UNITED STATES Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No ASSETS CURRENT ASSETS: Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts of $5,250 and $6,554, respectively Other receivables Inventories Prepaid expenses and other Costs and estimated earnings in excess of billings Assets related to discontinued operations Total current assets PROPERTY, PLANT AND EQUIPMENT, net GOODWILL IDENTIFIABLE INTANGIBLE ASSETS, net MARKETABLE SECURITIES OTHER NONCURRENT ASSETS Total assets LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt Current maturities of notes to former owners Accounts payable Accrued compensation and benefits Billings in excess of costs and estimated earnings Income taxes payable Accrued self-insurance expense Other current liabilities Liabilities related to discontinued operations Total current liabilities LONG-TERM DEBT, NET OF CURRENT MATURITIES NOTES TO FORMER OWNERS, NET OF CURRENT MATURITIES OTHER LONG-TERM LIABILITIES Total liabilities 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, 41,123,365 and 41,123,365 shares issued, respectively Treasury stock, at cost, 2,453,245 and 2,740,635 shares, respectively Additional paid-in capital Accumulated other comprehensive income (loss) Retained earnings (deficit) Total stockholders' equity Total liabilities and stockholders' equity REVENUES COST OF SERVICES Gross profit SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (GAIN) LOSS ON SALE OF ASSETS Operating income OTHER INCOME (EXPENSE): Interest income Interest expense Other Other income (expense) INCOME BEFORE INCOME TAXES INCOME TAX EXPENSE INCOME FROM CONTINUING OPERATIONS DISCONTINUED OPERATIONS: Operating income (loss), net of income tax (expense) benefit of $(39), $60, $(100), and $133 Estimated loss on disposition, net of tax of $—, $—, $—, and $— NET INCOME INCOME PER SHARE: Basic— Income from continuing operations Discontinued operations— Income (loss) from operations Estimated loss on disposition Net income Diluted— Income from continuing operations Discontinued operations— Income (loss) from operations Estimated loss on disposition Net income SHARES USED IN COMPUTING INCOME PER SHARE: Basic Diluted DIVIDENDS PER SHARE BALANCE AT Comprehensive Income: Net income Unrealized loss on marketable securities, net of tax Comprehensive Income Issuance of Stock: Issuance of shares for options exercised including tax benefit Issuance of restricted stock Shares received in lieu of tax withholding payment on vested restricted stock Stock-based compensation expense Forfeiture of unvested restricted stock Tax benefit from vesting of restricted stock Dividends Share repurchase BALANCE AT Comprehensive Income: Net income (unaudited) Unrealized income on marketable securities, net of tax (unaudited) Comprehensive Income (unaudited) Issuance of Stock: Issuance of shares for options exercised including tax benefit (unaudited) Issuance of restricted stock (unaudited) Shares received in lieu of tax withholding payment on vested restricted stock (unaudited) Stock-based compensation expense (unaudited) Forfeiture of unvested restricted stock (unaudited) Tax benefit from vesting of restricted stock (unaudited) Dividends (unaudited) Share repurchase (unaudited) BALANCE AT JUNE 30, 2009 (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities— Estimated loss on disposition of discontinued operations Amortization of identifiable intangible assets Depreciation expense Bad debt expense Deferred tax (benefit) expense Amortization of debt financing costs (Gain) loss on sale of assets Stock-based compensation expense Changes in operating assets and liabilities, net of effects of acquisitions and divestitures— (Increase) decrease in— Receivables Inventories Prepaid expenses and other current assets Costs and estimated earnings in excess of billings Other noncurrent assets Increase (decrease) in— Accounts payable and accrued liabilities Billings in excess of costs and estimated earnings Other long-term liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment Proceeds from sales of property and equipment Proceeds from businesses sold Sale of marketable securities Purchases of marketable securities Cash paid for acquisitions and intangible assets, net of cash acquired Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings on revolving line of credit Payments on other long-term debt Payments of dividends to shareholders Share repurchase program and shares received in lieu of tax withholding Excess tax benefit of stock-based compensation Proceeds from exercise of options Net cash used in financing activities NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, beginning of period— CASH AND CASH EQUIVALENTS, end of period— approximately statements. the following three levels: Cash and cash equivalents Auction rate securities ” Revenues Pre-tax income (loss) Revolving credit facility Notes to former owners Total debt Less—current maturities of notes to former owners Total long-term portion of debt Balance at December 31, 2008 Additions Utilization Balance at June 30, 2009 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 surety for any expenses or outlays it incurs. To date, we are not aware of any losses to our sureties in connection with bonds the sureties have posted on our behalf, and do not expect such losses to be incurred in the foreseeable future. Auto Liability—For auto liability, the per incident deductible is $500,000. We are fully insured for the next $1.5 million of each loss, and then have a single, aggregate excess loss insurance policy that covers losses up to $50 million. Common shares outstanding, end of period(a) Effect of using weighted average common shares outstanding Shares used in computing earnings per share—basic Effect of shares issuable under stock option plans based on the treasury stock method Effect of contingently issuable restricted stock Shares used in computing earnings per share—diluted 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 and 2005, and was strong from 2004 to 2008. indirect labor, supplies, tools, repairs and depreciation costs. These contract costs are included in our results of operations under the caption ” balances or their useful lives. Revenues Cost of services Gross profit Selling, general and administrative expenses (Gain) loss on sale of assets Operating income Interest income (expense), net Other income Income before income taxes Income tax expense Income from continuing operations Discontinued operations— Operating results, net of tax Estimated loss on disposition, net of tax Net income the Phoenix indications of general revenue direction over the near term, and should not be interpreted as indicative of ongoing revenue performance over several quarters. increase in tax reserves. 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. We currently estimate our effective tax rate for 2009 will be between 38% and 40%. Cash provided by (used in): Operating activities Investing activities Financing activities Free cash flow: Cash used in operating activities Purchases of property and equipment Proceeds from sales of property and equipment Free cash flow net income in 2009. future subsidiaries. As of Liabilities—Notes to former owners Operating lease obligations Interest payable Total our balance sheet. Therefore, we assumed that we would continue our current status of not utilizing any borrowings under our revolving credit facility. Fixed Rate Debt Average Interest Rate April 1—April 30 May 1—May 31 June 1—June 30 deemed a purchase of the common shares by us on the date of withholding. During the quarter ended April 1—April 30 May 1—May 31 June 1—June 30(Mark One) ýx
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2009ORo
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to DELAWARE 76-0526487 DELAWARE
(State or other jurisdiction(I.R.S. Employer of Incorporation or Organization) 76-0526487(I.R.S. Employer
Identification No.)777 Post Oak BoulevardSuite 500675 Bering Drive Suite 400 Houston, Texas 77057 Houston, Texas 77056Registrant'sRegistrant’s telephone number, including area code:(713) 830-9600ýo No oxoxLarge accelerated filer o Accelerated filer ý Non-accelerated filer oýxissuer'sissuer’s common stock, as of July 28,October 30, 2009 was 38,342,230.COMFORT SYSTEMS USA, INC.INDEX TO FORM 10-QFOR THE QUARTER ENDED JUNE 30, 2009PagePart I—Financial Information Item 1—Financial Statements COMFORT SYSTEMS USA, INC.Part I—Financial Information Item 1—Financial Statements Consolidated Balance Sheets1 Consolidated Statements of Operations 2COMFORT SYSTEMS USA, INC. Consolidated Statements of Stockholders' Equity 3 1 2 3 4 4 5 1514 29 Item 4—Controls and Procedures30Part II—Other Information 28 Part II—Other Information 3129 31 Item 4—Submission of Matters to a Vote of Security Holders 32 33 Signatures 32 December 31, September 30, 2008 2009 (Unaudited) ASSETS CURRENT ASSETS: $ 117,015 $ 139,863 Accounts receivable, less allowance for doubtful accounts of $5,250 and $6,897, respectively 266,602 228,250 6,156 8,686 11,350 9,412 23,399 26,694 19,123 17,373 1,544 438 445,189 430,716 35,650 34,083 90,940 95,590 16,281 13,841 8,423 5,590 2,009 1,506 $ 598,492 $ 581,326 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: $ ― $ ― 1,336 2,018 98,190 75,291 46,623 42,366 97,505 89,647 1,011 ― 25,360 26,925 27,963 29,702 397 — 298,385 265,949 — — NOTES TO FORMER OWNERS, NET OF CURRENT MATURITIES 9,363 6,607 4,273 5,677 312,021 278,233 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, 41,123,365 and 41,123,365 shares issued, respectively 411 411 Treasury stock, at cost, 2,453,245 and 2,827,755 shares, respectively (27,069 ) (30,324 ) 328,621 325,458 (326 ) (217 ) (15,166 ) 7,765 286,471 303,093 $ 598,492 $ 581,326 December 31, 2008 June 30, 2009 (Unaudited)
$ 117,015 $ 120,415 266,602 257,077 6,156 5,806 11,350 10,179 23,399 27,251 19,123 16,321 1,544 438 445,189 437,487 35,650 35,000 90,940 95,666 16,281 14,551 8,423 6,534 2,009 1,536 $ 598,492 $ 590,774
$ — $ — 1,336 1,018 98,190 84,972 46,623 38,075 97,505 100,211 1,011 1,012 25,360 25,989 27,963 29,933 397 — 298,385 281,210 — — 9,363 7,972 4,273 4,996 312,021 294,178 — — 411 411 (27,069 ) (29,338 ) 328,621 325,628 (326 ) (252 ) (15,166 ) 147 286,471 296,596 $ 598,492 $ 590,774 2008 2009 2008 2009 $ 346,705 $ 291,591 $ 993,862 $ 872,214 280,011 234,186 806,784 701,335 66,694 57,405 187,078 170,879 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 45,078 41,713 128,397 126,175 (183 ) (101 ) (311 ) (98 ) 21,799 15,793 58,992 44,802 OTHER INCOME (EXPENSE): 565 117 2,049 492 (377 ) (301 ) (1,045 ) (946 ) ― 3 158 5 188 (181 ) 1,162 (449 ) 21,987 15,612 60,154 44,353 8,250 6,072 23,070 17,293 13,737 9,540 37,084 27,060 DISCONTINUED OPERATIONS: 28 ― 115 (387 ) Estimated loss on disposition, net of tax of $—, $—, $—, and $— — ― — (93 ) $ 13,765 $ 9,540 $ 37,199 $ 26,580 INCOME PER SHARE: Basic — $ 0.35 $ 0.25 $ 0.94 $ 0.71 Discontinued operations — — ― — (0.01 ) — — ― — $ 0.35 $ 0.25 $ 0.94 $ 0.70 Diluted — $ 0.34 $ 0.25 $ 0.92 $ 0.70 Discontinued operations — — ― — (0.01 ) — — — — $ 0.34 $ 0.25 $ 0.92 $ 0.69 SHARES USED IN COMPUTING INCOME PER SHARE: 39,403 37,995 39,625 38,135 40,048 38,382 40,296 38,533 $ 0.045 $ 0.050 $ 0.135 $ 0.140 OPERATIONS
STOCKHOLDERS’ EQUITYPer Share Data)(Unaudited)
Amounts) Three Months Ended
June 30, Six Months Ended
June 30, 2008 2009 2008 2009 $ 353,349 $ 300,349 $ 647,157 $ 580,623 285,937 242,028 526,773 467,149 67,412 58,321 120,384 113,474
43,000
41,276
83,319
84,462 (97 ) 5 (128 ) 3 24,509 17,040 37,193 29,009 547 148 1,484 375 (410 ) (308 ) (668 ) (645 ) 52 9 158 2 189 (151 ) 974 (268 ) 24,698 16,889 38,167 28,741 9,529 6,491 14,820 11,221 15,169 10,398 23,347 17,520
24
(207
)
87
(387
) — (93 ) — (93 ) $ 15,193 $ 10,098 $ 23,434 $ 17,040 $ 0.38 $ 0.27 $ 0.59 $ 0.46 — (0.01 ) — (0.01 ) — — — — $ 0.38 $ 0.26 $ 0.59 $ 0.45 $ 0.38 $ 0.27 $ 0.58 $ 0.45 — (0.01 ) — (0.01 ) — — — — $ 0.38 $ 0.26 $ 0.58 $ 0.44 39,634 38,136 39,737 38,207 40,359 38,533 40,422 38,610 $ 0.045 $ 0.045 $ 0.090 $ 0.090 STOCKHOLDERS’ EQUITY Common Stock Treasury Stock Shares Amount Shares Amount BALANCE AT DECEMBER 31, 2007 41,123,365 $ 411 (781,415 ) $ (9,973 ) $ 336,996 $ ― $ (64,856 ) $ 262,578 Comprehensive Income: Net income $ 49,690 — — — — — — 49,690 49,690 Unrealized loss on marketable securities, net of tax (326 ) — — — — — (326 ) — (326 ) Comprehensive Income $ 49,364 — — — — — — — — Issuance of Stock: Issuance of shares for options exercised including tax benefit — — 514,658 6,566 (2,789 ) — — 3,777 Issuance of restricted stock — — 201,309 2,485 (2,485 ) — — Shares received in lieu of tax withholding payment on vested restricted stock — — (39,100 ) (513 ) — — — (513 ) Stock-based compensation expense — — — — 3,851 ― — 3,851 Forfeiture of unvested restricted stock — — (8,288 ) (93 ) 93 — ― ― Tax benefit from vesting of restricted stock — — — — 89 — — 89 Dividends — — — — (7,134 ) — — (7,134 ) Share repurchase — — (2,340,409 ) (25,541 ) — — — (25,541 ) BALANCE AT DECEMBER 31, 2008 41,123,365 411 (2,453,245 ) (27,069 ) 328,621 (326 ) (15,166 ) 286,471 Comprehensive Income: Net income (unaudited) $ 26,580 — — — — — — 26,580 26,580 Unrealized income on marketable securities, net of tax (unaudited) 109 — — — — — 109 — 109 Comprehensive Income (unaudited) $ 26,689 Issuance of Stock: Issuance of shares for options exercised including tax benefit (unaudited) — ― 280,150 3,012 (1,271 ) — — 1,741 Issuance of restricted stock (unaudited) — ― 241,857 2,652 (2,652 ) — — ― Shares received in lieu of tax withholding payment on vested restricted stock (unaudited) — — (45,779 ) (459 ) — — — (459 ) Stock-based compensation expense (unaudited) — — — — 2,543 — — 2,543 — — (7,038 ) (76 ) 76 — — — Tax benefit from vesting of restricted stock (unaudited) — — — — (124 ) — — (124 ) Dividends (unaudited) — ― — — (1,735 ) — (3,649 ) (5,384 ) Share repurchase (unaudited) — — (843,700 ) (8,384 ) — — — (8,384 ) BALANCE AT SEPTEMBER 30, 2009 (unaudited) 41,123,365 $ 411 (2,827,755 ) $ (30,324 ) $ 325,458 $ (217 ) $ 7,765 $ 303,093 STOCKHOLDERS' EQUITY
CASH FLOWSThousands, Except Share Amounts)Thousands) 2008 2009 2008 2009 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 13,765 $ 9,540 $ 37,199 $ 26,580 Adjustments to reconcile net income to net cash provided by operating activities ― Estimated loss on disposition of discontinued operations — ― — 93 Amortization of identifiable intangible assets 1,458 709 3,301 2,511 Depreciation expense 2,231 2,541 6,269 7,357 Bad debt expense 1,597 467 1,973 2,577 Deferred tax (benefit) expense 2,361 (380 ) 2,640 (2,427 ) Amortization of debt financing costs 27 27 81 81 Gain on sale of assets (183 ) (101 ) (316 ) (97 ) Stock-based compensation expense 891 481 2,971 2,543 Changes in operating assets and liabilities, net of effects of acquisitions — (Increase) decrease in — Receivables 11,297 28,360 (7,429 ) 36,230 Inventories 963 767 200 1,898 Prepaid expenses and other current assets (347 ) (321 ) 2,244 (1,421 ) Costs and estimated earnings in excess of billings 1,197 (1,052 ) (5,085 ) 1,747 Other noncurrent assets (4,313 ) (1,803 ) (3,122 ) (1,837 ) Accounts payable and accrued liabilities (5,781 ) (5,790 ) 2,200 (24,655 ) Billings in excess of costs and estimated earnings (3,504 ) (10,564 ) 4,044 (7,829 ) Other long-term liabilities (716 ) 1,922 (214 ) 1,403 Net cash provided by operating activities 20,943 24,803 46,956 44,754 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (3,773 ) (1,986 ) (10,778 ) (6,420 ) Proceeds from sales of property and equipment 539 326 656 500 Proceeds from businesses sold 208 278 324 584 Sale of marketable securities 25 1,000 7,600 3,000 Purchases of marketable securities ― ― (18,525 ) ― Cash paid for acquisitions and intangible assets, net of cash acquired (12,513 ) (1,056 ) (40,398 ) (4,905 ) Net cash used in investing activities (15,514 ) (1,438 ) (61,121 ) (7,241 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings on revolving line of credit ― ― ― ― Payments on other long-term debt (1,432 ) (365 ) (6,665 ) (2,074 ) Payments of dividends to shareholders (1,786 ) (1,912 ) (5,387 ) (5,365 ) Share repurchase program and shares received in lieu of tax withholding (4,747 ) (2,652 ) (15,002 ) (8,843 ) Excess tax benefit of stock-based compensation 1,755 439 1,844 593 Proceeds from exercise of options 1,573 573 2,044 1,024 Net cash used in financing activities (4,637 ) (3,917 ) (23,166 ) (14,665 ) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 792 19,448 (37,331 ) 22,848 CASH AND CASH EQUIVALENTS, beginning of period – continuing and discontinued operations 101,508 120,415 139,631 117,015 CASH AND CASH EQUIVALENTS, end of period– continuing and discontinued operations $ 102,300 $ 139,863 $ 102,300 $ 139,863 Stockholders' Equity Common Stock Treasury Stock Accumulated
Other
Comprehensive
Income (Loss) Comprehensive Income Additional
Paid-In
Capital Retained
Earnings
(Deficit) Total
Stockholders'
Equity Shares Amount Shares Amount
DECEMBER 31, 2007 41,123,365 $ 411 (781,415 ) $ (9,973 ) $ 336,996 $ — $ (64,856 ) $ 262,578 $ 49,690 — — — — — — 49,690 49,690 (326 ) — — — — — (326 ) — (326 ) $ 49,364 — — — — — — — — — — 514,658 6,566 (2,789 ) — — 3,777 — — 201,309 2,485 (2,485 ) — — — — — (39,100 ) (513 ) — — — (513 ) — — — — 3,851 — 3,851 — — (8,288 ) (93 ) 93 — — — — — 89 — — 89 — — — — (7,134 ) — — (7,134 ) — — (2,340,409 ) (25,541 ) — — — (25,541 )
DECEMBER 31, 2008 41,123,365 411 (2,453,245 ) (27,069 ) 328,621 (326 ) (15,166 ) 286,471 $ 17,040 — — — — — — 17,040 17,040 74 — — — — — 74 — 74 $ 17,114 — — 124,450 1,346 (730 ) — — 616 — — 241,857 2,652 (2,652 ) — — — — — (45,559 ) (456 ) — — — (456 ) — — — — 2,062 — — 2,062 — — (7,038 ) (76 ) 76 — — — — — — — (14 ) — — (14 ) — — — — (1,735 ) — (1,727 ) (3,462 ) — — (601,100 ) (5,735 ) — — — (5,735 ) 41,123,365 $ 411 (2,740,635 ) $ (29,338 ) $ 325,628 $ (252 ) $ 147 $ 296,596 CONSOLIDATED STATEMENTS OF CASH FLOWS(In Thousands)(Unaudited) Three Months Ended
June 30, Six Months Ended
June 30, 2008 2009 2008 2009 $ 15,193 $ 10,098 $ 23,434 $ 17,040 — 93 — 93 1,135 959 1,843 1,802 2,206 2,381 4,038 4,816 297 1,722 376 2,110 (19 ) (1,793 ) 279 (2,047 ) 27 27 54 54 (103 ) 6 (133 ) 4 1,441 778 2,080 2,062 (25,030 ) (11,935 ) (18,726 ) 7,870 (737 ) 401 (763 ) 1,131 5,830 (733 ) 2,591 (1,100 ) (3,319 ) 1,189 (6,282 ) 2,799 (1,204 ) (60 ) 1,191 (34 ) 25,018 8,192 7,981 (18,865 ) 7,209 12,173 7,548 2,735 (885 ) 386 502 (519 ) 27,059 23,884 26,013 19,951 (4,253 ) (2,662 ) (7,005 ) (4,434 ) 37 99 117 174 6 44 116 306 7,575 1,000 7,575 2,000 — — (18,525 ) — (4,667 ) (3,849 ) (27,885 ) (3,849 ) (1,302 ) (5,368 ) (45,607 ) (5,803 ) — — — — (5,233 ) (667 ) (5,233 ) (1,709 ) (1,798 ) (1,718 ) (3,601 ) (3,453 ) (6,414 ) (4,211 ) (10,255 ) (6,191 ) 93 72 89 154 467 274 471 451 (12,885 ) (6,250 ) (18,529 ) (10,748 ) 12,872 12,266 (38,123 ) 3,400
continuing and discontinued operations 88,636 108,149 139,631 117,015
continuing and discontinued operations $ 101,508 $ 120,415 $ 101,508 $ 120,415 The accompanying notes are an integral part of these consolidated financial statements.COMFORT SYSTEMS USA, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTSJune1. Business and Organization1. Business and Organization ("HVAC"(“HVAC”) installation, maintenance, repair and replacement services within the mechanical services industry. 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. Approximately 55%52% of our consolidated 2009 revenues are attributable to installation of systems in newly constructed facilities, with the remaining 45%48% attributable to maintenance, repair and replacement services. The following service activities account for our consolidated 2009 revenues: HVAC 77%, plumbing 15%13%, building automation control systems 3%, and other 5%7%. These service activities are within the mechanical services industry which is the single industry segment we serve.2. Summary of Significant Accounting PoliciesBasis of Presentation2. Summary of Significant Accounting Policies Basis of Presentation ("SEC"(“SEC”) for the year ended December 31, 2008 (the "Form 10-K"“Form 10-K”). There were no significant changes in accounting policies of the company during the current period. For a description of the significant accounting policies of the company, refer to Note 2 of Notes to Consolidated Financial Statements of Comfort Systems in the Form 10-K.Cash Flow InformationCash Flow Information continuing operations for the three months ended JuneSeptember 30, 2008 and 2009 was approximately $0.4$0.1 million and $0.2$0.3 million, respectively. There was no cash paid for interest for discontinued operations for the three and six months ended June 30, 2008 and 2009. Cash paid for income taxes for continuing operations for the three months ended JuneSeptember 30, 2008 and 2009 wasCOMFORT SYSTEMS USA, INC.CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)June 30, 2009(Unaudited)2. Summary of Significant Accounting Policies (Continued)$9.4$11.7 million and $11.0$9.9 million, respectively. Cash paid for income taxes for discontinued operations for both the three months ended JuneSeptember 30, 2008 and 2009 was less than approximately $0.1 million. Cash paid for interest for both the sixnine months ended JuneSeptember 30, 2008 and 2009 was approximately $0.5 million.$0.6 million and $0.8 million, respectively. Cash paid for income taxes for continuing operations for the sixnine months ended JuneSeptember 30, 2008 and 2009 was approximately $10.1$21.8 million and $12.7$22.6 million, respectively. Cash paid for income taxes for discontinued operations for both the sixnine months ended JuneSeptember 30, 2008 and 2009 was less than approximately $0.1 million.Segment DisclosureSegment Disclosure Under Statement 131, "Disclosures About Segments of an Enterprise and Related Information," eachEach operating subsidiary represents an operating segment and these segments have been aggregated, as the operating units meet all of Statement 131'sthe aggregation criteria.Use of EstimatesUse of Estimates Income TaxesIncome Taxes in accordance with Statement of Financial Standards 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.uncertain each quarter.uncertain. 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 is less than the estimates, we may not realize all or a portion of the recorded deferred tax assets.COMFORT SYSTEMS USA, INC.CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)June 30, 2009(Unaudited)2. Summary of Significant Accounting Policies (Continued)Financial InstrumentsFinancial Instruments We consider our marketableavailable-for-sale as defined in Statement 115, "Accounting for Certain Investments in Debt and Equity Securities" ("Statement 115").available-for-sale. These investments are recorded at fair value and are classified as marketable securities in the accompanying consolidated balance sheet as of JuneSeptember 30, 2009. The changes in fair values, net of applicable taxes, are recorded as unrealized gains (losses) as a component of accumulated other comprehensive income (loss) in stockholders'stockholders’ equity. In2006,30, 2009, we adopted changes issued by the Financial Accounting Standards Board (“FASB”) to the authoritative hierarchy of generally accepted accounting principles (“GAAP”). These changes establish the FASB Accounting Standards CodificationTM (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. These changes and the Codification itself doStatement No. 157, "Fair Value Measurements" ("Statement 157"), effective for fiscal years beginning after November 15, 2007. Statement 157 provides guidance for usingby the FASB to fair value accounting and reporting as it relates to measurenonfinancial assets and liabilities. The statement applies whenever other standards require (or permit) assets ornonfinancial liabilities to be measured at fair value. The statement does not expand the use of fair value in any new circumstances. On February 12, 2008, the FASB issued FASB Staff Position No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP 157-2") that amends Statement 157 to delay the effective date for all non-financial assets and non-financial liabilities, except those that are not recognized or disclosed at fair value in the financial statements on at least an annual basis. These changes define fair value, establish a recurring basis. FSP 157-2 defers the effective dateframework for measuring fair value in GAAP, and expand disclosures about fair value measurements. This guidance applies to other GAAP that require or permit fair value measurements and is to be applied prospectively with limited exceptions. The adoption of Statement 157these changes, as it relates to fiscal years beginning after November 15, 2008. We adopted Statement 157 on January 1, 2008 for financialnonfinancial assets and nonfinancial liabilities, measured on a recurring basis. We adopted FSP 157- 2 on January 1, 2009 for financial assets and liabilities measured on a nonrecurring basis. There washad no impact upon adoption of Statement 157 or FSP 157-2 on the consolidated financial statements;statements, however we were required to provide additional disclosurehave expanded the disclosures regarding marketable securities, goodwill, and intangible assets. In December 2007,issued Statement 141R (revised 2007), "Business Combinations," ("Statement 141R") which establishes principlesto accounting for howbusiness combinations. These changes apply to all assets acquired and liabilities assumed in a business combination that arise from certain contingencies and requires (i) an acquirer to recognize at fair value, at the acquisition date, an asset acquired or liability assumed in a business combination that arises from a contingency if the acquisition date fair value of that asset or liability can be determined during the measurement period otherwise the asset or liability should be recognized at the acquisition date if certain defined criteria are met; (ii) contingent consideration arrangements of an acquiree assumed by the acquirer recognizes and measures in the financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. This statement also provides guidance for recognizing and measuring the goodwill acquired in thea business combination be recognized initially at fair value; (iii) subsequent measurements of assets and determines what information to disclose to enable usersliabilities arising from contingencies be based on a systematic and rational method depending on their nature and contingent consideration arrangements be measured subsequently; and (iv) disclosures of the financial statements to evaluateamounts and measurement basis of such assets and liabilities and the nature and financial effects of the business combination. Statement 141R was effective for us beginning January 1, 2009.contingencies. The portions of the statement that relate to business combinations completed before the effective date willadoption did not have and are not expected to have a material impact on our consolidated financial statements. However, ourThe adoption of Statement 141R will significantly impact our accounting and reporting for future acquisitions, principally as a result of: (i)of the expanded requirements to value acquired assets, liabilities and contingencies at their fair values;values and (ii) the requirement that acquisition-relatedacquisition related transaction andCOMFORT SYSTEMS USA, INC.CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)June 30, 2009(Unaudited)2. Summary of Significant Accounting Policies (Continued)restructuring costs be expensed as incurred rather than capitalized as a part of the cost of the acquisition. In June 2008,issued FSP Emerging Issues Task Force (EITF) 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities." This FSP providesto the calculation of earnings per share. These changes state that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents whether(whether paid or unpaid,unpaid) are participating securities and shall be included in the computation of both basic and diluted earnings per share. We adopted this FSP on January 1, 2009.share pursuant to the two-class method for all periods presented. There was no significant impact upon the adoption of this FSP. In Maythese changes.issued Statement No. 165, "Subsequent Events" ("Statement 165"). Statement 165to accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The new guidance also requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. Statement 165 is effective for interim or annualThis change had no impact on our consolidated financial periods ending after June 15, 2009 and was adopted by the Company in the second quarter of 2009. There was no significant impact upon the adoption of this Statement 165.ReclassificationsReclassifications Subsequent Events The Company has evaluated subsequent events through the time of filing these financial statements with the SEC on July 30, 2009.3. Fair Value Measurements Statement 157 establishes3. Fair Value Measurements three-tier fair value hierarchy whichthat prioritizes the inputs to valuation techniques used in measuringto measure fair value. The hierarchy, prioritizeswhich gives the inputs into three levels based on the extenthighest priority to which inputs used in measuring fair value are observable in the market. These tiers include:•Level 1—defined as observable inputs such as quoted prices in active markets;•Level 2—defined as inputs other than quoted prices in active markets, that are either directly or indirectly observable; and•Level 3—defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.COMFORT SYSTEMS USA, INC.CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)June 30, 2009(Unaudited)3. Fair Value Measurements (Continued)· Level 1 - defined as observable inputs such as quoted prices in active markets; · Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and · Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. subject to the disclosure requirements of Statement 157 as of JuneSeptember 30, 2009 are as follows (in thousands): Fair Value Measurements at
Reporting Date Using Balance,
June 30,
2009 Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) Significant Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) $ 120,415 $ 120,415 $ — $ — $ 7,534 $ — $ 925 $ 6,609 Total $ 139,863 $ 139,863 $ — $ — $ 6,590 $ — $ 925 $ 5,665 JuneSeptember 30, 2009, our marketable securities consisted of $7.5$6.6 million of auction rate securities, which are variable rate debt instruments, having long-term maturities (with final maturities up to October 2034), but whose interest rates are designed to reset through an auction process, at intervals ranging from seven to 35 days. We had investments in marketable securities of $9.4 million as of December 31, 2008. All of our auction rate securities are high quality municipal obligations which have high investment grade ratings or otherwise are backed by high investment grade rated insurance agencies. During the first sixnine months ofended September 30, 2009, we sold $2.0$3.0 million of these auction rate securities at face value. During July 2009, we were informed that anAn additional $1.0 million will bewere sold at face value during the third quarter ofOctober 2009; this is included in "Prepaid‘‘Prepaid Expenses and Other"Other’’ in our consolidated balance sheet. The remaining $6.5$5.6 million has been classified as a noncurrent asset on the consolidated balance sheet as we have the intent and ability to hold these securities until the market for auction rate securities stabilizes or until the issuer refinances the underlying security. as of June 30, 2009.. Our analysis of the fair values of these securities considered, among other items, the creditworthiness of the counterparty, the timing of expected future cash flows, and the possibility that a discount may be required if we choose to sell the securities in the absence of a successful auction. These securities were also compared, when possible, to other observable market data with similar characteristics.JuneSeptember 30, 2009 we continue to collect interest when due on all of our auction rate securities. Any future fluctuation in fair value related to these instruments that we deem to be temporary, including any recoveries of previous write-downs, would be recorded to accumulated other comprehensive income (loss). Ifother-than-COMFORT SYSTEMS USA, INC.CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)June 30, 2009(Unaudited)3. Fair Value Measurements (Continued)temporarily impaired. During the sixnine months ended JuneSeptember 30, 2009, we did not recognize any other-than-temporary impairments on those assets required to be measured at fair value on a nonrecurring basis.4. Acquisitions4. Acquisitions ("earn-out"(‘‘earn-out’’) has been and will be paid if certain acquisitions achieve predetermined profitability targets. The total purchase price for these acquisitions was $68.9 million, including $4.7 million in earn-outs that were recorded during the first halfnine months of 2009. There were no acquisitions infor the first half ofnine months ended September 30, 2009. Our consolidated balance sheets include preliminary allocations of the purchase price to the assets acquired and liabilities assumed based on estimates of fair value, pending completion of final valuation and purchase price adjustments. The results of operations of these acquisitions are included in our consolidated financial statements from their respective acquisition dates.5. Discontinued Operations5. Discontinued Operations company'scompany’s after-tax income of $0.1 million for the first sixnine months ofended September 30, 2008 and after-tax loss of $0.4 million for the first sixnine months ofended September 30, 2009 have been reported in discontinued operations under "Operating“Operating income (loss), net of income tax (expense) benefit."” We recorded aan estimated loss on the sale of this company of $0.1 million in the second quarter of 2009. This loss has been reported in discontinued operations under "Estimated“Estimated loss on disposition, net tax." Three Months Ended
June 30, Six Months Ended
June 30, 2008 2009 2008 2009 $ 1,748 $ 779 $ 3,645 $ 1,795 $ 63 $ (267 ) $ 187 $ (520 ) COMFORT SYSTEMS USA, INC.CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)June 30, 2009(Unaudited)6. Long-Term Debt Obligations 2008 2009 2008 2009 $ 1,930 $ ― $ 5,575 $ 1,795 $ 74 $ ― $ 260 $ (520 ) 6. Long-Term Debt Obligations December 31, 2008 June 30, 2009 $ — $ — 10,699 8,990 10,699 8,990 1,336 1,018 $ 9,363 $ 7,972 December 31, September 30, 2008 2009 $ ― $ ― 10,699 8,625 10,699 8,625 1,336 2,018 $ 9,363 $ 6,607 "Facility"‘‘Facility’’) provided by a syndicate of banks which is available for borrowings and letters of credit. The Facility expires in February 2012 and is secured by the capital stock of our current and future subsidiaries. As of JuneSeptember 30, 2009, the total of the Facility was $100.0 million, withwe had no outstanding borrowings, $43.1 million in letters of credit outstanding, and $56.9 million of credit available.1.6%1.5% as of JuneSeptember 30, 2009. Commitment fees are payable on the portion of the revolving loan 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, as defined in the credit agreement.—The Facility requires that the ratio of our total indebtedness less cash and cash equivalents to our Credit Facility Adjusted EBITDA not exceed 2.50. The leverage ratio as of JuneSeptember 30, 2009 was 0.11.—The 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 excludes acquisitions, stock repurchases and the payment of cash dividends, at any time that the Leverage Ratio does not exceed 1.0. The fixed charge coverage ratio as of JuneSeptember 30, 2009 was 19.95.13.34.—The 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.COMFORT SYSTEMS USA, INC.CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)June 30, 2009(Unaudited)6. Long-Term Debt Obligations (Continued)JuneSeptember 30, 2009.$9.0$8.6 million as of JuneSeptember 30, 2009, of which $1.0$2.0 million is current as of JuneSeptember 30, 2009 and bear interest, payable annually, at a weighted average interest rate of 5.8%5.7%.7. Commitments and ContingenciesClaims and Lawsuits7. Commitments and Contingencies Claims and Lawsuits management'smanagement’s 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.JuneSeptember 30, 2009 for potential and asserted backcharges from several customers of our large multi-family operation based in Texas. The related expense was included in "Cost“Cost of Services"Services” prior to 2009 and the accrual is included in "Other “Other"” We believe these accruals reflect a probable outcome with respect to such backcharges and potential backcharges, however, if we are not successful in resolving these disputes, we may in the future experience a material adverse effect on our operating results.JuneSeptember 30, 2009 (in thousands): $ 5,838 — (169 ) $ 5,669 SuretyBalance at December 31, 2008 $ 5,838 Additions — Utilization (169 ) Balance at September 30, 2009 $ 5,669 Surety COMFORT SYSTEMS USA, INC.CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)June 30, 2009(Unaudited)7. Commitments and Contingencies (Continued)sureties'sureties’ assessment of our operating and financial risk could cause the sureties to decline to issue bonds for our 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. 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.Self-InsuranceSelf-Insurance worker'sworker’s compensation, employer'semployer’s 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 risks, such as worker'sworker’s compensation, auto liability and general liability, are reviewed by a third-party actuary quarterly. Our self-insurance arrangements currently are as follows:Worker'sWorker’s Compensation—The per-incident deductible for worker'sworker’s compensation is $500,000. Losses above $500,000 are determined by statutory rules on a state-by-state basis, and are fully covered by excess worker'sworker’s compensation insurance.Employer'sEmployer’s Liability—For employer'semployer’s liability, the per incident deductible is $500,000. We are fully insured for the next $500,000 of each loss, and then have a single, aggregate excess loss insurance policy that covers losses up to $50 million across both of these risk areas (as well as general liability and auto liability noted below).generalemployer’s liability and auto liability noted below).General Liability—For general liability, the per incident deductible is $500,000. We are fully insured for the next $500,000 of each loss, then have a single, aggregate excess loss insurance policy that covers losses up to $50 million across both these risk areas (as well as employer's liability and auto liability noted below).COMFORT SYSTEMS USA, INC.CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)June 30, 2009(Unaudited)7. Commitments and Contingencies (Continued)deductiblespolicy limits represents one policy limit that applies to all lines of risk; we do not have a separate $50 million of excess loss coverage for each of general liability, employer'semployer’s liability and auto liability.8. Stockholders' Equity8. Stockholders’ Equity ("EPS"(“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 and contingently issuable restricted stock.options and 0.60.4 million of anti-dilutive stock options that were excluded from the calculation of diluted EPS for the three months ended JuneSeptember 30, 2008 and 2009, respectively. There were approximately 0.2 million and 0.6 million of anti-dilutive stock options that were excluded from the calculation of diluted EPS for the sixnine months ended JuneSeptember 30, 2008 and 2009, respectively. Three Months
Ended
June 30, Six Months
Ended
June 30, 2008 2009 2008 2009 41,123 38,006 41,123 38,006 (1,489 ) 130 (1,386 ) 201 39,634 38,136 39,737 38,207 657 383 642 395 68 14 43 8 40,359 38,533 40,422 38,610 (a)Excludes 0.3 million and 0.4 million shares of unvested contingently issuable restricted stock outstanding as of June 30, 2008 and 2009, respectively. 2008 2009 2008 2009 39,532 37,919 39,532 37,919 Effect of using weighted average common shares outstanding (129 ) 76 93 216 39,403 37,995 39,625 38,135 Effect of shares issuable under stock option plans based on the treasury stock method 571 350 618 380 74 37 53 18 40,048 38,382 40,296 38,533 COMFORT SYSTEMS USA, INC.CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)June 30, 2009(Unaudited)8. Stockholders' Equity (Continued)(a) Excludes 0.3 million and 0.4 million shares of unvested contingently issuable restricted stock outstanding as of September 30, 2008 and 2009, respectively. "Board"“Board”) approved a stock repurchase program to acquire up to one million shares of our outstanding common stock. As of December 31, 2008, the Board approved extensions of the program to cover an additional 2.9 million shares. During the first quarter of 2009, the Board approved an extension of the program to cover an additional 0.5 million shares. During the third quarter of 2009, the Board approved an extension of the program to cover an additional 0.5 million shares. Since the inception of the repurchase program, the Board has approved 4.44.9 million shares to be repurchased.601,100843,700 shares during the sixnine months ended JuneSeptember 30, 2009, at an average price of $9.54$9.94 per share. Since the inception of the program in 2007, we have repurchased a cumulative total of 3.84.0 million shares as of JuneSeptember 30, 2009, at an average price of $11.14$11.12 per share.Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsItem 2. "Form 10-K"“Form 10-K”). This discussion contains "forward-looking statements"“forward-looking statements” regarding our business and industry within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on our current plans and expectations and involve risks and uncertainties that could cause our 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 risks set forth in "Item“Item 1A. Company Risk Factors"Factors” included in our Form 10-K. The terms "Comfort“Comfort Systems," "we," "us,"” “we,” “us,” or "the“the Company,"” refer to Comfort Systems USA, Inc. or Comfort Systems USA, Inc. and its consolidated subsidiaries, as appropriate in the context.Nature and Economics of Our BusinessNature and Economics of Our Business project.project.. ProjectJuneSeptember 30, 2009, we had 4,1484,468 projects in process. Our average project takes six to nine months to complete, with an average contract price of approximately $480,000.$425,000. 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. We have what we believe is a well-diversified distribution of revenues across end-use sectors that we believe reduces our exposure to negative developments in any given sector. 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.JuneSeptember 30, 2009, we had 76 projects in process with a contract price of between $15 million and $30 million, 19 projects between $10 million and $15 million, 53 projects between $5 million and $10 million, and 242241 projects between $1 million and $5 million. Taken together, projects with contract prices of $1 million or more totaled $1,306.0$1,286.0 million of aggregate contract value as of JuneSeptember 30, 2009, or approximately 66%68%, out of a total contract value for all projects in progress of $1,990.1$1,898.5 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.customer'scustomer’s 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.Profile and Management of Our OperationsProfile and Management of Our Operations Economic and Industry FactorsEconomic and Industry Factors Operating Environment and Management EmphasisOperating Environment and Management Emphasis and expanded moderately during 2004duringover the three year period from 2006 and 2007.to 2008. 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 healthcare 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 since 2004."Results‘‘Results of Operations"Operations’’ below, we have seen declining activity levels in our industry since late 2008 and 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. Our primary emphasis for 2009 will be on execution and cost control, and on maintaining activity levels that will permit us to earn reasonable profits while preserving our core workforce. We have increased our focus on project qualification, estimating, pricing and management, and on service performance."Liquidity‘‘Liquidity and Capital Resources"Resources’’ below. We have a credit facility in place with considerably less restrictive terms than those of our previous facilities; this facility does not expire until February 2012. We have strong surety relationships toCommission'sCommission’s Release No. 33-8040, "Cautionary‘‘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 report, 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 in our Form 10-K.Percentage of Completion Method of AccountingPercentage of Completion Method of Accounting 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"Cost“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."Costs“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“Billings in excess of costs and estimated earnings."Accounting for Allowance for Doubtful AccountsAccounting for Allowance for Doubtful Accounts Accounting for Self-Insurance LiabilitiesAccounting for Self-Insurance Liabilities worker'sworker’s compensation, employer'semployer’s 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 risks—worker'sworker’s compensation, auto liability and general liability—are 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.Accounting for Deferred Tax AssetsAccounting for Deferred Tax Assets In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangibles," ("Statement 142") weWe do not amortize goodwill. Statement 142 requires us toWe 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 Statement 142.recorded. 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.2625 reporting units have a goodwill balance. These reporting units are tested for impairment by comparing each unit'sunit’s 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. Statement 142 also requires that be amortized over their useful lives. Changes in strategy and/or market condition, may result in adjustments to recorded intangible asset balances.Results of Operations (in thousands): 2008 % 2009 % 2008 % 2009 % $ 346,705 100.0 % $ 291,591 100.0 % $ 993,862 100.0 % $ 872,214 100.0 % 280,011 80.8 % 234,186 80.3 % 806,784 81.2 % 701,335 80.4 % 66,694 19.2 % 57,405 19.7 % 187,078 18.8 % 170,879 19.6 % Selling, general and administrative expenses 45,078 13.0 % 41,713 14.3 % 128,397 12.9 % 126,175 14.5 % (183 ) (0.1 )% (101 ) ― (311 ) ― (98 ) ― 21,799 6.3 % 15,793 5.4 % 58,992 5.9 % 44,802 5.1 % Interest income (expense), net 188 0.1 % (184 ) (0.1 )% 1,004 0.1 % (454 ) (0.1 )% ― ― 3 ― 158 ― 5 ― Income before income taxes 21,987 6.3 % 15,612 5.4 % 60,154 6.1 % 44,353 5.1 % 8,250 6,072 23,070 17,293 Income from continuing operations 13,737 4.0 % 9,540 3.3 % 37,084 3.7 % 27,060 3.1 % Discontinued operations - Operating results, net of tax 28 ― 115 (387 ) Estimated loss on disposition, net of tax — — — (93 ) $ 13,765 $ 9,540 $ 37,199 $ 26,580 Results of Operations (in thousands):Revenues Three Months Ended June 30, Six Months Ended June 30, 2008 % 2009 % 2008 % 2009 % $ 353,349 100.0 % $ 300,349 100.0 % $ 647,157 100.0 % $ 580,623 100.0 % 285,937 80.9 % 242,028 80.6 % 526,773 81.4 % 467,149 80.5 % 67,412 19.1 % 58,321 19.4 % 120,384 18.6 % 113,474 19.5 % 43,000 12.2 % 41,276 13.7 % 83,319 12.9 % 84,462 14.5 % (97 ) — 5 — (128 ) — 3 — 24,509 6.9 % 17,040 5.7 % 37,193 5.7 % 29,009 5.0 % 137 — (160 ) (0.1 )% 816 0.1 % (270 ) — 52 — 9 — 158 — 2 — 24,698 7.0 % 16,889 5.6 % 38,167 5.9 % 28,741 5.0 % 9,529 6,491 14,820 11,221 15,169 4.3 % 10,398 3.5 % 23,347 3.6 % 17,520 3.0 % 24 (207 ) 87 (387 ) — (93 ) — (93 ) $ 15,193 $ 10,098 $ 23,434 $ 17,040 Revenues—Revenues decreased $53.0$55.1 million, or 15.0%15.9% to $300.3$291.6 million for the secondthird quarter of 2009 compared to the same period in 2008. Approximately 20.7%19.1% of the decrease in revenues related to the same store activity offset by 5.7%3.2% increase from 2008 acquisitions. The same store revenue decrease stemmed primarily from reduced activity in the nonresidential markets throughout the United States especially in healthcarethe lodging and entertainment sector (approximately $17.7$13.5 million) and office buildingsmanufacturing (approximately $15.9$12.2 million) as well as continued decreases in the multi-family sector (approximately $21.4$23.6 million). These decreases were partially offset by increased activity in the religious and not-for-profitgovernmental sector (approximately $5.1$3.9 million). We have seen decreased activity, primarily in our central Arizona operation,and Virginia operations, resulting from a significant decrease in that marketboth markets resulting in limited new projects and from the planned downsizing of our large multi-family operation based in Texas.sixnine months of 2009 decreased $66.5$121.6 million, or 10.3%12.2%, to $580.6$872.2 million as compared to the same period in 2008. Approximately 15.3%16.7% of the decrease in revenues related to same store activity offset by 5.0%4.5% increase from 2008 acquisitions. The same store decrease stemmed primarily from decreased activity in the nonresidential markets throughout the United States especially in office buildings (approximately $30.7$37.3 million) and in the healthcare sector (approximately $22.7million)$23.3 million). There has been decreased activity in our multi-family sector (approximately $38.4$62.0 million) as a result of our planned downsizing of our large multi-family operation based in Texas. These decreases were partially offset by increased activity in the educational and religious and not-for-profit sectors (approximately $7.7 million). We have seen decreased activity, primarily in our central Arizona and Alabama operationsoperation resulting from the closeout of several large projects as well as a decline in market activity in both markets.was $639.8 million a 10.7% decrease from March 31, 2009 backlog of $716.6$639.8 million. The sequential decrease of 10.7% was primarily related to our northern Maryland, northern VirginiaArkansas, Wisconsin, and centralnorthern Florida operations. On a same store basis, backlogBacklog as of JuneSeptember 30, 20092008 was $589.1$803.7 million, as compared to $778.2a decrease of $249.4 million from June 30, 2008.or 31.0%. The year-over-year decrease is primarily related to the planned downsizing of our large multi-family locationoperation based in Texas. In addition, backlog decreasedTexas, and decreases at our northern Virginia, central Arizona, and central Florida, New Hampshire and Arkansas operations due to the close out of several jobs and a decline in market activity.throughout 2009,over the next twelve months, particularly in the area of new construction.$9.1$9.3 million, or 13.5%13.9%, to $58.3$57.4 million for the secondthird quarter of 2009 as compared to the same period in 2008. As a percentage of revenues, gross profit increased from 19.1%19.2% in 2008 to 19.4%19.7% in 2009. The increase in gross profit percentage resulted primarily from higher profitability at our central Florida operation (approximately $1.5 million), as well as improved results at our northern Florida operation (approximately $1.0 million), and at our northernsouthern Maryland operation (approximately $0.9$1.1 million). These increases were partially offset by decreased activity at our large multi-family operation based in Texas (approximately $2.0 million).sixnine months of 2009 decreased $6.9$16.2 million, or 5.7%8.7% to $113.5$170.9 million, as compared to the same period in 2008. As a percentage of revenues, gross profit increased from 18.6%18.8% in 2008 to 19.5%19.6% in 2009. The increase in gross profit percentage for the first sixnine months of 2009 resulted primarily from higher profitability at our Centralcentral Florida operation (approximately $4.2$4.7 million), and southern Maryland operation (approximately $2.1 million) as well as improved profitability at our northern Maryland operation (approximately $1.9 million) and at our northern Florida operation (approximately $1.5 million). These increases were partially offset by decreased activityunderperformance at our Arizona operationssoutheast Texas operation (approximately $2.0 million) and at our large multi-family operation based in Texas (approximately $1.3 million).("(“SG&A"&A”) — —SG&A decreased $1.7$3.4 million, or 4.0%7.5% for the secondthird quarter of 2009 as compared to the same period in 2008. Approximately 10.1% of theThis decrease is primarily due to overhead reductions offset by a 6.1% increase from both a 2008 acquisition and an increase inlower bad debt expense (approximately $1.1 million) during the third quarter of $1.4 million. 2009 as compared to the third quarter of 2008. These decreases were partially offset by higher medical costs (approximately $1.0 million) primarily from terminated employees that elected health insurance coverage under COBRA. As a percentage of revenues, SG&A increased from 12.2%13.0% in 2008 to 13.7%14.3% in 2009 due to a lower 2009 revenue base. SG&A increased $1.1decreased $2.2 million, or 1.4%1.7%, to $84.5$126.2 million for the first sixnine months ended JuneSeptember 30, 2009 as compared to the same period in 2008. Approximately 4.7% of the increase is due to bothOn a 2008 acquisition and an increase in bad debt expense of $1.7same store basis, SG&A decreased $5.0 million. These increasesdecreases were offset by a decrease of 3.3%, primarily related to overhead reductions. reductions and lower compensation accruals due to lower profitability in 2009 partially offset by higher medical costs (approximately $0.9 million). As a percentage of revenues, SG&A increased from 12.9% for the first sixnine months of 2008 to 14.5% for the first sixnine months of 2009 due to a lower 2009 revenue base.secondthird quarter of 2009 as compared to the same period in 2008. Interest income decreased $1.1$1.6 million for the first half ofnine months ended September 30, 2009 as compared to the first halfsame period of 2008. The decrease is due to lower interest rates in 2009.—Our year to date effective tax rate for 2009 was 39.0%, as compared to 38.9%38.4% in 2008. One component of theThe increase in the effective tax rate for 2009 is primarily due to anwillhas been and continues to be on execution including a focus on cost controls and efficient project and service performance at the unit level. Based on our backlog and the weakening economic conditions for our industry, we expect continued profitability in 2009,over the next twelve months, but we expect lower profitability than we achieved in 2008over the past twelve months as industry conditions weaken throughout the year.continue to weaken. Three Months Ended
June 30, Six Months Ended
June 30, 2008 2009 2008 2009 (in thousands) $ 27,059 $ 23,884 $ 26,013 $ 19,951 $ (1,302 ) $ (5,368 ) $ (45,607 ) $ (5,803 ) $ (12,885 ) $ (6,250 ) $ (18,529 ) $ (10,748 ) $ 27,059 $ 23,884 $ 26,013 $ 19,951 (4,253 ) (2,662 ) (7,005 ) (4,434 ) 37 99 117 174 $ 22,843 $ 21,321 $ 19,125 $ 15,691 2008 2009 2008 2009 (in thousands) Cash provided by (used in): $ 20,943 $ 24,803 $ 46,956 $ 44,754 $ (15,514 ) $ (1,438 ) $ (61,121 ) $ (7,241 ) $ (4,637 ) $ (3,917 ) $ (23,166 ) $ (14,665 ) Free cash flow: $ 20,943 $ 24,803 $ 46,956 $ 44,754 (3,773 ) (1,986 ) (10,778 ) (6,420 ) 539 326 656 500 $ 17,709 $ 23,143 $ 36,834 $ 38,834 —We define free cash flow as cash provided by operating activities 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 company's 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.entity'sentity’s 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.JuneSeptember 30, 2009, we had free cash flow of $21.3$23.1 million as compared to free cash flow of $22.8$17.7 million in 2008. This increase is primarily due to improved working capital efficiency due tosixnine months ended JuneSeptember 30, 2009, we had free cash flow of $15.7$38.8 million, as compared to free cash flow of $19.1$36.8 million for the first sixnine months ofended September 30, 2008. These decreases are a result ofThis decrease is primarily due to lower earnings.JuneSeptember 30, 2009, our marketable securities consisted of $7.5$6.6 million of auction rate securities, which are variable rate debt instruments, having long-term maturities, but whose interest rates are designed to reset through an auction process, at intervals ranging from seven to 35 days. We had $9.4 million investments in marketable securities as of December 31, 2008. All of our auction rate securities are high quality direct municipal obligations which have high investment grade ratings or otherwise are backed by high investment grade rated insurance agencies. In February 2008, liquidity issues in the global credit markets caused auctions representing some of the auction rate securities we hold to fail because the amount of securities offered for sale exceeded the bids. As a result, the liquidity of our remaining auction rate securities has diminished, and we expect that this decreased liquidity for our auction rate securities will continue as long as the present depressed global credit market environment persists, or until issuers refinance and replace these securities with other instruments. As a result of the temporary declines in fair value for our auction rate securities, which we attribute to liquidity issues rather than credit issues, we recorded an unrealized loss of $0.3 million, net of tax of less than $0.1 million, to accumulated other comprehensive income (loss) as of June 30, 2009.. Our analysis of the fair values of these securities considered, among other items, the creditworthiness of the counterparty, the timing of expected future cash flows, and the possibility that a discount may be required if we choose to sell the securities in the absence of a successful auction. These securities were also compared, when possible, to other observable market data with similar characteristics.Julythe nine months ended September 30, 2009, we were informed that ansold $3.0 million of these auction rate securities at face value. An additional $1.0 million will bewas sold at face value during the third quarter ofOctober 2009; this is included in "Prepaid“Prepaid Expenses and Other"Other” in our consolidated balance sheet.4.44.9 million shares to be repurchased.601,100843,700 shares during the sixnine months ended JuneSeptember 30, 2009, at an average price of $9.54$9.94 per share. Since the inception of the repurchase program in 2007, we have repurchased a cumulative total of 3.84.0 million shares as of JuneSeptember 30, 2009, at an average price of $11.14$11.12 per share.—On February 20, 2007, we entered into a $100.0 million senior credit facility (the "Facility"‘‘Facility’’) provided by a syndicate of banks. The Facility is available for borrowings and letters of credit and will expireexpires in February 2012. The Facility2012 and is secured by the capital stock of our current andJuneSeptember 30, 2009, the total of the Facility was $100.0 million, withwe had no outstanding borrowings, $43.1 million in letters of credit outstanding, and $56.9 million of credit available.1.6%1.5% as of JuneSeptember 30, 2009. 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.Facility'sFacility’s principal financial covenants include:—The Facility requires that the ratio of our total indebtedness less cash and cash equivalents to our Credit Facility Adjusted EBITDA not exceed 2.50. The leverage ratio as of JuneSeptember 30, 2009 was 0.11.—The 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 excludes acquisitions, stock repurchases and the payment of cash dividends, at any time that the Leverage Ratio does not exceed 1.0. The fixed charge coverage ratio as of JuneSeptember 30, 2009 was 19.95.13.34.—The 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.JuneSeptember 30, 2009.—We issued subordinated notes to the former owners of acquired companies, as part of the consideration used to acquire these companies. These notes had an outstanding balance of $9.0$8.6 million, of which $1.0$2.0 million is current as of JuneSeptember 30, 2009. These notes bear interest, payable annually, at a weighted average interest rate of 5.8%5.7%.—As 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.Facility'sFacility’s capacity just the same as actual borrowings. Claims against letters of credit are rare in our industry. To date wesureties'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.JuneSeptember 30, 2009 (in thousands): Twelve Months Ended June 30, 2010 2011 2012 2013 2014 Thereafter Total $ 1,018 $ 6,597 $ 1,375 $ — $ — $ — $ 8,990 $ 9,550 7,920 7,063 5,990 4,057 6,468 41,048 $ 509 293 10 — — — 812 $ 11,077 $ 14,810 $ 8,448 $ 5,990 $ 4,057 $ 6,468 $ 50,850 Twelve Months Ended September 30, 2010 2011 2012 2013 2014 Thereafter Total Liabilities – Notes to former owners $ 2,018 $ 6,232 $ 375 $ ― $ ― $ ― $ 8,625 9,740 8,519 7,374 6,270 4,166 6,083 42,152 457 196 ― ― ― ― 653 $ 12,215 $ 14,947 $ 7,749 $ 6,270 $ 4,166 $ 6,083 $ 51,430 JuneSeptember 30, 2009, we also have $43.1 million letter of credit commitments, of which $42.5 million will expire in 2009 and $0.6 million will expire in 2010. The substantial majority of these letters of credit are posted with insurers who disburse funds on our behalf in connection with our worker'sworker’s 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 2009, we expect nearly all of them, particularly those supporting our insurance programs, will be renewed annually.—We have generated positive net free cash flow for the last ten calendar years, much of which occurred during challenging economic and industry conditions. We also expect to have significant borrowing capacity under our credit facility and we continue to have substantial uncommitted cash balances. We believe these factors will provide us with sufficient liquidity to fund our operations for the foreseeable future.Cyclicality and SeasonalityCyclicality and Seasonality Recent Accounting Pronouncements RecentOn September 30, 2009, we adopted changes issued by the Financial Accounting Pronouncements In September 2006,Standards Board (“FASB”) to the authoritative hierarchy of generally accepted accounting principles (“GAAP”). These changes establish the FASB Accounting Standards CodificationTM (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. These changes and the Codification itself do not change GAAP. Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on the consolidated financial statements.Statement No. 157, "Fair Value Measurements" ("Statement 157"), effective for fiscal years beginning after November 15, 2007. Statement 157 provides guidance for usingby the FASB to fair value accounting and reporting as it relates to measurenonfinancial assets and liabilities. The statement applies whenever other standards require (or permit) assets ornonfinancial liabilities to be measured at fair value. The statement does not expand the use of fair value in any new circumstances. On February 12, 2008, the FASB issued FASB Staff Position No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP 157-2") that amends Statement 157 to delay the effective date for all non-financial assets and non-financial liabilities, except those that are not recognized or disclosed at fair value in the financial statements on at least an annual basis. These changes define fair value, establish a recurring basis. FSP 157-2 defers the effective dateframework for measuring fair value in GAAP, and expand disclosures about fair value measurements. This guidance applies to other GAAP that require or permit fair value measurements and is to be applied prospectively with limited exceptions. The adoption of Statement 157these changes, as it relates to fiscal years beginning after November 15, 2008. We adopted Statement 157 on January 1, 2008 for financialnonfinancial assets and nonfinancial liabilities, measured on a recurring basis. We adopted FSP 157- 2 on January 1, 2009 for financial assets and liabilities measured on a nonrecurring basis. There washad no impact upon adoption of Statement 157 or FSP 157-2 on the consolidated financial statements;statements, however we were required to provide additional disclosurehave expanded the disclosures regarding marketable securities, goodwill, and intangible assets. In December 2007,issuedStatement 141R (revised 2007), "Business Combinations," ("Statement 141R") which establishes principles for howthat asset or liability can be determined during the measurement period otherwise the asset or liability should be recognized at the acquisition date if certain defined criteria are met; (ii) contingent consideration arrangements of an acquiree assumed by the acquirer recognizes and measures in the financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. This statement also provides guidance for recognizing and measuring the goodwill acquired in thea business combination be recognized initially at fair value; (iii) subsequent measurements of assets and determines what information to disclose to enable usersliabilities arising from contingencies be based on a systematic and rational method depending on their nature and contingent consideration arrangements be measured subsequently; and (iv) disclosures of the financial statements to evaluateamounts and measurement basis of such assets and liabilities and the nature and financial effects of the business combination. Statement 141R was effective for us beginning January 1, 2009.contingencies. The portions of the statement that relate to business combinations completed before the effective date willadoption did not have a material impact on our consolidated financial statements. However, ourThe adoption of Statement 141R will significantly impact our accounting and reporting for future acquisitions, principally as a result of (i)the expanded requirements to value acquired assets, liabilities and contingencies at theirvalues;values and (ii) the requirement that acquisition-relatedacquisition related transaction and restructuring costs be expensed as incurred rather than capitalized as a part of the cost of the acquisition. In June 2008,issued FSP Emerging Issues Task Force (EITF) 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities." This FSP providesto the calculation of earnings per share. These changes state that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents whether(whether paid or unpaid,unpaid) are participating securities and shall be included in the computation of both basic and diluted earnings per share. We adopted this FSP on January 1, 2009.share pursuant to the two-class method for all periods presented. There was no significant impact upon the adoption of this FSP. In Maythese changes.issued Statement No. 165, "Subsequent Events" ("Statement 165"). Statement 165to accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The new guidance also requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. Statement 165 is effective for interim or annualThis change had no impact on our consolidated financial periods ending after June 15, 2009. We adopted this Statement during the second quarter of 2009. There was no significant impact upon the adoption of this Statement 165. We have evaluated subsequent events through the time of filing these financial statements with the SEC on July 30, 2009.statements.JuneSeptember 30, 2009: Twelve Months Ended June 30, Fair
Value 2010 2011 2012 2013 2014 Thereafter $ 1,018 $ 6,597 $ 1,375 $ — $ — $ — $ 8,990 6.0 % 5.8 % 5.5 % — — — 5.8 % Twelve Months Ended September 30, 2010 2011 2012 2013 2014 Thereafter Fair Value $ 2,018 $ 6,232 $ 375 $ ― $ ― $ ― $ 8,625 5.5 % 5.8 % 6.0 % ― ― ― 5.7 % JuneSeptember 30, 2009, our marketable securities consisted of $7.5$6.6 million of auction rate securities, which are variable rate debt instruments, having long-term maturities, but whose interest rates are designed to reset through an auction process, at intervals ranging from seven to 35 days. We had $9.4 million in investments of marketable securities as of December 31, 2008. All of our auction rate securities are high quality direct municipal obligations which have high investment grade ratings or otherwise are backed by high investment grade rated insurance agencies. In February 2008, liquidity issues in the global credit markets caused auctions representing some of the auction rate securities we hold to fail because the amount of securities offered for sale exceeded the bids. As a result, the liquidity of our auction rate securities has diminished, and we expect that this decreased liquidity for our auction rate securities will continue as long as the present depressed global credit market environment persists, or until issuers refinance and replace these securities with other instruments. As a result of the temporary declines in fair value for our auction rate securities, which we attribute to liquidity issues rather than credit issues, we recorded an unrealized loss of $0.3 million, net of tax, of less than $0.1 million to accumulated other comprehensive income (loss) as of June 30, 2009.. Our analysis of the fair values of these securities considered, among other items, the creditworthiness of the counterparty, the timing of expected future cash flows, and the possibility that a discount may be required if we choose to sell the securities in the absence of a successful auction. These securities were also compared, when possible, to other observable market data with similar characteristics.other-than-temporarily impaired. During the sixnine months ended JuneSeptember 30, 2009, we did not recognize any other-than-temporary impairments on those assets required to be measured at fair value on a nonrecurring basis.ITEM 4. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresItem 4. Evaluation of Disclosure Controls and Procedures Changes in Internal Control over Financial ReportingChanges in Internal Control over Financial Reporting JuneSeptember 30, 2009 that have materially affected, or is reasonably likely to materially affect, internal control over financial reporting.Item 1. Item 2. Unregistered Sales of Equity Securities and Use of ProceedsRecent Sales of Unregistered SecuritiesItem 2. Recent Sales of Unregistered Securities 4.44.9 million shares to be repurchased.601,100843,700 shares during the sixnine months ended JuneSeptember 30, 2009, at an average price of $9.54$9.94 per share. WeSince the inception of the program, we have repurchased a cumulative total of 3.84.0 million shares as of JuneSeptember 30, 2009, at an average price of $11.14$11.12 per share.JuneSeptember 30, 2009, we purchased our common shares in the following amounts at the following average prices: Total
Number of
Shares
Purchased Average
Price Paid
Per Share Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs 32,900 $ 10.58 3,436,409 962,600 294,400 $ 9.39 3,730,809 668,200 70,600 $ 9.57 3,801,409 597,600 397,900 $ 9.52 3,801,409 597,600 July 1 – July 31 56,000 $ 10.06 3,857,409 541,600 August 1 – August 31 18,000 $ 11.31 3,875,409 1,000,000 September 1 – September 30 168,600 $ 11.16 4,044,009 831,400 242,600 $ 10.92 4,044,009 831,400 JuneSeptember 30, 2009, we withheld common shares to satisfy these tax withholding obligations as follows: Number of
Shares Purchased Average Price
Paid Per Share 27,441 $ 10.50 14,628 $ 9.06 — $ — 42,069 $ 10.00 Item 4. Submission of Matters to a Vote of Security HoldersPeriod July 1 – July 31 ― $ ― August 1 – August 31 220 $ 12.64 September 1 – September 30 ― $ ― 220 $ 12.64 The Company held its annual meeting of stockholders in Houston, Texas on May 15, 2009, which meeting was duly noticed in the Company's Proxy Statement dated April 15, 2009. All of the Company's incumbent directors were elected by a majority of the outstanding shares eligible to vote with respect to such election, each for a term expiring at the next annual meeting. Out of a potential of 38,718,499 Common Stock outstanding, William F. Murdy had 35,081,464 shares voted in favor of election, with 1,119,552 withheld. Darcy G. Anderson had 35,742,158 shares voted in favor of election, with 458,858 shares withheld. Herman E. Bulls had 35,739,568 shares voted in favor of election, with 461,448 shares withheld. Alfred J. Giardinelli, Jr. had 35,772,590 shares voted in favor of election, with 428,426 shares withheld. Alan P. Krusi had 35,742,158 shares voted in favor of election, with 458,858 shares withheld. Franklin Myers had 35,742,032 shares voted in favor of election, with 458,984 shares withheld. James H. Schultz had 35,770,317 shares voted in favor of election, with 430,699 shares withheld. Robert D. Wagner, Jr. had 35,772,090 shares voted in favor of election, with 428,926 shares withheld. The selection of Ernst & Young LLP as the Company's independent auditors for the year 2009 was ratified by the following vote: 36,109,214 votes for; 60,895 votes against; and 30,904 abstentions.(a)Exhibits.Item 6. (a) Exhibits. 3.110.1 Amended and Restated Bylaws of Comfort Systems USA, Inc. (incorporated by reference to Exhibit 3.1 of Form 8-K filed May 19, 2009).10.1
Supplemental Schedules and Exhibits to Amended and Restated Senior Credit Facility dated February 20, 2007.
31.110.2Form of Indemnification Agreement (incorporated by reference to Exhibit 3.1 of Form 8-K filed May 19, 2009).31.1
Rule 13a-14(a) Certification of William F. Murdy pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.231.2
Rule 13a-14(a) Certification of William George pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.132.1
Section 1350 Certification of William F. Murdy pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.232.2
Section 1350 Certification of William George pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.November 3, 2009 By: COMFORT SYSTEMS USA, INC.July 30, 2009By:/s/ WILLIAM F. MURDY
William F. MurdyJuly 30,November 3, 2009
By:By:WILLIAM GEORGE
William GeorgeWilliam George July 30,November 3, 2009
By:By:JULIE S. SHAEFF
Julie S. ShaeffJulie S. Shaeff