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0001104659-07-015093.txt : 20070301
0001104659-07-015093.hdr.sgml : 20070301
20070228200146
ACCESSION NUMBER: 0001104659-07-015093
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 20
CONFORMED PERIOD OF REPORT: 20061231
FILED AS OF DATE: 20070301
DATE AS OF CHANGE: 20070228
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: COMFORT SYSTEMS USA INC
CENTRAL INDEX KEY: 0001035983
STANDARD INDUSTRIAL CLASSIFICATION: ELECTRICAL WORK [1731]
IRS NUMBER: 760526487
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-13011
FILM NUMBER: 07660064
BUSINESS ADDRESS:
STREET 1: 777 POST OAK BOULEVARD
STREET 2: SUITE 500
CITY: HOUSTON
STATE: TX
ZIP: 77056
BUSINESS PHONE: 7138309600
MAIL ADDRESS:
STREET 1: 777 POST OAK BOULEVARD
STREET 2: SUITE 500
CITY: HOUSTON
STATE: TX
ZIP: 77056
10-K
1
a07-5471_110k.htm
10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2006
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 Blvd.
Suite 500
Houston, Texas 77056
(713) 830-9600
(Address
and telephone number of Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
|
|
Name of Each Exchange on
which Registered
|
Common Stock, $.01
par value
|
|
New York Stock
Exchange
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13
or 15(d) of the Act. Yes o No x
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 o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation SK is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).
Large accelerated filer o
|
|
Accelerated filer x
|
|
Non-accelerated filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No x
As of
February 23, 2007, the aggregate market value of the 39,995,792 shares of
the registrants common stock held by non-affiliates of the registrant was
$556,341,467, based on the $13.91 last sale price of the registrants common
stock on the New York Stock Exchange on February 23, 2007.
As of
February 23, 2007, 40,724,783 shares of the registrants common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (other than
the required information regarding executive officers) is incorporated by
reference from the registrants definitive proxy statement, which will be filed
with the Commission not later than 120 days following December 31, 2006.
FORWARD-LOOKING
STATEMENTS
This report contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements are based on the current plans and expectations of Comfort Systems
USA, Inc. 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, among others, national or regional
weakness in non-residential construction activity, difficulty in obtaining or
increased costs associated with bonding, shortages of labor and specialty
building materials, the use of incorrect estimates for bidding a fixed price
contract, retention of key management, the Companys backlog failing to
translate into actual revenue or profits, errors in the Companys percentage of
completion method of accounting, the result of competition in the Companys
markets, seasonal fluctuations in the demand for HVAC systems, the imposition
of past and future liability from environmental, safety, and health regulations
including the inherent risk associated with self-insurance, adverse litigation
results and other risks detailed in the Companys reports filed with the
Securities and Exchange Commission. Important factors that could cause actual
results to differ are discussed under Item 1A. Company Risk Factors. These
forward-looking statements speak only as of the date of this filing. Comfort
Systems USA, Inc. expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statement
contained herein to reflect any change in Comfort Systems USA, Inc.s
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
PART I
The
terms Comfort Systems, we, us, or the Company refer to Comfort Systems
USA, Inc. or Comfort Systems USA, Inc. and its consolidated
subsidiaries, as appropriate in the context.
ITEM 1. Business
Comfort Systems USA, Inc.,
a Delaware corporation, provides comprehensive heating, ventilation and air
conditioning (HVAC) installation, maintenance, repair and replacement
services within the mechanical services industry in 53 cities and 60 locations
throughout the United States.
We operate primarily in the commercial, industrial and
institutional HVAC markets, and perform most of our services within office
buildings, retail centers, apartment complexes, manufacturing plants, and
healthcare, education and government facilities. In addition to standard HVAC
services, we provide specialized applications such as building automation
control systems, fire protection, process cooling, electronic monitoring and
process piping. Certain locations also perform related activities such as
plumbing and electrical service. Approximately 98% of our consolidated 2006
revenues were derived from commercial, industrial and institutional customers
with approximately 61% of the revenues attributable to installation services in
newly constructed facilities and 39% attributable to maintenance, repair and
replacement services. Our consolidated 2006 revenues were derived from the
following service activities, all of which are in the mechanical services
industry, the single industry segment we serve:
Service Activity
|
|
|
|
Percentage of
Revenue
|
|
HVAC
|
|
|
74
|
%
|
|
Plumbing
|
|
|
18
|
%
|
|
Building Automation
Control Systems
|
|
|
3
|
%
|
|
Other
|
|
|
5
|
%
|
|
Total
|
|
|
100
|
%
|
|
We
were originally formed in 1997 through an initial public offering, or IPO, and
simultaneous acquisition of 12 companies engaged in our business. From the time
we completed our IPO through December 1999, we acquired 107 HVAC and
complementary businesses, of which 26 were tuck-in
1
operations that were integrated upon acquisition with
existing operations. From 2000 through 2005 we acquired only one company and
shifted our strategy from an emphasis on acquisition-based growth to a focus on
improving the performance of our existing operations. During that time, we sold
or ceased operations at 40 companies and consolidated another 14 companies into
other operations. During 2006, we sold certain assets and ceased operations at
one of our operating companies and consolidated one company into other
operations. Today we have 38 operating units.
Our
Internet address is
http://www.comfortsystemsusa.com. We make available free of charge
on or through our website our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and
Exchange Commission, or the Commission. Our website also includes our
code of ethics, titled Corporate Compliance Policy: Standards and Procedures
Regarding Business Practices, together with other governance materials
including our corporate governance guidelines and our Board committee charters.
Printed versions of our code of ethics and our corporate governance guidelines
may be obtained upon written request to our Corporate Compliance Officer at the
Companys headquarters address.
Industry Overview
We believe that the
commercial, industrial, and institutional HVAC industry generates annual
revenues in excess of $40 billion. HVAC systems are necessary to virtually all
commercial, industrial and institutional buildings as well as homes. Because
most buildings are sealed, HVAC systems provide the primary method of
circulating fresh air in such buildings. In many instances, replacing an aging
system with a modern, energy-efficient HVAC system significantly reduces a
buildings operating costs and improves air quality and HVAC system
effectiveness. Older commercial, industrial and institutional facilities often
have poor air quality as well as inadequate air conditioning, and older HVAC
systems result in significantly higher energy costs than do modern systems.
These factors cause many facility owners to consider replacing older systems
before the end of their functioning lives.
Many factors positively
affect HVAC industry growth, particularly (i) population growth, which has
increased the need for commercial, industrial and institutional space, (ii) an
aging installed base of buildings and HVAC equipment, (iii) increasing
sophistication, complexity, and efficiency of HVAC systems, (iv) growing
emphasis on indoor air quality, and (v) reduction or elimination of the
refrigerants commonly used in older HVAC systems. We believe these factors
should increase demand for the reconfiguration or replacement of existing HVAC
systems and may also mitigate, to some extent, the effect on the HVAC industry
of the cyclicality inherent in the traditional construction industry.
The HVAC industry can be broadly divided into two
service functions:
· installation
in newly constructed facilities, which provided approximately 61% of our
revenues in 2006, and
· maintenance,
repair and replacement, which provided the remaining 39% of our 2006 revenues.
Installation Services. Installation services consist
of design and build and plan and spec projects. In design and build
projects, the commercial HVAC firm is responsible for designing, engineering
and installing a cost-effective, energy-efficient system customized to the
specific needs of the building owner. Costs and other project terms are
normally negotiated between the building owner or its representative and the
HVAC firm. Firms that specialize in design and build projects generally have
specially-trained HVAC engineers, CAD/CAM design systems and in-house sheet
metal and prefabrication capabilities. These firms use a consultative approach
with customers and tend to develop long-term relationships with building owners
and developers, general contractors, architects, consulting engineers and
property managers. Plan and spec installation refers to projects in which a
third-party architect or consulting
2
engineer designs the HVAC systems and the installation
project is put out for bid. We believe that plan and spec projects usually
take longer to complete than design and build projects because the system design
and installation process generally are not integrated, thus resulting in more
frequent adjustments to the technical specifications of the project and
corresponding changes in work requirements and schedules. These adjustments can
occur during the bid process or during the project itself, in either case
adding weeks or months to the project schedule. Furthermore, in plan and spec
projects, the HVAC firm is not responsible for project design and other parties
must also approve any changes, thereby increasing overall project time and
cost.
Maintenance, Repair and
Replacement Services. These services include maintaining, repairing, replacing,
reconfiguring and monitoring previously installed HVAC systems and building
automation controls. The growth and aging of the installed base of HVAC systems
and the demand for more efficient and sophisticated systems and building
automation controls have fueled growth in this service line. The increasing
complexity of these HVAC systems is leading many commercial, industrial and
institutional building owners and property managers to increase attention to
maintenance and to outsource maintenance and repair, often through service
agreements with HVAC service providers. In addition, further restrictions have
been placed on the use of certain types of refrigerants used in HVAC systems,
which, along with indoor air quality concerns, may increase demand for the
reconfiguration and replacement of existing HVAC systems. State-of-the-art
control and monitoring systems feature electronic sensors and microprocessors. These
systems require specialized training to install, maintain and repair, and the
typical building engineer employed directly by a building owner or manager has
not received this training. Increasingly, HVAC systems in commercial,
industrial and institutional buildings are being remotely monitored through
PC-based communications systems to improve energy efficiency and expedite
problem diagnosis and correction, thereby allowing us to provide maintenance
and repair services at a lower cost.
Strategy
We
focus on strengthening operating competencies and on increasing profit margins.
The key elements of our operating strategy are:
Achieve Excellence in Core
Competencies. We have identified six core competencies, which we believe are critical
to attracting and retaining customers, increasing operating income and cash
flow and creating additional employment opportunities. The six core
competencies are: (i) customer cultivation and intimacy, (ii) design
and build expertise, (iii) estimating, (iv) job costing and job
measurements, (v) safety, and (vi) service capability.
Achieve Operating Efficiencies. We think we can achieve
operating efficiencies and cost savings through purchasing economies, adopting best
practices operating programs, and focusing on job management to deliver
services in a cost-effective and efficient manner. We have placed great
emphasis on improving the job loop at our locationsqualifying, estimating,
pricing and executing projects effectively and efficiently, then promptly
assessing project experience for applicability to current and future projects. We
also use our combined purchasing to gain volume discounts on products and
services such as HVAC components, raw materials, services, vehicles, bonding, insurance
and employee benefits.
Attract, Retain and Invest in
our Employees. We seek to attract and retain quality employees by providing them an
enhanced career path from working for a larger company, the opportunity to
realize a more stable income and attractive benefits packages. Over the past
few years we have substantially increased our investment in training, including
programs for project managers, field superintendents service managers, sales
managers, and more recently, leadership and development of key managers and
leaders. We believe these programs can lead to significantly increased
efficiency and growth.
3
Focus on Commercial, Industrial and Institutional Markets. We primarily focus on the
commercial, industrial and institutional markets, with particular emphasis on design
and build installation services, and on maintenance, repair and replacement
services. We believe that the commercial, industrial, and institutional HVAC
markets are attractive because of their growth opportunities, large and diverse
customer base, reduced weather exposure as compared to residential markets,
attractive margins and potential for long-term relationships with building
owners, property managers, general contractors and architects. We believe that
although the end-use is ultimately residential, large multi-family projects
have many of the same characteristics as commercial construction. Although we
plan to continue our involvement in multi-family work, we have decided to focus
a portion of our resources away from this work and we expect that as a result,
the portion of our work that is multi-family will diminish somewhat in the
future. Approximately 98% of our consolidated 2006 revenues were derived from
commercial and industrial customers and large multi-family residential
projects.
Maintain a Diverse Customer,
Geographic and Project Base. We have what we believe is a well-diversified
distribution of revenues across end-use sectors that reduces our exposure to
negative developments in any given sector. We also believe we have a reasonable
degree of geographical diversification, again reducing our exposure to negative
developments in any given region. Our distribution of revenues in 2006 by
end-use sector was as follows:
Multi-Family
|
|
22
|
%
|
Schools
|
|
14
|
%
|
Office
Buildings
|
|
13
|
%
|
Manufacturing
|
|
10
|
%
|
Healthcare
|
|
10
|
%
|
Government
|
|
9
|
%
|
Retail
|
|
7
|
%
|
Distribution
|
|
2
|
%
|
Residential
|
|
2
|
%
|
Hotels
|
|
2
|
%
|
Banks
|
|
1
|
%
|
Other
|
|
8
|
%
|
Total
|
|
100
|
%
|
Approximately
86% of our revenues are earned on a project basis for installation of HVAC
systems in newly constructed facilities or for replacement of HVAC systems in
existing facilities. As of December 31, 2006, we had 3,638 projects in
process with an aggregate contract value of approximately $1,451.4 million. Our
average project takes three to six months to complete, with an average contract
price of approximately $400,000. This relatively small average project size,
when taken together with the approximately 14% of our revenues derived from
maintenance and service, provides us with what we believe is a reasonably broad
base of work for a company involved in the construction services sector. A
stratification of projects in progress as of December 31, 2006, by
contract price is as follows:
Contract Price of Project
|
|
|
|
No. of
Projects
|
|
Aggregate Contract
Price Value (millions)
|
|
Under $1 million
|
|
|
3,386
|
|
|
|
$
|
490.6
|
|
|
$1 million - $5 million
|
|
|
194
|
|
|
|
457.2
|
|
|
$5 million - $10 million
|
|
|
43
|
|
|
|
276.3
|
|
|
$10 million - $15
million
|
|
|
11
|
|
|
|
138.5
|
|
|
$15 million - $33
million
|
|
|
4
|
|
|
|
88.8
|
|
|
Total
|
|
|
3,638
|
|
|
|
$
|
1,451.4
|
|
|
4
Leveraging Resources and Service
Capabilities. We believe significant operating efficiencies can be achieved by
leveraging resources among our operating locations. For example, we have
shifted certain prefabrication activities into centralized locations thereby
increasing asset utilization in these centralized locations and redirecting
prefabrication employees into other operational areas. We also allocate our
engineering, field and supervisory labor from one operation to another to more
fully use our employee base, meet our customers needs, and share expertise. We
believe we have realized scale benefits from combining purchasing, insurance,
benefits, bonding, and financing activities across our operations. We also believe
larger regional and national commercial, industrial, and institutional entities
can benefit from consolidating their HVAC needs with service companies that are
capable of providing those services regionally or nationally. In response to
this opportunity, we operate a national
call center to dispatch technicians to regional and national sites requiring
service and use web-based proprietary information systems to maintain
information on the customers sites and equipment.
Seek Growth Through Expansion and
Measured Acquisitions. We believe that we can increase our operating income by
opportunistically entering new markets or service lines through expansion and
acquisition. We have based such expansion on existing customers, relationships
or expertise, and expect to selectively pursue such opportunities in the future.
When we find opportunities to acquire businesses that have attractive
valuations and meet other criteria involving financial, operational,
management, geographic and legal due diligence considerations, we will consider
such transactions.
Operations and Services Provided
We
provide a wide range of installation, maintenance, repair and replacement
services for HVAC and related systems in commercial, industrial and
institutional properties. We manage our locations on a decentralized basis,
with local management maintaining responsibility for day-to-day operating
decisions. Our local management is augmented by regional leadership that
focuses on core business competencies, regional financial performance,
cooperation and coordination between locations, implementing best practices,
and on major corporate initiatives. In addition to senior management, local
personnel generally include design engineers, sales personnel, customer service
personnel, installation and service technicians, sheet metal and prefabrication
technicians, estimators and administrative personnel. We have centralized
certain administrative functions such as insurance, employee benefits,
training, safety programs, marketing and cash management to enable our local
operating management to focus on pursuing new business opportunities and
improving operating efficiencies. We also combine certain back office and
administrative functions at various locations.
Installation Services. Our installation business
related to newly constructed facilities, which comprised approximately 61% of
our consolidated 2006 revenues, involves the design, engineering, integration,
installation and start-up of HVAC, building automation controls and related
systems. We provide design and build and plan and spec installation
services for office buildings, retail centers, apartment complexes,
manufacturing plants, health care, education and government facilities and
other commercial, industrial, and institutional facilities. In a design and
build installation, working with the customer, we determine the needed
capacity and energy efficiency of the HVAC system that best suits the proposed
facility. We then estimate the amount of time, labor, materials and equipment
needed to build the specified system. The final design, terms, price and timing
of the project are then negotiated with the customer or its representatives,
after which any necessary modifications are made to the system plan. In plan
and spec installation, we participate in a bid process to provide labor,
equipment, materials and installation based on plans and engineering
specifications provided by a customer, general contractor or consulting
engineer.
Once
an agreement has been reached, we order the necessary materials and equipment
for delivery to meet the project schedule. In many instances, we fabricate the
ductwork and piping and assemble certain components for the system based on the
mechanical drawing specifications, eliminating the need to subcontract ductwork
or piping fabrication. Then we install the system at the project site, working
closely
5
with the general contractor. Our average project
takes three to six months to complete, with an average contract price of
approximately $400,000. We also perform larger project work, with 252 contracts
in progress at December 31, 2006 with contract prices in excess of $1
million. Our largest project currently in progress has a contract price of
$32.5 million. Project contracts typically provide for periodic billings to the
customer as we meet progress milestones or incur cost on the project. Project
contracts in our industry also frequently allow for a small portion of progress
billings or contract price to be withheld by the customer until after we have
completed the work, typically for six months. Amounts withheld under this
practice are known as retention or retainage.
We
also install process cooling systems and building automation controls and
monitoring systems. Process cooling systems are used primarily in industrial
facilities to provide heating and/or cooling to precise temperature and climate
standards for products being manufactured and for the manufacturing equipment. Building
automation control systems are used in HVAC and process cooling systems to
maintain pre-established temperature or climate standards for commercial or
industrial facilities. Building automation control systems are capable not only
of controlling a facilitys entire HVAC system, often on a room-by-room basis,
but can also be programmed to integrate energy management, and monitoring for
purposes of security, fire, card key access, lighting and other building
systems. This monitoring can be performed on-site or remotely through a
PC-based communications system. The monitoring system communicates an exception
when a system is operating outside pre-established parameters. Diagnosis of
potential problems and remedial adjustments can often be performed remotely
from system monitoring terminals.
Maintenance, Repair and
Replacement Services. Our maintenance, repair and replacement services comprised
approximately 39% of our consolidated 2006 revenues and include the
maintenance, repair, replacement, reconfiguration and monitoring of HVAC
systems and industrial process piping. Approximately two-thirds of our
maintenance, repair and replacement revenues were derived from replacing and
reconfiguring existing HVAC systems for commercial, industrial, and
institutional customers. Replacement and reconfiguration are usually performed
on a project basis and often use consultative expertise similar to that
provided in the design and build installation market.
Maintenance
and repair services are provided either in response to service calls or under a
service agreement. Service calls are coordinated by customer service
representatives or dispatchers that use computer and communication technology
to process orders, arrange service calls, communicate with customers, dispatch
technicians and invoice customers. Service technicians work from service vehicles
equipped with commonly used parts, supplies and tools to complete a variety of
jobs. Commercial, industrial and institutional service agreements usually have
terms of one to three years, with automatic annual renewals, and typically with
30-60 day cancellation notice periods. We also provide remote monitoring
of temperature, pressure, humidity and air flow for HVAC systems. If the system
is not operating within the specifications set forth by the customer and cannot
be remotely adjusted, a service crew is dispatched to analyze and repair the
system.
Sources of Supply
The
raw materials and components we use include HVAC system components, ductwork,
steel, sheet metal and copper tubing and piping. These raw materials and
components are generally available from a variety of domestic or foreign
suppliers at competitive prices. Delivery times are typically short for most
raw materials and standard components, but during periods of peak demand, may
extend to one month or more. Over the last two years, many steel, iron and
copper products, in particular, have experienced significant price fluctuation
and some constrained availability. We estimate that direct purchase of
these commodities comprises between 10% and 15% of our average project cost. We
began taking steps early in 2004 to reduce commodity cost exposure. Among these
steps were early buying of commodities for particular projects, or for general
inventory, as well as including escalation and escape provisions in project
bids and contracts wherever possible. The negative effects of unrecovered
commodity cost inflation in our
6
project
results have been modest, and are reviewed further in Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations later
in this report.
Chillers
for large units typically have the longest delivery time and generally have
lead times of up to six months. The major components of commercial HVAC systems
are compressors and chillers that are manufactured primarily by York, Carrier,
Trane and Lennox. The major suppliers of building automation control systems
are Honeywell, Johnson Controls, Siemens, York, Automated Logic, Novar and
Andover Control Corporation. We do not have any significant contracts
guaranteeing us a supply of raw materials or components.
We
administer a portion of our procurement activities with Emcor Group, a larger
publicly-held provider of electrical and mechanical services and facilities
management. This coordination includes contractual arrangements with Emcor
under which certain Emcor employees provide procurement management services to
us.
Sales and Marketing
We
have a diverse customer base, with no single customer accounting for more than 5%
of consolidated 2006 revenues. Management and a dedicated sales force are
responsible for developing and maintaining successful long-term relationships
with key customers. Customers generally include building owners and developers
and property managers, as well as general contractors, architects and
consulting engineers. We intend to continue our emphasis on developing and
maintaining long-term relationships with our customers by providing superior,
high-quality service in a professional manner. We believe we can continue to
leverage the diverse technical and marketing strengths at individual locations
to expand the services offered in other local markets. With respect to
multi-location service opportunities, we maintain a national sales force in our
national accounts group.
Employees
As of December 31,
2006, we had 6,647 employees. We have collective bargaining agreements covering
6 employees. We have not experienced and do not expect any significant strikes
or work stoppages and believe our relations with employees covered by
collective bargaining agreements are good.
Recruiting, Training and Safety
Our
continued success depends, in part, on our ability to continue to attract,
retain and motivate qualified engineers, service technicians, field supervisors
and project managers. We believe our success in retaining qualified employees
will be based on the quality of our recruiting, training, compensation,
employee benefits programs and opportunities for advancement. We provide
on-the-job training, technical training, apprenticeship programs, attractive
benefit packages and career advancement opportunities within our company.
We
have established comprehensive safety programs throughout our operations to
ensure that all technicians comply with safety standards we have established
and that are established under federal, state and local laws and regulations. Additionally,
we have implemented a best practices safety program throughout our
operations, which provides employees with incentives to improve safety
performance and decrease workplace accidents. Regional safety directors
establish safety programs and benchmarking to improve safety within their
region. Finally, our employment screening process seeks to determine that
prospective employees have requisite skills, sufficient background references
and acceptable driving records, if applicable. Our rate of incidents recordable
under the standards of the Occupational Safety and Health Administration (OSHA) per 100 employees per year, also
known as the OSHA recordable rate, was 3.60 during 2006. This level was 51%
better than the most recently published OSHA rate for our industry. We have
improved our OSHA recordable rate every year since we first began tracking it
company-wide eight years ago.
7
Risk Management, Insurance and
Litigation
The
primary risks in our operations are bodily injury, property damage and workers
compensation injuries. We retain the risk for workers compensation, employers
liability, auto liability, general liability and employee group health claims
resulting from uninsured deductibles per incident or occurrence. Because we
have very large deductibles, the vast majority of our claims are paid by us, so
as a practical matter we self-insure the great majority of these risks. Losses
up to such per-incident deductible amounts are estimated and accrued based upon
known facts, historical trends and industry averages utilizing the assistance
of an actuary to project the extent of these obligations.
We are subject to certain
claims and lawsuits arising in the normal course of business. We maintain
various insurance coverages to minimize financial risk associated with these
claims. We have estimated and provided accruals for probable losses and related
legal fees associated with certain of our litigation in our consolidated
financial statements. While we cannot predict the outcome of these proceedings,
in our opinion and based on reports of counsel, any liability arising from
these matters individually and in the aggregate will not have a material effect
on our operating results or financial condition, after giving effect to
provisions already recorded.
In addition to the matters
described above, we are defending a dispute arising out of an alleged delay
related to a multi-family construction project. Plaintiffs allege actual
damages of $7 million plus attorneys fees, punitive damages, and pre-judgment
interest. The trial relating to this matter is currently scheduled for the
second quarter of 2007. We anticipate that contribution from a co-defendant and
insurance proceeds will, in part, offset any adverse judgment. Management
believes the accruals relating to the matter appropriately reflect a probable
outcome; however, if we are not successful in this dispute, it could have a
material adverse effect on our operating results.
We
typically warrant labor for the first year after installation on new HVAC
systems and pass through to the customer manufacturers warranties on equipment.
We generally warrant labor for 30 days after servicing of existing HVAC systems.
We do not expect warranty claims to have a material adverse effect on our
financial position or results of operations.
Competition
The
HVAC industry is highly competitive and consists of thousands of local and
regional companies. We believe that purchasing decisions in the commercial,
industrial and institutional markets are
based on (i) competitive price, (ii) long-term customer
relationships, (iii) quality, timeliness and reliability of services
provided, (iv) an organizations perceived stability based on years in
business, financial strength, and access to bonding, (v) range of services
provided, and (vi) scale of operation. To improve our competitive position
we focus on both the consultative design and build installation market and
the maintenance, repair and replacement market to promote first the development
and then the strengthening of long-term customer relationships. In addition, we
believe our ability to provide multi-location coverage, access to project
financing and specialized technical skills for facilities owners gives us a
strategic advantage over smaller competitors who may be unable to provide these
services to customers at a competitive price.
We
believe that we are larger than most of our competitors, which are generally
small, owner-operated companies that typically operate in a limited geographic
area. However, there are divisions of larger contracting companies, utilities
and HVAC equipment manufacturers that provide HVAC services in some of the same
service lines and geographic areas we serve. Some of these competitors and
potential competitors have greater financial resources than we do to finance
development opportunities and support their operations. We believe our smaller
competitors generally compete with us based on price and their long-term
relationships with local customers. Our larger competitors compete with us on
those factors but may also provide attractive financing and comprehensive
service and product packages.
8
Vehicles
We
operate a fleet of various owned or leased service trucks, vans and support
vehicles. We believe these vehicles generally are well maintained and
sufficient for our current operations.
Governmental Regulation and Environmental Matters
Our operations are subject to
various federal, state and local laws and regulations, including: (i) licensing
requirements applicable to engineering, construction and service technicians, (ii) building
and HVAC codes and zoning ordinances, (iii) regulations relating to
consumer protection, including those governing residential service agreements,
and (iv) regulations relating to worker safety and protection of the
environment. We believe we have all required licenses to conduct our operations
and are in substantial compliance with applicable regulatory requirements. If
we fail to comply with applicable regulations we could be subject to
substantial fines or revocation of our operating licenses.
Many state and local regulations
governing the HVAC services trades require individuals to hold permits and
licenses. In some cases, a required permit or license held by a single
individual may be sufficient to authorize specified activities for all of our
service technicians who work in the state or county that issued the permit or
license. We seek to ensure that, where possible, we have two employees who hold
any such permits or licenses that may be material to our operations in a
particular geographic region.
Our
operations are subject to the federal Clean Air Act, as amended, which governs
air emissions and imposes specific requirements on the use and handling of
chlorofluorocarbons, or CFCs, and certain other refrigerants. Clean Air Act
regulations require the certification of service technicians involved in the
service or repair of equipment containing these refrigerants and also regulate
the containment and recycling of these refrigerants. These requirements have
increased our training expenses and expenditures for containment and recycling
equipment. The Clean Air Act is intended ultimately to eliminate the use of
CFCs in the United States and to require alternative refrigerants to be used in
replacement HVAC systems. We do not believe these regulations involving CFCs
will materially affect our business on the whole because, although they require
us to incur modest ongoing training costs, our competitors also incur such
costs, and the regulations may encourage our customers to update their HVAC
systems.
Executive Officers
We have five executive officers.
William F. Murdy, age 65, has served as our Chairman of the Board and Chief
Executive Officer since June 2000. Prior to this he was Interim President
and Chief Executive Officer of Club Quarters, a privately-owned chain of
membership hotels. From January 1998 through July 1999, Mr. Murdy
served as President, Chief Executive Officer and Chairman of the Board of
LandCare USA, a publicly-traded commercial landscape and tree services company.
He was primarily responsible for organizing LandCare USA and its listing as a
publicly-traded company on the New York Stock Exchange in July 1998. LandCare
USA was acquired in July 1999 by another publicly-traded company
specializing in services to homeowners and commercial facilities. From 1989
through December 1997, Mr. Murdy was President and Chief Executive
Officer of General Investment and Development Company, a privately-held real
estate operating company. From 1981 to 1989, Mr. Murdy served as the
Managing General Partner of the Morgan Stanley Venture Capital Fund. From 1974
to 1981, Mr. Murdy served as the Senior Vice President, among other
positions, of Pacific Resources, Inc., a publicly-traded company involved
primarily in petroleum refining and marketing.
Thomas N. Tanner,
age 58, has served as our Executive Vice
President and Chief Operating Officer since May 2005, was our Senior Vice
President and Chief Operating Officer from June 2004 to May 2005, and
served as Senior Vice President, Operations from January 2004 to May 2004.
From May 2001 to
9
December 2003,
Mr. Tanner was our East Region Vice President and from May 1999 to May 2001
was our East Region Controller. From September 1980 until May 1999, Mr. Tanner
was Vice President and Chief Financial Officer of three related companies that
were ultimately acquired by Comfort Systems: Armani Plumbing and Mechanical, Inc.,
Woodcock & Associates, Inc., and abj Fire Protection Co., Inc.
William George III, age 42, has served as our Executive Vice President and Chief
Financial Officer since May 2005, was our Senior Vice President, General
Counsel and Secretary from May 1998 to May 2005, and was our Vice
President, General Counsel and Secretary from March 1997 to April 1998.
From October 1995 to February 1997, Mr. George was Vice
President and General Counsel of American Medical Response, Inc., a
publicly-traded healthcare transportation company. From September 1992 to September 1995,
Mr. George practiced corporate and antitrust law at Ropes & Gray,
a Boston, Massachusetts law firm.
Julie S. Shaeff, age 41, has served as
our Senior Vice President and Chief Accounting Officer since May 2005, was
our Vice President and Corporate Controller from March 2002 to May 2005,
and was our Assistant Corporate Controller from September 1999 to February 2002.
From 1996 to August 1999, Ms. Shaeff was Financial Accounting ManagerCorporate
Controllers Group for Browning-Ferris Industries, Inc., a publicly-traded
waste services company. From 1987 to 1995, she held various positions with
Arthur Andersen LLP. Ms. Shaeff is a Certified Public Accountant.
Trent T. McKenna, age 34, has served as our Vice President, General Counsel and
Secretary since May 2005 and was our Associate General Counsel from August 2004
to May 2005. From February 1999 to August 2004, Mr. McKenna
was a practicing attorney in the area of complex commercial litigation in the
Houston, TX office of Akin Gump Strauss Hauer & Feld LLP, an
international law firm.
ITEM 1A. Company Risk Factors
Our
business is subject to a variety of risks. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not known to us or not described below, which we have not
determined to be material, may also impair our business operations. You should
carefully consider the risks described below, together with all the information
included in this report. Our business, financial condition and results of
operations could be adversely affected by the occurrence of any risk. Such risk
events may cause actual results to differ materially from expected and
historical results, and the trading price of our common stock could decline.
Because we bear the risk of cost overruns in most of
our contracts, we may experience reduced profits or, in some cases, losses
under these contracts if costs increase above our estimates.
Our contract prices are
established largely upon estimates and assumptions, which include assumptions
about future economic conditions, prices and availability of labor, equipment
and materials and other factors outside our control. If these estimates prove
to be inaccurate or circumstances change such as unanticipated technical
problems, difficulties in obtaining permits or approvals, changes in local laws
or labor conditions, weather delays, fluctuations in cost of raw materials, or
our suppliers or subcontractors inability to perform, cost overruns may
occur, and we could experience reduced profits or a loss for the project. Additionally,
in certain circumstances, we guarantee project completion or the achievement of
certain acceptance and performance testing levels by a scheduled date. Failure
to meet schedule or performance requirements could result in additional costs
to us. While we may seek to recover these amounts as claims from the supplier,
vendor, subcontractor or other third party responsible for the delay or for
providing non-conforming products or services, we cannot be certain that we
will recover all or any part of these costs in all circumstances. Performance
problems for existing and future projects could cause our actual results of
operations to differ materially from those anticipated by us as well as
damaging our reputation within our industry and our customer base.
10
Our backlog is subject to unexpected adjustments and
cancellations, which means that amounts included in our backlog may not result
in actual revenue or translate into profits.
We cannot guarantee that
the revenues projected in our backlog will be realized or, if realized, will
result in profits. Projects may remain in our backlog for an extended period of
time or project cancellations or scope adjustments may occur with respect to
contracts reflected in our backlog. Finally, poor project or contract
performance could also impact our profits. The revenue projected from our
backlog may not be realized or, if realized, may not result in profits.
We may be adversely impacted by the seasonal and
cyclical nature of the markets we serve, and an economic downturn in the
industries we serve may result in certain of our customers being unable to pay
us on a timely basis, or at all, and lead to a decrease in demand for our
services.
The demand for our
services is dependent upon the existence of construction projects and service
requirements within the industries in which we operate. Any downturn in the
commercial, industrial and institutional HVAC markets or any other of our
markets could adversely impact our performance. The industries we operate in
have been and will continue to be vulnerable to general downturns and are
cyclical in nature. As a result, our results may vary depending upon the demand
for projects within the industries we serve.
A significant portion of our business depends on our
ability to provide surety bonds. We may be unable to compete for work on
certain projects if we are not able to obtain the necessary surety bonds.
In the past we have
expanded and we intend to continue to expand the number of total contract
dollars that require an underlying bond. Surety market conditions are currently
difficult as a result of significant losses incurred by many surety companies. Consequently,
less overall bonding capacity is available in the market and terms have become
more expensive and restrictive. We may not be able to maintain a sufficient
level of bonding capacity in the future, which could preclude us from being
able to bid for certain contracts and successfully contract with certain
customers. Additionally, even if we are able to successfully increase bonding
capacity to sufficiently bond future work, we may be required to post
collateral to secure bonds which would decrease the liquidity that we would
have available for other purposes. If our surety companies were to limit or
eliminate our access to bonding, our alternatives would include seeking bonding
capacity from other surety companies, increasing business with clients that do
not require bonds and posting other forms of collateral for project
performance, such as letters of credit or cash. We may be unable to secure
these alternatives in a timely manner, on acceptable terms, or at all. As such,
if we were to experience an interruption or reduction in the availability of
bonding capacity, it is likely we would be unable to compete for or work on
certain projects.
Our use of the percentage-of-completion method of
accounting could result in a reduction or reversal of previously recorded
revenues or profits.
A material portion of our
revenues are recognized using the percentage-of-completion method of accounting.
The percentage-of-completion accounting practices that we use result in our
recognizing contract revenues and earnings ratably over the contract term in
the proportion that our actual costs bear to our estimated contract costs. The
earnings or losses recognized on individual contracts are based on estimates of
contract revenues, costs and profitability. We review our estimates of contract
revenues, costs and profitability on an ongoing basis. Prior to contract
completion, we may adjust our estimates on one or more occasions as a result of
change orders to the original contract, collection disputes with the customer
on amounts invoiced or claims against the customer for increased costs incurred
by us due to customer-induced delays and other factors. Contract losses are
recognized in the fiscal period when the loss is determined. Contract profit estimates
are also adjusted in the fiscal period in which it is determined that an
adjustment is required. As a result of the requirements of the
percentage-of-completion method of
11
accounting,
the possibility exists, for example, that we could have estimated and reported
a profit on a contract over several periods and later determined, usually near
contract completion, that all or a portion of such previously estimated and
reported profits were overstated. If this occurs, the full aggregate amount of
the overstatement will be reported for the period in which such determination
is made, thereby eliminating all or a portion of any profits from other
contracts that would have otherwise been reported in such period or even
resulting in a loss being reported for such period. On a historical basis, we
believe that we have made reasonably reliable estimates of the progress towards
completion on our long-term contracts. However, given the uncertainties
associated with these types of contracts, it is possible for actual costs to
vary from estimates previously made, which may result in reductions or
reversals of previously recorded revenues and profits.
Intense competition in our industry could reduce our
market share and our profits.
The markets we serve are
highly competitive. Our industry is characterized by many small companies whose
activities are geographically concentrated. We compete on the basis of our
technical expertise and experience, financial and operational resources,
nationwide presence, industry reputation and our dependability. While we
believe our customers consider a number of these factors in awarding available
contracts, a large portion of our work is awarded through a bid process. Consequently,
price is often the principal factor in determining which contractor is
selected, especially on smaller, less complex projects. Smaller competitors are
sometimes able to win bids for these projects based on price alone due to their
lower cost and financial return requirements. Intense competition is expected
to continue in our industry, presenting us with significant challenges in our
ability to maintain strong growth rates and acceptable profit margins. If we
are unable to meet these competitive challenges, we could lose market share to
our competitors and experience an overall reduction in our profits.
If we are unable to attract and retain qualified
managers and employees, we will be unable to operate efficiently, which could
reduce our profitability.
Our business is labor
intensive, and many of our operations experience a high rate of employment
turnover. At times of low unemployment rates in the United States, it will be
more difficult for us to find qualified personnel at low cost in some
geographic areas where we operate. Additionally, our business is managed by a
small number of key executive and operational officers. We may be unable to
hire and retain the sufficient skilled labor force necessary to operate
efficiently and to support our growth strategy. Our labor expenses may increase
as a result of a shortage in the supply of skilled personnel. Labor shortages,
increased labor costs or the loss of key personnel could result in reduced
profitability, which would negatively impact our business.
Past and future environmental, safety and health
regulations could impose significant additional costs on us that reduce our
profits.
HVAC systems are subject
to various environmental statutes and regulations, including the Clean Air Act
and those regulating the production, servicing and disposal of certain ozone
depleting refrigerants used in HVAC systems. There can be no assurance that the
regulatory environment in which we operate will not change significantly in the
future. Various local, state and federal laws and regulations impose licensing
standards on technicians who install and service HVAC systems. Our failure to
comply with these laws and regulations could subject us to substantial fines
and potentially the loss of our licenses. It is impossible to predict the full
nature and effect of judicial, legislative or regulatory developments relating
to health and safety regulations and environmental protection regulations
applicable to our operations.
12
We are effectively self-insured against many potential
liabilities, and our risk management policies and procedures may leave us
exposed to unidentified or unanticipated risks.
Although we maintain
insurance policies with respect to our related exposures, these policies are
subject to high deductibles; as such, we are effectively self-insured for
substantially most of our claims. We actuarially determine any liabilities for
unpaid claims and associated expenses for the three major lines of coverage
(Workers Compensation, General Liability and Auto Liability). The
determination of such claims and expenses and the appropriateness of the
estimated liability are reviewed and updated quarterly. However, insurance
liabilities are difficult to assess and estimate due to the many relevant
factors, the effects of which are often unknown, including the severity of an
injury, the determination of our liability in proportion to other parties, the
number of incidents that have occurred but are not reported and the
effectiveness of our safety program. Our accruals are based upon known facts,
historical trends (both internal trends and industry averages) and our
reasonable estimate of our future expenses and we believe such accruals to be
adequate. However, our risk management strategies and techniques may not be
fully effective in mitigating our risk exposure in all market environments or
against all types of risk. If any of the variety of instruments, processes and
strategies we utilize to manage our exposure to various types of risk are not
effective, we may incur losses that are not covered by our insurance policies
or that exceed our accruals or that exceed our coverage limits.
If we experience delays and/or defaults in customer
payments, we could be unable to recover all expenditures.
Because of the nature of
our contracts, at times we commit resources to projects prior to receiving payments
from the customer in amounts sufficient to cover expenditures on projects as
they are incurred. Delays in customer payments may require us to make a working
capital investment. If a customer defaults in making its payments on a project
in which we have devoted resources, it could have a material negative effect on
our results of operations.
Actual and potential claims, lawsuits and proceedings
could ultimately reduce our profitability and liquidity and weaken our
financial condition.
We are likely to continue
to be named as a defendant in legal proceedings claiming damages from us in
connection with the operation of our business. Most of the actions against us
arise out of the normal course of our performing services on project sites. We
also are and are likely to continue to be a plaintiff in legal proceedings
against customers, in which we seek to recover payment of contractual amounts
due to us as well as claims for increased costs incurred by us. When
appropriate we establish provisions against possible certain exposures, and we
adjust such provisions from time to time according to ongoing exposure. If in
the future our assumptions and estimates related to such exposures prove to be
inadequate or wrong, we could experience a reduction in our profitability and
liquidity and a weakening of our financial condition. In addition, claims,
lawsuits and proceedings may harm our reputation or divert management resources
away from operating our business.
Our recent and future acquisitions may not be successful.
We expect to continue to
pursue extremely selective acquisitions of businesses. We cannot assure you
that we will be able to locate acquisitions or that we will be able to
consummate any such transactions on terms and conditions acceptable to us, or
that such transactions will be successful. Acquisitions may expose us to
additional business risks that are different than those we have traditionally
experienced. We also may encounter difficulties integrating acquisitions and
successfully managing the growth we expect to experience from these
acquisitions.
13
Our common stock, which is listed on the New York
Stock Exchange, has from time-to-time experienced significant price and volume
fluctuations. These fluctuations are likely to continue in the future, and our
stockholders may not be able to resell their shares of common stock at or above
the purchase price paid.
The market price of our
common stock may change significantly in response to various factors and events
beyond our control. A variety of events may cause the market price of our
common stock to fluctuate significantly, including the following: (i) the
risk factors described in this Report on Form 10-K; (ii) a
shortfall in operating revenue or net income from that expected by securities
analysts and investors; (iii) changes in securities analysts estimates of
our financial performance or the financial performance of our competitors or
companies in our industry generally; (iv) general conditions in our
customers industries; (v) general conditions in the securities markets; (vi) our
announcements of significant contracts, milestones, acquisitions; (vii) our
relationship with other companies; (viii) our investors view of the
sectors and markets in which we operate; and (ix) additions or departures
of key personnel. Some companies that have volatile market prices for their
securities have been subject to security class action suits filed against them.
If a suit were to be filed against us, regardless of the outcome, it could
result in substantial costs and a diversion of our managements attention and
resources. This could have a material adverse effect on our business, results
of operations and financial condition.
If we do not effectively manage our growth, our
existing infrastructure may become strained, and we may be unable to increase
revenue growth.
The growth that we have
experienced, and in the future may experience, may provide challenges to our
organization, requiring us to expand our personnel and our operations. Future
growth may strain our infrastructure, operations and other managerial and
operating resources. If our business resources become strained, our earnings
may be adversely affected and we may be unable to increase revenue growth.
Our earnings have
previously been negatively impacted by goodwill impairment charges. Earnings
for future periods may be further affected by additional impairment charges.
When we acquire a
business, we record an asset called goodwill equal to the excess amount paid
for the business, including liabilities assumed, over the fair value of the
tangible and intangible assets of the business acquired. In 2001, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 141, which requires that all business combinations
be accounted for using the purchase method of accounting and that certain
intangible assets acquired in a business combination be recognized as assets
apart from goodwill. Also in 2001, the FASB issued SFAS No. 142, which
provides that goodwill and other intangible assets that have indefinite useful
lives not be amortized, but instead must be tested at least annually for
impairment, and intangible assets that have finite useful lives should continue
to be amortized over their useful lives. SFAS No. 142 also provides
specific guidance for testing goodwill and other non-amortized intangible
assets for impairment. SFAS No. 142 requires management to make certain
estimates and assumptions to allocate goodwill to reporting units and to
determine the fair value of reporting unit net assets and liabilities,
including, among other things, an assessment of market conditions, projected
cash flows, investment rates, cost of capital and growth rates, which could
significantly impact the reported value of goodwill and other intangible assets.
We perform an annual goodwill impairment review in the fourth quarter of every
fiscal year. Additionally, we perform a goodwill impairment review whenever
events or changes in circumstances indicate the carrying value may not be
recoverable. At some future date we may determine that an additional
significant impairment has occurred in the value of our unamortized intangible
assets or fixed assets, which could require us to write off an additional
portion of our assets and could adversely affect our financial condition or our
reported results of operations.
14
Failure or circumvention of our disclosure controls
and procedures or internal controls over financial reporting could seriously
harm our business.
We plan to continue to maintain
and strengthen internal controls and procedures to enhance the effectiveness of
our disclosure controls and internal controls over financial reporting. Any
system of controls, however well designed and operated, is based in part on
certain assumptions and can provide only reasonable, and not absolute,
assurances that the objectives of the system are met. Any failure of our
disclosure controls and procedures or internal controls over financial
reporting could harm our financial condition and results of operations.
Our charter contains certain anti-takeover provisions
that may inhibit or delay a change in control.
Our certificate of
incorporation authorizes our Board of Directors to issue, without stockholder
approval, one or more series of preferred stock having such preferences, powers
and relative, participating, optional and other rights (including preferences
over the common stock respecting dividends and distributions and voting rights)
as the Board of Directors may determine. The issuance of this blank-check
preferred stock could render more difficult or discourage an attempt to obtain
control by means of a tender offer, merger, proxy contest or otherwise. Additionally,
certain provisions of the Delaware General Corporation Law may also discourage
takeover attempts that have not been approved by the Board of Directors.
Failure to successfully comply with Section 404
of the Sarbanes-Oxley Act of 2002 on a timely basis could seriously harm our
business.
Section 404 of the
Sarbanes-Oxley Act of 2002 requires our management to report on our internal
controls over financial reporting and also requires our independent registered
public accountants to attest to this report. Although we have historically been
able to successfully comply with Section 404, in the future, we may not be
successful in complying with Section 404 on a timely basis. The failure to
comply with Section 404 could harm our financial condition and results of
operations.
ITEM 1B. Unresolved Staff Comments
None.
15
ITEM 2. Properties
We lease the real property and
buildings from which we operate. Our facilities are located in over twenty-four
states and Puerto Rico and consist of offices, shops, maintenance and warehouse
facilities. Generally, leases range from three to ten years and are on terms we
believe to be commercially reasonable. A majority of these premises are leased
from individuals or entities with whom we have no other business relationship. In
certain instances these leases are with employees who are also the former
owners of companies we purchased from 1997 through 1999. These leases were
entered into in connection with the acquisition of the companies these
individuals owned. To the extent we renew these leases or otherwise change
them, we enter into such agreements on terms that reflect a fair market
valuation for the properties. Leased premises range in size from approximately
2,400 square feet to 130,000 square feet. To maximize available capital, we
generally intend to continue to lease our properties, but may consider owning
properties where we believe ownership would be more economical. We believe that
our facilities are sufficient for our current needs.
We
lease our executive and administrative offices in Houston, Texas.
ITEM 3. Legal Proceedings
We are subject to
certain claims and lawsuits arising in the normal course of business. We
maintain various insurance coverages to minimize financial risk associated with
these claims. We have estimated and provided accruals for probable losses and
related legal fees associated with certain of our litigation in our
consolidated financial statements. While we cannot predict the outcome of these
proceedings, in our opinion and based on reports of counsel, any liability
arising from these matters individually and in the aggregate will not have a
material effect on our operating results or financial condition, after giving
effect to provisions already recorded.
In addition to the matters
described above, we are defending a dispute arising out of an alleged delay
related to a multi-family construction project. Plaintiffs allege actual
damages of approximately $7 million plus attorneys fees, punitive damages, and
pre-judgment interest. The trial relating to this matter is currently scheduled
for the second quarter of 2007. We anticipate that contribution from a
co-defendant and insurance proceeds will, in part, offset any adverse judgment.
Management believes that the accruals relating to the matter appropriately
reflect a probable outcome; however, if we are not successful in this dispute,
it could have a material adverse effect on our operating results.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
16
PART II
ITEM 5. Market for Registrants Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The following table
sets forth the reported high and low sales prices of our Common Stock for the
quarters indicated as traded at the New York Stock Exchange. Our Common Stock
is traded under the symbol FIX:
|
|
High
|
|
Low
|
|
First
Quarter, 2005
|
|
$
|
8.55
|
|
$
|
6.67
|
|
Second
Quarter, 2005
|
|
$
|
8.05
|
|
$
|
6.15
|
|
Third
Quarter, 2005
|
|
$
|
8.81
|
|
$
|
6.22
|
|
Fourth
Quarter, 2005
|
|
$
|
9.95
|
|
$
|
8.07
|
|
First
Quarter, 2006
|
|
$
|
13.66
|
|
$
|
8.88
|
|
Second
Quarter, 2006
|
|
$
|
15.72
|
|
$
|
11.82
|
|
Third
Quarter, 2006
|
|
$
|
14.50
|
|
$
|
11.42
|
|
Fourth
Quarter, 2006
|
|
$
|
14.08
|
|
$
|
10.42
|
|
January 1February 23,
2007
|
|
$
|
14.00
|
|
$
|
11.90
|
|
As of February 23, 2007,
there were approximately 460 stockholders of record of our Common Stock, and
the last reported sale price on that date was $13.91 per share.
In November 2005, the
Company declared an initial quarterly dividend of $0.025 per share of our
Common Stock. During 2006, the Company declared quarterly dividends totaling
$0.140 per share of our Common Stock. On February 28, 2007, the Company
declared a quarterly dividend of $0.035 per share on our Common Stock. The
dividend is payable on March 19, 2007 to shareholders of record at the close
of business on March 9, 2007. Our revolving credit agreement limits the
amount of dividends we can pay at any time that the ratio of Companys total
indebtedness less cash and cash equivalents to its Credit Facility Adjusted
EBITDA exceeds 1.0.
The following Corporate
Performance Graph and related information shall not be deemed soliciting
material or to be filed with the SEC, nor shall such information be
incorporated by reference into any future filing under the Securities Act or
the Exchange Act, except to the extent that we specifically incorporate it by
reference into such filing.
COMPARISON OF 5
YEAR CUMULATIVE TOTAL RETURN*
Among Comfort Systems USA, Inc., The S & P 500
Index
And The Russell 2000 Index
* $100
invested on 12/31/01 in stock or index including reinvestment of divendends.
Fiscal year ending December 31.
Copyright
© 2007. Standard & Poors, a division of The McGraw Hill Companies, Inc. All
rights reserved
www.researchdatagroup.com/S&P.htm
17
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
ITEM 6. Selected Financial Data
The following
selected historical financial data has been derived from the audited financial
statements of the Company and should be read in conjunction with the historical
Consolidated Financial Statements and related notes.
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(in thousands)
|
|
STATEMENT OF OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
745,782
|
|
$
|
732,025
|
|
$
|
767,358
|
|
$
|
892,549
|
|
$
|
1,056,525
|
|
Operating
income(a)
|
|
$
|
10,037
|
|
$
|
5,907
|
|
$
|
24,089
|
|
$
|
1,065
|
|
$
|
44,522
|
|
Income
(loss) from continuing operations
|
|
$
|
3,593
|
|
$
|
(807
|
)
|
$
|
13,679
|
|
$
|
(14,869
|
)
|
$
|
28,717
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
Operating
results, net of tax
|
|
$
|
1,850
|
|
$
|
438
|
|
$
|
(3,447
|
)
|
$
|
(1,309
|
)
|
$
|
(203
|
)
|
Estimated
gain (loss) on disposition, including
tax
|
|
$
|
(12,002
|
)
|
$
|
(5,210
|
)
|
$
|
481
|
|
$
|
9,952
|
|
$
|
210
|
|
Cumulative
effect of change in accounting principle,
net of tax
|
|
$
|
(202,521
|
)
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Net
income (loss)
|
|
$
|
(209,080
|
)
|
$
|
(5,579
|
)
|
$
|
10,713
|
|
$
|
(6,226
|
)
|
$
|
28,724
|
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
0.09
|
|
$
|
(0.02
|
)
|
$
|
0.36
|
|
$
|
(0.38
|
)
|
$
|
0.71
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
0.05
|
|
0.01
|
|
(0.09
|
)
|
(0.03
|
)
|
(0.01
|
)
|
Estimated
gain (loss) on disposition
|
|
(0.32
|
)
|
(0.14
|
)
|
0.01
|
|
0.25
|
|
0.01
|
|
Cumulative
effect of change in accounting
principle
|
|
(5.38
|
)
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(5.56
|
)
|
$
|
(0.15
|
)
|
$
|
0.28
|
|
$
|
(0.16
|
)
|
$
|
0.71
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
0.09
|
|
$
|
(0.04
|
)
|
$
|
0.35
|
|
$
|
(0.38
|
)
|
$
|
0.70
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
0.05
|
|
0.01
|
|
(0.09
|
)
|
(0.03
|
)
|
(0.01
|
)
|
Estimated
gain (loss) on disposition
|
|
(0.31
|
)
|
(0.14
|
)
|
0.01
|
|
0.25
|
|
0.01
|
|
Cumulative
effect of change in accounting
principle
|
|
(5.31
|
)
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(5.48
|
)
|
$
|
(0.17
|
)
|
$
|
0.27
|
|
$
|
(0.16
|
)
|
$
|
0.70
|
|
Cash
dividends per share
|
|
|
|
|
|
|
|
$
|
0.025
|
|
$
|
0.140
|
|
BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital
|
|
$
|
92,140
|
|
$
|
93,003
|
|
$
|
106,478
|
|
$
|
130,915
|
|
$
|
158,225
|
|
Total
assets
|
|
$
|
366,535
|
|
$
|
351,110
|
|
$
|
383,116
|
|
$
|
408,683
|
|
$
|
460,874
|
|
Total
debt, excluding discount
|
|
$
|
15,200
|
|
$
|
10,394
|
|
$
|
8,822
|
|
$
|
|
|
$
|
|
|
Total stockholders equity
|
|
$
|
205,086
|
|
$
|
200,660
|
|
$
|
216,597
|
|
$
|
213,523
|
|
$
|
242,714
|
|
(a) Included in operating income (loss) are goodwill impairment charges of
$0.2 million, $2.7 million, $0.6 million, $33.9 million and $ million for
2002, 2003, 2004, 2005 and 2006, respectively.
18
ITEM 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations
The
following discussion and analysis should be read in conjunction with the Consolidated
Financial Statements and related notes included elsewhere in this annual report
on Form 10-K. Also see Forward-Looking Statements discussion.
Introduction and Overview
We are a national provider
of comprehensive HVAC installation, maintenance, repair and replacement
services within the mechanical services industry. The services we provide
address a very broad need, as air is circulated through almost all commercial,
industrial and institutional buildings virtually year-round. We operate
primarily in the commercial, industrial and institutional HVAC markets and
perform most of our services within office buildings, retail centers, apartment
complexes, manufacturing plants, and healthcare, education and government
facilities. In addition to standard HVAC services, we provide specialized
applications such as building automation control systems, fire protection,
process cooling, electronic monitoring and process piping. Certain locations
also perform related activities such as electrical service and plumbing.
Nature and Economics of Our Business
Approximately 86% of our revenues are earned on a
project basis for installation of HVAC systems in newly constructed facilities
or for replacement of HVAC systems in existing facilities. Customers hire us to
ensure such systems deliver specified or generally expected heating, cooling,
conditioning and circulation of air in a facility. This entails installing core
system equipment such as packaged heating and air conditioning units, or in the
case of larger facilities, separate core components such as chillers, boilers,
air handlers, and cooling towers. We also typically install connecting and
distribution elements such as piping and ducting. Our responsibilities usually
require conforming the systems to pre-established engineering drawings and
equipment and performance specifications, which we frequently participate in
establishing. Our project management responsibilities include staging equipment
and materials to project sites, deploying labor to perform the work, and
coordinating with other service providers on the project, including any
subcontractors we might use to deliver our portion of the work.
When competing for project business, we usually
estimate the costs we will incur on a project, then propose a bid to the
customer that includes a contract price and other performance and payment terms.
Our bid price and terms are intended to cover our estimated costs on the
project and provide a profit margin to us commensurate with the value of the
installed system to the customer, the risk that project costs or duration will
vary from estimate, the schedule on which we will be paid, the opportunities
for other work that we might forego by committing capacity to this project, and
other costs that we incur more broadly to support our operations but which are
not specific to the project. Typically
customers will seek bids from competitors for a given project. While the
criteria on which customers select the winning bid vary widely and include
factors such as quality, technical expertise, on-time performance, post-project
support and service, and company history and financial strength, we believe
that price is the most influential factor for most customers in choosing an
HVAC installation and service provider.
After a customer accepts our bid, we generally enter
into a contract with the customer that specifies what we will deliver on the
project, what our related responsibilities are, and how much and when we will
be paid. Our overall price for the project is typically set at a fixed amount
in the contract, although changes in project specifications or work conditions
that result in unexpected additional work are usually subject to additional
payment from the customer via what are commonly known as change orders. Project
contracts typically provide for periodic billings to the customer as we meet
progress milestones or incur cost on the project. Project contracts in our
industry also frequently allow for a small portion of progress billings or
19
contract price to be
withheld by the customer until after we have completed the work, typically for
six months. Amounts withheld under this practice are known as retention or
retainage.
Labor and overhead costs account for the majority of
our cost of service. Accordingly, labor management and utilization have the
most impact on our project performance. Given the fixed price nature of much of
our project work, if our initial estimate of project costs is wrong or we incur
cost overruns that cannot be recovered in change orders, we can experience
reduced profits or even significant losses on fixed price project work. We also
perform some project work on a cost-plus or a time and materials basis, under
which we are paid our costs incurred plus an agreed-upon profit margin. These
margins are typically less than fixed-price contract margins because there is
less risk of unrecoverable cost overruns in cost-plus or time and materials
work.
As of December 31, 2006, we had 3,638 projects in
process. Our average project takes three to six months to complete, with an
average contract price of approximately $400,000. Our projects generally
require working capital funding of equipment and labor costs. Customer payments
on periodic billings generally do not recover these costs until late in the job.
Our average project duration together with typical retention terms as discussed
above generally allow us to complete the realization of revenue and earnings in
cash within one year. Because of the integral nature of HVAC and related
controls systems to most buildings, we have the legal right in almost all cases
to attach liens to buildings or related funding sources when we have not been
fully paid for installing systems, except with respect to some government
buildings. The service work that we do, which is discussed further below,
usually does not give rise to lien rights.
We also perform larger HVAC projects. As of December 31,
2006, we had four projects in process with a contract price of between $15 and
$35 million, eleven projects between $10 million and $15 million, 43 projects
between $5 million and $10 million, and 194 projects between $1 million and $5
million. Taken together, projects with contract prices of $1 million or more
totaled $960.8 million of aggregate contract value as of December 31,
2006, or approximately 66%, out of a total contract value for all projects in
progress of $1,451.4 million. Generally, projects closer in size to $1 million
will be completed in one year or less. It is unusual for us to work on a
project that exceeds two years in length.
In addition to project work, approximately 14% of our
revenues represent maintenance and repair service on already-installed HVAC and
controls systems. This kind of work usually takes from a few hours to a few
days to perform. Prices to the customer are usually based on the equipment and
materials used in the service as well as technician labor time. We usually bill
the customer for service work when it is complete, typically with payment terms
of up to thirty days. We also provide maintenance and repair service under
ongoing contracts. Under these contracts, we are paid regular monthly or
quarterly amounts and provide specified service based on customer requirements.
These agreements typically cover periods ranging from one to three years and
are cancelable on 30 to 60 days notice.
A relatively small but
growing portion of our revenues comes from national and regional account
customers. These customers typically have multiple sites, and contract with us
to perform maintenance and repair service. These contracts may also provide for
us to perform new or replacement systems installation. We operate a national
call center to dispatch technicians to sites requiring service. We perform the
majority of this work with our own employees, with the balance being
subcontracted to third parties that meet our performance qualifications. We
will also typically use proprietary information systems to maintain information
on the customers sites and equipment, including performance and service
records, and related cost data. These systems track the status of ongoing
service and installation work, and may also monitor system performance data. Under
these contractual relationships, we usually provide consolidated billing and
credit payment terms to the customer.
20
Profile and Management of Our Operations
Our company was originally formed in 1997 through an
initial public offering, or IPO, and simultaneous acquisition of 12 companies
engaged in our business. From the time we completed our IPO through December 1999,
we acquired 107 HVAC and complementary businesses, of which 26 were tuck-in
operations that were integrated upon
acquisition with existing operations. From 2000 through 2005 we acquired only
one company and shifted our strategy from an emphasis on acquisition-based
growth to a focus on improving the performance of our existing operations. During
that time, we sold or ceased operations at 40 companies and consolidated
another 14 companies into other operations. During 2006, we sold certain assets
and ceased operations at one of our operating companies and consolidated one
company into other operations. Today we have 38 operating units.
We manage our operations based on a variety of factors.
Financial measures we emphasize include profitability, and use of capital as indicated
by cash flow and by other measures of working capital principally involving
project cost, billings and receivables. We also monitor selling, general,
administrative and indirect project support expense, backlog, workforce size
and mix, growth in revenues and profits, variation of actual project cost from
original estimate, and overall financial performance in comparison to budget
and updated forecasts. Operational factors we emphasize include project
selection, estimating, pricing, management and execution practices, labor
utilization, safety, training, and the make-up of both existing backlog as well
as new business being pursued, in terms of project size, technical application
and facility type, end-use customers and industries, and location of the work.
Most
of our operations compete on a local or regional basis. Attracting and
retaining effective operating unit managers is an important factor in
our business, particularly in view of the relative uniqueness of each market
and operation, the importance of relationships with customers and other market
participants such as architects and consulting engineers, and the high degree
of competition and low barriers to entry in most of our markets. Accordingly,
we devote considerable attention to operating unit management quality,
stability, and contingency planning, including related considerations of
compensation, and non-competition protection where applicable.
Economic and Industry Factors
As an HVAC and building controls services provider, we
operate in the broader nonresidential construction services industry and are
affected by trends in this sector. While we do not have operations in all major
cities of the US, we believe our national presence is sufficiently large that
we experience trends in demand for and pricing of our services that are
consistent with trends in the national nonresidential construction sector. As a
result, we monitor the views of major construction sector forecasters along
with macroeconomic factors they believe drive the sector, including trends in
gross domestic product, interest rates, business investment, employment,
demographics, and the general fiscal condition of federal, state and local
governments. Although nonresidential construction activity has demonstrated
periods of both significant growth and decline, it has grown at a compound
annual rate of approximately 4.2% over the last twenty-five years.
Spending decisions for
building construction, renovation and system replacement are generally made on
a project basis, usually with some degree of discretion as to when and if
projects proceed. With larger amounts of capital, time, and discretion
involved, spending decisions are affected to a significant degree by
uncertainty, particularly concerns about macroeconomic and geopolitical trends.
We have experienced periods of time, such as after the terrorist incidents on September 11,
2001 in the US, and prior to and during the war in Iraq that occurred in early
2003, when uncertainty caused a significant slowdown in decisions to proceed
with installation and replacement project work. The Company believes that the
current economic environment is favorable relative to the activity levels of
recent years.
21
Operating Environment and Management Emphasis
Nonresidential building construction and renovation
activity, as reported by the federal government, declined over the three year
period of 2001 to 2003 and has expanded moderately during 2004 and 2005, and
has been strong during 2006. During the decline and through 2003, we responded
to market challenges by pursuing work in sectors less affected by this
downturn, such as government, educational, and health care facilities, and by
establishing marketing initiatives that take advantage of our size and range of
expertise. We also responded to declining gross profits over those years by
reducing our selling, general, and administrative expenses, and our indirect
project and service overhead costs. We believe our efforts in these areas
partially offset the decline in our profitability over that period. We have
experienced notable improvements in both industry activity as well as our own
results from 2004 to 2006, as discussed further under Results of Operations
below.
As a result of our sale of certain assets and our
continued strong emphasis on cash flow, our debt outstanding is now zero, and
we have substantial uncommitted cash balances, as discussed further in Liquidity
and Capital Resources below. On February 20, 2007, we put a new credit
facility in place with considerably less restrictive terms than those of our
previous facilities. In addition, we have added a second surety to further
support our bonding needs, and we believe our relationships with the surety
markets are positive in light of our strong current results and financial
position. We have generated positive
free cash flow in each of the last eight calendar years and will continue our
emphasis in this area. We believe that the relative size and strength of our
balance sheet and surety support as compared to most companies in our industry
represent competitive advantages for us.
As discussed at greater length in Results of
Operations below, we have seen increased activity levels in our industry from
2004 to 2006. We expect price competition to continue to be strong, as local
and regional competitors respond cautiously to changing conditions. We will
continue our efforts to find the more active sectors in our markets, and to
increase our regional and national account business. However, our primary
emphasis for 2007 will be on internal execution and margin improvement, rather
than on revenue growth. We plan to continue our involvement in multi-family
work; however, we have decided to focus a portion of our resources away from
this work and we expect that as a result, the portion of our work that is
multi-family will diminish somewhat in the future. In addition to the work we have done on our
underperforming units, we have increased our focus on project qualification,
estimating, pricing and management, and on service performance. This focus
includes significant increases in unit level training.
Beginning in 2004, there has been substantial cost
fluctuation in certain commodities that are used in construction activity,
including steel, iron, copper, lumber, and poly-vinyl chloride (PVC) pipe. We
estimate that direct purchase of these commodities, principally steel, iron and
copper, comprises between 10% and 15% of our average project cost. As noted
below in Results of Operations, for some of the project work we have
performed in 2004, the actual cost of certain commodities necessary for these
projects was significantly greater than the commodity cost estimates we used
when we committed to prices for these projects, which typically was done in
2003 before commodity cost inflation became apparent. We experienced most of
the negative effect of this unrecovered commodity cost inflation in the second
quarter of 2004. We began taking steps early in 2004 to reduce future commodity
cost exposure. Among these steps were early buying of commodities for
particular projects, or for general inventory, as well as including escalation
and escape provisions in project bids and contracts wherever possible. Since
mid-2004, we have experienced minimal unrecovered cost inflation. However,
commodity markets remain unsettled, and while we are taking steps as noted
above to minimize unrecoverable commodity cost inflation, these steps cannot
guarantee that we will avoid all such exposure. It is also possible that
further increases in or uncertainty about commodity costs will decrease demand
for nonresidential construction activity, which could in turn reduce our future
revenues.
22
Based on indications of
stabilizing industry conditions and on our emphasis on internal execution and
margin improvement, we expect that our 2007 profitability will improve as
compared to our 2006 results, although there can be no assurance that we will
achieve this outcome. Over the longer term, if industry conditions are stable
to improving, we believe we will experience more periods of increased revenues.
In addition, given the size and fragmentation of our industry, we believe it
makes sense for us to consider acquisition possibilities. However, we plan to
do so on a selective and opportunistic basis, and expect our growth in 2007
will largely be generated internally.
Critical Accounting Policies
In response to the
Commissions Release No. 33-8040, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies, we identified our critical
accounting policies based upon the significance of the accounting policy to our
overall financial statement presentation, as well as the complexity of the
accounting policy and our use of estimates and subjective assessments. We have
concluded that our most critical accounting policy is our revenue recognition
policy. As discussed elsewhere in this annual report on Form 10-K,
our business has two service functions: (i) installation, which we account
for under the percentage of completion method, and (ii) maintenance, repair
and replacement, which we account for as the services are performed, or in the
case of replacement, under the percentage of completion method. In addition, we
identified other critical accounting policies related to our allowance for
doubtful accounts receivable, the recording of our self-insurance liabilities,
valuation of deferred tax assets and the assessment of goodwill impairment. These
accounting policies, as well as others, are described in Note 2 to the
Consolidated Financial Statements included elsewhere in this annual report on Form 10-K.
Percentage of Completion Method of Accounting
Approximately 86% of our revenues were earned on a
project basis and recognized through the percentage of completion method of
accounting. Under this method as provided by American Institute of Certified
Public Accountants Statement of Position 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts,
contract revenue recognizable at any time during the life of a contract is determined
by multiplying expected total contract revenue by the percentage of contract
costs incurred at any time to total estimated contract costs. More
specifically, as part of the negotiation and bidding process in which we engage
in connection with obtaining installation contracts, we estimate our contract
costs, which include all direct materials (exclusive of rebates), labor and
subcontract costs and indirect costs related to contract performance, such as
indirect labor, supplies, tools, repairs and depreciation costs. These contract
costs are included in our results of operations under the caption Cost of
Services. Then, as we perform under
those contracts, we measure such costs incurred, compare them to total
estimated costs to complete the contract, and recognize a corresponding
proportion of contract revenue. Labor costs are considered to be incurred as
the work is performed. Subcontract labor is recognized as the work is
performed, but is generally subjected to approval as to milestones or other evidence
of completion. Non-labor project cost consists of purchased equipment,
prefabricated materials and other materials. Purchased equipment on our
projects is substantially produced to job specifications and is a value added
element to our work. The costs are considered to be incurred when title is
transferred to us, which typically is upon delivery to the worksite. Prefabricated
materials, such as ductwork and piping, are generally performed at our shops
and recognized as contract costs when fabricated for the unique specifications
of the job. Other materials cost are not significant and are generally recorded
when delivered to the worksite. This measurement and comparison process
requires updates to the estimate of total costs to complete the contract, and
these updates may include subjective assessments.
23
Our contracts typically
provide for a schedule of billings or invoices to the customer based on
reaching agreed- upon milestones or as we incur costs. The schedules for such
billings usually do not precisely match the schedule on which we incur costs. As
a result, contract revenues recognized in the statement of operations can and
usually do differ from amounts that can be billed or invoiced to the customer
at any point during the contract. Amounts by which cumulative contract revenues
recognized on a contract as of a given date exceed cumulative billings to the
customer under the contract are reflected as a current asset in our balance
sheet under the caption Costs and estimated earnings in excess of billings. Amounts by which cumulative billings to the customer
under a contract as of a given date exceed cumulative contract revenues
recognized on the contract are reflected as a current liability in our balance
sheet under the caption Billings in excess of costs and estimated earnings.
The percentage of completion
method of accounting is also affected by changes in job performance, job
conditions, and final contract settlements. These factors may result in
revisions to estimated costs and, therefore, revenues. Such revisions are
frequently based on further estimates and subjective assessments. We recognize
these revisions in the period in which they are determined. If such revisions
lead us to conclude that we will recognize a loss on a contract, the full
amount of the estimated ultimate loss is recognized in the period we reach that
conclusion, regardless of the percentage of completion of the contract.
Revisions to project costs
and conditions can give rise to change orders under which the customer agrees
to pay additional contract price. Revisions can also result in claims we might
make against the customer to recover project variances that have not been
satisfactorily addressed through change orders with the customer. Except in
certain circumstances, we do not recognize revenues or margin based on change
orders or claims until they have been agreed upon with the customer. The amount
of revenue associated with unapproved change orders and claims is currently
immaterial. Variations from estimated project costs could have a significant
impact on our operating results, depending on project size, and the
recoverability of the variation via additional customer payments.
Accounting for Allowance for Doubtful Accounts
We are required to
estimate the collectibility of accounts receivable and provide an allowance for
doubtful accounts for receivable amounts we believe we will not ultimately
collect. This requires us to make certain judgments and estimates
involving, among others, the
creditworthiness of the customer, our prior collection history with the
customer, ongoing relationships with the customer, the aging of past due
balances, our lien rights, if any, in the property where we performed the work,
and the availability, if any, of payment bonds applicable to our contract. These
estimates are re-evaluated and adjusted as additional information is received.
Accounting for Self-Insurance Liabilities
We are substantially
self-insured for workers compensation, employers liability, auto liability,
general liability and employee group health claims in view of the relatively
high per-incident deductibles we absorb under our insurance arrangements for
these risks. Losses up to deductible amounts are estimated and accrued based
upon known facts, historical trends and industry averages. Loss estimates
associated with the larger and longer-developing risksworkers compensation,
auto liability and general liabilityare reviewed by a third party actuary
quarterly. We believe these accruals are adequate. However, insurance
liabilities are difficult to estimate due to unknown factors, including the
severity of an injury, the determination of our liability in proportion to
other parties, timely reporting of occurrences, ongoing treatment or loss
mitigation, general trends in litigation recovery outcomes and the
effectiveness of safety and risk management programs. Therefore, if actual
experience differs from the assumptions and estimates used for recording the
liabilities, adjustments may be required and would be recorded in the period
that such experience becomes known.
24
Accounting for Deferred Tax Assets
We regularly evaluate
valuation allowances established for deferred tax assets for which future
realization is uncertain. We perform this evaluation quarterly. Estimations of
required valuation allowances include estimates of future taxable income. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which the activity underlying these
assets becomes deductible. We consider projected future taxable income and tax
planning strategies in making this assessment. If actual future taxable income
differs from our estimates, we may not realize deferred tax assets to the
extent we have estimated.
Accounting for Goodwill and Other Intangible Assets
In most businesses we have acquired, the value we paid
to buy the business was greater than the value of specifically identifiable net
assets in the business. Under generally accepted accounting principles, this
excess is termed goodwill and is recognized as an asset at the time the
business is acquired. It is generally expected that future net earnings from an
acquired business will exceed the goodwill asset recognized at the time the
business is bought.
Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets requires us to assess our goodwill asset
amounts for impairment each year, and more frequently if circumstances suggest
an impairment may have occurred. Impairment must be reflected when the value of
a given business unit in excess of its tangible net assets falls below the
goodwill asset balance carried for that unit on our books. If other business
units have had increases in the value of their respective goodwill balances,
such increases may not be recorded under SFAS No. 142. Accordingly, such
increases may not be netted against impairments at other business units. The
requirements for assessing whether goodwill assets have been impaired involve
market-based information. This information, and its use in assessing goodwill,
entails some degree of subjective assessment.
We currently perform our annual impairment testing as
of October 1 and any impairment charges resulting from this process are
reported in the fourth quarter. We segregated our operations into reporting
units based on the degree of operating and financial independence of each unit
and our related management of them. These reporting units are tested for
impairment by comparing the units fair value to its carrying value. The fair
value of each reporting unit was estimated using a discounted cash flow model
combined with market valuation approaches. Significant estimates and
assumptions are used in assessing the fair value of reporting units. These
estimates and assumptions involved future cash flows, growth rates, discount
rates, weighted average cost of capital and estimates of market valuations for
each of the reporting units.
We recorded goodwill
impairment charges of $0.6 million and $33.9 million in operating
results during the fourth quarters of 2004 and 2005, respectively. We recorded
an additional impairment charge of $2.7 million in 2004 related to
operations that were subsequently discontinued in 2005. This impairment charge
is reflected in operating loss associated with discontinued operations. The
impairment charge during 2004 from continuing operations of $0.6 million
related to a reporting unit in northern Michigan and was a result of concerns
about the activity levels in this market. During 2005, we experienced modest
revenue growth and improved profitability due to increased industry activity
and favorable market conditions. However, the revenue, operating profits and
cash flows for certain reporting units were lower than expected despite these
favorable market conditions. Primarily based upon this trend, the revenue,
earnings and cash flow projections for certain reporting units were revised
downward for the next several years as compared to previous projections. As a
result, an impairment charge of $33.9 million was recognized in 2005 for
these reporting units including operations in San Diego, Houston, Grand Rapids,
central Iowa, Birmingham, Buffalo and Albany. We did not have a goodwill
impairment charge in 2006.
25
Results of
Operations (in thousands):
Table 1Historical Results
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
Revenues
|
|
$
|
767,358
|
|
100.0
|
%
|
$
|
892,549
|
|
100.0
|
%
|
$
|
1,056,525
|
|
100.0
|
%
|
Cost of services
|
|
644,318
|
|
84.0
|
%
|
744,407
|
|
83.4
|
%
|
885,508
|
|
83.8
|
%
|
Gross profit
|
|
123,040
|
|
16.0
|
%
|
148,142
|
|
16.6
|
%
|
171,017
|
|
16.2
|
%
|
Selling, general
and administrative expenses
|
|
98,429
|
|
12.8
|
%
|
113,285
|
|
12.7
|
%
|
126,620
|
|
12.0
|
%
|
Goodwill
impairment
|
|
637
|
|
0.1
|
%
|
33,877
|
|
3.8
|
%
|
|
|
|
|
Gain on sale of
assets
|
|
(115
|
)
|
|
|
(85
|
)
|
|
|
(125
|
)
|
|
|
Operating income
|
|
24,089
|
|
3.1
|
%
|
1,065
|
|
0.1
|
%
|
44,522
|
|
4.2
|
%
|
Interest income
(expense), net
|
|
(1,394
|
)
|
(0.2
|
%)
|
(323
|
)
|
|
|
1,969
|
|
0.2
|
%
|
Other income
(expense)
|
|
(427
|
)
|
(0.1
|
%)
|
107
|
|
|
|
100
|
|
|
|
Write-off of debt
costs
|
|
|
|
|
|
(870
|
)
|
(0.1
|
%)
|
|
|
|
|
Income (loss)
before income taxes
|
|
22,268
|
|
2.9
|
%
|
(21
|
)
|
|
|
46,591
|
|
4.4
|
%
|
Income tax
expense
|
|
8,589
|
|
|
|
14,848
|
|
|
|
17,874
|
|
|
|
Income (loss)
from continuing operations
|
|
13,679
|
|
1.8
|
%
|
(14,869
|
)
|
(1.7
|
%)
|
28,717
|
|
2.7
|
%
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss, net of tax
|
|
(3,447
|
)
|
|
|
(1,309
|
)
|
|
|
(203
|
)
|
|
|
Estimated gain on disposition, including tax
|
|
481
|
|
|
|
9,952
|
|
|
|
210
|
|
|
|
Net income (loss)
|
|
$
|
10,713
|
|
|
|
$
|
(6,226
|
)
|
|
|
$
|
28,724
|
|
|
|
26
Table 2Supplemental Non-GAAP DisclosureOperating
Results of Ongoing Operations Excluding Certain Items
The
following table presents information excluding write-off of debt costs and
goodwill impairment charges. We have included this table because we believe it
offers an additional view of the core results of our continuing operations in a
way we find useful in managing these operations, and in a way which also
responds to frequent questions we receive about the Company from third parties.
However, this presentation of operating results is not in accordance with
generally accepted accounting principles, and should not be considered an
alternative to income as determined under generally accepted accounting
principles and presented above in Table 1Historical Results. In particular,
impairment charges under the goodwill accounting rules are generally
expected to occur periodically as goodwill recognized in connection with the
acquisition of businesses responds over time to changes in those businesses
markets and operations. We recorded goodwill impairment charges in 2004 and
2005.
|
|
2004
|
|
2005
|
|
2006
|
|
Income (loss) from continuing operations (after
tax)
|
|
$
|
13,679
|
|
|
|
$
|
(14,869
|
)
|
|
|
$
|
28,717
|
|
|
|
Goodwill impairment
(after tax)
|
|
637
|
|
|
|
33,955
|
|
|
|
|
|
|
|
Write-off of debt costs
(after tax)
|
|
|
|
|
|
479
|
|
|
|
|
|
|
|
Income from continuing
operations (after tax), excluding goodwill impairment and the write-off of debt
costs
|
|
$
|
14,316
|
|
1.9
|
%
|
$
|
19,565
|
|
2.2
|
%
|
$
|
28,717
|
|
2.7
|
%
|
Diluted earnings per shareincome from continuing
operations (after tax), excluding goodwill impairment and the write-off of
debt costs
|
|
$
|
0.36
|
|
|
|
$
|
0.49
|
|
|
|
$
|
0.70
|
|
|
|
2006 Compared to
2005
RevenuesRevenues increased $164.0 million, or 18.4% to $1,056.5 million
in 2006 compared to 2005. The revenue growth stemmed primarily from generally
improving nonresidential facilities markets throughout the United States
especially in markets such as the multi-family sector (approximately $86.8 million),
office buildings (approximately $37.9 million) and schools (approximately
$45.2 million). We have seen increased activity, primarily in our Texas,
California, Tennessee and Maryland operations, resulting from the start-up of
several large projects.
Backlog reflects revenues
still to be recognized under contracted or committed installation and
replacement project work. Project work generally lasts less than one year. Service
agreement revenues and service work and short duration projects which are
generally billed as performed do not flow through backlog. Accordingly, backlog
represents only a portion of our revenues for any given future period, and it
represents revenues that are likely to be reflected in our operating results
over the next six to twelve months. As a result, we believe the predictive
value of backlog information is limited to indications of general revenue
direction over the near term, and should not be interpreted as indicative of
ongoing revenue performance over several quarters.
Backlog associated with
continuing operations as of December 31, 2006 was $653.8 million, a
3.7% decrease from September 30, 2006 backlog of $678.9 million, and
a 3.9% decrease from December 31, 2005 backlog of $680.6 million. The
sequential and year over year decrease is primarily from one of our larger
multi-family operations working through its larger than usual existing backlog.
We plan to continue our involvement in multi-family work; however, we have
decided to focus a portion of our resources away from this work and we expect
that as a result, the portion of our work that is multi-family will diminish
somewhat in the future.
27
Following the three-year period of industry activity
declines from 2001-2003 noted previously, we saw modest year-over-year
revenue increases at our ongoing operations beginning in mid-2003 and
continuing throughout 2006. We continue to see signs that activity levels in
our industry will remain strong throughout 2007. These observations are based
on nonresidential construction spending trends, shipment data from HVAC
equipment manufacturers, forecasts from construction industry analysts, and
anecdotal indications of project consideration.
Along with the indications noted above that suggest
industry activity is improving, there remain the following cautionary factors
in the industry environment, each of which is discussed at greater length in
the Introduction above. Since HVAC and
related installation and replacement decisions are capital decisions usually
involving some amount of discretion, they tend to be affected to a greater
degree by macroeconomic or geopolitical uncertainty. Negative developments or
events in these arenas, should they occur, will likely cause end users to defer
HVAC and related spending decisions, thereby reducing our revenues.
We continue to experience a noticeable amount of price
competition in our markets, which restrains our ability to increase revenues.
While we believe we will see continued strength in
industry activity levels throughout 2007, in view of all of the foregoing
factors, we may experience modest revenue growth or revenue declines in
upcoming periods. In addition, if general economic activity in the US slows
significantly from current levels, we may realize decreases in revenue and
lower operating margins.
Gross ProfitGross profit increased $22.9 million, or 15.4%,
to $171.0 million in 2006 compared to 2005. As a percentage of revenues,
historical gross profit for 2006 was 16.2%, down from 16.6% in 2005. The
decrease in gross profit percentage resulted primarily from an increased
proportion of new construction work due to stronger activity, and by job
underperformance at our Connecticut operations (approximately $3.2 million),
and at our large multi-family operation based in Texas (approximately $2.3 million).
These decreases were partially offset by improved profitability at our Southern
California operation (approximately $1.9 million). In addition, we
realized higher risk management expense in 2006 ($3.4 million) primarily due to
general liability claims associated with our work in the multi-family market.
As noted in the Introduction
above, we are currently placing a greater emphasis on internal execution and
margin improvement than on revenue growth. This includes a strong focus on
those of our units that have underperformed, along with increased training
efforts on project qualification, estimating, pricing and management, and on
service performance. While we believe these efforts will help us increase gross
profits, we cannot assure that this will occur. Further, if we are successful
in these efforts, we cannot assure that they will offset adverse industry
trends, if such trends occur.
Selling, General
and Administrative Expenses (SG&A)SG&A increased $13.3 million, or 11.8% for 2006 as compared
to 2005. This is primarily due to an increase in the number of overhead
personnel to manage internal growth. As a percentage of revenues, SG&A
declined from 12.7% in 2005 to 12.0% in 2006. This decrease is consistent with
our effort to control our SG&A expenses as we experience internal revenue
growth.
Goodwill ImpairmentWe recorded goodwill impairment charges of $33.9 million
during the fourth quarter of 2005 and recorded no goodwill impairment charge in
2006. During 2005, we experienced modest revenue growth and improved
profitability due to increased industry activity and favorable market
conditions. However, the revenue, operating profits and cash flows for certain
reporting units were lower than expected despite these favorable market
conditions. Primarily based upon this trend, the revenue, earnings and cash
flow projections for certain reporting units were revised downward for the next
several years as compared to previous projections. As a result, an impairment
charge of $33.9 million was recognized in 2005 for these reporting units
including operations in San Diego, Houston, Grand Rapids, central Iowa,
Birmingham, Buffalo and Albany. Impairment must be reflected when the value of
a given business unit in excess of its tangible net assets falls below the
goodwill asset balance carried for that unit on the Companys books. If other
business units have had increases in the value of their respective goodwill
28
balances, such increases may not be
recorded under SFAS No. 142. Accordingly, such increases may not be netted
against impairments at other business units.
Interest Income
(Expense), NetInterest
expense, net was $0.3 million in 2005 and interest income, net was $2.0 million
in 2006. The decrease in interest expense, net is a result of payments on the
term loan throughout 2005 thereby having no debt outstanding in 2006, and the
increase in interest income is due to interest income earned from higher cash
balances in the current year. See Liquidity and Capital Resources for a
detail of the components of interest income (expense), net for 2005 and 2006.
Write off of debt
costsThe second quarter of
2005 includes a non-cash write off of $0.9 million of deferred financing
costs resulting from the replacement of our previous credit facility.
Income Tax ExpenseOur effective tax rate associated with results from
continuing operations for 2006 was 38.4%. Excluding effects of the goodwill
impairment charge, our 2005 effective tax rate was 43.6%. Our effective tax rate is generally higher than statutory
rates because of the effect of certain expenses that are not deductible for tax
purposes. In addition, adjustments to tax reserves are analyzed and adjusted
quarterly as events occur to warrant such changes. Adjustments to tax reserves
are a component of the effective tax rate. The decrease in the effective tax
rate is primarily due to an improvement in operating results which dilutes the
impact of non-deductible expenses and adjustments to our tax reserves. Furthermore,
our state tax rate is lower due to the change in where our income is being
earned.
During 2004, the American Jobs Creation Act of 2004
was signed into law. The primary
effect of this legislation was to permit us to claim a deduction for 3% of
earnings related to certain of our construction-related activities beginning in
2005. This deduction modestly decreased our effective tax rate. We currently
estimate that our effective tax rate for 2007 will be between 38% and 42%.
Discontinued
Operations
Sale of Assets to
MESA Energy Systems, Inc.On
June 1, 2006, we, along with our wholly-owned subsidiary, ARC Comfort
Systems USA, Inc. (ARC), entered into an asset purchase agreement to
sell certain assets of ARC to Mesa Energy Systems, Inc. (a subsidiary of
Emcor Group, Inc.) for approximately $0.7 million in cash. These
assets were sold at book value. The after-tax losses of this company of $1.5 million
and $0.2 million, for 2005 and 2006, respectively, have been reported in
discontinued operations under Operating loss, net of income tax benefit.
Sale of Companies
to ALCOn December 31,
2005, we sold two operations to Automated Logic Corporation and Automated Logic
Contracting Services, Inc. (together, ALC) for approximately $22.9 million
in cash, net of transaction costs and a purchase price adjustment based upon
the closing balance sheet for the transferred assets. The receivable related to
this sale was paid during the first quarter of 2006. We paid $7.0 million
in taxes related to this transaction during the first quarter of 2006. The
after-tax income of these companies of $1.3 million for 2005 has been
reported in discontinued operations under Operating loss, net of income tax
benefit. The gain recognized during
2005 on the sale of these units was $9.8 million, including tax expense,
and was reported in discontinued operations under Estimated gain on
disposition, including income taxes.
During the fourth quarter of 2006, we recorded an additional gain of
$0.1 million, net of tax, related to the collection of certain
receivables.
Individual Sales of
Operating CompaniesIn 2005,
we also sold two small operating companies in separate transactions and
shutdown the operations at another small operating company. The after-tax loss
of these companies was $1.2 million in 2005, and has been reported in
discontinued operations under Operating loss, net of income tax benefit. The gain recognized on the sale of these
units was $0.1 million, including tax expense, and was reported in
discontinued operations under Estimated gain on disposition, including income
taxes.
OutlookAs noted earlier in this review, while we see signs
that industry activity levels are continuing to increase in 2007, our primary
emphasis for this year is on margin improvement rather than revenue growth. Our
ongoing margin efforts include a focus on improving the results of units that
incurred losses or subpar income in 2006, and on intensified project and
service performance training at the unit level. Based
29
on these margin improvement efforts
and developments, on our increased level of backlog as compared to recent
periods, and on our belief that industry and economic conditions will remain
strong, we expect that our full-year 2007 profitability will improve as
compared to our 2006 results.
2005 Compared to 2004
RevenuesRevenues increased $125.2 million, or 16.3%, to
$892.5 million in 2005 compared to 2004. Approximately 12.6% of the
increase in revenues related to internal growth and the remaining 3.7% resulted
from the acquisition of Granite State Plumbing & Heating (Granite)
in January 2005. The internal revenue growth stemmed primarily from
generally improving nonresidential facilities markets throughout the United
States especially in the institutional markets such as schools and hospitals
(approximately $34.8 million), hotels (approximately $12.5 million),
and in the multi-family sector (approximately $23.2 million). We have seen
increased activity, primarily in our Alabama, Arizona, Florida and Wisconsin
operations, resulting from the start-up of several large projects. These gains
were offset to a lesser degree by lower revenues relating to our operations in
Southern California that were impacted by continued project delays resulting
from extended inclement weather in the first quarter of 2005.
Backlog associated with continuing operations as of December 31,
2005 was $680.6 million (including $13.0 million from the acquisition
of Granite), a 7.3% increase from September 30, 2005 backlog of $634.1 million,
and a 34.1% increase from December 31, 2004 backlog of $507.8 million.
These gains result primarily from significant new multi-family projects in
Alabama, as well as office building projects in the Washington, D.C. area.
Gross ProfitGross profit increased $25.1 million, or 20.4%,
to $148.1 million in 2005 compared to 2004. As a percentage of revenues,
historical gross profit for 2005 was 16.6%, up from 16.0% in 2004. The increase
in gross profit percentage resulted primarily from increased profitability in
our Arizona operations (approximately $3.4 million), higher margin
storm-related project repair work performed by our operation in Central Florida
(approximately $3.7 million) and improved margins at an operation in
Wisconsin which was negatively impacted by increases in the prices for certain
commodity materials in 2004 (approximately $3.7 million). These gains were
partially offset by job underperformance at one of our larger operations
(approximately $5.0 million).
Selling, General
and Administrative Expenses (SG&A)SG&A increased $14.9 million, or 15.1% for
2005 as compared to 2004. As a percentage of revenues, SG&A declined
from 12.8% in 2004 to 12.7% in 2005. This decrease is consistent with our
effort to control our SG&A expenses as we experience internal revenue
growth, partially offset by an increase resulting from higher medical costs
(approximately $3.1 million) in 2005 due to medical inflation in 2005 and
favorable claims experience in 2004.
Goodwill ImpairmentWe recorded goodwill impairment charges of $0.6 million
and $33.9 million during the fourth quarters of 2004 and 2005,
respectively. The impairment charge during 2004 from continuing operations of
$0.6 million related to a reporting unit in northern Michigan and was a
result of concerns about the activity levels in this market that resulted in
lower cash flow forecasts for the next several years. During 2005, we experienced modest revenue
growth and improved profitability due to increased industry activity and
favorable market conditions. However, the revenue, operating profits and cash
flows for certain reporting units were lower than expected despite these
favorable market conditions. Primarily based upon this trend, the revenue,
earnings and cash flow projections for certain reporting units were revised
downward for the next several years as compared to previous projections. As a
result, an impairment charge of $33.9 million was recognized in 2005 for
these reporting units including operations in San Diego, Houston, Grand Rapids,
central Iowa, Birmingham, Buffalo and Albany. Impairment must be reflected when
the value of a given business unit in excess of its tangible net assets falls
below the goodwill asset balance carried for that unit on the Companys books.
If other business units have had increases in the value of their respective
goodwill balances, such increases may not be recorded under SFAS No. 142.
Accordingly, such increases may not be netted against impairments at other
business units.
30
Interest Expense,
NetThe decrease in interest
expense, net is a result of payments on the term loan throughout 2004 and 2005
thereby reducing and eliminating our average debt outstanding, and interest
income earned from higher cash balances in 2005. See Liquidity and Capital
Resources for a detail of the components of interest expense, net for 2004 and
2005.
Write off of debt
costsThe second quarter of
2005 includes a non-cash write off of $0.9 million of deferred financing
costs resulting from the replacement of our previous credit facility.
Other Income
(Expense)Other expense was
$0.4 million for 2004 and other income was $0.1 million for 2005.
Other expense for 2004 includes losses of $0.4 million resulting from
mark-to-market adjustments on a warrant with a third party to buy shares of our
stock. The warrant also carried a put obligation. This warrant was exercised in
October 2004. This exercise also terminated the related put obligation. As
a result, there were no further mark-to-market adjustments to income associated
with them.
Income Tax ExpenseOur effective tax
rate associated with results from continuing operations for 2005 was (707.0)%.
Excluding effects of the goodwill impairment charges, our 2005 effective tax
rate was 43.6% as compared to 37.5% in 2004. Our 2004 rate is lower than usual
due to an increase in the fourth quarter of 2004 in our estimate of the amount
of future state taxable income we will have against which we can apply state
tax loss carryforwards. This change in estimate resulted in a reduction in our
allowance against state-level deferred tax assets. Our effective tax rate is
generally higher than statutory rates because of the effect of certain expenses
that are not deductible for tax purposes. In addition, adjustments to tax
reserves are analyzed and adjusted quarterly as events occur to warrant such
changes. Adjustments to tax reserves are a component of the effective tax rate.
During 2004, the American Jobs Creation Act of 2004 was signed into law. The primary effect of this legislation was to permit us to
claim a deduction for 3% of earnings related to certain of our
construction-related activities beginning in 2005. This deduction moderately
decreased our effective tax rate.
Discontinued
Operations
Sale
of Assets to MESA Energy Systems, Inc.On June 1, 2006,
we, along with our wholly-owned subsidiary, ARC Comfort Systems USA, Inc.
(ARC), entered into an asset purchase agreement to sell certain assets of ARC
to Mesa Energy Systems, Inc. (a subsidiary of Emcor Group, Inc.) for
approximately $0.7 million in cash. These assets were sold at book value. The
after-tax loss of this company of $2.3 million and $1.5 million, for
2004 and 2005, respectively, has been reported in discontinued operations under
Operating loss, net of income tax benefit.
Sale
of Companies to ALCOn December 31,
2005, we sold two operations to Automated Logic Corporation and Automated Logic
Contracting Services, Inc. (together, ALC) for approximately $22.9 million
in cash, net of transaction costs and a purchase price adjustment based upon
the closing balance sheet for the transferred assets. The receivable related to
this sale was paid during the first quarter of 2006. We paid $7.0 million
in taxes related to this transaction during the first quarter of 2006. The
after-tax income of these companies of $1.3 million in both 2004 and 2005
has been reported in discontinued operations under Operating loss, net of
income tax benefit. The gain
recognized during 2005 on the sale of these
units was $9.8 million, including tax expense, and was reported in
discontinued operations under Estimated gain on disposition, including income
taxes.
Individual
Sales of Operating CompaniesIn 2005, we also sold
two small operating companies in separate transactions and shutdown the
operations at another small operating company. The after-tax loss of these
companies was $2.5 million in 2004 and $1.2 million in 2005, and has
been reported in discontinued operations under Operating loss, net of income
tax benefit. The gain recognized on the
sale of these units was $0.1 million, including tax expense, and was
reported in discontinued operations under Estimated gain on disposition,
including income taxes.
31
In 2004, we sold a
small operating company. The after-tax income of this company for the first six
months of 2004 was less than $0.1 million and has been reported in
discontinued operations under Operating results, net of tax. The loss recognized on the sale of this unit
in the second quarter of 2004 was $0.5 million, including tax expense, and
was reported in discontinued operations under Estimated gain on disposition,
including income taxes. This loss
primarily resulted from the non-cash write off of goodwill associated with this
unit. This goodwill write off was not tax deductible.
Sale
of Companies to EmcorIn March 2002, we sold 19
operations to Emcor Group, Inc. (Emcor). The total purchase price was
$186.25 million, including the assumption by Emcor of approximately $22.1 million
of subordinated notes to former owners of certain of the divested companies. Of
Emcors purchase price, $5 million was deposited into an escrow account to
secure potential obligations on our part to indemnify Emcor for future claims
and contingencies arising from events and circumstances prior to closing, all
as specified in the transaction documents. Of this escrow, $4 million has
been applied in determining our liability to Emcor in connection with the
settlement of certain claims. The remaining $1 million of escrow is
available for book purposes to apply to any future claims and contingencies in
connection with this transaction, and has not been recognized as part of the
Emcor transaction purchase price.
There are ongoing open
matters relating to this transaction that we continue to address with Emcor. We
do not believe these open matters, either individually or in the aggregate,
will have a material effect on our financial position when ultimately resolved.
We maintain reserves for these matters, net of amounts receivable from escrow
that we believe will ultimately be applied in settling these matters. During
the second quarter of 2004, we concluded that the related reserves should be
reduced by $0.3 million, net of tax benefit. Additionally, during the
fourth quarter of 2004, we reduced these reserves by $0.2 million, net of
tax. During the third quarter of 2005, we reduced tax reserves by $0.1 million
in connection with the resolution of state tax examinations. These amounts are
reflected in discontinued operations in 2004 and 2005 in the caption Estimated
gain on disposition, including income tax benefit (expense).
Liquidity and Capital Resources
|
|
Year ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(in thousands)
|
|
Cash provided by (used
in):
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
26,184
|
|
$
|
37,446
|
|
$
|
17,734
|
|
Investing activities
|
|
$
|
(2,476
|
)
|
$
|
(6,769
|
)
|
$
|
17,721
|
|
Financing activities
|
|
$
|
(1,268
|
)
|
$
|
(7,660
|
)
|
$
|
(762
|
)
|
Free cash flow:
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$
|
26,184
|
|
$
|
37,446
|
|
$
|
17,734
|
|
Taxes paid related to the sale of businesses
|
|
|
|
|
|
7,020
|
|
Purchases of property and equipment
|
|
(4,998
|
)
|
(6,188
|
)
|
(8,113
|
)
|
Proceeds from sales of property and equipment
|
|
545
|
|
696
|
|
477
|
|
Free cash flow
|
|
$
|
21,731
|
|
$
|
31,954
|
|
$
|
17,118
|
|
Cash
FlowWe define free cash flow as cash
provided by operating activities excluding items related to sales of
businesses, less customary capital expenditures, plus the proceeds from asset
sales. Positive free cash flow represents funds available to invest in
significant operating initiatives, to acquire other companies, or to reduce a
companys outstanding debt or equity. If free cash flow is negative, additional
debt or equity is generally required to fund the outflow of cash. Free cash
flow may be defined differently by other companies.
32
Our business does not require significant amounts of
investment in long-term fixed assets. The substantial majority of the capital
used in our business is working capital that funds our costs of labor and
installed equipment deployed in project work until our customers pay us. Customary
terms in our industry allow customers to withhold a small portion of the
contract price until after we have completed the work, typically for six months.
Amounts withheld under this practice are known as retention or retainage. Our
average project duration together with typical retention terms generally allow
us to complete the realization of revenue and earnings in cash within one year.
Accordingly, we believe free cash flow, by encompassing both profit margins and
the use of working capital over our approximately one year working capital
cycle, is an effective measure of operating effectiveness and efficiency. We
have included free cash flow information here for this reason, and because we
are often asked about it by third parties evaluating the Company. However, free
cash flow is not considered under generally accepted accounting principles to
be a primary measure of an entitys financial results, and accordingly free
cash flow should not be considered an alternative to operating income, net
income, or amounts shown in our consolidated statements of cash flows as
determined under generally accepted accounting principles.
For the year ended December 31, 2006, we had free
cash flow of $17.1 million as compared to $32.0 million in 2005. This
decrease primarily resulted from an investment in working capital due to higher
activity levels.
During 2006, we collected approximately $25.7 million,
primarily related to the sale of two operations to Automated Logic Corporation
and Automated Logic Contracting Services, Inc. of $23.8 million and $0.7
million related to the sale of ARC to Mesa Energy Systems, Inc.
For the year ended December 31, 2005, we had free
cash flow of $32.0 million as compared to $21.7 million in 2004. This
increase resulted primarily from increased profitability, net of a slight
increase in capital expenditures.
Credit
FacilityIn June 2005, we entered into
a $75.0 million senior credit facility (the Facility) which is available
for borrowings and letters of credit. The Facility is secured by substantially
all of our assets except for assets related to projects subject to surety bonds.
As of December 31, 2006, the total
of the Facility was $75.0 million, with no outstanding borrowings, $25.2 million
in letters of credit outstanding, and $49.8 million of credit available.
On February 20,
2007, we amended the Facility (the Amended Facility). The Amended Facility
consists of a $100.0 million revolving credit facility which is available
for borrowings and letters of credit. The Amended Facility will expire in February 2012.
We have a choice of two interest rate options for
borrowings under the Amended Facility; these rates are floating rates
determined by the broad financial markets, meaning they can and do move up and
down from time to time. Excluding the amortization of debt financing and
arrangement costs, we estimate that the interest rate applicable to the
borrowings under the Amended Facility would be approximately 6.57% as of
December 31, 2006. The Company incurred certain financing and professional
costs in connection with the arrangement of
the Facility and the related amendment. These costs will be amortized as
a non-cash charge to interest expense over the term of the Amended Facility.
Commitment fees are payable on the portion of the capacity not in use for
borrowings or letters of credit at any given time. These fees range from
0.20%-0.30% per annum, based on the ratio of debt to Credit Facility Adjusted
EBITDA.
33
Interest
expense for 2004, 2005 and 2006 included the following primary elements (in
thousands):
|
|
2004
|
|
2005
|
|
2006
|
|
Interest expense on borrowings, and unused commitment fees
|
|
$
|
704
|
|
$
|
391
|
|
$
|
166
|
|
Letter of credit fees
|
|
443
|
|
389
|
|
351
|
|
Amortization of deferred debt arrangement costs and discount
|
|
419
|
|
295
|
|
99
|
|
Total
|
|
$
|
1,566
|
|
$
|
1,075
|
|
$
|
616
|
|
When a previous credit facility was replaced in 2005,
a corresponding amount of deferred debt arrangement costs were written off. This
charge of $0.9 million is reported as Write-off of debt costs in our
consolidated statement of operations for the year ended December 31, 2005.
Covenant
compliance is assessed as of each quarter end. Credit Facility Adjusted EBITDA
is defined under the Facility for financial covenant purposes as net earnings
for the four quarters ending as of any given quarterly covenant compliance
measurement date, plus the corresponding amounts for (a) interest expense;
(b) income taxes; (c) depreciation and amortization; and (d) other
non-cash charges. The following is a reconciliation of Credit Facility Adjusted
EBITDA to net income (in thousands):
Net income
|
|
$
|
28,724
|
|
Income
taxescontinuing operations and discontinued operations
|
|
17,646
|
|
Interest income,
net
|
|
(1,970
|
)
|
Depreciation and
amortization expense
|
|
5,265
|
|
Credit Facility Adjusted
EBITDA
|
|
$
|
49,665
|
|
Under the Amended Facility, only two financial
covenants remain.
Leverage
RatioThe Amended Facility requires that
the ratio of the Companys total indebtedness less cash and cash equivalents to
its Credit Facility Adjusted EBITDA not exceed 2.50.
Fixed
Charge Coverage RatioThe Amended Facility requires that
the ratio of Credit Facility Adjusted EBITDA, less non-financed capital
expenditures, tax provision, dividends and amounts used to repurchase stock to
the sum of interest expense and scheduled principal payments be at least 1.50.
Capital expenditures, tax provision, dividends and stock repurchase payments
are defined under the Facility for purposes of this covenant to be amounts for
the four quarters ending as of any given quarterly covenant compliance
measurement date. The calculation of the fixed charge coverage ratio was
redefined to exclude acquisitions, stock repurchases and the payment of cash
dividends, provided that the Leverage Ratio does not exceed 1.0.
Other
RestrictionsThe Amended Facility permits
acquisitions of up to $25.0 million per transaction, or $50.0 million
in the aggregate. However, these limitations only apply when the Leverage Ratio
is greater than 1.0.
Off-Balance
Sheet Arrangements and Other CommitmentsAs is common in our
industry, we have entered into certain off-balance sheet arrangements in the
ordinary course of business that result in risks not directly reflected in our
balance sheets. Our most significant off-balance sheet transactions include
liabilities associated with noncancelable operating leases. We also have other
off-balance sheet obligations involving letters of credit and surety
guarantees.
We enter into noncancelable operating leases for many
of our facility, vehicle and equipment needs. These leases allow us to conserve
cash by paying a monthly lease rental fee for use of facilities, vehicles and
34
equipment rather than
purchasing them. At the end of the lease, we have no further obligation to the
lessor. If we decide to cancel or terminate a lease before the end of its term,
we would typically owe the lessor the remaining lease payments under the term
of the lease.
Certain of our vendors require letters of credit to
ensure reimbursement for amounts they are disbursing on our behalf, such as to
beneficiaries under our self-funded insurance programs. We have also
occasionally used letters of credit to guarantee performance under our
contracts and to ensure payment to our subcontractors and vendors under those
contracts. The letters of credit we provide are actually issued by our lenders
through the Facility as described above. A letter of credit commits the lenders
to pay specified amounts to the holder of the letter of credit if the holder
demonstrates that we have failed to perform specified actions. If this were to
occur, we would be required to reimburse the lenders. Depending on the
circumstances of such a reimbursement, we may also have to record a charge to
earnings for the reimbursement. Absent a claim, there is no payment or
reserving of funds by us in connection with a letter of credit. However,
because a claim on a letter of credit would require immediate reimbursement by
us to our lenders, letters of credit are treated as a use of the Facilitys
capacity just the same as actual borrowings. Claims against letters of credit
are rare in our industry. To date we have not had a claim made against a letter
of credit that resulted in payments by a lender or by us. We believe that it is
unlikely that we will have to fund claims under a letter of credit in the
foreseeable future.
Many customers, particularly in connection with new
construction, require us to post performance and payment bonds issued by a
financial institution known as a surety. If we fail to perform under the terms
of a contract or to pay subcontractors and vendors who provided goods or
services under a contract, the customer may demand that the surety make
payments or provide services under the bond. We must reimburse the sureties for
any expenses or outlays they incur. To date, we are not aware of any losses to
our sureties in connection with bonds the sureties have posted on our behalf,
and we do not expect such losses to be incurred in the foreseeable future.
Surety market conditions are currently challenging as
a result of significant losses incurred by many sureties in recent periods,
both in the construction industry as well as in certain larger corporate
bankruptcies. As a result, less bonding capacity is available in the market and
terms have become more restrictive. Further, under standard terms in the surety
market, sureties issue bonds on a project-by-project basis, and can decline to
issue bonds at any time. Historically, approximately 25% of our business has
required bonds. While we have enjoyed a longstanding relationship with our
primary surety and we have added another surety to further support our bonding
needs, current market conditions as well as changes in our sureties assessment
of our operating and financial risk could cause our sureties to decline to
issue bonds for our work. If that were to occur, our alternatives include doing
more business that does not require bonds, posting other forms of collateral
for project performance such as letters of credit or cash, and seeking bonding
capacity from other sureties. We would likely also encounter concerns from
customers, suppliers and other market participants as to our creditworthiness.
While we believe our general operating and financial characteristics, including
a significant amount of cash on our balance sheet, would enable us to
ultimately respond effectively to an interruption in the availability of
bonding capacity, such an interruption would likely cause our revenues and
profits to decline in the near term.
The
following recaps the future maturities of our contractual obligations as of December 31,
2006 (in thousands):
|
|
Twelve Months Ended December 31,
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
Thereafter
|
|
Total
|
|
Operating lease
obligations
|
|
$
|
9,797
|
|
$
|
8,077
|
|
$
|
7,841
|
|
$
|
3,219
|
|
$
|
2,200
|
|
|
$
|
6,442
|
|
|
$
|
37,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Absent any significant commitments of capital for
items such as capital expenditures, acquisitions, dividends and share
repurchases, it is reasonable to expect the Company to continue to maintain
excess
35
cash on its balance sheet.
Therefore, we assumed that the Company would continue its current status of not
utilizing any borrowings under its revolving loan.
As of December 31, 2006 we also have $25.2 million
letter of credit commitments, of which $24.8 million expire in 2007 and
$0.4 million expire in 2008. The substantial majority of these letters of
credit are posted with insurers who disburse funds on our behalf in connection
with our workers compensation, auto liability and general liability insurance
program. These letters of credit provide additional security to the insurers
that sufficient financial resources will be available to fund claims on our
behalf, many of which develop over long periods of time, should we ever
encounter financial duress. Posting of letters of credit for this purpose is a
common practice for entities that manage their self-insurance programs through
third-party insurers as we do. While most of these letter of credit commitments
expire in 2007, we expect nearly all of them, particularly those supporting our
insurance programs, will be renewed annually.
Other than the operating lease obligations noted
above, we have no significant purchase or operating commitments outside of
commitments to deliver equipment and provide labor in the ordinary course of
performing project work.
OutlookWe have generated
positive net free cash flow for the last eight calendar years, most of which
occurred during challenging economic and industry conditions. We also expect to
have no debt, significant borrowing capacity under our credit facility, and
substantial uncommitted cash balances. We believe these factors will provide us
with sufficient liquidity to fund our operations for the foreseeable future.
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 (the first quarter of the year) 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, we expect our
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, our volume of business may be
adversely affected by declines in new installation and replacement projects in
various geographic regions of the United States.
New Accounting
Pronouncements
We have various stock-based compensation plans. Prior
to January 1, 2006, we accounted for those plans under the recognition and
measurement provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock-Based Compensation. No stock-based employee compensation
cost was recognized in the consolidated statements of operations for the years
ended December 31, 2004 or 2005, except with respect to the amortization
of the intrinsic value of restricted stock grants totaling $0.4 million
and $0.5 million, respectively. Options granted under our equity
compensation plans had an exercise price equal to the market value of the
underlying common stock on the date of grant and all terms were fixed,
accordingly, no expense was recognized under APB Opinion No. 25. Effective
January 1, 2006, we adopted the fair value recognition provisions of FASB
Statement No. 123R, Share-Based Payment (Statement 123R), using the
modified-prospective-transition method. Results for prior periods have not been
restated. The adoption of Statement 123R resulted in compensation expense of
$1.8 million ($1.1 million after-tax or $0.03 per basic share and
$0.03 per diluted share) for the year ended December 31, 2006. Prior to
adopting Statement 123R, we presented the benefits of tax deductions in excess
of recognized compensation costs (excess tax benefits) as operating cash flows
in the consolidated
36
statements of cash flows. Statement
123R requires these excess tax benefits to be reported as financing cash flows.
In June 2006, the
FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48). FIN 48 is an interpretation of FASB Statement No. 109,
Accounting for Income Taxes, and it seeks to reduce the diversity in practice
associated with certain aspects of measurement and recognition in accounting
for income taxes. In addition, FIN 48 requires expanded disclosure with respect
to the uncertainty in income taxes. FIN 48 will be effective for us beginning January 1,
2007. We are currently evaluating the impact, if any, that FIN 48 will have
on our financial statements.
ITEM 7-A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk
primarily related to potential adverse changes in interest rates as discussed below.
Management is actively involved in monitoring exposure to market risk and
continues to develop and utilize appropriate risk management techniques. We are
not exposed to any other significant financial market risks including commodity
price risk, foreign currency exchange risk or interest rate risks from the use
of derivative financial instruments. The Company does not use derivative
financial instruments.
We have limited exposure to
changes in interest rates due to our lack of indebtedness for borrowed money. We
have a debt facility under which we may borrow funds in the future. We do not
currently foresee any borrowing needs.
37
ITEM 8. Financial Statements and
Supplemental Data
INDEX
TO FINANCIAL STATEMENTS
38
Managements Report
on Internal Control over Financial Reporting
Our management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over financial
reporting as of December 31, 2006 based on the framework in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on that evaluation, our
management concluded that our internal control over financial reporting was
effective as of December 31, 2006.
Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Managements assessment of the effectiveness of our
internal control over financial reporting as of December 31, 2006 has been
audited by Ernst & Young LLP, an independent registered public
accounting firm, as stated in their report which is included elsewhere herein.
39
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
and Stockholders
Comfort Systems USA, Inc.
We have audited the accompanying consolidated balance
sheets of Comfort Systems USA, Inc. as of December 31, 2006 and 2005,
and the related consolidated statements of operations, stockholders equity,
and cash flows for each of the three years in the period ended December 31,
2006. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Comfort Systems USA, Inc. at December 31, 2006 and 2005,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 14 to the consolidated financial
statements, effective January 1, 2006 the Company adopted Statement of
Financial Accounting Standards No. 123 (revised 2004) Share-Based
Payment.
We also have audited, in accordance with the standards
of the Public Company Accounting Oversight Board (United States), the effectiveness
of Comfort Systems USA, Inc.s internal control over financial reporting
as of December 31, 2006, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 28, 2007 expressed an unqualified opinion thereon.
ERNST &
YOUNG LLP
Houston, Texas
February 28, 2007
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
Board of Directors and
Stockholders
Comfort Systems USA, Inc.
We have audited managements
assessment, included in the accompanying Managements Report on Internal
Control over Financial Reporting, that Comfort Systems USA, Inc.
maintained effective internal control over financial reporting as of December 31,
2006, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Comfort
Systems USA, Inc.s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an opinion on the
effectiveness of the companys internal control over financial reporting based
on our audit.
We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, managements
assessment that Comfort Systems USA, Inc. maintained effective internal
control over financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the COSO criteria. Also, in our
opinion, Comfort Systems USA, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31,
2006, based on the COSO criteria.
We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Comfort Systems USA, Inc.
as of December 31, 2006 and 2005, and the related consolidated statements
of operations, stockholders equity, and cash flows for each of the three years
in the period ended December 31, 2006 of Comfort Systems USA, Inc.
and our report dated February 28, 2007 expressed an unqualified opinion
thereon.
ERNST & YOUNG LLP
Houston, Texas
February 28, 2007
41
COMFORT SYSTEMS USA, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
|
|
December 31,
|
|
|
|
2005
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
55,593
|
|
$
|
90,286
|
|
Accounts receivable, less
allowance for doubtful accounts of $3,538 and $3,301, respectively
|
|
195,025
|
|
234,763
|
|
Receivable from sale of
operations
|
|
23,800
|
|
142
|
|
Other receivables
|
|
5,784
|
|
4,887
|
|
Inventories
|
|
8,083
|
|
8,762
|
|
Prepaid expenses and other
|
|
11,282
|
|
13,644
|
|
Costs and estimated earnings in
excess of billings
|
|
22,512
|
|
23,680
|
|
Assets related to discontinued
operations
|
|
3,996
|
|
221
|
|
Total current assets
|
|
326,075
|
|
376,385
|
|
PROPERTY AND EQUIPMENT, net
|
|
12,705
|
|
15,504
|
|
GOODWILL
|
|
62,954
|
|
62,954
|
|
OTHER NONCURRENT ASSETS
|
|
6,949
|
|
6,031
|
|
Total assets
|
|
$
|
408,683
|
|
$
|
460,874
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
Current maturities of
long-term debt
|
|
$
|
|
|
$
|
|
|
Accounts payable
|
|
71,922
|
|
81,180
|
|
Accrued compensation and
benefits
|
|
29,347
|
|
35,058
|
|
Billings in excess of costs
and estimated earnings
|
|
53,279
|
|
65,949
|
|
Income taxes payable
|
|
7,615
|
|
734
|
|
Accrued self insurance expense
|
|
17,350
|
|
19,618
|
|
Other current liabilities
|
|
14,338
|
|
15,171
|
|
Liabilities related to
discontinued operations
|
|
1,309
|
|
450
|
|
Total current liabilities
|
|
195,160
|
|
218,160
|
|
LONG-TERM DEBT, NET OF CURRENT MATURITIES
|
|
|
|
|
|
Total liabilities
|
|
195,160
|
|
218,160
|
|
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, 39,979,687 and 40,710,003 shares issued, respectively
|
|
400
|
|
407
|
|
Treasury stock, at cost, none
outstanding
|
|
|
|
|
|
Additional paid-in capital
|
|
340,264
|
|
339,589
|
|
Deferred compensation
|
|
(1,135
|
)
|
|
|
Retained earnings (deficit)
|
|
(126,006
|
)
|
(97,282
|
)
|
Total stockholders equity
|
|
213,523
|
|
242,714
|
|
Total liabilities and stockholders equity
|
|
$
|
408,683
|
|
$
|
460,874
|
|
The accompanying notes are an integral part of these consolidated financial statements.
42
COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
REVENUES
|
|
$
|
767,358
|
|
$
|
892,549
|
|
$
|
1,056,525
|
|
COST OF SERVICES
|
|
644,318
|
|
744,407
|
|
885,508
|
|
Gross profit
|
|
123,040
|
|
148,142
|
|
171,017
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
|
98,429
|
|
113,285
|
|
126,620
|
|
GOODWILL
IMPAIRMENT
|
|
637
|
|
33,877
|
|
|
|
GAIN ON SALE OF
ASSETS
|
|
(115
|
)
|
(85
|
)
|
(125
|
)
|
Operating income
|
|
24,089
|
|
1,065
|
|
44,522
|
|
OTHER INCOME
(EXPENSE):
|
|
|
|
|
|
|
|
Interest income
|
|
172
|
|
752
|
|
2,585
|
|
Interest expense
|
|
(1,566
|
)
|
(1,075
|
)
|
(616
|
)
|
Write-off of debt costs
|
|
|
|
(870
|
)
|
|
|
Other
|
|
(427
|
)
|
107
|
|
100
|
|
Other income (expense)
|
|
(1,821
|
)
|
(1,086
|
)
|
2,069
|
|
INCOME (LOSS) BEFORE INCOME
TAXES
|
|
22,268
|
|
(21
|
)
|
46,591
|
|
INCOME TAX EXPENSE
|
|
8,589
|
|
14,848
|
|
17,874
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS
|
|
13,679
|
|
(14,869
|
)
|
28,717
|
|
DISCONTINUED
OPERATIONS:
|
|
|
|
|
|
|
|
Operating loss, net of income tax benefit of $295,
$818 and $160
|
|
(3,447
|
)
|
(1,309
|
)
|
(203
|
)
|
Estimated gain on disposition, including income tax
benefit (expense) of $12, $(7,103) and $68
|
|
481
|
|
9,952
|
|
210
|
|
NET INCOME (LOSS)
|
|
$
|
10,713
|
|
$
|
(6,226
|
)
|
$
|
28,724
|
|
INCOME (LOSS) PER
SHARE:
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
0.36
|
|
$
|
(0.38
|
)
|
$
|
0.71
|
|
Discontinued
operations
|
|
|
|
|
|
|
|
Loss from operations
|
|
(0.09
|
)
|
(0.03
|
)
|
(0.01
|
)
|
Estimated gain on disposition
|
|
0.01
|
|
0.25
|
|
0.01
|
|
Net income (loss)
|
|
$
|
0.28
|
|
$
|
(0.16
|
)
|
$
|
0.71
|
|
Diluted
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.35
|
|
$
|
(0.38
|
)
|
$
|
0.70
|
|
Discontinued
operations
|
|
|
|
|
|
|
|
Loss from operations
|
|
(0.09
|
)
|
(0.03
|
)
|
(0.01
|
)
|
Estimated gain on disposition
|
|
0.01
|
|
0.25
|
|
0.01
|
|
Net income (loss)
|
|
$
|
0.27
|
|
$
|
(0.16
|
)
|
$
|
0.70
|
|
SHARES USED IN COMPUTING INCOME (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
Basic
|
|
38,409
|
|
39,298
|
|
40,247
|
|
Diluted
|
|
39,505
|
|
39,298
|
|
41,146
|
|
DIVIDENDS PER
SHARE
|
|
$
|
|
|
$
|
0.025
|
|
$
|
0.140
|
|
The accompanying notes are an integral part of these consolidated financial statements.
43
COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In Thousands, Except Share Amounts)
|
|
Common Stock
|
|
Treasury Stock
|
|
Additional
Paid-In
Capital
|
|
Deferred
Compensation
|
|
Retained
Earnings
(Deficit)
|
|
Total
Stockholders
Equity
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
BALANCE AT
DECEMBER 31,
2003
|
|
39,258,913
|
|
|
$
|
393
|
|
|
(1,041,864
|
)
|
$
|
(6,305
|
)
|
|
$
|
337,605
|
|
|
|
$
|
(540
|
)
|
|
$
|
(130,493
|
)
|
|
$
|
200,660
|
|
|
Issuance of Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares
for options exercised including tax benefit
|
|
|
|
|
|
|
|
440,508
|
|
2,658
|
|
|
(724
|
)
|
|
|
|
|
|
|
|
|
1,934
|
|
|
Issuance of
restricted stock
|
|
|
|
|
|
|
|
225,000
|
|
1,353
|
|
|
361
|
|
|
|
(1,714
|
)
|
|
|
|
|
|
|
|
Forfeiture of
unvested restricted stock
|
|
|
|
|
|
|
|
(56,250
|
)
|
(308
|
)
|
|
|
|
|
|
259
|
|
|
|
|
|
(49
|
)
|
|
Amortization of
deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
115
|
|
|
|
408
|
|
|
|
|
|
523
|
|
|
Shares issued for
exercise of
warrant
|
|
|
|
|
|
|
|
408,144
|
|
2,454
|
|
|
337
|
|
|
|
|
|
|
|
|
|
2,791
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
25
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,713
|
|
|
10,713
|
|
|
BALANCE AT
DECEMBER 31,
2004
|
|
39,258,913
|
|
|
393
|
|
|
(24,462
|
)
|
(148
|
)
|
|
337,719
|
|
|
|
(1,587
|
)
|
|
(119,780
|
)
|
|
216,597
|
|
|
Issuance of Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares
for options exercised including tax benefit
|
|
650,954
|
|
|
6
|
|
|
114,959
|
|
835
|
|
|
2,987
|
|
|
|
|
|
|
|
|
|
3,828
|
|
|
Issuance of
restricted stock
|
|
82,500
|
|
|
1
|
|
|
|
|
|
|
|
574
|
|
|
|
(575
|
)
|
|
|
|
|
|
|
|
Shares received in
lieu of tax withholding payment on vested restricted stock
|
|
|
|
|
|
|
|
(40,797
|
)
|
(318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(318
|
)
|
|
Forfeiture of
unvested restricted stock
|
|
(12,500
|
)
|
|
|
|
|
(50,000
|
)
|
(372
|
)
|
|
(74
|
)
|
|
|
360
|
|
|
|
|
|
(86
|
)
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
(999
|
)
|
|
|
|
|
|
|
|
|
(999
|
)
|
|
Amortization of
deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
667
|
|
|
|
|
|
727
|
|
|
Other
|
|
|
|
|
|
|
|
300
|
|
3
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,226
|
)
|
|
(6,226
|
)
|
|
BALANCE AT
DECEMBER 31,
2005
|
|
39,979,867
|
|
|
400
|
|
|
|
|
|
|
|
340,264
|
|
|
|
(1,135
|
)
|
|
(126,006
|
)
|
|
213,523
|
|
|
Issuance of Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares
for options exercised including tax benefit
|
|
592,636
|
|
|
6
|
|
|
61,360
|
|
786
|
|
|
3,868
|
|
|
|
|
|
|
|
|
|
4,660
|
|
|
Issuance of
restricted stock
|
|
137,500
|
|
|
1
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Shares received in
lieu of tax withholding payment on vested restricted stock
|
|
|
|
|
|
|
|
(46,985
|
)
|
(597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(597
|
)
|
|
Statement 123R
adoption
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,135
|
)
|
|
|
1,135
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
1,800
|
|
|
|
|
|
|
|
|
|
1,800
|
|
|
Forfeiture of
unvested restricted stock
|
|
|
|
|
|
|
|
(14,375
|
)
|
(189
|
)
|
|
151
|
|
|
|
|
|
|
|
|
|
(38
|
)
|
|
Tax benefit from
vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
316
|
|
|
|
|
|
|
|
|
|
316
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,674
|
)
|
|
|
|
|
|
|
|
|
(5,674
|
)
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,724
|
|
|
28,724
|
|
|
BALANCE AT DECEMBER 31,
2006
|
|
40,710,003
|
|
|
$
|
407
|
|
|
|
|
$
|
|
|
|
$
|
339,589
|
|
|
|
$
|
|
|
|
$
|
(97,282
|
)
|
|
$
|
242,714
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
44
COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10,713
|
|
$
|
(6,226
|
)
|
$
|
28,724
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating activities
|
|
|
|
|
|
|
|
Estimated gain on disposition
of discontinued operations
|
|
(481
|
)
|
(9,952
|
)
|
(210
|
)
|
Write-off of debt costs
|
|
|
|
870
|
|
|
|
Depreciation and amortization
expense
|
|
4,684
|
|
4,818
|
|
5,266
|
|
Goodwill impairment
|
|
3,347
|
|
33,877
|
|
|
|
Bad debt expense
|
|
2,873
|
|
1,769
|
|
686
|
|
Deferred tax expense (benefit)
|
|
(367
|
)
|
3,336
|
|
(887
|
)
|
Tax benefit of stock-based
compensation expense (pre-Statement 123R)
|
|
672
|
|
1,267
|
|
|
|
Amortization of debt financing
costs
|
|
419
|
|
295
|
|
99
|
|
Gain on sale of assets
|
|
(24
|
)
|
(36
|
)
|
(125
|
)
|
Stock-based compensation
expense
|
|
372
|
|
519
|
|
1,762
|
|
Mark-to-market warrant
obligation
|
|
449
|
|
|
|
|
|
Changes in operating assets and liabilities, net of
effects of acquisitions and divestitures
(Increase) decrease in
|
|
|
|
|
|
|
|
Receivables, net
|
|
(10,741
|
)
|
(26,439
|
)
|
(38,849
|
)
|
Inventories
|
|
(764
|
)
|
1,553
|
|
(713
|
)
|
Prepaid expenses and other
current assets
|
|
1,129
|
|
(1,365
|
)
|
(435
|
)
|
Costs and estimated earnings in
excess of billings
|
|
(9,280
|
)
|
2,217
|
|
(688
|
)
|
Other noncurrent assets
|
|
303
|
|
(518
|
)
|
427
|
|
Increase (decrease) in
|
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
15,446
|
|
12,028
|
|
17,187
|
|
Billings in excess of costs and
estimated earnings
|
|
7,447
|
|
19,368
|
|
12,509
|
|
Other, net
|
|
(13
|
)
|
65
|
|
1
|
|
Taxes paid related to the sale
of businesses
|
|
|
|
|
|
(7,020
|
)
|
Net cash provided by operating
activities
|
|
26,184
|
|
37,446
|
|
17,734
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchases of property and
equipment
|
|
(4,998
|
)
|
(6,188
|
)
|
(8,113
|
)
|
Proceeds from sales of property
and equipment
|
|
545
|
|
696
|
|
477
|
|
Proceeds from businesses sold,
net of cash sold and
transaction costs
|
|
1,977
|
|
1,666
|
|
25,737
|
|
Cash paid for acquisition and
intangible assets, including cash acquired
|
|
|
|
(2,943
|
)
|
(380
|
)
|
Net cash provided by (used in)
investing activities
|
|
(2,476
|
)
|
(6,769
|
)
|
17,721
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Net borrowings on revolving
line of credit
|
|
|
|
|
|
|
|
Payments on other long-term
debt
|
|
(1,607
|
)
|
(8,822
|
)
|
|
|
Borrowings of other long-term
debt
|
|
40
|
|
|
|
|
|
Debt financing costs
|
|
(963
|
)
|
(400
|
)
|
|
|
Payments of dividends to
shareholders
|
|
|
|
(999
|
)
|
(5,674
|
)
|
Tax benefit of stock-based
compensation
|
|
|
|
|
|
2,487
|
|
Proceeds from exercise of
options
|
|
1,262
|
|
2,561
|
|
2,425
|
|
Net cash used in financing
activities
|
|
(1,268
|
)
|
(7,660
|
)
|
(762
|
)
|
NET INCREASE IN CASH AND CASH
EQUIVALENTS
|
|
22,440
|
|
23,017
|
|
34,693
|
|
CASH AND CASH EQUIVALENTS,
beginning of yearcontinuing operations and
discontinued operations
|
|
10,136
|
|
32,576
|
|
55,593
|
|
CASH AND CASH EQUIVALENTS, end of yearcontinuing operations
and discontinued operations
|
|
$
|
32,576
|
|
$
|
55,593
|
|
$
|
90,286
|
|
The accompanying notes are an integral part of these consolidated financial statements.
45
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
1. Business and
Organization
Comfort
Systems USA, Inc., a Delaware corporation (Comfort Systems and
collectively with its subsidiaries, the Company), is a national provider of
comprehensive heating, ventilation and air conditioning (HVAC) installation,
maintenance, repair and replacement services within the mechanical services
industry. The Company operates primarily in the commercial, industrial and
institutional HVAC markets, and performs most of its services within office
buildings, retail centers, apartment complexes, manufacturing plants, and
healthcare, education and government facilities. In addition to standard HVAC
services, the Company provides specialized applications such as building
automation control systems, fire protection, process cooling, electronic
monitoring and process piping. Certain locations also perform related
activities such as electrical service and plumbing. Approximately 61% of the
Companys consolidated 2006 revenues are attributable to installation of
systems in newly constructed facilities, with the remaining 39% attributable to
maintenance, repair and replacement services. The following service activities
account for the Companys consolidated 2006 revenues: HVAC - 74%, plumbing -
18%, building automation control systems3%, and other5%. These service
activities are within the mechanical services industry which is the single
industry segment served by Comfort Systems.
2. Summary of
Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of Comfort Systems and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Cash Flow Information
The Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
Cash paid for interest in 2004,
2005 and 2006 was approximately $0.9 million, $0.8 million, and $0.5 million,
respectively. Cash paid for income taxes for continuing operations in 2004,
2005 and 2006 was approximately $6.3 million, $13.0 million and $15.6 million,
respectively. Cash paid for income taxes for discontinued operations in 2004,
2005 and 2006 was approximately $0.5 million, $0.1 million and $7.1 million,
respectively. The taxes paid for discontinued operations for 2006 related to
the sale in 2005 of two operations to Automated Logic Corporation and Automated
Logic Contracting Services, Inc. These taxes are included in the caption Taxes
paid related to the sale of business in
the accompanying consolidated statement of cash flows.
Inventories
Inventories consist of parts and
supplies that the Company purchases and holds for use in the ordinary course of
business and are stated at the lower of cost or market using the first-in,
first-out method.
Property and Equipment
Property and equipment are
stated at cost, and depreciation is computed using the straight-line method
over the estimated useful lives of the assets. Leasehold improvements are
capitalized and amortized over the lesser of the expected life of the lease or
the estimated useful life of the asset.
46
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
2. Summary of Significant
Accounting Policies (Continued)
Expenditures for repairs and
maintenance are charged to expense when incurred. Expenditures for major
renewals and betterments, which extend the useful lives of existing equipment,
are capitalized and depreciated over the remaining useful life of the
equipment. Upon retirement or disposition of property and equipment, the cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in Gain on sale of assets in the
statement of operations.
Goodwill
Goodwill represents the excess
of the aggregate purchase price paid by the Company in acquisitions over the
fair value of the net tangible and intangible assets acquired.
Long-Lived Assets
Long-lived assets are comprised principally of
goodwill, property and equipment, and deferred income tax assets. The Company
periodically evaluates whether events and circumstances have occurred that
indicate that the remaining balances of these assets may not be recoverable. The
Company uses estimates of future income from operations and cash flows, as well
as other economic and business factors, to assess the recoverability of these
assets.
Revenue Recognition
Approximately 86% of the Companys revenues were
earned on a project basis and recognized through the percentage of completion
method of accounting. Under this method as provided by American Institute of
Certified Public Accountants Statement of Position 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts, (SOP
81-1) contract revenue recognizable at any time during the life of a
contract is determined by multiplying expected total contract revenue by the
percentage of contract costs incurred at any time to total estimated contract
costs. More specifically, as part of the negotiation and bidding process in
which the Company engages in connection with obtaining installation contracts,
the Company estimates its contract costs, which include all direct materials
(exclusive of rebates), labor and subcontract costs and indirect costs related
to contract performance, such as indirect labor, supplies, tools, repairs and
depreciation costs. These contract costs are included in the Companys results
of operations under the caption Cost of Services. Then, as the Company performs under those
contracts, such costs are measured as incurred, compared to total estimated
costs to complete the contract, and a corresponding proportion of contract
revenue is recognized. Labor costs are considered to be incurred as the work is
performed. Subcontractor labor is recognized as the work is performed, but is
generally subjected to approval as to milestones or other evidence of
completion. Non-labor project cost consists of purchased equipment,
prefabricated materials and other materials. Purchased equipment on the Companys
projects are substantially all produced to job specifications and are a value
added element to the Companys work. The costs are considered to be incurred
when title is transferred to the Company, which typically is upon delivery to
the work site. Prefabricated materials, such as ductwork and piping, are
generally performed at the Companys shops and recognized as contract costs
when fabricated for the unique specifications of the job. Other materials cost
are not significant and are generally recorded when delivered to the work site.
This measurement and comparison process requires updates to the estimate of
total costs to complete the contract, and these updates may include subjective
assessments.
47
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
2. Summary of Significant Accounting Policies (Continued)
Project contracts typically provide for a schedule of
billings or invoices to the customer based on reaching agreed-upon milestones
or as the Company incurs costs. The schedules for such billings usually do not
precisely match the schedule on which costs are incurred. As a result, contract
revenues recognized in the statement of operations can and usually do differ
from amounts that can be billed or invoiced to the customer at any point during
the contract. Amounts by which cumulative contract revenues recognized on a
contract as of a given date exceed cumulative billings to the customer under
the contract are reflected as a current asset in the Companys balance sheet
under the caption Costs and estimated earnings in excess of billings. Amounts by which cumulative billings to the
customer under a contract as of a given date exceed cumulative contract
revenues recognized on the contract are reflected as a current liability in the
Companys balance sheet under the caption Billings in excess of costs and
estimated earnings.
The percentage of completion method of accounting is
also affected by changes in job performance, job conditions, and final contract
settlements. These factors may result in revisions to estimated costs and,
therefore, revenues. Such revisions are frequently based on further estimates
and subjective assessments. The effects of these revisions are recognized in
the period in which the revisions are determined. When such revisions lead to a
conclusion that a loss will be recognized on a contract, the full amount of the
estimated ultimate loss is recognized in the period such a conclusion is
reached, regardless of the percentage of completion of the contract.
Revisions to project costs and conditions can give
rise to change orders under which the customer agrees to pay additional
contract price. Revisions can also result in claims the Company might make
against the customer to recover project variances that have not been
satisfactorily addressed through change orders with the customer. Except in
certain circumstances, the Company does not recognize revenues or margin based
on change orders or claims until they have been agreed upon with the customer. The
amount of revenue associated with unapproved change orders and claims is
currently immaterial. Variations from estimated project costs could have a
significant impact on the Companys operating results, depending on project
size, and the recoverability of the variation via additional customer payments.
Revenues associated with maintenance, repair and
monitoring services and related contracts are recognized as services are
performed.
Accounts Receivable
Accounts receivable include
amounts billed to customers under retention or retainage provisions in
construction contracts. Such provisions are standard in the Companys industry
and usually allow for a small portion of progress billings or the contract
price to be withheld by the customer until after the Company has completed work
on the project, typically for a period of six months. Based on the Companys
experience with similar contracts in recent years, billings for such retention
balances at each balance sheet date are finalized and collected within the
subsequent year. Retention balances at December 31, 2005 and 2006 are
$45.1 million and $61.1 million, respectively, and are included in
accounts receivable.
The carrying value of the Companys receivables, net
of the allowance for doubtful accounts, represents their estimated net
realizable value. The Company estimates its allowance for doubtful accounts
48
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
2. Summary of Significant Accounting Policies (Continued)
based upon the
creditworthiness of its customers, prior collection history, ongoing
relationships with its customers, the aging of past due balances, the Companys
lien rights, if any, in the property where the Company performed the work, and
the availability, if any, of payment bonds applicable to the contract. The
receivables are written off when they are deemed to be uncollectible.
Self-Insurance Liabilities
The Company is substantially self-insured for workers
compensation, employers liability, auto liability, general liability and
employee group health claims, in view of the relatively high per-incident
deductibles the Company absorbs under its insurance arrangements for these risks.
Losses up to deductible amounts are estimated and accrued based upon known
facts, historical trends and industry averages. Loss estimates associated with
the larger and longer-developing risksworkers compensation, auto liability
and general liabilityare reviewed by a third-party actuary quarterly. The
Companys self-insurance arrangements are further discussed in Note 12 Commitments
and Contingencies.
Warranty Costs
The Company typically warrants
labor for the first year after installation on new HVAC systems. The Company
generally warrants labor for 30 days after servicing of existing HVAC systems. A
reserve for warranty costs is estimated and recorded based upon the historical
level of warranty claims and managements estimate of future costs.
Income Taxes
The Company files a consolidated
return for federal income tax purposes. Income taxes are provided for under the
liability method in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes, which takes into account
differences between financial statement treatment and tax treatment of certain
transactions. Deferred tax assets represent the tax effect of activity that has
been reflected in the financial statements but which will not be deductible for
tax purposes until future periods. Deferred tax liabilities represent the tax
effect of activity that has been reflected in the financial statements but
which will not be taxable until future periods.
The Company regularly evaluates valuation allowances
established for deferred tax assets for which future realization is uncertain. The
Company performs this evaluation each quarter. Estimations of required
valuation allowances include estimates of future taxable income. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which the activity underlying these assets
becomes deductible. The Company considers projected future taxable income and
tax planning strategies in making this assessment. If actual future taxable
income is less than the estimates, the Company may not realize all or a portion
of the recorded deferred tax assets.
New Accounting Pronouncements
Effective January 1, 2006, the Company adopted
the fair value recognition provisions of SFAS No. 123R, Share-Based
Payment (Statement 123R) using the modified-prospective method. See Note 14
Stock-Based Compensation.
In June 2006, the Financial Accounting Standards
Board (FASB) issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48). FIN 48 is an interpretation
of SFAS
49
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
2. Summary of Significant Accounting Policies (Continued)
No. 109, Accounting
for Income Taxes, and it seeks to reduce the diversity in practice associated
with certain aspects of measurement and recognition in accounting for income
taxes. In addition, FIN 48 requires expanded disclosure with respect to
the uncertainty in income taxes. FIN 48 will be effective for the Company
beginning January 1, 2007. The Company is currently evaluating the impact,
if any, that FIN 48 will have on the financial statements.
Segment Disclosure
Comfort Systems activities are within the mechanical
services industry, which is the single industry segment served by the Company. Under
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, each operating subsidiary represents an operating segment and
these segments have been aggregated, as no individual operating unit is
material and the operating units meet a majority of SFAS No. 131s
aggregation criteria.
Use of Estimates
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 assets and liabilities, revenues and expenses, and disclosures
regarding contingent assets and liabilities. Actual results could differ from
those estimates. The most significant estimates used in the Companys financial
statements affect revenue and cost recognition for construction contracts, the
allowance for doubtful accounts, self-insurance accruals, deferred tax assets,
warranty accruals, and the quantification of fair value for reporting units in
connection with the Companys goodwill impairment testing.
Concentrations of Credit Risk
The Company provides services in
a broad range of geographic regions. The Companys credit risk primarily
consists of receivables from a variety of customers including general
contractors, property owners and developers, and commercial and industrial
companies. The Company regularly reviews its accounts receivable and estimates
an allowance for uncollectible amounts. The Company has a diverse customer
base, with no single customer accounting for more than 5% of consolidated 2006
revenues.
Financial Instruments
The Companys financial instruments consist of cash
and cash equivalents, accounts receivable, receivables from related parties,
other receivables, accounts payable and a line of credit. The Company believes
that the carrying values of these instruments on the accompanying balance
sheets approximate their fair values.
Reclassifications
Certain reclassifications
have been made in prior period financial statements to conform to current
period presentation. These reclassifications have not resulted in any changes
to previously reported net income for any periods.
50
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
3. Acquisition
On January 17,
2005, the Company completed the acquisition of Granite State Plumbing &
Heating (Granite), an HVAC contractor located near Manchester, New Hampshire.
This acquisition has increased the Companys presence in the Northeast,
specifically in the Boston region and southern New Hampshire. The total
consideration paid in this transaction was approximately $2.9 million,
comprised entirely of cash, including cash acquired. The fair value of the
tangible net assets acquired exceeded the total consideration paid. As a
result, the long-term fixed assets of the acquisition were reduced by this
excess amount. The consolidated balance sheet of Comfort Systems includes an
allocation of the purchase price to the assets acquired and liabilities assumed
based on estimates of fair value. The purchase price was allocated as follows
(amounts in thousands):
Accounts
receivable, net
|
|
$
|
5,223
|
|
Costs and estimated
earnings in excess of billings
|
|
1,156
|
|
Other current
assets
|
|
284
|
|
Property and
equipment
|
|
210
|
|
Less: Accounts
payable
|
|
(2,983
|
)
|
Less: Billings
in excess of costs and estimated earnings
|
|
(175
|
)
|
Less: Other
current liabilities
|
|
(747
|
)
|
Less: Other
long-term liabilities
|
|
(25
|
)
|
Cash paid, including
cash acquired
|
|
$
|
2,943
|
|
The results of operations
of Granite are included in the Companys consolidated financial statements from
January 17, 2005 through December 31, 2006.
4. Discontinued Operations
Sale of Assets to
MESA Energy Systems, Inc.On
June 1, 2006, the Company along with its wholly-owned subsidiary, ARC
Comfort Systems USA, Inc. (ARC), entered into an asset purchase
agreement to sell certain assets of ARC to Mesa Energy Systems, Inc. (a
subsidiary of Emcor Group, Inc.) for approximately $0.7 million in
cash. These assets were sold at book value. The after-tax losses of this
company of $2.3 million, $1.5 million and $0.2 million for the
years ended December 31, 2004, 2005 and 2006, respectively, have been
reported in discontinued operations under Operating loss, net of income tax
benefit.
Sale of Companies
to ALCOn December 31,
2005, the Company sold two operations to Automated Logic Corporation and
Automated Logic Contracting Services, Inc. (together, ALC) for
approximately $22.9 million in cash, net of transaction costs and a
purchase price adjustment based upon the closing balance sheet for the
transferred assets. The receivable related to this sale was paid during the
first quarter of 2006. The gain recognized on the sale of these units was $9.8 million,
including tax expense, and was reported in discontinued operations under Estimated
gain on disposition, including income tax benefit (expense). During the fourth quarter of 2006, the
Company recorded an additional gain of $0.1 million, net of tax, related
to the collection of certain receivables. The Company paid $7.0 million in
taxes related to this transaction during the first quarter of 2006. The
after-tax income of these companies of $1.3 million
51
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
4. Discontinued Operations (Continued)
in both
2004 and 2005 has been reported in discontinued operations under Operating
loss, net of income tax benefit.
Individual Sales of
Operating CompaniesIn 2005,
the Company sold two small operating companies in separate transactions and
shutdown the operations at another small operating company. The after-tax loss
of these companies was $2.5 million in 2004 and $1.2 million in 2005,
and has been reported in discontinued operations under Operating loss, net of
income tax benefit. The gain recognized
on the sale of these units was $0.1 million, including tax expense, and
was reported in discontinued operations under Estimated gain on disposition,
including income taxes.
In 2004, the Company sold
a small operating company. The after-tax income of this company for the first
six months of 2004 was less than $0.1 million and has been reported in
discontinued operations under Operating loss net of income tax benefit. The loss recognized on the sale of this unit
in the second quarter of 2004 was $0.5 million, including tax expense, and
was reported in discontinued operations under Estimated gain on disposition,
including income tax benefit expense.
This loss primarily resulted from the non-cash write off of goodwill
associated with this unit. This goodwill write-off was not tax deductible.
Assets
and liabilities related to discontinued operations are as follows (in
thousands):
|
|
December 31,
2005
|
|
December 31,
2006
|
|
Accounts
receivable, net
|
|
|
$
|
2,457
|
|
|
|
$
|
216
|
|
|
Other current
assets, net
|
|
|
238
|
|
|
|
5
|
|
|
Costs and
estimated earnings in excess of billings
|
|
|
480
|
|
|
|
|
|
|
Property, plant
and equipment, net
|
|
|
139
|
|
|
|
|
|
|
Other noncurrent
assets
|
|
|
682
|
|
|
|
|
|
|
Total assets
|
|
|
$
|
3,996
|
|
|
|
$
|
221
|
|
|
Accounts payable.
|
|
|
$
|
232
|
|
|
|
$
|
27
|
|
|
Billings in
excess of costs and estimated earnings
|
|
|
161
|
|
|
|
|
|
|
Other current
liabilities
|
|
|
916
|
|
|
|
423
|
|
|
Total liabilities
|
|
|
$
|
1,309
|
|
|
|
$
|
450
|
|
|
Revenues
and pre-tax losses related to the operations discontinued in 2004, 2005 and
2006 are as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
Revenues
|
|
$
|
52,533
|
|
$
|
37,831
|
|
$
|
2,564
|
|
Pre-tax loss
|
|
$
|
(3,742
|
)
|
$
|
(2,127
|
)
|
$
|
(363
|
)
|
52
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
4. Discontinued Operations (Continued)
The Companys consolidated statements of operations
and the related earnings per share amounts have been restated to reflect the
effects of the discontinued operations. No interest expense is allocated to
discontinued operations.
Sale of Companies
to EmcorIn March 2002,
the Company sold 19 operations to Emcor Group, Inc. (Emcor). The total
purchase price was $186.25 million, including the assumption by Emcor of
approximately $22.1 million of subordinated notes to former owners of
certain of the divested companies. Of Emcors purchase price, $5 million
was deposited into an escrow account to secure potential obligations on the
Companys part to indemnify Emcor for future claims and contingencies arising
from events and circumstances prior to closing, all as specified in the
transaction documents. Of this escrow, $4 million has been applied in
determining the Companys liability to Emcor in connection with the settlement
of certain claims. The remaining $1 million of escrow is available for
book purposes to apply to any future claims and contingencies in connection
with this transaction, and has not been recognized as part of the Emcor
transaction purchase price.
There are ongoing open matters relating to this
transaction that the Company continues to address with Emcor. The Company does
not believe these open matters, either individually or in the aggregate, will
have a material effect on the Companys financial position when ultimately
resolved. The Company maintains reserves for these matters, net of amounts
receivable from escrow that it believes will ultimately be applied in settling
these matters. During the second quarter of 2004, the Company concluded that
the related reserves should be reduced by $0.3 million, net of tax
benefit. Additionally, during the fourth quarter of 2004, the Company reduced
these reserves by $0.2 million, net of tax. During the third quarter of
2005, the Company reduced tax reserves by $0.1 million in connection with
the resolution of state tax examinations. These amounts are reflected in
discontinued operations in 2004 and 2005 in the caption Estimated gain on
disposition, including income tax benefit (expense).
5. Goodwill
In most businesses the Company has acquired, the value
paid to buy the business was greater than the value of specifically
identifiable net assets in the business. Under generally accepted accounting
principles, this excess is termed goodwill and is recognized as an asset at the
time the business is acquired. It is generally expected that future net
earnings from an acquired business will exceed the goodwill asset recognized at
the time the business is bought. Under previous generally accepted accounting
principles, goodwill was required to be amortized, or regularly charged to the
Companys operating results in its statement of operations.
SFAS No. 142, Goodwill and Other Intangible
Assets requires companies to assess goodwill asset amounts for impairment each
year, and more frequently if circumstances suggest an impairment may have
occurred. Impairment must be reflected when the value of a given business unit
in excess of its tangible net assets falls below the goodwill asset balance
carried for that unit on the Companys books. If other business units have had
increases in the value of their respective goodwill balances, such increases
may not be recorded under SFAS No. 142. Accordingly, such increases may
not be netted against impairments at other business units.
53
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
5. Goodwill (Continued)
The Company currently performs its annual impairment
testing as of October 1 and any impairment charges resulting from this
process are reported in the fourth quarter. The Company segregated its
operations into reporting units based on the degree of operating and financial
independence of each unit and the Companys related management of them. These
reporting units are tested for impairment by comparing the units fair value to
its carrying value. The fair value of each reporting unit was estimated using a
discounted cash flow model combined with market valuation approaches. Significant
estimates and assumptions are used in assessing the fair value of reporting
units. These estimates and assumptions involved future cash flows, growth
rates, discount rates, weighted average cost of capital and estimates of market
valuations for each of the reporting units.
The Company recorded goodwill impairment charges of
$0.6 million, $33.9 million in operating results during the fourth quarters of
2004 and 2005, respectively. The Company recorded an additional impairment
charge of $2.7 million in 2004 related to operations that were
subsequently discontinued in 2005. This impairment charge is reflected in the
operating loss associated with discontinued operations. The impairment charge
during 2004 from continuing operations of $0.6 million related to a
reporting unit in northern Michigan and was a result of concerns about the
activity levels in this market. During 2005, the Company experienced modest
revenue growth and improved profitability due to increased industry activity
and favorable market conditions. However, the revenue, operating profits and
cash flows for certain reporting units were lower than expected despite these
favorable market conditions. Primarily based upon this trend, the revenue,
earnings and cash flow projections for certain reporting units were revised
downward for the next several years as compared to previous projections. As a
result, an impairment charge of $33.9 million was recognized in 2005 for
these reporting units including operations in San Diego, Houston, Grand Rapids,
central Iowa, Birmingham, Buffalo and Albany. The Company did not have a goodwill impairment
charge in 2006.
The
changes in the carrying amount of goodwill for the years ended December 31,
2004, 2005 and 2006 are as follows (in thousands):
Goodwill balance as of
December 31, 2004
|
|
$
|
100,123
|
|
Goodwill related to sale
of operation
|
|
(3,292
|
)
|
Impairment adjustment
|
|
(33,877
|
)
|
Goodwill balance as of
December 31, 2005
|
|
$
|
62,954
|
|
Goodwill related to sale
of operation
|
|
|
|
Impairment adjustment
|
|
|
|
Goodwill balance as of December 31, 2006
|
|
$
|
62,954
|
|
6. Restructuring Charges
The Company recorded
restructuring charges of approximately $3.2 million pre-tax in 2003. These
charges included approximately $1.5 million for severance costs and
retention bonuses primarily associated with the curtailment of the Companys
energy efficiency marketing activities, a reorganization of the Companys
national accounts operations as well as a reduction in corporate personnel. The
restructuring charges for this period also included approximately $1.6 million
for remaining lease obligations and $0.1 million of other costs recorded
in connection with the actions described above. The Company
54
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
6. Restructuring Charges (Continued)
increased its accrual for
these remaining lease obligations by $0.6 million in 2004, $0.3 million
in 2005 and $0.1 million in 2006 based on revised estimates of when and to
what extent it believes it can sublease the related facilities. These increases
to the accrual were included in Cost of Services and in Selling, General and
Administrative Expenses in the Companys consolidated statement of operations.
Accrued lease termination costs remaining from past restructuring charges are
expected to be completed by 2009.
The
following table shows the remaining liabilities associated with the cash
portion of the restructuring charges as of December 31, 2004, 2005 and
2006 (in thousands):
Lease termination costs and other:
|
|
|
|
Balance at
Beginning of Period
|
|
Additions
|
|
Payments
|
|
Balance at
End of Period
|
|
Year ended
December 31, 2004
|
|
|
$
|
1,745
|
|
|
|
$
|
610
|
(a)
|
|
|
$
|
(1,074
|
)
|
|
|
$
|
1,281
|
|
|
Year ended
December 31, 2005
|
|
|
$
|
1,281
|
|
|
|
$
|
273
|
(a)
|
|
|
$
|
(593
|
)
|
|
|
$
|
961
|
|
|
Year ended December 31, 2006
|
|
|
$
|
961
|
|
|
|
$
|
88
|
(a)
|
|
|
$
|
(363
|
)
|
|
|
$
|
686
|
|
|
(a) These
charges were included in Cost of Services and in Selling, General and
Administrative Expenses in the Companys consolidated statement of operations.
7. Property
and Equipment
Property and equipment consist of the following (dollars
in thousands):
|
|
Estimated
|
|
|
|
|
|
|
|
Useful Lives
|
|
December 31,
|
|
|
|
in Years
|
|
2005
|
|
2006
|
|
Transportation
equipment
|
|
|
3-7
|
|
|
$
|
8,118
|
|
$
|
8,638
|
|
Machinery
and equipment
|
|
|
3-10
|
|
|
14,415
|
|
15,218
|
|
Computer
and telephone equipment
|
|
|
3-7
|
|
|
13,699
|
|
14,523
|
|
Buildings
and leasehold improvements
|
|
|
3-40
|
|
|
7,742
|
|
8,588
|
|
Furniture
and fixtures
|
|
|
3-10
|
|
|
4,077
|
|
3,872
|
|
|
|
|
|
|
|
48,051
|
|
50,839
|
|
LessAccumulated
depreciation
|
|
|
|
|
|
(35,346
|
)
|
(35,335
|
)
|
Property and equipment, net
|
|
|
|
|
|
$
|
12,705
|
|
$
|
15,504
|
|
Depreciation
expense for the years ended December 31, 2004, 2005 and 2006 was $4.1 million,
$4.2 million and $5.0 million, respectively.
55
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
8. Detail
of Certain Balance Sheet Accounts
Activity in the Companys allowance for doubtful
accounts consists of the following (in thousands):
|
|
December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
Balance
at beginning of year
|
|
$
|
4,547
|
|
$
|
5,171
|
|
$
|
3,538
|
|
Additions
for bad debt expense
|
|
2,346
|
|
1,202
|
|
686
|
|
Deductions
for uncollectible receivables written off, net of recoveries
|
|
(2,422
|
)
|
(2,835
|
)
|
(923
|
)
|
Other
receivables reserves previously included in other accrued liabilities
|
|
700
|
|
|
|
|
|
Balance at end of year
|
|
$
|
5,171
|
|
$
|
3,538
|
|
$
|
3,301
|
|
Other current liabilities consist of the following (in
thousands):
|
|
December 31,
|
|
|
|
2005
|
|
2006
|
|
Accrued
warranty costs
|
|
$
|
3,998
|
|
$
|
4,313
|
|
Other
current liabilities
|
|
10,340
|
|
10,858
|
|
|
|
$
|
14,338
|
|
$
|
15,171
|
|
Contracts in progress are as follows (in thousands):
|
|
December 31,
|
|
|
|
2005
|
|
2006
|
|
Costs
incurred on contracts in progress
|
|
$
|
622,104
|
|
$
|
1,177,317
|
|
Estimated
earnings, net of losses
|
|
138,214
|
|
256,177
|
|
LessBillings
to date
|
|
(791,085
|
)
|
(1,475,763
|
)
|
|
|
$
|
(30,767
|
)
|
$
|
(42,269
|
)
|
Costs
and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
22,512
|
|
$
|
23,680
|
|
Billings
in excess of costs and estimated earnings on uncompleted contracts
|
|
(53,279
|
)
|
(65,949
|
)
|
|
|
$
|
(30,767
|
)
|
$
|
(42,269
|
)
|
9. Long-Term
Debt Obligations
Long-term debt obligations consist of the following (in
thousands):
|
|
December 31,
|
|
|
|
2005
|
|
2006
|
|
Revolving
credit facility
|
|
|
$
|
|
|
|
|
$
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Total
debt
|
|
|
|
|
|
|
|
|
|
Lesscurrent
maturities
|
|
|
|
|
|
|
|
|
|
Total long-term portion of
debt
|
|
|
$
|
|
|
|
|
$
|
|
|
|
56
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
9. Long-Term
Debt Obligations (Continued)
Credit Facility
On June 30, 2005, the Company entered into a
senior credit facility (the Facility) provided by a syndicate of banks. The
Facility consists of a $75.0 million revolving credit facility which is
available for borrowings and letters of credit. The Facility was scheduled to
expire on June 30, 2009. On February 20, 2007, the Company amended
the Facility, increasing the available borrowing capacity to $100.0 million
and amending certain covenants. See Note 16 Subsequent Events for additional
information. As of December 31, 2006, the total of the Facility was $75.0 million,
with no outstanding borrowings, $25.2 million in letters of credit
outstanding, and $49.8 million of credit available.
Certain of the Companys vendors require letters of
credit to ensure reimbursement for amounts they are disbursing on the Companys
behalf, such as to beneficiaries under the Companys self-funded insurance
programs. The Company has also occasionally used letters of credit to guarantee
performance under its contracts and to ensure payment to its subcontractors and
vendors under those contracts. The Companys lenders issue such letters of
credit through the Facility. A letter of credit commits the lenders to pay
specified amounts to the holder of the letter of credit if the holder
demonstrates that the Company has failed to perform specified actions. If this
were to occur, the Company would be required to reimburse the lenders for
amounts they fund to honor the letter of credit holders claim. Absent a claim,
there is no payment or reserving of funds by the Company in connection with a
letter of credit. However, because a claim on a letter of credit would require
immediate reimbursement by the Company to its lenders, letters of credit are
treated as a use of Facility capacity just the same as actual borrowings. The
Company has never had a claim made against a letter of credit that resulted in
payments by a lender or by the Company and believes such claim is unlikely in
the foreseeable future.
The Companys borrowing and letter of credit capacity
under the Revolving Loan portion of the Facility is $75.0 million less
borrowings and letters of credit outstanding, subject to a borrowing base. The
borrowing base is defined under the Facility as 65% of the following: total trade receivables including costs and
estimated earnings in excess of billings, less allowances for doubtful
accounts, less receivables related to projects that are subject to payment or
performance bonds. The borrowing base as of December 31, 2006 was $85.3 million.
This borrowing base is substantially greater than the $75.0 million
face-value limit of the Facility as of December 31, 2006.
The Facility contains financial covenants defining
various financial measures and the levels of these measures with which the
Company must comply, as discussed below under Covenants and Restrictions. Covenant
compliance is measured as of each quarter-end. While the Facilitys financial
covenants do not
57
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
9. Long-Term Debt Obligations (Continued)
specifically govern capacity under the Facility, if
the Companys debt level under the Facility at a quarter-end covenant
compliance measurement date were to cause the Company to violate the Facilitys
debt-to-Credit Facility Adjusted EBITDA covenant (described in more detail
below), the Companys borrowing capacity under the Facility could be restricted
by the lenders. Accordingly, available capacity amounts shown below are
presented both on a financial covenant basis and on a Facility face value
basis.
|
|
As of
December 31,
2006
|
|
|
|
(in thousands)
|
|
Amounts Outstanding:
|
|
|
|
|
|
Revolving loan
|
|
|
$
|
|
|
|
Other non-Facility debt
|
|
|
|
|
|
Total debt
|
|
|
$
|
|
|
|
Letters of credit
|
|
|
$
|
25,166
|
|
|
Available Capacity:
|
|
|
|
|
|
Unused Revolving Loan
and letter of credit capacity based on Revolving Loan face value of $75
million
|
|
|
$
|
49,834
|
|
|
Unused Revolving Loan and letter of credit capacity
based on quarter-end debt-to-Credit
Facility Adjusted EBITDA covenant
|
|
|
$
|
49,834
|
|
|
Collateral
The Facility is secured by first liens on
substantially all the assets of the Company except for assets related to
projects subject to surety bonds. The Facility is secured by a second lien on
these assets, which are discussed further below. The Companys assets are
primarily held by its subsidiaries. Accordingly, the Facility is also secured
by the capital stock of current and future subsidiaries, and these entities
guarantee repayment of amounts due under the Facility.
A common practice in the
Companys industry is the posting of payment and performance bonds with
customers. These bonds are offered by financial institutions known as sureties,
and provide assurance to the customer that in the event the Company encounters
significant financial or operational difficulties, the surety will arrange for
the completion of the Companys contractual obligations and for the payment of
the Companys vendors on the projects subject to the bonds. In cooperation with
its lenders, the Company has granted its surety a first lien on assets such as
receivables, costs and estimated earnings in excess of billings, and equipment
specifically identifiable to projects for which bonds are outstanding, as
collateral for potential obligations under bonds. As of December 31, 2006
the amount of these assets was approximately $88.4 million.
Interest Rates and
Fees
At December 31, 2006,
the Company had a choice of two interest rate options for borrowings under the
Facility. Under one option termed the Base Rate Option, the interest rate is
determined based on the higher of the Federal Funds Rate plus 0.5% or the prime
lending rate offered by Citibank, N.A. (not one of the banks providing the
Facility to the Company). Additional margins are then added to the higher of
these two rates. These additional margins are determined based on the ratio of
the Companys total debt
58
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
9. Long-Term Debt Obligations (Continued)
outstanding
as of a given quarter end to its earnings before interest, taxes, depreciation
and amortization (Credit Facility Adjusted EBITDA) for the twelve months
ending as of that quarter end, as shown below. Credit Facility Adjusted EBITDA
as defined under the Facility is discussed in more detail below under Covenants and Restrictions.
Under the other interest
rate option termed the Eurodollar Rate Option, borrowings bear interest based
on designated one to six-month Eurodollar rates that correspond very closely to
rates described in various general business media sources as the London
Interbank Offered Rate or LIBOR. Additional
margins are then added to LIBOR for borrowings based on the Companys ratio of
debt to Credit Facility Adjusted EBITDA, as shown below.
Letter of credit fees
under the Facility are also based on the Companys ratio of debt to Credit
Facility Adjusted EBITDA, as shown below.
The
interest rates underlying the Base Rate and Eurodollar Rate Options under the
Facility are floating rates determined by the broad financial markets, meaning
they can and do move up and down from time to time. For illustrative purposes,
the following are the respective market rates as of December 31, 2006
relating to interest options under the Facility:
Base Rate OptionThe
higher of:
|
|
|
|
Federal Funds Rate plus
0.50%
|
|
5.75
|
%
|
Citibank, N.A. Prime
Rate
|
|
8.25
|
%
|
Eurodollar Rate Option:
|
|
|
|
One-month LIBOR
|
|
5.32
|
%
|
Six-month LIBOR
|
|
5.37
|
%
|
|
|
Debt to Credit Facility Adjusted EBITDA
|
|
|
|
Less than 0.75
|
|
0.75 to 1.25
|
|
1.25 or greater
|
|
Additional Per Annum
Interest Margin Added Under:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Rate Option
|
|
|
1.00
|
%
|
|
|
1.50
|
%
|
|
|
2.00
|
%
|
|
Eurodollar Rate Option
|
|
|
2.00
|
%
|
|
|
2.50
|
%
|
|
|
3.00
|
%
|
|
Per Annum Letter of Credit Fees (not added to
underlying Base Rate or Eurodollar Rate)
|
|
|
1.50
|
%
|
|
|
1.875
|
%
|
|
|
2.25
|
%
|
|
Commitment fees of 0.25%
per annum are payable on the portion of Revolving Loan capacity not in use for
borrowings or letters of credit at any given time.
The Company incurred
approximately $0.4 million in financing and professional costs in
connection with the arrangement of the Facility. These costs are amortized as a
non-cash charge to interest expense over the term of the Facility in an amount
of approximately $0.1 million per year, and will continue to be amortized
through the term of the Facility as amended. Excluding the amortization of debt
financing and arrangement costs, the Company estimates that the interest rate
applicable to borrowings under the Facility would be approximately 7.32% as of December 31,
2006.
59
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
9. Long-Term Debt Obligations (Continued)
Covenants and
Restrictions
The Facility contains
financial covenants defining various financial measures and the levels of these
measures with which the Company must comply. Covenant compliance is assessed as
of each quarter end. Credit Facility Adjusted EBITDA is defined under the
Facility for financial covenant purposes as net earnings for the four quarters
ending as of any given quarterly covenant compliance measurement date, plus the
corresponding amounts for (a) interest expense; (b) income taxes; (c) depreciation
and amortization; and (d) other non-cash charges. The following is a
reconciliation of Credit Facility Adjusted EBITDA to net income (in thousands):
Net income
|
|
$
|
28,724
|
|
Income taxescontinuing
operations and discontinued operations
|
|
17,646
|
|
Interest income, net
|
|
(1,970
|
)
|
Depreciation and
amortization expense
|
|
5,265
|
|
Credit Facility Adjusted EBITDA
|
|
$
|
49,665
|
|
The Facilitys principal financial covenants include:
Fixed Charge Coverage
RatioThe Facility requires that the ratio of Credit
Facility Adjusted EBITDA, less non-financed capital expenditures, tax
provision, dividends and amounts used to repurchase stock to the sum of
interest expense and scheduled principal payments be at least 1.50. Capital
expenditures, tax provision, dividends and stock repurchase payments are
defined under the Facility for purposes of this covenant to be amounts for the
four quarters ending as of any given quarterly covenant compliance measurement
date. Interest expense is defined under the Facility as interest expense for
the four quarters ending as of any given quarterly covenant compliance
measurement date, excluding corresponding twelve-month amounts for (a) amortization
of deferred debt arrangement costs; and (b) mark-to-market interest
expense. Scheduled principal payments for this ratio are also measured for the
twelve months ending as of any given quarterly covenant compliance measurement
date. The Companys fixed charge coverage ratio as of December 31, 2006 as
measured under this covenant was 36.47 as compared to a minimum covenant
requirement of 1.50.
Tangible Net WorthThe
Facility requires that the Companys tangible net worth not be less than the
sum of (a) $100.5 million; (b) 50% of net income earned beginning
April 1, 2005; and (c) the net proceeds of any equity transactions. For
purposes of this ratio, the Facility defines tangible net worth as stockholders
equity less the book value of the following intangible assets: goodwill,
patents, copyrights, licenses, franchises, trade names, trade secrets, and
operating leases. The Facility also provides that for purposes of this ratio,
net income (loss) excludes any goodwill impairment charges. The Companys
tangible net worth as of December 31, 2006 as measured under this covenant
was $179.4 million, as compared to a covenant minimum of $136.0 million.
Debt
to Credit Facility Adjusted EBITDAThe Facility
requires that the Companys ratio of debt to Credit Facility Adjusted EBITDA
not exceed 2.5. The Companys debt-to-Credit Facility Adjusted EBITDA ratio as
of December 31, 2006 as measured under this covenant was zero because the
Company has no debt.
60
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
9. Long-Term Debt Obligations (Continued)
Capital ExpendituresThe
Facility limits capital expenditures to $20.0 million per year. The
Companys capital expenditures during the year ended December 31, 2006
were $8.1 million.
Other
RestrictionsThe Facility limits payment of dividends
and repurchase of shares by the Company to a combined maximum of $20.0 million
per year, and otherwise limits non-Facility debt, capital lease obligations,
acquisitions, investments, and sales of assets. During the fourth quarter of
2005, the Company amended the Facility to permit the sale of substantially all
of the assets of two subsidiaries. That sale is discussed in Note 4 Discontinued
Operations. The amendment also provides
additional flexibility for the Company to purchase its common shares.
Interest Expense
and Related Charges in Connection with Previous Credit Facilities
The
credit facility that preceded the Companys current one was in place from December 2003
to June 2005. The Companys next previous credit facility had been in
place from October 2002 to December 2003. Interest expense for 2004,
2005 and 2006 included the following primary elements (in thousands):
|
|
2004
|
|
2005
|
|
2006
|
|
Interest
expense on borrowings, and unused commitment
fees
|
|
$
|
704
|
|
$
|
391
|
|
$
|
166
|
|
Letter
of credit fees
|
|
443
|
|
389
|
|
351
|
|
Amortization
of deferred debt arrangement costs and discount
|
|
419
|
|
295
|
|
99
|
|
Total
|
|
$
|
1,566
|
|
$
|
1,075
|
|
$
|
616
|
|
When the Companys
previous credit facilities were reduced in size or terminated, corresponding
amounts of deferred debt arrangement costs were written off. This charge in the
amount of $0.9 million is reported as Write-off of debt costs in the
Companys consolidated statement of operations for the year ended December 31,
2005.
10. Income Taxes
The
provision for income taxes relating to continuing operations consists of the
following (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
Current
|
|
|
|
|
|
|
|
Federal
|
|
$
|
7,345
|
|
$
|
9,592
|
|
$
|
16,639
|
|
State
and Puerto Rico
|
|
1,511
|
|
2,113
|
|
2,122
|
|
|
|
8,856
|
|
11,705
|
|
18,761
|
|
Deferred
|
|
|
|
|
|
|
|
Federal
|
|
638
|
|
948
|
|
(1,236
|
)
|
State
and Puerto Rico
|
|
(905
|
)
|
2,195
|
|
349
|
|
|
|
(267
|
)
|
3,143
|
|
(887
|
)
|
|
|
$
|
8,589
|
|
$
|
14,848
|
|
$
|
17,874
|
|
61
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
10. Income Taxes (Continued)
The
difference in income taxes provided for and the amounts determined by applying
the federal statutory tax rate to income before income taxes results from the
following (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
Income
tax expense (benefit) at the statutory rate
|
|
$
|
7,794
|
|
$
|
(7
|
)
|
$
|
16,307
|
|
Increase
resulting from
|
|
|
|
|
|
|
|
State
income taxes, net of federal tax effect
|
|
652
|
|
2,481
|
|
1,412
|
|
Increase
(decrease) in valuation allowance
|
|
(621
|
)
|
131
|
|
355
|
|
Increase
(decrease) in contingency reserves
|
|
12
|
|
(14
|
)
|
(419
|
)
|
Non-deductible
goodwill impairment
|
|
224
|
|
11,857
|
|
|
|
Non-deductible
expenses
|
|
474
|
|
619
|
|
289
|
|
Production
activity deduction
|
|
|
|
(182
|
)
|
(320
|
)
|
Other
|
|
54
|
|
(37
|
)
|
250
|
|
|
|
$
|
8,589
|
|
$
|
14,848
|
|
$
|
17,874
|
|
Significant components of the
net deferred tax assets and net deferred tax liabilities as reflected on the
balance sheet are as follows:
|
|
December 31,
|
|
|
|
2005
|
|
2006
|
|
|
|
(In thousands)
|
|
Deferred
income tax assets
|
|
|
|
|
|
Accounts
receivable and allowance for doubtful accounts
|
|
$
|
1,371
|
|
$
|
1,258
|
|
Goodwill
|
|
4,557
|
|
3,217
|
|
Accrued
liabilities and expenses
|
|
8,934
|
|
11,277
|
|
State
net operating loss carryforwards
|
|
2,539
|
|
2,611
|
|
Other
|
|
450
|
|
962
|
|
Total
deferred income tax assets
|
|
17,851
|
|
19,325
|
|
Deferred
income tax liabilities
|
|
|
|
|
|
Property
and equipment
|
|
(779
|
)
|
(595
|
)
|
Long-term
contracts
|
|
(759
|
)
|
(689
|
)
|
Other
|
|
(43
|
)
|
(255
|
)
|
Total
deferred income tax liabilities
|
|
(1,581
|
)
|
(1,539
|
)
|
LessValuation
allowance
|
|
(2,027
|
)
|
(2,616
|
)
|
Net deferred income tax assets
|
|
$
|
14,243
|
|
$
|
15,170
|
|
The deferred income tax assets and liabilities reflected
above are included in the consolidated balance sheets as follows (in
thousands):
|
|
December 31,
|
|
|
|
2005
|
|
2006
|
|
Deferred
income tax assets
|
|
|
|
|
|
Prepaid
expenses and other
|
|
$
|
8,650
|
|
$
|
10,456
|
|
Other
non-current assets
|
|
5,593
|
|
4,714
|
|
Total deferred income tax
assets
|
|
$
|
14,243
|
|
$
|
15,170
|
|
62
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
10. Income Taxes (Continued)
As of December 31, 2006 the
Company had future tax benefits of $2.6 million related to $62 million
of available state net operating loss carryforwards for income tax purposes
which expire in 2007 through 2026. Valuation allowances of $2.2 million
and $0.4 million, respectively, have been recorded against net operating
loss carryforwards and related net state deferred tax assets. The Company
recorded an increase in valuation allowances of $0.4 million for the year
ending December 31, 2006. A deferred tax asset for state net operating
loss carryforwards, net of related valuation allowance, of $0.4 million
reflects the Companys conclusion that is likely that this asset will be
realized based upon expected future earnings in certain subsidiaries. The
Company updates this assessment of the realizability of deferred tax assets
relating to state net operating loss carryforwards quarterly.
Federal, state and local
authorities routinely audit income tax returns filed by the Company. During 2005,
the Company concluded an Internal Revenue Service (IRS) examination of its 2003
federal income tax return. No change was made to the Companys tax return. It
is the Companys policy to establish reserves for taxes that may become payable
in future years as a result of tax examinations. The Company establishes
reserves for taxes based on managements assessment of the probability that
examinations will result in additional income tax payments. Tax reserves are
analyzed quarterly and adjustments are recorded, as events occur to warrant
adjustment to reserves. The Company has recorded $0.5 million in income
tax reserves as of December 31, 2006. For the years ended December 31,
2005 and 2006 the Company has recorded decreases of $0.2 million and $0.4 million
to tax reserves respectively.
During 2004, the American
Jobs Creation Act of 2004 was signed into law. The primary effect of this
legislation was to permit the Company to claim a deduction for 3% of earnings
related to certain of the Companys construction-related activities beginning
in 2005. This deduction modestly decreased the effective rate.
11. Employee Benefit
Plans
The Company and certain of the
Companys subsidiaries sponsor various retirement plans for most full-time and
some part-time employees. These plans consist of defined contribution plans and
multi-employer pension plans and cover employees at substantially all of the
Companys operating locations. The defined contribution plans generally provide
for contributions up to 2.5% of covered employees salaries or wages. These
contributions totaled $2.6 million
for 2004, $3.1 million for 2005 and $3.3 million for 2006. Of these
amounts, approximately $0.3 million and $0.3 million were payable to
the plans at December 31, 2005 and 2006, respectively.
Certain
of the Companys subsidiaries also participate or have participated in various
multi-employer pension plans for the benefit of employees who are union members.
As of December 31, 2005 and 2006, the Company had 83 and 6 employees,
respectively, who were union members. During 2006, two of the Companys
operations withdrew from multi-employer pension plans; accordingly, the Company
is subject to unfunded pension plan liability related to these two withdrawals,
and has accrued $1.2 million in anticipation of these liabilities. The data
available from administrators of other multi-employer pension plans is not
sufficient to determine the accumulated benefit obligations, nor the net assets
attributable to the multi-employer plans in which Company employees participate
or previously participated. Company contributions to these plans were
approximately $0.1 million for 2004, $0.1 million for 2005 and zero
for 2006.
63
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
12. Commitments and
Contingencies
Leases
The
Company leases certain facilities and equipment under noncancelable operating
leases. Rent expense for the years ended December 31, 2004, 2005 and 2006
was $14.1 million, $14.9 million, and $14.7 million, respectively.
The Company recognizes escalating rental payments that are quantifiable at the
inception of the lease on a straight-line basis over the lease term. Concurrent
with the acquisitions of certain acquired companies, the Company entered into
various agreements with previous owners to lease land and buildings used in the
Companys operations. The terms of these leases generally range from three to
ten years and certain leases provide for escalations in the rental expenses
each year, the majority of which are based on inflation. Included in the 2004,
2005 and 2006 rent expense above are approximately $2.8 million, $2.5 million
and $2.4 million of rent paid to these related parties, respectively. The
following represents future minimum rental payments under noncancelable
operating leases (in thousands):
Year ending December 31
|
|
|
|
2007
|
|
$
|
9,797
|
|
2008
|
|
8,077
|
|
2009
|
|
7,841
|
|
2010
|
|
3,219
|
|
2011
|
|
2,200
|
|
Thereafter
|
|
6,442
|
|
|
|
$
|
37,576
|
|
Claims and Lawsuits
The Company is
subject to certain claims and lawsuits arising in the normal course of business.
The Company maintains various insurance coverages to minimize financial risk
associated with these claims. The Company has estimated and provided accruals
for probable losses and related legal fees associated with certain of its
litigation in the accompanying consolidated financial statements. While the
Company cannot predict the outcome of these proceedings, in managements
opinion and based on reports of counsel, any liability arising from these
matters individually and in the aggregate will not have a material effect on
the Companys operating results or financial condition, after giving effect to
provisions already recorded.
In addition to the matters
described above, the Company is defending a dispute arising out of an alleged
delay related to a multi-family construction project. Plaintiffs allege actual
damages of approximately $7 million plus attorneys fees, punitive damages and
pre-judgment interest. The trial relating to this matter is currently scheduled
for the second quarter of 2007. The Company anticipates that contribution from
a co-defendant and insurance proceeds will, in part, offset any adverse
judgment. Management believes the accruals relating to the matter appropriately
reflect a probable outcome; however, if the Company is not successful in this
dispute, it could have a material adverse effect on the Companys operating
results.
64
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
12. Commitments and
Contingencies (Continued)
Surety
Many customers, particularly in connection with new
construction, require the Company to post performance and payment bonds issued
by a financial institution known as a surety. If the Company fails to perform
under the terms of a contract or to pay subcontractors and vendors who provided
goods or services under a contract, the customer may demand that the surety
make payments or provide services under the bond. The Company must reimburse
the surety for any expenses or outlays it incurs. To date, the Company is not
aware of any losses to its sureties in connection with bonds the sureties have
posted on the Companys behalf, and does not expect such losses to be incurred
in the foreseeable future.
Surety market conditions
are currently challenging as a result of significant losses incurred by many
sureties in recent periods, both in the construction industry as well as in
certain larger corporate bankruptcies. As a result, less bonding capacity is
available in the market and terms have become more restrictive. Further, under
standard terms in the surety market, sureties issue bonds on a
project-by-project basis, and can decline to issue bonds at any time. Historically,
approximately 25% of the Companys business has required bonds. While the
Company has enjoyed a longstanding relationship with its primary surety and has
added another surety to further support its bonding needs, current market
conditions as well as changes in the sureties assessment of the Companys
operating and financial risk could cause the sureties to decline to issue bonds
for the Companys work. If that were to occur, the alternatives include doing
more business that does not require bonds, posting other forms of collateral
for project performance such as letters of credit or cash, and seeking bonding
capacity from other sureties. The Company would likely also encounter concerns
from customers, suppliers and other market participants as to its
creditworthiness. While the Company believes its general operating and
financial characteristics, including a significant amount of cash on its
balance sheet, would enable it to ultimately respond effectively to an
interruption in the availability of bonding capacity, such an interruption
would likely cause the Companys revenues and profits to decline in the near
term.
Self-Insurance
The Company is substantially self-insured for workers
compensation, employers liability, auto liability, general liability and
employee group health claims, in view of the relatively high per-incident
deductibles the Company absorbs under its insurance arrangements for these
risks. Losses up to deductible amounts are estimated and accrued based upon
known facts, historical trends and industry averages. Loss estimates associated
with the larger and longer-developing risks, such as workers compensation,
auto liability and general liability, are reviewed by a third-party actuary
quarterly.
The Companys self-insurance arrangements currently
are as follows:
Workers
CompensationThe per-incident deductible for workers
compensation is $500,000. Losses above that amount are determined by statutory rules on
a state-by-state basis, and are fully covered by excess workers compensation
insurance.
General
and Employers LiabilityFor general liability and
employers liability, the Company self-insures the first $500,000 of each loss,
is fully insured for the next $500,000 of each loss, then has a single,
aggregate excess loss insurance policy that covers losses up to $50 million
across both these risk areas (as well as auto liability noted below).
65
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
12. Commitments and Contingencies (Continued)
Auto
LiabilityFor auto liability, the Company self-insures
the first $500,000 of each loss, is fully insured for the next $1.5 million
of each loss, then has a single, aggregate excess loss insurance policy that covers
losses up to $50 million.
Employee
MedicalThe Companys deductible for employee group
health claims is $300,000 per person, per policy (calendar) year. Insurance
then covers any Company responsibility for medical claims in excess of the
deductible amount.
It is important to note
that the Companys $50 million of aggregate excess loss coverage above
applicable per-incident deductibles represents one policy limit that applies to
all lines of risk. In other words, the Company does not have a separate $50 million
of excess loss coverage for each of general liability, employers liability and
auto liability.
13. Stockholders
Equity
Long-Term Incentive Plans
In March 1997, the Companys
stockholders approved the Companys 1997 Long-Term Incentive Plan (the 1997
Plan) which provides for the granting of incentive or non-qualified stock
options, stock appreciation rights, restricted or deferred stock, dividend
equivalents or other incentive awards to directors, employees and consultants
to the Company. Aggregate options granted under the 1997 Plan may not exceed
13% of the total number of shares of Common Stock outstanding at the time of
any grant under the plan. The options the Company has granted under the 1997
Plan have exercise prices that were equal to the fair market value of the
Common Stock on the date of grant, and which become exercisable in five equal
annual installments beginning on the first anniversary of the date of grant. The
options expire after seven years from the date of grant if unexercised. The
1997 Plan will expire in March 2007.
In May 2000, the Companys
stockholders approved the Companys 2000 Incentive Plan (the 2000 Plan) which
provides for the granting of incentive or non-qualified stock options,
restricted stock or performance awards to directors, employees and other
persons or entities as approved by the Board of Directors. The options the
Company has granted under the 2000 Plan have exercise prices that were equal to
the fair market value of the Common Stock on the date of grant, and which
become exercisable in four equal annual installments beginning on the first
anniversary of the date of grant. The options expire after ten years from the
date of grant if unexercised. Under the 2000 Plan, 3.5 million shares were
authorized for issuance, of which none remain available for issuance as of December 31,
2006.
In May 2006,
the Companys stockholders approved the Companys 2006 Equity Incentive
Plan (the 2006 Plan) which provides for
the granting of incentive or non-qualified stock options, stock appreciation
rights, restricted or deferred stock, dividend equivalents or other incentive
awards to directors, employees and consultants to the Company. The
number of shares authorized and reserved for issuance under the 2006 Plan is
3,200,000 shares. The number of shares
available under this plan varies with the total number of shares of Common
Stock outstanding. As of December 31, 2006, there were 3,185,000 shares
available for issuance under this plan. The 2006 Plan will expire in May 2016.
The Company will make all future grants under the 2006 Plan.
66
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
13. Stockholders Equity (Continued)
Non-Employee Directors Stock Plan
In March 1997, the
Companys stockholders approved the 1997 Non-Employee Directors Stock Plan
(the Directors Plan), which provides for the granting of stock options or
stock appreciation rights to non-employees. The number of shares authorized and
reserved for issuance under the Directors Plan is 500,000 shares. Under the
Directors Plan, each non-employee director is granted options to purchase
10,000 shares at the time of the directors initial election. In addition, each
non-employee director is automatically granted options to purchase an
additional 10,000 shares at each annual meeting of the stockholders that is
more than two months after the date of the directors initial election. All
options are granted with an exercise price equal to the fair market value at
the date of grant and are immediately vested upon grant. The 1997 Plan will
expire in March 2007.
2006 Stock
Options/SAR Plan for Non-Employee Directors
In May 2006, the Companys
stockholders approved the Companys 2006 Stock Options/SAR Plan for
Non-Employee Directors (the 2006 Directors Plan), which provides for the
granting of stock options or stock appreciation rights to non-employees. The
number of shares authorized and reserved for issuance under the 2006 Directors
Plan is 500,000 shares. Outstanding options may be canceled and reissued
under terms specified in the plan. The number of shares available under this
plan varies with the total number of shares of Common Stock outstanding. As of December 31,
2006, there were 500,000 shares available for issuance under this plan. The 2006
Directors Plan will expire in May 2016.
Under the 2006 Directors Plan, each
participant who has served since at least the previous annual meeting and is
continuing in office and each newly elected non-employee director will be
awarded an award covering 10,000 shares (which will be the maximum number of
shares of Common Stock subject to awards that may be granted to any participant
in the aggregate in any calendar year). All
options will be granted with an exercise price equal to the fair market value
at the date of grant and become exercisable on the first anniversary of the
date of grant. The options expire after ten years from the date of grant if
unexercised. The Company will make all future grants under the 2006 Directors
Plan.
The
Company has never altered the price of any option after its grant.
Warrant
In connection with a previous credit facility, the
Company granted a lender a warrant to purchase 409,051 shares of Company common
stock (Common Stock) for nominal consideration. When the warrant was
originally issued, the warrant holder had the right to put, or require the
Company to repurchase some or all of the shares related to the warrant in
certain circumstances. The warrant was exercised in October 2004 in a
cashless transaction, whereby the Company issued 408,144 shares upon exercise
of the warrant. As a result of the
exercise, all rights under the warrant have terminated and the remaining value
of the warrant was eliminated as an obligation and added to stockholders
equity in October 2004. Because the warrant and put did not relate
to the Companys current credit facility, mark-to-market adjustments during the
year ended December 31, 2004, which were losses of $0.4 million, are
reflected as other income (expense) in the Companys statement of operations. There
are no further mark-to-market adjustments to income associated since the
warrant and put are no longer outstanding.
67
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
13. Stockholders Equity (Continued)
Restricted Common Stock
In March 1997, Notre
Capital Ventures II, L.L.C. (Notre) exchanged 2,742,912 shares of Common
Stock for an equal number of shares of restricted voting common stock (Restricted
Voting Common Stock). In November 2006, the Board voted to convert all
existing Restricted Voting Common Stock into Common Stock . As a result of this
action, all outstanding shares of Restricted Voting Common Stock immediately
converted into shares of Common Stock of the Company on a share for share
basis.
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, warrants and contingently issuable restricted stock.
Under EPS calculation methods established by generally
accepted accounting principles, including the effect of options whose exercise
price exceeds the average market price of the Common Stock for a given period
would increase calculated EPS. This impact is called anti-dilutive. Generally accepted accounting principles for
determining EPS require that any options or other common stock equivalents
whose inclusion in determining EPS would have an anti-dilutive effect be
excluded. Accordingly, options to purchase 1.3 million shares of Common
Stock at prices ranging from $7.00 to $21.438 per share which were outstanding
for the year ended December 31, 2004, and options to purchase 0.1 million
shares at prices ranging from $12.75 to $21.125 per share which were
outstanding for the year ended December 31, 2006, were not included in the
computation of diluted EPS because they were anti-dilutive.
Including options in an EPS calculation for a period
in which a loss is reported is also anti-dilutive. Accordingly, because the
Company reported a loss from continuing operations for the year ended December 31,
2005, options to purchase 0.9 million shares of common stock at prices
ranging from $1.90 to $21.438 per share were excluded from the computation of
diluted EPS because they were anti-dilutive.
As noted above, the
Company issued a warrant to purchase 409,051 shares of Common Stock along with
related put rights which were exercised in October 2004. As the impact of
the warrant was anti-dilutive for the year ended December 31, 2004, the
effect of the warrant was excluded from earnings per share. As a result of the
warrants exercise in October 2004, its related shares have now become part of
the Companys outstanding Common Stock.
68
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
13. Stockholders Equity (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):
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
Common
shares outstanding, end of period (a)
|
|
38,909
|
|
39,737
|
|
40,462
|
|
Effect
of using weighted average common shares outstanding
|
|
(500
|
)
|
(439
|
)
|
(215
|
)
|
Shares
used in computing earnings per sharebasic
|
|
38,409
|
|
39,298
|
|
40,247
|
|
Effect
of shares issuable under stock option plans based on the treasury stock method
|
|
1,056
|
|
|
|
818
|
|
Effect
of contingently issuable restricted shares
|
|
40
|
|
|
|
81
|
|
Shares
used in computing earnings per sharediluted
|
|
39,505
|
|
39,298
|
|
41,146
|
|
(a) Excludes 325,000, 242,917 and 247,709 shares of
unvested contingently issuable restricted stock outstanding as of December 31,
2004, 2005 and 2006 respectively (see Note 14 Stock-Based Compensation.)
14. Stock-Based Compensation
The Company has various stock-based compensation plans
which are administered by the compensation committee of the board of directors.
Prior to January 1, 2006, the Company accounted for those plans under the
recognition and measurement provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock-Based Compensation. No stock-based
employee compensation cost was recognized in the Consolidated Statements of
Operations for the years ended December 31, 2004 and December 31,
2005, except with respect to the amortization of the intrinsic value of
restricted stock grants totaling $0.4 million and $0.5 million,
respectively. Options granted under the Companys equity compensation plans had
an exercise price equal to the market value of the underlying common stock on
the date of grant and all terms were fixed; accordingly, no expense was
recognized under APB Opinion No. 25. Effective January 1, 2006, the
Company adopted the fair value recognition provisions of Statement 123R, using
the modified-prospective-transition method. Results for prior periods have not
been restated.
The impact of the adoption of FAS 123R resulted in
compensation expense of $1.8 million ($1.1 million after-tax or $0.03
per basic share and $0.03 per diluted share) for the year ended December 31,
2006.
69
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
14. Stock-Based Compensation (Continued)
The following table sets
forth pro forma information as if compensation expense for the years ended December 31,
2004 and December 31, 2005 had been determined consistent with the
requirements of Statement No. 123. For purposes of this pro forma
disclosure, the value of the stock options was estimated using a Black-Scholes
option-pricing formula and amortized to expense over the options vesting
periods (in thousands, except per share amounts):
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
2005
|
|
Net income (loss)
as reported
|
|
$
|
10,713
|
|
$
|
(6,226
|
)
|
Add: Stock-based
compensation included in reported net income, net of tax
|
|
242
|
|
337
|
|
Less:
Compensation expense per Statement 123, net of tax
|
|
(1,431
|
)
|
(1,028
|
)
|
Pro forma net
income (loss)
|
|
$
|
9,524
|
|
$
|
(6,917
|
)
|
Net income (loss)
per shareBasic
|
|
|
|
|
|
Net income (loss) per share as reported
|
|
$
|
0.28
|
|
$
|
(0.16
|
)
|
Pro forma net income (loss) per share
|
|
$
|
0.25
|
|
$
|
(0.18
|
)
|
Net income (loss)
per shareDiluted
|
|
|
|
|
|
Net income (loss) per share as reported
|
|
$
|
0.27
|
|
$
|
(0.16
|
)
|
Pro forma net
income (loss) per share
|
|
$
|
0.24
|
|
$
|
(0.18
|
)
|
Prior to adopting
Statement 123R, the Company presented the benefits of tax deductions in excess
of recognized compensation costs (excess tax benefits) as operating cash flows
in the consolidated statements of cash flows. Statement 123R requires these
excess tax benefits to be reported as financing cash flows.
Stock Options
The
following table summarizes activity under the Company's stock option plans:
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
Stock Options
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Outstanding at beginning of year
|
|
5,625,814
|
|
|
$
|
7.43
|
|
|
3,508,051
|
|
|
$
|
5.49
|
|
|
2,667,863
|
|
|
$
|
4.18
|
|
|
Granted
|
|
144,000
|
|
|
$
|
6.76
|
|
|
467,500
|
|
|
$
|
6.60
|
|
|
65,000
|
|
|
$
|
12.87
|
|
|
Exercised
|
|
(440,508
|
)
|
|
$
|
2.87
|
|
|
(765,913
|
)
|
|
$
|
3.34
|
|
|
(653,996
|
)
|
|
$
|
3.71
|
|
|
Forfeited
|
|
(658,986
|
)
|
|
$
|
9.85
|
|
|
(175,750
|
)
|
|
$
|
7.79
|
|
|
(93,625
|
)
|
|
$
|
6.35
|
|
|
Expired
|
|
(1,162,269
|
)
|
|
$
|
13.55
|
|
|
(366,025
|
)
|
|
$
|
9.90
|
|
|
(51,500
|
)
|
|
$
|
12.73
|
|
|
Outstanding at end of year
|
|
3,508,051
|
|
|
$
|
5.49
|
|
|
2,667,863
|
|
|
$
|
4.18
|
|
|
1,933,742
|
|
|
$
|
4.30
|
|
|
Options
exercisable at end of year
|
|
2,661,601
|
|
|
|
|
|
1,795,113
|
|
|
|
|
|
1,448,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during
the years ended December 31, 2004, 2005 and 2006 was $1.8 million, $3.5 million
and $6.0 million, respectively. Stock
options outstanding as of
70
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
14. Stock-Based Compensation (Continued)
December 31, 2006 have a
weighted-average remaining contractual term of 5.6 years and an aggregate
intrinsic value of $16.2 million. Stock
options exercisable as of December 31, 2006 have a weighted-average remaining
contractual term of 5.0 years and an aggregate intrinsic value of $12.6
million. As of December 31, 2006, the
Company has 1,835,541 shares that are vested or expected to vest; these shares
have a weighted average exercise price of $4.28 per share, have a
weighted-average remaining contractual term of 5.5 years and an aggregate
intrinsic value of $15.3 million.
The following table summarizes information about stock
options outstanding at December 31, 2006:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Number
Outstanding
at 12/31/06
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
Weighted-
Average
Exercise Price
|
|
Number
Exercisable
at 12/31/06
|
|
Weighted-
Average
Exercise Price
|
|
$1.90 2.875
|
|
|
819,117
|
|
|
5.13 years
|
|
|
$
|
2.33
|
|
|
662,992
|
|
|
$
|
2.43
|
|
|
$3.39 7.94
|
|
|
1,029,625
|
|
|
5.89 years
|
|
|
$
|
5.10
|
|
|
716,000
|
|
|
$
|
4.52
|
|
|
$11.75 13.00
|
|
|
75,000
|
|
|
8.25 years
|
|
|
$
|
12.88
|
|
|
60,000
|
|
|
$
|
12.92
|
|
|
$16.31 21.125
|
|
|
10,000
|
|
|
1.89 years
|
|
|
$
|
18.72
|
|
|
10,000
|
|
|
$
|
18.72
|
|
|
$1.90
21.125
|
|
|
1,933,742
|
|
|
5.64 years
|
|
|
$
|
4.30
|
|
|
1,448,992
|
|
|
$
|
4.01
|
|
|
The fair value of each
option award is estimated, based on several assumptions, on the date of grant
using the Black-Scholes option valuation model. Upon adoption of SFAS No. 123R,
the Company modified its methods used to determine these assumptions based on
the Securities and Exchange Commissions Staff Accounting Bulletin No. 107.
The fair values and the assumptions used for the 2004-2006 grants are shown in
the table below:
|
|
2004
|
|
2005
|
|
2006
|
|
Weighted-average fair
value per share of options granted
|
|
$4.33
|
|
$4.22
|
|
$5.53
|
|
Fair value
assumptions:
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
0.00%
|
|
0.00%
|
|
1.09%
- 1.10%
|
|
Expected stock price volatility
|
|
61.24%
|
|
61.23%-63.99%
|
|
45%
|
|
Risk-free interest rate
|
|
3.96%-4.38%
|
|
3.91%-4.31%
|
|
4.81%
- 4.94%
|
|
Expected term
|
|
7 years
|
|
7 years
|
|
5.0 - 6.3 years
|
|
Stock options are
accounted for as equity instruments, and compensation cost is recognized using
straight-line vesting over the four-year vesting period. As of December 31,
2006, the unrecognized compensation cost related to stock options was $1.1 million,
which is expected to be recognized over a weighted-average period of 1.0 years.
The total fair values of shares vested during the year ended December 31,
2006 was $1.1 million.
71
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
14. Stock-Based Compensation (Continued)
The following table
summarizes information about nonvested stock option awards as of December 31,
2006 and changes for the year ended December 31, 2006:
Stock Options
|
|
|
|
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
Nonvested at December 31, 2005
|
|
872,750
|
|
|
$
|
2.99
|
|
|
Granted
|
|
65,000
|
|
|
$
|
5.53
|
|
|
Vested
|
|
(363,625
|
)
|
|
$
|
2.92
|
|
|
Forfeited
|
|
(89,375
|
)
|
|
$
|
3.97
|
|
|
Nonvested
at December 31, 2006
|
|
484,750
|
|
|
$
|
3.20
|
|
|
The Company generally
issues new shares for stock options and restricted stock, unless treasury
shares are available.
Restricted Stock
The
following table summarizes activity under the Company's restricted stock plans:
Restricted Stock
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
Unvested at beginning of year
|
|
225,000
|
|
325,000
|
|
242,917
|
|
Granted
|
|
225,000
|
|
82,500
|
|
45,833
|
|
Vested
|
|
(68,750
|
)
|
(102,083
|
)
|
(118,333
|
)
|
Forfeited
|
|
(56,250
|
)
|
(62,500
|
)
|
(14,375
|
)
|
Expired
|
|
|
|
|
|
|
|
Unvested
at end of year
|
|
325,000
|
|
242,917
|
|
156,042
|
|
Approximately $0.6 million of compensation expense
related to restricted stock will be recognized over a weighted-average period
of 1.5 years. The total fair value of shares vested during year ended
December 31, 2006 was $0.6 million. The weighted-average fair value of
restricted stock shares awarded during 2004, 2005 and 2006 was $6.10, $5.58 and
$11.07, respectively. The aggregate intrinsic value of restricted stock vested
during the years ended December 31, 2004, 2005 and 2006 was $0.2 million,
$0.5 million and $1.5 million, respectively.
72
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
15. Quarterly
Results of Operations (Unaudited)
Quarterly
financial information for the years ended December 31, 2005 and 2006 is
summarized as follows (in thousands, except per share data):
|
|
2005
|
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Revenues
|
|
$
|
194,100
|
|
$
|
229,547
|
|
$
|
235,252
|
|
$
|
233,650
|
|
Gross profit
|
|
$
|
28,117
|
|
$
|
38,251
|
|
$
|
39,148
|
|
$
|
42,626
|
|
Operating income(loss)(a)
|
|
$
|
2,412
|
|
$
|
9,711
|
|
$
|
10,890
|
|
$
|
(21,948
|
)
|
Income (loss) from continuing operations(a)
|
|
$
|
1,280
|
|
$
|
4,883
|
|
$
|
6,096
|
|
$
|
(27,128
|
)
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
Operating results, net of tax
|
|
$
|
(751
|
)
|
$
|
(342
|
)
|
$
|
73
|
|
$
|
(289
|
)
|
Estimated gain (loss) on
disposition, including tax
|
|
$
|
|
|
$
|
137
|
|
$
|
(38
|
)
|
$
|
9,853
|
|
Net income (loss)
|
|
$
|
529
|
|
$
|
4,678
|
|
$
|
6,131
|
|
$
|
(17,564
|
)
|
INCOME (LOSS) PER
SHARE:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.03
|
|
$
|
0.12
|
|
$
|
0.16
|
|
$
|
(0.68
|
)
|
Discontinued
operations
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
(0.02
|
)
|
|
|
|
|
(0.01
|
)
|
Estimated gain on disposition
|
|
|
|
|
|
|
|
0.25
|
|
Net income (loss)
|
|
$
|
0.01
|
|
$
|
0.12
|
|
$
|
0.16
|
|
$
|
(0.44
|
)
|
Diluted
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.03
|
|
$
|
0.12
|
|
$
|
0.15
|
|
$
|
(0.68
|
)
|
Discontinued
operations
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
(0.02
|
)
|
|
|
|
|
(0.01
|
)
|
Estimated gain on disposition
|
|
|
|
|
|
|
|
0.25
|
|
Net income (loss)
|
|
$
|
0.01
|
|
$
|
0.12
|
|
$
|
0.15
|
|
$
|
(0.44
|
)
|
Cash flow from
operations
|
|
$
|
(5,541
|
)
|
$
|
11,929
|
|
$
|
8,103
|
|
$
|
22,955
|
|
73
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
15. Quarterly
Results of Operations (Unaudited) (Continued)
|
|
2006
|
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Revenues
|
|
$
|
236,385
|
|
$
|
264,390
|
|
$
|
287,676
|
|
$
|
268,074
|
|
Gross profit
|
|
$
|
36,768
|
|
$
|
42,464
|
|
$
|
46,209
|
|
$
|
45,576
|
|
Operating income
|
|
$
|
7,045
|
|
$
|
12,099
|
|
$
|
14,155
|
|
$
|
11,223
|
|
Income from continuing operations
|
|
$
|
4,534
|
|
$
|
7,717
|
|
$
|
8,967
|
|
$
|
7,499
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
Operating results, net of tax
|
|
$
|
(207
|
)
|
$
|
(5
|
)
|
$
|
(5
|
)
|
$
|
14
|
|
Estimated gain on disposition,
including tax
|
|
$
|
|
|
$
|
209
|
|
$
|
|
|
$
|
1
|
|
Net income
|
|
$
|
4,327
|
|
$
|
7,921
|
|
$
|
8,962
|
|
$
|
7,514
|
|
INCOME PER SHARE:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.11
|
|
$
|
0.19
|
|
$
|
0.22
|
|
$
|
0.19
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
Estimated gain on disposition
|
|
|
|
0.01
|
|
|
|
|
|
Net income
|
|
$
|
0.11
|
|
$
|
0.20
|
|
$
|
0.22
|
|
$
|
0.19
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.11
|
|
$
|
0.19
|
|
$
|
0.22
|
|
$
|
0.18
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
Estimated gain on disposition
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.11
|
|
$
|
0.19
|
|
$
|
0.22
|
|
$
|
0.18
|
|
Cash flow from
operations
|
|
$
|
(20,508
|
)
|
$
|
8,586
|
|
$
|
5,556
|
|
$
|
24,100
|
|
The Companys quarterly results of operations and the
related earnings per share amounts have been restated to reflect the effects of
discontinued operations.
(a) Fourth quarter 2005
includes a goodwill impairment charge of $33.9 million.
The sums of the individual
quarterly earnings per share amounts do not necessarily agree with year-to-date
earnings per share as each quarters computation is based on the weighted
average number of shares outstanding during the quarter, the weighted average
stock price during the quarter and the dilutive effects of options and
contingently issuable restricted stock in each quarter.
16. Subsequent
Events
On February 20, 2007, the Company amended its
senior credit facility (the Amended
Facility) provided by a syndicate of banks. The Amended Facility consists of a
$100.0 million revolving credit facility which is available for borrowings and
letters of credit. The Amended Facility expires in February 2012. Under
the Amended Facility, only two financial covenants remain.
74
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
16. Subsequent Events (Continued)
Leverage RatioThe Amended
Facility requires that the ratio of the Companys total indebtedness less cash
and cash equivalents to its Credit Facility Adjusted EBITDA not exceed 2.50.
Fixed Charge Coverage RatioThe
Amended Facility requires that the ratio of Credit Facility Adjusted EBITDA,
less non-financed capital expenditures, tax provision, dividends and amounts
used to repurchase stock to the sum of interest expense and scheduled principal
payments be at least 1.50. Capital expenditures, tax provision, dividends and
stock repurchase payments are defined under the Facility for purposes of this
covenant to be amounts for the four quarters ending as of any given quarterly
covenant compliance measurement date. The calculation of the fixed charge
coverage ratio was redefined to exclude acquisitions, stock repurchases and the
payment of cash dividends, provided that the Leverage Ratio does not exceed
1.0.
Other RestrictionsThe Amended
Facility permits acquisitions of up to $25.0 million per transaction, or $50.0
million in the aggregate. However, these limitations only apply when the
Leverage Ratio is greater than 1.0.
The
Company continues to have a choice of two interest rate options for borrowings
under the Facility, the Base Rate Option and the Eurodollar Rate Option. Under
the Base Rate Option, the interest rate is determined based on the higher of
the Federal Funds Rate plus 0.5% or the prime lending rate offered by Citibank,
N.A. (not one of the banks providing the Facility to the Company). Additional
margins are then added to the higher of these two rates. These additional
margins are determined based on the ratio of the Companys Credit Facility
Adjusted EBITDA for the twelve months ending as of that quarter end, as shown
below. Under the Eurodollar Rate Option, borrowings bear interest based on
designated one to six-month Eurodollar rates that correspond very closely to
rates described in various general business media sources as the London
Interbank Offered Rate or LIBOR.
Additional margins are then added to LIBOR for borrowings based on the
Companys ratio of debt to Credit Facility Adjusted EBITDA, as shown below. Letter
of credit fees under the Facility are also based on the Companys ratio of debt
to Credit Facility Adjusted EBITDA, as shown below.
|
|
Debt to Credit Facility Adjusted EBITDA
|
|
|
|
Less than 0.75
|
|
0.75 to 1.25
|
|
1.25 to 2.00
|
|
2.00 or greater
|
|
Additional Per
Annum Interest Margin Added Under:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Rate Option
|
|
|
0.25
|
%
|
|
|
0.50
|
%
|
|
|
0.75
|
%
|
|
|
1.00
|
%
|
|
Eurodollar Rate Option
|
|
|
1.25
|
%
|
|
|
1.50
|
%
|
|
|
1.75
|
%
|
|
|
2.00
|
%
|
|
Commitment fees
on any portion of the Revolving Loan capacity not in use for borrowings or letters
of credit at any given time
|
|
|
0.20
|
%
|
|
|
0.20
|
%
|
|
|
0.25
|
%
|
|
|
0.30
|
%
|
|
Excluding the amortization of debt financing and
arrangement costs, we estimate that the interest rate applicable to the
borrowings under the Amended Facility would be approximately 6.57% as of December 31,
2006. The Company incurred certain financing and professional costs in
connection with the arrangement of the Facility and the related amendment. These
costs will be amortized as a non-cash charge to interest expense over the term
of the Amended Facility.
75
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Evaluation of
Disclosure Controls and Procedures
The Companys executive
management is responsible for ensuring the effectiveness of the design and
operation of our disclosure controls and procedures. We carried out an
evaluation under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(b) and 15d-15(e) under
the Securities Exchange Act of 1934) as of the end of the fiscal year covered
by this report. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) of the Securities
Exchange Act of 1934) are effective as of the end of the period covered by this
report .
Internal Controls
over Financial Reporting
Managements report on our
internal controls over financial reporting can be found in Item 8 of this
report. The Independent Registered Public Accounting Firms Attestation Report
on managements assessment of the effectiveness of our internal controls over
financial reporting can also be found in Item 8 of this report.
Changes in Internal
Control over Financial Reporting
There has been no change
in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and
15(d)-15(f) under the Securities Exchange Act of 1934) during the
three months ended December 31, 2006 that has materially affected, or is
reasonably likely to materially affect, internal control over financial
reporting.
ITEM 9B. Other Information
None.
76
PART III
ITEM 10. Directors,
Executive Officers, and Corporate Governance
We have adopted a code of ethics that applies to our
principal executive officer, our principal financial officer, and our principal
accounting officer, as well as to our other employees. This code of ethics
consists of our Corporate Compliance Policy. The Company has made this code of
ethics available on our website, as described in Item 1 of this annual report
on Form 10-K. If we make substantive amendments to this code of
ethics or grant any waiver, including any implicit waiver, we will disclose the
nature of such amendment or waiver on our website or in a report on Form 8-K
within four business days of such amendment or waiver.
The other information
called for by this item has been omitted in accordance with the instructions to
Form 10-K. The Company will file with the Commission a definitive
proxy statement including the other information to be disclosed under this item
in the 120 days following December 31, 2006 and such information is hereby
incorporated by reference.
ITEMS 11, 12, 13 AND 14.
These
items have been omitted in accordance with the instructions to Form 10-K.
The Company will file with the Commission a definitive proxy statement
including the information to be disclosed under the items in the 120 days
following December 31, 2006 and such information is hereby incorporated by
reference.
77
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this annual report on
Form 10-K:
(1) Consolidated Financial Statements (Included Under
Item 8): The Index to the Consolidated Financial Statements is included on
page 33 of this annual report on Form 10-K and is incorporated
herein by reference.
(2) Financial Statement Schedules: None.
(b) Exhibits
Reference
is made to the Index of Exhibits beginning on page 80 which index is
incorporated herein by reference.
(c) Excluded financial statements:
None.
78
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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/ WILLIAM F. MURDY
|
|
|
William F. Murdy
|
|
|
Chairman of the Board and Chief
Executive Officer
|
|
|
By:
|
/s/ WILLIAM GEORGE
|
|
|
William George
|
|
|
Executive Vice President and
Chief Financial Officer
|
|
|
By:
|
/s/ JULIE S. SHAEFF
|
|
|
Julie S. Shaeff
|
|
|
Senior Vice President and Chief
Accounting Officer
|
Date: February 28, 2007
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons in the capacities and on the date indicated.
|
Signature
|
|
|
|
Title
|
|
|
|
Date
|
|
|
|
|
|
|
/s/
WILLIAM F. MURDY
|
|
Chairman of the Board and
Chief
|
|
February 28, 2007
|
William
F. Murdy
|
|
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
HERMAN E. BULLS
|
|
Director
|
|
February 28, 2007
|
Herman
E. Bulls
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
FRANKLIN MYERS
|
|
Director
|
|
February 28, 2007
|
Franklin
Myers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
ALFRED J. GIARDINELLI, JR.
|
|
Director
|
|
February 28, 2007
|
Alfred
J. Giardinelli, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
JAMES H. SCHULTZ
|
|
Director
|
|
February 28, 2007
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James
H. Schultz
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/s/
ROBERT D. WAGNER, JR.
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Director
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February 28, 2007
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Robert D. Wagner, Jr.
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79
INDEX
OF EXHIBITS
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Incorporated
by Reference to the
Exhibit Indicated Below and to the
Filing with the Commission Indicated
Below
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Exhibit
Number
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Description of Exhibits
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Exhibit
Number
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Filing or
File Number
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3.1
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Second
Amended and Restated Certificate of Incorporation of the Registrant.
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3.1
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333-24021
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3.2
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Certificate
of Amendment dated May 21, 1998.
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3.2
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1998 Form 10-K
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3.3
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Certificate
of Amendment dated July 19, 2003.
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3.3
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2003 Form 10-K
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3.4
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Bylaws
of Registrant, as amended.
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3.3
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1998 Form 10-K
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4.1
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Form of
certificate evidencing ownership of Common Stock of the Registrant.
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4.1
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333-24021
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*10.1
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Comfort
Systems USA, Inc. 1997 Long-Term Incentive Plan
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10.1
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333-24021
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*10.2
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Comfort
Systems USA, Inc. 1997 Non-Employee Directors Stock Plan
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10.2
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333-24021
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*10.3
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Amendment
to the 1997 Non-Employee Directors Stock Plan dated May 23, 2002.
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10.3
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Second Quarter 2002 Form 10-Q/A
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*10.4
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Comfort
Systems USA, Inc. 2006 Equity Incentive Plan
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10.4
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333-138377
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*10.5
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Comfort
Systems USA, Inc. 2006 Stock Options/SAR Plan for Non-Employee
Directors.
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10.5
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333-138377
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*10.6
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Form of
Option Award under the Comfort Systems USA, Inc. 2006 Equity Incentive
Plan.
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10.6
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Filed Herewith
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*10.7
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Form of
Option Award under the Comfort Systems USA, Inc. 2006 Stock Options/SAR
Plan for Non-Employee Directors.
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10.7
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Filed Herewith
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*10.8
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Employment
Agreement dated June 27, 2000 by and among Comfort Systems USA (Texas),
L.P. and William F. Murdy.
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10.2
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Second Quarter 2000 Form 10-Q
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*10.9
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Employment
Agreement dated December 1, 2003 by and among Comfort Systems USA
(Texas), L.P. and William George.
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10.8
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2003 Form 10-K
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*10.10
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Employment
Agreement dated January 1, 2004 by and among Comfort Systems USA
(Texas), L.P. and Thomas N. Tanner.
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10.10
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2003 Form 10-K
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*10.11
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Employment
Agreement dated December 1, 2003 by and among Comfort Systems USA
(Texas), L.P. and Julie S. Shaeff.
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10.10
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2005 Form 10-K
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*10.12
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Employment
Agreement dated January 1, 2006 by and among Comfort Systems USA
(Texas), L.P. and Trent T. McKenna.
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10.12
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Filed Herewith
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*10.13
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Employment
Agreement between the Company, Eastern Heating & Cooling, Inc.
and Alfred J. Giardinelli, Jr.
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10.1
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Second Quarter 2003 Form 10-Q
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*10.14
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Form of
Restricted Stock Award Agreement between William F. Murdy and the Company
dated March 22, 2002.
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10.2
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First Quarter 2002 Form 10-Q
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80
10.15
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Amended and Restated
Credit Agreement by and among the Company and Wachovia Bank, N.A., Bank of
Texas, N.A., Capital One, N.A. and Certain Financial Institutions dated as of
February 20, 2007.
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10.1
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February 26, 2007 Form 8-K
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*10.16
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Restricted
Stock Award Agreement dated June 8, 2004 by the Company to William F.
Murdy.
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10.1
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Second Quarter 2004 Form 10-Q
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*10.17
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Restricted
Stock Award Agreement dated June 8, 2004 by the Company to William
George.
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10.3
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Second Quarter 2004 Form 10-Q
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*10.18
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Restricted
Stock Award Agreement dated June 8, 2004 by the Company to Thomas N.
Tanner.
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10.4
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Second Quarter 2004 Form 10-Q
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*10.19
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Restricted
Stock Award Agreement dated June 8, 2004 by the Company to Julie S.
Shaeff.
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10.18
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2005 Form 10-K
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*10.20
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Restricted
Stock Award Agreement dated April 1, 2006 by the Company to William F.
Murdy.
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10.20
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Filed Herewith
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*10.21
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Restricted
Stock Award Agreement dated April 1, 2006 by the Company to William
George, III.
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10.21
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Filed Herewith
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*10.22
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Restricted
Stock Award Agreement dated April 1, 2006 by the Company to Thomas N.
Tanner.
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10.22
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Filed Herewith
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*10.23
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Restricted
Stock Award Agreement dated April 1, 2006 by the Company to Julie S.
Shaeff.
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10.23
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Filed Herewith
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*10.24
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Restricted
Stock Award Agreement dated April 1, 2006 by the Company to Trent T.
McKenna.
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10.24
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Filed Herewith
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21.1
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List
of subsidiaries of Comfort Systems USA, Inc.
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Filed Herewith
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23.1
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Consent
of Ernst & Young LLP.
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Filed Herewith
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31.1
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Rule 13a-14(a) Certification
of William F. Murdy pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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Filed Herewith
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31.2
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Rule 13a-14(a) Certification
of William George pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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Filed Herewith
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32.1
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Section 1350
Certification of William F. Murdy
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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Furnished Herewith
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32.2
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Section 1350 Certification of William George pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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Furnished Herewith
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* - Management contract or compensatory plan
81
EX-10.6
2
a07-5471_1ex10d6.htm
EX-10.6
Exhibit 10.6
2006
Equity Incentive Plan
Option to Purchase:
shares
Granted to:
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This stock option has been granted on
on behalf of
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Comfort Systems USA, Inc. at the option price of $ .
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William F. Murdy
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Chief Executive Officer and President
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This is not a stock certificate or a negotiable instrument. Non-Transferable.
Location:
Comfort
Systems USA, Inc. 2006 Equity Incentive Plan
Non-Qualified Stock Option Notice
[Name]
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Grant Date: [Grant
Date]
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[Address]
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Options Granted: [Total
Number of Options]
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[City, State Zip]
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Option Price: [Option
Price]
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Last Date to Exercise: [ ]
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We are pleased to inform
you that you have been granted an option to purchase Comfort Systems USA, Inc.
(the Company) common stock. Your grant
has been made under the Companys 2006 Equity
Incentive Plan (the Plan), which together with the terms contained in
this Notice, sets forth the terms and conditions of your grant and is
incorporated herein by reference. If
this is your first grant, a copy of the 2006 Equity Incentive Plan and of the Prospectus is
enclosed. Please review these documents
carefully.
Vesting:
Subject to the terms of the Plan, the option vests according
to the following schedule:
Vesting Date
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Shares
Vesting
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Exercise:
You may exercise this
Option, in whole or in part, to purchase a whole number of vested shares at any
time, by following the exercise procedures set up by the Company. All exercises must take place before the Last
Date to Exercise, or such earlier date as is set out in the Plan following your
death, disability or your ceasing to be an employee. The number of shares you may purchase as of
any date cannot exceed the total number of shares vested by that date, less any
shares you have previously acquired by exercising this Option.
Employment Requirements:
The Plan sets out the
terms and conditions that govern this grant in the event of your termination of
employment, death or disability. In the event of your separation from the Company for any reason and
under any circumstances, all further vesting of shares under this grant stops,
and all unvested shares are canceled. As
set out in the Plan, you will have 3 months after your employment ceases or is
suspended to exercise your vested options, and in the event of your death or
total disability you or your estate will have a period of 1 year to exercise
any vested options.
Taxes and Withholding:
This option is not
intended to be an Incentive Stock Option, as defined under Section 422(b) of
the Internal Revenue Code. Any exercise
of this option is normally a taxable event, and if the Company determines that
any federal, state, local or foreign tax or withholding payment is required relating
to the exercise or sale of shares arising from this grant, the Company shall
have the right to require such payments from you, or to withhold such amounts
from other payments due to you from the Company.
EX-10.7
3
a07-5471_1ex10d7.htm
EX-10.7
Exhibit 10.7
2006 Stock Options/SAR Plan
for
Non-Employee Directors
Option to Purchase:
shares
Granted to:
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This stock
option has been granted on on
behalf of
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Comfort Systems
USA, Inc. at the option price of $ .
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William F. Murdy
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Chief Executive
Officer and President
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This is not a stock
certificate or a negotiable instrument.
Non-Transferable.
Location:
Comfort Systems USA, Inc. 2006
Stock Options/SAR
Plan for Non-Employee Directors
Non-Qualified Stock
Option Notice
[Name]
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Grant Date: [Grant
Date]
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[Address]
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Options Granted: [Total
Number of Options]
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[City, State
Zip]
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Option Price: [Option
Price]
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Last Date to
Exercise: [ ]
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We are pleased to inform
you that you have been granted an option to purchase Comfort Systems USA, Inc.
(the Company) common stock. Your grant
has been made under the Companys 2006 Equity
Incentive Plan (the Plan), which together with the terms contained in
this Notice, sets forth the terms and conditions of your grant and is
incorporated herein by reference. If
this is your first grant, a copy of the 2006 Equity Incentive Plan and of the Prospectus is
enclosed. Please review these documents
carefully.
Vesting:
Subject to the terms of the Plan, the option vests according to the
following schedule:
Vesting Date
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Shares Vesting
|
Exercise:
You may exercise this
Option, in whole or in part, to purchase a whole number of vested shares at any
time, by following the exercise procedures set up by the Company. All exercises must take place before the Last
Date to Exercise, or such earlier date as is set out in the Plan following your
death, disability or your ceasing to be an employee. The number of shares you may purchase as of
any date cannot exceed the total number of shares vested by that date, less any
shares you have previously acquired by exercising this Option.
Employment Requirements:
The Plan sets out the
terms and conditions that govern this grant in the event of your termination of
employment, death or disability. In the event of your
separation from the Company for any reason and under any circumstances, all
further vesting of shares under this grant stops, and all unvested shares are canceled. As set out in the Plan, you will have 3
months after your employment ceases or is suspended to exercise your vested
options, and in the event of your death or total disability you or your estate
will have a period of 1 year to exercise any vested options.
Taxes and Withholding:
This option is not
intended to be an Incentive Stock Option, as defined under Section 422(b) of
the Internal Revenue Code. Any exercise
of this option is normally a taxable event, and if the Company determines that
any federal, state, local or foreign tax or withholding payment is required
relating to the exercise or sale of shares arising from this grant, the Company
shall have the right to require such payments from you, or to withhold such
amounts from other payments due to you from the Company.
EX-10.12
4
a07-5471_1ex10d12.htm
EX-10.12
Exhibit 10.12
EMPLOYMENT AGREEMENT
This
Employment Agreement (this AGREEMENT) by and among COMFORT SYSTEMS USA (TEXAS), L.P., a Texas limited partnership
(the COMPANY), and TRENT MCKENNA (EMPLOYEE) is hereby entered into and
effective as of the 1st day of January 2006.
R E C I T A L S
A. The Company is engaged primarily in
the heating, ventilation, air conditioning, plumbing, mechanical contracting,
specialty fabrication, electrical, fire protection and process piping industry.
B. Company desires to employ Employee
hereunder in a confidential relationship wherein Employee, in the course of his
employment, will become familiar with and aware of information as to the
Companys customers, specific manner of doing business, processes, techniques
and trade secrets and future plans with respect thereto, all of which have been
and will be established and maintained at great expense to the Company, which
information is a trade secret and constitutes the valuable good will of the
Company; and
NOW,
THEREFORE, in consideration of the mutual promises and covenants set forth
herein, it is hereby agreed as follows:
A G R E E M E N T S
1. EMPLOYMENT AND DUTIES.
(a)
Company hereby employs Employee to serve as Vice President, General Counsel,
and Secretary of the Company. As such, Employee shall have responsibilities,
duties and authority customarily accorded to and expected of an officer holding
such position directly with the Company. Employee hereby accepts this
employment upon the terms and conditions herein contained and agrees to devote
his full time, attention and efforts to promote and further the business of
Company.
(b)
Employee shall faithfully adhere to, execute and fulfill all policies
established by Company from time to time.
2. COMPENSATION. For all services
rendered by Employee, Company shall compensate Employee as follows:
(a) BASE SALARY. Effective as of the Effective Date, the base
salary payable to Employee shall be $150,000 per year, payable on a regular
basis in accordance with Companys standard payroll procedures but not less
frequently than monthly. On at least an annual basis, Company will review
Employees performance and may, in its sole discretion, (i) make
1
increases to such
base salary; (ii) pay a performance bonus; or (iii) recommend Employee for an
equity grant under the then existing stock plan(s) of Comfort Systems USA, Inc.
(b) EMPLOYEE PERQUISITES, BENEFITS AND
OTHER COMPENSATION. Employee shall be entitled to receive additional benefits
and compensation from Company in such form and to such extent as specified
below:
(i) Coverage,
subject to contributions required of executives of the Company generally, for
Employee and his dependent family members under health, hospitalization,
disability, dental, life and other insurance plans that Company may have in
effect from time to time. Benefits
provided to Employee under this clause (i) shall be equal to such benefits
provided to other Company employees of the same level.
(ii) Reimbursement
for all business travel and other out-of-pocket expenses reasonably incurred by
Employee in the performance of services pursuant to this Agreement. All reimbursable expenses shall be
appropriately documented in reasonable detail by Employee upon submission of
any request for reimbursement, and in a format and manner consistent with
Companys expense reporting policy.
(iii) Company
shall provide Employee with other employee perquisites as may be available to
or deemed appropriate for Employee by Company and participation in all other
Company-wide employee benefits as are available from time to time.
3. NONCOMPETITION AGREEMENT.
(a)
Employee shall not, during the term of his employment hereunder, be engaged in
any other business activity pursued for gain, profit or other pecuniary
advantage if such activity interferes with Employees duties and
responsibilities hereunder. The foregoing limitations shall not be construed as
prohibiting Employee from making personal investments in such form or manner as
will neither require his services in the operation or affairs of the companies
or enterprises in which such investments are made nor violate the terms of this
paragraph 3. Employee will not, during
the period of his employment by or with Company, and for a period of two (2) years
immediately following the termination of his employment under this Agreement,
except as provided below, directly or indirectly, for himself or on behalf of
or in conjunction with any other person, persons, company, partnership,
corporation or business of whatever nature:
(i) engage,
as an officer, director, shareholder, owner, partner, joint venturer, or in a
managerial capacity, whether as an employee, independent contractor, consultant
or advisor, or as a sales representative, in any business in direct competition
with Company or any of its subsidiaries and affiliates within 100 miles of
where the Company or any of its subsidiaries and affiliates conduct business,
including any territory serviced by the Company or any of such subsidiaries
(the TERRITORY);
(ii) call
upon any person who is, at that time, an employee of Company or any of its
subsidiaries or affiliates sales or managerial capacity for the purpose or with
the intent of enticing such employee away from or out of the employ of Company
or any of its subsidiaries or affiliates or any its subsidiaries or affiliates;
2
(iii) call
upon any person or entity which is, at that time, or which has been, within one
(1) year prior to that time, a customer of the Company or any of its
subsidiaries or affiliates for the purpose of soliciting or selling products or
services in direct competition with the Company or any of its subsidiaries or
affiliates; or
(iv) call
upon any prospective acquisition candidate, on Employees own behalf or on
behalf of any competitor, which candidate was, to Employees actual knowledge
after due inquiry, either called upon by Company or any of its subsidiaries or
affiliates or for which Employee participated in an acquisition analysis for
the purpose of acquiring such entity or all or substantially all of such entitys
assets.
Notwithstanding
the above, the foregoing covenant shall not be deemed to prohibit Employee from
acquiring as a passive investment not more than two percent (2%) of the capital
stock of a competing business the stock of which is traded on a national
securities exchange or on an over-the -counter or similar market.
(b)
Because of the difficulty of measuring economic losses to Company or any of its
subsidiaries or affiliates as a result of a breach of the foregoing covenant,
and because of the immediate and irreparable damage that could be caused to
Company or any of its subsidiaries or affiliates for which they would have no
other adequate remedy, Employee agrees that the foregoing covenant may be
enforced by Company or any of its subsidiaries or affiliates in the event of
breach or threatened breach by Employee, by injunctions, restraining orders and
other appropriate equitable relief.
(c)
It is agreed by the parties that the foregoing covenants in this paragraph 3
impose a reasonable restraint on Employee in light of the activities and
business of the Company on the date of the execution of this Agreement and the
current plans of the Company or any of its subsidiaries or affiliates; but it
is also the intent of the Company and Employee that such covenants be construed
and enforced in accordance with the changing activities, business and locations
of the Company or any of its subsidiaries or affiliates throughout the term of
this covenant, whether before or after the date of termination of the employment
of Employee. For example, if, during the term of this Agreement, the Company or
any of its subsidiaries or affiliates engages in new and different activities,
enters a new business or establishes new locations for its current activities
or business in addition to or other than the activities or business enumerated
under the Recitals above or the locations currently established therefor, then
Employee will be precluded from soliciting the customers or Employees of such
new activities or business or from such new location and from directly
competing with such new business within 100 miles of its then-established
operating location(s) through the term of this covenant.
It
is further agreed by the parties hereto that, in the event that Employee shall
cease to be employed hereunder, and shall enter into a business or pursue other
activities not in competition with the Company or any of its subsidiaries or
affiliates, or similar activities or business in locations the operation of
which, under such circumstances, does not violate clause (i) of paragraph 3(a),
Employee shall not be chargeable with a violation of this paragraph 3 if the
Company or any of its subsidiaries or affiliates shall thereafter enter the
same, similar or a competitive (i) business, (ii) course of activities or (iii)
location, as applicable.
3
(d)
The covenants in this paragraph 3 are severable and separate, and the
unenforceability of any specific covenant shall not affect the provisions of
any other covenant. Moreover, in the
event any court of competent jurisdiction shall determine that the scope, time
or territorial restrictions set forth herein are unreasonable, then it is the
intention of the parties that such restrictions be enforced to the fullest
extent which the court deems reasonable, and this Agreement shall thereby be
reformed.
(e)
All of the covenants in this paragraph 3 shall be construed as an agreement
independent of any other provision in this Agreement, and the existence of any
claim or cause of action of Employee against Company or any of its subsidiaries
or affiliates, whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by Company or any of its subsidiaries
or affiliates of such covenants. It is specifically agreed that the period of
two (2) years following termination of employment stated at the beginning of
this paragraph 3, during which the agreements and covenants of Employee made in
this paragraph 3 shall be effective, shall be computed by excluding from such
computation any time during which Employee is in violation of any provision of
this paragraph 3.
4. PLACE OF PERFORMANCE; RELOCATION
RIGHTS.
(a)
Employee understands that he may be requested by Company or any of its
subsidiaries or affiliates to relocate from his present residence to another
geographic location in order to more efficiently carry out his duties and
responsibilities under this Agreement or as part of a promotion or other
increase in duties and responsibilities. In such event, if Employee agrees to
relocate, Company or any of its subsidiaries or affiliates will pay all
relocation costs to move Employee, his immediate family and their personal
property and effects. Such costs may include, by way of example, but are not
limited to, pre-move visits to search for a new residence, investigate schools
or for other purposes; temporary lodging and living costs prior to moving into
a new permanent residence; duplicate home carrying costs; all closing costs on
the sale of Employees present residence and on the purchase of a comparable
residence in the new location; and added income taxes that Employee may incur
if any relocation costs are not deductible for tax purposes. The general intent
of the foregoing is that Employee shall not personally bear any out-of-pocket cost
as a result of the relocation, with an understanding that Employee will use his
best efforts to incur only those costs which are reasonable and necessary to
effect a smooth, efficient and orderly relocation with minimal disruption to
the business affairs of Company or any of its subsidiaries or affiliates and
the personal life of Employee and his family.
(b)
Notwithstanding the above, if Employee is requested by Company to relocate his
primary residence and Employee refuses, such refusal shall not constitute CAUSE
for termination of this Agreement under the terms of paragraph 5(a)(iii).
5. TERM; TERMINATION; RIGHTS ON
TERMINATION.
(a) TERM. The term of
this Agreement shall begin on the date hereof and continue for two (2) years
(the INITIAL TERM) unless terminated sooner as herein provided, and shall
automatically renew after the Initial Term on a year-to-year basis on the same
terms and conditions contained herein in effect as of the time of renewal
unless the Company notifies Employee at least 60 days prior to such expiration
(the TERM). This Agreement and Employees employment may be terminated in any
one of the following ways:
4
(i) TERMINATION
AS A RESULT OF THE EMPLOYEES DEATH. The death of Employee shall immediately
terminate this Agreement and upon such termination Employees Estate shall
receive from the Company, in a lump-sum payment, the base salary at the rate
then in effect for one (1) year, provided, however, that such lump-sum payment
shall be reduced by the amount, if any, of benefit payable under any life
insurance policies to the extent such policies are procured and paid for by the
Company.
(ii) TERMINATION
ON ACCOUNT OF DISABILITY. If, as a result of incapacity due to physical or
mental illness or injury, Employee shall have been absent from his full-time
duties hereunder for four (4) consecutive months, then thirty (30) days after
receiving written notice (which notice may occur before or after the end of
such four (4) month period, but which shall not be effective earlier than the last
day of such four (4) month period), Company may terminate Employees employment
hereunder provided Employee is unable to resume his full-time duties with or
without reasonable accommodation at the conclusion of such notice period. Also,
Employee may terminate his employment hereunder if his health should become
impaired to an extent that makes the continued performance of his duties
hereunder hazardous to his physical or mental health or his life, provided that
Employee shall have furnished Company with a written statement from a qualified
doctor to such effect and provided, further, that, at Companys request made
within thirty (30) days of the date of such written statement, Employee shall
submit to an examination by a doctor selected by Company who is reasonably
acceptable to Employee or Employees doctor and such doctor shall have
concurred in the conclusion of Employees doctor. In the event this Agreement
is terminated as a result of Employees disability, Employee shall receive from
Company, in a lump-sum payment due within ten (10) days of the effective date
of termination, the base salary at the rate then in effect for whatever time
period is remaining under the Initial Term of this Agreement or for one (1)
year, whichever amount is greater; provided, however, that any such payments
shall be reduced by the amount of any disability insurance payments payable to
the Employee as a result of such disability.
(iii) TERMINATION
BY THE COMPANY FOR CAUSE. Company may terminate this Agreement immediately for CAUSE,
which shall be: (1) Employees willful and material breach of this Agreement
(which breach cannot be cured or, if capable of being cured, is not cured
within ten (10) days after receipt of written notice to cure); (2) Employees
gross negligence in the performance or intentional nonperformance of any of
Employees material duties and responsibilities hereunder; (3) Employees
willful dishonesty, fraud or misconduct with respect to the business or affairs
of Company or any of its subsidiaries or affiliates which materially and
adversely affects the operations or reputation of Company or any of its
subsidiaries or affiliates; (4) Employees conviction of a felony crime; (5)
Employees confirmed positive illegal drug test result; (6) confirmed sexual
harassment by Employee; or (7) Employees material and willful violation of the
Companys Compliance and Business Ethics
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Policies. In the event of
a termination for Cause, as enumerated above, Employee shall have no right to
any severance compensation.
(iv) TERMINATION
WITHOUT CAUSE. At any time after the commencement of employment, either
Employee or Company may, voluntarily or without cause, respectively, terminate
this Agreement and Employees employment, effective thirty (30) days after
written notice is provided to the other. Should Employee be terminated by
Company without Cause Employee shall receive from Company, in a lump-sum
payment due on the effective date of termination, the base salary at the rate
then in effect for one (1) year. Further, any termination without Cause by
Company shall operate to shorten the period set forth in paragraph 3(a) and
during which the terms of paragraph 3 apply to one (1) year from the date of
termination of employment. Except as
provided in paragraph 12 below, if Employee resigns or otherwise terminates
this Agreement, the provisions of paragraph 3 hereof shall apply, except that
Employee shall receive no severance compensation. If Employee is terminated by
the Company without Cause, or if the Employee terminates his employment for
Good Reason pursuant to paragraph 12(c) below, then the Company shall make the
insurance premium payments contemplated by COBRA for a period of twelve (12)
months immediately following such termination.
(b) CHANGE IN CONTROL OF THE COMPANY. In the event of
a Change in Control of the Company (as defined below) during the Term,
paragraph 12 below shall apply.
(c) EFFECT OF TERMINATION. Upon termination of this
Agreement for any reason provided above, Employee shall be entitled to receive
all compensation earned and all benefits and reimbursements due through the
effective date of termination. Additional compensation subsequent to
termination, if any, will be due and payable to Employee only to the extent and
in the manner expressly provided herein. All other rights and obligations of
Company and Employee under this Agreement shall cease as of the effective date
of termination, except that Companys obligations under paragraph 9 herein and
Employees obligations under paragraphs 3, 6, 7, 8 and 10 herein shall survive
such termination in accordance with their terms.
(d) BREACH BY COMPANY.
If termination of Employees employment arises out of Companys material
failure to pay Employee on a timely basis the amounts to which he is entitled
under this Agreement or as a result of any other breach of this Agreement by
Company, as determined by a court of competent jurisdiction or pursuant to the
provisions of paragraph 16 below, Company shall pay all amounts and damages to
which Employee may be entitled as a result of such breach, including interest
thereon and all reasonable legal fees and expenses and other costs incurred by
Employee to enforce her rights hereunder.
Further, none of the provisions of paragraph 3 shall apply in the event
this Agreement is terminated as a result of a breach by Company.
6
6. RETURN OF COMPANY PROPERTY. All records, designs, patents, business
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by Employee by or on behalf of the Company or its
representatives, vendors or customers which pertain to the business of the
Company shall be and remain the property of the Company and be subject at all
times to its discretion and control.
Likewise, all correspondence, reports, records, charts, advertising
materials and other similar data pertaining to the business, activities or
future plans of the Company which is collected by Employee shall be delivered
promptly to the Company without request by it upon termination of Employees
employment.
7. INVENTIONS. Employee shall disclose
promptly to the Company any and all significant conceptions and ideas for
inventions, improvements and valuable discoveries, whether patentable or not,
which are conceived or made by Employee, solely or jointly with another, during
the period of employment or within one (1) year thereafter, and which are
directly related to the business or activities of the Company and which
Employee conceives as a result of his employment hereunder. Employee hereby
assigns and agrees to assign all his interests therein to the Company or its
nominee. Whenever requested to do so by the Company, Employee shall execute any
and all applications, assignments or other instruments that the Company shall
deem necessary to apply for and obtain Letters Patent of the United States or
any foreign country or to otherwise protect the Companys interest therein.
8. TRADE SECRETS. Employee agrees that
he will not, during or after the Term of this Agreement, disclose the specific
terms of the Companys relationships or agreements with their respective
significant vendors or customers or any other significant and material trade
secret of the Company, whether in existence or proposed, to any person, firm,
partnership, corporation or business for any reason or purpose whatsoever,
except and only to the extent required by law or legal process following notice
to the Company.
9. INDEMNIFICATION. In the event
Employee is made a party to any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative (other
than an action by Company against Employee), by reason of the fact that his is
or was performing services under this Agreement, then Company shall indemnify
Employee against all expenses (including attorneys fees), judgments, fines and
amounts paid in settlement, as actually and reasonably incurred by Employee in
connection therewith, to the maximum extent permitted by applicable law. The
advancement of expenses shall be mandatory to the extent permitted by
applicable law. In the event that both Employee
and Company are made a party to the same third-party action, complaint, suit or
proceeding, Company agrees to engage counsel, and Employee agrees to use the
same counsel, provided that if counsel selected by Company shall have a
conflict of interest that prevents such counsel from representing Employee,
Employee may engage separate counsel and Company shall pay all reasonable
attorneys fees of such separate counsel. Company shall not be required to pay
the fees of more than one law firm except as described in the preceding
sentence, and shall not be required to pay the fees of more than two law firms
under any circumstances. Further, while
Employee is expected at all times to use his best efforts to faithfully
discharge his duties under this Agreement, Employee cannot be held liable to
Company for errors or omissions made in good faith where Employee has not
exhibited gross, willful and wanton negligence or misconduct or performed
criminal or fraudulent acts.
7
10. NO PRIOR AGREEMENTS. Employee hereby represents and warrants to
the Company that the execution of this Agreement by Employee and his employment
by Company and the performance of his duties hereunder will not violate or be a
breach of any agreement with a former Company, client or any other person or
entity. Further, Employee agrees to indemnify Company and the Company for any
claim, including, but not limited to, attorneys fees and expenses of
investigation, by any such third party that such third party may now have or
may hereafter come to have against Company or any of its subsidiaries or
affiliates based upon or arising out of any noncompetition agreement, invention
or secrecy agreement between Employee and such third party which was in
existence as of the date of this Agreement.
11. ASSIGNMENT; BINDING EFFECT. Employee
understands that he has been selected for employment by Company and/or the
Company on the basis of his personal qualifications, experience and skills.
Employee agrees, therefore, he cannot assign all or any portion of his
performance under this Agreement. Subject to the preceding two (2) sentences
and the express provisions of paragraph 12 below, this Agreement shall be
binding upon, inure to the benefit of and be enforceable by the parties hereto
and their respective heirs, legal representatives, successors and assigns.
12 CHANGE IN CONTROL.
(a) Upon notice by Employee
at any time during the 90 days following a Change in Control, the Employee may
elect to terminate his employment and shall be entitled to receive in a lump-sum
payment due upon the date of such termination the amount equal to one (1) times
annual base salary then in effect, and the noncompetition provisions of
paragraph 3 shall apply for a period of one (1) year immediately following the
effective date of termination.
(b) Upon a Change in Control,
any options or restricted stock outstanding to Employee that have not
previously vested shall be immediately vested.
(c) In any Change in Control
situation, if Employee is terminated by Company without Cause at any time
during the twelve (12) months immediately following the closing of the
transaction giving rise to the Change in Control, or Employee terminates this
Agreement for Good Reason (as defined below) at any time during the twelve (12)
months immediately following the closing of the transaction giving rise to the
Change in Control, Employee shall be entitled to receive in a lump-sum payment,
due on the effective date of termination, the amount equal to one (1) times the
greater of (i) his annual base salary then in effect or (ii) his annual base
salary in effect immediately prior to the closing of the transaction giving
rise to the Change in Control, and the noncompetition provisions of paragraph 3
shall apply for a period of one (1) year immediately following the effective
date of termination. For purposes of this Agreement, Employee shall have GOOD
REASON to terminate this Agreement and his employment hereunder if, without
Employees consent, (x) Employee is demoted by means of a reduction in
authority, responsibilities, duties or title to a position of materially less
stature or importance within the Company than as described in paragraph 1
hereof or (y) the Company breaches this Agreement in any material respect and
fails to cure such breach within ten (10) days after Employee
8
delivers
written notice and a written description of such breach to the Company, which
notice shall specifically refer to this section of this Agreement.
(d) For purposes of applying
paragraph 5 under the circumstances described in (b) above, the effective date
of termination will be the closing date of the transaction giving rise to the
Change in Control and all compensation, reimbursements and lump-sum payments
due Employee must be paid in full by Company at or prior to such closing.
Further, Company shall ensure that Employee will be given sufficient time and
opportunity to elect whether to exercise all or any of his vested options to
purchase the Companys Common Stock, including any options with accelerated
vesting under the provisions of the Companys Long-Term Incentive Plans (or
other applicable plan then in effect), such that he may convert the options to
shares of the Companys Common Stock at or prior to the closing of the
transaction giving rise to the Change in Control, if he so desires.
(e) A CHANGE IN CONTROL
shall be deemed to have occurred if:
(i) any person, other than Comfort Systems USA, Inc.,
a Delaware corporation and the beneficial owner of the Company (CSUSA), or an
employee benefit plan of CSUSA, or any entity controlled by either, acquires
directly or indirectly the Beneficial Ownership (as defined in Section 13(d) of
the Securities Exchange Act of 1934, as amended) of any voting security of the
CSUSA and immediately after such acquisition such Person is, directly or
indirectly, the Beneficial Owner of voting securities representing fifty
percent (50%) or more of the total voting power of all of the then-outstanding
voting securities of CSUSA;
(ii) the following individuals no longer constitute a
majority of the members of the Board of Directors of CSUSA: (A) the individuals
who, as of the date hereof, constitute the Board of Directors of CSUSA (the ORIGINAL
DIRECTORS); (B) the individuals who thereafter are elected to the Board of
Directors of the CSUSA and whose election, or nomination for election, to the
Board of Directors of CSUSA was approved by a vote of at least two-thirds (2/3)
of the Original Directors then still in office (such directors becoming ADDITIONAL
ORIGINAL DIRECTORS immediately following their election); and (C) the
individuals who are elected to the Board of Directors of CSUSA and whose
election, or nomination for election, to the Board of Directors of CSUSA was
approved by a vote of at least two-thirds (2/3) of the Original Directors and
Additional Original Directors then still in office (such directors also
becoming ADDITIONAL ORIGINAL DIRECTORS immediately following their election);
(iii) the stockholders of CSUSA shall approve a
merger, consolidation, recapitalization, or reorganization of CSUSA, a reverse
stock split of outstanding voting securities, or consummation of any such
transaction if stockholder approval is not obtained, other than any such
transaction which would result in at least seventy-five percent (75%) of the
total voting power represented by the voting securities of the surviving entity
outstanding immediately after such transaction being Beneficially Owned by at
least seventy-five percent (75%) of the holders of outstanding voting
securities of CSUSA immediately prior to the transaction, with the voting power
of
9
each such continuing holder relative to other such
continuing holders not substantially altered in the transaction; or
(iv) the stockholders of CSUSA shall approve a plan of
complete liquidation of CSUSA or an agreement for the sale or disposition of
all or a substantial portion of the CSUSAs assets (i.e., fifty percent (50%)
or more of the total assets of CSUSA).
(v) Employee must be notified in writing by Company or
any of its subsidiaries or affiliates at anytime that either Company or any of
its subsidiaries or affiliates anticipates that a Change in Control may take
place.
(f) If it shall be
determined that any payment or distribution by Company, the Company or any
other person to or for the benefit of the Employee (a PAYMENT) would be
subject to the excise tax imposed by Section 4999 of the Internal Revenue Code
of 1986, as amended (the EXCISE TAX), as a result of the termination of
employment of the Employee in the event of a Change in Control, then Company,
the Company or the successor to the Company shall pay an additional payment (a GROSS-UP
PAYMENT) in an amount such that after payment by the Employee of all taxes,
including, without limitation, any income taxes and Excise Tax imposed on the
Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed on the Payments. Such amount will be due and payable
by Company, the Company or the successor to the Company within ten (10) days
after the Employee delivers written request for reimbursement accompanied by a
copy of the Employees tax return(s) or other tax filings showing the excise
tax actually incurred by the Employee.
13. COMPLETE AGREEMENT. This Agreement
sets forth the entire agreement of the parties hereto relating to the subject
matter hereof and supersedes any other employment agreements or understandings,
written or oral, between or among Company, the Company and Employee. This
Agreement is not a promise of future employment. Employee has no oral
representations, understandings or agreements with Company or any of its
subsidiaries or affiliates or any of its officers, directors or representatives
covering the same subject matter as this Agreement. This Agreement is the
final, complete and exclusive statement and expression of the agreement between
Company and Employee and of all the terms of this Agreement, and it cannot be
varied, contradicted or supplemented by evidence of any prior or
contemporaneous oral or written agreements. This written Agreement may not be
later modified except by a further writing signed by a duly authorized officer
of Company and Employee, and no term of this Agreement may be waived except in
writing signed by the party waiving the benefit of such term.
14. NOTICE. Whenever any notice is
required hereunder, it shall be given in writing addressed as follows:
To Company:
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Comfort Systems USA (Texas), L.P.
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777 Post Oak Blvd, Suite 500
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Houston, Texas 77056
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Attention: Law Department
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To Employee:
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Trent McKenna
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7938 Clarion Way
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Houston, TX 77040
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Notice
shall be deemed given and effective on the earlier of three (3) days after the
deposit in the U.S. mail of a writing addressed as above and sent first class
mail, certified, return receipt requested, or when actually received by means
of hand delivery, delivery by Federal Express or other courier service, or by
facsimile transmission. Either party may change the address for notice by
notifying the other party of such change in accordance with this paragraph 14.1
15. SEVERABILITY; HEADINGS. If any
portion of this Agreement is held invalid or inoperative, the other portions of
this Agreement shall be deemed valid and operative and, so far as is reasonable
and possible, effect shall be given to the intent manifested by the portion
held invalid or inoperative. The paragraph headings herein are for reference
purposes only and are not intended in any way to describe, interpret, define or
limit the extent or intent of this Agreement or of any part hereof.
16. ARBITRATION. With the exception of
paragraphs 3 and 7, any unresolved dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three (3) arbitrators in Houston, Texas, in
accordance with the National Rules for the Resolution of Employment Disputes of
the American Arbitration Association (AAA) then in effect, provided that
Employee shall comply with Companys grievance procedures in an effort to
resolve such dispute or controversy before resorting to arbitration, and
provided further that the parties may agree to use arbitrators other than those
provided by the AAA. The arbitrators shall not have the authority to add to, detract
from, or modify any provision hereof nor to award punitive damages to any
injured party. The arbitrators shall have the authority to order back-pay,
severance compensation, vesting of options or restricted stock (or cash
compensation in lieu of vesting of options or restricted stock), reimbursement
of costs, including those incurred to enforce this Agreement, and interest
thereon in the event the arbitrators determine that Employee was terminated
without disability or Cause, as defined in paragraphs 5(a)(ii) and 5(a)(iii),
respectively, or that Company has breached this Agreement in any material
respect. A decision by a majority of the arbitration panel shall be final and
binding. Judgment may be entered on the arbitrators award in any court having jurisdiction.
The direct expense of any arbitration proceeding shall be borne by Company.
17. GOVERNING LAW. This Agreement shall
in all respects be construed according to the laws of the State of Texas.
18. COUNTERPARTS. This Agreement may be
executed simultaneously in two (2) or more counterparts, each of which shall be
deemed an original and all of which together shall constitute but one and the
same instrument.
19. THIRD-PARTY BENEFICIARY. The Company
is intended to be a third-party beneficiary under this Agreement, and shall be
entitled to enforce the provisions hereof benefiting the Company.
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IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day
and year first above written.
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COMFORT SYSTEMS USA (TEXAS), L.P.
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By:
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Comfort Systems USA G.P., Inc.
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By:
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/s/ William F. Murdy
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William F. Murdy
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Chief Executive Officer
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COMFORT SYSTEMS USA, INC.
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By:
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/s/ William F. Murdy
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William F Murdy
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Chief Executive Officer
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EMPLOYEE:
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/s/ Trent McKenna
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Trent McKenna
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12
EX-10.20
5
a07-5471_1ex10d20.htm
EX-10.20
Exhibit
10.20
COMFORT SYSTEMS USA, INC.
1997 Equity Incentive Plan
Restricted Stock Award Agreement
William
F. Murdy
Comfort Systems USA, Inc.
777 Post Oak Blvd, Suite 500
Houston, Texas 77056
Ladies and
Gentlemen:
The
undersigned (i) acknowledges that he has received an award (the Award) of
restricted stock from Comfort Systems USA, Inc., a Delaware corporation (the Company)
under the 1997 Equity Incentive Plan (the Plan), subject to the terms set
forth below and in the Plan; (ii) further acknowledges receipt of a copy of the
Plan as in effect on the date hereof; and (iii) agrees with the Company as
follows:
1. Effective Date. This Agreement shall take effect as of April
1, 2006, which is the date of grant of the Award.
2. Shares Subject to Award. The Award consists of 50,000 shares (the Shares)
of common stock of the Company (Stock).
The undersigneds rights to the Shares are subject to the restrictions
described in this Agreement and the Plan (which is incorporated herein by
reference with the same effect as if set forth herein in full) in addition to
such other restrictions, if any, as may be imposed by law.
3. Meaning of Certain Terms. Except as otherwise expressly provided, all
terms used herein shall have the same meaning as in the Plan. The term vest as used herein with respect
to any Share means the lapsing of the restrictions described herein and in the
Plan with respect to such Share.
4. Nontransferability of Shares. The Shares acquired by the undersigned
pursuant to this Agreement shall not be sold, transferred, pledged, assigned or
otherwise encumbered or disposed of except as provided below and in the Plan.
5. Forfeiture Risk. Except as provided in Section 7(b) of this
Agreement, if the undersigned ceases to be employed by the Company and its
subsidiaries for any reason, including death, any then unvested Shares acquired
by the undersigned hereunder shall be immediately forfeited. The undersigned hereby (i) appoints the
Company as the attorney-in-fact of the undersigned to take such actions as may
be necessary or appropriate to effectuate a transfer of the record ownership of
any such shares that are unvested and forfeited hereunder, (ii) agrees to
deliver to the Company, as a precondition to the issuance of any certificate or
certificates with respect to unvested Shares hereunder, one or more stock
powers, endorsed in blank, with respect to such Shares, and (iii) agrees to
sign such other powers and
take such other actions as the Company may reasonably request to
accomplish the transfer or forfeiture of any unvested Shares that are forfeited
hereunder.
6. Retention of Certificates. Any certificates representing unvested Shares
shall be held by the Company. The
undersigned agrees that the Company may give stop transfer instructions to the
depository to ensure compliance with the provisions hereof.
7. Vesting of Shares. The shares acquired hereunder shall vest in
accordance with the provisions of this Paragraph 7 and applicable provisions of
the Plan, as follows:
(a) If
the Committee determines that, for the prior 12 month period preceding the
scheduled vesting date, the Company did not have positive earnings from its
continuing operations, all as determined and reported in accordance with
generally accepted accounting principles in the Companys regularly prepared
financial statements, Employee shall immediately and irrevocably forfeit all of
the Shares. Additionally, if the
Committee determines that for any of the 12 month periods prior to the date
that such restricted shares are scheduled to vest under Provision 7(b) herein
the Company did not achieve 60% of the average 3-year trailing EBITDA target
for full award of bonuses under the average of the Companys prior 3-year
Senior Management Incentive Programs, then Employee shall immediately and
irrevocably forfeit all of the shares scheduled to vest. If in the prior 12 month period, the Company
achieved between 60% to 80% of the average 3-year trailing EBITDA target for
full award of bonuses under the average of the Companys prior 3-year Senior
Management Incentive Programs, then Employee shall immediately and irrevocably
forfeit shares proportionately based on a scale where 60% or less equals 0% of
shares retained by Employee and 80% or greater equals 100% of shares retained
by Employee; and all shares not forfeited pursuant to the aforementioned scale
shall immediately vest.
(b) If
and only if the positive earnings goal in Section 7(a) has been achieved, and
provided that the undersigned is then, and since the date of grant has
continuously been employed by the Company or its subsidiaries, then the Shares
shall vest as follows:
16,666 Shares on May 15,
2007;
an additional 16,667
Shares on April 1, 2008; and
an additional 16,667
Shares on April 1, 2009;
provided, however, that, not
withstanding (a) or (b) above, any unvested Shares that have not earlier been
forfeited shall vest immediately in the event of (i) a Change in Control as
defined in the Employment Agreement dated June 27, 2000 between the undersigned
and the Company (the Employment Agreement).
8. Legend. Any certificates representing unvested Shares
shall be held by the Company, and any such certificate shall contain a legend
substantially in the following form:
THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES
OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS (INCLUDING
FORFEITURE) OF THE COMPANYS 1997 EQUITY INCENTIVE PLAN AND A RESTRICTED STOCK
AWARD AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER AND COMFORT SYSTEMS
USA, INC. COPIES OF SUCH PLAN AND
AGREEMENT ARE ON FILE IN THE OFFICES OF COMFORT SYSTEMS USA, INC.
As soon as practicable
following the vesting of any such Shares the Company shall cause a certificate
or certificates covering such Shares to be delivered to the undersigned.
9. Dividends, etc. The undersigned shall be entitled to (i)
receive any and all dividends or other distributions paid with respect to those
Shares of which he is the record owner on the record date for such dividend or
other distribution, and (ii) vote any Shares of which he is the record owner on
the record date for such vote; provided, however,
that any property (other than cash) distributed with respect to a share of
Stock (the associated share) acquired hereunder, including without limitation
a distribution of Stock by reason of a stock dividend, stock split or
otherwise, or a distribution of other securities with respect to an associated
share, shall be subject to the restrictions of this Agreement in the same
manner and for so long as the associated share remains subject to such
restrictions, and shall be promptly forfeited to the Company if and when the
associated share is so forfeited; and further provided, that the
Administrator may require that any cash distribution with respect to the Shares
other than a normal cash dividend be placed in escrow or otherwise made subject
to such restrictions as the Administrator deems appropriate to carry out the
intent of the Plan. References in this
Agreement to the Shares shall refer, mutatis mutandis,
to any such restricted amounts.
10. Sale of Vested Shares. The undersigned understands that he will
be free to sell any Share once it has vested, subject to (i) satisfaction of
any applicable tax withholding requirements with respect to the vesting or transfer
of such Share; (ii) the completion of any administrative steps (for
example, but without limitation, the transfer of certificates) that the Company
may reasonably impose; and (iii) applicable company policies and the
requirements of federal and state securities laws.
11. Certain Tax Matters. The undersigned expressly acknowledges the
following:
a. The
undersigned has been advised to confer promptly with a professional tax advisor
to consider whether the undersigned should make a so-called 83(b) election
with respect to the Shares. Any such
election, to be effective, must be made in accordance with applicable
regulations and
within thirty (30) days following the date of this
award. The Company has made no recommendation to the undersigned with respect
to the advisability of making such an election.
b. The award or vesting of the Shares acquired hereunder,
and the payment of dividends with respect to such shares, may give rise to wages
subject to withholding. The undersigned
expressly acknowledges and agrees that his rights hereunder are subject to his
paying to the Company in cash (or by such other means as may be acceptable to
the Company in its discretion, including, if the Committee so determines, by
the delivery of previously acquired Stock or shares of Stock acquired hereunder
or by the withholding of amounts from any payment hereunder) all taxes required
to be withheld in connection with such award, vesting or payment.
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Very truly yours,
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/s/
William F. Murdy
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William F. Murdy
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The foregoing Restricted Stock
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Award Agreement is hereby accepted:
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COMFORT SYSTEMS USA, INC.
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By:
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/s/ William George
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Executive Vice President and
Chief Financial Officer
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EX-10.21
6
a07-5471_1ex10d21.htm
EX-10.21
Exhibit
10.21
COMFORT SYSTEMS USA, INC.
1997 Equity Incentive Plan
Restricted Stock Award Agreement
William George, III
Comfort Systems USA, Inc.
777 Post Oak Blvd, Suite 500
Houston, Texas 77056
Ladies and
Gentlemen:
The
undersigned (i) acknowledges that he has received an award (the Award) of
restricted stock from Comfort Systems USA, Inc., a Delaware corporation (the Company)
under the 1997 Equity Incentive Plan (the Plan), subject to the terms set
forth below and in the Plan; (ii) further acknowledges receipt of a copy of the
Plan as in effect on the date hereof; and (iii) agrees with the Company as
follows:
1. Effective Date. This Agreement shall take effect as of April
1, 2006, which is the date of grant of the Award.
2. Shares Subject to Award. The Award consists of 25,000 shares (the Shares)
of common stock of the Company (Stock).
The undersigneds rights to the Shares are subject to the restrictions
described in this Agreement and the Plan (which is incorporated herein by
reference with the same effect as if set forth herein in full) in addition to
such other restrictions, if any, as may be imposed by law.
3. Meaning of Certain Terms. Except as otherwise expressly provided, all
terms used herein shall have the same meaning as in the Plan. The term vest as used herein with respect
to any Share means the lapsing of the restrictions described herein and in the
Plan with respect to such Share.
4. Nontransferability of Shares. The Shares acquired by the undersigned
pursuant to this Agreement shall not be sold, transferred, pledged, assigned or
otherwise encumbered or disposed of except as provided below and in the Plan.
5. Forfeiture Risk. Except as provided in Section 7(b) of this
Agreement, if the undersigned ceases to be employed by the Company and its
subsidiaries for any reason, including death, any then unvested Shares acquired
by the undersigned hereunder shall be immediately forfeited. The undersigned hereby (i) appoints the
Company as the attorney-in-fact of the undersigned to take such actions as may
be necessary or appropriate to effectuate a transfer of the record ownership of
any such shares that are unvested and forfeited hereunder, (ii) agrees to
deliver to the Company, as a precondition to the issuance of any certificate or
certificates with respect to unvested Shares hereunder, one or more stock
powers, endorsed in blank, with respect to such Shares, and (iii) agrees to
sign such other powers and
take such other actions as the Company may reasonably
request to accomplish the transfer or forfeiture of any unvested Shares that
are forfeited hereunder.
6. Retention of Certificates. Any certificates representing unvested Shares
shall be held by the Company. The
undersigned agrees that the Company may give stop transfer instructions to the
depository to ensure compliance with the provisions hereof.
7. Vesting of Shares. The shares acquired hereunder shall vest in
accordance with the provisions of this Paragraph 7 and applicable provisions of
the Plan, as follows:
(a) If
the Committee determines that, for the prior 12 month period preceding the
scheduled vesting date, the Company did not have positive earnings from its
continuing operations, all as determined and reported in accordance with
generally accepted accounting principles in the Companys regularly prepared
financial statements, Employee shall immediately and irrevocably forfeit all of
the Shares. Additionally, if the
Committee determines that for any of the 12 month periods prior to the date
that such restricted shares are scheduled to vest under Provision 7(b) herein
the Company did not achieve 60% of the average 3-year trailing EBITDA target
for full award of bonuses under the average of the Companys prior 3-year
Senior Management Incentive Programs, then Employee shall immediately and
irrevocably forfeit all of the shares scheduled to vest. If in the prior 12 month period, the Company
achieved between 60% to 80% of the average 3-year trailing EBITDA target for
full award of bonuses under the average of the Companys prior 3-year Senior
Management Incentive Programs, then Employee shall immediately and irrevocably
forfeit shares proportionately based on a scale where 60% or less equals 0% of
shares retained by Employee and 80% or greater equals 100% of shares retained
by Employee; and all shares not forfeited pursuant to the aforementioned scale
shall immediately vest.
(b) If
and only if the positive earnings goal in Section 7(a) has been achieved, and
provided that the undersigned is then, and since the date of grant has
continuously been employed by the Company or its subsidiaries, then the Shares
shall vest as follows:
8,333 Shares on May 15,
2007;
an additional 8,333
Shares on April 1, 2008; and
an additional 8,334
Shares on April 1, 2009;
provided, however, that, not
withstanding (a) or (b) above, any unvested Shares that have not earlier been
forfeited shall vest immediately in the event of (i) a Change in Control as
defined in the Employment Agreement dated December 1, 2003 between the
undersigned and the Company (the Employment Agreement).
8. Legend. Any certificates representing unvested Shares
shall be held by the Company, and any such certificate shall contain a legend
substantially in the following form:
THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES
OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS (INCLUDING
FORFEITURE) OF THE COMPANYS 1997 EQUITY INCENTIVE PLAN AND A RESTRICTED STOCK
AWARD AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER AND COMFORT SYSTEMS
USA, INC. COPIES OF SUCH PLAN AND
AGREEMENT ARE ON FILE IN THE OFFICES OF COMFORT SYSTEMS USA, INC.
As soon as practicable
following the vesting of any such Shares the Company shall cause a certificate
or certificates covering such Shares to be delivered to the undersigned.
9. Dividends, etc.` The undersigned shall be entitled to (i)
receive any and all dividends or other distributions paid with respect to those
Shares of which he is the record owner on the record date for such dividend or
other distribution, and (ii) vote any Shares of which he is the record owner on
the record date for such vote; provided, however,
that any property (other than cash) distributed with respect to a share of
Stock (the associated share) acquired hereunder, including without limitation
a distribution of Stock by reason of a stock dividend, stock split or
otherwise, or a distribution of other securities with respect to an associated
share, shall be subject to the restrictions of this Agreement in the same
manner and for so long as the associated share remains subject to such
restrictions, and shall be promptly forfeited to the Company if and when the
associated share is so forfeited; and further provided, that the
Administrator may require that any cash distribution with respect to the Shares
other than a normal cash dividend be placed in escrow or otherwise made subject
to such restrictions as the Administrator deems appropriate to carry out the
intent of the Plan. References in this
Agreement to the Shares shall refer, mutatis mutandis,
to any such restricted amounts.
10. Sale of Vested Shares. The undersigned understands that he will
be free to sell any Share once it has vested, subject to (i) satisfaction of
any applicable tax withholding requirements with respect to the vesting or transfer
of such Share; (ii) the completion of any administrative steps (for
example, but without limitation, the transfer of certificates) that the Company
may reasonably impose; and (iii) applicable company policies and the
requirements of federal and state securities laws.
11. Certain Tax Matters. The undersigned expressly acknowledges the
following:
a. The
undersigned has been advised to confer promptly with a professional tax advisor
to consider whether the undersigned should make a so-called 83(b) election
with respect to the Shares. Any such
election, to be effective, must be made in accordance with applicable
regulations and
within thirty (30) days following the date of this
award. The Company has made no
recommendation to the undersigned with respect to the advisability of making
such an election.
b. The
award or vesting of the Shares acquired hereunder, and the payment of dividends
with respect to such shares, may give rise to wages subject to
withholding. The undersigned expressly
acknowledges and agrees that his rights hereunder are subject to his paying to
the Company in cash (or by such other means as may be acceptable to the Company
in its discretion, including, if the Committee so determines, by the delivery
of previously acquired Stock or shares of Stock acquired hereunder or by the
withholding of amounts from any payment hereunder) all taxes required to be
withheld in connection with such award, vesting or payment.
|
Very truly yours,
|
|
|
|
|
|
|
|
|
/s/ William
George, III
|
|
|
William George, III
|
|
|
|
|
|
|
|
The foregoing Restricted Stock
|
Award Agreement is hereby accepted:
|
COMFORT SYSTEMS USA, INC.
|
|
|
|
|
|
|
By:
|
/s/ William F. Murdy
|
|
|
Chairman of the Board and Chief
Executive Officer
|
|
|
|
|
|
|
EX-10.22
7
a07-5471_1ex10d22.htm
EX-10.22
Exhibit
10.22
COMFORT SYSTEMS USA, INC.
1997 Equity Incentive Plan
Restricted Stock
Award Agreement
Thomas
N. Tanner
Comfort Systems USA, Inc.
777 Post Oak Blvd, Suite 500
Houston, Texas 77056
Ladies and
Gentlemen:
The
undersigned (i) acknowledges that he has received an award (the Award) of
restricted stock from Comfort Systems USA, Inc., a Delaware corporation (the Company)
under the 1997 Equity Incentive Plan (the Plan), subject to the terms set
forth below and in the Plan; (ii) further acknowledges receipt of a copy of the
Plan as in effect on the date hereof; and (iii) agrees with the Company as
follows:
1. Effective Date. This Agreement shall take effect as of April
1, 2006, which is the date of grant of the Award.
2. Shares Subject to Award. The Award consists of 25,000 shares (the Shares)
of common stock of the Company (Stock).
The undersigneds rights to the Shares are subject to the restrictions
described in this Agreement and the Plan (which is incorporated herein by
reference with the same effect as if set forth herein in full) in addition to
such other restrictions, if any, as may be imposed by law.
3. Meaning of Certain Terms. Except as otherwise expressly provided, all
terms used herein shall have the same meaning as in the Plan. The term vest as used herein with respect
to any Share means the lapsing of the restrictions described herein and in the
Plan with respect to such Share.
4. Nontransferability of Shares. The Shares acquired by the undersigned
pursuant to this Agreement shall not be sold, transferred, pledged, assigned or
otherwise encumbered or disposed of except as provided below and in the Plan.
5. Forfeiture Risk. Except as provided in Section 7(b) of this
Agreement, if the undersigned ceases to be employed by the Company and its
subsidiaries for any reason, including death, any then unvested Shares acquired
by the undersigned hereunder shall be immediately forfeited. The undersigned hereby (i) appoints the
Company as the attorney-in-fact of the undersigned to take such actions as may
be necessary or appropriate to effectuate a transfer of the record ownership of
any such shares that are unvested and forfeited hereunder, (ii) agrees to
deliver to the Company, as a precondition to the issuance of any certificate or
certificates with respect to unvested Shares hereunder, one or more stock
powers, endorsed in blank, with respect to such Shares, and (iii) agrees to
sign such other powers and
take such other actions as the Company may reasonably
request to accomplish the transfer or forfeiture of any unvested Shares that
are forfeited hereunder.
6. Retention of Certificates. Any certificates representing unvested Shares
shall be held by the Company. The
undersigned agrees that the Company may give stop transfer instructions to the
depository to ensure compliance with the provisions hereof.
7. Vesting of Shares. The shares acquired hereunder shall vest in
accordance with the provisions of this Paragraph 7 and applicable provisions of
the Plan, as follows:
(a) If
the Committee determines that, for the prior 12 month period preceding the
scheduled vesting date, the Company did not have positive earnings from its
continuing operations, all as determined and reported in accordance with
generally accepted accounting principles in the Companys regularly prepared
financial statements, Employee shall immediately and irrevocably forfeit all of
the Shares. Additionally, if the
Committee determines that for any of the 12 month periods prior to the date
that such restricted shares are scheduled to vest under Provision 7(b) herein
the Company did not achieve 60% of the average 3-year trailing EBITDA target
for full award of bonuses under the average of the Companys prior 3-year
Senior Management Incentive Programs, then Employee shall immediately and
irrevocably forfeit all of the shares scheduled to vest. If in the prior 12 month period, the Company
achieved between 60% to 80% of the average 3-year trailing EBITDA target for
full award of bonuses under the average of the Companys prior 3-year Senior
Management Incentive Programs, then Employee shall immediately and irrevocably
forfeit shares proportionately based on a scale where 60% or less equals 0% of
shares retained by Employee and 80% or greater equals 100% of shares retained
by Employee; and all shares not forfeited pursuant to the aforementioned scale
shall immediately vest.
(b) If
and only if the positive earnings goal in Section 7(a) has been achieved, and
provided that the undersigned is then, and since the date of grant has
continuously been employed by the Company or its subsidiaries, then the Shares
shall vest as follows:
8,333 Shares on May 15,
2007;
an additional 8,333
Shares on April 1, 2008; and
an additional 8,334
Shares on April 1, 2009;
provided, however, that, not
withstanding (a) or (b) above, any unvested Shares that have not earlier been
forfeited shall vest immediately in the event of (i) a Change in Control as
defined in the Employment Agreement dated June 14, 2002 between the undersigned
and the Company (the Employment Agreement).
8. Legend. Any certificates representing unvested Shares
shall be held by the Company, and any such certificate shall contain a legend
substantially in the following form:
THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES
OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS (INCLUDING
FORFEITURE) OF THE COMPANYS 1997 EQUITY INCENTIVE PLAN AND A RESTRICTED STOCK
AWARD AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER AND COMFORT SYSTEMS
USA, INC. COPIES OF SUCH PLAN AND
AGREEMENT ARE ON FILE IN THE OFFICES OF COMFORT SYSTEMS USA, INC.
As soon as practicable
following the vesting of any such Shares the Company shall cause a certificate
or certificates covering such Shares to be delivered to the undersigned.
9. Dividends, etc. The undersigned shall be entitled to (i)
receive any and all dividends or other distributions paid with respect to those
Shares of which he is the record owner on the record date for such dividend or
other distribution, and (ii) vote any Shares of which he is the record owner on
the record date for such vote; provided, however,
that any property (other than cash) distributed with respect to a share of
Stock (the associated share) acquired hereunder, including without limitation
a distribution of Stock by reason of a stock dividend, stock split or
otherwise, or a distribution of other securities with respect to an associated
share, shall be subject to the restrictions of this Agreement in the same
manner and for so long as the associated share remains subject to such
restrictions, and shall be promptly forfeited to the Company if and when the
associated share is so forfeited; and further provided, that the
Administrator may require that any cash distribution with respect to the Shares
other than a normal cash dividend be placed in escrow or otherwise made subject
to such restrictions as the Administrator deems appropriate to carry out the
intent of the Plan. References in this
Agreement to the Shares shall refer, mutatis mutandis,
to any such restricted amounts.
10. Sale of Vested Shares. The undersigned understands that he will
be free to sell any Share once it has vested, subject to (i) satisfaction of
any applicable tax withholding requirements with respect to the vesting or
transfer of such Share; (ii) the completion of any administrative steps
(for example, but without limitation, the transfer of certificates) that the
Company may reasonably impose; and (iii) applicable company policies and the
requirements of federal and state securities laws.
11. Certain Tax Matters. The undersigned expressly acknowledges the
following:
a. The
undersigned has been advised to confer promptly with a professional tax advisor
to consider whether the undersigned should make a so-called 83(b) election
with respect to the Shares. Any such
election, to be effective, must be made in accordance with applicable
regulations and
within thirty (30) days following the date of this
award. The Company has made no
recommendation to the undersigned with respect to the advisability of making
such an election.
b. The
award or vesting of the Shares acquired hereunder, and the payment of dividends
with respect to such shares, may give rise to wages subject to
withholding. The undersigned expressly
acknowledges and agrees that his rights hereunder are subject to his paying to
the Company in cash (or by such other means as may be acceptable to the Company
in its discretion, including, if the Committee so determines, by the delivery
of previously acquired Stock or shares of Stock acquired hereunder or by the
withholding of amounts from any payment hereunder) all taxes required to be
withheld in connection with such award, vesting or payment.
|
Very truly yours,
|
|
|
|
|
|
|
|
|
/s/ Thomas N. Tanner
|
|
|
Thomas N. Tanner
|
|
|
|
|
|
|
|
The foregoing Restricted Stock
|
Award Agreement is hereby accepted:
|
COMFORT SYSTEMS USA, INC.
|
|
|
|
|
|
|
By:
|
/s/
William F. Murdy
|
|
|
Chairman of the Board and
Chief Executive Officer
|
|
|
|
|
|
|
EX-10.23
8
a07-5471_1ex10d23.htm
EX-10.23
Exhibit
10.23
COMFORT SYSTEMS USA, INC.
1997 Equity Incentive Plan
Restricted Stock
Award Agreement
Julie S. Shaeff
Comfort Systems USA, Inc.
777 Post Oak Blvd, Suite 500
Houston, Texas 77056
Ladies and
Gentlemen:
The
undersigned (i) acknowledges that she has received an award (the Award) of
restricted stock from Comfort Systems USA, Inc., a Delaware corporation (the Company)
under the 1997 Equity Incentive Plan (the Plan), subject to the terms set
forth below and in the Plan; (ii) further acknowledges receipt of a copy of the
Plan as in effect on the date hereof; and (iii) agrees with the Company as
follows:
1. Effective Date. This Agreement shall take effect as of April
1, 2006, which is the date of grant of the Award.
2. Shares Subject to Award. The Award consists of 5,000 shares (the Shares)
of common stock of the Company (Stock).
The undersigneds rights to the Shares are subject to the restrictions
described in this Agreement and the Plan (which is incorporated herein by
reference with the same effect as if set forth herein in full) in addition to
such other restrictions, if any, as may be imposed by law.
3. Meaning of Certain Terms. Except as otherwise expressly provided, all
terms used herein shall have the same meaning as in the Plan. The term vest as used herein with respect
to any Share means the lapsing of the restrictions described herein and in the
Plan with respect to such Share.
4. Nontransferability of Shares. The Shares acquired by the undersigned
pursuant to this Agreement shall not be sold, transferred, pledged, assigned or
otherwise encumbered or disposed of except as provided below and in the Plan.
5. Forfeiture Risk. Except as provided in Section 7(b) of this
Agreement, if the undersigned ceases to be employed by the Company and its
subsidiaries for any reason, including death, any then unvested Shares acquired
by the undersigned hereunder shall be immediately forfeited. The undersigned hereby (i) appoints the
Company as the attorney-in-fact of the undersigned to take such actions as may
be necessary or appropriate to effectuate a transfer of the record ownership of
any such shares that are unvested and forfeited hereunder, (ii) agrees to
deliver to the Company, as a precondition to the issuance of any certificate or
certificates with respect to unvested Shares hereunder, one or more stock
powers, endorsed in blank, with respect to such Shares, and (iii) agrees to
sign such other powers and
take such other actions as the Company may reasonably
request to accomplish the transfer or forfeiture of any unvested Shares that
are forfeited hereunder.
6. Retention of Certificates. Any certificates representing unvested Shares
shall be held by the Company. The
undersigned agrees that the Company may give stop transfer instructions to the
depository to ensure compliance with the provisions hereof.
7. Vesting of Shares. The shares acquired hereunder shall vest in
accordance with the provisions of this Paragraph 7 and applicable provisions of
the Plan, as follows:
(a) If
the Committee determines that for any of the 12-month periods prior to the date
that such restricted shares are scheduled to vest under Provision 7(b) herein
the Company did not achieve 60% of the average 3-year trailing EBITDA target
for full award of bonuses under the average of the Companys prior 3-year
Senior Management Incentive Programs, then Employee shall immediately and
irrevocably forfeit all of the shares scheduled to vest. If in the prior 12-month period, the Company
achieved between 60% to 80% of the average 3-year trailing EBITDA target for
full award of bonuses under the average of the Companys prior 3-year Senior
Management Incentive Programs, then Employee shall immediately and irrevocably
forfeit shares proportionately based on a scale where 60% or less equals 0% of
shares retained by Employee and 80% or greater equals 100% of shares retained
by Employee; and all shares not forfeited pursuant to the aforementioned scale
shall immediately vest.
(b) If
and only if the positive earnings goal in Section 7(a) has been achieved, and
provided that the undersigned is then, and since the date of grant has
continuously been employed by the Company or its subsidiaries, then the Shares
shall vest as follows:
1,666 Shares on May 15,
2007;
an additional 1,667 Shares
on April 1, 2008; and
an additional 1,667
Shares on April 1, 2009;
provided, however, that, not
withstanding (a) or (b) above, any unvested Shares that have not earlier been
forfeited shall vest immediately in the event of (i) a Change in Control as
defined in the Employment Agreement dated December 1, 2003 between the
undersigned and the Company (the Employment Agreement).
8. Legend. Any certificates representing unvested Shares
shall be held by the Company, and any such certificate shall contain a legend
substantially in the following form:
THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES
OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS (INCLUDING
FORFEITURE) OF THE COMPANYS 1997 EQUITY INCENTIVE PLAN AND A RESTRICTED STOCK
AWARD AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER AND COMFORT SYSTEMS
USA, INC. COPIES OF SUCH PLAN AND
AGREEMENT ARE ON FILE IN THE OFFICES OF COMFORT SYSTEMS USA, INC.
As soon as practicable
following the vesting of any such Shares the Company shall cause a certificate
or certificates covering such Shares to be delivered to the undersigned.
9. Dividends, etc.. The undersigned shall be entitled to (i)
receive any and all dividends or other distributions paid with respect to those
Shares of which she is the record owner on the record date for such dividend or
other distribution, and (ii) vote any Shares of which she is the record owner
on the record date for such vote; provided, however,
that any property (other than cash) distributed with respect to a share of
Stock (the associated share) acquired hereunder, including without limitation
a distribution of Stock by reason of a stock dividend, stock split or
otherwise, or a distribution of other securities with respect to an associated
share, shall be subject to the restrictions of this Agreement in the same
manner and for so long as the associated share remains subject to such
restrictions, and shall be promptly forfeited to the Company if and when the
associated share is so forfeited; and further provided, that the
Administrator may require that any cash distribution with respect to the Shares
other than a normal cash dividend be placed in escrow or otherwise made subject
to such restrictions as the Administrator deems appropriate to carry out the
intent of the Plan. References in this
Agreement to the Shares shall refer, mutatis mutandis,
to any such restricted amounts.
10. Sale of Vested Shares. The undersigned understands that she will
be free to sell any Share once it has vested, subject to (i) satisfaction of
any applicable tax withholding requirements with respect to the vesting or
transfer of such Share; (ii) the completion of any administrative steps
(for example, but without limitation, the transfer of certificates) that the Company
may reasonably impose; and (iii) applicable company policies and the
requirements of federal and state securities laws.
11. Certain Tax Matters. The undersigned expressly acknowledges the
following:
a. The
undersigned has been advised to confer promptly with a professional tax advisor
to consider whether the undersigned should make a so-called 83(b) election
with respect to the Shares. Any such
election, to be effective, must be made in accordance with applicable
regulations and within thirty (30) days following the date of this award. The Company has made no recommendation to the
undersigned with respect to the advisability of making such an election.
b. The
award or vesting of the Shares acquired hereunder, and the payment of dividends
with respect to such shares, may give rise to wages subject to
withholding. The undersigned expressly
acknowledges and agrees that her rights hereunder are subject to her paying to
the Company in cash (or by such other means as may be acceptable to the Company
in its discretion, including, if the Committee so determines, by the delivery
of previously acquired Stock or shares of Stock acquired hereunder or by the
withholding of amounts from any payment hereunder) all taxes required to be
withheld in connection with such award, vesting or payment.
|
Very truly yours,
|
|
|
|
|
|
|
|
|
/s/ Julie S. Shaeff
|
|
|
Julie S. Shaeff
|
|
|
|
|
|
|
|
The foregoing Restricted Stock
|
Award Agreement is hereby accepted:
|
COMFORT SYSTEMS USA, INC.
|
|
|
|
|
|
|
By:
|
/s/
William F. Murdy
|
|
|
Chairman of the Board and
Chief Executive Officer
|
|
|
|
|
|
|
EX-10.24
9
a07-5471_1ex10d24.htm
EX-10.24
Exhibit
10.24
COMFORT SYSTEMS USA, INC.
1997 Equity Incentive Plan
Restricted Stock Award Agreement
Trent McKenna
Comfort Systems USA, Inc.
777 Post Oak Blvd, Suite 500
Houston, Texas 77056
Ladies and
Gentlemen:
The
undersigned (i) acknowledges that he has received an award (the Award) of
restricted stock from Comfort Systems USA, Inc., a Delaware corporation (the Company)
under the 1997 Equity Incentive Plan (the Plan), subject to the terms set
forth below and in the Plan; (ii) further acknowledges receipt of a copy of the
Plan as in effect on the date hereof; and (iii) agrees with the Company as
follows:
1. Effective Date. This Agreement shall take effect as of April
1, 2006, which is the date of grant of the Award.
2. Shares Subject to Award. The Award consists of 5,000 shares (the Shares)
of common stock of the Company (Stock).
The undersigneds rights to the Shares are subject to the restrictions
described in this Agreement and the Plan (which is incorporated herein by
reference with the same effect as if set forth herein in full) in addition to
such other restrictions, if any, as may be imposed by law.
3. Meaning of Certain Terms. Except as otherwise expressly provided, all
terms used herein shall have the same meaning as in the Plan. The term vest as used herein with respect
to any Share means the lapsing of the restrictions described herein and in the
Plan with respect to such Share.
4. Nontransferability of Shares. The Shares acquired by the undersigned
pursuant to this Agreement shall not be sold, transferred, pledged, assigned or
otherwise encumbered or disposed of except as provided below and in the Plan.
5. Forfeiture Risk. Except as provided in Section 7(b) of this
Agreement, if the undersigned ceases to be employed by the Company and its
subsidiaries for any reason, including death, any then unvested Shares acquired
by the undersigned hereunder shall be immediately forfeited. The undersigned hereby (i) appoints the
Company as the attorney-in-fact of the undersigned to take such actions as may
be necessary or appropriate to effectuate a transfer of the record ownership of
any such shares that are unvested and forfeited hereunder, (ii) agrees to
deliver to the Company, as a precondition to the issuance of any certificate or
certificates with respect to unvested Shares hereunder, one or more stock
powers, endorsed in blank, with respect to such Shares, and (iii) agrees to
sign such other powers and
take such other actions as the Company may reasonably
request to accomplish the transfer or forfeiture of any unvested Shares that
are forfeited hereunder.
6. Retention of Certificates. Any certificates representing unvested Shares
shall be held by the Company. The
undersigned agrees that the Company may give stop transfer instructions to the
depository to ensure compliance with the provisions hereof.
7. Vesting of Shares. The shares acquired hereunder shall vest in
accordance with the provisions of this Paragraph 7 and applicable provisions of
the Plan, as follows:
(a) If
the Committee determines that for any of the 12-month periods prior to the date
that such restricted shares are scheduled to vest under Provision 7(b) herein
the Company did not achieve 60% of the average 3-year trailing EBITDA target
for full award of bonuses under the average of the Companys prior 3-year
Senior Management Incentive Programs, then Employee shall immediately and
irrevocably forfeit all of the shares scheduled to vest. If in the prior 12-month period, the Company
achieved between 60% to 80% of the average 3-year trailing EBITDA target for
full award of bonuses under the average of the Companys prior 3-year Senior
Management Incentive Programs, then Employee shall immediately and irrevocably
forfeit shares proportionately based on a scale where 60% or less equals 0% of
shares retained by Employee and 80% or greater equals 100% of shares retained
by Employee; and all shares not forfeited pursuant to the aforementioned scale
shall immediately vest.
(b) If
and only if the positive earnings goal in Section 7(a) has been achieved, and
provided that the undersigned is then, and since the date of grant has
continuously been employed by the Company or its subsidiaries, then the Shares
shall vest as follows:
1,666 Shares on May 15,
2007;
an additional 1,667 Shares
on April 1, 2008; and
an additional 1,667
Shares on April 1, 2009;
provided, however, that, not
withstanding (a) or (b) above, any unvested Shares that have not earlier been
forfeited shall vest immediately in the event of (i) a Change in Control as defined
in the Employment Agreement dated January 1, 2006 between the undersigned and
the Company (the Employment Agreement).
8. Legend. Any certificates representing unvested Shares
shall be held by the Company, and any such certificate shall contain a legend
substantially in the following form:
THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES
OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS
AND CONDITIONS (INCLUDING FORFEITURE) OF THE COMPANYS
1997 EQUITY INCENTIVE PLAN AND A RESTRICTED STOCK AWARD AGREEMENT ENTERED INTO
BETWEEN THE REGISTERED OWNER AND COMFORT SYSTEMS USA, INC. COPIES OF SUCH PLAN AND AGREEMENT ARE ON FILE
IN THE OFFICES OF COMFORT SYSTEMS USA, INC.
As soon as practicable
following the vesting of any such Shares the Company shall cause a certificate
or certificates covering such Shares to be delivered to the undersigned.
9. Dividends, etc.. The undersigned shall be entitled to (i)
receive any and all dividends or other distributions paid with respect to those
Shares of which he is the record owner on the record date for such dividend or
other distribution, and (ii) vote any Shares of which he is the record owner on
the record date for such vote; provided, however,
that any property (other than cash) distributed with respect to a share of
Stock (the associated share) acquired hereunder, including without limitation
a distribution of Stock by reason of a stock dividend, stock split or
otherwise, or a distribution of other securities with respect to an associated
share, shall be subject to the restrictions of this Agreement in the same
manner and for so long as the associated share remains subject to such
restrictions, and shall be promptly forfeited to the Company if and when the
associated share is so forfeited; and further provided, that the
Administrator may require that any cash distribution with respect to the Shares
other than a normal cash dividend be placed in escrow or otherwise made subject
to such restrictions as the Administrator deems appropriate to carry out the
intent of the Plan. References in this
Agreement to the Shares shall refer, mutatis mutandis,
to any such restricted amounts.
10. Sale of Vested Shares. The undersigned understands that he will
be free to sell any Share once it has vested, subject to (i) satisfaction of
any applicable tax withholding requirements with respect to the vesting or
transfer of such Share; (ii) the completion of any administrative steps
(for example, but without limitation, the transfer of certificates) that the
Company may reasonably impose; and (iii) applicable company policies and the
requirements of federal and state securities laws.
11. Certain Tax Matters. The undersigned expressly acknowledges the
following:
a. The
undersigned has been advised to confer promptly with a professional tax advisor
to consider whether the undersigned should make a so-called 83(b) election
with respect to the Shares. Any such
election, to be effective, must be made in accordance with applicable
regulations and within thirty (30) days following the date of this award. The Company has made no recommendation to the
undersigned with respect to the advisability of making such an election.
b. The
award or vesting of the Shares acquired hereunder, and the payment of dividends
with respect to such shares, may give rise to wages subject
to withholding.
The undersigned expressly acknowledges and agrees that his rights
hereunder are subject to his paying to the Company in cash (or by such other
means as may be acceptable to the Company in its discretion, including, if the
Committee so determines, by the delivery of previously acquired Stock or shares
of Stock acquired hereunder or by the withholding of amounts from any payment
hereunder) all taxes required to be withheld in connection with such award,
vesting or payment.
|
Very truly yours,
|
|
|
|
|
|
|
|
|
/s/ Trent McKenna
|
|
|
Trent McKenna
|
|
|
|
|
|
|
|
The foregoing Restricted Stock
|
Award Agreement is hereby accepted:
|
COMFORT SYSTEMS USA, INC.
|
|
|
|
|
|
|
By:
|
/s/
William F. Murdy
|
|
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Chairman of the Board and Chief
Executive Officer
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EX-21.1
10
a07-5471_1ex21d1.htm
EX-21.1
Exhibit 21.1
COMFORT SYSTEMS USA, INC. SUBSIDIARIES
|
No.
|
|
ENTITY NAME
|
|
STATE OF ORGANIZATION
|
1
|
|
ACI Mechanical, Inc.
|
|
Delaware
|
2
|
|
ARC Comfort Systems USA, Inc.
|
|
Delaware
|
3
|
|
Accurate Air Systems, L.P.
|
|
Texas
|
4
|
|
Accu-Temp GP, Inc.
|
|
Delaware
|
5
|
|
Accu-Temp LP, Inc.
|
|
Delaware
|
6
|
|
AirTemp, Inc.
|
|
Delaware
|
7
|
|
Atlas-Accurate Holdings, L.L.C.
|
|
Delaware
|
8
|
|
Atlas Comfort Systems USA, L.P.
|
|
Texas
|
9
|
|
Batchelors Mechanical Contractors, Inc.
|
|
Alabama
|
10
|
|
BCM Controls Corporation
|
|
Massachusetts
|
11
|
|
California Comfort Systems USA, Inc.
|
|
California
|
12
|
|
Climate Control, Inc.
|
|
Delaware
|
13
|
|
Comfort Systems USA (Arkansas), Inc.
|
|
Delaware
|
14
|
|
Comfort Systems USA (Atlanta), Inc.
|
|
Georgia
|
15
|
|
Comfort Systems USA (Baltimore), Inc.
|
|
Delaware
|
16
|
|
Comfort Systems USA (Bristol), Inc.
|
|
Delaware
|
17
|
|
Comfort Systems USA (Carolinas), Inc.
|
|
Delaware
|
18
|
|
Comfort Systems USA (Florida), Inc.
|
|
Florida
|
19
|
|
Comfort Systems USA (Hartford), Inc.
|
|
Delaware
|
20
|
|
Comfort Systems USA (Intermountain), Inc.
|
|
Utah
|
21
|
|
Comfort Systems USA National Accounts LLC
|
|
Indiana
|
22
|
|
Comfort Systems USA (Ohio), Inc.
|
|
Ohio
|
23
|
|
Comfort Systems USA (Pasadena), L.P.
|
|
Texas
|
24
|
|
Comfort Systems USA (Southeast), Inc.
|
|
Delaware
|
25
|
|
Comfort Systems USA (Syracuse), Inc.
|
|
New York
|
26
|
|
Comfort Systems USA (Texas), L.P.
|
|
Texas
|
27
|
|
Comfort Systems USA G.P., Inc.
|
|
Delaware
|
28
|
|
Comfort Systems USA (Twin Cities), Inc.
|
|
Minnesota
|
29
|
|
Comfort Systems USA (Western Michigan), Inc.
|
|
Michigan
|
30
|
|
CS53 Acquisition Corp.
|
|
Delaware
|
31
|
|
Design Mechanical, Incorporated
|
|
Delaware
|
32
|
|
Eastern Heating & Cooling, Inc.
|
|
New York
|
33
|
|
Eastern Refrigeration Co., Inc.
|
|
New York
|
34
|
|
Granite State Holdings Company, Inc.
|
|
Delaware
|
35
|
|
Granite State Plumbing & Heating LLC
|
|
Delaware
|
36
|
|
H&M Mechanical, Inc.
|
|
Delaware
|
37
|
|
Helm Corporation
|
|
Colorado
|
38
|
|
Hess Mechanical Corporation
|
|
Delaware
|
39
|
|
Hudson River Heating and Cooling, Inc.
|
|
Delaware
|
40
|
|
H-VAC, Supply, L.L.C.
|
|
Puerto Rico
|
41
|
|
Hydro-Kool, L.L.C.
|
|
Delaware
|
42
|
|
J&J Mechanical, Inc.
|
|
Kentucky
|
43
|
|
James Air Conditioning Enterprise Inc.
|
|
Puerto Rico
|
44
|
|
Martin Heating, Inc.
|
|
Wyoming
|
45
|
|
Mechanical Technical Services, L.P.
|
|
Texas
|
46
|
|
MJ Mechanical Services, Inc.
|
|
Delaware
|
47
|
|
North American Mechanical, Inc.
|
|
Delaware
|
48
|
|
Quality Air Heating and Cooling, Inc.
|
|
Michigan
|
COMFORT SYSTEMS USA, INC. SUBSIDIARIES
|
No.
|
|
ENTITY NAME
|
|
STATE OF ORGANIZATION
|
49
|
|
Quality Professional Employer Organization LLC
|
|
Delaware
|
50
|
|
S.I. Goldman Company, Inc.
|
|
Delaware
|
51
|
|
S.M. Lawrence Company, Inc.
|
|
Tennessee
|
52
|
|
SA Associates, Inc.
|
|
Utah
|
53
|
|
Salmon & Alder, LLC
|
|
Utah
|
54
|
|
Seasonair, Inc.
|
|
Maryland
|
55
|
|
Sheren Plumbing & Heating, Inc.
|
|
Delaware
|
56
|
|
Temp-Right Service, Inc.
|
|
Delaware
|
57
|
|
The Capital Refrigeration Company
|
|
Delaware
|
58
|
|
Tri-City Mechanical, Inc.
|
|
Arizona
|
59
|
|
Western Building Services, Inc.
|
|
Colorado
|
EX-23.1
11
a07-5471_1ex23d1.htm
EX-23.1
Exhibit
23.1
CONSENT
OF INDEPENDENT AUDITORS
We consent to the
incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No.
333-38011) pertaining to the 1997 Long-Term Incentive Plan, 1997 Non-Employee Directors
Stock Plan, and 1998 Employee Stock Purchase Plan of Comfort Systems USA, Inc.
(2) Registration Statement (Form S-8 No. 333-44354) pertaining to the
2000 Incentive Plan of Comfort Systems USA, Inc.
(3) Registration Statement (Form S-8 No. 333-44356) pertaining to the
401K Plan of Comfort Systems USA, Inc.
(4)
Registration Statement (Form S-8 No. 333-138377) pertaining to 2006 Equity Incentive Plan and 2006 Stock
Options/SAR Plan for Non-Employee Directors.
of our reports dated
February 27, 2007, with respect to the consolidated financial statements of
Comfort Systems USA, Inc., Comfort Systems USA, Inc. managements assessment of
the effectiveness of internal control over financial reporting, and the
effectiveness of internal control over financial reporting of Comfort Systems
USA, Inc. included in this Annual Report (Form 10-K) for the year ended
December 31, 2006.
|
|
ERNST & YOUNG LLP
|
|
|
|
|
|
|
|
|
Houston, Texas
|
|
|
February 28, 2007
|
EX-31.1
12
a07-5471_1ex31d1.htm
EX-31.1
Exhibit
31.1
CERTIFICATION
I, William F. Murdy, Chairman of the Board
and Chief Executive Officer of Comfort Systems USA, Inc. (the Company),
certify that:
1. I have reviewed this annual report on Form
10-K of the Company;
2. Based on my knowledge, this report does not
contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrants other certifying officer(s)
and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15-d-15 (f)) for the registrant and have:
(a) Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control over
financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the
registrants disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the
registrants internal control over financial reporting that occurred during the
registrants most recent fiscal quarter (the registrants fourth fiscal quarter
in the case of an annual report) that has materially affected, or is
reasonably likely to
materially affect, the registrants internal control over financial reporting;
and
5. The registrants other certifying officer(s)
and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrants auditors and the audit committee
of the registrants board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material
weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that
involves management or other employees who have a significant role in the
registrants internal control over financial reporting.
Date: February 28,
2007
|
|
/s/ William F. Murdy
|
|
|
|
|
By:
|
|
|
William F. Murdy
|
|
Chairman of the Board and Chief
Executive Officer
|
|
|
|
EX-31.2
13
a07-5471_1ex31d2.htm
EX-31.2
Exhibit
31.2
CERTIFICATION
I, William George,
Executive Vice President and Chief Financial Officer of Comfort Systems USA,
Inc. (the Company), certify that:
1. I have reviewed this annual report on Form
10-K of the Company;
2. Based on my knowledge, this report does not
contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrants other certifying officers and
I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f) for the registrant and have:
(a) Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control over
financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the
registrants disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the
registrants internal control over financial reporting that occurred during the
registrants most recent fiscal (the registrants fourth
fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting; and
5. The registrants other certifying officer(s)
and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrants auditors and the audit committee
of the registrants board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material
weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that
involves management or other employees who have a significant role in the
registrants internal control over financial reporting.
Date: February 28,
2007
|
|
/s/ William George
|
|
|
|
|
By :
|
|
|
William George
|
|
Executive Vice President and
Chief Financial Officer
|
EX-32.1
14
a07-5471_1ex32d1.htm
EX-32.1
Exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002*
In connection with the Annual Report of Comfort
Systems USA, Inc. (the Company) on Form 10-K for the year ended December 31,
2006 as filed with the Securities and Exchange Commission on the date hereof
(the Report), I, William F. Murdy, Chairman of the Board and Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934; and
2. The information contained in the Report fairly
presents, in all material respects, the financial condition and result of
operations of the Company.
|
|
/s/ William F. Murdy
|
|
|
|
|
By:
|
|
|
William F. Murdy
|
|
Chairman of the Board and Chief
Executive Officer
|
* A signed original of this written statement
required by Section 906 has been provided to Comfort Systems USA, Inc. and will
be retained by Comfort Systems USA, Inc. and furnished to the Securities and
Exchange Commission or its staff upon request.
EX-32.2
15
a07-5471_1ex32d2.htm
EX-32.2
Exhibit 32.2
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002*
In connection with the Annual Report of Comfort
Systems USA, Inc. (the Company) on Form 10-K for the year ended December 31,
2006 as filed with the Securities and Exchange Commission on the date hereof
(the Report), I, William George, Executive Vice President and Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report
fully complies with the requirements of Section 13(a) or 15(d), as applicable,
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly
presents, in all material respects, the financial condition and result of
operations of the Company.
|
|
/s/ William George
|
|
|
|
|
By:
|
|
|
William George
|
Executive
Vice President and Chief Financial Officer
|
* A signed original of this written statement
required by Section 906 has been provided to Comfort Systems USA, Inc. and will
be retained by Comfort Systems USA, Inc. and furnished to the Securities and
Exchange Commission or its staff upon request.
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