Comfort Systems USA, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing.
Business context
Comfort Systems provides commercial, industrial and institutional mechanical contracting services, principally HVAC, across 35 operating units and 89 locations. HVAC accounted for 77% of 2015 revenue. About 44% of revenue came from new construction installation and 56% from work on existing buildings, including renovation, maintenance, repair and replacement. The company reports one industry segment.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $1,580.5 million | $1,410.8 million |
| Gross profit / margin | $318.1 million / 20.1% | $249.8 million / 17.7% |
| Operating income / margin | $90.0 million / 5.7% | $42.2 million / 3.0% |
| Net income attributable to Comfort Systems | $49.4 million | $23.1 million |
| Diluted EPS | $1.30 | $0.61 |
| Cash provided by operations | $97.9 million | $42.6 million |
| Free cash flow, as defined by the company | $78.4 million | $24.7 million |
At year-end, cash was $56.5 million, total debt was $11.5 million, working capital was $118.9 million and total stockholders’ equity was $365.0 million. The current ratio was approximately 1.39. The $250 million revolving facility had $10.0 million borrowed, $41.5 million of letters of credit outstanding and $198.5 million available. The company reported a 0.10 leverage ratio, a 27.45 fixed-charge coverage ratio and compliance with all financial covenants.
FY2015 revenue increased 12.0%; management attributed 10.6 percentage points to same-store activity and 1.4 points to the Northern Texas acquisition. Backlog was $711.6 million at year-end, down 6.1% from $757.8 million a year earlier, but up 6.8% from the prior quarter.
In Q4 2015, revenue was $383.8 million, gross profit was $83.9 million and net income attributable to the company was $13.2 million, compared with $356.5 million, $69.3 million and $10.7 million, respectively, in Q4 2014. Q4 diluted EPS was $0.35 versus $0.29.
Material changes and unusual items
- Gross margin improved to 20.1% from 17.7%, reflecting better margins at many locations, improved project execution and stronger volumes in some markets.
- Fourth-quarter 2015 gross profit included approximately $3.4 million from approved change orders on multiple projects, with minimal associated cost. The company said unapproved change-order and claim revenue was immaterial.
- SG&A rose 10.3% to $229.0 million, primarily due to higher compensation accruals and expanded service activity; as a share of revenue, it declined to 14.5% from 14.7%.
- The effective tax rate rose to 35.2% from 28.9%. Management cited state taxes and valuation-allowance effects among the drivers.
- Operating cash flow improved substantially; management attributed the increase principally to higher net income and working-capital timing. Financing activities used $47.8 million, including net repayments on the revolving facility, dividends and share repurchases.
- No goodwill impairment was recorded in 2015; a $0.7 million charge was recorded in 2014. The company completed four small, “tuck-in” acquisitions in 2015.
Outlook, risks and contingencies
Management said industry conditions improved during 2015. For 2016, it expected revenue and profitability to be similar to or above 2015 levels, emphasizing project execution, cost control, workforce development and investment in service and small-project growth. It estimated a 2016 effective tax rate of 36%–42%, partly reflecting the January 1, 2016 purchase of EAS’s remaining 40% noncontrolling interest.
Key risks include cyclical construction demand and price competition; fixed-price project cost overruns and estimates underlying percentage-of-completion accounting; backlog cancellations or changes; labor availability and utilization; customer payment delays; dependence on subcontractors and suppliers; and the company’s substantial self-insurance exposure. Surety-bond capacity is important to bidding: historically, 20%–30% of business required bonds. Legal claims were described as arising in the ordinary course, with accruals recorded; management did not expect them to materially affect results, cash flows or financial condition.
Subsequent events included a February 2016 amendment increasing the revolving facility to $325 million, with a $100 million accordion option and maturity in February 2021, and the February 2016 acquisition of Shoffner for $17.25 million plus a possible earn-out.
Important facts for investors to verify
- Whether the margin improvement is sustainable after considering the $3.4 million Q4 change-order gain and project-level estimate revisions.
- Backlog conversion, cancellation and profitability, given the 6.1% year-over-year decline and management’s caution that backlog is only a limited near-term indicator.
- Cash conversion and working-capital trends, including receivables, retainage and costs in excess of billings.
- Actual 2016 tax rate and earnings attributable to shareholders after the EAS buyout.
- Availability and cost of surety bonds, insurance coverage and self-insurance claims, as well as compliance with credit-facility covenants.
- Integration and performance of acquisitions, including Shoffner, and the terms and funding of the amended credit facility.