10-QPeriod: Q3 FY2018

COMFORT SYSTEMS USA INC Quarterly Report for Q3 Ended Sep 30, 2018

Filed October 25, 2018For Securities:FIX

Summary

Comfort Systems USA Inc. (FIX) reported strong revenue and earnings growth in the third quarter and first nine months of 2018, reflecting continued improvement in the nonresidential construction services industry. Revenue surged by 23.6% year-over-year for the quarter and 20.2% for the nine-month period, driven by both acquisitions and broad-based same-store activity. Gross profit also saw significant increases, with gross margin expanding slightly to 21.5% in Q3, indicating improved project execution and higher volumes. The company's financial position remains robust, supported by a strong credit facility and a history of positive free cash flow generation. Management expects this positive trend to continue through the fourth quarter of 2018 and into 2019, driven by favorable industry conditions and the company's strategic focus on project performance, labor development, and growth investments. The company was in compliance with all its financial covenants as of September 30, 2018.

Financial Highlights

52 data points
Beta

Revenue

$594.54M

21.5% Gross Margin

Net Income

$38.54M

6.5% Net Margin

EPS (Diluted)

$1.02

Total Assets

$1.06B

Cash & Equivalents

$19.25M

Free Cash Flow

$22.55M

Financial Statements
Beta
Revenue$594.54M
Cost of Revenue$466.67M
Gross Profit$127.87M
SG&A Expenses$75.30M
Operating Income$52.79M
Interest Expense$1.15M
Net Income$38.54M
EPS (Basic)$1.03
EPS (Diluted)$1.02
Shares Outstanding (Basic)37.29M
Shares Outstanding (Diluted)37.67M

Key Highlights

  • 1Revenue increased by 23.6% to $594.5 million in Q3 2018 and by 20.2% to $1.59 billion for the first nine months of 2018, compared to the prior year periods.
  • 2Gross profit increased by 26.8% to $127.9 million in Q3 2018, with gross margin improving to 21.5% from 21.0% in the prior year.
  • 3Operating income grew significantly, up 52.0% to $52.8 million in Q3 2018 and up 49.0% to $112.2 million for the first nine months of 2018.
  • 4Net income more than doubled in Q3 2018, rising 73.0% to $38.5 million, and increased by 83.8% to $87.7 million for the nine-month period.
  • 5Backlog as of September 30, 2018, increased by 39.3% year-over-year to $1.25 billion, indicating strong future project pipeline.
  • 6The company's total leverage ratio was a healthy 0.5 as of September 30, 2018, well below the covenant limit of 3.00.
  • 7Free cash flow for the first nine months of 2018 was $47.0 million, demonstrating the company's ability to generate cash from operations.

Frequently Asked Questions

The substantial increase in revenue and profits was driven by a combination of factors. This includes strong organic growth across existing operations ('same-store activity'), which saw broad-based increases in North Carolina, Virginia, and Wisconsin, among others. Additionally, acquisitions, such as the Indiana acquisition completed in Q3 2018, contributed to the revenue growth. Improved project execution and increased volumes, particularly at the North Carolina operation, also boosted gross profit and margins.

Comfort Systems USA Inc. maintains a strong financial position with significant liquidity. As of September 30, 2018, the company had $296.4 million of available credit under its amended and expanded $400 million revolving credit facility. The company's total leverage ratio was very low at 0.5, significantly below the covenant limit of 3.00, indicating strong debt management. Furthermore, the company has a long history of generating positive free cash flow, which provides a solid foundation for its operations and growth.

Management is optimistic about the near-term outlook. They expect continued improvement in industry conditions through 2018 and 2019. Based on the current backlog and economic conditions, Comfort Systems USA anticipates year-over-year improvement in both revenue and net earnings for the fourth quarter of 2018 and expects favorable conditions to persist into 2019. Their strategy focuses on efficient project performance, developing their labor force, and making strategic investments in growth.

While the report indicates strong performance, it references standard industry risks. The company operates in the cyclical nonresidential construction services industry and is affected by economic trends, interest rates, and business investment. Price competition is also noted as ongoing. While not detailed as new risks in this filing, investors are advised to refer to the company's Form 10-K for a comprehensive list of risk factors.