Comfort Systems USA, Inc. (NYSE:FIX) Q3 2023 Earnings Call Transcript

Comfort Systems USA, Inc. (NYSE:FIX) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Thank you for standing by, and welcome to the Q3 2023 Comfort Systems USA Earnings Conference Call. [Operator Instructions] Please be advised that today’s call is being recorded. I would now like to turn the conference to your host, Julie Shaeff, Chief Accounting Officer. Please go ahead.

Julie Shaeff: Thanks, Valerie. Good morning. Welcome to Comfort Systems USA Third Quarter 2023 Earnings Call. Our comments today as well as our press releases contain forward-looking statements within the meaning of applicable securities laws and regulations. What we will say today is based upon the current plans and expectations of Comfort Systems USA. Those plans and expectations include risks and uncertainties that might cause actual future activities and results of our operations to be materially different from those set forth in our comments. You can read a detailed listing and commentary concerning our specific risk factors in our most recent Form 10-K and Form 10-Q as well as in our press release covering these earnings.

A slide presentation has been provided as a companion to our remarks. The presentation is posted on the Investor Relations section of the company’s website found at comfortsystemsusa.com. Joining me on the call today are Brian Lane, President and Chief Executive Officer; Trent McKenna, Chief Operating Officer; and Bill George, Chief Financial Officer. Brian will open our remarks.

Brian Lane: Thanks, Julie. Good morning, everyone, and thank you for joining us on the call today. I am in all of the discipline and execution that our amazing teams continue to demonstrate and build on. They are the true source of our exceptional results this quarter. Our best ever growth earnings and cash flow. We earned $2.93 per share this quarter compared to $1.71 a year ago. Current quarter revenue was $1.4 billion, with same-store growth of 20%. Revenue was higher across our operations and our modular business, in particular, surged while maintaining superb execution for our customers. Service also continues to grow and increase earnings. Thanks in large part, the past and ongoing investments. Our mechanical and electrical operations performed incredibly well.

Our backlog continues to track at unprecedented levels, and our pipeline of additional work is still strong. Backlog is $4.3 billion, $1 billion ahead of last year, and we also booked a sequential increase, even though this is our seasonally most active quarter. Demand is especially robust in our industrial sectors. The unprecedented demand for data, chip and battery and strong trends in other areas like food, pharma and health care continue to give our teams the opportunity to show their expertise and commitment. We are carefully selecting work that has good margins and good working conditions for our valuable workforce. Operating cash flow surged this quarter to over $200 million. As our customers continue to recognize our value and performance, with favorable payment terms and timely payments.

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Q&A Session

Today, we also increased our quarterly dividend by $0.025 to $0.25 per share. or a rate of $1 per share on an annualized basis. This reflects our continuing strong cash flow and our commitment to reward our shareholders. We are also excited to announce that on October 2, we acquired Decco, an extremely capable pipe and mechanical company located in New Hampshire, and we welcome that team to Comfort Systems. I will discuss our business and outlook in a few minutes. But first, I’ll turn this call over to Bill to review our financial performance. Bill?

Bill George: Thanks, Brian. We have an amazing third quarter with 20% same-store revenue growth, higher margins and over $200 million of operating cash flow. In addition, compared to last year, both our EPS and EBITDA increased by over 50%. Revenue for the third quarter of 2023 was $1.4 billion, an increase of 23% or $258 million compared to last year. Our mechanical segment revenue increased by $173 million or 20%, and continues to benefit from growth in our modular business. Our electrical segment increased by an even larger [33%] and to $347 million. Combined same-store revenue increased by 20% or $224 million as we continue to benefit from strong demand and some pass-through effects of inflation. We are facing tougher revenue comparables in the fourth quarter of the year, and we currently estimate that same-store revenue growth in the fourth quarter will be in the mid-teens.

Gross profit was $277 million for the third quarter a $75 million improvement compared to a year ago. Our gross profit percentage improved to 20.1% this quarter compared to 18.1% for the third quarter of 2022, driven by improved mechanical margins. Quarterly gross profit exceeded 20% for the first time in a few years. This quarter, we grew by over 20% on a same-store basis and added 2 full percentage points to our gross profit margin, an extraordinary operational accomplishment. The quarterly gross profit percentage in our mechanical segment improved to 20.4% this year as compared to 17.6% last year. Margins in our electrical segment declined slightly in the quarter to 19.4% as compared to 19.7% in Q3 2022. However, last year, our electrical segment benefited from a litigation win.

So core execution and electrical profitability was also notably higher. We are optimistic that for the fourth quarter and next year, margins can trend in the strong ranges that we achieved over the last few quarters. SG&A expense for the quarter was $143 million or 10.4% revenue compared to $121 million or 10.8% of revenue for the third quarter in 2022. On a same-store basis, SG&A was up approximately $18 million due to inflation and ongoing investments to support our much higher activity levels. But the growth in our SG&A cost was slower than our growth in revenue, resulting in SG&A leverage this quarter as compared to last year. Our operating income increased by 66% from last year to $135 million. With improved mechanical margins and SG&A leverage, our operating income percentage improved to 9.8% this quarter, an all-time high from 7.3% for the third quarter of 2022.

Interest expense for the first 9 months in 2023 continues to benefit from our extremely strong cash flow. It is also partially and temporarily offset by interest income related to a favorable legal outcome earlier this year. Our year-to-date tax rate of 16.1% included an incremental benefit of $10 million or $0.27 of tax gains related to prior years. Although individual items have affected our tax rate lately, we estimate that a normalized tax rate for us is approximately 20% to 22%. After considering all these factors, net income for the third quarter of 2023 was $105 million or $2.93 per share. This compares to net income for the third quarter of 2022 of $62 million or $1.71 per share. Excluding prior year tax gains, earnings per share increased to $2.74 per share from $1.67 per share in the prior year, an increase of 64%.