Comfort Systems USA, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited, compared with Q1 2020. The company provides mechanical and electrical contracting, installation, maintenance, repair and replacement services across U.S. commercial, industrial and institutional markets.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $669.8 million | $700.1 million | Down 4.3% |
| Gross profit / margin | $123.5 million / 18.4% | $117.1 million / 16.7% | Gross profit up 5.4%; margin up 1.7 points |
| Operating income / margin | $35.6 million / 5.3% | $24.7 million / 3.5% | Operating income up 44.0% |
| Net income / diluted EPS | $26.5 million / $0.73 | $17.7 million / $0.48 | Net income up 49.5% |
| Operating cash flow | $84.6 million | $21.9 million | Up $62.7 million |
| Free cash flow | $80.3 million | $15.1 million | Up $65.2 million |
- Cash was $52.1 million at March 31, versus $54.9 million at year-end 2020. Current assets were $762.6 million and current liabilities $691.7 million.
- Total debt principal was $172.0 million ($171.8 million net of issuance costs), down from $236.0 million at year-end. The company had $10.0 million drawn on its revolver, $49.5 million of letters of credit and $390.5 million of available credit.
- Leverage ratio was 0.6 against a maximum of 3.0; fixed-charge coverage was 28.5 against a minimum of 1.5. The company reported compliance with all financial covenants.
- Q1 operating cash flow benefited from strong collections, including a $49.7 million receivables decrease and $20.6 million increase in billings in excess of costs. Management expects the latter benefit to decline during 2021. Investing cash use was $15.0 million; financing cash use was $72.4 million, including debt repayment.
Material changes and business trends
- Revenue fell despite acquisitions: same-store revenue declined 11.8%, partly offset by a 7.5% contribution from the North Carolina electrical contractor, TAS and TEC acquisitions. Mechanical revenue decreased 0.9%; electrical revenue decreased $25.2 million, largely reflecting fewer large Texas electrical jobs than in the prior-year quarter.
- Higher gross margin reflected improved electrical project execution. SG&A declined 5.1% to $88.2 million; management also cited lower bad-debt expense, following COVID-related collection concerns in Q1 2020.
- Backlog was $1.66 billion, up 9.8% from December 2020 and 2.6% year over year. The year-over-year increase included acquisitions; same-store backlog declined 17.4%. The company expects to recognize approximately 80–85% of remaining performance obligations over the next 12 months.
- Mechanical services generated 84.5% of revenue and electrical services 15.5%. New construction revenue declined to 45.1% of total revenue from 49.6% a year earlier.
- Q1 is typically seasonally weaker for construction activity. The company reported 5,837 active projects and $5.0 billion of aggregate contract value in projects in progress.
Outlook, risks and unusual items
- Management said it anticipates solid earnings and cash flow throughout 2021 and expects supportive industry conditions to continue into 2022; these are qualitative expectations, not quantified earnings or revenue guidance. COVID-related project award and start delays were easing but expected to affect activity, particularly in Q2 2021.
- Risks include pandemic-related disruption, economic and nonresidential construction cyclicality, seasonal demand, price competition, fixed-price project cost overruns, labor and material availability, and the timing of customer payments. Management noted safety measures and COVID protocols added cost or inefficiency.
- A customer dispute involves approximately $15 million of claimed damages and a company counterclaim of approximately $9 million. Arbitration was scheduled for the second half of 2021. The company recorded an accrual, but its amount is not stated here; an adverse outcome could exceed estimates.
- Management said ordinary-course legal matters were not expected to materially affect results, cash flows or financial condition after recorded provisions. Surety bonding capacity was described as adequate, but loss of bonding support could reduce revenue and profit.
- Texas electrical operations had $96.8 million of goodwill; their fair value exceeded carrying value by 24% in the latest quantitative assessment. The filing identifies this unit as more susceptible to impairment if conditions worsen.
- The company’s 24.8% Q1 effective tax rate compared with 27.6% in Q1 2020. Management estimated future effective tax rates of 24%–29%, potentially lower if tax-credit and deduction claims are pursued. Amended-return tax benefits are subject to an IRS examination and offset by unrecognized tax benefits.
- Contingent earn-out fair-value changes contributed $1.2 million of income in Q1 2021, versus $2.3 million in Q1 2020. Acquisition-related fair-value estimates and project cost-to-complete estimates involve significant judgment.
Important facts for investors to verify
- Whether the year-over-year decline in same-store revenue and backlog stabilizes, and how backlog converts into revenue and margins.
- How much of the strong operating cash flow came from timing-related collections and contract billings, and whether cash generation remains strong as those benefits unwind.
- Progress and outcome of the customer arbitration, including the recorded accrual and any resulting financial exposure.
- Performance of the Texas electrical reporting unit and whether its goodwill impairment headroom changes.
- COVID-related project delays, cost inflation, labor availability and bonding capacity, as well as the effect of acquisition integration on operating results.
- IRS examination developments, tax-credit and deduction claims, and the resulting effective tax rate.