Comfort Systems USA, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; financial comparisons are to Q1 2014 unless otherwise noted. Amounts below are in millions except per-share data. The company provides HVAC and related mechanical installation, maintenance, repair and replacement services.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $369.5 | $321.4; up 15.0% |
| Gross profit / margin | $64.7 / 17.5% | $52.1 / 16.2% |
| Operating income / margin | $11.2 / 3.0% | $1.9 / 0.6% |
| Net income attributable to Comfort Systems | $5.1; diluted EPS $0.13 | $0.4; diluted EPS $0.01 |
| Cash from operations | $20.4 | $(8.8) |
| Free cash flow | $17.0 | $(12.4) |
- SG&A was $53.7 million, or 14.5% of revenue, versus $50.4 million, or 15.7%, a year earlier. Interest expense was $0.5 million, up from $0.3 million.
- Cash and cash equivalents were $38.9 million at March 31, 2015, versus $32.1 million at year-end 2014. Total current assets were $422.8 million and current liabilities $292.8 million.
- Total debt, including capital leases, was $37.8 million, down from $40.3 million at December 31, 2014. The main credit facility had $36.0 million borrowed, $48.0 million in letters of credit and $164.5 million available. The company reported covenant compliance; leverage ratio was 0.51 against a 2.75 maximum.
- Backlog was $718.0 million, down 5.2% sequentially and up 17.3% year over year. The company cautions that backlog covers only contracted installation and replacement work and is not a reliable indicator of results over multiple quarters.
Changes and management commentary
- Revenue growth comprised 10.2% same-store growth and 4.8% attributed to the Northern Texas acquisition. Stronger project activity at EAS, Arkansas and the Virginia operation contributed to same-store growth.
- Gross profit rose 24.0%; management cited improved project execution at EAS and a turnaround in Southern California after 2014 job underperformance. Higher project revenue helped SG&A decline as a share of sales.
- Operating cash flow improved by $29.2 million year over year, principally due to higher accounts payable and billings in excess of costs, as well as higher earnings. Management said project timing drove much of the working-capital effect.
- Two tuck-in acquisitions were completed in Q1 for a total purchase price, including earn-outs, of $6.7 million. Two operating locations were merged; the company had 36 operating locations at quarter-end.
- The company paid a quarterly dividend of $0.06 per share, compared with $0.055 a year earlier. No shares were repurchased in Q1.
Outlook, risks and unusual items
- Management expects nonresidential construction activity to improve gradually through the remainder of 2015, while remaining below prior peaks. It expects 2015 revenue to exceed levels experienced in recent years and profitability to improve versus 2014. Priorities include execution, cost discipline, labor development and growth in service and small projects.
- Management estimated a 2015 effective tax rate of 35%–40%; Q1’s rate was 35.5%, versus 39.1% in Q1 2014.
- Business risks include economic and construction cyclicality, seasonal weakness in Q1 and Q4, price competition, fixed-price project cost overruns, and estimates used in percentage-of-completion accounting. Bonding markets remain challenging; historically, 25%–35% of business required bonds, and reduced surety availability could pressure revenue and profit.
- The company is substantially self-insured for several liability and employee-health exposures. It also has floating-rate debt, operating lease commitments, letters of credit and surety obligations. Management reported no material expected effect from ordinary-course litigation after recorded accruals, and no Q1 impairment charges.
- Contingent earn-out obligations were $0.4 million at quarter-end; there was no Q1 fair-value adjustment. The company reported $5.4 million of cash paid for acquisitions, net of cash acquired, in investing activities.
- Disclosure controls were concluded to be effective, and no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Reconcile the business-mix descriptions: the notes report 52% of 2015 revenue from installation in newly constructed facilities and 48% from maintenance, repair and replacement, while MD&A describes approximately 83% as project-based and 17% as maintenance and repair. Confirm the differing definitions and scope.
- Assess whether Q1 margin improvement and positive operating cash flow reflect sustainable execution or, in part, project timing and working-capital movements.
- Track backlog conversion, new project bookings and the timing and profitability of acquired operations; backlog declined sequentially despite year-over-year growth.
- Monitor surety capacity and terms, fixed-price project estimates, self-insurance accruals and the company’s ability to maintain covenant headroom as activity and borrowing needs change.
- Review the 2015 outlook and estimated tax-rate range against subsequent results; management’s forecasts are forward-looking and subject to the risks described in the filing.