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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 MARCH 31, 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 May
10, 2000, was 37,515,743.
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<PAGE>
COMFORT SYSTEMS USA, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 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...................... 10
Item 3 -- Quantitative and Qualitative Disclosures about Market
Risk..................................................... 13
Part II -- Other Information
Item 1 -- Legal Proceedings........................................ 14
Item 2 -- Recent Sales of Unregistered Securities.................. 14
Item 6 -- Exhibits and Reports on Form 8-K......................... 14
Item 9 -- Changes and Disagreements with Accountants on Accounting
and Financial Disclosure................................. 14
Signature.......................................................... 15
<PAGE>
COMFORT SYSTEMS USA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 3,664 $ 8,344
Accounts receivable............. 314,599 307,283
Less -- Allowance.......... 5,568 5,199
------------ -----------
Accounts receivable,
net................ 309,031 302,084
Other receivables............... 4,575 4,971
Inventories..................... 20,907 20,090
Prepaid expenses and other...... 19,891 21,100
Costs and estimated earnings in
excess of billings............. 54,575 65,428
------------ -----------
Total current
assets............. 412,643 422,017
PROPERTY AND EQUIPMENT, net.......... 41,964 43,061
GOODWILL, less accumulated
amortization of $20,665 and
$23,842............................ 474,529 471,275
OTHER NONCURRENT ASSETS.............. 14,136 13,808
------------ -----------
Total assets.......... $943,272 $ 950,161
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ 3,353 $ 1,786
Current maturities of notes to
affiliates and former owners... 24,536 22,868
Accounts payable................ 96,032 95,763
Accrued compensation and
benefits....................... 36,187 29,949
Billings in excess of costs and
estimated earnings............. 52,170 51,522
Other current liabilities....... 27,799 25,762
------------ -----------
Total current
liabilities........ 240,077 227,650
DEFERRED INCOME TAXES................ 4,547 6,844
LONG-TERM DEBT, NET OF CURRENT
MATURITIES......................... 225,471 250,880
NOTES TO AFFILIATES AND FORMER
OWNERS, NET OF CURRENT
MATURITIES......................... 52,473 40,394
OTHER LONG-TERM LIABILITIES.......... 1,739 1,593
------------ -----------
Total liabilities..... 524,307 527,361
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 1,700,270 shares,
respectively................... (11,978) (12,009)
Additional paid-in capital...... 342,655 342,513
Retained earnings............... 87,895 91,903
------------ -----------
Total stockholders'
equity............. 418,965 422,800
------------ -----------
Total liabilities and
stockholders'
equity............. $943,272 $ 950,161
============ ===========
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)
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 2000
---------- ----------
REVENUES............................. $ 291,926 $ 362,566
COST OF SERVICES..................... 228,748 291,699
---------- ----------
Gross profit............... 63,178 70,867
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 44,858 54,828
GOODWILL AND OTHER AMORTIZATION...... 2,784 3,183
---------- ----------
Operating income........... 15,536 12,856
OTHER INCOME (EXPENSE):
Interest income................. 166 169
Interest expense................ (4,187) (6,095)
Other........................... 42 102
---------- ----------
Other income (expense)..... (3,979) (5,824)
---------- ----------
INCOME BEFORE INCOME TAXES........... 11,557 7,032
PROVISION FOR INCOME TAXES........... 4,993 3,024
---------- ----------
NET INCOME........................... $ 6,564 $ 4,008
========== ==========
NET INCOME PER SHARE:
Basic........................... $ 0.17 $ 0.11
========== ==========
Diluted......................... $ 0.17 $ 0.11
========== ==========
SHARES USED IN COMPUTING NET INCOME
PER SHARE:
Basic........................... 38,311 37,560
========== ==========
Diluted......................... 39,769 37,560
========== ==========
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).................... -- -- 127,867 904 (142) -- 762
Common Stock repurchases
(unaudited).................... -- -- (132,613) (935) -- -- (935)
Net income (unaudited)............. -- -- -- -- -- 4,008 4,008
----------- ------ ----------- -------- ---------- --------- --------------
BALANCE AT MARCH 31, 2000
(unaudited)........................ 39,258,913 $393 (1,700,270) $(12,009) $342,513 $91,903 $422,800
=========== ====== =========== ======== ========== ========= ==============
</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)
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 2000
---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................... $ 6,564 $ 4,008
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities --
Depreciation and amortization
expense........................ 5,320 6,107
Bad debt expense................ 158 155
Deferred tax expense
(benefit)...................... (584) 1,834
Gain on sale of property and
equipment...................... (40) (96)
Changes in operating assets and
liabilities, net of effects of
acquisitions of purchased
companies --
(Increase) decrease in --
Receivables, net...... (95) 7,327
Inventories........... (1,468) 685
Prepaid expenses and
other current
assets............ 944 1,734
Costs and estimated
earnings in excess
of billings....... (5,335) (10,662)
Other noncurrent
assets............ (652) 161
Increase (decrease) in --
Accounts payable and
accrued
liabilities....... 532 (11,165)
Billings in excess of
costs and
estimated
earnings.......... (3,810) (800)
Other, net............ (73) (184)
---------- ------------
Net cash provided by (used
in) operating
activities.............. 1,461 (896)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment...................... (3,875) (3,656)
Proceeds from sales of property
and equipment.................. 319 176
Cash paid for purchased
companies, net of cash
acquired....................... (9,775) --
---------- ------------
Net cash used in investing
activities.............. (13,331) (3,480)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt...... (44,474) (65,325)
Borrowings of long-term debt.... 52,282 74,554
Proceeds from issuance of common
stock.......................... 850 762
Repurchases of common stock..... -- (935)
---------- ------------
Net cash provided by
financing activities.... 8,658 9,056
---------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (3,212) 4,680
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 6,985 3,664
---------- ------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 3,773 $ 8,344
========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
COMFORT SYSTEMS USA, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. BUSINESS AND ORGANIZATION:
Comfort Systems USA, Inc.(Registered Trademark), 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 three months ended March 31, 1999 and 2000
was approximately $3.9 million and $5.1 million, respectively. Cash paid for
income taxes for the three months ended March 31, 1999 and 2000 was
approximately $2.9 million and $4.5 million, respectively.
3. BUSINESS COMBINATIONS:
During fiscal 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
market 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
5
<PAGE>
COMFORT SYSTEMS USA, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 -- (CONTINUED)
modify the terms of $2.1 million of these notes in order to eliminate the
provisions relating to convertibility into Common Stock. The remaining
convertible subordinated notes are convertible in 2000 into 5,133 shares of
Common Stock.
There were no acquisitions for the three months ended March 31, 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):
THREE MONTHS ENDED
MARCH 31, 1999
------------------
Revenues............................. $320,666
Net income........................... $ 7,134
Net income per share -- diluted...... $ 0.18
Shares used in computing net income
per share -- diluted.............. 40,712
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 related to the purchase price of the purchased companies
acquired during 1999 and (d) interest expense related to subordinated notes
issued in connection with the acquisition of certain 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.
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.
4. LONG-TERM DEBT OBLIGATIONS:
Long-term debt obligations consist of the following (in thousands):
DECEMBER 31, MARCH 31,
1999 2000
------------ ------------
(UNAUDITED)
Revolving credit facility............ $225,215 $250,800
Notes to affiliates and former
owners............................. 77,009 63,262
Other................................ 3,609 1,866
------------ ------------
Total debt........................... 305,833 315,928
Less: current maturities............. 27,889 24,654
------------ ------------
$277,944 $291,274
============ ============
REVOLVING CREDIT FACILITY
The Company has a revolving credit facility provided by Bank One, Texas,
N.A. and other banks (the "Credit Facility"). The Credit Facility provides the
Company with a revolving line of credit of up to $300
6
<PAGE>
COMFORT SYSTEMS USA, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 -- (CONTINUED)
million secured by accounts receivable, inventory and the shares of capital
stock of the Company's subsidiaries. The Company currently has a choice of two
interest rate options when borrowing under the Credit Facility. Under one
option, the interest rate is determined based on the higher of the Federal Funds
Rate plus 0.5% or the bank's prime rate. An additional margin of zero to 1.25%
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 1.0% to 2.5%. The additional margin for
both options depends on the ratio of the Company's debt to EBITDA. Commitment
fees of 0.25% 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
the payment of dividends by the Company without the lenders' approval and
requires the Company to comply with certain financial covenants. The amended
Credit Facility expires on November 1, 2001, at which time all amounts
outstanding under the Credit Facility are due.
As of March 31, 2000, the Company had borrowed $250.8 million under the
Credit Facility at an average interest rate of approximately 8.1% per annum for
the first three months of 2000. The Company's unused committed borrowing
capacity under the Credit Facility was $46.8 million at March 31, 2000. As of
May 10, 2000, $269.0 million was outstanding under this facility.
NOTES TO AFFILIATES AND FORMER OWNERS
Notes in the amount of $63.3 million referred to above were issued to
former owners of certain purchased companies as partial consideration of the
acquisition purchase price. Of these notes, $62.9 million bear interest, payable
quarterly, at a weighted average interest rate of 5.81% and $1.6 million of
these notes are convertible by the holders into shares of the Company's Common
Stock at a weighted average price of $25.88 per share. The remaining notes in
the amount of $0.4 million are non-interest bearing and require principal
payments in equal annual installments in 2001, 2002 and 2003. The terms of the
convertible subordinated notes require $0.4 million of principal payments in
2000, $0.6 million of principal payments in 2001 and $0.6 million of principal
payments in 2002. The terms of the nonconvertible interest bearing subordinated
notes require $10.8 million of principal payments in 2000, $28.4 million of
principal payments in 2001, $21.3 million of principal payments in 2002 and $0.8
million of principal payments in 2003.
INTENDED REFINANCING
The Company intends to refinance a portion of its variable-rate debt
under the Credit Facility with fixed-rate private placement debt with maturities
ranging from five to ten years. As a result, the Company entered into interest
rate-lock agreements during April 2000 to hedge against increases in market
interest rates on the anticipated refinancing of this debt. The notional amount
of these derivatives is $90 million. Because market interest rates have
increased since the Company entered in these rate-lock agreements, the
settlement value of them is currently positive should the Company choose to
terminate these agreements.
Because a significant amount of current borrowings under the Credit
Facility is intended to be refinanced into longer-term, fixed-rate private
placement debt, the Company also intends to reduce the size, and the related
commitment costs, of the Credit Facility, as well as extend its maturity to
November 2003. The reduction in the Credit Facility is expected to be less than
the amount refinanced into private placement debt. As a result, the Company
expects to increase its aggregate borrowing capacity. Because these steps
include a reduction in the current Credit Facility, a portion of the deferred
issuance costs of the Credit Facility proportionate to the amount of the
reduction in the Credit Facility is expected to be recognized as a noncash,
extraordinary charge to earnings in the second quarter. This extraordinary
charge is expected to be approximately $.01 to $.02 per share.
5. 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. The Company has provided
accruals for probable losses and legal fees associated with certain of these
actions in the accompanying consolidated financial statements.
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.
7
<PAGE>
COMFORT SYSTEMS USA, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 -- (CONTINUED)
6. 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 quarter of 2000, the Company purchased approximately 0.1
million shares at a cost of approximately $0.9 million. Subsequent to March 31,
2000, the Company has purchased approximately 43,000 additional shares at a cost
of approximately $0.3 million through May 10, 2000.
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 March 31, 2000,
1,211,020 shares of Restricted Voting Common Stock had been converted to shares
of Common Stock.
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 to purchase 4.3 million shares of
Common Stock at prices ranging from $7.625 to $21.438 per share were outstanding
for the three months ended March 31, 2000, but were not included in the
computation of diluted earnings per share because the options' exercise prices
were greater than the respective average market price of the Common Stock.
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 for the three months
ended March 31, 1999 was $0.2 million. The convertible subordinated notes had an
anti-dilutive effect for the three months ended March 31, 2000.
8
<PAGE>
COMFORT SYSTEMS USA, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 -- (CONTINUED)
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
MARCH 31,
--------------------
1999 2000
--------- ---------
Common shares outstanding, end of
period............................. 38,578 37,559
Effect of using weighted average
common shares outstanding.......... (267) 1
Shares used in computing earnings per --------- ---------
share -- basic..................... 38,311 37,560
Effect of shares issuable under stock
option plans based on the treasury
stock method....................... 166 --
Effect of shares issuable related to
convertible notes.................. 1,292 --
--------- ---------
Shares used in computing earnings per
share -- diluted................... 39,769 37,560
========= =========
9
<PAGE>
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 (Registered Trademark),
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 uncertainties 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.
Historical results are not necessarily indicative of future results of the
Company because, among other things, the businesses acquired were not under
common control or management prior to their acquisition. The results of the
Company have historically been subject to seasonal fluctuations. The timing and
magnitude of acquisitions, assimilation costs and the seasonal nature of the
HVAC industry may materially affect operating results. Accordingly, the
operating results for any period are not necessarily indicative of the results
that may be achieved for any subsequent period. These interim historical
statements of operations should be read in conjunction with the historical
consolidated financial statements and related notes of Comfort Systems, filed
herewith, and the additional information and the respective financial statements
and related notes of Comfort Systems included in the Form 10-K.
10
<PAGE>
RESULTS OF OPERATIONS -- HISTORICAL (IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------------------
1999 2000
--------------------- ---------------------
<S> <C> <C> <C> <C>
Revenues............................. $ 291,926 100.0% $ 362,566 100.0%
Cost of services..................... 228,748 78.4 291,699 80.5
---------- --------- ---------- ---------
Gross profit......................... 63,178 21.6 70,867 19.5
Selling, general and administrative
expenses........................... 44,858 15.4 54,828 15.1
Goodwill and other amortization...... 2,784 1.0 3,183 0.9
---------- --------- ---------- ---------
Operating income..................... 15,536 5.3 12,856 3.5
Other income (expense)............... (3,979) (1.4) (5,824) (1.6)
---------- --------- ---------- ---------
Income before income taxes........... 11,557 4.0 7,032 1.9
Provision for income taxes........... 4,993 -- 3,024 --
---------- --------- ---------- ---------
Net income........................... $ 6,564 2.2% $ 4,008 1.1%
========== ========= ========== =========
</TABLE>
REVENUES -- Revenues increased $70.6 million, or 24.2%, to $362.6 million
for the first quarter of 2000 compared to 1999. Approximately 13.6% of the
increase in revenues related to internal growth and the remaining 10.6% resulted
from acquisition activity during 1999. An increase in subcontracting revenues
between periods accounted for approximately 3% of the total increase in revenues
from the first quarter of 1999. The Company believes that the construction
industry is continuing to experience capacity issues principally relating to
shortages of labor which could impact the Company's internal revenue growth.
GROSS PROFIT -- Gross profit increased $7.7 million, or 12.2%, to $70.9
million for the first quarter of 2000 compared to 1999. As a percentage of
revenues, gross profit decreased from 21.6% for the three months ended March 31,
1999 to 19.5% for the three months ended March 31, 2000. This decrease in gross
profit as a percentage of revenues resulted from increased labor costs, an
increase in lower margin subcontracting activity, execution shortfalls and
operational inefficiencies as a result of the Company's current activity levels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") -- SG&A increased
$10.0 million, or 22.2%, to $54.8 million for the first quarter of 2000 compared
to 1999. As a percentage of revenues, selling, general and administrative
expenses decreased from 15.4% for the three months ended March 31, 1999 to 15.1%
for the three months ended March 31, 2000. This decrease in SG&A as a percentage
of revenues resulted from increased revenue volume without a commensurate
increase in overhead costs.
OTHER INCOME (EXPENSE) -- Other expense, net, increased $1.8 million, or
46.4%, to $5.8 million for the first quarter of 2000 compared to 1999 primarily
due to the increase in interest expense related to the acquisition of purchased
companies in 1999 and repurchases of the Company's common stock
("Common Stock").
LIQUIDITY AND CAPITAL RESOURCES -- HISTORICAL
For the three months ended March 31, 2000, net cash used in operating
activities was $0.9 million primarily as a result of an increase in costs and
estimated earnings in excess of billings and a decrease in accounts payable and
accrued liabilities. Cash provided by operating activities for the three months
ended March 31, 1999 was $1.5 million.
Cash used in investing activities was $3.5 million for the three months
ended March 31, 2000, primarily in connection with purchases of property and
equipment for $3.7 million. Cash used in investing activities for the three
months ended March 31, 1999 was $13.3 million, primarily for the acquisition of
purchased companies.
Cash provided by financing activities for the three months ended March 31,
2000 was $9.1 million and was primarily attributable to net borrowings of
long-term debt of $9.2 million, which were primarily used
11
<PAGE>
for working capital and capital expenditures. Net cash provided by financing
activities for the three months ended March 31, 1999 was $8.7 million and was
primarily attributable to net borrowings of long-term debt related to the
acquisition of purchased companies.
The Company has a revolving credit facility provided by Bank One, Texas,
N.A. and other banks (the "Credit Facility"). The Credit Facility provides the
Company with a revolving line of credit of up to $300 million secured by
accounts receivable, inventory and the shares of capital stock of the Company's
subsidiaries. The Company currently has a choice of two interest rate options
when borrowing under the Credit Facility. Under one option, the interest rate is
determined based on the higher of the Federal Funds Rate plus 0.5% or the bank's
prime rate. An additional margin of zero to 1.25% 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 1.0% to 2.5%. The additional margin for both options depends on the
ratio of the Company's debt to EBITDA. Commitment fees of 0.25% 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 the payment of dividends
by the Company without the lenders' approval and requires the Company to comply
with certain financial covenants. The amended Credit Facility expires on
November 1, 2001, at which time all amounts outstanding under the Credit
Facility are due.
As of March 31, 2000, the Company had borrowed $250.8 million under the
Credit Facility at an average interest rate of approximately 8.1% per annum for
the first three months of 2000. The Company's unused committed borrowing
capacity under the Credit Facility was $46.8 million at March 31, 2000. As of
May 10, 2000, $269.0 million was outstanding under this facility.
The Company intends to refinance a portion of its variable-rate debt under
the Credit Facility with fixed-rate private placement debt with maturities
ranging from five to ten years. As a result, the Company entered into interest
rate-lock agreements during April 2000 to hedge against increases in market
interest rates on the anticipated refinancing of this debt. The notional amount
of these derivatives is $90 million. Because market interest rates have
increased since the Company entered in these rate-lock agreements, the
settlement value of them is currently positive should the Company choose to
terminate these agreements.
Because a significant amount of current borrowings under the Credit
Facility is intended to be refinanced into longer-term, fixed-rate private
placement debt, the Company also intends to reduce the size, and the related
commitment costs, of the Credit Facility, as well as extend its maturity to
November 2003. The reduction in the Credit Facility is expected to be less than
the amount refinanced into private placement debt. As a result, the Company
expects to increase its aggregate borrowing capacity. Because these steps
include a reduction in the current Credit Facility, a portion of the deferred
issuance costs of the Credit Facility proportionate to the amount of the
reduction in the Credit Facility is expected to be recognized as a noncash,
extraordinary charge to earnings in the second quarter.This extraordinary charge
is expected to be approximately $.01 to $.02 per share.
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 quarter of 2000, the Company purchased approximately 0.1
million shares at a cost of approximately $0.9 million. Subsequent to March 31,
2000, the Company purchased approximately 43,000 additional shares at a cost of
approximately $0.3 million through May 10, 2000.
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, debt service requirements and
additional acquisition opportunities. Should the Company accelerate or revise
its acquisition program, the Company may need to seek additional financing
through the public or private sale of equity or debt securities or increase its
Credit Facility. There can be no assurance that the Company will secure such
financing if and when it is needed, or that such financing will be available on
terms that the Company deems acceptable.
YEAR 2000
Computers, software, and other equipment utilizing embedded technology that
use only two digits to identify a year in a date field may be unable to
accurately process certain date-based information at or after the year 2000.
This is commonly referred to as the "Year 2000 issue." The Company implemented
a Year 2000 program and used both internal and external resources to assess and
replace or reprogram computers, software and other equipment as needed. Key
areas of the Company's operations that were addressed included external
customers, external suppliers and internal computers, software and potential
back-up and contingency plans. To date, the Company has not experienced any
significant Year 2000 issues.
The Company's initial assessment identified Year 2000 issues within the
Company's operating systems. The total cost of Year 2000 enhancements was
approximately $800,000 and was funded from operating cash flows. The majority of
such costs was for the acquisition of hardware and software and was
12
<PAGE>
capitalized. The remaining costs were expensed as incurred and did not have a
material effect on the results of operations.
The ability of third parties with which the Company transacts business to
adequately address remaining Year 2000 issues is outside of the Company's
control. There can be no assurance that the failure of the Company, or such
third parties, to adequately address their respective remaining Year 2000 issues
will not have a material adverse effect on the Company's financial condition or
results of operations. Accordingly, as part of the Year 2000 program,
contingency plans were developed to respond to any failures. At this time, the
Company does not expect that any failure of the Company or third parties to
achieve Year 2000 compliance will adversely affect the Company.
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. The Company intends to refinance a portion of its
variable-rate debt under the Credit Facility with fixed-rate private placement
debt with maturities ranging from five to ten years. As a result, the Company
entered into interest rate-lock agreements during April 2000 to hedge against
increases in market interest rates on the anticipated refinancing of this debt.
The notional amount of these derivatives is $90 million. Because market interest
rates have increased since the Company entered in these rate-lock agreements,
the settlement value of them is currently positive should the Company choose to
terminate these agreements.
13
<PAGE>
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 March 31, 2000, the Company did not
issue any unregistered shares of its common stock in connection with
acquisitions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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.
14
<PAGE>
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: May 12, 2000
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 8,344
<SECURITIES> 0
<RECEIVABLES> 307,283
<ALLOWANCES> 5,199
<INVENTORY> 20,090
<CURRENT-ASSETS> 422,017
<PP&E> 99,398
<DEPRECIATION> (56,337)
<TOTAL-ASSETS> 950,161
<CURRENT-LIABILITIES> 227,650
<BONDS> 291,274
0
0
<COMMON> 393
<OTHER-SE> 422,407
<TOTAL-LIABILITY-AND-EQUITY> 950,161
<SALES> 362,566
<TOTAL-REVENUES> 362,566
<CGS> 291,699
<TOTAL-COSTS> 291,699
<OTHER-EXPENSES> 57,856
<LOSS-PROVISION> 155
<INTEREST-EXPENSE> 6,095
<INCOME-PRETAX> 7,032
<INCOME-TAX> 3,024
<INCOME-CONTINUING> 4,008
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<EXTRAORDINARY> 0
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<NET-INCOME> 4,008
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.11
</TABLE>
