Comfort Systems USA, Inc. (NYSE: FIX) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited consolidated results. The company provides mechanical and electrical contracting, installation, maintenance, repair and replacement services across the United States.
Key financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $885.2 million | $669.8 million | +32.2% |
| Gross profit / margin | $153.1 million / 17.3% | $123.5 million / 18.4% | Profit +24.0%; margin down 1.1 percentage points |
| Operating income / margin | $35.7 million / 4.0% | $35.6 million / 5.3% | Nearly flat income; margin down 1.3 points |
| Net income | $86.8 million | $26.5 million | +227.5% |
| Diluted EPS | $2.40 | $0.73 | +228.8% |
| Operating cash flow | $63.7 million | $84.6 million | Down $20.9 million |
| Free cash flow | $55.6 million | $80.3 million | Down $24.7 million |
Net income includes a $49.1 million income tax benefit, principally related to IRS approval of prior-year research credits and the company’s expected claims for 2019–2021 credits. The reported profit increase therefore substantially exceeds the change in operating income. A $4.1 million gain from remeasurement of contingent earn-out obligations also increased pretax income.
Balance sheet, liquidity and operations
- Cash was $115.6 million at March 31, 2022, up from $58.8 million at year-end 2021. Current assets were $1.14 billion and current liabilities were $857.2 million.
- Total debt principal was $412.7 million, compared with $388.2 million at December 31, 2021. It included $260.0 million drawn on the revolving facility, a $112.5 million term loan and $40.2 million of notes to former owners.
- The $600 million credit facility expires in January 2025. The company reported $134.4 million available to borrow after outstanding borrowings and letters of credit; it was in compliance with financial covenants at quarter-end. Floating-rate borrowings expose the company to interest-rate increases.
- Revenue growth comprised 15.6% same-store growth and 16.6% from acquisitions. Mechanical revenue rose 20.7% to $682.5 million; electrical revenue rose 94.6% to $202.7 million, reflecting acquisitions and growth at the Texas electrical operation.
- Backlog reached $2.73 billion, up 18.2% from December 2021 and 64.6% year over year. The company expected to recognize approximately 80–85% of remaining performance obligations within 12 months.
Material changes, outlook and risks
- Gross margin declined as electrical and new-construction work represented a larger revenue share, alongside weaker margins at certain operations. SG&A rose 33.5% to $117.8 million, broadly in line with revenue growth; same-store SG&A excluding amortization increased 16.3%.
- Operating cash flow fell year over year, principally due to the change in receivables, including higher billed receivables and strong prior-year collections. The decrease was partly offset by $33.3 million of tax refunds and higher earnings.
- Management reported strong demand and a good opportunity pipeline, and anticipated “solid earnings and cash flow” in 2022. It gave no numerical full-year guidance. It cited continuing labor cost increases and reduced availability, supply constraints, higher material and equipment costs, and delivery delays, while noting efforts to plan and procure materials earlier and work with customers on supply risks.
- The business is seasonal and cyclical; management generally expects first-quarter revenue and operating results to be lower than in the second and third quarters. Fixed-price projects carry cost-overrun and execution risk, and the company depends on labor availability, subcontractor performance, material supply and project estimates.
- A customer dispute involved approximately $12 million of customer claims and approximately $9 million of company claims. Arbitration was scheduled for Q2 2022; the company had accrued an estimated amount but warned the outcome could differ and lead to additional costs.
- On April 1, 2022, after quarter-end, the company acquired Atlantic Electric, which it expected to contribute approximately $50 million of annualized revenue; the transaction was primarily funded from the revolving facility.
Important facts for investors to verify
- How much of reported earnings growth is sustainable after separating the $49.1 million tax benefit and the contingent earn-out fair-value gain from recurring operations.
- Whether revenue growth can translate into recovering gross and operating margins, particularly amid labor and supply constraints and changes in project mix.
- Whether receivables convert to cash and operating cash flow recovers as project activity and seasonal working-capital needs change.
- Backlog conversion, project execution and cost estimates, including the effect of acquisitions on growth and profitability.
- Debt levels, borrowing costs, remaining facility capacity and covenant headroom, including funding needs for acquisitions.
- The result and any financial consequences of the customer arbitration, as well as developments in surety and self-insurance exposures.