- The company reported compliance with its credit covenants: leverage ratio 0.67 against a 2.50 maximum, and fixed-charge coverage ratio 12.19 against a 2.00 minimum.
- Backlog was $621.2m, up 22.6% year over year and 0.3% sequentially; same-store backlog rose 4.6% year over year.
- First-half capital expenditures were $3.9m. The company repurchased about 0.4m shares for $3.7m and paid $0.10 per share in dividends during the half.
Outlook, risks and notable items
- Management expected industry activity to remain roughly flat over the next 12 months and forecast the company to be profitable in 2011, but with lower overall profitability than in 2010. It emphasized project execution, cost control and preserving the core workforce. The estimated 2011 effective tax rate was 25%–38%.
- Pricing competition and weak nonresidential construction demand remain headwinds. Fixed-price project work depends on accurate cost estimates; overruns that cannot be recovered from customers can reduce profits or create losses.
- The company accrued $7.1m for potential and asserted customer backcharges. A July 2011 agreement led to a $0.6m second-quarter accrual increase and a planned $4.8m payment in Q3. Management warned unresolved disputes could materially adversely affect results.
- Surety-market capacity and terms remain challenging. Historically, 25%–35% of the company’s business required bonds; reduced bonding availability could lower near-term revenue and profit.
- Management cited cash use for working capital as a key factor. Goodwill impairment risk also remains if operating results or recovery assumptions weaken; no impairment was recorded in the first half of 2011.
Investor verification priorities
- Track gross-margin recovery, job write-downs and pricing, especially in Maryland and the consolidated Southern Alabama operation.
- Monitor receivables, working-capital requirements and operating cash flow against the first-half cash outflow.
- Confirm settlement, payment and remaining exposure related to the $7.1m backcharge accrual and $4.8m Q3 payment.
- Verify backlog conversion, same-store trends, and whether the 2011 profitability outlook remains achievable.
- Monitor renewals of letters of credit and surety support, alongside available revolver capacity and covenant compliance.