10-QPeriod: Q2 FY2009

COMFORT SYSTEMS USA INC Quarterly Report for Q2 Ended Jun 30, 2009

Filed July 31, 2009For Securities:FIX

Summary

Comfort Systems USA, Inc. reported a decline in revenue for the second quarter and the first six months of 2009 compared to the prior year, largely attributed to reduced activity in nonresidential construction markets, particularly in healthcare and office buildings, as well as a planned downsizing of its multi-family operation. Despite the revenue decrease, the company demonstrated resilience in gross profit margin, which slightly improved as a percentage of revenue due to better performance in specific operations. The company maintained a strong liquidity position with zero outstanding borrowings on its $100 million senior credit facility and substantial cash balances. However, the company noted ongoing challenges in the surety market, which could impact bonding capacity. Management's primary focus for the remainder of 2009 is on execution, cost control, and preserving workforce stability amidst expected continued weakness in the industry. While profitability is expected to continue, it is anticipated to be lower than the previous year.

Key Highlights

  • 1Revenue decreased by 15.0% in Q2 2009 and 10.3% for the first six months of 2009 compared to the prior year.
  • 2Gross profit margin improved slightly to 19.4% in Q2 2009 and 19.5% for the first six months of 2009, up from 19.1% and 18.6% respectively in the prior year.
  • 3Selling, General, and Administrative (SG&A) expenses decreased by 4.0% in Q2 2009 but increased by 1.4% for the first six months, primarily due to overhead reductions offset by increased bad debt expense and acquisition-related costs.
  • 4The company reported zero outstanding borrowings on its $100 million senior credit facility as of June 30, 2009, with $56.9 million of credit availability.
  • 5Backlog decreased by 10.7% sequentially to $639.8 million as of June 30, 2009, and by 22.1% year-over-year.
  • 6Free cash flow for the first six months of 2009 was $15.7 million, down from $19.1 million in the prior year, due to lower earnings.
  • 7The company has $7.5 million invested in auction rate securities, which have experienced liquidity issues, resulting in a small unrealized loss reported in accumulated other comprehensive income.

Frequently Asked Questions

The decline in revenue is primarily due to reduced activity in nonresidential construction markets, especially in healthcare and office buildings, and a planned downsizing of the company's large multi-family operation. Market slowdowns in regions like central Arizona and Alabama also contributed.

Comfort Systems USA maintains a strong liquidity position with no outstanding borrowings on its $100 million senior credit facility as of June 30, 2009, leaving $56.9 million in available credit. The company has consistently generated positive free cash flow and has substantial cash reserves.

The company expects continued weakness in the non-residential construction sector throughout 2009, leading to lower activity levels and continued price competition. Management's focus is on execution, cost control, and maintaining workforce stability. Profitability is expected to continue but at lower levels than in 2008.

The company has $7.5 million in auction rate securities that have experienced liquidity issues due to market conditions, leading to a small unrealized loss. While this doesn't currently impact the company's ability to execute its business plan, a prolonged lack of liquidity or credit deterioration could lead to impairment charges. Additionally, challenging surety market conditions could restrict bonding capacity, though the company has strong surety relationships and alternative strategies in place.