10-QPeriod: Q2 FY2018

COMFORT SYSTEMS USA INC Quarterly Report for Q2 Ended Jun 30, 2018

Filed July 26, 2018For Securities:FIX

Summary

Comfort Systems USA, Inc. (FIX) reported a strong second quarter and first half of 2018, demonstrating significant revenue and profit growth driven by increased project activity and improved operational execution. The company's strategic focus on project qualification, estimating, pricing, and management, coupled with investments in its service business and regional/national accounts, appears to be yielding positive results. Financially, the company shows a robust improvement in operating income and net income compared to the prior year, alongside a substantial increase in backlog, signaling continued demand for its mechanical installation, renovation, and maintenance services. The company also reported a strong free cash flow generation and maintained compliance with its debt covenants, highlighting a healthy financial position and confidence in its operational strategy for the remainder of 2018.

Financial Highlights

52 data points
Beta

Revenue

$535.04M

20.8% Gross Margin

Net Income

$32.55M

6.1% Net Margin

EPS (Diluted)

$0.87

Total Assets

$959.17M

Cash & Equivalents

$28.00M

Free Cash Flow

$25.13M

Financial Statements
Beta
Revenue$535.04M
Cost of Revenue$423.86M
Gross Profit$111.18M
SG&A Expenses$71.21M
Operating Income$40.17M
Interest Expense$736K
Net Income$32.55M
EPS (Basic)$0.87
EPS (Diluted)$0.87
Shares Outstanding (Basic)37.22M
Shares Outstanding (Diluted)37.60M

Key Highlights

  • 1Revenue increased by 15.0% to $535.0 million in Q2 2018 and by 18.2% to $1.00 billion in the first six months of 2018, driven by strong same-store activity and recent acquisitions.
  • 2Gross profit increased by 16.1% to $111.2 million in Q2 2018 and by 16.6% to $200.2 million in the first six months of 2018, with gross margin improving slightly to 20.8% in Q2.
  • 3Backlog grew significantly, up 13.8% sequentially to $1.23 billion and up 30.9% year-over-year, indicating robust future project pipelines.
  • 4Operating income more than doubled in Q2 2018 to $40.2 million (7.5% margin) and increased by 44.9% in the first six months to $59.4 million (5.9% margin), reflecting improved operational leverage.
  • 5Net income surged by 86.7% in Q2 2018 to $32.5 million ($0.71 per share, though EPS is not explicitly stated, net income growth is significant) and by 93.3% in the first six months to $49.2 million.
  • 6Free cash flow generation was strong, increasing to $24.1 million for the first six months of 2018 from $10.1 million in the prior year, underscoring effective working capital management.
  • 7The company amended its senior credit facility in April 2018, increasing borrowing capacity to $400 million and maintaining strong compliance with financial covenants, with a Total Leverage Ratio of 0.3x and a Fixed Charge Coverage Ratio of 24.3x as of June 30, 2018.

Frequently Asked Questions

Revenue growth was primarily driven by increased activity at specific operations, notably in North Carolina, Virginia, Arizona, and Tennessee. The acquisition of BCH also contributed, alongside a significant 15.2% increase in same-store revenue for the first six months.

The cost of services remained relatively stable as a percentage of revenue (around 79-80%). Gross profit increased in line with revenue, and the gross profit margin saw a slight improvement in Q2 2018 to 20.8% from 20.6% in Q2 2017, attributed to increased volumes and improved project execution at key locations. However, for the first six months, the gross margin slightly decreased to 20.0% from 20.3% due to underperformance at certain New York and California operations.

The company expects continued improvement in industry conditions and anticipates revenue and net earnings growth for 2018, supported by a strong backlog. Key priorities include cost discipline, efficient project performance, workforce development, and investing in growth, particularly in the service business and smaller projects. They are also focusing on project qualification, estimating, pricing, and management.

The company exhibits a strong financial position with significant free cash flow generation, a robust backlog, and ample borrowing capacity under its amended credit facility. They are in compliance with all debt covenants. The company has generated positive free cash flow for 19 consecutive years, indicating a stable and reliable cash-generating business model.