10-QPeriod: Q3 FY2006

COMFORT SYSTEMS USA INC Quarterly Report for Q3 Ended Sep 30, 2006

Filed November 1, 2006For Securities:FIX

Summary

Comfort Systems USA, Inc. (FIX) reported a strong third quarter and year-to-date performance for the period ending September 30, 2006. The company saw significant revenue growth driven by an improving nonresidential and multi-family construction market. Net income also increased substantially, reflecting this top-line growth and improved operational efficiency, with SG&A expenses as a percentage of revenue declining. The company's balance sheet remains strong with no long-term debt and ample cash balances. While gross profit margin saw a slight decrease due to a higher proportion of new construction work and some job underperformance, overall profitability improved. Management is focused on internal execution and margin improvement, with positive outlook for the full year 2006 compared to 2005.

Key Highlights

  • 1Revenue increased by 22.3% year-over-year to $287.7 million for the third quarter of 2006.
  • 2Net income rose to $9.0 million for the third quarter of 2006, up from $6.1 million in the prior year period.
  • 3The company reported zero long-term debt and had $52.9 million of credit available under its $75.0 million senior credit facility as of September 30, 2006.
  • 4Gross profit margin slightly decreased from 16.6% to 16.1% year-over-year for the third quarter, attributed to increased new construction work and job underperformance in Connecticut.
  • 5Selling, General, and Administrative (SG&A) expenses as a percentage of revenue decreased from 12.0% in Q3 2005 to 11.2% in Q3 2006, indicating improved cost control relative to revenue growth.
  • 6The company adopted the fair value recognition provisions of FASB Statement 123R for share-based payments, resulting in new compensation expense.
  • 7Backlog for continuing operations stood at $678.9 million as of September 30, 2006, a slight decrease from the prior quarter but an increase compared to the prior year.

Frequently Asked Questions

Revenue growth was primarily driven by generally improving nonresidential and multi-family construction markets across the United States. Specific contributions came from increased activity in the multi-family sector, office buildings, and institutional markets such as schools and hospitals.

Comfort Systems USA reported no outstanding long-term debt as of September 30, 2006. They have a $75.0 million senior credit facility with $52.9 million of credit available, indicating a strong liquidity position.

The company expects its full-year 2006 results to be better than its 2005 results. This positive outlook is based on improving industry conditions, a focus on internal execution and margin improvement, and a stable backlog. However, they caution that macroeconomic or geopolitical uncertainty could impact future revenue.

Effective January 1, 2006, Comfort Systems USA adopted Statement 123R for share-based payments. This resulted in the recognition of stock-based compensation expense, amounting to $0.4 million for the third quarter and $1.4 million for the first nine months of 2006. This also requires excess tax benefits from stock-based compensation to be reported as financing cash flows, a change from prior practice.