form10-q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009
OR
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from ___________________ to
_____________________
Commission
file number: 1-13011
COMFORT
SYSTEMS USA, INC.
(Exact
name of registrant as specified in its charter)
DELAWARE
|
|
76-0526487
|
(State
or other jurisdiction
|
|
(I.R.S.
Employer
|
of
Incorporation or Organization)
|
|
Identification
No.)
|
675
Bering Drive
|
Suite
400
|
Houston,
Texas 77057
|
(Address
of Principal Executive Offices) (Zip Code)
Registrant’s
telephone number, including area code: (713) 830-9600
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes o No x
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes o No x
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Large
accelerated filer o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes o No x
The
number of shares outstanding of the issuer’s common stock, as of October 30,
2009 was 38,223,710.
COMFORT
SYSTEMS USA, INC.
INDEX
TO FORM 10-Q
FOR
THE QUARTER ENDED SEPTEMBER 30, 2009
|
|
|
|
|
|
Page
|
|
Part
I—Financial Information
|
|
|
|
|
|
Item
1—Financial Statements
|
|
|
|
|
|
COMFORT
SYSTEMS USA, INC.
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
2
|
|
|
|
|
|
3
|
|
|
|
|
|
4
|
|
|
|
|
|
5
|
|
|
|
|
|
14
|
|
|
|
|
|
27
|
|
|
|
|
|
28
|
|
|
Part
II—Other Information
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
29
|
|
|
|
|
|
31
|
|
|
|
|
|
32
|
|
|
CONSOLIDATED
BALANCE SHEETS
(In
Thousands, Except Share Amounts)
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
(Unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
117,015 |
|
|
$ |
139,863 |
|
Accounts
receivable, less allowance for doubtful accounts of $5,250 and $6,897,
respectively
|
|
|
266,602 |
|
|
|
228,250 |
|
Other
receivables
|
|
|
6,156 |
|
|
|
8,686 |
|
Inventories
|
|
|
11,350 |
|
|
|
9,412 |
|
Prepaid
expenses and other
|
|
|
23,399 |
|
|
|
26,694 |
|
Costs
and estimated earnings in excess of billings
|
|
|
19,123 |
|
|
|
17,373 |
|
Assets
related to discontinued operations
|
|
|
1,544 |
|
|
|
438 |
|
Total
current assets
|
|
|
445,189 |
|
|
|
430,716 |
|
PROPERTY,
PLANT AND EQUIPMENT, net
|
|
|
35,650 |
|
|
|
34,083 |
|
GOODWILL
|
|
|
90,940 |
|
|
|
95,590 |
|
IDENTIFIABLE
INTANGIBLE ASSETS, net
|
|
|
16,281 |
|
|
|
13,841 |
|
MARKETABLE
SECURITIES
|
|
|
8,423 |
|
|
|
5,590 |
|
OTHER
NONCURRENT ASSETS
|
|
|
2,009 |
|
|
|
1,506 |
|
Total
assets
|
|
$ |
598,492 |
|
|
$ |
581,326 |
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$ |
― |
|
|
$ |
― |
|
Current
maturities of notes to former owners
|
|
|
1,336 |
|
|
|
2,018 |
|
Accounts
payable
|
|
|
98,190 |
|
|
|
75,291 |
|
Accrued
compensation and benefits
|
|
|
46,623 |
|
|
|
42,366 |
|
Billings
in excess of costs and estimated earnings
|
|
|
97,505 |
|
|
|
89,647 |
|
Income
taxes payable
|
|
|
1,011 |
|
|
|
― |
|
Accrued
self-insurance expense
|
|
|
25,360 |
|
|
|
26,925 |
|
Other
current liabilities
|
|
|
27,963 |
|
|
|
29,702 |
|
Liabilities
related to discontinued operations
|
|
|
397 |
|
|
|
— |
|
Total
current liabilities
|
|
|
298,385 |
|
|
|
265,949 |
|
LONG-TERM
DEBT, NET OF CURRENT MATURITIES
|
|
|
— |
|
|
|
— |
|
NOTES
TO FORMER OWNERS, NET OF CURRENT MATURITIES
|
|
|
9,363 |
|
|
|
6,607 |
|
OTHER
LONG-TERM LIABILITIES
|
|
|
4,273 |
|
|
|
5,677 |
|
Total
liabilities
|
|
|
312,021 |
|
|
|
278,233 |
|
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, 2,453,245 and 2,827,755 shares,
respectively
|
|
|
(27,069
|
) |
|
|
(30,324
|
) |
Additional
paid-in capital
|
|
|
328,621 |
|
|
|
325,458 |
|
Accumulated
other comprehensive income (loss)
|
|
|
(326
|
) |
|
|
(217
|
) |
Retained
earnings (deficit)
|
|
|
(15,166
|
) |
|
|
7,765 |
|
Total
stockholders’ equity
|
|
|
286,471 |
|
|
|
303,093 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
598,492 |
|
|
$ |
581,326 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
Thousands, Except Per Share Data)
(Unaudited)
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
REVENUES
|
|
$ |
346,705 |
|
|
$ |
291,591 |
|
|
$ |
993,862 |
|
|
$ |
872,214 |
|
COST
OF SERVICES
|
|
|
280,011 |
|
|
|
234,186 |
|
|
|
806,784 |
|
|
|
701,335 |
|
Gross
profit
|
|
|
66,694 |
|
|
|
57,405 |
|
|
|
187,078 |
|
|
|
170,879 |
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
45,078 |
|
|
|
41,713 |
|
|
|
128,397 |
|
|
|
126,175 |
|
GAIN
ON SALE OF ASSETS
|
|
|
(183
|
) |
|
|
(101
|
) |
|
|
(311
|
) |
|
|
(98
|
) |
Operating
income
|
|
|
21,799 |
|
|
|
15,793 |
|
|
|
58,992 |
|
|
|
44,802 |
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
565 |
|
|
|
117 |
|
|
|
2,049 |
|
|
|
492 |
|
Interest
expense
|
|
|
(377
|
) |
|
|
(301
|
) |
|
|
(1,045
|
) |
|
|
(946
|
) |
Other
|
|
|
― |
|
|
|
3 |
|
|
|
158 |
|
|
|
5 |
|
Other
income (expense)
|
|
|
188 |
|
|
|
(181
|
) |
|
|
1,162 |
|
|
|
(449
|
) |
INCOME
BEFORE INCOME TAXES
|
|
|
21,987 |
|
|
|
15,612 |
|
|
|
60,154 |
|
|
|
44,353 |
|
INCOME
TAX EXPENSE
|
|
|
8,250 |
|
|
|
6,072 |
|
|
|
23,070 |
|
|
|
17,293 |
|
INCOME
FROM CONTINUING OPERATIONS
|
|
|
13,737 |
|
|
|
9,540 |
|
|
|
37,084 |
|
|
|
27,060 |
|
DISCONTINUED
OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss), net of income tax (expense) benefit of $(46), $―, $(145),
and $133
|
|
|
28 |
|
|
|
― |
|
|
|
115 |
|
|
|
(387
|
) |
Estimated
loss on disposition, net of tax of $—, $—, $—, and $—
|
|
|
— |
|
|
|
― |
|
|
|
— |
|
|
|
(93
|
) |
NET
INCOME
|
|
$ |
13,765 |
|
|
$ |
9,540 |
|
|
$ |
37,199 |
|
|
$ |
26,580 |
|
INCOME
PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.35 |
|
|
$ |
0.25 |
|
|
$ |
0.94 |
|
|
$ |
0.71 |
|
Discontinued
operations —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
— |
|
|
|
― |
|
|
|
— |
|
|
|
(0.01
|
) |
Estimated
loss on disposition
|
|
|
— |
|
|
|
— |
|
|
|
― |
|
|
|
— |
|
Net
income
|
|
$ |
0.35 |
|
|
$ |
0.25 |
|
|
$ |
0.94 |
|
|
$ |
0.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.34 |
|
|
$ |
0.25 |
|
|
$ |
0.92 |
|
|
$ |
0.70 |
|
Discontinued
operations —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
— |
|
|
|
― |
|
|
|
— |
|
|
|
(0.01
|
) |
Estimated
loss on disposition
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net
income
|
|
$ |
0.34 |
|
|
$ |
0.25 |
|
|
$ |
0.92 |
|
|
$ |
0.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARES
USED IN COMPUTING INCOME PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
39,403 |
|
|
|
37,995 |
|
|
|
39,625 |
|
|
|
38,135 |
|
Diluted
|
|
|
40,048 |
|
|
|
38,382 |
|
|
|
40,296 |
|
|
|
38,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS
PER SHARE
|
|
$ |
0.045 |
|
|
$ |
0.050 |
|
|
$ |
0.135 |
|
|
$ |
0.140 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(In
Thousands, Except Share Amounts)
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
Common
Stock
|
|
|
Treasury
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
|
Retained
Earnings
(Deficit)
|
|
|
Total
Stockholders’
Equity
|
|
BALANCE
AT DECEMBER 31, 2007
|
|
|
|
|
|
41,123,365 |
|
|
$ |
411 |
|
|
|
(781,415
|
) |
|
$ |
(9,973
|
) |
|
$ |
336,996 |
|
|
$ |
― |
|
|
$ |
(64,856
|
) |
|
$ |
262,578 |
|
Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
49,690 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
49,690 |
|
|
|
49,690 |
|
Unrealized
loss on marketable securities, net of tax
|
|
|
(326
|
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(326
|
) |
|
|
— |
|
|
|
(326
|
) |
Comprehensive
Income
|
|
$ |
49,364 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Issuance
of Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares for options exercised including tax benefit
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
514,658 |
|
|
|
6,566 |
|
|
|
(2,789
|
) |
|
|
— |
|
|
|
— |
|
|
|
3,777 |
|
Issuance
of restricted stock
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
201,309 |
|
|
|
2,485 |
|
|
|
(2,485
|
) |
|
|
— |
|
|
|
|
|
|
|
— |
|
Shares
received in lieu of tax withholding payment on vested restricted
stock
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
(39,100
|
) |
|
|
(513
|
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(513
|
) |
Stock-based
compensation expense
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,851 |
|
|
|
― |
|
|
|
— |
|
|
|
3,851 |
|
Forfeiture
of unvested restricted stock
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
(8,288
|
) |
|
|
(93
|
) |
|
|
93 |
|
|
|
— |
|
|
|
― |
|
|
|
― |
|
Tax
benefit from vesting of restricted stock
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
89 |
|
|
|
— |
|
|
|
— |
|
|
|
89 |
|
Dividends
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,134
|
) |
|
|
— |
|
|
|
— |
|
|
|
(7,134
|
) |
Share
repurchase
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
(2,340,409
|
) |
|
|
(25,541
|
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(25,541
|
) |
BALANCE
AT DECEMBER 31, 2008
|
|
|
|
|
|
|
41,123,365 |
|
|
|
411 |
|
|
|
(2,453,245
|
) |
|
|
(27,069
|
) |
|
|
328,621 |
|
|
|
(326
|
) |
|
|
(15,166
|
) |
|
|
286,471 |
|
Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (unaudited)
|
|
$ |
26,580 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
26,580 |
|
|
|
26,580 |
|
Unrealized
income on marketable securities, net of tax (unaudited)
|
|
|
109 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
109 |
|
|
|
— |
|
|
|
109 |
|
Comprehensive
Income (unaudited)
|
|
$ |
26,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares for options exercised including tax benefit
(unaudited)
|
|
|
|
|
|
|
— |
|
|
|
― |
|
|
|
280,150 |
|
|
|
3,012 |
|
|
|
(1,271
|
) |
|
|
— |
|
|
|
— |
|
|
|
1,741 |
|
Issuance
of restricted stock (unaudited)
|
|
|
|
|
|
|
— |
|
|
|
― |
|
|
|
241,857 |
|
|
|
2,652 |
|
|
|
(2,652
|
) |
|
|
— |
|
|
|
— |
|
|
|
― |
|
Shares
received in lieu of tax withholding payment on vested restricted stock
(unaudited)
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
(45,779
|
) |
|
|
(459
|
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(459
|
) |
Stock-based
compensation expense (unaudited)
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,543 |
|
|
|
— |
|
|
|
— |
|
|
|
2,543 |
|
Forfeiture
of unvested restricted stock (unaudited)
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
(7,038
|
) |
|
|
(76
|
) |
|
|
76 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Tax
benefit from vesting of restricted stock (unaudited)
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(124
|
) |
|
|
— |
|
|
|
— |
|
|
|
(124
|
) |
Dividends
(unaudited)
|
|
|
|
|
|
|
— |
|
|
|
― |
|
|
|
— |
|
|
|
— |
|
|
|
(1,735
|
) |
|
|
— |
|
|
|
(3,649
|
) |
|
|
(5,384
|
) |
Share
repurchase (unaudited)
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
(843,700
|
) |
|
|
(8,384
|
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(8,384
|
) |
BALANCE
AT SEPTEMBER 30, 2009 (unaudited)
|
|
|
|
|
|
|
41,123,365 |
|
|
$ |
411 |
|
|
|
(2,827,755
|
) |
|
$ |
(30,324
|
) |
|
$ |
325,458 |
|
|
$ |
(217
|
) |
|
$ |
7,765 |
|
|
$ |
303,093 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
Thousands)
(Unaudited)
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
13,765 |
|
|
$ |
9,540 |
|
|
$ |
37,199 |
|
|
$ |
26,580 |
|
Adjustments
to reconcile net income to net cash provided by operating activities
―
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
loss on disposition of discontinued operations
|
|
|
— |
|
|
|
― |
|
|
|
— |
|
|
|
93 |
|
Amortization
of identifiable intangible assets
|
|
|
1,458 |
|
|
|
709 |
|
|
|
3,301 |
|
|
|
2,511 |
|
Depreciation
expense
|
|
|
2,231 |
|
|
|
2,541 |
|
|
|
6,269 |
|
|
|
7,357 |
|
Bad
debt expense
|
|
|
1,597 |
|
|
|
467 |
|
|
|
1,973 |
|
|
|
2,577 |
|
Deferred
tax (benefit) expense
|
|
|
2,361 |
|
|
|
(380
|
) |
|
|
2,640 |
|
|
|
(2,427
|
) |
Amortization
of debt financing costs
|
|
|
27 |
|
|
|
27 |
|
|
|
81 |
|
|
|
81 |
|
Gain
on sale of assets
|
|
|
(183
|
) |
|
|
(101
|
) |
|
|
(316
|
) |
|
|
(97
|
) |
Stock-based
compensation expense
|
|
|
891 |
|
|
|
481 |
|
|
|
2,971 |
|
|
|
2,543 |
|
Changes
in operating assets and liabilities, net of effects of acquisitions
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
11,297 |
|
|
|
28,360 |
|
|
|
(7,429
|
) |
|
|
36,230 |
|
Inventories
|
|
|
963 |
|
|
|
767 |
|
|
|
200 |
|
|
|
1,898 |
|
Prepaid
expenses and other current assets
|
|
|
(347
|
) |
|
|
(321
|
) |
|
|
2,244 |
|
|
|
(1,421
|
) |
Costs
and estimated earnings in excess of billings
|
|
|
1,197 |
|
|
|
(1,052
|
) |
|
|
(5,085
|
) |
|
|
1,747 |
|
Other
noncurrent assets
|
|
|
(4,313
|
) |
|
|
(1,803
|
) |
|
|
(3,122
|
) |
|
|
(1,837
|
) |
Increase
(decrease) in —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
|
(5,781
|
) |
|
|
(5,790
|
) |
|
|
2,200 |
|
|
|
(24,655
|
) |
Billings
in excess of costs and estimated earnings
|
|
|
(3,504
|
) |
|
|
(10,564
|
) |
|
|
4,044 |
|
|
|
(7,829
|
) |
Other
long-term liabilities
|
|
|
(716
|
) |
|
|
1,922 |
|
|
|
(214
|
) |
|
|
1,403 |
|
Net
cash provided by operating activities
|
|
|
20,943 |
|
|
|
24,803 |
|
|
|
46,956 |
|
|
|
44,754 |
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(3,773
|
) |
|
|
(1,986
|
) |
|
|
(10,778
|
) |
|
|
(6,420
|
) |
Proceeds
from sales of property and equipment
|
|
|
539 |
|
|
|
326 |
|
|
|
656 |
|
|
|
500 |
|
Proceeds
from businesses sold
|
|
|
208 |
|
|
|
278 |
|
|
|
324 |
|
|
|
584 |
|
Sale
of marketable securities
|
|
|
25 |
|
|
|
1,000 |
|
|
|
7,600 |
|
|
|
3,000 |
|
Purchases
of marketable securities
|
|
|
― |
|
|
|
― |
|
|
|
(18,525
|
) |
|
|
― |
|
Cash
paid for acquisitions and intangible assets, net of cash
acquired
|
|
|
(12,513
|
) |
|
|
(1,056
|
) |
|
|
(40,398
|
) |
|
|
(4,905
|
) |
Net
cash used in investing activities
|
|
|
(15,514
|
) |
|
|
(1,438
|
) |
|
|
(61,121
|
) |
|
|
(7,241
|
) |
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
borrowings on revolving line of credit
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
Payments
on other long-term debt
|
|
|
(1,432
|
) |
|
|
(365
|
) |
|
|
(6,665
|
) |
|
|
(2,074
|
) |
Payments
of dividends to shareholders
|
|
|
(1,786
|
) |
|
|
(1,912
|
) |
|
|
(5,387
|
) |
|
|
(5,365
|
) |
Share
repurchase program and shares received in lieu of tax
withholding
|
|
|
(4,747
|
) |
|
|
(2,652
|
) |
|
|
(15,002
|
) |
|
|
(8,843
|
) |
Excess
tax benefit of stock-based compensation
|
|
|
1,755 |
|
|
|
439 |
|
|
|
1,844 |
|
|
|
593 |
|
Proceeds
from exercise of options
|
|
|
1,573 |
|
|
|
573 |
|
|
|
2,044 |
|
|
|
1,024 |
|
Net
cash used in financing activities
|
|
|
(4,637
|
) |
|
|
(3,917
|
) |
|
|
(23,166
|
) |
|
|
(14,665
|
) |
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
792 |
|
|
|
19,448 |
|
|
|
(37,331
|
) |
|
|
22,848 |
|
CASH
AND CASH EQUIVALENTS, beginning of period – continuing and discontinued
operations
|
|
|
101,508 |
|
|
|
120,415 |
|
|
|
139,631 |
|
|
|
117,015 |
|
CASH
AND CASH EQUIVALENTS, end of period– continuing and discontinued
operations
|
|
$ |
102,300 |
|
|
$ |
139,863 |
|
|
$ |
102,300 |
|
|
$ |
139,863 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
COMFORT
SYSTEMS USA, INC.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
(Unaudited)
1.
|
Business
and Organization
|
Comfort
Systems USA, Inc., a Delaware corporation, provides comprehensive heating,
ventilation and air conditioning (“HVAC”) installation, maintenance, repair and
replacement services within the mechanical services industry. We
operate primarily in the commercial, industrial and institutional HVAC markets,
and perform most of our services within office buildings, retail centers,
apartment complexes, manufacturing plants, and healthcare, education and
government facilities. In addition to standard HVAC services, we
provide specialized applications such as building automation control systems,
fire protection, process cooling, electronic monitoring and process
piping. Certain locations also perform related activities such as
electrical service and plumbing. Approximately 52% of our
consolidated 2009 revenues are attributable to installation of systems in newly
constructed facilities, with the remaining 48% attributable to maintenance,
repair and replacement services. The following service activities
account for our consolidated 2009 revenues: HVAC 77%, plumbing 13%, building
automation control systems 3%, and other 7%. These service activities
are within the mechanical services industry which is the single industry segment
we serve.
2.
|
Summary
of Significant Accounting Policies
|
These
interim statements should be read in conjunction with the historical
Consolidated Financial Statements and related notes of Comfort Systems included
in the Annual Report on Form 10-K as filed with the Securities and Exchange
Commission (“SEC”) for the year ended December 31, 2008 (the “Form
10-K”).
The
accompanying unaudited consolidated financial statements were prepared using
generally accepted accounting principles for interim financial information and
the instructions to Form 10-Q and applicable rules of Regulation S-X of the
SEC. Accordingly, these financial statements do not include all the
footnotes required by generally accepted accounting principles for complete
financial statements, and should be read in conjunction with the Form
10-K. We believe all adjustments necessary for a fair presentation of
these interim statements have been included and are of a normal and recurring
nature. The results of operations for interim periods are not
necessarily indicative of the results for the full fiscal year.
We
consider all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
Cash paid
for interest for the three months ended September 30, 2008 and 2009 was
approximately $0.1 million and $0.3 million, respectively. Cash paid
for income taxes for continuing operations for the three months ended September
30, 2008 and 2009 was approximately $11.7 million and $9.9 million,
respectively. Cash paid for income taxes for discontinued operations
for both the three months ended September 30, 2008 and 2009 was less than $0.1
million. Cash paid for interest for the nine months ended September
30, 2008 and 2009 was approximately $0.6 million and $0.8 million,
respectively. Cash paid for income taxes for continuing operations
for the nine months ended September 30, 2008 and 2009 was approximately $21.8
million and $22.6 million, respectively. Cash paid for income taxes
for discontinued operations for both the nine months ended September 30, 2008
and 2009 was less than approximately $0.1 million.
Subsequent
Events
We
evaluated subsequent events through the time of filing this Quarterly Report on
Form 10-Q on November 3, 2009. No significant events occurred
subsequent to the balance sheet or prior to the filing of this report that would
have a material impact on our consolidated financial statements.
Our
activities are within the mechanical services industry which is the single
industry segment we serve. Each operating subsidiary represents an
operating segment and these segments have been aggregated, as the operating
units meet all of the aggregation criteria.
The
preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
revenues and expenses and disclosures regarding contingent assets and
liabilities. Actual results could differ from those
estimates. The most significant estimates used in our financial
statements affect revenue and cost recognition for construction contracts, the
allowance for doubtful accounts, self-insurance accruals, deferred tax assets,
warranty accruals, and the quantification of fair value for reporting units in
connection with our goodwill impairment testing.
We file a
consolidated return for federal income tax purposes. Income taxes are provided
for under the liability method, which takes into account differences between
financial statement treatment and tax treatment of certain
transactions. Deferred tax assets represent the tax effect of
activity that has been reflected in the financial statements but which will not
be deductible for tax purposes until future periods. Deferred tax
liabilities represent the tax effect of activity that has been reflected in the
financial statements but which will not be taxable until future
periods.
We
regularly evaluate valuation allowances established for deferred tax assets for
which future realization is uncertain. Estimations of required
valuation allowances include estimates of future taxable income. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which the activity underlying these
assets becomes deductible. We consider projected future taxable
income and tax planning strategies in making this assessment. If
actual future taxable income is less than the estimates, we may not realize all
or a portion of the recorded deferred tax assets.
Our
financial instruments consist of cash and cash equivalents, marketable
securities, accounts receivable, other receivables, accounts payable, notes to
former owners and a revolving credit facility. We believe that the
carrying values of these instruments on the accompanying balance sheets
approximate their fair values.
Marketable
securities are classified as available-for-sale. These investments
are recorded at fair value and are classified as marketable securities in the
accompanying consolidated balance sheet as of September 30, 2009. The
changes in fair values, net of applicable taxes, are recorded as unrealized
gains (losses) as a component of accumulated other comprehensive income (loss)
in stockholders’ equity.
Recent
Accounting Pronouncements
On
September 30, 2009, we adopted changes issued by the Financial Accounting
Standards Board (“FASB”) to the authoritative hierarchy of generally accepted
accounting principles (“GAAP”). These changes establish the FASB
Accounting Standards CodificationTM
(“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with GAAP. These changes and the
Codification itself do
not
change GAAP. Other than the manner in which new accounting guidance
is referenced, the adoption of these changes had no impact on the consolidated
financial statements.
Fair
Value Accounting
On
January 1, 2009, we adopted changes issued by the FASB to fair value accounting
and reporting as it relates to nonfinancial assets and nonfinancial liabilities
that are not recognized or disclosed at fair value in the financial statements
on at least an annual basis. These changes define fair value,
establish a framework for measuring fair value in GAAP, and expand disclosures
about fair value measurements. This guidance applies to other GAAP
that require or permit fair value measurements and is to be applied
prospectively with limited exceptions. The adoption of these changes,
as it relates to nonfinancial assets and nonfinancial liabilities, had no impact
on the consolidated financial statements, however we have expanded the
disclosures regarding marketable securities, goodwill, and intangible
assets.
Business
Combinations and Consolidation Accounting
On
January 1, 2009, we adopted changes issued by the FASB to accounting for
business combinations. These changes apply to all assets acquired and
liabilities assumed in a business combination that arise from certain
contingencies and requires (i) an acquirer to recognize at fair value, at the
acquisition date, an asset acquired or liability assumed in a business
combination that arises from a contingency if the acquisition date fair value of
that asset or liability can be determined during the measurement period
otherwise the asset or liability should be recognized at the acquisition date if
certain defined criteria are met; (ii) contingent consideration arrangements of
an acquiree assumed by the acquirer in a business combination be recognized
initially at fair value; (iii) subsequent measurements of assets and liabilities
arising from contingencies be based on a systematic and rational method
depending on their nature and contingent consideration arrangements be measured
subsequently; and (iv) disclosures of the amounts and measurement basis of such
assets and liabilities and the nature of the contingencies. The
adoption did not have a material impact on our consolidated financial
statements. The adoption will significantly impact our accounting and
reporting for future acquisitions, principally as a result of the expanded
requirements to value acquired assets, liabilities and contingencies at their
fair values and the requirement that acquisition related transaction costs be
expensed as incurred rather than capitalized as a part of the cost of the
acquisition.
Earnings
Per Share
On
January 1, 2009, we adopted changes issued by the FASB to the calculation of
earnings per share. These changes state that unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share pursuant to the two-class
method for all periods presented. There was no significant impact
upon the adoption of these changes.
Subsequent
Events
On June
30, 2009, we adopted changes issued by the FASB to accounting for and disclosure
of events that occur after the balance sheet date but before financial
statements are issued. The new guidance also requires disclosure of
the date through which an entity has evaluated subsequent events and the basis
for that date. This change had no impact on our consolidated
financial statements.
Certain
reclassifications have been made in prior period financial statements to conform
to current period presentation. These reclassifications have not
resulted in any changes to previously reported net income for any
periods.
3.
|
Fair
Value Measurements
|
We use a
fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The hierarchy, which gives the highest priority
to quoted prices in active markets, is comprised of the following three
levels:
|
·
|
Level
1 - defined as observable inputs such as quoted prices in active
markets;
|
|
·
|
Level
2 - defined as inputs other than quoted prices in active markets that are
either directly or indirectly observable;
and
|
|
·
|
Level
3 - defined as unobservable inputs in which little or no market data
exists, therefore requiring an entity to develop its own
assumptions.
|
The
assets measured at fair value on a recurring basis as of September 30, 2009 are
as follows (in thousands):
|
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
|
Total
|
|
|
Quoted
Prices In
Active
Markets
for
Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Cash
and cash equivalents
|
|
$ |
139,863 |
|
|
$ |
139,863 |
|
|
$ |
— |
|
|
$ |
— |
|
Auction
rate securities
|
|
$ |
6,590 |
|
|
$ |
— |
|
|
$ |
925 |
|
|
$ |
5,665 |
|
Cash and
cash equivalents consist primarily of highly rated money market funds at a
variety of well-known institutions with original maturities of three months or
less. The original cost of these assets approximates fair value due
to their short term maturity.
As of
September 30, 2009, our marketable securities consisted of $6.6 million of
auction rate securities, which are variable rate debt instruments, having
long-term maturities (with final maturities up to October 2034), but whose
interest rates are designed to reset through an auction process, at intervals
ranging from seven to 35 days. We had investments in marketable
securities of $9.4 million as of December 31, 2008. All of our
auction rate securities are high quality municipal obligations which have high
investment grade ratings or otherwise are backed by high investment grade rated
insurance agencies. During the nine months ended September 30, 2009,
we sold $3.0 million of these auction rate securities at face
value. An additional $1.0 million were sold at face value during
October 2009; this is included in ‘‘Prepaid Expenses and Other’’ in our
consolidated balance sheet. The remaining $5.6 million has been
classified as a noncurrent asset on the consolidated balance sheet as we have
the intent and ability to hold these securities until the market for auction
rate securities stabilizes or until the issuer refinances the underlying
security.
The
auction events for some of these instruments failed during 2008 due to events in
the credit markets. As a result of the temporary declines in fair
value for our auction rate securities, which we attribute to liquidity issues
rather than credit issues, we recorded an unrealized loss of $0.3 million, net
of tax of less than $0.1 million, to accumulated other comprehensive income
(loss). Our analysis of the fair values of these securities
considered, among other items, the creditworthiness of the counterparty, the
timing of expected future cash flows, and the possibility that a discount may be
required if we choose to sell the securities in the absence of a successful
auction. These securities were also compared, when possible, to other
observable market data with similar characteristics.
As of
September 30, 2009 we continue to collect interest when due on all of our
auction rate securities. Any future fluctuation in fair value related
to these instruments that we deem to be temporary, including any recoveries of
previous write-downs, would be recorded to accumulated other comprehensive
income (loss). If
we
determine that any future valuation adjustment was other than temporary, we
would record a charge to earnings as appropriate.
We
measure certain assets, including our goodwill and intangible assets, at a fair
value on a nonrecurring basis. These assets are recognized at fair
value when they are deemed to be impaired. During the nine months
ended September 30, 2009, we did not recognize any impairments on those assets
required to be measured at fair value on a nonrecurring basis.
We
completed various acquisitions in 2008 which were not material individually or
in the aggregate. Additional contingent purchase price (‘‘earn-out’’)
has been and will be paid if certain acquisitions achieve predetermined
profitability targets. The total purchase price for these
acquisitions was $68.9 million, including $4.7 million in earn-outs that were
recorded during the nine months of 2009. There were no acquisitions
for the nine months ended September 30, 2009. The results of
operations of these acquisitions are included in our consolidated financial
statements from their respective acquisition dates.
5.
|
Discontinued
Operations
|
We sold a
small operating company in June 2009. This company’s after-tax income
of $0.1 million for the nine months ended September 30, 2008 and after-tax loss
of $0.4 million for the nine months ended September 30, 2009 have been reported
in discontinued operations under “Operating income (loss), net of income tax
(expense) benefit.” We recorded an estimated loss on the sale of this
company of $0.1 million in the second quarter of 2009. This loss has
been reported in discontinued operations under “Estimated loss on disposition,
net tax.”
Our
consolidated statements of operations and the related earnings per share amounts
have been restated to reflect the effects of this discontinued
operation. No interest expense was allocated to this discontinued
operation.
Revenues
and pretax income (loss) related to this company in 2008 and 2009 were as
follows (in thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
Revenues
|
|
$ |
1,930 |
|
|
$ |
― |
|
|
$ |
5,575 |
|
|
$ |
1,795 |
|
Pre-tax
income (loss)
|
|
$ |
74 |
|
|
$ |
― |
|
|
$ |
260 |
|
|
$ |
(520
|
) |
6.
|
Long-Term
Debt Obligations
|
Long-term
debt obligations consist of the following (in thousands):
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2009
|
|
Revolving
credit facility
|
|
$ |
― |
|
|
$ |
― |
|
Notes
to former owners
|
|
|
10,699 |
|
|
|
8,625 |
|
Total
debt
|
|
|
10,699 |
|
|
|
8,625 |
|
Less
―current maturities of notes to former
owners
|
|
|
1,336 |
|
|
|
2,018 |
|
Total
long-term portion of debt
|
|
$ |
9,363 |
|
|
$ |
6,607 |
|
We have a
$100.0 million senior credit facility (the ‘‘Facility’’) provided by a syndicate
of banks which is available for borrowings and letters of credit. The
Facility expires in February 2012 and is secured by the capital stock of our
current and future subsidiaries. As of September 30, 2009, we had no
outstanding borrowings, $43.1 million in letters of credit outstanding, and
$56.9 million of credit available.
We have a
choice of two interest rate options for borrowings under the Facility; these
rates are floating rates determined by the broad financial markets, meaning they
can and do move up and down from time to time. We estimate that the
interest rate applicable to the borrowings under the Facility would be
approximately 1.5% as of September 30, 2009. Commitment fees are
payable on the portion of the revolving loan capacity not in use for borrowings
or letters of credit at any given time. These fees range from
0.20%-0.30% per annum, based on the ratio of debt to Credit Facility Adjusted
EBITDA, as defined in the credit agreement.
The
Facility contains financial covenants defining various financial measures and
the levels of these measures with which we must comply. The
Facility's principal financial covenants include:
Leverage Ratio — The Facility
requires that the ratio of our total indebtedness less cash and cash equivalents
to our Credit Facility Adjusted EBITDA not exceed 2.50. The leverage
ratio as of September 30, 2009 was 0.11.
Fixed Charge Coverage Ratio —
The Facility requires that the ratio of Credit Facility Adjusted EBITDA,
less non-financed capital expenditures, tax provision, dividends and amounts
used to repurchase stock to the sum of interest expense and scheduled principal
payments be at least 1.50. Capital expenditures, tax provision,
dividends and stock repurchase payments are defined under the Facility for
purposes of this covenant to be amounts for the four quarters ending as of any
given quarterly covenant compliance measurement date. The calculation
of the fixed charge coverage ratio excludes acquisitions, stock repurchases and
the payment of cash dividends, at any time that the Leverage Ratio does not
exceed 1.0. The fixed charge coverage ratio as of September 30, 2009
was 13.34.
Other Restrictions — The
Facility permits acquisitions of up to $25.0 million per transaction, or $50.0
million in the aggregate. However, these limitations only apply when
the Leverage Ratio is greater than 1.0.
While the
Facility's financial covenants do not specifically govern capacity under the
Facility, if our debt level under the Facility at a quarter-end covenant
compliance measurement date were to cause us to violate the Facility's
debt-to-Credit Facility Adjusted EBITDA covenant, our borrowing capacity under
the Facility and the favorable terms that we currently enjoy could be negatively
impacted by the lenders.
We are in
compliance with all the financial covenants as of September 30,
2009.
Notes
to Former Owners
We issued
subordinated notes to the former owners of acquired companies, as part of the
consideration used to acquire these companies. These notes had an
outstanding balance of $8.6 million as of September 30, 2009, of which $2.0
million is current as of September 30, 2009 and bear interest, payable annually,
at a weighted average interest rate of 5.7%.
|
7.
|
Commitments
and Contingencies
|
We are
subject to certain legal and regulatory claims, including lawsuits arising in
the normal course of business. We maintain various insurance
coverages to minimize financial risk associated with these claims. We
have estimated and provided accruals for probable losses and related legal fees
associated with certain of its litigation in the accompanying consolidated
financial statements. While we cannot predict the outcome of these
proceedings, in management’s opinion and based on reports of counsel, any
liability arising from these matters individually and in the aggregate will not
have a material effect on our operating results or financial condition, after
giving effect to provisions already recorded.
In
addition to the matters described above, we have accrued $5.7 million as of
September 30, 2009 for potential and asserted backcharges from several customers
of our large multi-family operation based in Texas. The related
expense was included in “Cost of Services” prior to 2009 and the accrual is
included in “Other
Current
Liabilities.” We believe these accruals reflect a probable outcome
with respect to such backcharges and potential backcharges, however, if we are
not successful in resolving these disputes, we may in the future experience a
material adverse effect on our operating results.
The
following table shows the activity during the first nine months of 2009 and the
remaining backcharges as of September 30, 2009 (in thousands):
Balance
at December 31, 2008
|
|
$ |
5,838 |
|
Additions
|
|
|
— |
|
Utilization
|
|
|
(169
|
) |
Balance
at September 30, 2009
|
|
$ |
5,669 |
|
Many
customers, particularly in connection with new construction, require us to post
performance and payment bonds issued by a financial institution known as a
surety. If we fail to perform under the terms of a contract or to pay
subcontractors and vendors who provided goods or services under a contract, the
customer may demand that the surety make payments or provide services under the
bond. We must reimburse the surety for any expenses or outlays it
incurs. To date, we are not aware of any losses to our sureties in
connection with bonds the sureties have posted on our behalf, and do not expect
such losses to be incurred in the foreseeable future.
Surety
market conditions remain challenging as a result of significant losses incurred
by many sureties in recent periods, both in the construction industry as well as
in certain larger corporate bankruptcies. As a result, less bonding
capacity is available in the market and terms have become more
restrictive. Further, under standard terms in the surety market,
sureties issue bonds on a project-by-project basis, and can decline to issue
bonds at any time. Historically, approximately 25% to 30% of our
business has required bonds. While we have strong surety
relationships to support our bonding needs, current market conditions as well as
changes in the sureties’ assessment of our operating and financial risk could
cause the sureties to decline to issue bonds for our work. If that
were to occur, the alternatives include doing more business that does not
require bonds, posting other forms of collateral for project performance such as
letters of credit or cash, and seeking bonding capacity from other
sureties. We would likely also encounter concerns from customers,
suppliers and other market participants as to our
creditworthiness. While we believe our general operating and
financial characteristics, including a significant amount of cash on our balance
sheet, would enable us to ultimately respond effectively to an interruption in
the availability of bonding capacity, such an interruption would likely cause
our revenues and profits to decline in the near term.
We are
substantially self-insured for worker’s compensation, employer’s liability, auto
liability, general liability and employee group health claims, in view of the
relatively high per-incident deductibles we absorb under our insurance
arrangements for these risks. Losses up to deductible amounts are
estimated and accrued based upon known facts, historical trends and industry
averages. Loss estimates associated with the larger and
longer-developing risks, such as worker’s compensation, auto liability and
general liability, are reviewed by a third-party actuary
quarterly. Our self-insurance arrangements currently are as
follows:
Worker’s Compensation — The
per-incident deductible for worker’s compensation is $500,000. Losses
above $500,000 are determined by statutory rules on a state-by-state basis, and
are fully covered by excess worker’s compensation insurance.
Employer’s Liability — For
employer’s liability, the per incident deductible is $500,000. We are
fully insured for the next $500,000 of each loss, and then have a single,
aggregate excess loss insurance policy that covers losses up to $50 million
across both of these risk areas (as well as general liability and auto liability
noted below).
General Liability — For
general liability, the per incident deductible is $500,000. We are
fully insured for the next $1.5 million of each loss, and then have a single,
aggregate excess loss insurance policy that covers losses up to $50 million
across both these risk areas (as well as employer’s liability and auto liability
noted below).
Auto Liability — For auto
liability, the per incident deductible is $500,000. We are fully
insured for the next $1.5 million of each loss, and then have a single,
aggregate excess loss insurance policy that covers losses up to $50
million.
Employee Medical — We have
two medical plans. The deductible for employee group health claim is
$300,000 per person, per policy (calendar) year for one plan and $150,000 per
person, per policy (calendar) year for the other plan. Insurance then
covers any responsibility for medical claims in excess of the deductible
amount.
Our $50
million of aggregate excess loss coverage above applicable per-incident policy
limits represents one policy limit that applies to all lines of risk; we do not
have a separate $50 million of excess loss coverage for each of general
liability, employer’s liability and auto liability.
Earnings
Per Share
Basic
earnings per share (“EPS”) is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the
year. Diluted EPS is computed considering the dilutive effect of
stock options and contingently issuable restricted stock.
There
were approximately 2,000 and 0.4 million of anti-dilutive stock options that
were excluded from the calculation of diluted EPS for the three months ended
September 30, 2008 and 2009, respectively. There were approximately
0.2 million and 0.6 million of anti-dilutive stock options that were excluded
from the calculation of diluted EPS for the nine months ended September 30, 2008
and 2009, respectively.
The
following table reconciles the number of shares outstanding with the number of
shares used in computing basic and diluted earnings per share for each of the
periods presented (in thousands):
|
|
Three
Months
Ended
September
30,
|
|
|
Nine
Months
Ended
September
30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
Common
shares outstanding, end of period(a)
|
|
|
39,532 |
|
|
|
37,919 |
|
|
|
39,532 |
|
|
|
37,919 |
|
Effect
of using weighted average common shares outstanding
|
|
|
(129
|
) |
|
|
76 |
|
|
|
93 |
|
|
|
216 |
|
Shares
used in computing earnings per share—basic
|
|
|
39,403 |
|
|
|
37,995 |
|
|
|
39,625 |
|
|
|
38,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of shares issuable under stock option plans based on the treasury stock
method
|
|
|
571 |
|
|
|
350 |
|
|
|
618 |
|
|
|
380 |
|
Effect
of contingently issuable restricted stock
|
|
|
74 |
|
|
|
37 |
|
|
|
53 |
|
|
|
18 |
|
Shares
used in computing earnings per share—diluted
|
|
|
40,048 |
|
|
|
38,382 |
|
|
|
40,296 |
|
|
|
38,533 |
|
|
(a)
|
Excludes
0.3 million and 0.4 million shares of unvested contingently issuable
restricted stock outstanding as of September 30, 2008 and 2009,
respectively.
|
Share
Repurchase Program
On March
29, 2007, our Board of Directors (the “Board”) approved a stock repurchase
program to acquire up to one million shares of our outstanding common
stock. As of December 31, 2008, the Board approved extensions of the
program to cover an additional 2.9 million shares. During the first
quarter of 2009, the Board approved an extension of the program to cover an
additional 0.5 million shares. During the third quarter of 2009, the
Board approved an extension of the program to cover an additional 0.5 million
shares. Since the inception of the repurchase program, the Board has
approved 4.9 million shares to be repurchased.
The share
repurchases will be made from time to time at our discretion in the open market
or privately negotiated transactions as permitted by securities laws and other
legal requirements, and subject to market conditions and other
factors. The Board may modify, suspend, extend or terminate the
program at any time. We repurchased 843,700 shares during the nine
months ended September 30, 2009, at an average price of $9.94 per share. Since the
inception of the program in 2007, we have repurchased a cumulative total of 4.0
million shares as of September 30, 2009, at an average price of $11.12 per
share.
Item
2.
|
Management’s Discussion and Analysis of Financial
Condition and Results of
Operations
|
The
following discussion should be read in conjunction with our historical
Consolidated Financial Statements and related notes thereto included elsewhere
in this Form 10-Q and the Annual Report on Form 10-K as filed with the
Securities and Exchange Commission for the year ended December 31, 2008 (the
“Form 10-K”). This discussion contains “forward-looking statements”
regarding our business and industry within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are based on our
current plans and expectations and involve risks and uncertainties that could
cause our actual future activities and results of operations to be materially
different from those set forth in the forward-looking
statements. Important factors that could cause actual results to
differ include risks set forth in “Item 1A. Company Risk Factors” included in
our Form 10-K. The terms “Comfort Systems,” “we,” “us,” or “the
Company,” refer to Comfort Systems USA, Inc. or Comfort Systems USA, Inc. and
its consolidated subsidiaries, as appropriate in the context.
Introduction
and Overview
We are a
national provider of comprehensive HVAC installation, maintenance, repair and
replacement services within the mechanical services industry. The
services we provide address a very broad need, as air is circulated through
almost all commercial, industrial and institutional buildings virtually
year-round. We operate primarily in the commercial, industrial and
institutional HVAC markets and perform most of our services within office
buildings, retail centers, apartment complexes, manufacturing plants, and
healthcare, education and government facilities. In addition to
standard HVAC services, we provide specialized applications such as building
automation control systems, fire protection, process cooling, electronic
monitoring and process piping. Certain locations also perform related
activities such as electrical service and plumbing.
|
Nature
and Economics of Our Business
|
Approximately
86% of our revenues are earned on a project basis for installation of HVAC
systems in newly constructed facilities or for replacement of HVAC systems in
existing facilities. Customers hire us to ensure such systems deliver
specified or generally expected heating, cooling, conditioning and circulation
of air in a facility. This entails installing core system equipment
such as packaged heating and air conditioning units, or in the case of larger
facilities, separate core components such as chillers, boilers, air handlers,
and cooling towers. We also typically install connecting and
distribution elements such as piping and ducting. Our
responsibilities usually require conforming the systems to pre-established
engineering drawings and equipment and performance specifications, which we
frequently participate in establishing. Our project management
responsibilities include staging equipment and materials to project sites,
deploying labor to perform the work, and coordinating with other service
providers on the project, including any subcontractors we might use to deliver
our portion of the work.
When
competing for project business, we usually estimate the costs we will incur on a
project, then propose a bid to the customer that includes a contract price and
other performance and payment terms. Our bid price and terms are
intended to cover our estimated costs on the project and provide a profit margin
to us commensurate with the value of the installed system to the customer, the
risk that project costs or duration will vary from estimate, the schedule on
which we will be paid, the opportunities for other work that we might forego by
committing capacity to this project, and other costs that we incur more broadly
to support our operations but which are not specific to the
project. Typically customers will seek bids from competitors for a
given project. While the criteria on which customers select the winning bid vary
widely and include factors such as quality, technical expertise, on-time
performance, post-project support and service, and company history and financial
strength, we believe that price is the most influential factor for most
customers in choosing an HVAC installation and service provider.
After a
customer accepts our bid, we generally enter into a contract with the customer
that specifies what we will deliver on the project, what our related
responsibilities are, and how much and when we will be paid. Our
overall price for the project is typically set at a fixed amount in the
contract, although changes in project specifications or work conditions that
result in unexpected additional work are usually subject to additional payment
from the customer via what are commonly known as change
orders. Project contracts typically provide for periodic billings to
the customer as we meet progress milestones or incur cost on the
project.. Project
contracts
in our industry also frequently allow for a small portion of progress billings
or contract price to be withheld by the customer until after we have completed
the work, typically for six months. Amounts withheld under this
practice are known as retention or retainage.
Labor and
overhead costs account for the majority of our cost of
service. Accordingly, labor management and utilization have the most
impact on our project performance. Given the fixed price nature of
much of our project work, if our initial estimate of project costs is wrong or
we incur cost overruns that cannot be recovered in change orders, we can
experience reduced profits or even significant losses on fixed price project
work. We also perform some project work on a cost-plus or a time and
materials basis, under which we are paid our costs incurred plus an agreed-upon
profit margin. These margins are typically less than fixed-price
contract margins because there is less risk of unrecoverable cost overruns in
cost-plus or time and materials work.
As of
September 30, 2009, we had 4,468 projects in process. Our average
project takes six to nine months to complete, with an average contract price of
approximately $425,000. Our projects generally require working
capital funding of equipment and labor costs. Customer payments on
periodic billings generally do not recover these costs until late in the
job. Our average project duration together with typical retention
terms as discussed above generally allow us to complete the realization of
revenue and earnings in cash within one year. We have what we believe
is a well-diversified distribution of revenues across end-use sectors that we
believe reduces our exposure to negative developments in any given
sector. Because of the integral nature of HVAC and related controls
systems to most buildings, we have the legal right in almost all cases to attach
liens to buildings or related funding sources when we have not been fully paid
for installing systems, except with respect to some government
buildings. The service work that we do, which is discussed further
below, usually does not give rise to lien rights.
We also
perform larger HVAC projects. As of September 30, 2009, we had 6
projects in process with a contract price of between $15 million and $30
million, 19 projects between $10 million and $15 million, 53 projects between $5
million and $10 million, and 241 projects between $1 million and $5
million. Taken together, projects with contract prices of $1 million
or more totaled $1,286.0 million of aggregate contract value as of September 30,
2009, or approximately 68%, out of a total contract value for all projects in
progress of $1,898.5 million. Generally, projects closer in size to
$1 million will be completed in one year or less. It is unusual for
us to work on a project that exceeds two years in length.
In
addition to project work, approximately 14% of our revenues represent
maintenance and repair service on already-installed HVAC and controls
systems. This kind of work usually takes from a few hours to a few
days to perform. Prices to the customer are usually based on the
equipment and materials used in the service as well as technician labor
time. We usually bill the customer for service work when it is
complete, typically with payment terms of up to thirty days. We also
provide maintenance and repair service under ongoing contracts. Under
these contracts, we are paid regular monthly or quarterly amounts and provide
specified service based on customer requirements. These agreements
typically cover periods ranging from one to three years and are cancelable on 30
to 60 days notice.
A
relatively small but growing portion of our revenues comes from national and
regional account customers. These customers typically have multiple
sites, and contract with us to perform maintenance and repair service. These
contracts may also provide for us to perform new or replacement systems
installation. We operate a national call center to dispatch
technicians to sites requiring service. We perform the majority of
this work with our own employees, with the balance being subcontracted to third
parties that meet our performance qualifications. We will also
typically use proprietary information systems to maintain information on the
customer’s sites and equipment, including performance and service records, and
related cost data. These systems track the status of ongoing service
and installation work, and may also monitor system performance
data. Under these contractual relationships, we usually provide
consolidated billing and credit payment terms to the customer.
|
Profile
and Management of Our Operations
|
We manage
our 41 operating units based on a variety of factors. Financial
measures we emphasize include profitability, and use of capital as indicated by
cash flow and by other measures of working capital principally involving project
cost, billings and receivables. We also monitor selling, general,
administrative and indirect
project
support expense, backlog, workforce size and mix, growth in revenues and
profits, variation of actual project cost from original estimate, and overall
financial performance in comparison to budget and updated
forecasts. Operational factors we emphasize include project
selection, estimating, pricing, management and execution practices, labor
utilization, safety, training, and the make-up of both existing backlog as well
as new business being pursued, in terms of project size, technical application
and facility type, end-use customers and industries, and location of the
work.
Most of
our operations compete on a local or regional basis. Attracting and
retaining effective operating unit managers is an important factor in our
business, particularly in view of the relative uniqueness of each market and
operation, the importance of relationships with customers and other market
participants such as architects and consulting engineers, and the high degree of
competition and low barriers to entry in most of our
markets. Accordingly, we devote considerable attention to operating
unit management quality, stability, and contingency planning, including related
considerations of compensation, and non-competition protection where
applicable.
|
Economic
and Industry Factors
|
As an
HVAC and building controls services provider, we operate in the broader
nonresidential construction services industry and are affected by trends in this
sector. While we do not have operations in all major cities of the
United States, we believe our national presence is sufficiently large that we
experience trends in demand for and pricing of our services that are consistent
with trends in the national nonresidential construction sector. As a
result, we monitor the views of major construction sector forecasters along with
macroeconomic factors they believe drive the sector, including trends in gross
domestic product, interest rates, business investment, employment, demographics,
and the general fiscal condition of federal, state and local
governments. Although nonresidential construction activity has
demonstrated periods of both significant growth and decline, it has grown at a
compound annual rate of approximately 4.2% over the last twenty-five
years.
Spending
decisions for building construction, renovation and system replacement are
generally made on a project basis, usually with some degree of discretion as to
when and if projects proceed. With larger amounts of capital, time,
and discretion involved, spending decisions are affected to a significant degree
by uncertainty, particularly concerns about economic and financial conditions
and trends. We have experienced periods of time, when economic
weakness caused a significant slowdown in decisions to proceed with installation
and replacement project work.
|
Operating
Environment and Management Emphasis
|
Nonresidential
building construction and renovation activity, as reported by the federal
government, declined over the three year period of 2001 to 2003, expanded
moderately during 2004 and 2005, and was strong over the three year period from
2006 to 2008. During the decline and through 2003, we responded to
market challenges by pursuing work in sectors less affected by this downturn,
such as government, educational, and healthcare facilities, and by establishing
marketing initiatives that take advantage of our size and range of
expertise. We also responded to declining gross profits over those
years by reducing our selling, general, and administrative expenses, and our
indirect project and service overhead costs. We believe our efforts
in these areas partially offset the decline in our profitability over that
period. We experienced notable improvements in both industry activity
as well as our own results from 2004 to 2008.
As
discussed at greater length in ‘‘Results of Operations’’ below, we have seen
declining activity levels in our industry since late 2008 and we expect price
competition to continue to be strong, as local and regional competitors respond
cautiously to changing conditions. We will continue our efforts to
find the more active sectors in our markets, and to increase our regional and
national account business. Our primary emphasis for 2009 will be on
execution and cost control, and on maintaining activity levels that will permit
us to earn reasonable profits while preserving our core workforce. We
have increased our focus on project qualification, estimating, pricing and
management, and on service performance.
As a
result of our continued strong emphasis on cash flow, our debt outstanding under
our revolving credit facility is zero, and we have substantial uncommitted cash
balances, as discussed further in ‘‘Liquidity and Capital Resources’’
below. We have a credit facility in place with considerably less
restrictive terms than those of our previous facilities; this facility does not
expire until February 2012. We have strong surety relationships
to
support
our bonding needs, and we believe our relationships with the surety markets are
positive in light of our strong current results and financial
position. We have generated positive free cash flow in each of the
last ten calendar years and will continue our emphasis in this
area. We believe that the relative size and strength of our balance
sheet and surety support as compared to most companies in our industry represent
competitive advantages for us.
Critical
Accounting Policies
In
response to the Commission’s Release No. 33-8040, ‘‘Cautionary Advice Regarding
Disclosure About Critical Accounting Policies,’’ we identified our critical
accounting policies based upon the significance of the accounting policy to our
overall financial statement presentation, as well as the complexity of the
accounting policy and our use of estimates and subjective
assessments. We have concluded that our most critical accounting
policy is our revenue recognition policy. As discussed elsewhere in
this report, our business has two service functions: (i) installation, which we
account for under the percentage of completion method, and (ii) maintenance,
repair and replacement, which we account for as the services are performed, or
in the case of replacement, under the percentage of completion
method. In addition, we identified other critical accounting policies
related to our allowance for doubtful accounts receivable, the recording of our
self-insurance liabilities, valuation of deferred tax assets and the assessment
of goodwill impairment. These accounting policies, as well as others,
are described in Note 2 to the Consolidated Financial Statements included in our
Form 10-K.
|
Percentage
of Completion Method of Accounting
|
Approximately
86% of our revenues were earned on a project basis and recognized through the
percentage of completion method of accounting. Under this method
contract revenue recognizable at any time during the life of a contract is
determined by multiplying expected total contract revenue by the percentage of
contract costs incurred at any time to total estimated contract
costs. More specifically, as part of the negotiation and bidding
process in which we engage in connection with obtaining installation contracts,
we estimate our contract costs, which include all direct materials (exclusive of
rebates), labor and subcontract costs and indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs and depreciation
costs. These contract costs are included in our results of operations
under the caption “Cost of Services.” Then, as we perform under those
contracts, we measure such costs incurred, compare them to total estimated costs
to complete the contract, and recognize a corresponding proportion of contract
revenue. Labor costs are considered to be incurred as the work is
performed. Subcontract labor is recognized as the work is performed,
but is generally subjected to approval as to milestones or other evidence of
completion. Non-labor project cost consists of purchased equipment,
prefabricated materials and other materials. Purchased equipment on
our projects is substantially produced to job specifications and is a value
added element to our work. The costs are considered to be incurred
when title is transferred to us, which typically is upon delivery to the
worksite. Prefabricated materials, such as ductwork and piping, are
generally performed at our shops and recognized as contract costs when
fabricated for the unique specifications of the job. Other materials cost are
not significant and are generally recorded when delivered to the
worksite. This measurement and comparison process requires updates to
the estimate of total costs to complete the contract, and these updates may
include subjective assessments.
Our
contracts typically provide for a schedule of billings or invoices to the
customer based on reaching agreed-upon milestones or as we incur
costs. The schedules for such billings usually do not precisely match
the schedule on which we incur costs. As a result, contract revenues
recognized in the statement of operations can and usually do differ from amounts
that can be billed or invoiced to the customer at any point during the
contract. Amounts by which cumulative contract revenues recognized on
a contract as of a given date exceed cumulative billings to the customer under
the contract are reflected as a current asset in our balance sheet under the
caption “Costs and estimated earnings in excess of billings.” Amounts
by which cumulative billings to the customer under a contract as of a given date
exceed cumulative contract revenues recognized on the contract are reflected as
a current liability in our balance sheet under the caption “Billings in excess
of costs and estimated earnings.”
The
percentage of completion method of accounting is also affected by changes in job
performance, job conditions, and final contract settlements. These
factors may result in revisions to estimated costs and, therefore,
revenues. Such
revisions are frequently based on further estimates and subjective
assessments. We recognize these revisions in the period in which they
are determined. If such revisions lead us to conclude that we will
recognize a loss on a contract, the full amount of the estimated ultimate loss
is recognized in the period we reach that conclusion, regardless of the
percentage of completion of the contract.
Revisions
to project costs and conditions can give rise to change orders under which the
customer agrees to pay additional contract price. Revisions can also
result in claims we might make against the customer to recover project variances
that have not been satisfactorily addressed through change orders with the
customer. Except in certain circumstances, we do not recognize
revenues or margin based on change orders or claims until they have been agreed
upon with the customer. The amount of revenue associated with
unapproved change orders and claims is currently
immaterial. Variations from estimated project costs could have a
significant impact on our operating results, depending on project size, and the
recoverability of the variation via additional customer payments.
|
Accounting
for Allowance for Doubtful Accounts
|
We are
required to estimate the collectibility of accounts receivable and provide an
allowance for doubtful accounts for receivable amounts we believe we will not
ultimately collect. This requires us to make certain judgments and
estimates involving, among others, the creditworthiness of the customer, our
prior collection history with the customer, ongoing relationships with the
customer, the aging of past due balances, our lien rights, if any, in the
property where we performed the work, and the availability, if any, of payment
bonds applicable to our contract. These estimates are re-evaluated
and adjusted as additional information is received.
|
Accounting
for Self-Insurance Liabilities
|
We are
substantially self-insured for worker’s compensation, employer’s liability, auto
liability, general liability and employee group health claims in view of the
relatively high per-incident deductibles we absorb under our insurance
arrangements for these risks. Losses up to deductible amounts are
estimated and accrued based upon known facts, historical trends and industry
averages. Loss estimates associated with the larger and
longer-developing risks—worker’s compensation, auto liability and general
liability—are reviewed by a third party actuary quarterly. We believe
these accruals are adequate. However, insurance liabilities are
difficult to estimate due to unknown factors, including the severity of an
injury, the determination of our liability in proportion to other parties,
timely reporting of occurrences, ongoing treatment or loss mitigation, general
trends in litigation recovery outcomes and the effectiveness of safety and risk
management programs. Therefore, if actual experience differs from the
assumptions and estimates used for recording the liabilities, adjustments may be
required and would be recorded in the period that such experience becomes
known.
|
Accounting
for Deferred Tax Assets
|
We
regularly evaluate valuation allowances established for deferred tax assets for
which future realization is uncertain. We perform this evaluation
quarterly. Estimations of required valuation allowances include
estimates of future taxable income. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which the activity underlying these assets becomes
deductible. We consider projected future taxable income and tax
planning strategies in making this assessment. If actual future
taxable income differs from our estimates, we may not realize deferred tax
assets to the extent we have estimated.
Recoverability
of Goodwill and Identifiable Intangible Assets
Goodwill
is the excess of purchase cost over the fair value of the net assets of acquired
businesses. We do not amortize goodwill. We assess our
goodwill asset amounts for impairment each year, and more frequently if
circumstances suggest an impairment may have occurred. Impairment
must be reflected when the value of a given business unit in excess of its
tangible net assets falls below the goodwill asset balance carried for that unit
on our books. If other business units have had increases in the value
of their respective goodwill balances, such increases may not be
recorded. Accordingly, such increases may not be netted against
impairments at other business units. The requirements for assessing
whether goodwill assets have been impaired involve market-based
information. This information, and its use in assessing goodwill,
entails some degree of subjective assessment.
We
currently perform our annual impairment testing as of October 1 and any
impairment charges resulting from this process are reported in the fourth
quarter. We segregate our operations into reporting units based on
the degree of operating and financial independence of each unit and our related
management of them. We perform our annual goodwill impairment testing
at the reporting unit level. We have 41 reporting units of which 25
reporting units have a goodwill balance. These reporting units are
tested for impairment by comparing each unit’s fair value to its carrying
value. The fair value of each reporting unit was estimated using a
discounted cash flow model combined with market valuation
approaches. Significant estimates and assumptions are used in
assessing the fair value of reporting units. These estimates and
assumptions involved future cash flows, growth rates, discount rates, weighted
average cost of capital and estimates of market valuations for each of the
reporting units.
We
amortize identifiable intangible assets with finite lives over their useful
lives. Changes in strategy and/or market condition, may result in
adjustments to recorded intangible asset balances or their useful
lives.
|
Results
of Operations (in thousands):
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
%
|
|
|
2009
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
|
2009
|
|
|
%
|
|
Revenues
|
|
$ |
346,705 |
|
|
|
100.0 |
% |
|
$ |
291,591 |
|
|
|
100.0 |
% |
|
$ |
993,862 |
|
|
|
100.0 |
% |
|
$ |
872,214 |
|
|
|
100.0 |
% |
Cost
of services
|
|
|
280,011 |
|
|
|
80.8 |
% |
|
|
234,186 |
|
|
|
80.3 |
% |
|
|
806,784 |
|
|
|
81.2 |
% |
|
|
701,335 |
|
|
|
80.4 |
% |
Gross
profit
|
|
|
66,694 |
|
|
|
19.2 |
% |
|
|
57,405 |
|
|
|
19.7 |
% |
|
|
187,078 |
|
|
|
18.8 |
% |
|
|
170,879 |
|
|
|
19.6 |
% |
Selling,
general and administrative expenses
|
|
|
45,078 |
|
|
|
13.0 |
% |
|
|
41,713 |
|
|
|
14.3 |
% |
|
|
128,397 |
|
|
|
12.9 |
% |
|
|
126,175 |
|
|
|
14.5 |
% |
Gain
on sale of assets
|
|
|
(183
|
) |
|
|
(0.1 |
)% |
|
|
(101
|
) |
|
|
― |
|
|
|
(311
|
) |
|
|
― |
|
|
|
(98
|
) |
|
|
― |
|
Operating
income
|
|
|
21,799 |
|
|
|
6.3 |
% |
|
|
15,793 |
|
|
|
5.4 |
% |
|
|
58,992 |
|
|
|
5.9 |
% |
|
|
44,802 |
|
|
|
5.1 |
% |
Interest
income (expense), net
|
|
|
188 |
|
|
|
0.1 |
% |
|
|
(184
|
) |
|
|
(0.1 |
)% |
|
|
1,004 |
|
|
|
0.1 |
% |
|
|
(454 |
) |
|
|
(0.1 |
)% |
Other
income
|
|
|
― |
|
|
|
― |
|
|
|
3 |
|
|
|
― |
|
|
|
158 |
|
|
|
― |
|
|
|
5 |
|
|
|
― |
|
Income
before income taxes
|
|
|
21,987 |
|
|
|
6.3 |
% |
|
|
15,612 |
|
|
|
5.4 |
% |
|
|
60,154 |
|
|
|
6.1 |
% |
|
|
44,353 |
|
|
|
5.1 |
% |
Income
tax expense
|
|
|
8,250 |
|
|
|
|
|
|
|
6,072 |
|
|
|
|
|
|
|
23,070 |
|
|
|
|
|
|
|
17,293 |
|
|
|
|
|
Income
from continuing operations
|
|
|
13,737 |
|
|
|
4.0 |
% |
|
|
9,540 |
|
|
|
3.3 |
% |
|
|
37,084 |
|
|
|
3.7 |
% |
|
|
27,060 |
|
|
|
3.1 |
% |
Discontinued
operations -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
results, net of tax
|
|
|
28 |
|
|
|
|
|
|
|
― |
|
|
|
|
|
|
|
115 |
|
|
|
|
|
|
|
(387
|
) |
|
|
|
|
Estimated
loss on disposition, net of tax
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
(93
|
) |
|
|
|
|
Net
income
|
|
$ |
13,765 |
|
|
|
|
|
|
$ |
9,540 |
|
|
|
|
|
|
$ |
37,199 |
|
|
|
|
|
|
$ |
26,580 |
|
|
|
|
|
Revenues — Revenues decreased
$55.1 million, or 15.9% to $291.6 million for the third quarter of 2009 compared
to the same period in 2008. Approximately 19.1% of the decrease in
revenues related to the same store activity offset by 3.2% increase from 2008
acquisitions. The same store revenue decrease stemmed primarily from
reduced activity in the nonresidential markets throughout the United States
especially in the lodging and entertainment sector (approximately $13.5 million)
and manufacturing (approximately $12.2 million) as well as continued decreases
in the multi-family sector (approximately $23.6 million). These
decreases were partially offset by increased activity in the governmental sector
(approximately $3.9 million). We have seen decreased activity,
primarily in our central Arizona and Virginia operations, resulting
from a significant decrease in both markets resulting in limited new projects
and from the planned downsizing of our large multi-family operation based in
Texas.
Revenues
for the first nine months of 2009 decreased $121.6 million, or 12.2%, to $872.2
million as compared to the same period in 2008. Approximately 16.7%
of the decrease in revenues related to same store activity offset by 4.5%
increase from 2008 acquisitions. The same store decrease stemmed
primarily from decreased activity in the nonresidential markets throughout the
United States especially in office buildings (approximately $37.3 million) and
in the healthcare sector (approximately $23.3 million). There has
been decreased activity in our multi-family sector (approximately $62.0 million)
as a result of our planned downsizing of our large multi-family operation based
in Texas. These decreases were partially offset by increased activity
in the educational and religious and not-for-profit sectors (approximately $7.7
million). We have seen decreased activity, primarily in our central
Arizona operation resulting from a decline in market activity in the
Phoenix
market
and from the planned downsizing of our large multi-family operation based in
Texas.
Backlog
reflects revenues still to be recognized under contracted or committed
installation and replacement project work. Project work generally
lasts less than one year. Service agreement revenues and service work
and short duration projects which are generally billed as performed do not flow
through backlog. Accordingly, backlog represents only a portion of
our revenues for any given future period, and it represents revenues that are
likely to be reflected in our operating results over the next six to twelve
months. As a result, we believe the predictive value of backlog
information is limited to indications of general revenue direction over the near
term, and should not be interpreted as indicative of ongoing revenue performance
over several quarters.
Backlog
as of September 30, 2009 was $554.3 million a 13.4% decrease from June 30, 2009
backlog of $639.8 million. The sequential decrease was primarily
related to our Arkansas, Wisconsin, and northern Florida
operations. Backlog as of September 30, 2008 was $803.7 million, a
decrease of $249.4 million or 31.0%. The year-over-year decrease is
primarily related to the planned downsizing of our large multi-family operation
based in Texas, and decreases at our central Arizona, central Florida, New
Hampshire and Arkansas operations due to the close out of several jobs and a
decline in market activity.
Following
the three-year period of industry activity declines from 2001-2003 noted
previously, we saw modest year-over-year revenue increases at our ongoing
operations beginning in mid-2003 and continuing throughout
2008. Based on our backlog and forecasts from industry construction
analysts, we expect that activity levels in our industry are likely to decrease
over the next twelve months, particularly in the area of new
construction.
We
continue to experience a noticeable amount of price competition in our markets,
which restrains our ability to profitably increase revenues.
Gross Profit — Gross profit
decreased $9.3 million, or 13.9%, to $57.4 million for the third quarter of 2009
as compared to the same period in 2008. As a percentage of revenues,
gross profit increased from 19.2% in 2008 to 19.7% in 2009. The
increase in gross profit percentage resulted primarily from higher profitability
at our southern Maryland operation (approximately $1.1 million).
Gross
profit for the first nine months of 2009 decreased $16.2 million, or 8.7% to
$170.9 million, as compared to the same period in 2008. As a
percentage of revenues, gross profit increased from 18.8% in 2008 to 19.6% in
2009. The increase in gross profit percentage for the first nine
months of 2009 resulted primarily from higher profitability at our central
Florida operation (approximately $4.7 million), and southern Maryland operation
(approximately $2.1 million) as well as improved profitability at our northern
Maryland operation (approximately $1.9 million). These increases were
partially offset by underperformance at our southeast Texas operation
(approximately $2.0 million).
Selling, General and Administrative
Expenses (“SG&A”) — SG&A decreased $3.4 million, or 7.5% for the
third quarter of 2009 as compared to the same period in 2008. This decrease is primarily
due to overhead reductions and lower bad debt expense (approximately $1.1
million) during the third quarter of 2009 as compared to the third quarter of
2008. These decreases were partially offset by higher medical costs
(approximately $1.0 million) primarily from terminated employees that elected
health insurance coverage under COBRA. As a percentage of
revenues, SG&A increased from 13.0% in 2008 to 14.3% in 2009 due to a lower
2009 revenue base. SG&A decreased $2.2 million, or 1.7%, to $126.2 million
for the first nine months ended September 30, 2009 as compared to the same
period in 2008. On a same store basis, SG&A decreased $5.0
million. These decreases were
primarily related to overhead reductions and lower compensation accruals due to
lower profitability in 2009 partially offset by higher medical costs
(approximately $0.9 million). As a percentage of revenues,
SG&A increased from 12.9% for the first nine months of 2008 to 14.5% for the
first nine months of 2009 due to a lower 2009 revenue base.
Interest Income (Expense), Net
— Interest income decreased $0.4 million for the third quarter of 2009 as
compared to the same period in 2008. Interest income decreased $1.6
million for the first nine months ended September 30, 2009 as compared to the
same period of 2008. The decrease is due to lower interest rates in
2009.
Income Tax Expense — Our year
to date effective tax rate for 2009 was 39.0%, as compared to 38.4% in
2008. The increase in the effective tax rate for 2009 is primarily
due to an increase in tax reserves. Adjustments to tax reserves are
analyzed and adjusted quarterly as events occur to warrant such
changes. Adjustments to tax reserves are a component of the effective
tax rate. We currently estimate our effective tax rate for 2009 will
be between 38% and 40%.
Outlook — We expect that
developing weakness in the underlying environment for non-residential activity
has and will continue to affect 2009 activity levels in our industry compared to
2008. Our backlog while still at solid levels by historical standards
has been declining. Our primary emphasis for 2009 has been and
continues to be on execution including a focus on cost controls and efficient
project and service performance at the unit level. Based on our
backlog and the weakening economic conditions for our industry, we expect
continued profitability over the next twelve months, but we expect lower
profitability than we achieved over the past twelve months as industry
conditions continue to weaken.
Liquidity and Capital
Resources:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
Cash
provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
20,943 |
|
|
$ |
24,803 |
|
|
$ |
46,956 |
|
|
$ |
44,754 |
|
Investing
activities
|
|
$ |
(15,514
|
) |
|
$ |
(1,438
|
) |
|
$ |
(61,121
|
) |
|
$ |
(7,241
|
) |
Financing
activities
|
|
$ |
(4,637
|
) |
|
$ |
(3,917
|
) |
|
$ |
(23,166
|
) |
|
$ |
(14,665
|
) |
Free
cash flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided
by operating activities
|
|
$ |
20,943 |
|
|
$ |
24,803 |
|
|
$ |
46,956 |
|
|
$ |
44,754 |
|
Purchases
of property and equipment
|
|
|
(3,773
|
) |
|
|
(1,986
|
) |
|
|
(10,778
|
) |
|
|
(6,420
|
) |
Proceeds
from sales of property and equipment
|
|
|
539 |
|
|
|
326 |
|
|
|
656 |
|
|
|
500 |
|
Free
cash flow
|
|
$ |
17,709 |
|
|
$ |
23,143 |
|
|
$ |
36,834 |
|
|
$ |
38,834 |
|
Cash Flow — We define free
cash flow as cash provided by operating activities less customary capital
expenditures, plus the proceeds from asset sales. Positive free cash
flow represents funds available to invest in significant operating initiatives,
to acquire other companies, or to reduce a company's outstanding debt or
equity. If free cash flow is negative, additional debt or equity is
generally required to fund the outflow of cash. Free cash flow may be
defined differently by other companies.
Our
business does not require significant amounts of investment in long-term fixed
assets. The substantial majority of the capital used in our business
is working capital that funds our costs of labor and installed equipment
deployed in project work until our customers pay us. Customary terms
in our industry allow customers to withhold a small portion of the contract
price until after we have completed the work, typically for six
months. Amounts withheld under this practice are known as retention
or retainage. Our average project duration together with typical
retention terms generally allow us to complete the realization of revenue and
earnings in cash within one year. Accordingly, we believe free cash
flow, by encompassing both profit margins and the use of working capital over
our approximately one year working capital cycle, is an effective measure of
operating effectiveness and efficiency. We have included free cash
flow information here for this reason, and because we are often asked about it
by third parties evaluating us. However, free cash flow is not
considered under generally accepted accounting principles to be a primary
measure of an entity’s financial results, and accordingly free cash flow should
not be considered an alternative to operating income, net income, or amounts
shown in our consolidated statements of cash flows as determined under generally
accepted accounting principles.
For the
three months ended September 30, 2009, we had free cash flow of $23.1 million as
compared to free cash flow of $17.7 million in 2008. This increase is
primarily due to improved working capital efficiency due to
lower
revenue growth. For the nine months ended September 30, 2009, we had
free cash flow of $38.8 million, as compared to free cash flow of $36.8 million
for the nine months ended September 30, 2008. This decrease is
primarily due to lower net income in 2009.
As of
September 30, 2009, our marketable securities consisted of $6.6 million of
auction rate securities, which are variable rate debt instruments, having
long-term maturities, but whose interest rates are designed to reset through an
auction process, at intervals ranging from seven to 35 days. We had
$9.4 million investments in marketable securities as of December 31,
2008. All of our auction rate securities are high quality direct
municipal obligations which have high investment grade ratings or otherwise are
backed by high investment grade rated insurance agencies. In February
2008, liquidity issues in the global credit markets caused auctions representing
some of the auction rate securities we hold to fail because the amount of
securities offered for sale exceeded the bids. As a result, the
liquidity of our remaining auction rate securities has diminished, and we expect
that this decreased liquidity for our auction rate securities will continue as
long as the present depressed global credit market environment persists, or
until issuers refinance and replace these securities with other
instruments. As a result of the temporary declines in fair value for
our auction rate securities, which we attribute to liquidity issues rather than
credit issues, we recorded an unrealized loss of $0.3 million, net of tax of
$0.1 million, to accumulated other comprehensive income (loss). Our
analysis of the fair values of these securities considered, among other items,
the creditworthiness of the counterparty, the timing of expected future cash
flows, and the possibility that a discount may be required if we choose to sell
the securities in the absence of a successful auction. These
securities were also compared, when possible, to other observable market data
with similar characteristics.
As a
result of the current situation in the auction markets, our ability to liquidate
our investment in auction rate securities and fully recover the carrying value
of our investment in the near term may be limited or impossible. If
in the future the issuers are unable to successfully close future auctions and
their credit ratings deteriorate and if we determine that any future valuation
adjustment was other than temporary, we may be required to record an impairment
charge on these investments. Because the tax exempt interest rates on
these bonds are relatively attractive, we believe that we may be able to
liquidate our investment without significant loss in the foreseeable future;
however, it could take until the final maturity of the underlying notes (up to
October 2034) to be repaid. Based on our expected operating cash
flows, and our other sources of cash, we do not anticipate the potential lack of
liquidity on these investments will affect our ability to execute our current
business plan. During the nine months ended September 30, 2009, we
sold $3.0 million of these auction rate securities at face value. An
additional $1.0 million was sold at face value during October 2009; this is
included in “Prepaid Expenses and Other” in our consolidated balance
sheet.
As of
December 31, 2008, the Board approved extensions of the program to cover an
additional 2.9 million shares. During the first quarter of 2009, the
Board approved an extension of the program to cover an additional 0.5 million
shares. During the third quarter of 2009, the Board
approved an extension of the program to cover an additional 0.5 million
shares. Since the inception of the repurchase program, the Board has
approved 4.9 million shares to be repurchased.
The share
repurchases will be made from time to time at our discretion in the open market
or privately negotiated transactions as permitted by securities laws and other
legal requirements, and subject to market conditions and other
factors. The Board may modify, suspend, extend or terminate the
program at any time. We repurchased 843,700 shares during the nine
months ended September 30, 2009, at an average price of $9.94 per
share. Since the inception of the repurchase program in 2007, we have
repurchased a cumulative total of 4.0 million shares as of September 30, 2009,
at an average price of $11.12 per share.
Credit Facility — On February
20, 2007, we entered into a $100.0 million senior credit facility (the
‘‘Facility’’) provided by a syndicate of banks. The Facility expires
in February 2012 and is secured by the capital stock of our current and future
subsidiaries. As of September 30, 2009, we had no outstanding borrowings, $43.1
million in letters of credit outstanding, and $56.9 million of credit
available.
We have a
choice of two interest rate options for borrowings under the Facility; these
rates are floating rates determined by the broad financial markets, meaning they
can and do move up and down from time to time. Excluding the
amortization of debt financing and arrangement cost, we estimate that the
interest rate applicable to
the
borrowings under the Facility would be approximately 1.5% as of September 30,
2009. Commitment fees are payable on the portion of the capacity not
in use for borrowings or letters of credit at any given time. These
fees range from 0.20%-0.30% per annum, based on the ratio of debt to Credit
Facility Adjusted EBITDA.
The
Facility contains financial covenants defining various financial measures and
the levels of these measures with which we must comply. The
Facility’s principal financial covenants include:
Leverage Ratio — The Facility
requires that the ratio of our total indebtedness less cash and cash equivalents
to our Credit Facility Adjusted EBITDA not exceed 2.50. The leverage
ratio as of September 30, 2009 was 0.11.
Fixed Charge Coverage Ratio —
The Facility requires that the ratio of Credit Facility Adjusted EBITDA,
less non-financed capital expenditures, tax provision, dividends and amounts
used to repurchase stock to the sum of interest expense and scheduled principal
payments be at least 1.50. Capital expenditures, tax provision,
dividends and stock repurchase payments are defined under the Facility for
purposes of this covenant to be amounts for the four quarters ending as of any
given quarterly covenant compliance measurement date. The calculation
of the fixed charge coverage ratio excludes acquisitions, stock repurchases and
the payment of cash dividends, at any time that the Leverage Ratio does not
exceed 1.0. The fixed charge coverage ratio as of September 30, 2009
was 13.34.
Other Restrictions — The
Facility permits acquisitions of up to $25.0 million per transaction, or $50.0
million in the aggregate. However, these limitations only apply when
the Leverage Ratio is greater than 1.0.
While the
Facility's financial covenants do not specifically govern capacity under the
Facility, if our debt level under the Facility at a quarter-end covenant
compliance measurement date were to cause us to violate the Facility's
debt-to-Credit Facility Adjusted EBITDA covenant, our borrowing capacity under
the Facility and the favorable terms that we currently enjoy could be negatively
impacted by the lenders.
We are in
compliance with all the financial covenants as of September 30,
2009.
Notes to Former Owners — We
issued subordinated notes to the former owners of acquired companies, as part of
the consideration used to acquire these companies. These notes had an
outstanding balance of $8.6 million, of which $2.0 million is current as of
September 30, 2009. These notes bear interest, payable annually, at a
weighted average interest rate of 5.7%.
Off-Balance Sheet Arrangements and
Other Commitments — As is common in our industry, we have entered into
certain off-balance sheet arrangements in the ordinary course of business that
result in risks not directly reflected in our balance sheets. Our
most significant off-balance sheet transactions include liabilities associated
with noncancelable operating leases. We also have other off-balance
sheet obligations involving letters of credit and surety
guarantees.
We enter
into noncancelable operating leases for many of our facility, vehicle and
equipment needs. These leases allow us to conserve cash by paying a
monthly lease rental fee for use of facilities, vehicles and equipment rather
than purchasing them. At the end of the lease, we have no further
obligation to the lessor. If we decide to cancel or terminate a lease
before the end of its term, we would typically owe the lessor the remaining
lease payments under the term of the lease.
Certain
of our vendors require letters of credit to ensure reimbursement for amounts
they are disbursing on our behalf, such as to beneficiaries under our
self-funded insurance programs. We have also occasionally used
letters of credit to guarantee performance under our contracts and to ensure
payment to our subcontractors and vendors under those contracts. The
letters of credit we provide are actually issued by our lenders through the
Facility as described above. A letter of credit commits the lenders
to pay specified amounts to the holder of the letter of credit if the holder
demonstrates that we have failed to perform specified actions. If
this were to occur, we would be required to reimburse the
lenders. Depending on the circumstances of such a reimbursement, we
may also have to record a charge to earnings for the
reimbursement. Absent a claim, there is no payment or reserving of
funds by us in connection with a letter of credit. However, because a
claim on a letter of credit would require immediate reimbursement by us to our
lenders, letters of credit are treated as a use of the Facility’s capacity just
the same as actual borrowings. Claims against letters of credit are
rare in our industry. To date we
have not
had a claim made against a letter of credit that resulted in payments by a
lender or by us. We believe that it is unlikely that we will have to
fund claims under a letter of credit in the foreseeable future.
Many
customers, particularly in connection with new construction, require us to post
performance and payment bonds issued by a financial institution known as a
surety. If we fail to perform under the terms of a contract or to pay
subcontractors and vendors who provided goods or services under a contract, the
customer may demand that the surety make payments or provide services under the
bond. We must reimburse the sureties for any expenses or outlays they
incur. To date, we are not aware of any losses to our sureties in
connection with bonds the sureties have posted on our behalf, and we do not
expect such losses to be incurred in the foreseeable future.
Surety
market conditions are currently challenging as a result of significant losses
incurred by many sureties in recent periods, both in the construction industry
as well as in certain larger corporate bankruptcies. As a result,
less bonding capacity is available in the market and terms have become more
restrictive. Further, under standard terms in the surety market,
sureties issue bonds on a project-by-project basis, and can decline to issue
bonds at any time. Historically, approximately 25% to 30% of our
business has required bonds. While we have strong surety
relationships to support our bonding needs, current market conditions as well as
changes in our sureties’ assessment of our operating and financial risk could
cause our sureties to decline to issue bonds for our work. If that
were to occur, our alternatives include doing more business that does not
require bonds, posting other forms of collateral for project performance such as
letters of credit or cash, and seeking bonding capacity from other
sureties. We would likely also encounter concerns from customers,
suppliers and other market participants as to our
creditworthiness. While we believe our general operating and
financial characteristics, including a significant amount of cash on our balance
sheet, would enable us to ultimately respond effectively to an interruption in
the availability of bonding capacity, such an interruption would likely cause
our revenues and profits to decline in the near term.
The
following recaps the future maturities of our contractual obligations as of
September 30, 2009 (in thousands):
|
|
Twelve
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
Total
|
|
Liabilities
– Notes to former owners
|
|
$ |
2,018 |
|
|
$ |
6,232 |
|
|
$ |
375 |
|
|
$ |
― |
|
|
$ |
― |
|
|
$ |
― |
|
|
$ |
8,625 |
|
Operating
lease obligations
|
|
|
9,740 |
|
|
|
8,519 |
|
|
|
7,374 |
|
|
|
6,270 |
|
|
|
4,166 |
|
|
|
6,083 |
|
|
|
42,152 |
|
Interest
payable
|
|
|
457 |
|
|
|
196 |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
653 |
|
Total
|
|
$ |
12,215 |
|
|
$ |
14,947 |
|
|
$ |
7,749 |
|
|
$ |
6,270 |
|
|
$ |
4,166 |
|
|
$ |
6,083 |
|
|
$ |
51,430 |
|
Absent
any significant commitments of capital for items such as capital expenditures,
acquisitions, dividends and share repurchases, it is reasonable to expect us to
continue to maintain excess cash on our balance sheet. Therefore, we
assumed that we would continue our current status of not utilizing any
borrowings under our revolving credit facility.
As of
September 30, 2009, we also have $43.1 million letter of credit commitments, of
which $42.5 million will expire in 2009 and $0.6 million will expire in
2010. The substantial majority of these letters of credit are posted
with insurers who disburse funds on our behalf in connection with our worker’s
compensation, auto liability and general liability insurance
program. These letters of credit provide additional security to the
insurers that sufficient financial resources will be available to fund claims on
our behalf, many of which develop over long periods of time, should we ever
encounter financial duress. Posting of letters of credit for this
purpose is a common practice for entities that manage their self-insurance
programs through third-party insurers as we do. While most of these
letter of credit commitments expire in 2009, we expect nearly all of them,
particularly those supporting our insurance programs, will be renewed
annually.
Other
than the operating lease obligations noted above, we have no significant
purchase or operating commitments outside of commitments to deliver equipment
and provide labor in the ordinary course of performing project
work.
Outlook — We have generated positive
net free cash flow for the last ten calendar years, much of which occurred
during challenging economic and industry conditions. We also expect
to have significant borrowing capacity under our credit facility and we continue
to have substantial uncommitted cash balances. We believe these
factors will provide us with sufficient liquidity to fund our operations for the
foreseeable future.
|
Cyclicality
and Seasonality
|
Historically,
the construction industry has been highly cyclical. As a result, our
volume of business may be adversely affected by declines in new installation and
replacement projects in various geographic regions of the United States during
periods of economic weakness.
The HVAC
industry is subject to seasonal variations. Specifically, the demand
for new installation and replacement is generally lower during the winter months
(the first quarter of the year) due to reduced construction activity during
inclement weather and less use of air conditioning during the colder
months. Demand for HVAC services is generally higher in the second
and third calendar quarters due to increased construction activity and increased
use of air conditioning during the warmer months. Accordingly, we
expect our revenues and operating results generally will be lower in the first
and fourth calendar quarters.
|
Recent
Accounting Pronouncements
|
On
September 30, 2009, we adopted changes issued by the Financial Accounting
Standards Board (“FASB”) to the authoritative hierarchy of generally accepted
accounting principles (“GAAP”). These changes establish the FASB
Accounting Standards CodificationTM
(“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with GAAP. These changes and the
Codification itself do not change GAAP. Other than the manner in
which new accounting guidance is referenced, the adoption of these changes had
no impact on the consolidated financial statements.
Fair
Value Accounting
On
January 1, 2009, we adopted changes issued by the FASB to fair value accounting
and reporting as it relates to nonfinancial assets and nonfinancial liabilities
that are not recognized or disclosed at fair value in the financial statements
on at least an annual basis. These changes define fair value,
establish a framework for measuring fair value in GAAP, and expand disclosures
about fair value measurements. This guidance applies to other GAAP
that require or permit fair value measurements and is to be applied
prospectively with limited exceptions. The adoption of these changes,
as it relates to nonfinancial assets and nonfinancial liabilities, had no impact
on the consolidated financial statements, however we have expanded the
disclosures regarding marketable securities, goodwill, and intangible
assets.
Business
Combinations and Consolidation Accounting
On
January 1, 2009, we adopted changes issued by the FASB to accounting for
business combinations. These changes apply to all assets acquired and
liabilities assumed in a business combination that arise from certain
contingencies and requires (i) an acquirer to recognize at fair value, at the
acquisition date, an asset acquired or liability assumed in a business
combination that arises from a contingency if the acquisition-date fair value of
that asset or liability can be determined during the measurement period
otherwise the asset or liability should be recognized at the acquisition date if
certain defined criteria are met; (ii) contingent consideration arrangements of
an acquiree assumed by the acquirer in a business combination be recognized
initially at fair value; (iii) subsequent measurements of assets and liabilities
arising from contingencies be based on a systematic and rational method
depending on their nature and contingent consideration arrangements be measured
subsequently; and (iv) disclosures of the amounts and measurement basis of such
assets and liabilities and the nature of the contingencies. The
adoption did not have a material impact on our consolidated financial
statements. The adoption will significantly impact our accounting and
reporting for future acquisitions, principally as a result of the expanded
requirements to value acquired assets, liabilities and contingencies at
their
fair
values and (ii) the requirement that acquisition related transaction costs be
expensed as incurred rather than capitalized as a part of the cost of the
acquisition.
Earnings
Per Share
On
January1, 2009, we adopted changes issued by the FASB to the calculation of
earnings per share. These changes state that unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share pursuant to the two-class
method for all periods presented. There was no significant impact
upon the adoption of these changes.
Subsequent
Events
On June 30, 2009, we adopted changes
issued by the FASB to accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are
issued. The new guidance also requires disclosure of the date through
which an entity has evaluated subsequent events and the basis for that
date. This change had no impact on our consolidated financial
statements.
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
We are
exposed to market risk primarily related to potential adverse changes in
interest rates as discussed below. We are actively involved in
monitoring exposure to market risk and continue to develop and utilize
appropriate risk management techniques. We are not exposed to any
other significant financial market risks including commodity price risk, foreign
currency exchange risk or interest rate risks from the use of derivative
financial instruments. We do not use derivative financial
instruments.
We have
limited exposure to changes in interest rates under our revolving credit
facility. We have a debt facility under which we may borrow funds in
the future. We do not currently foresee any borrowing
needs. Our debt with fixed interest rates consists of notes to former
owners of acquired companies.
The
following table presents principal amounts (stated in thousands) and related
average interest rates by year of maturity for our debt obligations and their
indicated fair market value at September 30, 2009:
|
|
Twelve
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
Fair
Value
|
|
Fixed
Rate Debt
|
|
$ |
2,018 |
|
|
$ |
6,232 |
|
|
$ |
375 |
|
|
$ |
― |
|
|
$ |
― |
|
|
$ |
― |
|
|
$ |
8,625 |
|
Average
Interest Rate
|
|
|
5.5 |
% |
|
|
5.8 |
% |
|
|
6.0 |
% |
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
5.7 |
% |
As of
September 30, 2009, our marketable securities consisted of $6.6 million of
auction rate securities, which are variable rate debt instruments, having
long-term maturities, but whose interest rates are designed to reset through an
auction process, at intervals ranging from seven to 35 days. We had
$9.4 million in investments of marketable securities as of December 31,
2008. All of our auction rate securities are high quality direct
municipal obligations which have high investment grade ratings or otherwise are
backed by high investment grade rated insurance agencies. In February
2008, liquidity issues in the global credit markets caused auctions representing
some of the auction rate securities we hold to fail because the amount of
securities offered for sale exceeded the bids. As a result, the
liquidity of our auction rate securities has diminished, and we expect that this
decreased liquidity for our auction rate securities will continue as long as the
present depressed global credit market environment persists, or until issuers
refinance and replace these securities with other instruments. As a
result of the temporary declines in fair value for our auction rate securities,
which we attribute to liquidity issues rather than credit issues, we recorded an
unrealized loss of $0.3 million, net of tax, of less than $0.1 million to
accumulated other comprehensive income (loss). Our analysis of the
fair values of these securities considered, among other items, the
creditworthiness of the counterparty, the timing of expected future cash flows,
and the possibility that a discount may be required if we choose to sell the
securities in the absence of a successful auction. These securities
were also compared, when possible, to other observable market data with similar
characteristics.
As a
result of the current situation in the auction markets, our ability to liquidate
our investment in auction rate securities and fully recover the carrying value
of our investment in the near term may be limited or impossible. If
in the future the issuers are unable to successfully close future auctions and
their credit ratings deteriorate and if we determine that any future valuation
adjustment was other than temporary, we may be required to record an impairment
charge on these investments. Because the tax exempt interest rates on
these bonds are relatively attractive, we believe that we may be able to
liquidate our investment without significant loss in the foreseeable future;
however, it could take until the final maturity of the underlying notes (up to
October 2034) to be repaid. Based on our expected operating cash
flows, and our other sources of cash, we do not anticipate the potential lack of
liquidity on these investments will affect our ability to execute our current
business plan.
We
measure certain assets, including our goodwill and intangible assets at a fair
value on a nonrecurring basis. These assets are recognized at fair
value when they are deemed to be impaired. During the nine months
ended September 30, 2009, we did not recognize any impairments on those assets
required to be measured at fair value on a nonrecurring basis.
|
Evaluation
of Disclosure Controls and
Procedures
|
Our
executive management is responsible for ensuring the effectiveness of the design
and operation of our disclosure controls and procedures. We carried
out an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this
report. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934) are effective as of the end of the period covered by this
report.
|
Changes
in Internal Control over Financial
Reporting
|
There
have not been any changes in our internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities
Exchange Act of 1934) during the three months ended September 30, 2009 that have
materially affected, or is reasonably likely to materially affect, internal
control over financial reporting.
COMFORT
SYSTEMS USA, INC.
PART
II—OTHER INFORMATION
We are
subject to certain claims and lawsuits arising in the normal course of
business. We maintain various insurance coverages to minimize
financial risk associated with these claims. We have estimated and
provided accruals for probable losses and related legal fees associated with
certain of our litigation in our consolidated financial
statements. While we cannot predict the outcome of these proceedings,
in our opinion and based on reports of counsel, any liability arising from these
matters individually and in the aggregate will not have a material effect on our
operating results or financial condition, after giving effect to provisions
already recorded.
Item
2.
|
Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
Recent
Sales of Unregistered Securities
|
None.
Issuer
Purchases of Equity Securities
On March
29, 2007, our Board of Directors (the "Board") approved a stock repurchase
program to acquire up to one million shares of our outstanding common
stock. As of December 31, 2008, the Board approved extensions of the
program to cover an additional 2.9 million shares. During the first
quarter of 2009, the Board approved an extension of the program to cover an
additional 0.5 million shares. During the third quarter of 2009, the
Board approved an extension of the program to cover an additional 0.5 million
shares. Since the inception of the repurchase program, the Board has
approved 4.9 million shares to be repurchased.
The share
repurchases will be made from time to time at our discretion in the open market
or privately negotiated transactions as permitted by securities laws and other
legal requirements, and subject to market conditions and other
factors. The Board may modify, suspend, extend or terminate the
program at any time. We repurchased 843,700 shares during the nine
months ended September 30, 2009, at an average price of $9.94 per
share. Since the inception of the program, we have repurchased a
cumulative total of 4.0 million shares as of September 30, 2009, at an average
price of $11.12 per share.
During
the quarter ended September 30, 2009, we purchased our common shares in the
following amounts at the following average prices:
Period
|
|
Total
Number
of
Shares
Purchased
|
|
|
Average
Price
Paid
Per
Share
|
|
|
Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans
or Programs
|
|
|
Maximum
Number of
Shares
that May Yet Be
Purchased
Under the
Plans
or Programs
|
|
July
1 – July 31
|
|
|
56,000 |
|
|
$ |
10.06 |
|
|
|
3,857,409 |
|
|
|
541,600 |
|
August
1 – August 31
|
|
|
18,000 |
|
|
$ |
11.31 |
|
|
|
3,875,409 |
|
|
|
1,000,000 |
|
September
1 – September 30
|
|
|
168,600 |
|
|
$ |
11.16 |
|
|
|
4,044,009 |
|
|
|
831,400 |
|
|
|
|
242,600 |
|
|
$ |
10.92 |
|
|
|
4,044,009 |
|
|
|
831,400 |
|
Under our
restricted share plan, employees may elect to have us withhold common shares to
satisfy minimum statutory federal, state and local tax withholding obligations
arising on the vesting of restricted stock awards and exercise of
options. When we withhold these shares, we are required to remit to
the appropriate taxing authorities the market price of the shares withheld,
which could be deemed a purchase of the common shares by us on the date of
withholding. During the quarter ended September 30, 2009, we withheld
common shares to satisfy these tax withholding obligations as
follows:
Period
|
|
Number
of
Shares
Purchased
|
|
|
Average
Price
Paid
Per Share
|
|
July
1 – July 31
|
|
|
― |
|
|
$ |
― |
|
August
1 – August 31
|
|
|
220 |
|
|
$ |
12.64 |
|
September
1 – September 30
|
|
|
― |
|
|
$ |
― |
|
|
|
|
220 |
|
|
$ |
12.64 |
|
10.1
|
|
Supplemental
Schedules and Exhibits to Amended and Restated Senior Credit Facility
dated February 20, 2007.
|
31.1
|
|
Rule
13a-14(a) Certification of William F. Murdy pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
|
Rule
13a-14(a) Certification of William George pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
|
Section
1350 Certification of William F. Murdy pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
32.2
|
|
Section
1350 Certification of William George pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
Comfort Systems
USA,
Inc.
|
November
3, 2009
|
By:
|
/s/
William F.
Murdy
|
|
|
William
F. Murdy
|
|
|
Chairman
of the Board and
Chief
Executive Officer
|
November
3, 2009
|
By:
|
/s/
William
George
|
|
|
William
George
|
|
|
Executive
Vice President and
Chief
Financial Officer
|
November
3, 2009
|
By:
|
/s/
Julie S.
Shaeff
|
|
|
Julie
S. Shaeff
|
|
|
Senior
Vice President and
Chief
Accounting Officer
|