Comfort Systems USA, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. The company provides commercial, industrial and institutional HVAC installation, maintenance, repair and replacement services, alongside plumbing, building automation and other mechanical services. It operates as a single mechanical-services segment.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $325.9 million | $326.9 million; down 0.3% |
| Gross profit / margin | $51.5 million / 15.8% | $42.9 million / 13.1% |
| Operating income (loss) | $5.1 million | $(3.0) million |
| Income (loss) attributable to Comfort Systems | $2.5 million; diluted EPS $0.07 | $(1.0) million; diluted EPS $(0.03) |
| Operating cash flow | $(10.4) million | $(19.8) million |
| Free cash flow, as defined by the company | $(13.4) million | $(21.5) million |
SG&A was $46.5 million, or 14.3% of revenue, compared with $46.1 million, or 14.1%. Income tax expense was $2.0 million, with a 42.6% effective rate, versus a $0.9 million tax benefit and 28.0% rate in Q1 2012. Cash and equivalents were $25.4 million at March 31, down from $40.8 million at year-end 2012. Current assets were $377.2 million and current liabilities $270.2 million.
Total debt was $7.4 million, including $5.0 million in notes to former owners and $2.4 million of other debt; there were no borrowings on the $125 million revolving facility. The company reported $71.8 million of remaining facility availability after $53.2 million of letters of credit. It was in compliance with its financial covenants.
Changes and operating drivers
- Revenue was nearly flat, with reduced contribution from a large data-center project substantially completed in 2012 partly offset by increased activity in other markets, including EAS.
- Gross profit rose $8.5 million. Management cited improved EAS profitability, prior-year Maryland job underperformance, and approximately $1.4 million of additional gross profit from settling a claim on an accelerated data-center project.
- Backlog was $631.1 million, up 2.1% from December 31, 2012 and 1.7% year over year, primarily due to EAS.
- Operating cash use improved year over year, but remained negative. Receivables and costs and estimated earnings in excess of billings were significant uses of operating cash.
- The company consolidated one operating unit during the quarter, leaving 36 locations at March 31.
Outlook, risks and other items
Management expected subdued nonresidential construction activity to continue in 2013 and industry activity to remain broadly flat near term. It expected 2013 profitability to be similar to 2012 levels, with emphasis on execution, cost discipline, project qualification and service performance. The company estimated a 35%–45% effective tax rate for 2013. Management noted that first-quarter and fourth-quarter results are typically seasonally weaker.
- Price competition and weak construction demand may constrain revenue and margins. Fixed-price project work exposes results to cost overruns and changes in project conditions; percentage-of-completion estimates require judgment.
- Bonding capacity is important: historically, approximately 25%–35% of business required bonds. Challenging surety-market conditions or reduced availability could lower near-term revenue and profits.
- The company is substantially self-insured for several liability and employee-health risks. Actual claims may differ from accrual estimates.
- Potential asbestos exposure relates to approximately 43,000 potentially mislabeled gaskets supplied by Ferguson. The parties reached a claims-handling protocol, but the company said a liability estimate was not reasonably possible.
- Management said ordinary-course claims and lawsuits were not expected to have a material effect after recorded accruals. Operating lease obligations totaled $41.4 million; letters of credit totaled $53.2 million.
- The Delaware operation was substantially shut down in 2012 and remained in discontinued operations, with a $0.1 million after-tax loss in Q1 2013.
Important facts for investors to verify
- Whether improved gross margins are sustainable, particularly given the one-time $1.4 million project-claim settlement and cited operating-unit improvements.
- Backlog conversion, project mix and pricing trends against management’s subdued-activity and similar-profitability outlook.
- Collection of receivables and working-capital movements, given negative operating and free cash flow despite quarterly profitability.
- Ongoing access to surety bonds and renewal of letters of credit, including the effect on facility availability and project capacity.
- Developments in the Ferguson gasket matter and self-insurance claims that could change estimated liabilities.
- Tax-rate variability and the basis for management’s 35%–45% full-year estimate.