10-QPeriod: Q3 FY2001

COMFORT SYSTEMS USA INC Quarterly Report for Q3 Ended Sep 30, 2001

Filed November 13, 2001For Securities:FIX

Summary

Comfort Systems USA, Inc. reported a net income of $5.6 million for the third quarter of 2001, a significant turnaround from a net loss of $3.7 million in the same period of the prior year. For the nine months ended September 30, 2001, the company reported a net income of $10.0 million, compared to a net loss of $0.6 million in the corresponding period of 2000. Revenues saw a slight decrease of 3.5% for the quarter and 1.9% for the nine-month period, attributed to divestitures and a strategic focus on profit margins over aggressive revenue growth, alongside a general economic slowdown. The company's financial condition shows improved liquidity, with cash provided by operating activities increasing significantly. However, the company is operating under a tightened revolving credit facility with more stringent covenants, reflecting past covenant violations. Management expresses confidence in meeting these requirements through restructuring efforts and operating strategies, though it acknowledges uncertainty. A significant accounting change is on the horizon with the adoption of SFAS No. 142, which will eliminate goodwill amortization, but may require a substantial non-cash goodwill impairment charge in early 2002.

Key Highlights

  • 1Reported a net income of $5.6 million for Q3 2001, a positive shift from a $3.7 million net loss in Q3 2000.
  • 2Achieved nine-month net income of $10.0 million in 2001, contrasting with a $0.6 million net loss in the same period of 2000.
  • 3Revenues declined slightly by 3.5% in Q3 and 1.9% year-to-date, reflecting divestitures and a strategic shift towards profitability.
  • 4Gross profit margin improved to 17.9% in Q3 2001 from 16.8% in Q3 2000, driven by better performance at certain operations.
  • 5Selling, General, and Administrative (SG&A) expenses decreased by 9.1% in Q3 and 6.5% year-to-date, indicating cost control measures.
  • 6The company's revolving credit facility has been amended with tighter covenants and financial ratio requirements due to prior violations.
  • 7Expects a potentially significant non-cash goodwill impairment charge in Q1 2002 due to the adoption of new accounting standards (SFAS 142).

Frequently Asked Questions

Comfort Systems USA, Inc. has shown a substantial improvement in profitability. For the third quarter of 2001, they reported a net income of $5.6 million, a significant turnaround from a net loss of $3.7 million in the same quarter of 2000. For the first nine months of 2001, net income was $10.0 million, compared to a net loss of $0.6 million for the same period in 2000. While revenues saw a slight decline, the company focused on improving gross profit margins and reducing operating expenses.

The company's revolving credit facility has been amended with significantly tighter covenants and financial ratio requirements, stemming from previous violations. While management believes they can meet these requirements, there is no assurance they will succeed. Failure to meet these covenants could necessitate renegotiation with banks, with uncertain outcomes. Additionally, the company has substantial subordinated debt to former owners, with amended payment schedules extending into 2003.

Yes, the company will be adopting SFAS No. 142 in 2002, which eliminates the amortization of goodwill. While this will remove a non-cash charge of approximately $3 million per quarter, the company anticipates it will likely need to record a significant non-cash goodwill impairment charge upon adoption. The exact amount of this charge is not yet determinable but is expected to be substantial relative to the unamortized goodwill balance. This impairment charge is expected to be recorded as a cumulative effect of a change in accounting principle in the first quarter of 2002.

Revenues have decreased slightly due to divestitures of underperforming operations and a management focus on profit margins rather than aggressive growth. The company anticipates continued modest revenue growth, but this is subject to broader economic conditions and the success of its strategy to improve operating efficiency and profit margins. The company also notes that the HVAC industry is seasonal, with lower activity expected in the first and fourth quarters.