Comfort Systems USA, Inc. — FY2013 Form 10-K
Reporting period: Year ended December 31, 2013; filed February 27, 2014. The filing is an annual report, not a standalone fourth-quarter filing. Comfort Systems provides HVAC and related mechanical services, primarily to commercial, industrial and institutional customers, through 36 operating units.
Financial performance
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $1,357.3 million | $1,331.2 million | +2.0% |
| Gross profit / margin | $239.9 million / 17.7% | $207.6 million / 15.6% | +15.5% |
| Operating income / margin | $46.3 million / 3.4% | $22.3 million / 1.7% | More than doubled |
| Net income attributable to Comfort Systems | $27.3 million | $13.5 million | +102.6% |
| Diluted earnings per share | $0.73 | $0.36 | +$0.37 |
| Cash from operating activities | $38.4 million | $30.5 million | +$7.9 million |
| Free cash flow, company-defined | $22.1 million | $19.8 million | +$2.3 million |
At December 31, 2013, cash was $52.1 million, working capital was $127.6 million, total assets were $601.8 million and stockholders’ equity was $314.0 million. Total debt was $2.0 million, consisting of notes to former owners due in July 2014; there were no revolver borrowings. The amended revolving facility provides $175 million of capacity, with $126.9 million available after $48.1 million of letters of credit. The company reported a 0.03 leverage ratio and compliance with its covenants.
Fourth-quarter 2013 unaudited results: revenue was $330.3 million versus $315.9 million; operating income was $9.1 million versus $8.1 million; net income attributable to the company was $5.6 million versus $4.4 million; diluted EPS was $0.15 versus $0.12.
Changes versus the prior year
- Revenue grew modestly, while gross margin improved by 2.1 percentage points and operating margin by 1.7 points.
- Management attributed stronger gross profit to improved performance across many operations, higher activity at Arizona and EAS, and comparison with prior-year job underperformance in Maryland. Results also included a $1.6 million gross-profit benefit from settling a claim on a data-center project and approximately $2.5 million of gross-profit benefit from a prior-period accounting correction.
- SG&A increased 4.5% to $194.2 million (14.3% of revenue versus 14.0%), reflecting higher salaries and bonuses, partly offset by lower bad-debt expense.
- Year-end backlog was $603.6 million, down 2.3% from $618.0 million a year earlier, though up 5.7% sequentially from September 2013.
- Operating cash flow increased, and cash rose $11.3 million during the year. Capital expenditures were $17.4 million; the company repaid $5.4 million of debt and paid $7.9 million in dividends.
Outlook, risks and unusual items
- Management expected subdued nonresidential construction conditions to continue in 2014. It forecast revenue at levels experienced in recent years and 2014 profitability comparable to improved 2013 levels, emphasizing execution, cost discipline and efficient project and service performance. Estimated 2014 effective tax rate: 35%–45%.
- Revenue recognition for most project work uses percentage-of-completion estimates. Fixed-price contracts expose the company to cost overruns, labor and materials inflation, schedule delays, subcontractor performance and potential losses or reversals of previously recognized profit.
- Other material risks include cyclical and seasonal demand, competitive pricing, project cancellations or backlog adjustments, customer payment delays, skilled-labor availability, self-insurance exposure, and constrained surety-bond capacity. Historically, 25%–35% of business required bonds; reduced bonding access could limit bids and near-term revenue.
- The company recorded approximately $1.3 million of after-tax income in 2013 from correcting prior-period accounting errors, primarily affecting years before 2010. It concluded the errors were not material to 2013 or previously issued statements and did not restate prior periods; the adjustment contributed about $0.03 per diluted share in third-quarter 2013.
- A $1.6 million reduction in the estimated fair value of acquisition earn-out obligations increased 2013 income. No goodwill impairment or acquisitions were recorded in 2013. Goodwill totaled $114.6 million; impairment remains a risk if operating results or recovery assumptions weaken.
- Management assessed internal control over financial reporting as effective, and the auditor issued unqualified opinions on the financial statements and internal controls. Routine claims and lawsuits were not expected by management to have a material effect after recorded provisions.
Important facts for investors to verify
- Review the 2013 accounting-error correction, its components, and the company’s materiality assessment and no-restatement conclusion.
- Assess the sustainability of the margin rebound, including the project-claim settlement and other disclosed gross-profit contributions.
- Track backlog conversion, bookings and cancellations; backlog is not a complete measure of future revenue and generally covers only the next six to twelve months of project work.
- Monitor receivables, retainage, project-cost estimates and working-capital timing; operating cash flow benefited from payment timing and accrued liabilities.
- Confirm renewal of letters of credit and continuing access to surety bonds, and note the $2.0 million notes-to-former-owners maturity in 2014.
- Compare 2014 results with management’s stated expectations for revenue, profitability and the 35%–45% tax rate.