UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] 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.)
777 POST OAK BOULEVARD
SUITE 500
HOUSTON, TEXAS 77056
(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 [X] No [ ]
The number of shares outstanding of the issuer's common stock, as of
November 13, 2000, was 37,286,284.
<PAGE>
COMFORT SYSTEMS USA, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
PAGE
----
Part I -- Financial Information
Item 1 -- Financial Statements
COMFORT SYSTEMS USA, INC ........................................
Consolidated Balance Sheets ............................... 1
Consolidated Statements of Operations ..................... 2
Consolidated Statements of Stockholders' Equity ........... 3
Consolidated Statements of Cash Flows ..................... 4
Condensed Notes to Consolidated Financial Statements ...... 5
Item 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 12
Item 3 -- Quantitative and Qualitative Disclosures about Market Risk . 16
Part II -- Other Information
Item 1 -- Legal Proceedings .......................................... 17
Item 2 -- Recent Sales of Unregistered Securities .................... 17
Item 6 -- Exhibits and Reports on Form 8-K ........................... 17
Item 9 -- Changes and Disagreements with Accountants on Accounting and
Financial Disclosure ....................................... 17
Signature ............................................................ 18
<PAGE>
COMFORT SYSTEMS USA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 3,664 $ 7,700
Accounts receivable, less
allowance of $5,568 and
$7,917......................... 309,031 360,517
Other receivables............... 4,575 5,981
Inventories..................... 20,907 19,908
Prepaid expenses and other...... 19,891 29,908
Costs and estimated earnings in
excess of billings............. 54,575 48,151
-------- --------
Total current assets.. 412,643 472,165
PROPERTY AND EQUIPMENT, net.......... 41,964 46,260
GOODWILL, less accumulated
amortization of $20,665 and
$30,131............................ 474,529 458,064
OTHER NONCURRENT ASSETS.............. 14,136 4,842
-------- --------
Total assets.......... $943,272 $981,331
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ 3,353 $ 221
Current maturities of notes to
affiliates and former owners... 24,536 15,499
Accounts payable................ 96,032 119,814
Accrued compensation and
benefits....................... 36,187 41,602
Billings in excess of costs and
estimated earnings............. 52,170 67,768
Other current liabilities....... 27,799 29,137
-------- --------
Total current
liabilities.......... 240,077 274,041
DEFERRED INCOME TAXES................ 4,547 6,746
LONG-TERM DEBT, NET OF CURRENT
MATURITIES......................... 225,471 248,069
NOTES TO AFFILIATES AND FORMER
OWNERS, NET OF CURRENT
MATURITIES......................... 52,473 35,187
OTHER LONG-TERM LIABILITIES.......... 1,739 586
-------- --------
Total liabilities..... 524,307 564,629
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,
39,258,913 shares issued....... 393 393
Treasury stock, at cost,
1,695,524 and 1,927,821 shares,
respectively................... (11,978) (12,923)
Additional paid-in capital...... 342,655 341,923
Retained earnings............... 87,895 87,309
-------- --------
Total stockholders'
equity............... 418,965 416,702
-------- --------
Total liabilities and
stockholders' equity $943,272 $981,331
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ---------------------------
1999 2000 1999 2000
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES............................. $374,815 $423,922 $1,008,234 $1,191,458
COST OF SERVICES..................... 298,480 352,838 792,482 978,869
-------- -------- ---------- ----------
Gross profit............... 76,335 71,084 215,752 212,589
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 45,793 58,021 133,984 169,182
GOODWILL AMORTIZATION................ 2,983 3,151 8,650 9,483
RESTRUCTURING CHARGES................ -- 9,959 -- 10,313
-------- -------- ---------- ----------
Operating income (loss).... 27,559 (47) 73,118 23,611
OTHER INCOME (EXPENSE):
Interest income................. 209 105 598 483
Interest expense................ (5,265) (7,122) (14,078) (19,900)
Other........................... 89 588 192 678
-------- -------- ---------- ----------
Other income (expense)..... (4,967) (6,429) (13,288) (18,739)
-------- -------- ---------- ----------
REDUCTIONS IN NON-OPERATING ASSETS
AND LIABILITIES, NET............... -- -- -- (5,190)
-------- -------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES.... 22,592 (6,476) 59,830 (318)
INCOME TAX EXPENSE (BENEFIT)......... 9,724 (2,787) 25,753 268
-------- -------- ---------- ----------
NET INCOME (LOSS).................... $ 12,868 $ (3,689) $ 34,077 $ (586)
======== ======== ========== ==========
NET INCOME (LOSS) PER SHARE:
Basic........................... $ 0.33 $ (0.10) $ 0.88 $ (0.02)
======== ======== ========== ==========
Diluted......................... $ 0.33 $ (0.10) $ 0.86 $ (0.02)
======== ======== ========== ==========
SHARES USED IN COMPUTING NET INCOME
(LOSS) PER SHARE:
Basic........................... 39,060 37,265 38,705 37,429
======== ======== ========== ==========
Diluted......................... 39,531 37,265 40,335 37,429
======== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL TOTAL
------------------- --------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- ------ ---------- -------- ---------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998......... 38,141,180 $381 -- $ -- $333,978 $45,573 $379,932
Issuance of Common Stock:
Acquisition of purchased
companies...................... 958,533 10 125,197 885 6,164 -- 7,059
Issuance of Employee Stock
Purchase Plan shares........... 142,276 2 -- -- 2,036 -- 2,038
Issuance of shares for options
exercised...................... 16,924 -- -- -- 477 -- 477
Common Stock repurchases........... -- -- (1,820,721) (12,863) -- -- (12,863)
Net income......................... -- -- -- -- -- 42,322 42,322
---------- ---- ---------- -------- -------- ------- --------
BALANCE AT DECEMBER 31, 1999......... 39,258,913 393 (1,695,524) (11,978) 342,655 87,895 418,965
Issuance of Common Stock:
Issuance of Employee Stock
Purchase Plan shares
(unaudited).................... -- -- 329,212 2,254 (732) -- 1,522
Common Stock repurchases
(unaudited)...................... -- -- (175,513) (1,224) -- -- (1,224)
Shares exchanged in repayment of
notes receivable (unaudited)..... -- -- (385,996) (1,975) -- -- (1,975)
Net loss (unaudited)............... -- -- -- -- -- (586) (586)
---------- ---- ---------- -------- -------- ------- --------
BALANCE AT SEPTEMBER 30, 2000
(unaudited)........................ 39,258,913 $393 (1,927,821) $(12,923) $341,923 $87,309 $416,702
========== ==== ========== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................... $ 34,077 $ (586)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities --
Restructuring charges........... -- 10,313
Reductions in non-operating
assets and liabilities, net.... -- 5,190
Depreciation and amortization
expense........................ 16,955 18,413
Bad debt expense................ 656 3,864
Deferred tax expense
(benefit)...................... (639) 101
Gain on sale of property and
equipment...................... (280) (636)
Changes in operating assets and
liabilities, net of effects of
acquisitions of purchased
companies --
(Increase) decrease in --
Receivables, net...... (46,153) (54,815)
Inventories........... (3,032) 867
Prepaid expenses and
other current
assets............ (41) 1,919
Costs and estimated
earnings in excess
of billings....... (17,294) 6,615
Other noncurrent
assets............ 1,076 1,533
Increase (decrease) in --
Accounts payable and
accrued
liabilities....... 16,875 16,272
Billings in excess of
costs and
estimated
earnings.......... 1,074 15,446
Other, net............ (1,001) (1,192)
--------- ---------
Net cash provided by
operating activities.... 2,273 23,304
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment...................... (11,360) (14,687)
Proceeds from sales of property
and equipment.................. 1,020 1,477
Cash paid for purchased
companies, net of cash
acquired....................... (27,448) --
Other........................... (500) --
--------- ---------
Net cash used in investing
activities.............. (38,288) (13,210)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt...... (154,486) (235,772)
Borrowings of long-term debt.... 188,860 229,416
Proceeds from issuance of common
stock.......................... 2,258 1,522
Repurchases of common stock..... -- (1,224)
--------- ---------
Net cash provided by (used
in) financing
activities.............. 36,632 (6,058)
--------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 617 4,036
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 6,985 3,664
--------- ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 7,602 $ 7,700
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
COMFORT SYSTEMS USA, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. BUSINESS AND ORGANIZATION:
Comfort Systems USA, Inc., a Delaware corporation ("Comfort Systems" and
collectively with its subsidiaries, the "Company"), is a leading national
provider of comprehensive heating, ventilation and air conditioning ("HVAC")
installation, maintenance, repair and replacement services. The Company operates
primarily in the commercial and industrial HVAC markets, and performs most of
its services within manufacturing plants, office buildings, retail centers,
apartment complexes, and healthcare, education and government facilities. In
addition to standard HVAC services, the Company provides specialized
applications such as process cooling, control systems, electronic monitoring and
process piping. Certain locations also perform related services such as
electrical and plumbing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
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 for the year ended December 31, 1999 (the "Form 10-K").
There were no significant changes in the accounting policies of the Company
during the periods presented. For a description of the significant accounting
policies of the Company, refer to Note 2 of Notes to Consolidated Financial
Statements of Comfort Systems included in 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.
Accordingly, these financial statements do not include all information or
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the Form 10-K. The
Company believes 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 fiscal year.
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 revenues, expenses, assets,
liabilities and contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
CASH FLOW INFORMATION
Cash paid for interest for the nine months ended September 30, 1999 and
2000 was approximately $12.0 million and $18.8 million, respectively. Cash paid
for income taxes for the nine months ended September 30, 1999 and 2000 was
approximately $23.0 million and $12.1 million, respectively.
ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). This
5
<PAGE>
COMFORT SYSTEMS USA, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 -- (CONTINUED)
standard requires entities to recognize all derivative instruments (including
certain derivative instruments embedded in other contracts) as assets or
liabilities in its balance sheet and measure them at fair value. The statement
requires that changes in the derivatives fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. SFAS No. 133, as
amended, is effective for the Company beginning January 1, 2001. The Company is
currently evaluating SFAS No. 133 and the impact on existing accounting policies
and financial reporting disclosures. The Company does not expect the adoption of
SFAS No. 133 to have a significant impact on the Company's results of operations
or financial position.
RECLASSIFICATIONS
Certain reclassifications have been made in prior period financial
statements to conform to current period presentation.
3. RESTRUCTURING CHARGES:
During the three and nine months ended September 30, 2000, the Company
recorded restructuring charges of approximately $10.0 million and
$10.3 million, respectively, associated primarily with restructuring efforts at
certain underperforming operations. As announced by the Company in the second
quarter of 2000, management has been performing an extensive review of its
operations. As part of this ongoing review, management decided to cease
operating at two operating locations, sell two smaller satellite operations, and
merge one small company into a larger operation. These actions are expected to
be substantially complete by the end of 2000. The restructuring charges
associated with these actions are primarily non-cash and include goodwill
impairments of approximately $7.1 million and the writedown of other long-lived
assets of approximately $0.9 million. The remaining restructuring items
primarily include severance and lease termination costs. Severance costs relate
to the departure of the Company's former chief executive officer and to the
termination of approximately 20 employees including certain corporate personnel
and the management of certain underperforming locations. The following table
shows the portions of the restructuring charges that are expected to result in
cash disbursements, and how much of those amounts had been paid by
September 30, 2000 (in thousands):
<TABLE>
<CAPTION>
TOTAL BALANCE AT
ACCRUAL PAYMENTS SEPTEMBER 30, 2000
------- -------- ------------------
<S> <C> <C> <C>
Severance............................ $1,303 $(487) $ 816
Lease termination costs and other.... 1,040 (82) 958
------ ----- ------
Total........................... $2,343 $(569) $1,774
====== ===== ======
</TABLE>
Aggregated financial information related to the operations addressed by
restructuring is as follows (in thousands):
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 2000
------- -------
Revenues............................. $14,653 $18,381
Operating loss....................... $ (96) $(6,304)
The Company is continuing its extensive review of its operations and
activities which are not strategic. This review includes further core
commercial/industrial HVAC operations as well as the Company's expanded
e-commerce activities, and will likely result in decisions to cease operating at
or sell additional operations. Management expects this effort to be
substantially complete by year-end.
6
<PAGE>
COMFORT SYSTEMS USA, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 -- (CONTINUED)
4. REDUCTIONS IN NON-OPERATING ASSETS AND LIABILITIES, NET:
During the quarter ended June 30, 2000, the Company recorded a non-cash
charge of approximately $5.2 million primarily related to the impairment of
certain non-operating assets. These assets primarily related to notes receivable
from former business owners. In addition, the Company recorded an impairment of
approximately $0.8 million to its minority investment in two entities associated
with the distribution and implementation of high-end engineering and design
software. The Company also recorded a gain of approximately $0.6 million on the
reduction of its subordinated note payable to a former owner in connection with
the settlement of claims with this former owner.
5. BUSINESS COMBINATIONS:
During 1999, the Company acquired 25 businesses which were accounted for as
purchases. These companies provide HVAC and related services. The aggregate
consideration paid in these transactions was $38.0 million in cash, 1,151,907
shares of the Company's common stock ("Common Stock") with a fair value at the
dates of acquisition totaling $8.5 million, $2.2 million in the form of
convertible subordinated notes and $21.3 million in the form of subordinated
notes. In addition, the Company received 68,177 shares from a former owner
related to a prior year acquisition. Subsequent to the issuance of certain of
the convertible subordinated notes, the Company entered into agreements with
certain of the convertible noteholders to modify the terms of $2.1 million of
these notes to eliminate the provisions relating to convertibility into Common
Stock. The remaining convertible subordinated notes are convertible into 5,133
shares of Common Stock.
There were no acquisitions during the nine months ended September 30, 2000.
The accompanying balance sheets include allocations of the respective
purchase prices to the assets acquired and liabilities assumed based on
preliminary estimates of fair value and are subject to final adjustment.
The unaudited pro forma data presented below consists of the income
statement data presented in these consolidated financial statements plus income
statement data for the purchased companies as if the acquisitions were effective
on January 1, 1999 through the respective dates of acquisitions (in thousands,
except per share data):
NINE MONTHS ENDED
SEPTEMBER 30, 1999
------------------
Revenues............................. $1,062,327
Net income........................... $ 34,095
Net income per share -- diluted...... $ 0.85
Shares used in computing net income
per share -- diluted............... 40,922
Pro forma adjustments included in the preceding table regarding the
purchased companies primarily relate to (a) certain reductions in salaries and
benefits to the former owners of the purchased companies which the former owners
agreed would take effect as of the acquisition date, (b) amortization of
goodwill related to the purchased companies, (c) interest expense on borrowings
of $38.0 million used in the acquisition of the purchased companies, and
(d) interest expense related to subordinated notes issued in the acquisition of
certain of the purchased companies. In addition, an incremental tax provision
has been recorded as if all applicable purchased companies had been subject to
federal and state income taxes.
7
<PAGE>
COMFORT SYSTEMS USA, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 -- (CONTINUED)
The pro forma results presented above are not necessarily indicative of
actual results which might have occurred had the operations and management teams
of the Company and the purchased companies been combined at the beginning of the
period presented.
6. LONG-TERM DEBT OBLIGATIONS:
Long-term debt obligations consist of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
Revolving credit facility............ $225,215 $247,700
Notes to affiliates and former
owners............................... 77,009 50,686
Other................................ 3,609 590
-------- --------
Total debt........................... 305,833 298,976
Less: current maturities............. 27,889 15,720
-------- --------
$277,944 $283,256
======== ========
REVOLVING CREDIT FACILITY
The Company has a revolving credit facility (the "Credit Facility" or the
"Facility") provided by Bank One, Texas, N.A. ("Bank One") and other banks (the
"Bank Group"). The Credit Facility provides the Company with a revolving line of
credit of up to the lesser of $280 million or 80% of net accounts receivable.
Borrowings under the Facility are secured by accounts receivable, inventory,
fixed assets other than real estate, and the shares of capital stock of the
Company's subsidiaries. The Credit Facility expires on November 1, 2001, at
which time all amounts outstanding are due. The Company has a choice of two
interest rate options under the Facility. Under one option, the interest rate is
determined based on the higher of the Federal Funds Rate plus 0.5% or Bank One's
prime rate. An additional margin of 1% to 2% is then added to the higher of
these two rates. Under the other interest rate option, borrowings bear interest
based on designated short-term Eurodollar rates (which generally approximate
LIBOR) plus 2.25% to 3.5%. The additional margin for both options depends on the
ratio of the Company's debt to earnings before interest, taxes, depreciation and
amortization, ("EBITDA") as defined. Commitment fees of 0.375% to 0.5% per
annum, also depending on the ratio of debt to EBITDA, are payable on the unused
portion of the Facility.
The Credit Facility prohibits payment of dividends by the Company, limits
certain non-Bank Group debt, and restricts outlays of cash by the Company
relating to certain investments, capital expenditures, vehicle leases,
acquisitions and principal repayments of subordinate debt. The Credit Facility
also provides for the maintenance of certain levels of shareholder equity and
EBITDA, and for the maintenance of certain ratios of the Company's EBITDA to
interest expense and debt to EBITDA.
Under the terms of the Credit Facility that were in effect as of June 30,
2000, the Company was in violation of two of the Facility's financial balance
and ratio requirements, in both cases by small amounts. The Bank Group waived
these violations. In connection with these waivers, the Bank Group increased
certain interest charges, introduced a minimum EBITDA requirement and reduced
the requirements of the ratios of EBITDA to interest expense and debt to EBITDA.
As of September 30, 2000, the Company was in violation of several of the
Facility's financial balance and ratio requirements, primarily as a result of
the restructuring charges the Company recorded in the third quarter. The Bank
Group has waived these
8
<PAGE>
COMFORT SYSTEMS USA, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 -- (CONTINUED)
violations. In connection with these waivers, the Bank Group increased certain
interest charges and agreed to exclude aggregate restructuring charges recorded
in 2000 of up to $27.5 million before taxes from consideration in determining
the Company's compliance with the financial balance and ratio requirements of
the Facility. In addition, the Bank Group agreed to reduce the requirements of
financial balances and ratios for the Company's 2000 results.
As of September 30, 2000, the Company had $247.7 million in borrowings
outstanding under the Credit Facility and had incurred interest expense at an
average rate of approximately 8.6% per annum for the first nine months of 2000.
The Credit Facility's interest rate terms as summarized above are effective as
of November 13, 2000 and will result in an increase of approximately 0.30% in
the additional margin and related costs the Company pays in excess of the
indicated market interest rate in either of the interest rate options. As of
September 30, 2000, the Company also had $2.2 million in letters of credit
outstanding under the Facility, and unused borrowing capacity under the Facility
of $50.1 million. As of November 13, 2000, $230.0 million in borrowings and $2.2
million in letters of credit were outstanding under the Facility, and $47.8
million in unused capacity was available.
INTENDED REFINANCINGS
Earlier this year, the Company intended to refinance a portion of its
variable-rate debt under the Credit Facility with fixed-rate private placement
debt. In anticipation of this transaction, the Company entered into interest
rate lock agreements to hedge against increases in market interest rates. In the
second quarter of 2000, the Company elected not to complete this refinancing and
terminated the interest lock agreements at a nominal gain. In connection with
this refinancing, the Company also had intended to significantly decrease the
size of the Credit Facility. As disclosed by the Company in May 2000, if this
had occurred, the Company would have recognized extraordinary charges of
approximately $0.01 to $0.02 per share for the write-off of a portion of the
deferred issuance costs of the Credit Facility. Because the Company no longer
intends to significantly reduce the Credit Facility as contemplated in the
second quarter, it no longer expects such charges will be necessary.
The Company is considering steps to extend the maturity of, or otherwise
refinance, its borrowings under the Credit Facility. These amounts currently
mature in November 2001.
NOTES TO AFFILIATES AND FORMER OWNERS
Subordinated notes were issued to former owners of certain purchased
companies as part of the consideration used to acquire their companies. These
notes had an outstanding balance of $50.7 million as of September 30, 2000. Of
these notes, $50.3 million bear interest, payable quarterly, at a weighted
average interest rate of 5.79% and $0.4 million are non-interest bearing. In
addition, $1.2 million of these notes are convertible by the holders into shares
of the Company's Common Stock at a weighted average price of $25.27 per share.
The scheduled maturities of the subordinated notes are $3.4 million in 2000,
$24.4 million in 2001, $22.0 million in 2002, and $0.9 million in 2003.
Under the current terms of the Credit Facility, the Company is restricted
from making scheduled repayments of subordinate debt beginning in October 2000.
As a result, the Company did not make principal payments of approximately $3.4
million related to its subordinated debt that were due in October and November
of 2000. The holders of these notes have the right to notify the Company and the
Bank Group of this default and generally must wait for one year from the date of
the notification to pursue payment remedies. Through November 13, 2000, the
Company has received notices from five holders of the Company's subordinate debt
holding indebtedness totaling $5.4 million. The Company intends to negotiate
9
<PAGE>
COMFORT SYSTEMS USA, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 -- (CONTINUED)
the disposition of this issue in connection with pursuing an extension of the
maturity of borrowings under the Credit Facility as discussed above.
7. COMMITMENTS AND CONTINGENCIES:
CLAIMS AND LAWSUITS
The Company is party to litigation in the ordinary course of business.
There are currently no pending legal proceedings that, in management's opinion,
would have a material adverse effect on the Company's operating results or
financial condition. The Company maintains various insurance coverages in order
to limit financial risk associated with certain claims.
A wholly-owned insurance company subsidiary reinsures a portion of the risk
associated with surety bonds issued by a third party insurance company. Because
no claims have been made against these financial instruments in the past,
management does not expect these instruments will have a material effect on the
Company's consolidated financial statements.
8. STOCKHOLDERS' EQUITY:
TREASURY STOCK
On October 5, 1999, the Company announced that its Board of Directors had
approved a share repurchase program authorizing the Company to buy up to
4.0 million shares of its Common Stock. During 1999, the Company purchased
approximately 1.8 million shares at a cost of approximately $12.9 million.
During the first nine months of 2000, the Company purchased approximately
0.2 million shares at a cost of approximately $1.2 million. The Company does not
expect further share repurchases under this program for the foreseeable future.
RESTRICTED COMMON STOCK
In March 1997, Notre Capital Ventures II, L.L.C. exchanged 2,742,912 shares
of Common Stock for an equal number of shares of restricted voting common stock
("Restricted Voting Common Stock"). The holders of Restricted Voting Common
Stock are entitled to elect one member of the Company's Board of Directors and
0.55 of one vote for each share on all other matters on which they are entitled
to vote. Holders of Restricted Voting Common Stock are not entitled to vote on
the election of any other directors.
Each share of Restricted Voting Common Stock will automatically convert to
Common Stock on a share-for-share basis (i) in the event of a disposition of
such share of Restricted Voting Common Stock by the holder thereof (other than a
distribution which is a distribution by a holder to its partners or beneficial
owners, or a transfer to a related party of such holders (as defined in
Sections 267, 707, 318 and/or 4946 of the Internal Revenue Code of 1986, as
amended)), (ii) in the event any person acquires beneficial ownership of 15% or
more of the total number of outstanding shares of Common Stock of the Company,
or (iii) in the event any person offers to acquire 15% or more of the total
number of outstanding shares of Common Stock of the Company. After July 1, 1998,
the Board of Directors may elect to convert any remaining shares of Restricted
Voting Common Stock into shares of Common Stock in the event 80% or more of the
originally outstanding shares of Restricted Voting Common Stock have been
previously converted into shares of Common Stock. As of September 30, 2000,
1,346,828 shares of Restricted Voting Common Stock had been converted to shares
of Common Stock.
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COMFORT SYSTEMS USA, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 -- (CONTINUED)
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
convertible subordinated notes. Options had an anti-dilutive effect for the
three months and nine months ended September 30, 2000 because the Company
reported a net loss during these periods, and therefore, are not included in the
diluted EPS calculation. The Company has options outstanding to purchase 4.7
million shares of Common Stock at prices ranging from $3.875 to $21.438 per
share. Diluted EPS is also computed by adjusting both net earnings and shares
outstanding as if the conversion of the convertible subordinated notes occurred
on the first day of the year. The after-tax interest expense related to the
assumed conversion of the convertible subordinated notes during the three months
and nine months ended September 30, 1999 was $0.1 million and $0.8 million,
respectively. The convertible subordinated notes had an anti-dilutive effect
during the three months and nine months ended September 30, 2000, and therefore,
are not included in the diluted EPS calculation.
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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
1999 2000 1999 2000
------ ------ ------ ------
Common shares outstanding, end of
period............................. 39,252 37,331 39,252 37,331
Effect of using weighted average
common shares outstanding ......... (192) (66) (547) 98
------ ------ ------ ------
Shares used in computing earnings per
share -- basic..................... 39,060 37,265 38,705 37,429
Effect of shares issuable under stock
option plans based on the treasury
stock method....................... 202 -- 228 --
Effect of shares issuable related to
convertible notes.................. 269 -- 1,402 --
------ ------ ------ ------
Shares used in computing earnings per
share -- diluted................... 39,531 37,265 40,335 37,429
====== ====== ====== ======
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COMFORT SYSTEMS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the historical
consolidated financial statements of Comfort Systems USA, Inc. ("Comfort
Systems" and collectively with its subsidiaries, the "Company") 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, 1999 (the "Form 10-K"). This discussion contains forward-looking
statements regarding the business and industry of Comfort Systems within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are based on the current plans and expectations of the Company and
involve risks and uncertanties that could cause 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 "Factors Which May Affect Future Results,"
included in the Form 10-K.
The Company is a leading national provider of comprehensive HVAC
installation, maintenance, repair and replacement services. The Company operates
primarily in the commercial and industrial HVAC markets, and performs most of
its services within manufacturing plants, office buildings, retail centers,
apartment complexes, and healthcare, education and government facilities. In
addition to standard HVAC services, the Company provides specialized
applications such as process cooling, control systems, electronic monitoring and
process piping. Certain locations also perform related services such as
electrical and plumbing.
RESULTS OF OPERATIONS -- (IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- ------------------------------------------
1999 2000 1999 2000
----------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $374,815 100.0% $423,922 100.0% $1,008,234 100.0% $1,191,458 100.0%
Cost of services..................... 298,480 79.6% 352,838 83.2% 792,482 78.6% 978,869 82.2%
-------- -------- ---------- ----------
Gross profit......................... 76,335 20.4% 71,084 16.8% 215,752 21.4% 212,589 17.8%
Selling, general and administrative
expenses........................... 45,793 12.2% 58,021 13.7% 133,984 13.3% 169,182 14.2%
Goodwill amortization................ 2,983 0.8% 3,151 0.7% 8,650 0.9% 9,483 0.8%
Restructuring charges................ -- -- 9,959 2.3% -- -- 10,313 0.9%
-------- -------- ---------- ----------
Operating income (loss).............. 27,559 7.4% (47) -- 73,118 7.3% 23,611 2.0%
Other income (expense)............... (4,967) (1.3)% (6,429) (1.5)% (13,288) (1.3)% (18,739) (1.6)%
Reductions in non-operating assets
and liabilities, net............... -- -- -- -- -- -- (5,190) (0.4)%
-------- -------- ---------- ----------
Income (loss) before income taxes.... 22,592 6.0% (6,476) (1.5)% 59,830 5.9% (318) --
Income tax expense (benefit)......... 9,724 (2,787) 25,753 268
-------- -------- ---------- ----------
Net income (loss).................... $ 12,868 3.4% $ (3,689) (0.9)% $ 34,077 3.4% $ (586) --
======== ======== ========== ==========
</TABLE>
REVENUES -- Revenues increased $49.1 million, or 13.1%, to $423.9 million
for the third quarter of 2000 and increased $183.2 million, or 18.2%, to $1.2
billion for the first nine months of 2000, compared to the same periods in 1999.
For the three months ended September 30, 2000, the 13.1% revenue growth rate was
comprised of approximately 11.0% internal growth and 2.1% for operations that
were acquired in the second half of 1999 that are in the Company's results for
the full third quarter of 2000. For the first nine months of 2000, the 18.2%
revenue growth rate was comprised of approximately 12.8% internal growth and
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5.4% for second-half 1999 acquisitions that are in the Company's results for the
first nine months of 2000. Revenue growth of approximately 3% versus both the
comparable three and nine-month periods in 1999 resulted from the Company's
ability to increase volume by subcontracting portions of projects to other
contractors.
Of the 11.0% and 12.8% internal revenue growth amounts for the quarter and
year-to-date periods in 2000 as compared to last year, 7.2% and 7.1%,
respectively, were attributable to the Company's largest single operation. This
growth represents substantial increases in volume at this operation which did
not result in commensurate increases in profitability due to scarce technical
and skilled labor and customer scheduling and site restrictions related to
strong business conditions. The Company has experienced these kinds of
challenges at numerous other operations as well, and believes they reflect high
levels of activity and capacity constraints for the construction industry in
general. As a result, management is placing less emphasis on revenue growth and
more on efficiency and profit margin improvements in current activities and
planning for 2001 across all operations. It is likely, therefore, that the
Company will experience slower revenue growth in future periods. There can be no
assurance, however, that this strategy will lead to improved profit margins in
the near term.
GROSS PROFIT -- Gross profit decreased $5.3 million, or 6.9%, to $71.1
million for the third quarter of 2000 and decreased $3.2 million, or 1.5%, to
$212.6 million for the first nine months of 2000, compared to the same periods
in 1999. As a percentage of revenues, gross profit decreased from 20.4% for the
three months ended September 30, 1999 to 16.8% for the three months ended
September 30, 2000 and decreased from 21.4% for the first nine months of 1999 to
17.8% for the first nine months of 2000.
During the third quarter of 2000, the Company's largest operation and one
other of the Company's larger operations turned in disappointing results due to
execution shortfalls on certain sizable projects with nationally recognized
companies. In addition, the Company has also experienced weak performance at
several locations relating to ongoing turnaround efforts and execution
difficulties. The remaining decrease in gross profit as a percentage of revenues
resulted from increased labor costs, pricing pressures in certain markets and
scheduling and efficiency challenges associated with labor availability and
productivity at the high levels of activity at most of our operations. The
Company has also realized a change in its mix of revenue volume to include more
subcontracting activities which generally carry lower margins.
During the nine months ended September 30, 2000, the Company reported
negative gross profit of approximately $3.6 million related to one of its
operations in the Midwest. The Company has decided to cease operations at this
location and costs associated with this step are included in restructuring
charges as discussed below. The remaining decrease in gross profit as a
percentage or revenues for the nine months ended September 30, 2000 is
consistent with the factors discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") -- SG&A increased
$12.2 million, or 26.7%, to $58.0 million for the third quarter of 2000 and
increased $35.2 million, or 26.3%, to $169.2 million for the first nine months
of 2000, compared to the same periods in 1999. As a percentage of revenues,
selling, general and administrative expenses increased from 12.2% for the three
months ended September 30, 1999 to 13.7% for the three months ended
September 30, 2000 and from 13.3% for the first nine months of 1999 to 14.2% for
the first nine months of 2000. This increase in SG&A as a percentage of revenues
resulted primarily from the inclusion in 2000 of results of companies acquired
in 1999 that have higher SG&A as a percentage of sales than the rest of the
Company's operations. These acquisitions include Outbound Services where the
Company has incurred significantly higher SG&A to support expansion of its
e-commerce activities. The Company also increased corporate and regional office
spending to support the requirements of a larger organization, and to increase
its efforts to land more national account and energy project business. In
addition, as discussed above, the Company has experienced weak performance at
several locations relating to turnaround efforts and execution difficulties, and
these companies have realized a disproportionate amount of SG&A as compared to
their revenue volumes.
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<PAGE>
RESTRUCTURING CHARGES -- During the three and nine months ended
September 30, 2000, the Company recorded restructuring charges of approximately
$10.0 million and $10.3 million, respectively, associated primarily with
restructuring efforts at certain underperforming operations. As announced by the
Company in the second quarter of 2000, management has been performing an
extensive review of its operations. As part of this ongoing review, management
decided to cease operating at two operating locations, sell two smaller
satellite operations, and merge one small company into a larger operation. These
actions are expected to be substantially complete by the end of 2000. The
aggregate results of these operations for the first nine months of 2000 were
revenues of $18.4 million and operating losses of $6.3 million. The
restructuring charges associated with these actions are primarily non-cash and
include goodwill impairments of approximately $7.1 million and the writedown of
other long-lived assets of approximately $0.9 million. The remaining
restructuring items primarily include severance and lease termination costs.
Severance costs relate to the departure of the Company's former chief executive
officer and to the termination of approximately 20 employees including certain
corporate personnel and the management of certain underperforming locations.
The Company is continuing its extensive review of its operations and
activities which are not strategic. This review includes further core
commercial/industrial HVAC operations as well as the Company's expanded
e-commerce activities, and will likely result in decisions to cease operating at
or sell additional operations. Management expects this effort to be
substantially complete by year-end.
OTHER INCOME (EXPENSE) -- Other expense, net, increased $1.5 million, or
29.4%, to $6.4 million for the third quarter of 2000 and increased $5.5 million,
or 41.0%, to $18.7 million for the first nine months of 2000, compared to the
same periods in 1999. This increase was primarily due to the increase in
interest expense related to the cash and subordinate notes portions of
consideration paid for companies acquired in 1999.
REDUCTIONS IN NON-OPERATING ASSETS AND LIABILITIES, NET -- During the
quarter ended June 30, 2000, the Company recorded a non-cash charge of
approximately $5.2 million primarily related to the impairment of certain
non-operating assets. These assets primarily related to notes receivable from
former business owners. In addition, the Company recorded an impairment of
approximately $0.8 million to its minority investment in two entities associated
with the distribution and implementation of high-end engineering and design
software. The Company also recorded a gain of approximately $0.6 million on the
reduction of its subordinated note payable to a former owner in connection with
the settlement of claims with this former owner.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW -- For the nine months ended September 30, 2000, net cash
provided by operating activities was $23.3 million and represents an increase of
$21.0 million over the comparable period of the prior year. This improvement
primarily results from an increase in accounts payable and accrued liabilities,
and an increase in billings in excess of costs and estimated earnings.
Cash used in investing activities was $13.2 million for the nine months
ended September 30, 2000, primarily in connection with purchases of property and
equipment for $14.7 million. Cash used in investing activities for the nine
months ended September 30, 1999 was $38.3 million, primarily in connection with
the acquisition of purchased companies and purchases of property and equipment.
Cash used in financing activities for the nine months ended September 30,
2000 was $6.1 million and was primarily attributable to net payments of
long-term debt of $6.4 million. Net cash provided by financing activities for
the nine months ended September 30, 1999 was $36.6 million and was primarily
attributable to net borrowings of long-term debt used to fund acquisitions.
REVOLVING CREDIT FACILITY -- The Company has a revolving credit facility
(the "Credit Facility" or the "Facility") provided by Bank One, Texas, N.A.
("Bank One") and other banks (the "Bank Group"). The
14
<PAGE>
Credit Facility provides the Company with a revolving line of credit of up to
the lesser of $280 million or 80% of net accounts receivable. Borrowings under
the Facility are secured by accounts receivable, inventory, fixed assets other
than real estate, and the shares of capital stock of the Company's subsidiaries.
The Credit Facility expires on November 1, 2001, at which time all amounts
outstanding are due. The Company has a choice of two interest rate options under
the Facility. Under one option, the interest rate is determined based on the
higher of the Federal Funds Rate plus 0.5% or Bank One's prime rate. An
additional margin of 1% to 2% is then added to the higher of these two rates.
Under the other interest rate option, borrowings bear interest based on
designated short-term Eurodollar rates (which generally approximate LIBOR) plus
2.25% to 3.5%. The additional margin for both options depends on the ratio of
the Company's debt to earnings before interest, taxes, depreciation and
amortization, ("EBITDA") as defined. Commitment fees of 0.375% to 0.5% per
annum, also depending on the ratio of debt to EBITDA, are payable on the unused
portion of the Facility.
The Credit Facility prohibits payment of dividends by the Company, limits
certain non-Bank Group debt, and restricts outlays of cash by the Company
relating to certain investments, capital expenditures, vehicle leases,
acquisitions and principal repayments of subordinate debt. The Credit Facility
also provides for the maintenance of certain levels of shareholder equity and
EBITDA, and for the maintenance of certain ratios of the Company's EBITDA to
interest expense and debt to EBITDA.
Under the terms of the Credit Facility that were in effect as of June 30,
2000, the Company was in violation of two of the Facility's financial balance
and ratio requirements, in both cases by small amounts. The Bank Group waived
these violations. In connection with these waivers, the Bank Group increased
certain interest charges, introduced a minimum EBITDA requirement and reduced
the requirements of the ratios of EBITDA to interest expense and debt to EBITDA.
As of September 30, 2000, the Company was in violation of several of the
Facility's financial balance and ratio requirements, primarily as a result of
the restructuring charges the Company recorded in the third quarter. The Bank
Group has waived these violations. In connection with these waivers, the Bank
Group increased certain interest charges and agreed to exclude aggregate
restructuring charges recorded in 2000 of up to $27.5 million before taxes from
consideration in determining the Company's compliance with the financial balance
and ratio requirements of the Facility. In addition, the Bank Group agreed to
reduce the requirements of financial balances and ratios for the Company's 2000
results.
As of September 30, 2000, the Company had $247.7 million in borrowings
outstanding under the Credit Facility and had incurred interest expense at an
average rate of approximately 8.6% per annum for the first nine months of 2000.
The Credit Facility's interest rate terms as summarized above are effective as
of November 13, 2000 and will result in an increase of approximately 0.30% in
the additional margin and related costs the Company pays in excess of the
indicated market interest rate in either of the interest rate options. As of
September 30, 2000, the Company also had $2.2 million in letters of credit
outstanding under the Facility, and unused borrowing capacity under the Facility
of $50.1 million. As of November 13, 2000, $230.0 million in borrowings and $2.2
million in letters of credit were outstanding under the Facility, and $47.8
million in unused capacity was available.
INTENDED REFINANCING -- Earlier this year, the Company intended to
refinance a portion of its variable-rate debt under the Credit Facility with
fixed-rate private placement debt. In anticipation of this transaction, the
Company entered into interest rate lock agreements to hedge against increases in
market interest rates. In the second quarter of 2000, the Company elected not to
complete this refinancing and terminated the interest lock agreements at a
nominal gain. In connection with this refinancing, the Company also had intended
to significantly decrease the size of the Credit Facility. As disclosed by the
Company in May 2000, if this had occurred, the Company would have recognized
extraordinary charges of approximately $0.01 to $0.02 per share for the
write-off of a portion of the deferred issuance costs of the Credit Facility.
Because the Company no longer intends to significantly reduce the Credit
Facility as contemplated in the second quarter, it no longer expects such
charges will be necessary.
15
<PAGE>
The Company is considering steps to extend the maturity of, or otherwise
refinance, its borrowings under the Credit Facility. These amounts currently
mature in November 2001.
NOTES TO AFFILIATES AND FORMER OWNERS -- Subordinated notes were issued to
former owners of certain purchased companies as part of the consideration used
to acquire their companies. These notes had an outstanding balance of $50.7
million as of September 30, 2000. Of these notes, $50.3 million bear interest,
payable quarterly, at a weighted average interest rate of 5.79% and $0.4 million
are non-interest bearing. In addition, $1.2 million of these notes are
convertible by the holders into shares of the Company's Common Stock at a
weighted average price of $25.27 per share. The scheduled maturities of the
subordinated notes are $3.4 million in 2000, $24.4 million in 2001, $22.0
million in 2002, and $0.9 million in 2003.
Under the current terms of the Credit Facility, the Company is restricted
from making scheduled repayments of subordinate debt beginning in October 2000.
As a result, the Company did not make principal payments of approximately $3.4
million related to its subordinated debt that were due in October and November
of 2000. The holders of these notes have the right to notify the Company and the
Bank Group of this default and generally must wait for one year from the date of
the notification to pursue payment remedies. Through November 13, 2000, the
Company has received notices from five holders of the Company's subordinate debt
holding indebtedness totaling $5.4 million. The Company intends to negotiate the
disposition of this issue in connection with pursuing an extension of the
maturity of borrowings under the Credit Facility as discussed above.
STOCK REPURCHASES -- On October 5, 1999, the Company announced that its
Board of Directors had approved a share repurchase program authorizing the
Company to buy up to 4.0 million shares of its Common Stock. During 1999, the
Company purchased approximately 1.8 million shares at a cost of approximately
$12.9 million. During the first nine months of 2000, the Company purchased
approximately 0.2 million shares at a cost of approximately $1.2 million. The
Company does not expect further share repurchases under this program for the
foreseeable future.
OUTLOOK -- The Company anticipates that available borrowings under its
Credit Facility and cash flow from operations will be sufficient to meet the
Company's normal working capital and capital expenditure needs. The Company will
need to extend the maturity of its borrowings under the Credit Facility and
certain of its subordinate debt to affiliates and former owners. As discussed
above, the Company is considering alternatives to accomplish these steps. There
can be no assurance that extensions can be obtained, or that if the Company
needs additional financing, that such financing can be secured when needed or on
terms the Company deems acceptable.
SEASONALITY AND CYCLICALITY
The HVAC industry is subject to seasonal variations. Specifically, the
demand for new installation and replacement is generally lower during the winter
months 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, the Company expects its revenues and operating results
generally will be lower in the first and fourth calendar quarters.
Historically, the construction industry has been highly cyclical. As a
result, the Company's volume of business may be adversely affected by declines
in new installation projects in various geographic regions of the United States.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk primarily related to potential
adverse changes in interest rates. Management is actively involved in monitoring
exposure to market risk and continues to develop and utilize appropriate risk
management techniques.
16
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COMFORT SYSTEMS USA, INC.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to litigation in the ordinary course of business.
There are currently no pending legal proceedings that, in management's opinion,
will have a material adverse effect on the Company's consolidated operating
results or financial condition.
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES
During the three month period ended September 30, 2000, the Company did not
issue any unregistered shares of its common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 -- Fourth Amendment to Credit Agreement dated as of November 13,
2000 amending the Third Amended and Restated Credit Agreement dated
December 14, 1998 among the Company and its subsidiaries, Bank One,
Texas, N.A., as agent and the banks listed therein. (Filed herewith).
27.1 -- Financial Data Schedule. (Filed herewith).
(b) Reports on Form 8-K
None.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
17
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SIGNATURE
PURSUANT TO THE REQUIREMENTS 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.
By: /s/ J. GORDON BEITTENMILLER
J. GORDON BEITTENMILLER
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND DIRECTOR
Dated: November 14, 2000
18
