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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

Commission file number: 1-13011

COMFORT SYSTEMS USA, INC.
(Exact name of registrant as specified in its charter)

675 Bering Drive
Suite 400
Houston, Texas 77057
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code:(713) 830-9600

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

        Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

        Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o    No ý

        The number of shares outstanding of the issuer's common stock as of October 23, 2015April 20, 2016 was 37,449,35237,444,146 (excluding treasury shares of 3,674,013)3,679,219).

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COMFORT SYSTEMS USA, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2015MARCH 31, 2016

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COMFORT SYSTEMS USA, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

The accompanying notes are an integral part of these consolidated financial statements.

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COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In Thousands, Except Share Amounts)

The accompanying notes are an integral part of these consolidated financial statements.

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COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015March 31, 2016

(Unaudited)

1. Business and Organization

        Comfort Systems USA, Inc., a Delaware corporation, provides comprehensive mechanical contracting services, which principally includes heating, ventilation and air conditioning ("HVAC") installation, maintenance,, plumbing, piping and controls, as well as off-site construction, electrical, monitoring and fire protection. We install, maintain, repair and replacement services withinreplace products and systems throughout 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.United States. Approximately 46%41% of our consolidated 20152016 revenue wasis attributable to installation of systems in newly constructed facilities, with the remaining 54%59% attributable to maintenance, repair and replacement services. The

        Our consolidated 2016 revenue was derived from the following service activities, account for our consolidated 2015 revenue: HVAC 77%, plumbing 14%, building automation control systems 5% and other 4%. These service activitiesall of which are withinin the mechanical services industry, which is the single industry segment we serve.serve:

2. Summary of Significant Accounting Policies

Basis of Presentation

        These interim statements should be read in conjunction with the historical Consolidated Financial Statements and related notes of Comfort Systems included in the Annual Report on Form 10-K as filed with the Securities and Exchange Commission ("SEC") for the year ended December 31, 20142015 (the "Form 10-K").

        The accompanying unaudited consolidated financial statements were prepared using generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X of the SEC. Accordingly, these financial statements do not include all the footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the Form 10-K. We believe all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature. Certain amounts in prior periods may have been reclassified to conform to the current year presentation. The effects of the reclassifications were not material to the unaudited consolidated financial statements. The results of operations for interim periods are not necessarily indicative of the results for the full fiscal year.

Use of Estimates

        The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities, revenue and expenses and disclosures regarding contingent assets and liabilities.

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2016

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

Actual results could differ from those estimates. The most significant estimates used in our financial statements affect revenue and cost recognition for construction contracts, the allowance for doubtful accounts, self-insurance accruals, deferred tax assets, warranty accruals, fair value accounting for acquisitions and the quantification of fair value for reporting units in connection with our goodwill impairment testing. In the prior year, during the third quarter, one of our operating locations recorded

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2015

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

a revision in contract estimate on a project in a loss position resulting in a writedown to this individual project for $2.2 million and $4.4 million, on a pre-tax basis, for the three and nine months ended September 30, 2014, respectively.

Recent Accounting Pronouncements

        In May 2014, the FASBFinancial Accounting Standards Board ("FASB") issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 provides a framework that replaces the existing revenue recognition guidance. The guidance can be applied on a full retrospective or modified retrospective basis whereby the entity records a cumulative effect of initially applying this update at the date of initial application. We currently plan to use the modified retrospective basis on the adoption date. It is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. We are currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements.

        In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issue Costs." Under ASU 2015-03, an entity presents debt issue costs related to a note in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Entities would apply the new guidance retrospectively to all prior periods. ASU No. 2015-03 does not address the presentation of issuance costs associated with revolving debt agreements. It is effective for annual periods beginning after December 15, 2015, including interim periods within that reporting period. Currently, this authoritative guidance is not expected to have a material impact on our consolidated financial statements.

        In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory", which requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonable predictable costs of completion, disposal and transportation. Inventory measured using last-in, first-out (LIFO) and the retail inventory method (RIM) are not impacted by the new guidance. Entities should apply the new guidance prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. It is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We are currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements.

        In September 2015,February 2016, the FASBFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842)" ("ASU No. 2015-16, "Simplifying the Accounting2016-02"). The standard requires lessees to recognize assets and liabilities for Measurement-Period Adjustments", which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. Itmost leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, including interim periods within those fiscal years. We early adopted this2018. Early adoption is permitted. ASU 2016-02's transition provisions are applied using a modified retrospective approach at the beginning of the earliest comparative period presented in the third quarterfinancial statements. Full retrospective application is prohibited. We are currently evaluating the potential impact of 2015 and its adoption did not have a material impactthis authoritative guidance on our consolidated financial statements.

        In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, "Compensation—Stock Compensation (Topic 718)" ("ASU 2016-09"). The standard will change certain aspects of accounting for share-based payments to employees. Specifically, the new guidance requires all income tax effects to be recognized in the income statement when the awards vest or are settled. It will also allow an employer to repurchase more of an employee's shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2015March 31, 2016

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

is permitted, but all of the guidance must be adopted in the same period. We are currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements.

Financial Instruments

        Our financial instruments consist of cash and cash equivalents, accounts receivable, other receivables, accounts payable, life insurance policies, notes to former owners, capital leases and a revolving credit facility. We believe that the carrying values of these instruments on the accompanying balance sheets approximate their fair values.

Segment Disclosure

        Our activities are within the mechanical services industry, which is the single industry segment we serve. Each operating subsidiaryunit represents an operating segment and these segments have been aggregated, as the operating units meet all of the aggregation criteria.

3. Fair Value Measurements

        We classify and disclose assets and liabilities carried at fair value in one of the following three categories:

•

Level 1—quoted prices in active markets for identical assets and liabilities;



•

Level 2—observable market based inputs or unobservable inputs that are corroborated by market data; and



•

Level 3—significant unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

        The following table summarizes the fair values, and levels within the fair value hierarchy in which the fair value measurements fall, for assets and liabilities measured on a recurring basis as of September 30, 2015March 31, 2016 (in thousands):

        Cash and cash equivalents consist primarily of highly rated money market funds at a variety of well-known institutions with original maturities of three months or less. The original cost of these assets approximates fair value due to their short term maturity.

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2016

(Unaudited)

3. Fair Value Measurements (Continued)

        One of our operations has life insurance policies covering 4849 employees with a combined face value of $45.2$45.7 million. The policy is invested in mutual funds and the fair value measurement of the cash surrender balance associated with these policies is determined using Level 2 inputs within the fair

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2015

(Unaudited)

3. Fair Value Measurements (Continued)

value hierarchy and will vary with investment performance. The cash surrender value of these policies was $3.4is $3.6 million as of September 30,March 31, 2016 and $3.6 million as of December 31, 2015. These assets are included in "Other Noncurrent Assets" in our consolidated balance sheets.

        We value contingent earn-out obligations using a probability weighted discounted cash flow method. This fair value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. This analysis reflects the contractual terms of the purchase agreements (e.g., minimum and maximum payments, length of earn-out periods, manner of calculating any amounts due, etc.) and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate. The contingent earn-out obligations are measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings.

        The table below presents a reconciliation of the fair value of our contingent earn-out obligations that use significant unobservable inputs (Level 3) (in thousands):.

        We measure certain assets at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the nine months ended September 30, 2014, we recorded a goodwill impairment charge of $0.7 million based on Level 3 measurements. We did not recognize any impairments, in the current year,quarter, on those assets required to be measured at fair value on a nonrecurring basis.

4. Acquisitions

Acquisition        We completed two acquisitions in the first quarter of DynaTen2016. We acquired the remaining 40% noncontrolling interest in Environmental Air Systems, LLC ("EAS") on January 1, 2016 for $47.0 million, including $42.0 million funded on the closing date plus a holdback, an earn-out that we will pay if certain financial targets are met after the acquisition date and a working capital adjustment. Due to our majority ownership and control over EAS on the acquisition date, the difference between the preliminary purchase price and the noncontrolling interest liability was recorded in Additional Paid-In Capital in our Balance Sheet.

        On May 1, 2014,Additionally in the first quarter of 2016, we closed a transaction to acquire DynaTen Corporation ("DynaTen"acquired 100% of the ShoffnerKalthoff family of companies (collectively, "Shoffner") which reports as a separate operating location in Northern Texas. DynaTen is a regional mechanical contractor basedthe Knoxville, Tennessee area. Shoffner was included in Fort Worth, Texasour consolidated results of operations beginning on its acquisition date, which engages in a broad rangeincluded revenue of mechanical contracting projects, HVAC services and controls, in the Dallas/Fort Worth metroplex and in surrounding areas.$14.5 million. The total purchase price, which was finalized in the first quarterpreliminary acquisition date fair value of 2015 was $40.5 million, of which $19.8 million was allocated to goodwill.

Other Acquisitions

        We completed one acquisition in the third quarter of 2015 and two acquisitions in the first quarter of 2015. In addition to the DynaTen acquisition noted above, additional acquisitions were completed in the first and second quarter of 2014. These acquisitions were not material and were "tucked-in" with existing operations. The total purchase price for the "tucked-in" acquisitions, including earn-outs, was

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2015March 31, 2016

(Unaudited)

4. Acquisitions (Continued)

$7.1consideration transferred for this acquisition was $19.5 million, of which $13.5 million was allocated to goodwill and $9.5identifiable intangible assets. The preliminary purchase price included $15.5 million forfunded on the nine months ended September 30, 2015closing date plus a note payable to former owners, an earn-out that we will pay if certain financial targets are met after the acquisition date and 2014, respectively.a working capital adjustment. Our consolidated balance sheet includes preliminary allocations of the purchase price related to the three acquisitions completed in the fiscal year 2015, to the assets acquired and liabilities assumed based on estimates of fair value,for this acquisition pending the completion of the final valuation of intangible assets and accrued liabilities. The acquisitions completed in the current year were not material, individually or in the aggregate.

Other Acquisitions

        We funded cash of $0.8 million in the first quarter of 2016 for an acquisition completed in the fourth quarter of 2015. We also completed two acquisitions in the first quarter of 2015. These acquisitions were not material and were "tucked-in" with existing operations. The total purchase price adjustments.for the "tucked-in" acquisitions, including earn-outs, was $6.7 million in the first quarter of 2015.

        The results of operations of acquisitions are included in our consolidated financial statements from their respective acquisition dates. Additional contingent purchase price ("earn-out") has been or will be paid if certain acquisitions achieve predetermined profitability targets. Such earn-outs are not subject to the continued employment of the sellers.

5. Goodwill

        The changes in the carrying amount of goodwill are as follows (in thousands):

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2016

(Unaudited)

6. Long-Term Debt Obligations

        Long-term debtDebt obligations consist of the following (in thousands):

Revolving Credit Facility

        We have a $250.0 millionOn February 22, 2016, we amended our senior credit facility (the "Facility") provided by a syndicate of banks, increasing our borrowing capacity from $250.0 million to $325.0 million, with a $100 million accordion option. The Facility, which is available for borrowings and letters of credit. The Facilitycredit, expires in October 2019February 2021 and is secured by a first lien on substantially all of our personal property except for assets related to projects subject to surety bonds and assets held by certain unrestricted subsidiaries and a second lien on our assets related to projects subject to surety bonds. As of September 30, 2015,March 31, 2016, we had $10.0$51.0 million of outstanding borrowings, $46.4$41.5 million in letters of credit outstanding and $193.6$232.5 million of credit available.

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2015

(Unaudited)

6. Long-Term Debt Obligations (Continued)

        There are two interest rate options for borrowings under the Facility, the Base Rate Loan Option and the Eurodollar Rate Loan Option. These rates are floating rates determined by the broad financial markets, meaning they can and do move up and down from time to time. Additional margins are then added to these two rates.

        The following is a summary of the additional margins:

        The weighted average interest rate applicable to the borrowings under the Facility was approximately 1.5%1.7% as of September 30, 2015.March 31, 2016.

        Certain of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on our behalf, such as to beneficiaries under our self-funded insurance programs. We have

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2016

(Unaudited)

6. Debt Obligations (Continued)

also occasionally used letters of credit to guarantee performance under our contracts and to ensure payment to our subcontractors and vendors under those contracts. Our lenders issue such letters of credit through the Facility for a fee. We have never had a claim made against a letter of credit that resulted in payments by a lender or by us and believe such a claim is unlikely in the foreseeable future. The letter of credit fees range from 1.25% to 2.00% per annum, based on the ratio of Consolidated Total Indebtedness to Credit Facility Adjusted EBITDA, as defined in the credit agreement.

        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% to 0.35% per annum, based on the ratio of Consolidated Total Indebtedness to Credit Facility Adjusted EBITDA, as defined in the credit agreement.

        The Facility contains financial covenants defining various financial measures and the levels of these measures with which we must comply. Covenant compliance is assessed as of each quarter end.

        The Facility's principal financial covenants include:

        Leverage Ratio—The Facility requires that the ratio of our Consolidated Total Indebtedness to our Credit Facility Adjusted EBITDA not exceed (i) 3.00 to 1.00 as of the end of each fiscal quarter through September 30, 2017, and (ii) 2.75 to 1.00 as of the end of each fiscal quarter thereafter through maturity. The leverage ratio as of September 30, 2015March 31, 2016 was 0.1.0.4.

        Fixed Charge Coverage Ratio—The Facility requires that the ratio of (a) Credit Facility Adjusted EBITDA, less non-financed capital expenditures, tax provision, dividends and amounts used to repurchase stock to (b) the sum of interest expense and scheduled principal payments of indebtedness be at least 2.0;2.00 to 1.00; provided that the calculation of the fixed charge coverage ratio excludes stock repurchases and the payment of dividends at any time that the Company's Net Leverage Ratio does not exceed 1.5.1.50 to 1.00. The Facility also allows the fixed charge coverage ratio not to be reduced for stock repurchases through

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2015

(Unaudited)

6. Long-Term Debt Obligations (Continued)

September 30, 2015 in an aggregate amount not to exceed $25 million and for stock repurchases made after February 22, 2016 but on or prior to December 31, 2017 in an aggregate amount not to exceed $25 million, if at the time of and after giving effect to such repurchase the Company's Net Leverage Ratio was less than or equal to 1.5.1.50 to 1.00. 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 fixed charge coverage ratio as of September 30, 2015March 31, 2016 was 30.6.30.4.

        Other Restrictions—The Facility permits acquisitions of up to $25.0$30.0 million per transaction, provided that the aggregate purchase price of all such an acquisition and of acquisitions in the same fiscal year does not exceed $60.0$65.0 million. However, these limitations only apply when the Company's NetTotal Leverage Ratio is equal to or greater than 2.0.2.00 to 1.00.

        While the Facility's financial covenants do not specifically govern capacity under the Facility, if our debt level under the Facility at a quarter-end covenant compliance measurement date were to cause us to violate the Facility's leverage ratio covenant, our borrowing capacity under the Facility and the favorable terms that we currently have could be negatively impacted by the lenders.

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2016

(Unaudited)

6. Debt Obligations (Continued)

        We were in compliance with all of our financial covenants as of September 30, 2015.March 31, 2016.

Notes to Former Owners

        WeAs part of the consideration used to acquire two companies, we have outstanding subordinated notes to the former owners. These notes had an outstanding balance of $2.8 million as of March 31, 2016. In conjunction with the Shoffner acquisition in the first quarter, we issued a subordinated note to former owners with an outstanding balance of $1.8 million as of March 31, 2016 that bears interest, payable quarterly, at a weighted average interest rate of 3.0%. The principal is due in equal installments in February 2018 and 2019. In conjunction with an acquisition in the fourth quarter of 2014, we issued a subordinated note to the former owners of an acquired company as part of the consideration used to acquire the company. This note hadwith an outstanding balance of $1.0 million as of September 30, 2015 andMarch 31, 2016 that bears interest, payable quarterly, at a weighted average interest rate of 2.5%. The principleprincipal is due in equal installments onin October 2016 and 2017.

Other Debt

        As part of the Shoffner acquisition, we acquired debt with an outstanding balance at the acquisition date of $0.4 million with principle and interest due the last day of every month; ending on the December 30, 2019 maturity date. The interest rate is the one month LIBOR rate plus 2.25%. As of March 31, 2016, $0.4 million of the note was outstanding, of which $0.1 million was considered current.

In conjunctionaddition, with twoone of our acquisitions we acquired capital lease obligations. As of September 30, 2015, $0.7March 31, 2016, $0.4 million of capital lease obligations arewere outstanding, of which $0.4$0.2 million iswas considered current.

        Our majority owned subsidiary, Environmental Air Systems, LLC, has a revolving $2.5 million credit line that is available for temporary working capital needs and expires May 31, 2016. As of September 30, 2015, we had no outstanding borrowings and, therefore, $2.5 million of credit available. We estimate that the weighted average interest rate applicable to borrowings under this variable rate credit line would be approximately 2.0% as of September 30, 2015.

7. Commitments and Contingencies

Claims and Lawsuits

        We are subject to certain legal and regulatory claims, including lawsuits arising in the normal course of business. We maintain various insurance coverages to minimize financial risk associated with these claims. We have estimated and provided accruals for probable losses and related legal fees associated with certain litigation in the accompanying consolidated financial statements. While we

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2015

(Unaudited)

7. Commitments and Contingencies (Continued)

cannot predict the outcome of these proceedings, in management'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, cash flows or financial condition, after giving effect to provisions already recorded.

Surety

        Many customers, particularly in connection with new construction, require us to post performance and payment bonds issued by a financial institution known as a surety. If we fail to perform under the terms of a contract or to pay subcontractors and vendors who provided goods or services under a contract, the customer may demand that the surety make payments or provide services under the bond.

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2016

(Unaudited)

7. Commitments and Contingencies (Continued)

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.

        Surety market conditions have seen some strengthening as the commercial construction markets have started to rebound. Bonding capacity remains adequate in the current market conditions along with acceptable terms and conditions. Historically, approximately 25%20% to 35%30% of our business has required bonds. While we currently have strong surety relationships to support our bonding needs, future market conditions or changes in the 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 would enable us to ultimately respond effectively to an interruption in the availability of bonding capacity, such an interruption would likely cause our revenue and profits to decline in the near term.

Self-Insurance

        We are substantially self-insured for workers' compensation, employer'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 workers' compensation, auto liability and general liability, are reviewed by a third-party actuary quarterly.

8. Stockholders' Equity

Earnings Per Share

        Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period.year. Diluted EPS is computed considering the dilutive effect of stock options, contingently issuable restricted stock, and restricted stock units and performance stock units. The vesting of unvested contingently issuable performance stock units is based on the achievement of certain earnings per share targets and total shareholder return. These shares are considered contingently issuable shares for purposes of calculating diluted earnings per share. These shares are not included in the diluted earnings per share denominator until the performance criteria are met, if it is assumed that the end of the reporting period was the end of the contingency period.

        Unvested restricted stock, restricted stock units and performance stock units are included in diluted earnings per share, weighted outstanding until the shares and units vest. Upon vesting, the vested restricted stock, restricted stock units and performance stock units are included in basic earnings per share weighted outstanding from the vesting date.

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2015March 31, 2016

(Unaudited)

8. Stockholders' Equity (Continued)

        There were no anti-dilutive stock options for the three and nine months ended September 30, 2015, respectively. There were approximately 0.20.1 million anti-dilutive stock options excluded from the calculation of diluted EPS for the three and nine months ended September 30, 2014.March 31, 2016 and for the three months ended March 31, 2015.

        The following table reconciles the number of shares outstanding with the number of shares used in computing basic and diluted earnings per share for each of the periods presented (in thousands):

Share Repurchase Program

        On March 29, 2007, our Board of Directors (the "Board") approved a stock repurchase program to acquire up to 1.0 million shares of our outstanding common stock. Subsequently, the Board has from time to time approved extensions of the program to acquire additional shares. Since the inception of the repurchase program, the Board has approved 7.6 million shares to be repurchased. Since the inceptionAs of the program in 2007 through September 30, 2015,March 31, 2016, we have repurchased a cumulative total of 6.87.0 million shares at an average price of $11.70$12.22 per share.share under the repurchase program.

        The share repurchases will be made from time to time at our discretion in the open market or privately negotiated transactions as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. The Board may modify, suspend, extend or terminate the program at any time. During the nine months ended September 30, 2015,current quarter, we repurchased 0.20.1 million shares for approximately $4.9$2.8 million at an average price of $25.17$27.84 per share.

9. Subsequent Event

        In the fourth quarter of 2015, we came to an agreement with customers on multiple jobs and received approved change orders which we expect to result in the recognition in the fourth quarter of 2015 of additional revenue with minimal additional costs. We expect this to result in project gain of approximately $3.0 million to $3.5 million in the fourth quarter of 2015.

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion and analysis should be read in conjunction with our historical Consolidated Financial Statements and related notes included elsewhere in this Form 10-Q and the Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 20142015 (the "Form 10-K"). This discussion contains "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 1A. Risk Factors" included in our Form 10-K. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The terms "Comfort Systems," "we," "us," or "the Company," refer to Comfort Systems USA, Inc. or Comfort Systems USA, Inc. and its consolidated subsidiaries, as appropriate in the context.

Introduction and Overview

        We are a national provider of comprehensive HVACmechanical installation, renovation, 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.

Nature and Economics of Our Business

        Approximately 82% of our revenue is earned on a project basis for installation of HVACmechanical systems in newly constructed facilities or for replacement of HVAC systems in existing facilities. Customers hire us to ensure such systems deliver specified or generally expected heating, cooling, conditioning and circulation of air in a facility. This entails installing core system equipment such as packaged heating and air conditioning units, or in the case of larger facilities, separate core components such as chillers, boilers, air handlers, and cooling towers. We also typically install connecting and distribution elements such as piping and ducting. Our responsibilities usually require conforming the systems to pre-established engineering drawings and equipment and performance specifications, which we frequently participate in establishing. Our project management responsibilities include staging equipment and materials to project sites, deploying labor to perform the work, and coordinating with other service providers on the project, including any subcontractors we might use to deliver our portion of the work.

        When competing for project business, we usually estimate the costs we will incur on a project, and then propose a bid to the customer that includes a contract price and other performance and payment terms. Our bid price and terms are intended to cover our estimated costs on the project and provide a profit margin to us commensurate with the value of the installed system to the customer, the risk that project costs or duration will vary from estimate, the schedule on which we will be paid, the opportunities for other work that we might forego by committing capacity to this project, and other costs that we incur more broadly to support our operations but which are not specific to the project. Typically customers will seek bids from competitors for a given project. While the criteria on which customers select the winning bid vary widely and include factors such as quality, technical expertise, on-time performance, post-project support and service, and company history and financial strength, we

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believe that price is the most influential factor for most customers in choosing an HVACa mechanical installation and service provider.

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        After a customer accepts our bid, we generally enter into a contract with the customer that specifies what we will deliver on the project, what our related responsibilities are, and how much and when we will be paid. Our overall price for the project is typically set at a fixed amount in the contract, although changes in project specifications or work conditions that result in unexpected additional work are usually subject to additional payment from the customer via what are commonly known as change orders. Project contracts typically provide for periodic billings to the customer as we meet progress milestones or incur cost on the project. Project contracts in our industry also frequently allow for a small portion of progress billings or contract price to be withheld by the customer until after we have completed the work, typically for six months. Amounts withheld under this practice are known as retention or retainage.

        Labor and overhead costs account for the majority of our cost of service. Accordingly, labor management and utilization have the most impact on our project performance. Given the fixed price nature of much of our project work, if our initial estimate of project costs is wrong or we incur cost overruns that cannot be recovered in change orders, we can experience reduced profits or even significant losses on fixed price project work. We also perform some project work on a cost-plus or a time and materials basis, under which we are paid our costs incurred plus an agreed-upon profit margin, although such projects are sometimes subject to a guaranteed maximum cost. These margins are frequently less than fixed-price contract margins because there is less risk of unrecoverable cost overruns in cost-plus or time and materials work.

        As of March 31, 2016 we had 4,079 projects in process. Our average project takes six to nine months to complete, with an average contract price of approximately $484,000. We also perform larger HVAC projects. 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.$502,000. 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 revenue 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.

        A stratification of projects in progress as of September 30, 2015,March 31, 2016, by contract price, is as follows:

        In addition to project work, approximately 18% of our revenue represents maintenance and repair service on already installed HVAC and controls systems. This kind of work usually takes from a few

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hours to a few days to perform. Prices to the customer are usually based on the equipment and materials used in the service as well as technician labor time. We usually bill the customer for service work when it is complete, typically with payment terms of up to thirty days. We also provide maintenance and repair service under ongoing contracts. Under these contracts, we are paid regular monthly or quarterly amounts and provide specified service based on customer requirements. These

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agreements typically cover periods ranging from one to three years with thirty- to sixty-day cancellation notice periods.

        A relatively small portion of our revenue comes from national and regional account customers. These customers typically have multiple sites, and contract with us to perform maintenance and repair service. These contracts may also provide for us to perform new or replacement systems installation. We operate a national call center to dispatch technicians to sites requiring service. We perform the majority of this work with our own employees, with the balance being subcontracted to third parties that meet our performance qualifications. We will also typically use proprietary information systems to maintain information on the customer'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 Operations

        We manage our 35 operating units based on a variety of factors. Financial measures we emphasize include profitability, and use of capital as indicated by cash flow and by other measures of working capital principally involving project cost, billings and receivables. We also monitor selling, general, administrative and indirect project support expense, backlog, workforce size and mix, growth in revenue and profits, variation of actual project cost from original estimate, and overall financial performance in comparison to budget and updated forecasts. Operational factors we emphasize include project selection, estimating, pricing, management and execution practices, labor utilization, safety, training, and the make-up of both existing backlog as well as new business being pursued, in terms of project size, technical application and facility type, end-use customers and industries, and location of the work.

        Most of our operations compete on a local or regional basis. Attracting and retaining effective operating unit managers is an important factor in our business, particularly in view of the relative uniqueness of each market and operation, the importance of relationships with customers and other market participants such as architects and consulting engineers, and the high degree of competition and low barriers to entry in most of our markets. Accordingly, we devote considerable attention to operating unit management quality, stability, and contingency planning, including related considerations of compensation, and non-competition protection where applicable.

Economic and Industry Factors

        As an HVACa mechanical and building controls services provider, we operate in the broader nonresidential construction services industry and are affected by trends in this sector. While we do not have operations in all major cities of the United States, we believe our national presence is sufficiently large that we experience trends in demand for and pricing of our services that are consistent with trends in the national nonresidential construction sector. As a result, we monitor the views of major construction sector forecasters along with macroeconomic factors they believe drive the sector, including trends in gross domestic product, interest rates, business investment, employment, demographics, and the general fiscal condition of federal, state and local governments.

        Spending decisions for building construction, renovation and system replacement are generally made on a project basis, usually with some degree of discretion as to when and if projects proceed. With larger amounts of capital, time, and discretion involved, spending decisions are affected to a

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significant degree by uncertainty, particularly concerns about economic and financial conditions and trends. We have experienced periods of time when economic weakness caused a significant slowdown in decisions to proceed with installation and replacement project work.

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Operating Environment and Management Emphasis

        Nonresidential building construction and renovation activity, as reported by the federal government, declined over the four year period from 2009 to 2012, andwith 2013 and 2014 activity levels were relatively stable at the low levels of the preceding years.years followed by an increase in activity in 2015. While we expect that activity levels and the underlying environment for nonresidential construction activity will remain below prior peaks, we have seen industry conditions improve duringin the first quarter of 2016 continue at the improved levels we saw in 2015.

        As a result of our continued strong emphasis on cash flow, at March 31, 2016 we currently have modest indebtedness under our revolving credit facility and we have substantial uncommitted cash balances,had a strong financial position, as discussed further in "Liquidity and Capital 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 October 2019.February 2021. We have strong surety relationships to support our bonding needs, and we believe our relationships with the surety markets are strong and benefit from our solid current results and financial position. We have generated positive free cash flow in each of the last sixteenseventeen calendar years and will continue our emphasis in this area. We believe that the relative size and strength of our balance sheet and surety support as compared to most companies in our industry represent competitive advantages for us.

        As discussed at greater length in "Results of Operations" below, we expect price competition to continue as our customers and local and regional competitors respond cautiously to changing conditions. We will continue our efforts to expand and improve our service business, to find the more active sectors in our markets, and to increase our regional and national account business. Our primary emphasis for the remainder of 20152016 will be on execution and cost control, but we are seeking growth based on our belief that industry conditions are beginning to improve, and we believe that activity levels will permit us to earn improved profits while preserving and developing our workforce. We continue to focus on project qualification, estimating, pricing and management; and we are investing in service growth and improved performance.

Cyclicality and Seasonality

        Historically, the construction industry has been highly cyclical. As a result, our volume of business may generally be adversely affected by declines in new installation and replacement projects in various geographic regions of the United States during periods of economic weakness.

        The HVAC industry is subject to seasonal variations. Specifically, the demand for new installation and replacement is generally lower during the winter months (the first quarter of the year) due to reduced construction activity during inclement weather and less use of air conditioning during the colder months. Demand for HVAC services is generally higher in the second and third calendar quarters due to increased construction activity and increased use of air conditioning during the warmer months. Accordingly, we expect our revenue and operating results generally will be lower in the first and fourth calendar quarters.quarter.

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Results of Operations (dollars in thousands):

        We had 3735 operating locations as of December 31, 2014.2015. We completed two acquisitionsone acquisition in the first quarter of 2015 and one2016, known as "Shoffner", that reports as a separate operating location in the third quarter of 2015. These acquisitions were not material and were "tucked-in" with existing operations.Knoxville, Tennessee area. In addition, we merged four operating locations into two operating locations during the firstcurrent quarter, and closedcreated two operating locations out of one existing operating location during the third quarter.location. As of September 30, 2015,March 31, 2016, we had 35 operating locations. Acquisitions are included in our results of operations from the respective acquisition date. The same-store comparison from 20152016 to 2014,2015, as described below, excludes fourtwo months of results for our Northern Texas operation,Shoffner, which was acquired in May 2014.February 2016. An operating location is included in the same-store comparison on the first day it has comparable prior year operating data. An operating location is excluded from the same-store comparison in the current year and comparable prior years when it is properly characterized as a discontinued operation under applicable accounting standards.

        Revenue—Revenue increased $40.4$16.4 million, or 10.9%4.4%, to $410.6$385.9 million for the thirdfirst quarter of 20152016 compared to the same period in 2014. The revenue increase is primarily due to our Environmental Air Systems, LLC ("EAS") operation ($17.1 million), our Arizona operation ($6.5 million), our California operation ($6.5 million) and one of our Maryland operations ($6.4 million). These operations, as well as many of our other operating locations, experienced increased project work compared to the prior quarter in multiple markets, but primarily the industrials sector due to improved market conditions.

        Revenue increased $142.4 million, or 13.5%, to $1,196.7 million for the first nine months of 2015 compared to the same period in 2014.2015. The increase included a 11.6%0.5% increase in revenue related to same-store activity and a 1.9%3.9% increase related to the acquisition of our Northern Texas operation.Shoffner. The same-store revenue slight increase is primarily due to our EASMichigan operation ($57.18.0 million), one of our large operation headquartered in Virginia operations ($16.9 million), our Arizona operation ($15.26.1 million) and our Arkansascombined New York operations ($6.7 million) which was partially offset by lower revenue at our EAS operation ($13.519.5 million). These operations, as well as many of our other operating locations,

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, which experienced increaseddecreased large project work compared to the prior year, in multiple markets, but primarily the industrials sector due to improved market conditions.

        In the fourth quarter of 2015, we came to an agreement with customers on multiple jobs and received approved change orders which we expect to resultspecifically in the recognition in the fourth quarter of 2015 of additional revenue with minimal additional costs. We expect this to result in project gain of approximately $3.0 million to $3.5 million in the fourth quarter of 2015.manufacturing sector.

        Backlog reflects revenue still to be recognized under contracted or committed installation and replacement project work. Project work generally lasts less than one year. Service agreement revenue and service work and short duration projects, which are generally billed as performed, do not flow through backlog. Accordingly, backlog represents only a portion of our revenue for any given future period, and it represents revenue that is likely to be reflected in our operating results over the next six to twelve months. As a result, we believe the predictive value of backlog information is limited to indications of general revenue direction over the near term, and should not be interpreted as indicative of ongoing revenue performance over several quarters.

        Backlog as of September 30, 2015March 31, 2016 was $666.3$776.9 million, a 6.4% decrease9.2% increase from June 30,December 31, 2015 backlog of $712.3$711.6 million, and a 1.4%an 8.2% increase from September 30, 2014March 31, 2015 backlog of $656.8$718.0 million.

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Sequential backlog decreasedincreased mainly due to the aforementioned acquisition of Shoffner ($56.4 million or 7.9%). Same-store backlog remained relatively flat as increases at over half of our operating locations, includingNorthern Texas operation ($15.6 million) and our EAS operation ($21.515.1 million), were offset by decreases due to the completion of project work, during the quarter.primarily at one of our Virginia operations ($8.3 million) and one of our Maryland operations ($7.5 million). The year-over-year backlog increase was also primarily due to increasedthe Shoffner acquisition (7.8%). Same-store backlog remained flat as increases at our Michigan operation ($16.0 million), our Northern Texas operation ($15.1 million) and our EAS operation ($14.0 million) were offset by decreases due to completion of project bookingswork, primarily at all of our New York operationsCalifornia operation ($23.521.2 million) and one of our VirginiaMaryland operations ($14.514.3 million). This was partially offset by a decrease at our Arkansas operation ($24.3 million) due to the completion of project work during the quarter.

        We experienced significant industry activity declines in 2009 through 2012 with activity levels stabilizing in 2013 and 2014. Based on our backlog and forecasts from industry construction analysts, we expect that activity levels in our industry are likely to gradually improve over the next twelve months, particularly in the area of new construction.

        Gross Profit—Gross profit increased $21.0$8.8 million, or 31.6%13.6%, to $87.5$73.5 million for the thirdfirst quarter of 20152016 as compared to the same period in 2014. The increase in gross profit was due to overall increased margins at a majority of operating locations. Specifically, we saw continued improvement at our Southern California operation ($3.6 million), which had experienced job underperformance in 2014, improved project execution at one of our Texas operations ($2.3 million) and improved market conditions at one of our Virginia operations ($1.5 million). As a percentage of revenue, gross profit increased from 18.0% in 2014 to 21.3% in 2015 primarily due to the factors discussed above.

        Gross profit increased $53.7 million, or 29.8%, to $234.2 million for the first nine months of 2015 as compared to the same period in 2014.2015. The increase included a $3.4$2.0 million, or 1.9%3.0%, increase related to the acquisition of our Northern Texas operationShoffner and a $50.4$6.8 million, or 27.9%10.6%, increase on a same-store basis. The same-store increase in gross profit was primarily due to overallthe impact of increased margins at a majority of operating locations. Specifically, increases were due to job underperformancevolumes at our Southern CaliforniaMichigan operation in 2014 ($9.81.7 million), and improved project execution at our largeNorthern Texas operation headquartered in Virginia ($6.21.7 million), one of our Tennessee operations ($1.1 million) and improved market conditions which resulted in an increase in volumesour combined New York operations ($1.5 million). This was partially offset by a decrease at our EAS operation ($6.01.6 million). which has experienced a decrease in volumes in the current quarter when compared to the same period in 2015. As a percentage of revenue, gross profit increased from 17.1%17.5% in 20142015 to 19.6%19.0% in 20152016 primarily due to the factors discussed above.

        Selling, General and Administrative Expenses ("SG&A")—SG&A increased $5.7$4.5 million, or 10.9%8.4%, to $57.9$58.2 million for the thirdfirst quarter of 20152016 as compared to 2014. Excluding2015. On a same-store basis, excluding amortization expense, SG&A increased $5.7$2.9 million, or 11.2%5.6%. This increase is primarily due to increased compensation accruals based on operating results ($4.7costs (approximately $1.7 million) andwhich are primarily related to expanded service activities at certain locations ($1.0 million).multiple locations. Amortization expense remained relatively flat during the period. As a percentage of revenue, SG&A remained the same at 14.1% for both 2014 and 2015.