Comfort Systems USA, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. The company provides commercial, industrial and institutional HVAC installation, maintenance, repair and replacement services across 37 operating units.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $1,410.8 million | $1,357.3 million |
| Gross profit / margin | $249.8 million / 17.7% | $239.9 million / 17.7% |
| Operating income / margin | $42.2 million / 3.0% | $46.3 million / 3.4% |
| Net income attributable to Comfort Systems | $23.1 million; $0.61 per diluted share | $27.3 million; $0.73 per diluted share |
| Cash from operations | $42.6 million | $38.4 million |
| Free cash flow, as defined by the company | $24.7 million | $22.1 million |
| Cash and working capital at year-end | $32.1 million cash; $130.6 million working capital | $52.1 million cash; $127.6 million working capital |
| Total debt, including capital leases | $40.3 million | $2.0 million |
FY 2014 revenue increased 3.9%, while gross margin was unchanged. Operating income fell about 8.7% and attributable net income fell about 15.4%. SG&A rose 6.9% to $207.7 million, or 14.7% of revenue versus 14.3%.
Fourth quarter: Revenue was $356.5 million versus $330.3 million in Q4 2013; gross profit was $69.3 million versus $61.4 million; operating income was $14.9 million versus $9.1 million; and attributable net income was $10.7 million versus $5.6 million. Quarterly diluted EPS was $0.29 versus $0.15.
Operating cash flow improved by $4.1 million year over year. Investing cash use rose to $74.1 million, principally reflecting $52.0 million paid for four 2014 acquisitions and $19.2 million of property and equipment purchases. Cash declined $20.0 million over the year.
The amended revolving facility provides up to $250 million and expires in October 2019. At year-end the company had $38.5 million borrowed, $45.0 million of letters of credit outstanding and $138.9 million of available credit. The leverage ratio was 0.62 against a 2.75 maximum; the company reported compliance with its covenants.
Material changes and operating developments
- Revenue growth included 0.6% same-store growth and a 3.3% contribution from the Northern Texas acquisition. Backlog reached $757.8 million, up 25.5% from year-end 2013; management cautions that backlog is limited to project work and may be adjusted or cancelled.
- Gross margin held at 17.7%, but higher compensation, service-growth and information-technology investment, training costs, and bad-debt expense increased SG&A.
- Four acquisitions were completed in 2014. The DynaTen acquisition in May had a stated purchase price of $40.5 million; other acquisitions were described as immaterial.
- Share repurchases totaled approximately $8.0 million, and cash dividends were $0.225 per share for the year.
Outlook, risks and unusual items
- Management expected industry conditions to begin improving in 2015, with revenue at or somewhat above recent-year levels and profitability likely to improve versus 2014. Priorities included execution, cost control, labor development and investment in service and small-project growth. The company estimated a 2015 effective tax rate of 35%–40%.
- Principal risks include cyclical construction demand and price competition; fixed-price project cost overruns and estimation risk under percentage-of-completion accounting; delays or defaults in customer payments; labor availability and utilization; and reliance on subcontractors and suppliers.
- Bonding and insurance capacity are material operating dependencies. Approximately 25%–35% of business historically required bonds, and the filing describes challenging surety-market conditions. The company is substantially self-insured for several major risk categories.
- 2014 included a $4.4 million pre-tax write-down on an underperforming Southern California project and a $0.7 million goodwill impairment charge at that operation. Goodwill was $140.3 million at year-end; further impairment is possible if operating assumptions weaken.
- The company reported ordinary-course legal claims and accrued probable losses, but management did not expect them, after recorded provisions, to materially affect results, cash flows or financial condition. 2013 results included a $1.3 million after-tax benefit from correction of prior-period accounting errors; the company concluded those errors were not material to previously issued statements.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end.
Important facts for investors to verify
- Whether the higher backlog converts to profitable revenue, and how much is affected by cancellations, project timing or scope changes.
- Whether service investments and acquisitions deliver profitable growth without further SG&A increases or impairment charges.
- Project-estimate revisions, including the Southern California loss project, and the quality of percentage-of-completion estimates.
- Working-capital conversion, receivable collection and retainage: year-end receivables were $303.6 million, including $50.5 million of retention balances.
- Available borrowing capacity after letters of credit, covenant headroom, floating-rate exposure and the renewal or availability of surety bonds and insurance.
- The assumptions underlying the 2015 revenue, profitability and tax-rate outlook.