Comfort Systems USA, Inc. — Q1 2016 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2016, compared with Q1 2015; balance-sheet figures are compared with December 31, 2015. The company provides mechanical contracting and related services across the United States, primarily HVAC, plumbing, controls and other building services. It reports one industry segment. Q1 revenue was 41% from newly constructed facilities and 59% from maintenance, repair and replacement.
Key financial results
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Revenue | $385.9 million | $369.5 million | Up 4.4% |
| Gross profit / margin | $73.5 million / 19.0% | $64.7 million / 17.5% | Profit up 13.6%; margin improved 1.5 percentage points |
| Operating income / margin | $15.5 million / 4.0% | $11.2 million / 3.0% | Income up $4.3 million |
| Net income attributable to Comfort Systems | $9.8 million | $5.1 million | Up about 93%; Q1 2015 included $1.8 million attributable to noncontrolling interests |
| Diluted EPS | $0.26 | $0.13 | Up $0.13 |
| Operating cash flow / free cash flow | $13.0 million / $9.5 million | $20.4 million / $17.0 million | Both declined; company-defined free cash flow |
SG&A rose 8.4% to $58.2 million, and increased to 15.1% of revenue from 14.5%, mainly reflecting compensation costs associated with expanded service activity. Interest expense rose 38.8% to $0.7 million, primarily from higher net revolver borrowings used to fund acquisitions. The effective tax rate was 36.0%, versus 35.5%; management estimated a 35%–40% rate for 2016.
Liquidity and capital
At March 31, 2016, cash was $43.5 million, total assets $709.0 million, and current liabilities $306.9 million. Total debt obligations, including capital leases, were $54.6 million, versus $11.5 million at year-end 2015; cash exceeded debt by about $11.0 million. The company had $51.0 million drawn on its revolving facility, $41.5 million in letters of credit and $232.5 million of remaining availability. The facility was expanded to $325 million, with a $100 million accordion option, and expires in February 2021. The company reported covenant compliance, a 0.4 leverage ratio and a 30.4 fixed-charge coverage ratio.
Material changes and operating developments
- Revenue growth comprised 0.5% same-store growth and 3.9% from Shoffner, acquired in February. Shoffner contributed $14.5 million of revenue during the period.
- The company acquired the remaining 40% of Environmental Air Systems (EAS) for stated consideration of $47.0 million, and acquired 100% of Shoffner for preliminary consideration of $19.5 million. EAS noncontrolling interests were eliminated as of January 1.
- Backlog was $776.9 million, up 9.2% from December 31, 2015 and 8.2% year over year; management cautions it is an imperfect indicator and generally represents work expected to be recognized over the next six to twelve months.
- Cash used in investing was $60.6 million, chiefly reflecting acquisitions. Net revolving-credit borrowings were $41.0 million. Cash declined $12.9 million to $43.5 million.
- The company repurchased 102,029 shares for approximately $2.8 million at an average $27.84 per share and paid $2.4 million in dividends.
Outlook, commentary and risks
Management said industry conditions improved in 2015 and Q1 2016. For 2016, it expects revenue and profitability to be similar to or above 2015 levels, based on backlog and industry conditions. Priorities include project execution, cost discipline, labor development, and investment in service and small-project growth; this is an expectation, not a quantified earnings forecast.
Management cited ongoing price competition and the construction sector’s cyclicality and seasonality; Q1 is typically a lower-demand period. Fixed-price project work exposes results to estimation errors, cost overruns and labor utilization. Working-capital needs, customer retainage and timing of project billings and collections can affect cash flow. Historically, 20%–30% of business required surety bonds; loss of bonding capacity could reduce near-term revenue and profits. The company is substantially self-insured for several liability and employee-health risks. It reported ordinary-course legal claims and said, after recorded provisions, they were not expected to materially affect results, cash flows or financial condition. No nonrecurring impairment was reported.
Important facts for investors to verify
- Whether the improved gross margin and operating performance persist, especially given EAS’s lower project volume and the company’s fixed-price execution risks.
- How much future growth and earnings are attributable to Shoffner and the EAS ownership change, versus underlying same-store performance.
- Whether backlog converts to revenue and cash as anticipated, and whether operating cash flow recovers from the year-over-year decline.
- Acquisition funding, earn-out obligations, debt levels and covenant headroom; also note the facility’s floating-rate exposure and letters of credit using borrowing capacity.
- Whether 2016 results meet management’s “similar to or above” 2015 outlook and its estimated 35%–40% effective tax rate.