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CORRESP
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filename1.htm

April
18, 2005

Jeffrey
Gordon

Staff
Accountant

United
States Securities and Exchange Commission

Washington,
DC 20549

RE:          Comfort Systems USA, Inc.

Form
10-K for the fiscal year ended December 31, 2004

Form
8-K filed March 3, 2005

File
No. 1-13011

Dear
Mr. Gordon:

The
following is a response to the items included in your comment letter dated
March 25, 2005.

Form 10-K for the fiscal year ended December 31, 2004

Comments applicable to your overall filing

1.     Comment
– Where a comment below requests additional disclosures or other revisions to
be made, please show us in your supplemental response what the revisions will
look like.  These revisions should be
included in your future filings.

Response – We acknowledge this request and have provided the additional
disclosures or other revisions to our future filings in this letter, as
applicable.

Item
7 – Management’s Discussion and Analysis

2004 Compared to 2003, page 23

2.     Comment
– Please discuss in greater detail the business reasons for the changes between
periods in revenues, gross profit, and selling and administrative
expenses.  In doing so, please disclose
the amount of each significant change in line items between periods and the
business reasons for it.  In
circumstances where there is more than one business reason for the change,
attempt to quantify the incremental impact of each individual business reason
discussed on the overall change in the line item.  Please show us what your revised MD&A for
2004 as compared to 2003 will look like.
See Item 303(a)(3) of Regulation S-K and Financial Reporting
Codification 501.04.

Response
–We
have continually expanded over recent years the depth of our disclosures in the
operational section of MD&A including adding industry perspective along
with our

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identification
of company-specific variances in our principal income statement captions.  Based on your comment, we are taking the
further step of adding quantification to the individual variances we cite, wherever
possible.  We have included the revisions
to MD&A in Exhibit A (changes are in bold italics) and will include these
changes in future filings.

Liquidity and Capital Resources, page 31

3.     Comment
– Please disclose the interest rate and fees that apply to your credit
facility.

Response
–
The Company will include the following disclosure in Liquidity and Capital
Resources in future filings:

“The
interest rates 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.  The weighted average interest rate
that we have paid on borrowings under the Facility during 2004 was 5.16% per
annum.  This reflects a combination of
borrowings under both interest rate options described above, as well as a
transaction in which the interest rate relating to $10 million in principal
value of debt was fixed at 5.12% through early July 2004.  Following the expiration in early July 2004
of the fixed interest commitment referred to above, we estimate that the
weighted average interest rate, now entirely on a floating basis, is currently
approximately 5.28%.  These rates do not
include amortization of debt financing and arrangement costs or mark-to-market
adjustments for derivatives, which are separately identified in the table
below.  Commitment fees of 0.375% per
annum are also payable on the portion of the Revolving Loan capacity not in use
for borrowings or letters of credit at any given time.

Interest
expense for 2003 and 2004 included the following primary elements (in
thousands):

  2003

  2004

  Interest expense on borrowings, and unused
  commitment fees

  $

  1,397

  $

  704

  Letter of credit fees

  512

  443

  Amortization of deferred debt arrangement costs
  and discount

  1,496

  419

  Mark-to-market adjustments on derivatives

  488

  —

  Interest income

  (66

  )

  (172

  )

  Interest expense, net

  $

  3,827

  $

  1,394

See
Note 8 of the “Notes to Consolidated Financial Statements” for a detailed
discussion of the interest rates and fees associated with the Facility.”

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4.     Comment
– Please retitle what you currently call EBITDA, since you are including other
non-cash charges in this measure.  See
Question 14 of our FAQ Regarding the Use of Non-GAAP Financial Measures dated
June 13, 2003.  In addition, please
present a reconciliation of what you currently call EBITDA to the most directly
comparable financial measure calculated and presented in accordance with
GAAP.  See Item 10(e)(i)(B) of Regulation
S-K.

Response – Due to the Company’s sensitivity to covenant calculations under its
previous debt financing in 2003, we have chosen to include the specific details
of our covenant calculations in both MD&A and our Notes to the Consolidated
Financial Statements.  As indicated in
our disclosure, EBITDA is a defined term under the Facility and is used in two
of our covenant calculations.  Due to the
non-GAAP nature of this amount, we had not included the actual amount of EBITDA
in our filings but instead provided the covenant requirement and actual
calculated amount of each financial covenant.

Since
this is a defined term in our Facility, we will title this amount “Defined
EBITDA” in our future filings..  In
response to your comment, we are willing to provide the actual amount of
Defined EBITDA as calculated under the Facility’s definition and provide a
reconciliation of that amount to the most directly comparable financial measure
calculated and presented in accordance with GAAP.  We would utilize the following format in
future filings (in thousands):

  Net income

  $

  10,713

  Discontinued operations – estimated gain on
  disposition

  (469

  )

  Income taxes – continuing operations and
  discontinued operations

  8,282

  Mark-to-market adjustment on derivatives

  449

  Interest expense, net

  1,394

  Depreciation

  4,684

  Goodwill impairment

  3,347

  Defined EBITDA

  $

  28,400

5.     Comment
– Please revise your table of contractual cash obligations to include the
estimated interest payments on your debt.
Because the table is aimed at increasing transparency of cash flow, we
believe these payments should be included in the table.  Please also disclose any assumptions you made
to derive these amounts.  Please also
revise your table so that the sum of your contractual obligations for each
period and in total appears at the bottom of the table.

Response – The Company will include the following disclosure in
Liquidity and Capital Resources in future filings:

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“The
following recaps the future maturities of our debt along with other contractual
obligations as of December 31, 2004 (in thousands):

  Twelve Months Ended December 31,

  2005

  2006

  2007

  2008

  2009

  Thereafter

  Total

  Revolving loan

  $

  —

  $

  —

  $

  —

  $

  —

  $

  —

  $

  —

  $

  —

  Term loan

  2,000

  2,000

  2,000

  2,500

  —

  —

  8,500

  Other debt

  71

  71

  68

  53

  36

  23

  322

  Total debt

  2,071

  2,071

  2,068

  2,553

  36

  23

  8,822

  Interest payments

  458

  391

  253

  103

  2

  1

  1,208

  Operating lease obligations

  8,541

  7,170

  6,608

  5,256

  3,877

  12,384

  43,836

  Total

  $

  11,070

  $

  9,632

  $

  8,929

  $

  7,912

  $

  3,915

  $

  12,408

  $

  53,866

To estimate
future interest payments, we used certain financial institution forecasts that
project modest increases in the interest rate over the remaining term of the
loans.  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 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.”

Item 8 – Financial Statements

Note 2 – Summary of Signficant Accounting Policies, page 48

6.     Comment
– Please disclose the types of expenses that you include in the cost of
services line item and the types of expenses that you include in the selling,
general and administrative expenses line item.
Please also disclose whether you include inbound freight changes,
purchasing and receiving costs, inspection costs, warehousing costs, internal
transfer costs, and the other costs of your distribution network in the cost of
services line item.  With the exception
of warehousing costs, if you currently exclude a portion of these costs from
cost of services, please disclose:

•              in
a footnote the line items that these excluded costs are included in and the
amounts included in each line item for each period presented, and

•              in
MD&A that your gross margins may not be comparable to those of other
entities since some entities include all of the costs related to their
distribution network in cost of services and others like you exclude a portion
of them from gross margin, including them instead in a line item, such as
selling, general and administrative expenses.

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Response
–
We are a specialty contractor in the construction industry and do not have a
distribution network in place where we incur significant costs associated with
the transportation or warehousing of products.
Within the “Revenue Recognition” discussion, we disclose the types of costs
that we include in contract costs.  In
future filings, we will amend the disclosure to directly link these costs to
the “Cost of services” caption as indicated below (changes are in bold
italics).  Since selling, general and
administrative costs include standard costs such as selling expenses, corporate
overhead, administrative functions such as management oversight, accounting and
office support costs, etc., we do not believe that specific disclosure of these
costs is necessary.

“Revenue Recognition

Approximately 80% of the Company’s 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 Company’s income statement under the caption “Costs 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.  This measurement
and comparison process requires updates to the estimate of total costs to
complete the contract, and these updates may include subjective assessments.  For certain contracts where the Company
performs multiple construction-related activities such as HVAC, plumbing, fire
protection and other services, the contract may be segmented for revenue
recognition purposes into separate projects if specific criteria are met under
SOP 81-1.  The contract price is assigned
to the different services based upon the relative value of each service to the
expected total contract revenue.”

Inventories, page 48

7.     Comment – Please disclose your major classes of
inventory, such as raw materials, work in process and finished goods, as well
as the corresponding amounts in each class.
See Rule 5-02(6)(a) of Regulation S-X.

Response – Our inventory consists of parts and supplies that we purchase and
hold for use in the ordinary course of heating, ventilation and air conditioning
(HVAC)

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installation
and service business.  Since we perform
virtually no manufacturing activities associated with the inventory, we don’t
carry raw materials or work in process.
In future filings, we will clarify this point with the following
revision to our disclosure (changes in bold italics):

“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, page 48

8.     Comment
– You disclose that gains and losses resulting from the retirement or
disposition of property and equipment are recognized in other income
(expense).  If the property and equipment
that is retired or disposed of is not a component of an entity, the resulting
gains and losses should be included in operating income.  See paragraph 45 of SFAS 144.  Please revise accordingly.

Response
–
In future filings, we will include these gains and losses in operating income.

Goodwill, page 49

9.     Comment
– You disclose that goodwill represents the excess of the aggregate purchase
price over the fair value of the net tangible assets acquired.  Please clarify that the determination of
goodwill not only takes into consideration the value of net tangible assets
acquired, but also intangible assets acquired that are separate from goodwill.

Response
–
In future filings, we will change our disclosure as follows:

“Goodwill
represents the excess of the aggregate purchase price paid by the Company in
acquisitions accounted for as purchases over the fair value of the net tangible
and intangible assets acquired.”

Revenue Recognition, page 49

10.   Comment
– You disclose that as you perform under your percentage of completion
projects, such costs are measured as incurred, compared to total estimated
costs to complete the project, and a corresponding proportion of contract
revenue is recognized.  Please disclose
when you include actual costs incurred in your revenue recognition
computations.  Are products and materials
included in the computation when they arrive on site?  Do you wait until they are actually installed?  Do you wait until they are both installed and
a key milestone has been met?

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Response
–
Our first paragraph under the title Revenue Recognition will be amended in
future filings as follows (changes are in bold italics):

“ Revenue Recognition

Approximately 80% of the Company’s 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.  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