Comfort Systems USA, Inc. — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012; the filing also reports fourth-quarter results. Amounts below are in U.S. dollars. The company provides HVAC installation, maintenance, repair and replacement services, primarily to commercial, industrial and institutional customers. It operated 37 units across 87 locations. Installation in new facilities contributed 47% of 2012 revenue; maintenance, repair and replacement contributed 53%.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $1,331.2 million | $1,216.7 million |
| Gross profit / margin | $207.6 million / 15.6% | $181.5 million / 14.9% |
| Operating income (loss) | $22.3 million / 1.7% margin | $(42.6) million |
| Net income (loss) attributable to Comfort Systems USA | $13.5 million; $0.36 per diluted share | $(36.8) million; $(0.99) per diluted share |
| Cash from operating activities | $30.5 million | $29.7 million |
| Free cash flow (company-defined) | $19.8 million | $21.7 million |
| Cash and working capital at year-end | $40.8 million cash; $104.0 million working capital | $51.2 million cash; $109.8 million working capital |
| Total debt at year-end | $7.4 million | $15.4 million |
FY 2012 revenue rose 9.4% year over year: 3.4% same-store growth and 6.0% from acquisitions. Gross margin improved, while SG&A rose to $185.8 million, or 14.0% of revenue, from 13.7%. The 2011 loss included a $57.4 million goodwill impairment; no goodwill impairment was recorded in 2012. The 2012 effective tax rate was 46.6%, which management attributed chiefly to tax-reserve changes and jurisdictional variability.
Fourth quarter: Revenue was $315.9 million versus $313.9 million in Q4 2011; gross profit was $55.1 million versus $50.5 million; operating income was $8.1 million versus $4.7 million; and net income attributable to the company was $4.4 million versus $1.7 million. Diluted EPS was $0.12 versus $0.05.
At December 31, the $125 million revolving facility had no borrowings, $48.2 million of letters of credit outstanding and $76.8 million available. The company reported a 0.15 leverage ratio and a 16.31 fixed-charge coverage ratio, and was in compliance with its covenants. The facility expires in September 2016. The company declared $0.20 per share in dividends for 2012 and repurchased 286,036 shares for $2.9 million.
Backlog, outlook and material developments
- Year-end backlog was $618.0 million, down 1.8% from $629.5 million a year earlier. Management cautions that backlog covers only a portion of future revenue and may be adjusted or cancelled.
- Management expected nonresidential activity to remain subdued in 2013 and profitability to continue, but at lower levels similar to 2012. Priorities included project execution, cost control, pricing and maintaining the core workforce. The company estimated a 2013 effective tax rate of 35%–45%.
- A large Virginia project was accelerated by the owner, causing more than $3 million in additional costs and a 2012 job write-down. After year-end, the company reached an agreement in principle on the claim and expected $1.0–$1.6 million of incremental gross profit in Q1 2013, subject to resolving remaining subcontractor issues.
- The company substantially completed the shutdown of its Delaware operation in Q4 2012. Discontinued operations produced $0.4 million of after-tax income in 2012, including a $0.3 million benefit from reducing estimated liabilities on earlier discontinued operations.
- A supplier notified the company that approximately 34,000 gaskets it had purchased might have been mislabeled as non-asbestos. The filing states that no reasonable estimate of any liability was possible.
Risks and contingencies
- Fixed-price project work exposes the company to cost overruns, labor and materials inflation, schedule delays, performance claims and revisions to percentage-of-completion estimates. Contract losses are recognized when identified, and prior profit estimates may be reduced or reversed.
- Demand and pricing are exposed to cyclical nonresidential construction, continued economic weakness and intense competition. Backlog cancellations and customer payment delays or defaults could affect results and working capital.
- Surety capacity is important: historically, 25%–35% of business required bonds. Tighter surety-market conditions could restrict bidding or require collateral. The company also self-insures substantially for several liability and employee-health risks.
- Goodwill was $114.6 million at year-end. Although 2012 testing found no impairment, future impairment remains possible if operating performance or recovery assumptions weaken.
- The company disclosed ordinary-course legal matters and accrued probable losses; management did not expect them to be material after recorded provisions. The potential gasket-related exposure was not quantifiable.
Management and the auditor reported effective internal control over financial reporting as of December 31, 2012. The independent auditor issued an unqualified opinion on the financial statements.
Investor verification priorities
- Track whether 2013 operating results and margins match management’s expectation of subdued activity and profitability similar to 2012.
- Verify collection trends, doubtful-account expense and cash conversion, given higher 2012 bad-debt expense and the company’s project working-capital needs.
- Check resolution and collection of the Virginia project claim and whether the expected $1.0–$1.6 million Q1 2013 gross-profit benefit was realized.
- Monitor bond availability, letters of credit, covenant headroom and debt maturities, particularly the $5.0 million former-owner notes due in 2014.
- Follow developments regarding the possibly asbestos-containing gaskets, tax examinations and unquantified contingent exposures.