Good day ladies and gentlemen. Thank you for standing by, and welcome to the third quarter 2021 Comfort Systems USA earnings conference call. At this time, all participants are on a listen only mode. After the speaker presentation, there'll be a question-and-answer session. To ask a question during this session, you will need to press the star then the one key on your touchtone telephone. Please be advised that today's conference is being recorded. If you require operator assistance, please press star then zero. I would now like to hand the conference over to your speaker host today, Julie Shaeff, Chief Accounting Officer. Please go ahead.
Thanks, Olivia. Good morning. Welcome to Comfort Systems USA's third quarter earnings call. Our comments this morning 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 on 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.
Okay. Thanks, Julie. Good morning, everyone, and thank you for joining us on the call today. We are happy to report a fantastic third quarter. We earned $1.27 per share on revenue of $834 million. Same-store revenue grew by 9% compared to the third quarter of 2020 as work and bookings are returning as COVID challenges decrease. Our backlog was over $1.9 billion this quarter, which is a $270 million same-store increase over this time last year. Our free cash flow continues to be strong, and yesterday we increased our dividend by 8%. Our essential workforce continues to perform at an outstanding level, and we are grateful for their strength and perseverance during these challenging times.
During the third quarter, we closed our acquisition of Amteck, which focuses on electrical projects and service in Kentucky, Tennessee, and the Carolinas. Amteck brings an exceptional set of capabilities and relationships and a strong reputation in industrial markets such as food processing. We are thrilled to have them as part of Comfort Systems USA. I will discuss our business and outlook in a few minutes, but first, I will turn this over to Bill to review our financial performance. Bill?
Thanks, Brian, and hello, everyone. This will be pretty brief. Revenue for the third quarter of 2021 was $834 million, an increase of $120 million or 17% compared to last year. Same-store revenue increased by a strong 9%, with the remaining increase resulting from our acquisitions of TEC and Amteck. Gross profit this quarter was $159 million, a $12 million improvement compared to a year ago, while gross profit percentage was 19.1% this quarter compared to 20.6% for the third quarter of 2020. Our gross profit percentage related to our Mechanical segment was strong at 20.1%, and margins in the Electrical segment have increased significantly compared to last year.
SG&A expense for the quarter was $95 million or 11.4% of revenue, compared to $91 million or 12.7% of revenue for the third quarter of 2020. On a same-store basis, SG&A was down approximately $2 million, primarily due to tax consulting fees that we incurred in the prior year. Our year-to-date 2021 tax rate was in the expected range at 24.1%. Net income for the third quarter of 2021 was $46 million or $1.27 per share. This compares to net income for the third quarter of 2020 of $50 million or $1.36 per share, as last year included a 17 cent benefit that resulted when we settled tax audits from past years.
Excluding that discrete item from last year, our earnings per share increased by 7% compared to the record level of a year ago. For our third quarter, EBITDA was up significantly to $82 million, an increase of 15% over the prior year. Through nine months, our EBITDA is $188 million. Free cash flow in the first nine months was $139 million as compared to $199 million in 2020. The COVID-induced work slowdown and some temporary tax benefits created unprecedented cash flow last year.
Our cash flow this year is robust through nine months, and we expect continued good cash flow, although we are likely to continue to deploying some net working capital to start new projects in many places. In addition, we will be paying the federal government an extra $16 million of payroll taxes next quarter that were deferred under the CARES Act in 2020. Ongoing strong cash flow has allowed us to reduce our debt faster than expected while still actively repurchasing our stock. Since the beginning of the year, we have repurchased 346,000 shares, which is almost 1% of our outstanding shares, at an average price of $73.69. Since we began our repurchase program in 2007, we have bought back over 9.6 million shares at an average price of less than $22.
Brian mentioned that we closed the acquisition of Amteck. Amteck is reported in our electrical segment, and it is expected to contribute annualized revenues of approximately $175 million-$200 million and earnings before interest, taxes, depreciation, and amortization of $14 million-$17 million. However, because of the amortization expense related to intangibles, the acquisition is not expected to contribute to EPS for the next few quarters. That's all I have on financials, Brian.
All right. Thanks, Bill. I am going to spend a few minutes discussing our backlog and markets. I will also comment on our outlook for the remainder of 2021 and full year 2022. Backlog at the end of the third quarter of 2021 was $1.94 billion. Our sequential same-store backlog was up slightly, which is great for the end of a third quarter due to the heavy backlog burn this time of year. Year over year, our backlog is up by over $500 million or 36%. Same-store backlog increased by 19%, a broad-based increase. We believe that the impact on activity levels related to COVID-19 have now stabilized, and we expect to continue seeing good trends and work availability in the coming quarters. Industrial customers were 43% of total revenue in the first nine months of 2021.
We think this sector, which includes technology, life sciences, and food processing, will remain strong for us as industrial is heavily represented in new backlog as well as in our recent acquisitions. Institutional markets, which include education, healthcare, and government, are strong and represented 33% of our revenue. The commercial sector is also doing well. With our changing mix, it is now a small part of our business at about 24% of revenue. Year to date, construction was 77% of our revenue, with 46% from construction projects for new buildings and 31% from construction projects in existing buildings. Service was very strong this quarter, and our increasing service revenue was 23% of our year-to-date revenue, with service projects providing 9% of revenue and pure service, including hourly work, providing 14% of revenue.
Year to date, service revenue was up by 11%. With our continuing strong margins, our service earnings were up by a similar amount. Service has rebounded as buildings are open and profitable small project activity is back. Overall, service continues to be a great source of profit for us. Finally, our outlook. Our backlog is at record levels. Project development and planning activities with our customers are continuing. We are paying more for materials, but so far, our teams have coped successfully with challenges in material availability and cost. We are closely monitoring material shortages and costs and are taking steps to add additional protections on new work. Vaccine mandates by certain customers have posed challenges in our ability to pursue certain work or to staff or maintain scheduling on work that is subject to such mandates.
So far, we have been able to meet our customers' requirements. However, the Occupational Safety and Health Administration, OSHA, is drafting an emergency regulation on vaccinations, and it is impossible to predict the scope, timing, and impact of the new regulation on us or our industry or on the U.S. economy. The underlying trends in customer demand and opportunities are very positive. Despite challenges, we continue to anticipate solid earnings and cash flow for the remainder of 2021, and we feel that we have good prospects for 2022. Over the last few years, we completed a series of transformative acquisitions that have built upon our unbroken history of profitability and cash flow to increase our scale, deepen our exposure to complex markets, including industrial, technology, and pharma, and expand our recurring service revenue.
Each investment has strengthened and expanded our unmatched nationwide community of skilled workers. We are also experiencing increasing benefits from our substantial and ongoing investments in training, productivity, and technology. These acquisitions and other investments have laid the foundation for the current strong results and gives us confidence as we move forward. Above all, we are mindful of the ongoing challenges that our employees across the United States continue to confront, and we are deeply grateful for their perseverance. We are committed to providing our workers, and thus our customers, with unmatched resources, opportunities, and support. I will now turn it back over to Olivia for questions. Thank you.
Thank you. Ladies and gentlemen, if you'd like to ask a question, you will need to press the star then the one key on your touchtone telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Now first question coming from the line of Sean Eastman with KeyBanc. Your line is open.
You there, Sean?
Check your mute button.
Mm-mm.
Our next question in queue coming from the line of Adam Thalhimer with Thompson Davis. Your line is open.
Hey, good morning, guys. Congrats on a great quarter.
Hey, thanks, Adam. Good morning.
Adam, you're not speechless.
There's no echo anymore.
There you go.
Is it too early to have an outlook on just core non-res growth next year?
I mean, I would say that we have a good opportunity to achieve better growth than we've achieved in, you know, the last several years. I think we would expect mid-single-digit growth, maybe with a little upside. You know, we just had 9%, but that was also a year ago, we had some COVID effect still, even though our third quarter last year was surprisingly good. I think mid-single digits.
Yeah, Adam. Yeah, we're optimistic.
Thanks to our.
Going into next year. If you look at how much our service has grown, the strength of our backlog, and still there's a lot of opportunities we are looking at. 2022 will be in good shape.
What are you seeing on the M&A front?
You know, we keep saying that we'll probably take a pause after we do these deals that are big for us. I think that that's less likely now. There are some people we're talking to who are very mindful of changes in the capital gains rate. I think we have an opportunity to do a transaction or some transactions in the next few months. I will say that we're pretty much only doing relationship deals right now, people we've talked to for a long time who, you know, now have an interest, think maybe it's a good time to sell with tax changes coming. We're not, you know, engaging in processes or bidding for companies.
It's a very frothy market for people chasing assets that are the kind of assets that can be put in an auction, and we're not doing that.
Yeah. You know, Adam, you know, as you know, Bill does all our deals, and if we continue on what's happened the last 10 years, you know, it'll be good for us.
Okay. Lastly, you had a nice uptick in backlog within electrical.
Yeah.
Was that Walker? Can you talk a little bit about the outlook for Walker?
I'll answer that one. I mean, Walker has done a terrific job this year, basically. It'll double their margins. They're in Texas, and there's plenty of opportunities in Texas, particularly Dallas, San Antonio, and now Houston's picked up pretty steadily. I think going forward, the combination of their backlog and opportunities, I think, Walker is well poised to have a very good end of this year and a good 2022.
Okay. Thanks, guys. I'll turn it over.
All right. Thanks, Adam.
Our next question coming from the line of Brent Thielman with D.A. Davidson. Your line is open.
Hey thank you. Good morning.
Morning Brent.
Hey, the service work looks like sort of collectively grew 10% this quarter. Brian, just wanna get your thoughts on, you know, whether you think you can sustain these sort of growth rates in that side of the business going forward.
One thing I would keep in mind, remember service was kinda shut down a bit in the middle of last year, so this is a combination of a little bit of bounce back and really good growth.
Yeah. I think. You know, Brent, this, you've been with us a long time, and we've continued to, you know, invest in service both on the sales front and execution. We will continue to grow that business pretty steadily. That is a real source of strength now that we're consistently getting performance from.
Brian, any or Bill, any thoughts on, you know, allocating more capital than you typically have to building out that business or, you know, continue as is?
I know I think we're gonna continue as is so that, you know, we make sure that we keep our capability in line with customer expectations. We don't wanna disappoint anyone. We believe, you know, slow and steady growth, make sure we keep our employees and our customers happy, and we can deliver a top-shelf service to them.
Right. There's two ways we deploy capital. One is investments in the existing business. We don't leave any opportunity behind to invest in the existing business. It's a very capital-light business, but we do buy capital. We've really invested in, like, handheld tech, various technologies, and we also really invest in training. Like we've just really been into training in all parts of our business and maybe especially service for years now. We don't really. There's not a dollar I know of that we could invest that we don't invest. When it comes to acquisitions, we really just buy the best available company, and we love it. It's definitely a plus if they have a nice service business, but if they can also go build complex food plants like Amteck, we love that too.
We just keep trying to keep doing what works. We love great workforces, complex capabilities, geographies where you're really people have to drive a long way to find somebody who can do what you can do. Those are the kind of things we love.
Okay. That's great. I think this is kind of a follow-up to Adam's question, but you talk a lot about the industrial vertical, and it's obviously been, you know, fantastic for you. I just wanna get a pulse on some of these other markets you're in, and I know they're shrinking as a percentage of the pie, but, you know, looking at this sector, this quarter, areas like education were down, couple other verticals in there that were down. Do you think, you know, we'll be in a place in 2022 where some of these areas see a more material turn?
Yeah. I just think it's down percentage, but they're actually growing in real dollars. You know, education's been pretty consistent for us, particularly at the university level, as you know. We've got some K-12 work, and I think you'll get some IAQ opportunities as we go on. Medical's picked up for us. We got some good growth in our backlog in medical and, you know, in commercial buildings, it's more in the service and, you know, tenant fit out type work. The other markets are good, slight growth with industrial obviously with the most growth opportunity. Bill?
I agree.
Okay. Just, the last one, I guess, is just on the electrical margins. I mean, we've seen some real stability here this year, in terms of what you've reported there and any thoughts kinda going forward, you know, if you feel like these are the same, it's the same levels.
Yeah. This is an opportunity for Comfort Systems, right? Walker has very significant improvement, but keep in mind, we've also bought some really good electrical companies, and they are now in that segment, and they bring in, you know, very, very good margins. It's probably unlikely that we will get to overall electrical margins that are as high as our overall mechanical margins on average over long periods of time, in part because of the service component is a little bigger in mechanical. I really like our opportunity to continue to pull a little bit of improvement out of electrical. Remember what Brian said about Walker's. Walker's got good opportunities, and that's really true in all of our businesses.
Yeah.
It's true in electrical, and they probably, as a segment, it probably has a little more room to get better.
Yeah. Right. Just, I mean, we're really happy with the electrical business and what we see the future of. I think that's gonna be a really strong element for Comfort Systems on a long-term basis.
Okay. Great. Thank you, guys.
All right. Take care.
Now as a reminder, ladies and gentlemen, to ask a question, please press star one. Our next question coming from the line of Julio Romero with Sidoti. Your line is open.
Hey, good morning. Thanks for taking the questions.
Hey, good morning.
Hey.
I wanted to ask about the order trends. You know, they've obviously trended very nicely, seen sequential growth for four straight quarters. You know, how do you expect to see orders trend over the next couple of quarters? You know, are you at this point kind of turning down any projects at all?
Our booking season usually is the winter, and that's not changed. We have I think, you know, as far as the timing, we can't really control when the pieces of paper get finalized. Over the next six months, I think we have the bookings should continue to get better, the net sort of, you know, the net bookings. Pricing is good in those bookings. When we're busy, we're picky. Also right now, there are some places where, you know, we're not pursuing work where there might be a vaccine mandate, although you were hearing more about that thirty days ago than you are now. But in part, we're doing that because we can, right?
Yeah. Julio, just to follow on that, though, I think the discipline we're maintaining on, you know, no-go, what projects to take, I think the operating folks are really doing a terrific job about, you know, what opportunities to pursue and maybe ones to pass over. Really pleased with how that's going.
Got it. Yeah. Being picky is certainly a good thing.
Yes
in this market. I guess you mentioned you know not being as attracted to areas you know where there may be some vaccine mandates. Are you seeing any other kind of bottlenecks on the labor side, you know, vaccine mandates or any other bottleneck that you may be seeing?
There are places, certain types of customers we're talking a lot about vaccine mandates, especially 30 or 60 days ago. We are making good progress in seeing more of our workforce vaccinated. Our workforce is, you know, they're in a cohort that has lower vaccination rates than the national average. When we look at work that requires a vaccine, we look at what we have in the way of availability and which of you know, what our workforce looks like, and we decide whether that's a good project to pursue, and we also have to take that into account in our pricing. As far as, you know, other bottlenecks, our bottleneck is always labor, right, Brian?
Yeah. It's always labor, Julio. We luckily, you know, we have a lot of folks working here, and they're managing across companies as best. We're constantly in the market, you know, looking for good people. You know, we're managing it like we've done, you know, for 50 years.
By the way, just about vaccine mandates, you know, this is not a Comfort Systems issue, right?
Yeah.
This is a U.S., United States issue. If the federal government, when they promulgate those regulations, decides to sit down somewhere between 15%-40% of our blue-collar workforce, that's gonna affect the nation. Comfort Systems, actually, we're well positioned for that. 25% of our revenue is in Texas. Our next biggest state is Florida. We think we're actually very well positioned for the worst case of that compared to anybody you could compare us to that we know of. But having said that, you know, it does feel like it's trending towards sort of there are more people getting vaccinated and there's customers are sort of looking at different ways of keeping their job sites safe.
Got it. I guess, you know, any industry pain points where everyone's feeling labor tightness might in some ways play to your advantage on a competitive balance.
That seems to have happened in the past.
Yeah, it's happened in the past.
Okay.
You know, Julio, you know, we're a good employer. We're a good place to work. We're, you know, we're very attractive to folks out there that wanna do mechanical, electrical, plumbing type work.
Understood. Congrats on a nice quarter and best of luck in 4Q.
Thank you very much.
All right. Our next question coming from the line of Sean Eastman with KeyBanc. Your line is open.
Hi. Can you guys hear me this time?
Yep. Here you are, Sean.
There we go. Just wanted to keep you on your toes there, you know. Just out of curiosity, what do you have a sense for the vaccination rate of Comfort Systems workforce?
That's really, you know, the thing about Comfort is there isn't a workforce for Comfort Systems.
Yeah.
There's workforces in Massachusetts, and there's workforces in Florida. I would say that overall, people think our industry is about 50% vaccinated. In my opinion, we're above the industry average for that.
Yeah.
We've done a lot to try to make that happen. Also, you know, sometimes people don't necessarily, they can be vaccinated and not report it, right? There are times when you're in a milieu where you don't want to admit that you're vaccinated. It's hard to measure.
In terms of that, Sean, we're making it really easy for folks to get vaccinated, you know, that are working here.
Yep.
Okay. Interesting. The higher level one for me, you know, this over this past quarter, we saw a few of the big OEMs highlight these huge addressable market opportunities surrounding energy efficiency that, you know, it seems to be, you know, in addition to the IAQ solutions demand. Just considering all these net zero pledges coming out of both the private sector and the public sector, I wondered if that's something Comfort Systems is positioning around.
You know, I actually, we don't usually sort of talk about huge activities, but our guys, we're in a lot of geographies that, with the right expertise and capabilities, to benefit from some of the trends that this is driving. For example, electric vehicles. You know, historically, Comfort's not involved in the automobile industry. If you need to build batteries, if you need sort of sophisticated electronics, an awful lot of that's right in our wheelhouse, and it's right in the geographies that we're in. We're actually, like, I've been in planning meetings lately just at subsidiaries where they are starting to see opportunities like that with code names on their boards.
Hmm.
I do think, you know, anything that gives the United States a reason to reconfigure things and to redeploy things, we're the guys who can help you do that.
Sean, this isn't theory. We are actually working on a project right now for the maker of electric batteries. You know, it's real life. We got real work with, you know, revenue and profit.
You put that on top of life sciences, which are good, and then, you know, various other types of technology, you know, we're in technology, and a lot of this is technology driven. In addition to internal air quality, we think there are other good things right in the heart of our complex, sort of industrial expertise that have good prospects because of these changes.
What's great about our workforce is we're very adaptable to work on multi-type facilities, Sean. It's a real strength of ours.
Okay, that's really interesting. I wanted to check in on the modular business as well. I mean, I felt like the longer term play there was, you know, helping to address the sort of structural labor shortage. Obviously, that seems to be, you know, quite an acute situation right now. How is that playing out for you guys? I just wondered, you know, maybe on the flip side of that business could be a little more susceptible to some of the capacity constraints just around, you know, shipping and things like that. You know, I wanted to check back in on that business.
Yeah, I would say we definitely have had to put more money into shipping.
Yeah.
It quotes for shipping. A lot of what we sell is, some of the biggest stuff is sort of the buyer ships it. Also, you know, it's an opportunity to improve your labor utilization on certain types of projects. It's 10% of revenue. It was a nice. It was very profitable this quarter. It was, you know, I might have highlighted how well it did this quarter, but pretty much the whole business did well. You've been highlighting everything. We had a really nice quarter in offsite construction and modular, and we feel like we're doing a good job beginning to find new customers and help them understand how this can help them. You know, this is a strategic thing that you do with five-year plans, not two-quarter plans.
We've got some really, really good people working together between our two big off-site construction things, and they've got a good plan for the coming years. We're excited.
Yeah. You know, that into the business, Sean, we got great leadership locally, terrific workforce. They're applying technology, advancements in welding. What they're doing is tremendously exciting to me. I love going there, and I think it'll just keep getting better and better.
Okay, good update there. Then you guys are, you know, clearly boasting about the success of the acquisition program here on this call, I think rightfully so. You know, we kinda touched on how the program has sort of helped position you guys in these growth end markets where you've got these secular drivers. To the extent you can comment, if you just look back over the last 5 years or even 10 years, I mean, what kind of cash returns have you seen from the acquisition program?
I'm gonna let Bill answer that one.
That's embarrassing to answer.
Interesting.
No, it's been fantastic. Like, these companies, so we haven't bought a company of any size since 2008 that hasn't met on average the projections we had the day we bought it. Some of them have exceeded those projections by multiples of what we planned on getting when we bought them. They actually do better. They help our cash flow much more than they help our earnings because there's so much amortization in the first few years. That's one of the reasons why our cash flow has been down. Did we lose you?
Uh-uh.
All right, now I'm showing no further questions at this time. I would now like to turn the call back over to Brian Lane for any closing remarks.
All right, thank you very much. In closing, I want to again thank our hard-working employees. They're doing just a terrific job. We are glad we'll be seeing many of you again in person soon, but in the meanwhile, please be safe. Enjoy the rest of your day, and thank you very much.
Thanks, everyone.
Ladies and gentlemen, that ends our conference call today. Thank you for your participation. You may now disconnect.