Comfort Systems USA Inc 10-Q for FY2020 Q1

Comfort Systems USA Inc (FIX)

10-Q 2020-04-27 For: 2020-03-31

Added on April 03, 2026

About this 10-Q

Comfort Systems USA Inc filed this 10-Q on April 27, 2020, covering the quarter ended March 31, 2020 (FY2020 Q1).

Headline figures

Quarter ended March 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.

Revenue: $700.13M; up 30.0% from $538.47M a year earlier
Net income: $17.72M; down 10.8% from net income of $19.87M a year earlier
Diluted EPS: $0.48; down 9.4% from $0.53 a year earlier

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(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	FIX	New York Stock Exchange

Large accelerated filer ⌧	Accelerated filer ◻	Non-accelerated filer ◻	Smaller reporting company ☐	Emerging growth company ☐


		Page
Part I—Financial Information		2
Item 1—Financial Statements		2
Consolidated Balance Sheets		2
Consolidated Statements of Operations		3
Consolidated Statements of Stockholders’ Equity		4
Consolidated Statements of Cash Flows		5
Condensed Notes to Consolidated Financial Statements		6
Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3—Quantitative and Qualitative Disclosures about Market Risk		31
Item 4—Controls and Procedures		32
Part II—Other Information		32
Item 1—Legal Proceedings		32
Item 1A—Risk Factors		32
Item 2—Unregistered Sales of Equity Securities and Use of Proceeds		33
Item 6—Exhibits		34
Signatures		35


	March 31,		December 31,
	2020		2019
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	133,264	$	50,788
Billed accounts receivable, less allowance for credit losses of $10,337 and $6,907, respectively		643,748		619,037
Unbilled accounts receivable, less allowance for credit losses of $785 and $0, respectively		51,058		55,542
Other receivables, less allowance for credit losses of $875 and $0, respectively		17,908		37,632
Inventories		10,312		10,053
Prepaid expenses and other		14,612		14,396
Costs and estimated earnings in excess of billings, less allowance for credit losses of $25 and $0, respectively		7,541		2,736
Total current assets		878,443		790,184
PROPERTY AND EQUIPMENT, NET		113,974		109,796
LEASE RIGHT-OF-USE ASSET		82,301		84,073
GOODWILL		347,391		332,447
IDENTIFIABLE INTANGIBLE ASSETS, NET		167,675		159,974
DEFERRED TAX ASSETS		21,803		21,923
OTHER NONCURRENT ASSETS		6,480		6,615
Total assets	$	1,618,067	$	1,505,012
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt	$	850	$	20,817
Accounts payable		184,627		196,195
Accrued compensation and benefits		81,305		102,891
Billings in excess of costs and estimated earnings		215,106		166,918
Accrued self-insurance		42,027		39,546
Other current liabilities		75,710		81,630
Total current liabilities		599,625		607,997
LONG-TERM DEBT, NET		333,113		205,318
LEASE LIABILITIES		70,410		72,697
DEFERRED TAX LIABILITIES		1,425		1,425
OTHER LONG-TERM LIABILITIES		20,451		32,271
Total liabilities		1,025,024		919,708
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par, 5,000,000 shares authorized, none issued and outstanding		—		—
Common stock, $.01 par, 102,969,912 shares authorized, 41,123,365 and 41,123,365 shares issued, respectively		411		411
Treasury stock, at cost, 4,673,627 and 4,465,448 shares, respectively		(112,513)		(103,960)
Additional paid-in capital		323,103		320,168
Retained earnings		382,042		368,685
Total stockholders’ equity		593,043		585,304
Total liabilities and stockholders’ equity	$	1,618,067	$	1,505,012

Delaware (State or other jurisdiction of Incorporation or Organization)	76-0526487 (I.R.S. Employer Identification No.)
675 Bering Drive Suite 400 Houston, Texas 77057 (Address of Principal Executive Offices) (Zip Code)


	Three Months Ended
	March 31,
	2020		2019
REVENUE	$	700,131	$	538,473
COST OF SERVICES		583,038		431,808
Gross profit		117,093		106,665
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		92,924		78,905
GAIN ON SALE OF ASSETS		(554)		(219)
Operating income		24,723		27,979
OTHER INCOME (EXPENSE):
Interest income		64		25
Interest expense		(2,617)		(1,062)
Changes in the fair value of contingent earn-out obligations		2,272		(158)
Other		25		15
Other income (expense)		(256)		(1,180)
INCOME BEFORE INCOME TAXES		24,467		26,799
PROVISION FOR INCOME TAXES		6,751		6,933
NET INCOME	$	17,716	$	19,866

INCOME PER SHARE:
Basic	$	0.48	$	0.54
Diluted	$	0.48	$	0.53

SHARES USED IN COMPUTING INCOME PER SHARE:
Basic		36,674		36,923
Diluted		36,905		37,234
DIVIDENDS PER SHARE	$	0.105	$	0.095


	Three Months Ended
	March 31, 2019
							Additional				Total
	Common Stock			Treasury Stock			Paid-In		Retained		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Earnings		Equity
BALANCE AT DECEMBER 31, 2018	41,123,365	$	411	(4,229,653)	$	(87,747)	$	316,479	$	268,904	$	498,047
Net income (unaudited)	—		—	—		—		—		19,866		19,866
Issuance of Stock:
Issuance of shares for options exercised (unaudited)	—		—	41,103		861		(61)		—		800
Issuance of restricted stock & performance stock (unaudited)	—		—	38,539		817		1,189		—		2,006
Shares received in lieu of tax withholding payment on vested restricted stock (unaudited)	—		—	(15,013)		(781)		—		—		(781)
Stock-based compensation (unaudited)	—		—	—		—		2,084		—		2,084
Dividends (unaudited)	—		—	—		—		—		(3,506)		(3,506)
Share repurchase (unaudited)	—		—	(67,394)		(3,321)		—		—		(3,321)
BALANCE AT MARCH 31, 2019 (unaudited)	41,123,365	$	411	(4,232,418)	$	(90,171)	$	319,691	$	285,264	$	515,195

	Three Months Ended
	March 31, 2020
							Additional				Total
	Common Stock			Treasury Stock			Paid-In		Retained		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Earnings		Equity
BALANCE AT DECEMBER 31, 2019	41,123,365	$	411	(4,465,448)	$	(103,960)	$	320,168	$	368,685	$	585,304
Net income (unaudited)	—		—	—		—		—		17,716		17,716
Cumulative-effect adjustment (1)	—		—	—		—		—		(515)		(515)
Issuance of Stock:
Issuance of shares for options exercised (unaudited)	—		—	—		—		—		—		—
Issuance of restricted stock & performance stock (unaudited)	—		—	43,902		1,054		801		—		1,855
Shares received in lieu of tax withholding payment on vested restricted stock (unaudited)	—		—	(14,722)		(622)		—		—		(622)
Stock-based compensation (unaudited)	—		—	—		—		2,134		—		2,134
Dividends (unaudited)	—		—	—		—		—		(3,844)		(3,844)
Share repurchase (unaudited)	—		—	(237,359)		(8,985)		—		—		(8,985)
BALANCE AT MARCH 31, 2020 (unaudited)	41,123,365	$	411	(4,673,627)	$	(112,513)	$	323,103	$	382,042	$	593,043


	Three Months Ended March 31,
Revenue by Service Provided	2020				2019
Mechanical Services	$	565,464	80.8	%	$	534,585	99.3	%
Electrical Services		134,667	19.2	%		3,888	0.7	%
Total	$	700,131	100.0	%	$	538,473	100.0	%

	Three Months Ended March 31,
Revenue by Type of Customer	2020				2019
Industrial	$	275,198	39.3	%	$	168,660	31.3	%
Education		109,584	15.7	%		66,743	12.4	%
Office Buildings		75,572	10.8	%		66,212	12.3	%
Healthcare		99,259	14.2	%		92,023	17.1	%
Government		38,981	5.6	%		32,279	6.0	%
Retail, Restaurants and Entertainment		61,203	8.7	%		59,391	11.0	%
Multi-Family and Residential		18,731	2.7	%		30,235	5.6	%
Other		21,603	3.0	%		22,930	4.3	%
Total	$	700,131	100.0	%	$	538,473	100.0	%

	Three Months Ended March 31,
Revenue by Activity Type	2020				2019
New Construction	$	347,400	49.6	%	$	223,960	41.6	%
Existing Building Construction		207,166	29.6	%		182,296	33.8	%
Service Projects		51,648	7.4	%		50,384	9.4	%
Service Calls, Maintenance and Monitoring		93,917	13.4	%		81,833	15.2	%
Total	$	700,131	100.0	%	$	538,473	100.0	%


	Service		Construction		Other		Total
Balance at beginning of year	$	3,192	$	3,400	$	315	$	6,907
Impact of new accounting standard		310		331		54		695
Bad debt expense (benefit)		2,754		1,797		—		4,551
Deductions for uncollectible receivables written off, net of recoveries		(234)		(6)		—		(240)
Credit allowance of acquired companies on the acquisition date		—		352		—		352
Purchase accounting adjustments		—		72		—		72
Reclass to other current liabilities		—		—		(315)		(315)
Balance at March 31, 2020	$	6,022	$	5,946	$	54	$	12,022


	Three Months Ended March 31,					Year Ended December 31,
	2020				2019
	Contract		Contract		Contract		Contract
	Assets		Liabilities		Assets		Liabilities
Balance at beginning of period	$	2,736	$	166,918	$	10,213	$	130,986
Change due to acquisitions / disposals		436		12,851		6,573		31,556
Change due to conditional versus unconditional		4,394		—		(14,050)		—
Change in timing for performance obligation to be satisfied		—		35,337		—		4,376
Change related to credit allowance		(25)		—		—		—
Balance at end of period	$	7,541	$	215,106	$	2,736	$	166,918


	March 31, 2020		December 31, 2019
Lease right-of-use assets	$	82,301	$	84,073
Lease liabilities:
Other current liabilities		14,515		14,016
Long-term lease liabilities		70,410		72,697
Total lease liabilities	$	84,925	$	86,713


Year ending December 31—
2020 (excluding the three months ended March 31, 2020)	$	13,376
2021		15,511
2022		13,261
2023		10,945
2024		9,436
Thereafter		36,982
Total Lease Payments		99,511
Less—Present Value Discount		(14,586)
Present Value of Lease Liabilities	$	84,925


	Fair Value Measurements at March 31, 2020
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	133,264	$	—	$	—	$	133,264
Life insurance—cash surrender value	$	—	$	3,898	$	—	$	3,898
Contingent earn-out obligations	$	—	$	—	$	16,414	$	16,414

	Fair Value Measurements at December 31, 2019
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	50,788	$	—	$	—	$	50,788
Life insurance—cash surrender value	$	—	$	3,905	$	—	$	3,905
Contingent earn-out obligations	$	—	$	—	$	28,497	$	28,497


	Three Months Ended
	March 31,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	17,716	$	19,866
Adjustments to reconcile net income to net cash provided by operating activities—
Amortization of identifiable intangible assets		6,230		4,891
Depreciation expense		6,461		5,833
Change in right-of-use assets		8,182		3,254
Bad debt expense		4,551		235
Deferred tax provision		300		149
Amortization of debt financing costs		135		96
Gain on sale of assets		(554)		(219)
Changes in the fair value of contingent earn-out obligations		(2,272)		158
Stock-based compensation		3,631		3,176
Changes in operating assets and liabilities, net of effects of acquisitions and divestitures—
(Increase) decrease in—
Receivables, net		(7,894)		38,272
Inventories		(256)		(492)
Prepaid expenses and other current assets		5,392		(2,083)
Costs and estimated earnings in excess of billings and unbilled accounts receivable		(695)		671
Other noncurrent assets		225		(193)
Increase (decrease) in—
Accounts payable and accrued liabilities		(45,799)		(59,331)
Billings in excess of costs and estimated earnings		35,337		(10,740)
Other long-term liabilities		(8,770)		(2,552)
Net cash provided by operating activities		21,920		991
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(7,497)		(8,844)
Proceeds from sales of property and equipment		690		357
Cash paid for acquisitions, net of cash acquired		(8,729)		(1,313)
Net cash used in investing activities		(15,536)		(9,800)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior credit facility		150,000		54,000
Payments on senior credit facility		(37,375)		(53,000)
Payments on other debt		(12,817)		(1,030)
Payments of dividends to stockholders		(3,844)		(3,506)
Share repurchase		(8,985)		(3,321)
Shares received in lieu of tax withholding		(622)		(781)


	Valuation Method	Estimated Useful Life		Estimated Fair Value
Backlog	Excess earnings	2 years	$	4,600
Trade Names	Relief-from-royalty	25 years		32,600
Customer Relationships	Excess earnings	10 years		53,000
Total			$	90,200


	Mechanical Services		Electrical Services
	Segment		Segment		Total
Balance at December 31, 2018	$	235,182	$	—	$	235,182
Acquisitions and purchase price adjustments (See Note 4)		579		96,686		97,265
Impact of segment reorganization		(1,101)		1,101		—
Balance at December 31, 2019		234,660		97,787		332,447
Acquisitions and purchase price adjustments (See Note 4)		—		14,944		14,944
Balance at March 31, 2020	$	234,660	$	112,731	$	347,391


	March 31,		December 31,
	2020		2019
Revolving credit facility	$	150,000	$	28,000
Term loan		140,625		150,000
Notes to former owners		43,667		48,483
Total principal amount		334,292		226,483
Less—unamortized debt issuance costs		(329)		(348)
Total debt, net of unamortized debt issuance costs		333,963		226,135
Less—current portion		(850)		(20,817)
Total long-term portion of debt, net	$	333,113	$	205,318


Balance at beginning of year	$	28,497
Issuances		55
Settlements		(9,866)
Adjustments to fair value		(2,272)
Balance at March 31, 2020	$	16,414


Consideration transferred:
Cash paid at closing	$	178,000
Advance to former owners		20,500
Working capital adjustment		(7,809)
Notes issued to former owners		25,000
Tax equalization payment		202
Estimated fair value of contingent earn-out payments		19,500
	$	235,393
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents	$	4,850
Billed and unbilled accounts receivable		92,309
Other current assets		8,225
Other long-term assets		53
Property and equipment		4,970
Goodwill		96,786
Identifiable intangible assets		90,200
Lease right-of-use asset		9,195
Accounts payable		(20,220)
Accrued compensation and benefits		(974)
Billings in excess of costs and estimated earnings		(31,553)
Other current liabilities		(11,305)
Long-term lease liabilities		(7,143)
	$	235,393


	Consolidated Total Indebtedness to
	Credit Facility Adjusted EBITDA
	Less than 1.00		1.00 to 1.75		1.75 to 2.50		2.50 or greater
Additional Per Annum Interest Margin Added Under:
Base Rate Loan Option	0.25	%	0.50	%	0.75	%	1.00	%
Eurodollar Rate Loan Option	1.25	%	1.50	%	1.75	%	2.00	%


	Three Months Ended March 31, 2020
	Mechanical Services		Electrical Services		Corporate		Consolidated
Revenue	$	565,464	$	134,667	$	—	$	700,131
Gross Profit	$	108,922	$	8,171	$	—	$	117,093

	Three Months Ended March 31, 2019
	Mechanical Services		Electrical Services		Corporate		Consolidated
Revenue	$	534,585	$	3,888	$	—	$	538,473
Gross Profit	$	105,852	$	813	$	—	$	106,665


		Aggregate
		Contract
	No. of	Price Value
Contract Price of Project	Projects	(millions)
Under $1 million	4,801	$	654.8
$1 million - $5 million	574		1,262.7
$5 million - $10 million	95		682.1
$10 million - $15 million	43		530.2
Greater than $15 million	51		1,455.8
Total	5,564	$	4,585.6


				Total Number of Shares	Maximum Number of
				Purchased as Part of	Shares that May Yet Be
	Total Number of	Average Price		Publicly Announced Plans	Purchased Under the Plans
Period	Shares Purchased	Paid Per Share		or Programs (1)	or Programs
January 1 - January 31	26,606	$	49.04	8,653,973	894,196
February 1 - February 29	17,724	$	47.58	8,671,697	876,472
March 1 - March 31	193,029	$	35.42	8,864,726	683,443
	237,359	$	37.85	8,864,726	683,443


		Incorporated by Reference to the Exhibit Indicated Below and to the Filing with the Commission Indicated Below
Exhibit Number	Description of Exhibits	Exhibit Number	Filing or File Number
2.1	Agreement and Plan of Merger dated as of March 9, 2020 among Comfort Systems USA, Inc., OSC Acquisition Corp., TAS Energy Inc., and Element Partners II, L.P., as Stockholder Representative	2.1	March 13, 2020 Form 8-K
3.1	Second Amended and Restated Certificate of Incorporation of the Registrant	3.1	333-24021
3.2	Certificate of Amendment dated May 21, 1998	3.2	1998 Form 10-K
3.3	Certificate of Amendment dated July 9, 2003	3.3	2003 Form 10-K
3.4	Certificate of Amendment dated May 20, 2016	3.1	May 20, 2016 Form 8-K
3.5	Amended and Restated Bylaws of Comfort Systems USA, Inc.	3.1	March 25, 2016 Form 8-K
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*	Inline XBRL Instance Document
101.SCH*	Inline XBRL Taxonomy Extension Schema Document
101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	Inline XBRL Taxonomy Extension Presentation Linkbase
104	Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document)


	Comfort Systems USA, Inc.

April 27, 2020	By:	/s/ Brian E. Lane
		Brian E. Lane
		President, Chief Executive Officer and Director

April 27, 2020	By:	/s/ William George
		William George
		Executive Vice President and Chief Financial Officer

April 27, 2020	By:	/s/ Julie S. Shaeff
		Julie S. Shaeff
		Senior Vice President and Chief Accounting Officer


Date: April 27, 2020	/s/ Brian E. Lane
	Brian E. Lane President and Chief Executive Officer


	/s/ William George
Date: April 27, 2020	William George Executive Vice President and Chief Financial Officer