10-QPeriod: Q2 FY2019

COMFORT SYSTEMS USA INC Quarterly Report for Q2 Ended Jun 30, 2019

Filed July 25, 2019For Securities:FIX

Summary

Comfort Systems USA, Inc. (FIX) reported a significant increase in revenue for the second quarter and first six months of 2019, driven largely by the acquisition of Walker TX Holding Company, LLC. While consolidated revenue saw substantial growth, same-store revenue experienced a slight decrease in the second quarter but increased over the first six months. The company's gross profit also increased in dollar terms but declined as a percentage of revenue, partly due to lower margins on the acquired business and amortization of backlog. Selling, General, and Administrative (SG&A) expenses rose, but as a percentage of revenue, they decreased. Net income for the quarter and six months was lower than the previous year, impacted by increased interest expense and changes in the fair value of contingent earn-out obligations, alongside a higher effective tax rate. Financially, the company shows a strong increase in total assets, significantly due to the acquisition, with substantial growth in goodwill and identifiable intangible assets. Debt levels increased considerably to fund acquisitions, reflected in higher interest expenses. Despite a decrease in operating cash flow, the company's liquidity remains strong, supported by a revolving credit facility and manageable debt levels relative to its earnings.

Financial Highlights

52 data points
Beta

Revenue

$650.30M

18.5% Gross Margin

Net Income

$24.17M

3.7% Net Margin

EPS (Diluted)

$0.65

Total Assets

$1.44B

Cash & Equivalents

$36.79M

Free Cash Flow

$18.77M

Financial Statements
Beta
Revenue$650.30M
Cost of Revenue$530.29M
Gross Profit$120.02M
SG&A Expenses$84.51M
Operating Income$35.70M
Interest Expense$3.05M
Net Income$24.17M
EPS (Basic)$0.65
EPS (Diluted)$0.65
Shares Outstanding (Basic)36.94M
Shares Outstanding (Diluted)37.22M

Key Highlights

  • 1Revenue increased significantly by 21.5% ($115.3 million) in Q2 2019 and 18.9% ($188.8 million) in the first six months of 2019 compared to the prior year periods, primarily driven by the acquisition of Walker.
  • 2Gross profit increased in absolute terms but decreased as a percentage of revenue from 20.8% in Q2 2018 to 18.5% in Q2 2019, attributed to lower margins on acquisitions and amortization.
  • 3Net income for the quarter decreased to $24.2 million from $32.5 million in Q2 2018, and for the six months decreased to $44.0 million from $49.2 million, impacted by higher interest expenses and changes in contingent earn-out obligations.
  • 4The company recognized $96.8 million in goodwill and $90.2 million in identifiable intangible assets from the Walker acquisition.
  • 5Total debt increased significantly to $295.0 million as of June 30, 2019, from $76.9 million as of December 31, 2018, primarily due to borrowings under the revolving credit facility to fund acquisitions.
  • 6Backlog increased by 30.9% sequentially to $1.50 billion as of June 30, 2019, indicating a strong pipeline of future work.
  • 7Operating cash flow decreased by $10.9 million to $26.6 million for the first six months of 2019 compared to the same period in 2018.

Frequently Asked Questions

The substantial revenue growth in the second quarter and the first six months of 2019 was primarily driven by the acquisition of Walker TX Holding Company, LLC, which contributed significantly to both segments. While consolidated revenue increased, same-store revenue saw a slight decrease in the second quarter but an overall increase for the first six months.

The acquisitions, particularly Walker, have significantly boosted revenue and total assets. However, they have also led to increased debt levels, higher interest expenses, and the recognition of substantial goodwill and intangible assets. The acquired businesses generally carry lower initial margins, impacting overall gross profit margins.

The company's debt increased significantly to fund acquisitions, with borrowings under its revolving credit facility rising substantially. Despite this increase, the company remains in compliance with its debt covenants, reporting a total leverage ratio of 1.4 as of June 30, 2019, which is well below the covenant limit. Management emphasizes maintaining sufficient liquidity and has a strong credit facility.

The company expects industry conditions to remain strong in 2019, supporting favorable revenue and net earnings levels. However, it anticipates that earnings for the remainder of 2019 will be lower than reported in 2018. The focus for 2019 is on cost discipline, efficient project performance, workforce development, and investing in growth, particularly in service and smaller projects.