UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form ~~10‑Q~~10-Q


(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, ~~2017~~2019
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number: ~~1‑13011~~1-13011

COMFORT SYSTEMS USA, INC.

(Exact name of registrant as specified in its charter)


~~DELAWARE~~Delaware (State or other jurisdiction of Incorporation or Organization)	~~76‑0526487~~76-0526487 (I.R.S. Employer Identification No.)
675 Bering Drive Suite 400 Houston, Texas77057 (Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: ~~(713) 830‑9600~~(713) 830-9600

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	FIX	New York Stock Exchange

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 ☒⌧ No ☐◻

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~~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 ☒⌧ No ☐◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ⌧	Accelerated filer ◻	Non-accelerated filer ◻	Smaller reporting company ☐	Emerging growth company ☐
~~Large accelerated filer~~ ☒	~~Accelerated filer~~ ☐	~~Non‑accelerated filer~~ ☐ (Do not check if a smaller reporting company)	~~Smaller reporting company~~ ☐	~~Emerging growth company~~ ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐◻

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule ~~12b‑2)~~12b-2). Yes ☐ No ☒⌧

The number of shares outstanding of the issuer’s common stock as of October ~~19, 2017~~18, 2019 was ~~37,134,226~~36,675,927 (excluding treasury shares of ~~3,989,139)~~4,447,438).

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

COMFORT SYSTEMS USA, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

September 30,

December 31,

2017

2016

(Unaudited)

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$
29,496

$
32,074

Accounts receivable, less allowance for doubtful accounts of $4,328 and $4,288, respectively

390,497

318,837

Other receivables

13,651

20,363

Inventories

10,778

9,208

Prepaid expenses and other

11,622

6,106

Costs and estimated earnings in excess of billings

39,333

29,369

Total current assets

495,377

415,957

PROPERTY AND EQUIPMENT, NET

74,883

68,195

GOODWILL

203,771

149,208

IDENTIFIABLE INTANGIBLE ASSETS, NET

78,527

42,435

DEFERRED INCOME TAX ASSETS

27,282

27,170

OTHER NONCURRENT ASSETS

4,747

5,938

Total assets

$
884,587

$
708,903

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Current maturities of long-term debt

$
618

$
600

Current maturities of long-term capital lease obligations

90

163

Accounts payable

122,203

103,440

Accrued compensation and benefits

68,294

61,712

Billings in excess of costs and estimated earnings

103,049

83,985

Accrued self-insurance

32,774

33,520

Other current liabilities

46,774

34,261

Total current liabilities

373,802

317,681

LONG-TERM DEBT

80,951

1,955

LONG-TERM CAPITAL LEASE OBLIGATIONS

33

93

DEFERRED INCOME TAX LIABILITIES

2,289

2,289

OTHER LONG-TERM LIABILITIES

15,583

10,252

Total liabilities

472,658

332,270

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, 3,989,139 and 3,914,251 shares, respectively

(64,312)

(57,387)

Additional paid-in capital

312,312

309,625

Retained earnings

163,518

123,984

Total stockholders’ equity

411,929

376,633

Total liabilities and stockholders’ equity

$
884,587

$
708,903

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

~~COMFORT SYSTEMS USA, INC.~~

~~CONSOLIDATED STATEMENTS OF OPERATIONS~~

~~(In Thousands, Except Per Share Data)~~

~~(Unaudited)~~

Three Months Ended

Nine Months Ended

September 30,

September 30,


2017

2016

2017

2016

REVENUE

$
480,851

$
428,760

$
1,326,850

$
1,242,240

COST OF SERVICES

379,993

335,944

1,054,300

986,496

Gross profit

100,858

92,816

272,550

255,744

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

66,707

61,032

196,553

180,245

GOODWILL IMPAIRMENT

—

—

1,105

—

GAIN ON SALE OF ASSETS

(184)

(166)

(464)

(523)

Operating income

34,335

31,950

75,356

76,022

OTHER INCOME (EXPENSE):

Interest income

16

3

55

6

Interest expense

(961)

(563)

(2,392)

(1,870)

Changes in the fair value of contingent earn-out obligations

2,469

804

1,845

468

Other

10

80

57

455

Other income (expense)

1,534

324

(435)

(941)

INCOME BEFORE INCOME TAXES

35,869

32,274

74,921

75,081

INCOME TAX EXPENSE

13,585

11,803

27,188

27,052

NET INCOME

$
22,284

$
20,471

$
47,733

$
48,029

INCOME PER SHARE:

Basic

$
0.60

$
0.55

$
1.28

$
1.28

Diluted

$
0.59

$
0.54

$
1.27

$
1.27

SHARES USED IN COMPUTING INCOME PER SHARE:

Basic

37,232

37,360

37,259

37,380

Diluted

37,626

37,821

37,684

37,854

DIVIDENDS PER SHARE

$
0.075

$
0.070

$
0.220

$
0.205

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

~~COMFORT SYSTEMS USA, INC.~~

~~CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY~~

~~(In Thousands, Except Share Amounts)~~

Additional

Non-

Total


Common Stock

Treasury Stock

Paid-In

Retained

Controlling

Stockholders’


Shares

Amount

Shares

Amount

Capital

Earnings

Interests

Equity

BALANCE AT DECEMBER 31, 2015

41,123,365

$
411

(3,696,781)

$
(46,845)

$
323,765

$
69,390

$
18,284

$
365,005

Cumulative effect of change in accounting principle

—

—

—

—

—

(38)

—

(38)

Net income

—

—

—

—

—

64,896

—

64,896

Issuance of Stock:

Issuance of shares for options exercised

—

—

111,761

1,568

10

—

—

1,578

Issuance of restricted stock & performance stock

—

—

172,727

2,282

(306)

—

—

1,976

Shares received in lieu of tax withholding payment on vested restricted stock

—

—

(41,788)

(1,304)

—

—

—

(1,304)

Stock-based compensation

—

—

—

—

3,502

—

—

3,502

Dividends

—

—

—

—

—

(10,264)

—

(10,264)

Acquisition of noncontrolling interest

—

—

—

—

(17,346)

—

(18,284)

(35,630)

Share repurchase

—

—

(460,170)

(13,088)

—

—

—

(13,088)

BALANCE AT DECEMBER 31, 2016

41,123,365

411

(3,914,251)

(57,387)

309,625

123,984

—

376,633

Net income (unaudited)

—

—

—

—

—

47,733

—

47,733

Issuance of Stock:

Issuance of shares for options exercised (unaudited)

—

—

90,498

1,366

(70)

—

—

1,296

Issuance of restricted stock & performance stock (unaudited)

—

—

134,646

2,037

(421)

—

—

1,616

Shares received in lieu of tax withholding payment on vested restricted stock (unaudited)

—

—

(39,335)

(1,419)

—

—

—

(1,419)

Stock-based compensation (unaudited)

—

—

—

—

3,178

—

—

3,178

Dividends (unaudited)

—

—

—

—

—

(8,199)

—

(8,199)

Share repurchase (unaudited)

—

—

(260,697)

(8,909)

—

—

—

(8,909)

BALANCE AT SEPTEMBER 30, 2017 (unaudited)

41,123,365

$
411

(3,989,139)

$
(64,312)

$
312,312

$
163,518

$
—

$
411,929

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

~~COMFORT SYSTEMS USA, INC.~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~


	September 30,		December 31,
	2019		2018
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	40,363	$	45,620
Billed accounts receivable, less allowance for doubtful accounts of $6,526 and $5,898, respectively		607,061		481,366
Unbilled accounts receivable		49,926		37,180
Other receivables		25,476		16,361
Inventories		12,667		12,416
Prepaid expenses and other		8,788		6,544
Costs and estimated earnings in excess of billings		6,121		10,213
Total current assets		750,402		609,700
PROPERTY AND EQUIPMENT, NET		108,129		99,618
LEASE RIGHT-OF-USE ASSET		84,281		—
GOODWILL		332,200		235,182
IDENTIFIABLE INTANGIBLE ASSETS, NET		166,736		95,275
DEFERRED TAX ASSETS		20,254		17,634
OTHER NONCURRENT ASSETS		5,458		5,155
Total assets	$	1,467,460	$	1,062,564
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt	$	13,847	$	3,279
Accounts payable		176,624		176,167
Accrued compensation and benefits		100,390		87,388
Billings in excess of costs and estimated earnings		167,097		130,986
Accrued self-insurance		40,750		36,386
Other current liabilities		79,024		32,852
Total current liabilities		577,732		467,058
LONG-TERM DEBT		228,167		73,639
LEASE LIABILITIES		73,213		—
DEFERRED TAX LIABILITIES		1,387		1,387
OTHER LONG-TERM LIABILITIES		29,331		22,433
Total liabilities		909,830		564,517
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par, 5,000,000 shares authorized, NaN 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, 4,447,438 and 4,229,653 shares, respectively		(101,243)		(87,747)
Additional paid-in capital		320,157		316,479
Retained earnings		338,305		268,904
Total stockholders’ equity		557,630		498,047
Total liabilities and stockholders’ equity	$	1,467,460	$	1,062,564

~~(In Thousands)~~

~~(Unaudited)~~

Nine Months Ended

September 30,

2017

2016

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$
47,733

$
48,029

Adjustments to reconcile net income to net cash provided by operating activities—

Amortization of identifiable intangible assets

12,622

6,227

Depreciation expense

14,714

13,444

Goodwill impairment

1,105

—

Bad debt expense (benefit)

29

(177)

Deferred tax benefit

(112)

(606)

Amortization of debt financing costs

282

273

Gain on sale of assets

(464)

(523)

Changes in the fair value of contingent earn-out obligations

(1,845)

(468)

Stock-based compensation

4,317

3,868

Changes in operating assets and liabilities, net of effects of acquisitions and divestitures—

(Increase) decrease in—

Receivables, net

(38,051)

(4,301)

Inventories

(1,059)

(298)

Prepaid expenses and other current assets

(608)

(3,648)

Costs and estimated earnings in excess of billings

(7,348)

(3,726)

Other noncurrent assets

913

(128)

Increase (decrease) in—

Accounts payable and accrued liabilities

22,595

1,628

Billings in excess of costs and estimated earnings

10,309

(10,928)

Other long-term liabilities

560

1,088

Net cash provided by operating activities

65,692

49,754

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment

(16,830)

(17,257)

Proceeds from sales of property and equipment

784

847

Cash paid for acquisitions, net of cash acquired

(94,860)

(58,510)

Net cash used in investing activities

(110,906)

(74,920)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from revolving line of credit

140,000

144,000

Payments on revolving line of credit

(74,000)

(129,000)

Payments on other debt

(798)

(567)

Payments on capital lease obligations

(133)

(194)

Debt financing costs

—

(789)

Payments of dividends to stockholders

(8,199)

(7,663)

Share repurchase

(8,909)

(10,977)

Shares received in lieu of tax withholding

(1,419)

(1,304)

Proceeds from exercise of options

1,296

733

Deferred acquisition payments

(2,802)

—

Payments for contingent consideration arrangements

(2,400)

(200)

Net cash provided by (used in) financing activities

42,636

(5,961)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

(2,578)

(31,127)

CASH AND CASH EQUIVALENTS, beginning of period

32,074

56,464

CASH AND CASH EQUIVALENTS, end of period

$
29,496

$
25,337

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

Table of Contents

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
REVENUE	$	706,918	$	594,536	$	1,895,693	$	1,594,520
COST OF SERVICES		564,216		466,668		1,526,310		1,266,416
Gross profit		142,702		127,868		369,383		328,104
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		90,006		75,297		253,417		216,528
GAIN ON SALE OF ASSETS		(708)		(219)		(1,119)		(630)
Operating income		53,404		52,790		117,085		112,206
OTHER INCOME (EXPENSE):
Interest income		82		25		174		53
Interest expense		(2,779)		(1,152)		(6,891)		(2,601)
Changes in the fair value of contingent earn-out obligations		(2,004)		434		(3,924)		493
Other		3		39		167		4,062
Other income (expense)		(4,698)		(654)		(10,474)		2,007
INCOME BEFORE INCOME TAXES		48,706		52,136		106,611		114,213
PROVISION FOR INCOME TAXES		12,473		13,595		26,339		26,466
NET INCOME	$	36,233	$	38,541	$	80,272	$	87,747

INCOME PER SHARE:
Basic	$	0.98	$	1.03	$	2.18	$	2.36
Diluted	$	0.98	$	1.02	$	2.16	$	2.33

SHARES USED IN COMPUTING INCOME PER SHARE:
Basic		36,805		37,294		36,891		37,236
Diluted		37,051		37,667		37,170		37,634
DIVIDENDS PER SHARE	$	0.100	$	0.085	$	0.295	$	0.240

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

Table of Contents

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In Thousands, Except Share Amounts)


	Nine Months Ended
	September 30, 2018
							Additional				Total
	Common Stock			Treasury Stock			Paid-In		Retained		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Earnings		Equity
BALANCE AT DECEMBER 31, 2017	41,123,365	$	411	(3,936,291)	$	(63,519)	$	312,784	$	168,269	$	417,945
Net income (unaudited)	—		—	—		—		—		16,659		16,659
Issuance of Stock:
Issuance of shares for options exercised (unaudited)	—		—	19,124		326		(88)		—		238
Issuance of restricted stock & performance stock (unaudited)	—		—	52,306		892		1,331		—		2,223
Shares received in lieu of tax withholding payment on vested restricted stock (unaudited)	—		—	(19,921)		(846)		—		—		(846)
Stock-based compensation (unaudited)	—		—	—		—		1,880		—		1,880
Dividends (unaudited)	—		—	—		—		—		(2,786)		(2,786)
Share repurchase (unaudited)	—		—	(150,481)		(6,175)		—		—		(6,175)
BALANCE AT MARCH 31, 2018 (unaudited)	41,123,365		411	(4,035,263)		(69,323)		315,907		182,142		429,138
Net income (unaudited)	—		—	—		—		—		32,547		32,547
Issuance of Stock:
Issuance of shares for options exercised (unaudited)	—		—	112,616		1,949		(29)		—		1,920
Issuance of restricted stock & performance stock (unaudited)	—		—	77,263		1,335		(1,335)		—		(0)
Shares received in lieu of tax withholding payment on vested restricted stock (unaudited)	—		—	(17,046)		(693)		—		—		(693)
Stock-based compensation (unaudited)	—		—	—		—		1,692		—		1,692
Dividends (unaudited)	—		—	—		—		—		(2,974)		(2,974)
Share repurchase (unaudited)	—		—	(15,326)		(654)		—		—		(654)
BALANCE AT JUNE 30, 2018 (unaudited)	41,123,365		411	(3,877,756)		(67,386)		316,235		211,715		460,975
Net income (unaudited)	—		—	—		—		—		38,541		38,541
Issuance of Stock:
Issuance of shares for options exercised (unaudited)	—		—	60,135		1,046		(305)		—		741
Issuance of restricted stock & performance stock (unaudited)	—		—	—		—		—		—		—
Shares received in lieu of tax withholding payment on vested restricted stock (unaudited)	—		—	—		—		—		—		—
Stock-based compensation (unaudited)	—		—	—		—		424		—		424
Dividends (unaudited)	—		—	—		—		—		(3,170)		(3,170)
Share repurchase (unaudited)	—		—	(85,222)		(4,744)		—		—		(4,744)
BALANCE AT SEPTEMBER 30, 2018 (unaudited)	41,123,365	$	411	(3,902,843)	$	(71,084)	$	316,354	$	247,086	$	492,767

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

Table of Contents

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In Thousands, Except Share Amounts)


	Nine Months Ended
	September 30, 2019
							Additional				Total
	Common Stock			Treasury Stock			Paid-In		Retained		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Earnings		Equity
BALANCE AT DECEMBER 31, 2018	41,123,365	$	411	(4,229,653)	$	(87,747)	$	316,479	$	268,904	$	498,047
Net income (unaudited)	—		—	—		—		—		19,866		19,866
Issuance of Stock:
Issuance of shares for options exercised (unaudited)	—		—	41,103		861		(61)		—		800
Issuance of restricted stock & performance stock (unaudited)	—		—	38,539		817		1,189		—		2,006
Shares received in lieu of tax withholding payment on vested restricted stock (unaudited)	—		—	(15,013)		(781)		—		—		(781)
Stock-based compensation (unaudited)	—		—	—		—		2,084		—		2,084
Dividends (unaudited)	—		—	—		—		—		(3,506)		(3,506)
Share repurchase (unaudited)	—		—	(67,394)		(3,321)		—		—		(3,321)
BALANCE AT MARCH 31, 2019 (unaudited)	41,123,365		411	(4,232,418)		(90,171)		319,691		285,264		515,195
Net income (unaudited)	—		—	—		—		—		24,173		24,173
Issuance of Stock:
Issuance of shares for options exercised (unaudited)	—		—	1,408		31		(11)		—		20
Issuance of restricted stock & performance stock (unaudited)	—		—	69,067		1,486		(1,486)		—		—
Shares received in lieu of tax withholding payment on vested restricted stock (unaudited)	—		—	(13,573)		(717)		—		—		(717)
Stock-based compensation (unaudited)	—		—	—		—		1,685		—		1,685
Dividends (unaudited)	—		—	—		—		—		(3,692)		(3,692)
Share repurchase (unaudited)	—		—	(93,468)		(4,576)		—		—		(4,576)
BALANCE AT JUNE 30, 2019 (unaudited)	41,123,365		411	(4,268,984)		(93,947)		319,879		305,745		532,088
Net income (unaudited)	—		—							36,233		36,233
Issuance of Stock:
Issuance of shares for options exercised (unaudited)	—		—	5,426		124		57		—		181
Issuance of restricted stock & performance stock (unaudited)	—		—	—		—		—		—		—
Shares received in lieu of tax withholding payment on vested restricted stock (unaudited)	—		—	—		—		—		—		—
Stock-based compensation (unaudited)	—		—	—		—		221		—		221
Dividends (unaudited)	—		—	—		—		—		(3,673)		(3,673)
Share repurchase (unaudited)	—		—	(183,880)		(7,420)		—		—		(7,420)
BALANCE AT SEPTEMBER 30, 2019 (unaudited)	41,123,365	$	411	(4,447,438)	$	(101,243)	$	320,157	$	338,305	$	557,630

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

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)


	Nine Months Ended
	September 30,
	2019		2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	80,272	$	87,747
Adjustments to reconcile net income to net cash provided by operating activities—
Amortization of identifiable intangible assets		20,221		14,102
Depreciation expense		18,222		16,630
Change in right-of-use assets		10,552		—
Bad debt expense		2,093		2,905
Deferred tax provision (benefit)		(2,620)		5,520
Amortization of debt financing costs		287		288
Gain on sale of assets		(1,119)		(630)
Changes in the fair value of contingent earn-out obligations		3,924		(493)
Stock-based compensation		4,861		6,021
Changes in operating assets and liabilities, net of effects of acquisitions and divestitures—
(Increase) decrease in—
Receivables, net		(31,647)		(80,726)
Inventories		(248)		(1,917)
Prepaid expenses and other current assets		(4,625)		3,085
Costs and estimated earnings in excess of billings and unbilled accounts receivable		(2,081)		(18,328)
Other noncurrent assets		(544)		(199)
Increase (decrease) in—
Accounts payable and accrued liabilities		6,635		19,537
Billings in excess of costs and estimated earnings		4,555		17,682
Other long-term liabilities		(9,023)		(3,222)
Net cash provided by operating activities		99,715		68,002
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(22,641)		(22,059)
Proceeds from sales of property and equipment		1,447		1,077
Proceeds from sale of business		1,611		—
Cash paid for acquisitions, net of cash acquired		(196,470)		(65,287)
Net cash used in investing activities		(216,053)		(86,269)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit		320,000		104,000
Payments on revolving line of credit		(177,000)		(79,000)
Payments on other debt		(3,254)		(1,094)
Debt financing costs		—		(844)
Payments of dividends to stockholders		(10,871)		(8,930)
Share repurchase		(15,317)		(11,573)
Shares received in lieu of tax withholding		(1,498)		(1,540)
Proceeds from exercise of options		1,001		2,899
Deferred acquisition payments		(637)		(750)
Payments for contingent consideration arrangements		(1,343)		(2,195)
Net cash provided by financing activities		111,081		973
NET DECREASE IN CASH AND CASH EQUIVALENTS		(5,257)		(17,294)
CASH AND CASH EQUIVALENTS, beginning of period		45,620		36,542
CASH AND CASH EQUIVALENTS, end of period	$	40,363	$	19,248

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, ~~2017~~2019

(Unaudited)

1. Business and Organization

Comfort Systems USA, Inc., a Delaware corporation, provides comprehensive mechanical and electrical contracting services, which principally includes heating, ventilation and air conditioning (“HVAC”), plumbing, electrical, piping and controls, as well as off-site construction, ~~electrical,~~ monitoring and fire protection. We install, maintain, repair and replace products and systems throughout the United States. ~~Approximately 37% of our~~The terms “Comfort Systems,” “we,” “us,” or the “Company,” refer to Comfort Systems USA, Inc. or Comfort Systems USA, Inc. and its consolidated ~~2017 revenue is attributable to installation of systems in newly constructed facilities, with the remaining 63% attributable to maintenance, repair and replacement services.~~

~~Our consolidated 2017 revenue was derived from the following service activities, all of which are~~subsidiaries, as appropriate in the ~~mechanical services industry, the single industry segment we serve:~~context.

Revenue

Service Activity

$ in thousands

%

HVAC and Plumbing

$
1,207,434

91
%
Building Automation Control Systems

66,343

5
%
Other

53,073

4
%
Total

$
1,326,850

100
%

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, ~~2016~~2018 (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. 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. 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.

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Recent Accounting Pronouncements

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 on the adoption date. We plan to use the modified retrospective basis on the adoption date. ASU 2014-09 is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. While we are still evaluating the potential impact of this authoritative guidance on our consolidated financial statements, we currently believe the areas that may impact us the most include accounting for variable consideration, capitalization of incremental costs of obtaining a contract and the guidance on the number of performance obligations contained in a contract. The impact on our consolidated financial statements upon adoption of ASU 2014-09 will be determined in large part by the contracts in progress on our adoption date; however, we currently do not believe the adoption will have a material impact on our consolidated financial statements.

~~In February 2016, the FASB~~ issued ASU No. 2016-02, “Leases (Topic 842)”. The standard requires ~~lessees~~substantially all leases (with the exception of leases with a term of one year or less) to ~~recognize assets and liabilities for most leases.~~be recorded on the Balance Sheet using a method referred to as the right-of-use (“ROU”) asset approach. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those years. Full retrospective application is prohibited. We adopted ASU No. 2016-02, Leases (Topic 842), on January 1, 2019, using the transition method allowed by ASU No. 2018-11, “Leases (Topic 842) Targeted Improvements” in which lessees apply the new lease standard on the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We adopted the practical expedient allowing us to not include leases with an initial term of 12 months or less on the Balance Sheet. Furthermore, we elected to apply the practical expedient allowing an entity to forgo reassessing (1) whether expired or existing contracts contain a lease, (2) classification of expired or existing leases, and (3) whether capitalized costs associated with expired or existing leases should be

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classified as “initial direct costs” under Topic 842. The adoption of ASU 2016-02 did not have a significant impact to our Statement of Operations or Cash Flows. The adoption of ASU 2016-02 resulted in the recording of right-of-use asset and lease liabilities of $75.9 million on our Balance Sheet as of January 1, 2019 but did not result in a cumulative-effect adjustment to retained earnings.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326).” The standard requires companies to consider historical experiences, current market conditions and reasonable and supportable forecasts in the measurement of expected credit losses. ASU 2016-13 is effective for fiscal years beginning after December 15, ~~2018.~~2019 and interim periods within those years. 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 financial statements. Full retrospective application is prohibited. We are currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements.

In August ~~2016,~~2018, the FASB issued ASU No. ~~2016-15, “Statement of Cash Flows~~2018-13, “Fair Value Measurement (Topic ~~230)~~820): ~~Classification of Certain Cash Receipts and Cash Payments”. This standard provides guidance on how certain cash receipts and cash payments are presented and classified in~~Disclosure Framework — Changes to the ~~statement of cash flows and is intended to reduce diversity in practice with respect to these items. The standard is applied using a retrospective transition method and is effective~~Disclosure Requirements for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We currently do not believe the adoption will have a material impact on our consolidated financial statements.

~~In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and other (Topic 350): Simplifying the Accounting for Goodwill Impairment”.~~Fair Value Measurement.” This standard removes ~~Step~~certain disclosure requirements including the valuation processes for Level 3 fair value measurements, the policy for timing of transfers between levels and the amount of and reasons for transfers between Level 1 and Level 2 of the ~~goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its~~ fair value ~~not to exceed the carrying amount of goodwill. Additionally, entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts.~~hierarchy. The standard ~~is applied prospectively~~requires certain additional disclosures for public entities, including disclosure of the changes in unrealized gains and losses included in Other Comprehensive Income for Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 ~~including annual or~~and interim ~~goodwill impairment tests~~periods within those ~~fiscal~~ years. ~~Early adoption~~Certain amendments, including the amendment on changes in unrealized gains and losses and the range and weighted average of significant unobservable inputs, should be applied prospectively while other amendments should be applied retrospectively to all periods presented upon their effective date. We are currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements.

Revenue Recognition

Revenue is ~~permitted~~recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration to which we expect to be entitled in exchange for ~~interim~~those goods or services. Sales-based taxes are excluded from revenue.

We provide comprehensive mechanical and ~~annual goodwill~~electrical contracting services, which principally includes HVAC, plumbing, electrical, piping and controls, as well as off-site construction, monitoring and fire protection. We install, maintain, repair and replace products and systems throughout the United States. All of our revenue is recognized over time as we deliver goods and services to our customers. Revenue can be earned based on an agreed upon fixed price or based on actual costs incurred marked up at an agreed upon percentage.

For fixed price agreements, we use the percentage of completion method of accounting under which 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 to obtain installation contracts, we estimate our contract costs, which include all direct materials, labor and subcontract costs and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. These contract costs are included in our results of operations under the caption “Cost of Services.” Then, as we perform under those contracts, we measure 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. Subcontractor labor is recognized as the work is performed. Non-labor project costs consist 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 work site. 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 costs are generally recorded when delivered to the work site. This measurement and comparison process requires updates to the estimate of total costs to complete the contract, and these updates may include subjective assessments and judgments.

We account for a contract when: (i) it has approval and commitment from both parties, (ii) the rights of the parties are identified, (iii) payment terms are identified, (iv) the contract has commercial substance, and (v) collectability

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of consideration is probable. We consider the start of a project to be when the above criteria have been met and we either have written authorization from the customer to proceed or an executed contract.

Selling, marketing and estimation costs incurred in relation to selling contracts are expensed as incurred. On rare occasions, we may incur significant expenses related to selling a contract that we only incurred because we sold that contract. If this occurs, we capitalize that cost and amortize it on a percentage of completion basis over the life of the contract. We do not currently have any capitalized selling, marketing, or estimation costs on our Balance Sheet and did not incur any impairment ~~tests~~loss in the current year.

We generally do not incur significant incremental costs related to obtaining or fulfilling a contract prior to the start of a project. On rare occasions, when significant pre-contract costs are incurred, they are capitalized and amortized on a percentage of completion basis over the life of the contract. We do not currently have any capitalized obtaining or fulfillment costs on our Balance Sheet and did not incur any impairment loss on such costs in the current year.

Project contracts typically provide for a schedule of billings or invoices to the customer based on our job-to-date percentage of completion of specific tasks inherent in the fulfillment of our performance obligation(s). The schedules for such billings usually do not precisely match the schedule on which costs are incurred. As a result, contract revenue recognized in the Statement of Operations can and usually does differ from amounts that can be billed or invoiced to the customer at any point during the contract. Amounts by which cumulative contract revenue recognized on a contract as of a given date exceed cumulative billings and unbilled receivables to the customer under the contract are reflected as a current asset in our Balance Sheet under the caption “Costs and estimated earnings in excess of billings.” Amounts by which cumulative billings to the customer under a contract as of a given date exceed cumulative contract revenue recognized on the contract are reflected as a current liability in our Balance Sheet under the caption “Billings in excess of costs and estimated earnings.”

We typically invoice our customers with payment terms of net due in 30 days. It is common in the construction industry for a contract to specify more lenient payment terms allowing the customer 45 to 60 days to make their payment. It is also common for the contract in the construction industry to specify that a general contractor is not required to submit payments to a subcontractor until it has received those funds from the owner or funding source. In most instances, we receive payment of our invoices between 30 to 90 days of the date of the invoice.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

To determine the proper revenue recognition method for contracts, we evaluate whether two or more contracts should be combined and accounted for as one performance obligation and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most of our contracts, the customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability (even if that single project results in the delivery of multiple units). Hence, the entire contract is accounted for as one performance obligation. Less commonly, however, we may promise to provide distinct goods or services within a contract, in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. We infrequently sell standard products with observable standalone sales. In such cases, the observable standalone sales are used to determine the standalone selling price. More frequently, we sell a customized, customer-specific solution, and, in these cases, we typically use the expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.

We recognize revenue over time for all of our services as we perform them because (i) control continuously transfers to that customer as work progresses, and (ii) we have the right to bill the customer as costs are incurred. The customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to

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payment for work performed to date plus a reasonable profit to deliver products or services that do not have an alternative use to the Company.

For the reasons listed above, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We generally use the cost to cost measure of progress for our contracts, as it best depicts the transfer of assets to the customer that occurs as we incur costs on our contracts. Under the cost to cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenue, including estimated fees or profits, is recorded proportionally as costs are incurred. Costs to fulfill include labor, materials and subcontractors’ costs, other direct costs and an allocation of indirect costs.

For a small portion of our business in which our services are delivered in the form of service maintenance agreements for existing systems to be repaired and maintained, as opposed to constructed, our performance obligation is to maintain the customer’s mechanical system for a specific period of time. Similar to jobs, we recognize revenue over time; however, for service maintenance agreements in which the full cost to provide services may not be known, we generally use an input method to recognize revenue, which is based on the amount of time we have provided our services out of the total time we have been contracted to perform those services.

Due to the nature of the work required to be performed on ~~testing dates~~many of our performance obligations, the estimation of total revenue and cost at completion (the process described below in more detail) is complex, subject to many variables and requires significant judgment. The consideration to which we are entitled on our long-term contracts may include both fixed and variable amounts. Variable amounts can either increase or decrease the transaction price. A common example of variable amounts that can either increase or decrease contract value are pending change orders that represent contract modifications for which a change in scope has been authorized or acknowledged by our customer, but the final adjustment to contract price is yet to be negotiated. Other examples of positive variable revenue include amounts awarded upon achievement of certain performance metrics, program milestones or cost of completion date targets and can be based upon customer discretion. Variable amounts can result in a deduction from contract revenue if we fail to meet stated performance requirements, such as complying with the construction schedule.

Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing performance obligation(s). The effect of a contract modification on the transaction price, and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase or decrease) on a cumulative catchup basis.

We have a Company-wide policy requiring periodic review of the Estimate at Completion in which management reviews the progress and execution of our performance obligations and estimated remaining obligations. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenue and costs. The risks and opportunities include management's judgment about the ability and cost to achieve the schedule (e.g., the number and type of milestone events), technical requirements (e.g., a newly developed product versus a mature product) and other contract requirements. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation (e.g., to estimate increases in wages and prices for materials and related support cost allocations), execution by our subcontractors, the availability and timing of funding from our customer, and overhead cost rates, among other variables.

Based on this analysis, any adjustments to revenue, cost of services, and the related impact to operating income are recognized as necessary in the quarter in which they become known. These adjustments may result from positive program performance if we determine we will be successful in mitigating risks surrounding the technical, schedule and cost aspects of those performance obligations or realizing related opportunities and may result in an increase in operating income during the performance of individual performance obligations. Likewise, if we determine we will not be successful in mitigating these risks or realizing related opportunities, these adjustments may result in a decrease in

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operating income. Changes in estimates of revenue, cost of services and the related impact to operating income are recognized quarterly on a cumulative catchup basis, meaning we recognize in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation's percentage of completion. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations. For projects in which estimates of total costs to be incurred on a performance obligation exceed total estimates of revenue to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined.

The Company typically does not incur any returns, refunds, or similar obligations after the completion of the performance obligation since any deficiencies are corrected during the course of the work or are included as a modification to revenue. The Company does offer an industry standard warranty on our work, which is most commonly for a one-year period. The vendors providing the equipment and materials are responsible for any failures in their product unless installed incorrectly. We include an estimated amount to cover estimated warranty expense in our Cost of Services and record a liability on our Balance Sheet to cover our current estimated outstanding warranty obligations.

Prior to implementing ASC 606 on January 1, ~~2017.~~2018, our methods for recognizing revenue were very similar to our current method under ASC 606. We ~~early~~used the actual cost as a percent of total expected cost at completion to estimate our percentage complete on fixed price jobs, a mark-up of costs for jobs in which revenue was based on time and materials incurred and elapsed time for those service maintenance contracts in which the full cost to provide the services cannot be reasonably estimated. Furthermore, our process for allocating transaction price to performance obligations is also substantially similar to prior years in which, in most cases, a contract is one performance obligation. In those cases in which a contract is determined to have more than one performance obligation, the contract price is allocated to each performance obligation based on its standalone sales price.

In the first nine months of 2018 and 2019, net revenue recognized from our performance obligations satisfied in previous periods was not material.

Disaggregation of Revenue

Our consolidated 2019 revenue was derived from contracts to provide service activities in the mechanical and electrical services segments we serve. Refer to Note 9 – Segment Information for additional information on our reportable segments. We disaggregate our revenue from contracts with customers by activity, customer type and contract type, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. See details in the following tables (dollars in thousands):


	Three Months Ended September 30,								Nine Months Ended September 30,
Revenue by Service Provided	2019				2018				2019				2018
HVAC and Plumbing	$	545,088	77.1	%	$	540,733	91.0	%	$	1,531,331	80.8	%	$	1,448,761	90.9	%
Electrical Services		116,902	16.5	%		1,611	0.3	%		218,061	11.5	%		1,611	0.1	%
Building Automation Control Systems		24,540	3.5	%		25,822	4.3	%		73,816	3.9	%		72,128	4.5	%
Other		20,388	2.9	%		26,370	4.4	%		72,485	3.8	%		72,020	4.5	%
Total	$	706,918	100.0	%	$	594,536	100.0	%	$	1,895,693	100.0	%	$	1,594,520	100.0	%

	Three Months Ended September 30,								Nine Months Ended September 30,
Revenue by Type of Customer	2019				2018				2019				2018
Industrial	$	222,156	31.4	%	$	184,174	31.0	%	$	588,818	31.1	%	$	398,351	25.0	%
Education		125,836	17.8	%		115,202	19.4	%		292,799	15.4	%		312,852	19.6	%
Office Buildings		83,271	11.8	%		75,871	12.8	%		254,966	13.5	%		224,300	14.1	%
Healthcare		126,909	18.0	%		79,424	13.3	%		306,810	16.2	%		214,537	13.4	%
Government		41,502	5.9	%		32,633	5.5	%		118,224	6.2	%		106,065	6.6	%
Retail, Restaurants and Entertainment		67,141	9.5	%		60,908	10.2	%		184,618	9.7	%		169,899	10.7	%
Multi-Family and Residential		24,121	3.4	%		33,903	5.7	%		83,417	4.4	%		102,995	6.5	%
Other		15,982	2.2	%		12,421	2.1	%		66,041	3.5	%		65,521	4.1	%
Total	$	706,918	100.0	%	$	594,536	100.0	%	$	1,895,693	100.0	%	$	1,594,520	100.0	%

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	Three Months Ended September 30,								Nine Months Ended September 30,
Revenue by Activity Type	2019				2018				2019				2018
New Construction	$	312,279	44.2	%	$	227,715	38.3	%	$	827,718	43.7	%	$	606,208	38.0	%
Existing Building Construction		224,125	31.6	%		216,010	36.3	%		605,819	31.9	%		572,808	35.9	%
Service Projects		62,668	8.9	%		56,557	9.5	%		171,860	9.1	%		150,890	9.5	%
Service Calls, Maintenance and Monitoring		107,846	15.3	%		94,254	15.9	%		290,296	15.3	%		264,614	16.6	%
Total	$	706,918	100.0	%	$	594,536	100.0	%	$	1,895,693	100.0	%	$	1,594,520	100.0	%

Accounts Receivable

Accounts Receivable include amounts from work completed in which we have billed or have an unconditional right to bill our customers. The amounts due are stated at their net estimated realizable value. We maintain an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and collateral to the extent applicable.

Contract Assets and Liabilities

Contract assets include unbilled amounts typically resulting from sales under long term contracts when the cost to cost method of revenue recognition is used, revenue recognized exceeds the amount billed to the customer and right to payment is conditional, subject to completing a milestone, such as a phase of the project. Contract assets are generally classified as current.

Contract liabilities consist of advance payments and billings in excess of revenue recognized. Our contract assets and liabilities are reported in a net position on a contract by contract basis at the end of each reporting period. We classify advance payments and billings in excess of revenue recognized as current. It is very unusual for us to have advanced payments with a term of greater than one year; therefore, our contract assets are usually all current. If we have advanced payments with a term greater than one year, the noncurrent portion of advanced payments would be included in other long-term liabilities in our consolidated Balance Sheets.

The following table presents the changes in contract assets and contract liabilities (in thousands):


	Nine Months Ended				Year Ended
	September 30, 2019				December 31, 2018
	Contract		Contract		Contract		Contract
	Assets		Liabilities		Assets		Liabilities
Balance at beginning of period	$	10,213	$	130,986	$	30,116	$	106,005
Change due to acquisitions / disposals		6,573		31,556		2,833		8,195
Change due to conditional versus unconditional		(10,665)		—		6,244		—
Reclassified to unbilled accounts receivable		—		—		(28,980)		—
Change in timing for performance obligation to be satisfied		—		4,555		—		16,786
Balance at end of period	$	6,121	$	167,097	$	10,213	$	130,986

In the first nine months of 2019 and 2018, we recognized revenue of $123.3 million and $99.8 million related to our contract liabilities at January 1, 2019 and January 1, 2018, respectively.

We did not have any impairment losses recognized on our receivables or contract assets in the first nine months of 2019 and 2018.

Remaining Performance Obligations

Remaining construction performance obligations represent the remaining transaction price of firm orders for which work has not been performed and excludes unexercised contract options. As of September 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $1.61 billion. The Company expects to recognize revenue on approximately 80-85% of the remaining performance obligations over the

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next 12 months, with the remaining recognized thereafter. Our service maintenance agreements are generally one-year renewable agreements. We have adopted ~~ASU 2017-04~~the practical expedient that allows us to not include service maintenance contracts one year or less, therefore we do not report unfulfilled performance obligations for service maintenance agreements.

Leases

We lease certain facilities, vehicles and equipment under noncancelable operating leases. The most significant portion of these noncancelable operating leases are for the facilities occupied by our corporate office and our operating locations. Leases with an initial term of 12 months or less are not recorded on the Balance Sheet. We account for lease components separately from the non-lease components. We have certain leases with variable payments based on an index as well as some short-term leases on equipment and facilities. Variable lease expense and short-term lease expense were not material to our financial statements and aggregated to $6.2 million in the first nine months of 2019. Lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The weighted average discount rate as of September 30, 2019 was 4.0%. We recognize lease expense, including escalating lease payments and lease incentives, on a straight-line basis over the lease term. Lease expense for the three months ended September 30, 2019 and 2018 was $6.5 million and $6.1 million, respectively. Lease expense for the nine months ended September 30, 2019 and 2018 was $18.3 million and $17.2 million, respectively.

The lease terms generally range from three to ten years. Some leases include 1 or more options to renew, with renewal terms that can extend the lease term. Our lease terms may include the exercise of lease renewal options when it is reasonably certain that we will exercise the option and it is at our sole discretion. The weighted average remaining lease term was 8.1 years at September 30, 2019.

A majority of the Company’s real property leases are with individuals or entities with whom we have no other business relationship. However, in certain instances the Company enters into real property leases with current or former employees. Rent paid to related parties for the three months ended September 30, 2019 and 2018 was approximately $0.7 million and $1.3 million, respectively. Rent paid to related parties for the nine months ended September 30, 2019 and 2018 was approximately $2.7 million and $3.5 million, respectively.

If we decide to cancel or terminate a lease before the end of its term, we would typically owe the lessor the remaining lease payments under the term of the lease. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. On rare occasions we rent or sublease certain real estate assets that we no longer use to third parties.

The following table summarizes the lease asset and liabilities included in the consolidated Balance Sheet as follows (in thousands):


	September 30, 2019
Lease right-of-use assets	$	84,281
Lease liabilities:
Other current liabilities		13,549
Long-term lease liabilities		73,213
Total lease liabilities	$	86,762

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The maturities of lease liabilities are as follows (in thousands):


Year ending December 31—
2019 (excluding the nine months ended September 30, 2019)	$	4,326
2020		16,288
2021		14,477
2022		12,291
2023		10,328
Thereafter		44,617
Total Lease Payments		102,327
Less—Present Value Discount		(15,565)
Present Value of Lease Liabilities	$	86,762

Supplemental information related to leases was as follows (in thousands):


	Three Months Ended		Nine Months Ended
	September 30, 2019		September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities	$	6,466	$	18,426
Lease right-of-use assets obtained in exchange for lease liabilities	$	7,050	$	10,768

Income Taxes

We conduct business throughout the United States in virtually all fifty states. Our effective tax rate changes based upon our relative profitability, or lack thereof, in states with varying tax rates and rules. In addition, discrete items, such as tax law changes, judgments and legal structures, can impact our effective tax rate. These items can also include the tax treatment for impairment of goodwill and other intangible assets, changes in fair value of acquisition-related assets and liabilities, tax reserves for uncertain tax positions, accounting for losses associated with underperforming operations and noncontrolling interests.

In the third quarter of 2019, we filed an amended federal return for 2015 to claim the credit for increasing research activities (“R&D tax credits”) and recorded a $4.6 million tax benefit that was fully offset by an increase in unrecognized tax benefits. We previously filed an amended federal return for 2014 to claim R&D tax credits during 2018 and recorded a $2.7 million tax benefit that was also fully offset by an increase in unrecognized tax benefits. These tax benefits were fully offset by increases in unrecognized tax benefits due to the uncertainty of the outcome from examinations opened by the Internal Revenue Service (the “IRS”). As a result, the R&D tax credits claimed have had no impact on our effective tax rates.

For the nine months ended September 30, 2019, our provision for income taxes was reduced by $2.0 million due to benefits from the filing, and expected filing, of amended returns to claim the energy efficient commercial buildings deduction (the “179D deduction”) allocated to us.

Our provision for income taxes was reduced by $2.8 million in the first quarter of ~~2017, which did not have~~2018 due to a ~~material impact on~~decrease in unrecognized tax benefits from the filing of a federal income tax automatic accounting method change application.

Other Income

In April 2018, we entered into settlement agreements with British Petroleum (“BP”) related to 2 claims from one of our ~~consolidated financial statements.~~subsidiaries regarding the April 2010 BP Deepwater Horizon oil spill. We recorded a gain of $4.0 million in the second quarter of 2018 as a result of these settlements.

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~~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 unit represents an operating segment and these segments have been aggregated, as the operating units meet all of the aggregation criteria.

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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~~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, ~~2017~~2019 and December 31, 2018 (in thousands):



	Balance		Fair Value Measurements at Reporting Date
	September 30,
	2017		Level 1		Level 2		Level 3

									Fair Value Measurements at September 30, 2019
									Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	29,496	$	29,496	$	—	$	—	$	40,363	$	—	$	—	$	40,363
Life insurance—cash surrender value	$	3,180	$	—	$	3,180	$	—	$	—	$	3,758	$	—	$	3,758
Contingent earn-out obligations	$	9,863	$	—	$	—	$	9,863	$	—	$	—	$	29,430	$	29,430

									Fair Value Measurements at December 31, 2018
									Level 1		Level 2		Level 3		Total
Cash and cash equivalents									$	45,620	$	—	$	—	$	45,620
Life insurance—cash surrender value									$	—	$	3,252	$	—	$	3,252
Contingent earn-out obligations									$	—	$	—	$	7,375	$	7,375

Cash and cash equivalents consist primarily of highly rated money market funds at a variety of ~~well‑known~~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. The carrying value of our borrowings associated with the Revolving Credit Facility approximate its fair value due to the variable rate on such debt.

~~One of our operations has~~We have life insurance policies covering 4466 employees with a combined face value of ~~$37.3~~$51.1 million. The ~~policy is~~policies are invested in ~~mutual funds~~several investment vehicles, and the fair value measurement of the cash surrender balance associated with these policies is determined using Level 2 inputs within the fair value hierarchy and will vary with investment performance. The cash surrender value of these policies was ~~$3.2~~$3.8 million as of September 30, ~~2017~~2019 and ~~$3.7~~$3.3 million as of December 31, ~~2016.~~2018. These assets are included in “Other Noncurrent Assets” in our consolidated ~~balance sheets.~~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).:


Balance at beginning of year	$	7,375
Issuances		19,500
Settlements		(1,369)
Adjustments to fair value		3,924
Balance at September 30, 2019	$	29,430

Balance at beginning of year

$
2,531

Issuances

11,755

Settlements

(2,578)

Adjustments to fair value

(1,845)

Balance at September 30, 2017

$
9,863

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did not recognize any ~~other~~ impairments in the ~~first nine months of 2017,~~current quarter on those assets required to be measured at fair value on a nonrecurring basis.

4. Acquisitions

Walker Acquisition

On April 1, ~~2017,~~2019, we acquired all of the issued and outstanding ~~stock~~equity interests of ~~BCH Holdings, Inc.~~Walker TX Holding Company, LLC and each of its ~~wholly-owned~~wholly owned subsidiaries (collectively ~~“BCH”~~“Walker”) ~~for $100 million, comprised~~. Walker is a full-service electrical contracting and network infrastructure engineering business serving commercial and industrial clients with headquarters in Irving, Texas and operations throughout the state of ~~$85.7 million in cash at closing and $14.3 million in~~Texas. As a ~~note payable to the former owners, plus an earn‑out that we will pay if certain financial targets are met after~~result of the acquisition, ~~date and~~Walker is a ~~working capital adjustment. The preliminary acquisition date fair value~~wholly owned subsidiary of ~~consideration transferred for this acquisition~~the Company reported in our electrical services segment. Revenue attributable to Walker was ~~$122.6 million, of which $97.9 million was allocated to goodwill and identifiable intangible assets. Our consolidated operating results included revenue of $73.2~~$203.1 million for the six months from the acquisition date. ~~BCH is an integrated, single-source provider of mechanical service, maintenance and construction with headquarters in Tampa, Florida and operations throughout~~

The following summarizes the ~~southeastern region of the United States, which reports as a separate operating location.~~

We completed two acquisitions in the first quarter of 2016. We acquired the remaining 40% noncontrolling interest in Environmental Air Systems, LLC (“EAS”) on January 1, 2016 for $46.6 million, including $42.0 million funded on the closing date plus a holdback, an earn-out that will be earned 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 purchase price and the noncontrolling interest liability was recorded in Additional Paid-In Capital in our Balance Sheet.

Additionally in the first quarter of 2016, we acquired 100% of the ShoffnerKalthoff family of companies (collectively, “Shoffner”), which reports as a separate operating location in the Knoxville, Tennessee area. The acquisition date fair value of consideration transferred ~~for this acquisition was $19.8 million, of which $14.8 million was allocated to goodwill~~ and identifiable intangible assets. The purchase price included $15.5 million funded on the closing date plus a note payable to the former owners, an earn-out that we will pay if certain financial targets are met after the acquisition date fair value of the identifiable assets acquired and liabilities assumed, including an amount for goodwill (in thousands):


Consideration transferred:
Cash paid at closing	$	178,000
Advance to former owners		20,500
Working capital adjustment		(7,594)
Notes issued to former owners		25,000
Tax equalization payment		202
Estimated fair value of contingent earn-out payments		19,500
	$	235,608
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents	$	4,850
Billed and unbilled accounts receivable		92,309
Other current assets		8,587
Other long-term assets		53
Property and equipment		4,970
Goodwill		96,439
Identifiable intangible assets		90,200
Lease right-of-use asset		10,495
Accounts payable		(20,220)
Accrued compensation and benefits		(974)
Billings in excess of costs and estimated earnings		(31,553)
Other current liabilities		(11,278)
Long-term lease liabilities		(8,270)
	$	235,608

The allocation of the purchase price to the assets acquired and liabilities assumed is preliminary and, therefore, subject to change pending the completion of the final valuation of intangible assets and accrued liabilities. Goodwill represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. All of the goodwill recognized as a ~~working capital adjustment.~~result of this transaction is tax deductible.

In estimating the fair value of the acquired intangible assets, we utilized the valuation methodology determined to be the most appropriate for the individual intangible asset. In order to estimate the fair value of the backlog and customer relationships, we utilized an excess earnings methodology, which consisted of the projected cash flows attributable to these assets discounted to present value using a risk-adjusted discount rate that represented the required rate of return. The trade name value was determined based on the relief-from-royalty method, which applies a royalty rate to the revenue stream attributable to this asset, and the resulting royalty payment is tax effected and discounted to present value. Some of the more significant estimates and assumptions inherent in determining the fair value of the identifiable intangible assets are associated with forecasting cash flows and profitability, which represent Level 3 inputs.

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The primary assumptions used were generally based upon the present value of anticipated cash flows discounted at rates ranging from 8.5%-11.5%. Estimated years of projected earnings generally follow the range of estimated remaining useful lives for each intangible asset class.

The acquired intangible assets include the following (dollars in thousands):


	Valuation Method	Estimated Useful Life		Estimated Fair Value
Backlog	Excess earnings	2 years	$	4,600
Trade Names	Relief-from-royalty	25 years		32,600
Customer Relationships	Excess earnings	10 years		53,000
Total			$	90,200

The contingent earn-out obligation is associated with the achievement of specified earnings milestones over a five year period, and the range of estimated milestone payments is from $1 million to $11 million (undiscounted). We determined the initial fair value of the contingent earn-out obligation based on the Monte Carlo Simulation method, which represents a Level 3 measurement. Cash flows were discounted using a 10.2% discount rate, which we believe is appropriate and representative of a market participant assumption. Subsequent to the acquisition date, we will measure the contingent earn-out obligation at fair value each reporting period. Future changes in the estimated fair value of the contingent payments will be recognized immediately in earnings.

Pro Forma Impact of the Acquisition

The following unaudited pro forma information presents the consolidated results of the Company and Walker for the three and nine months ended September 30, 2019 and 2018, with adjustments to give effect to pro forma events that are directly attributable to the acquisition and have a continuing impact. The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the results of operations of future periods or the results of operations that actually would have been realized had the entities been a single company during the periods presented or the results that the company will experience after the acquisition. The unaudited pro forma information does not give effect to the potential impact of current financial conditions, regulatory matters or any operating efficiencies that may be associated with the acquisition.

The unaudited pro forma consolidated results of operations, assuming the acquisition had occurred on January 1, 2018, are as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Revenue	$	706,918	$	707,199	$	1,984,054	$	1,885,757
Pre-tax income	$	49,718	$	51,374	$	106,223	$	116,754

Other Acquisitions

In addition to the ~~BCH~~Walker acquisition, we completed ~~three additional acquisitions~~1 acquisition in the first quarter of 2019 and 1 acquisition in the second quarter of ~~2017. We completed one acquisition in the third quarter of 2017. The~~2019 with a total purchase price ~~for these acquisitions, including earn-outs, was $9.6~~of $2.6 million for the nine months ended September 30, ~~2017. These~~2019. We completed 2 acquisitions ~~were not material~~in the first quarter of 2018, 3 acquisitions in the second quarter of 2018 and 2 acquisitions in the third quarter of 2018. NaN acquisition completed in the third quarter of 2018 reports as a separate operating location and the remainder were “tucked-in” with existing operations. Our consolidated Balance Sheet includes preliminary allocations of the purchase price to the assets acquired and liabilities assumed pending the completion of the final valuation of intangible assets and accrued liabilities.

The results of operations of acquisitions are included in our consolidated financial statements from their respective acquisition dates. Our consolidated ~~balance sheet~~Balance Sheet includes preliminary allocations of the purchase price to the assets acquired and liabilities assumed for the applicable ~~acquisition~~acquisitions pending the completion of the final valuation of intangible assets and accrued liabilities. ~~The~~Excluding the Walker acquisition, the acquisitions completed in the current and prior year were not material, individually or in the aggregate. Additional contingent purchase price (“earn-out”) has

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been or will be paid if certain acquisitions achieve predetermined profitability targets.Such earn-outs, which are not subject to the continued employment of the sellers,. are estimated as of the purchase date and included as part of the consideration paid for the acquisition. If we have an earn-out for which continued employment is a condition to receive payment, then the earn-out is recorded as compensation expense over the period earned.

5. Goodwill and Identifiable Intangible Assets, Net

Goodwill

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


	September 30,		December 31,
	2017		2016
Balance at beginning of year	$	149,208	$	143,874

					Mechanical Services		Electrical Services
					Segment		Segment		Total
Balance at December 31, 2017					$	200,584	$	—	$	200,584
Additions (See Note 4)		55,668		5,334		34,598		—		34,598
Impairment adjustment		(1,105)		—		—		—		—
Balance at end of period	$	203,771	$	149,208
Balance at December 31, 2018						235,182		—		235,182
Additions (See Note 4)						579		96,439		97,018
Impact of segment reorganization						(1,101)		1,101		—
Impairment adjustment						—		—		—
Balance at September 30, 2019					$	234,660	$	97,540	$	332,200

~~We recorded~~Identifiable Intangible Assets, Net

Identifiable intangible assets consist of the following (dollars in thousands):


	Estimated	September 30, 2019				December 31, 2018
	Useful Lives	Gross Book		Accumulated		Gross Book		Accumulated
	in Years	Value		Amortization		Value		Amortization
Customer relationships	1 - 15	$	182,963	$	(75,455)	$	128,480	$	(60,731)
Backlog	1 - 2		13,700		(11,906)		9,100		(8,260)
Tradenames	2 - 25		71,995		(14,561)		39,395		(12,709)
Total		$	268,658	$	(101,922)	$	176,975	$	(81,700)

The amounts attributable to customer relationships and tradenames are amortized to “Selling, General and Administrative Expenses” based upon the estimated consumption of their economic benefits, or a ~~goodwill impairment charge~~straight-line method over periods from one to twenty-five years if the pattern of ~~$1.1~~economic benefit cannot otherwise be reliably estimated. The amounts attributable to backlog are being amortized to “Cost of Services” on a proportionate method over the remaining backlog period. Amortization expense for the three- and nine-months ended September 30, 2019 was $7.2 million ~~during~~and $20.2 million, respectively. Amortization expense for the ~~first quarter~~three- and nine-months ended September 30, 2018 was $5.3 million and $14.1 million, respectively.

At September 30, 2019, future amortization expense of ~~2017. Based on changes to our market strategy that occurred in March 2017 related to our reporting unit based in California, we reevaluated our~~identifiable intangible assets is as follows (in thousands):


Year ended December 31—
2019 (remainder of the year)	$	6,844
2020		23,213
2021		19,158
2022		16,536
2023		15,082
Thereafter		85,903
Total	$	166,736

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projected future earnings for this operating location. When the carrying value of a given reporting unit exceeds its fair value, a goodwill impairment loss is recorded for this difference, not to exceed the carrying amount of goodwill. Based upon our projected future earnings for this location, we could no longer support the related goodwill balance and therefore the goodwill associated with this location was fully impaired. The fair value was estimated using a discounted cash flow model.

6. Debt Obligations

Debt obligations consist of the following (in thousands):


	September 30,		December 31,
	2017		2016

					September 30,		December 31,
					2019		2018
Revolving credit facility	$	66,000	$	—	$	193,000	$	50,000
Notes to former owners		15,330		2,250		48,983		26,813
Other debt		239		305		31		105
Capital lease obligations		123		256
Total debt		81,692		2,811		242,014		76,918
Less—current portion		(708)		(763)		(13,847)		(3,279)
Total long-term portion of debt	$	80,984	$	2,048	$	228,167	$	73,639

Revolving Credit Facility

~~We have a $325.0 million~~In April 2018, we amended our senior credit facility (the “Facility”) provided by a syndicate of banks, increasing our borrowing capacity from $325.0 million to $400.0 million, with a $100 million accordion option. The Facility, which is available for borrowings and letters of credit, expires in ~~February 2021~~April 2023 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, ~~2017,~~2019, we had ~~$66.0~~$193.0 million of outstanding borrowings, ~~$39.6~~$33.6 million in letters of credit outstanding and ~~$219.4~~$173.4 million of credit available.

There are ~~two~~2 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:


	Consolidated Total Indebtedness to
	Credit Facility Adjusted EBITDA
	Less than 0.75		0.75 to 1.50		1.50 to 2.25		2.25 or greater

									Consolidated Total Indebtedness to
									Credit Facility Adjusted EBITDA
									Less than 1.00		1.00 to 1.75		1.75 to 2.50		2.50 or greater
Additional Per Annum Interest Margin Added Under:
Base Rate Loan Option	0.25	%	0.50	%	0.75	%	1.00	%	0.25	%	0.50	%	0.75	%	1.00	%
Eurodollar Rate Loan Option	1.25	%	1.50	%	1.75	%	2.00	%	1.25	%	1.50	%	1.75	%	2.00	%

The weighted average interest rate applicable to the borrowings under the Facility was approximately ~~2.6%~~3.6% as of September 30, ~~2017.~~2019.

Certain of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on our behalf, such as to beneficiaries under our self-funded insurance programs. We have also occasionally used letters of credit to guarantee performance under our contracts and to ensure payment to our subcontractors and vendors under those contracts. Our lenders issue such letters of credit through the ~~Facility for a fee.~~Facility. 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.

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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.

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The Facility’s principal financial covenants include:

Total 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.~~quarter. The total leverage ratio as of September 30, ~~2017~~2019 was ~~0.5.~~1.2.

Fixed Charge Coverage Ratio—The Facility requires that the ratio of (a) Credit Facility Adjusted EBITDA, less non-financed capital expenditures, ~~tax~~ provision for income taxes, dividends and amounts used to repurchase stock to (b) the sum of interest expense and scheduled principal payments of indebtedness be at least 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, as defined in the credit agreement, does not exceed ~~1.50~~1.75 to 1.00. The Facility also allows the fixed charge coverage ratio not to be reduced for stock repurchases ~~through September 30, 2015~~made after the effective date of the Facility 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~~$30 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 ~~1.50~~1.75 to 1.00. ~~Capital~~Credit Facility Adjusted EBITDA, capital expenditures, ~~tax~~ provision for income taxes, dividends, ~~and~~ stock repurchase payments, interest expense and scheduled principal payments are defined under the Facility, for purposes of this covenant, to be amounts for the ~~four~~4 quarters ending as of any given quarterly covenant compliance measurement date. The fixed charge coverage ratio as of September 30, ~~2017~~2019 was ~~29.5.~~13.1.

Other Restrictions—The Facility permits acquisitions of up to ~~$30.0~~$40.0 million per transaction, provided that the aggregate purchase price of all such acquisitions in the same fiscal year does not exceed ~~$65.0~~$80.0 million. However, these limitations only apply when the Company’s Total Leverage Ratio is greater than 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.

We were in compliance with all of our financial covenants as of September 30, ~~2017.~~2019.

Notes to Former Owners

As part of the consideration used to acquire ~~two~~7 companies, we have outstanding notes to the former owners. These notes had an outstanding balance of ~~$15.3~~$49.0 million as of September 30, ~~2017.~~2019. In conjunction with the Walker acquisition in the second quarter of 2019, we issued a promissory note to former owners with an outstanding balance of $25.0 million as of September 30, 2019 that bears interest, payable quarterly, at a stated interest rate of 4.0%. The principal is due in equal installments in April 2022 and April 2023. In conjunction with the BCH acquisition in the second quarter of 2017, we issued a promissory note to former owners with an outstanding balance of $14.3 million as of September 30, ~~2017~~2019 that bears interest, payable quarterly, at a ~~weighted average~~stated interest rate of ~~3.0%~~3.0%. The principal is due in equal installments in April 2020 and 2021. In conjunction with ~~the Shoffner acquisition~~5 immaterial acquisitions in ~~the first quarter of 2016,~~2018 and 2019, we issued ~~a subordinated note~~notes to former owners with an outstanding balance of ~~$1.0~~$9.7 million as of September 30, ~~2017~~2019 that ~~bears~~bear interest, payable quarterly, at ~~a weighted average~~stated interest ~~rate of 3.0%~~rates ranging from 2.5% - 3.5%. The ~~principal is~~principals are due ~~in equal installments in February 2018 and 2019.~~between January 2020 – July 2021.

Other Debt

As part of the Shoffner acquisition, we acquired debt with an outstanding balance at the acquisition date of $0.4 million with principal 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 September 30, ~~2017, $0.2~~2019, less than $0.1 million of the note was outstanding, all of which ~~$0.1 million~~ was considered current.

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In addition, with one of our acquisitions we acquired capital lease obligations. As of September 30, 2017, $0.1 million of capital lease obligations were outstanding, of which $0.1 million was considered current.

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 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. 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~~Current market conditions ~~have seen some strengthening as the commercial construction~~for surety markets ~~have started to rebound. Bonding~~and bonding capacity ~~remains~~are adequate ~~in the current market conditions along~~ with acceptable terms and conditions. Historically, approximately 20% to 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~~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~~per-incident deductibles we absorb under our insurance arrangements for these risks. Losses are estimated and accrued based upon known facts, historical trends and industry averages. Estimated losses in excess of our deductible, which have not already been paid, are included in our accrual with a corresponding receivable from our insurance carrier. Loss estimates associated with the larger and ~~longer‑developing~~longer-developing risks, such as workers’ compensation, auto liability and general liability, are reviewed by a ~~third‑party~~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 year. Diluted EPS is computed considering the dilutive effect of stock options, restricted stock, 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.

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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.

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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.

There were less than ~~0.1 million anti-dilutive stock options for the three and nine months ended September 30, 2017. There were approximately~~ 0.1 million anti-dilutive stock options excluded from the calculation of diluted EPS for the three and nine months ended September 30, ~~2016.~~ 2019 and 2018, respectively.

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):


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2017	2016	2017	2016

					Three Months Ended		Nine Months Ended
					September 30,		September 30,
					2019	2018	2019	2018
Common shares outstanding, end of period	37,134	37,230	37,134	37,230	36,676	37,221	36,676	37,221
Effect of using weighted average common shares outstanding	98	130	125	150	129	73	215	15
Shares used in computing earnings per share—basic	37,232	37,360	37,259	37,380	36,805	37,294	36,891	37,236
Effect of shares issuable under stock option plans based on the treasury stock method	293	319	312	331	181	280	211	294
Effect of restricted and contingently issuable shares	101	142	113	143	65	93	68	104
Shares used in computing earnings per share—diluted	37,626	37,821	37,684	37,854	37,051	37,667	37,170	37,634

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 increased the number of shares that may be acquired under the program and approved extensions of the program. On August 10, 2018, the Board approved an extension to the program ~~to acquire additional~~by increasing the shares authorized for repurchase by 0.7 million shares. Since the inception of the repurchase program, the Board has approved ~~8.1~~8.8 million shares to be repurchased. As of September 30, ~~2017,~~2019, we have repurchased a cumulative total of ~~7.6~~8.5 million shares at an average price of ~~$13.75~~$17.38 per 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, ~~2017,~~2019, we repurchased 0.3 million shares for approximately ~~$8.9~~$15.3 million at an average price of ~~$34.18~~$44.43 per share.

9. Segment Information

Our activities are within the mechanical services industry and the electrical services industry, which represent our 2 reportable segments. Each of our 35 operating locations represents an operating segment, and these segments have been aggregated into 2 reportable segments, as the operating locations meet all of the aggregation criteria. The following table presents information about our reportable segments (in thousands):


	Three Months Ended September 30, 2019
	Mechanical Services		Electrical Services		Corporate & Eliminations		Consolidated
Revenue	$	590,016	$	116,902	$	—	$	706,918
Gross Profit	$	128,501	$	14,201	$	—	$	142,702

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	Three Months Ended September 30, 2018
	Mechanical Services		Electrical Services		Corporate & Eliminations		Consolidated
Revenue	$	592,925	$	1,611	$	—	$	594,536
Gross Profit	$	127,669	$	199	$	—	$	127,868

	Nine Months Ended September 30, 2019
	Mechanical Services		Electrical Services		Corporate & Eliminations		Consolidated
Revenue	$	1,677,632	$	218,061	$	—	$	1,895,693
Gross Profit	$	344,632	$	24,751	$	—	$	369,383

	Nine Months Ended September 30, 2018
	Mechanical Services		Electrical Services		Corporate & Eliminations		Consolidated
Revenue	$	1,592,909	$	1,611	$	—	$	1,594,520
Gross Profit	$	327,905	$	199	$	—	$	328,104

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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~~10-Q and the Annual Report on Form ~~10‑K~~10-K filed with the Securities and Exchange Commission for the year ended December 31, ~~2016~~2018 (the “Form ~~10‑K”~~10-K”). This discussion contains ~~“forward‑looking~~“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~~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.~~10-K. We undertake no obligation to revise or publicly release the results of any revision to these ~~forward‑looking~~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~~forward-looking statements. The terms “Comfort Systems,” “we,” “us,” or ~~“the Company,~~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 mechanical and electrical installation, renovation, maintenance, repair and replacement services within the mechanical and electrical services ~~industry.~~industries. 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. We operate our business in two business segments: mechanical and electrical.

Nature and Economics of Our Business

~~Approximately 80% of~~In our ~~revenue is earned on a project basis for installation of~~ mechanical ~~systems in newly constructed facilities or for replacement of systems in existing facilities. Customers~~business segment, customers hire us to ensure ~~such~~HVAC 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~~

In our electrical business segment, our principal business activity is electrical construction and engineering in the commercial and industrial field. We also perform electrical logistics services, electrical service work, and electrical construction and engineering services.

In both our mechanical and electrical business segments, our responsibilities usually require conforming the systems to ~~pre‑established~~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.

Approximately 84.7% of our revenue is earned on a project basis for installation services in newly constructed facilities or for replacement of systems in existing facilities. 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 to support our operations but which are not specific to the project. Typically, customers will seek pricing from competitors for a given project. While the criteria on which customers select a service provider vary widely and include factors such as quality, technical expertise, ~~on‑time~~on-time performance, ~~post‑project~~post-project support and service, and company history and financial strength, we believe that price for value is the most influential factor for most customers in choosing a mechanical or electrical 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. Amounts withheld under this practice are known as retention or retainage.

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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~~cost-plus or a time and materials basis, under which we are paid our costs incurred plus an ~~agreed‑upon~~agreed-upon profit margin, and such projects are sometimes subject to a guaranteed maximum cost. These margins are frequently less than ~~fixed‑price~~fixed-price contract margins because there is less risk of unrecoverable cost overruns in ~~cost‑plus~~cost-plus or time and materials work.

As of September 30, ~~2017~~2019 we had ~~5,210~~6,061 projects in process. Our average project takes six to nine months to complete, with an average contract price of approximately ~~$457,000.~~$750,000. 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~~consider to be a ~~well‑diversified~~well-diversified distribution of revenue across ~~end‑use~~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~~our services 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, ~~2017,~~2019, by contract price, is as follows:


		Aggregate
		Contract
	No. of	Price Value

					Aggregate
					Contract
				No. of	Price Value
Contract Price of Project	Projects	(millions)		Projects	(millions)
Under $1 million	4,722	$	546.7	5,278	$	730.6
$1 million - $5 million	387		856.8	598		1,306.8
$5 million - $10 million	70		469.5	103		739.6
$10 million - $15 million	19		233.8	36		439.8
Greater than $15 million	12		273.7	46		1,331.3
Total	5,210	$	2,380.5	6,061	$	4,548.1

In addition to project work, approximately ~~20%~~15.3% of our revenue represents maintenance and repair service on already installed HVAC, electrical, and controls systems. This kind of work usually takes from a few hours to a few days to perform. Prices to the customer are based on the equipment and materials used in the service as well as technician labor time. We usually bill the customer for service work when it is complete, typically with payment terms of up to thirty days. We also provide maintenance and repair service under ongoing contracts. Under these contracts, we are paid regular monthly or quarterly amounts and provide specified service based on customer requirements. These agreements typically are for one or more years and frequently contain ~~thirty‑~~thirty- to ~~sixty‑day~~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.

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Profile and Management of Our Operations

We manage our 3635 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,

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training, and the ~~make‑up~~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~~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~~non-competition protection where applicable.

Economic and Industry Factors

As a mechanical and ~~building controls~~electrical 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 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.

Operating Environment and Management Emphasis

Nonresidential building construction and renovation activity, as reported by the federal government, declined steeply over the ~~four year~~four-year period from 2009 to 2012, and 2013 and 2014 activity levels were relatively stable at the low levels of the preceding years. During the four-year period from 2015 ~~and 2016,~~to 2018, there was an increase in overall activity levels, and ~~these improved~~we currently expect that activity will continue at strong levels ~~have continued~~ during ~~2017.~~2019.

~~As a result of our continued strong emphasis on cash flow, at September 30, 2017 we 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~~we believe are favorable that does not expire until ~~February 2021.~~April 2023. 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~~operating history and financial position. We have generated positive free cash flow in each of the last ~~eighteen~~twenty calendar years and will continue our emphasis in this area. We believe that the relative size and strength of our ~~balance sheet~~Balance Sheet and surety ~~support~~relationships, 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 improved market conditions. We will continue ~~our efforts~~ to invest in our service business, to pursue the more active sectors in our markets, and to emphasize our regional and national account business. Our primary emphasis for ~~2017 has been~~2019 is on execution and cost control, but we are seeking growth based on our belief that industry conditions will continue to be strong in the near ~~term, and we~~term. We believe that activity levels will permit us to continue to earn ~~improved~~solid profits while preserving and developing our workforce. We continue to focus on project qualification, estimating, pricing and ~~management;~~management, and we are investing in growth and improved performance.

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Cyclicality and Seasonality

Historically, the construction industry has been highly cyclical. As a result, our volume of business, particularly in new construction projects and renovation, may 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~~mechanical and electrical contracting industries are subject to seasonal variations. 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~~our 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 calendar quarter.

Results of Operations (dollars in thousands):


	Three Months Ended September 30,								Nine Months Ended September 30,
	2017				2016				2017				2016

																	Three Months Ended September 30,								Nine Months Ended September 30,
																	2019				2018				2019				2018
Revenue	$	480,851	100.0	%	$	428,760	100.0	%	$	1,326,850	100.0	%	$	1,242,240	100.0	%	$	706,918	100.0	%	$	594,536	100.0	%	$	1,895,693	100.0	%	$	1,594,520	100.0	%
Cost of services		379,993	79.0	%		335,944	78.4	%		1,054,300	79.5	%		986,496	79.4	%		564,216	79.8	%		466,668	78.5	%		1,526,310	80.5	%		1,266,416	79.4	%
Gross profit		100,858	21.0	%		92,816	21.6	%		272,550	20.5	%		255,744	20.6	%		142,702	20.2	%		127,868	21.5	%		369,383	19.5	%		328,104	20.6	%
Selling, general and administrative expenses		66,707	13.9	%		61,032	14.2	%		196,553	14.8	%		180,245	14.5	%		90,006	12.7	%		75,297	12.7	%		253,417	13.4	%		216,528	13.6	%
Goodwill impairment		—	—			—	—			1,105	0.1	%		—	—
Gain on sale of assets		(184)	—			(166)	—			(464)	—			(523)	—			(708)	(0.1)	%		(219)	—			(1,119)	(0.1)	%		(630)	—
Operating income		34,335	7.1	%		31,950	7.5	%		75,356	5.7	%		76,022	6.1	%		53,404	7.6	%		52,790	8.9	%		117,085	6.2	%		112,206	7.0	%
Interest income		16	—			3	—			55	—			6	—			82	—			25	—			174	—			53	—
Interest expense		(961)	(0.2)	%		(563)	(0.1)	%		(2,392)	(0.2)	%		(1,870)	(0.2)	%		(2,779)	(0.4)	%		(1,152)	(0.2)	%		(6,891)	(0.4)	%		(2,601)	(0.2)	%
Changes in the fair value of contingent earn-out obligations		2,469	0.5	%		804	0.2	%		1,845	0.1	%		468	—			(2,004)	(0.3)	%		434	0.1	%		(3,924)	(0.2)	%		493	—
Other income (expense)		10	—			80	—			57	—			455	—			3	—			39	—			167	—			4,062	0.3	%
Income before income taxes		35,869	7.5	%		32,274	7.5	%		74,921	5.6	%		75,081	6.0	%		48,706	6.9	%		52,136	8.8	%		106,611	5.6	%		114,213	7.2	%
Income tax expense		13,585				11,803				27,188				27,052
Provision for income taxes																		12,473				13,595				26,339				26,466
Net income	$	22,284	4.6	%	$	20,471	4.8	%	$	47,733	3.6	%	$	48,029	3.9	%	$	36,233	5.1	%	$	38,541	6.5	%	$	80,272	4.2	%	$	87,747	5.5	%

We had 3536 operating locations as of December 31, ~~2016. We completed one acquisition in~~2018. In the first quarter of 2019, we combined two operating locations into one. In the second quarter of ~~2017, known as “BCH”, that~~2019, we completed the acquisition of Walker, which reports as a separate ~~location in~~operating location. In the ~~Tampa, Florida area. Other than~~third quarter of 2019, we sold the ~~addition~~majority of ~~BCH, we did not make any changes to operating locations during~~ the ~~first nine months~~assets and ongoing business of ~~2017.~~our California operation. As of September 30, ~~2017,~~2019, we had 3635 operating locations. Acquisitions are included in our results of operations from the respective acquisition date. The ~~same‑store~~same-store comparison from ~~2017~~2019 to ~~2016,~~2018, as described below, excludes six months of results for ~~BCH,~~the Indiana acquisition, which was acquired ~~in April 2017~~July 1, 2018 as well as ~~the first month~~six months of ~~2017~~results for ~~Shoffner,~~Walker, which was acquired ~~in February 2016.~~April 1, 2019. An operating location is included in the ~~same‑store~~same-store comparison on the first day it has comparable prior year operating ~~data.~~data, except for immaterial acquisitions that were absorbed and integrated, or “tucked-in”, with existing operations.

Revenue—Revenue for the third quarter of 2019 increased ~~$52.1~~$112.4 million, or ~~12.1%~~18.9%, to ~~$480.9~~$706.9 million compared to the same period in 2018. The increase included an 18.6% increase related to the Walker acquisition and a 0.3% increase in revenue related to same-store activity.

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The following table presents our operating segment revenue (in thousands, except percentages):


	Three Months Ended September 30,
	2019				2018
Revenue:
Mechanical Services	$	590,016	83.5	%	$	592,925	99.7	%
Electrical Services		116,902	16.5	%		1,611	0.3	%
Total	$	706,918	100.0	%	$	594,536	100.0	%

Revenue for our Mechanical services segment decreased $2.9 million, or 0.5%, to $590.0 million for the third quarter of ~~2017~~2019 compared to the same period in ~~2016. The increase included an 8.0% increase related to the acquisition of BCH and a 4.1% increase in~~2018. Same-store revenue ~~related to same‑store activity. The same‑store revenue increase is~~decreased primarily due to a decrease in activity at one of our Virginia operations ($11.1 million) and our North Carolina operation ($9.3 million), as well as the sale of the majority of the assets and ongoing business of our California operation in the third quarter of 2019 ($3.8 million). This decrease was partially offset by an increase in activity at one of our ~~Virginia~~Texas operations ($~~9.3~~12.4 million) and one of our ~~Wisconsin operation~~Florida operations ($~~4.8~~7.4 million).

Revenue for our Electrical services segment increased ~~$84.6~~$115.3 million to $116.9 million for the third quarter of 2019 compared to the same period in 2018. The increase related to the acquisition of Walker in April 2019 as well as a smaller acquisition completed in the third quarter of 2018.

Revenue for the first nine months of 2019 increased $301.2 million, or ~~6.8%~~18.9%, to ~~$1.33~~$1.90 billion compared to the same period in 2018. The increase included a 16.1% increase related to the Indiana and Walker acquisitions and a 2.8% increase in revenue related to same-store activity.

The following table presents our operating segment revenue (in thousands, except percentages):


	Nine Months Ended September 30,
	2019				2018
Revenue:
Mechanical Services	$	1,677,632	88.5	%	$	1,592,909	99.9	%
Electrical Services		218,061	11.5	%		1,611	0.1	%
Total	$	1,895,693	100.0	%	$	1,594,520	100.0	%

Revenue for our Mechanical services segment increased $84.7 million, or 5.3%, to $1.7 billion for the first nine months of ~~2017~~2019 compared to the same period in ~~2016.~~2018. Of this increase, $53.8 million was attributable to the Indiana acquisition. The same-store revenue increase included ~~a 6.4% increase related to the acquisitions of BCH and Shoffner and a 0.4%~~an increase in ~~revenue related to same‑store activity. The same‑store revenue increase is primarily due to an increase in~~

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activity at one of our ~~New Hampshire~~Florida operations ($21.8 million), our Alabama operation ($~~16.3 million) and our Wisconsin operation ($11.4 million). This was partially offset by a decrease at our North Carolina operation ($11.7~~12.0 million) and one of our ~~Virginia~~Texas operations ($~~9.1~~10.4 million). This increase was offset by a decrease in activity at one of our Maryland operations ($17.1 million) and the sale of the majority of the assets and ongoing business of our California operation in the third quarter of 2019 ($9.7 million).

Revenue for our Electrical services segment increased $216.5 million to $218.1 million for the first nine months of 2019 compared to the same period in 2018. The increase related to the acquisition of Walker in April 2019 as well as a smaller acquisition completed in the third quarter of 2018.

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, ~~2017~~2019 was ~~$901.2 million,~~$1.61 billion, a ~~3.9% decrease~~7.6% increase from June 30, ~~2017~~2019 backlog of ~~$937.8 million,~~$1.50 billion, and a ~~25.3%~~28.2% increase from September 30, ~~2016~~2018 backlog of ~~$719.3 million.~~$1.25 billion. Sequential backlog ~~decreased~~increased $113.2 million or 7.6% primarily due to ~~the completion~~increased project bookings at Walker ($63.1 million), one of ~~project work at~~our Virginia

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operations ($19.6 million) and one of our Texas operations ($~~13.3 million), one of our Virginia operations ($10.4 million) and one of our Florida operations ($10.4~~15.2 million). The year‑over‑year backlog increase included the Walker acquisition ~~of BCH~~ ($~~31.8~~279.3 million) and a same-store increase of ~~$150.1~~$74.8 million or ~~20.9%~~6.0%. Same-store year-over-year backlog increased primarily due to increased project bookings at ~~our Colorado operation ($50.6 million),~~ one of our ~~Virginia~~Florida operations ($~~41.4~~33.6 million), our ~~North Carolina~~Iowa operation ($~~22.3~~28.9 million) and one of our ~~Arizona operation~~Tennessee operations ($~~22.1~~26.1 million), partially offset by completion of project work at one of our Florida operations ($45.9 million).

Gross Profit—Gross profit increased ~~$8.0~~$14.8 million, or ~~8.7%~~11.6%, to ~~$100.9~~ $142.7 million for the third quarter of ~~2017~~2019 as compared to the same period in ~~2016.~~2018. The increase included a ~~6.1%~~10.1% increase related to the Walker acquisition ~~of BCH~~ and a ~~2.6%~~1.5% increase in ~~same‑store~~same-store activity. The ~~same‑store~~same-store increase in gross profit was primarily due to increased volumes at one of our Florida operations ($1.9 million) and one of our Virginia operations ($~~1.4~~1.2 million), offset by decreased volumes at another one of our Virginia operations ($2.6 million) and our Wisconsin operation ($1.3 million). Additionally, we had improvements in project execution at our North Carolina operation ($2.9 million) and our Arkansas operation ($1.8 million), offset by a decrease at one of our Tennessee operations ($2.1 million) compared to the prior ~~year~~year. As a percentage of revenue, gross profit decreased from 21.5% in 2018 to 20.2% in 2019 primarily due to the factors discussed above as well as ~~improved project execution~~lower margins on the Walker acquisition including backlog amortization of $1.2 million.

Gross profit increased $41.3 million, or 12.6%, to $369.4 million for the first nine months of 2019 as compared to the same period in 2018. The increase included an 8.0% increase related to the Indiana and Walker acquisitions and a 4.6% increase in same-store activity. The same-store increase in gross profit was primarily due to increased volumes at one of our ~~Texas~~Florida operations ($~~1.2~~4.9 million) and one of our Virginia operations ($4.1 million), offset by a decrease at our Wisconsin operation ($2.6 million) compared to the prior year. Additionally, we had improvements in project execution at our North Carolina operation ($5.8 million). As a percentage of revenue, gross profit decreased from ~~21.6%~~20.6% in ~~2016~~2018 to ~~21.0%~~19.5% in ~~2017~~2019 primarily due to the factors discussed above and lower margins on the Walker acquisition including backlog amortization of $2.8 million in 2019.

Selling, General and Administrative Expenses (“SG&A”)—SG&A increased $14.7 million, or 19.5%, to $90.0 million for the third quarter of 2019 as compared to 2018. On a same-store basis, excluding amortization expense, SG&A increased $5.2 million, or 7.4%. This increase is primarily due to investments made in personnel in response to the growth we have experienced in recent years ($2.5 million) and an increase in ~~backlog~~professional fees in 2019 ($1.4 million, of which approximately $0.9 million relates to tax planning costs). Additionally, we had an increase in amortization expense of $1.7 million during the period as compared to the prior year period, primarily as a result of the ~~BCH~~Walker acquisition. As a percentage of revenue, SG&A remained steady at 12.7% in 2019 and 2018 as a result of the increases discussed above being largely offset by lower SG&A as a percentage of revenue at Walker.

~~Gross profit~~SG&A increased ~~$16.8~~$36.9 million, or ~~6.6%~~17.0%, to ~~$272.6~~$253.4 million for the first nine months of ~~2017~~2019 as compared to the same period in 2016. The increase included a 5.5% increase related to the acquisitions of BCH and Shoffner and a 1.1% increase in same‑store activity. The same‑store increase in gross profit was primarily due to increased volumes at our Wisconsin operation ($3.5 million). As a percentage of revenue, gross profit decreased slightly from 20.6% in 2016 to 20.5% in 2017 due to an increase in backlog amortization as a result of the BCH acquisition.

~~Selling, General and Administrative Expenses (“SG&A”)—SG&A increased $5.7 million, or 9.3%, to $66.7 million for the third quarter of 2017 as compared to 2016.~~2018. On a ~~same‑store~~same-store basis, excluding amortization expense, SG&A increased ~~$0.6~~$13.8 million, or ~~1.0%~~6.7%. This increase is primarily due to the increase in ~~same-store~~ revenue in the current year period. Amortization expense increased $1.9 million during the period as a result of the BCH acquisition. As a percentage of revenue, SG&A decreased from 14.2% in 2016 to 13.9% in 2017.

~~SG&A increased $16.3 million, or 9.0%, to $196.6 million for the first nine months of 2017 as~~ compared to ~~2016. On a same‑store basis, excluding amortization expense, SG&A increased $5.4 million, or 3.1%. This increase is primarily~~the prior year period, investments made in personnel due to ~~$0.8 million~~the growth we have experienced in ~~compensation costs related to leadership changes, investments in service~~recent years ($8.6 million), and an increase in ~~bad debt expense~~professional fees in 2019 ($2.7 million, of ~~$0.2~~which approximately $1.3 million ~~due~~relates to the collection of aged receivables in the prior year period. Additionally, we incurred $0.4 million in expenses in the first quarter of 2017 related to the acquisition of BCH completed on April 1, 2017.tax planning costs). Amortization expense increased ~~$3.4~~$4.3 million during the period primarily as a result of the ~~BCH acquisition.~~Walker and Indiana acquisitions. As a percentage of revenue, SG&A ~~increased~~decreased from ~~14.5%~~13.6% in ~~2016~~2018 to ~~14.8%~~13.4% in ~~2017~~2019 primarily due to the ~~factors discussed above.~~acquisition of Walker, which has lower SG&A as a percentage of revenue.

We have included ~~same‑store~~same-store SG&A, excluding amortization, because we believe it is an effective measure of comparative results of operations. However, ~~same‑store~~same-store SG&A, excluding amortization, is not considered under

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generally accepted accounting principles to be a primary measure of an entity’s financial results, and accordingly, should not be considered an alternative to SG&A as shown in our consolidated statements of operations.

Three Months Ended

Nine Months Ended

September 30,

September 30,


2017

2016

2017

2016

(in thousands)

(in thousands)

SG&A

$
66,707

$
61,032

$
196,553

$
180,245

Less: SG&A from companies acquired

(3,185)

—

(7,516)

—

Less: Amortization expense

(3,394)

(1,515)

(8,072)

(4,649)

Same-store SG&A, excluding amortization expense

$
60,128

$
59,517

$
180,965

$
175,596

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	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
	(in thousands)				(in thousands)
SG&A	$	90,006	$	75,297	$	253,417	$	216,528
Less: SG&A from companies acquired		(7,803)		—		(18,854)		—
Less: Amortization expense		(6,065)		(4,384)		(16,575)		(12,315)
Same-store SG&A, excluding amortization expense	$	76,138	$	70,913	$	217,988	$	204,213

~~Goodwill Impairment~~—We recorded a goodwill impairment charge of $1.1 million during the first quarter of 2017. Based on changes to our market strategy that occurred in March 2017 related to our reporting unit based in California, we reevaluated our projected future earnings for this operating location. When the carrying value of a given reporting unit exceeds its fair value, a goodwill impairment loss is recorded for this difference, not to exceed the carrying amount of goodwill. Based upon our projected future earnings for this location, we could no longer support the related goodwill balance and therefore the goodwill associated with this location was fully impaired. The fair value was estimated using a discounted cash flow model.

Interest Expense—Interest expense increased ~~$0.4~~$1.6 million, or ~~70.7%~~141.2%, to ~~$1.0~~$2.8 million for the third quarter of ~~2017~~2019 as compared to the same period in ~~2016.~~2018. Interest expense increased ~~$0.5 million, or 27.9%, to $2.4~~$4.3 million for the first nine months of ~~2017~~2019 as compared to the same period in ~~2016.~~2018. The increase reflects the increased borrowings on the revolving credit facility ~~as well as~~and notes to former owners ~~used to fund the BCH acquisition during the second quarter~~as a result of ~~2017.~~our recent acquisitions.

Changes in the Fair Value of Contingent ~~Earn‑out~~Earn-out Obligations—The contingent ~~earn‑out~~earn-out obligations are measured at fair value each reporting period, and changes in estimates of fair value are recognized in earnings. ~~Income~~Expense from changes in the fair value of contingent ~~earn‑out~~earn-out obligations for the third quarter of ~~2017~~2019 increased ~~$1.7~~ $2.4 million as compared to the same period in 2016. This increase was the result of reducing our obligation related to the BCH acquisition primarily due to third quarter results being below the initial estimate as a result of the impact of Hurricane Irma and less project activity in the quarter than previously estimated. In the third quarter of 2016, based on updated measurements of estimated future cash flows for our contingent obligations, we reduced our obligation related to the EAS acquisition resulting in a gain of $0.8 million.

~~Income~~2018. Expense from changes in the fair value of contingent ~~earn‑out~~earn-out obligations for the first nine months of ~~2017~~2019 increased ~~$1.4~~$4.4 million from income of $0.5 million in the same period in 2018. This increase in expense was primarily the result of increasing our obligation related to the BCH acquisition due to results being higher than previously forecasted.

Other Income—Other income decreased $3.9 million for the first nine months of 2019 as compared to the same period in ~~2016. This increase was the result of reducing our obligation~~2018. In April 2018, we entered into settlement agreements with British Petroleum (“BP”) related to two claims from one of our subsidiaries regarding the ~~BCH acquisition primarily due to third~~April 2010 BP Deepwater Horizon oil spill. We recorded a gain of $4.0 million in the second quarter ~~results being below the initial estimate~~of 2018 as a result of ~~the impact of Hurricane Irma and less project activity in the quarter than previously estimated. In the third quarter of 2016, based on updated measurements of estimated future cash flows~~these settlements.

Provision for ~~our contingent obligations, we reduced our obligation related to the EAS acquisition resulting in a gain of $0.8 million.~~

Income ~~Tax Expense~~Taxes—~~We perform work throughout the United States in virtually all fifty states.~~ Our effective tax rate varies based on our relative profitability, or lack thereof, in states with varying tax rates and rules. In addition, discrete items, judgments and legal structures can change our effective tax rate. These items can include the tax treatmentprovision for ~~impairment of goodwill and other intangible assets, changes in fair value of acquisition-related assets and liabilities, tax reserves~~income taxes for ~~uncertain tax positions, accounting for losses associated with underperforming operations and noncontrolling interests.~~

~~For~~ the nine months ended September 30, ~~2017, our income tax expense~~2019 was ~~$27.2~~$26.3 million with an effective tax rate of ~~36.3%~~24.7% as compared to a provision for income ~~tax expense~~taxes of ~~$27.1~~ $26.5 million with an effective tax rate of ~~36.0%~~23.2% for the same period in ~~2016.~~2018. The effective tax rate for ~~2017~~2019 was higher than the ~~35.0% federal statutory rate primarily due to~~ ~~net state income taxes (3.6%) and nondeductible expenses (1.1%) partially offset by benefits from deductions for stock-based compensation (1.2%) and the domestic production activities deduction (1.9%). The effective tax rate for 2016 was higher than the 35.0%~~21% federal statutory rate primarily due to net state income taxes ~~(3.6%~~(4.4%) and nondeductible expenses ~~(0.8%~~(1.7%)

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partially offset by benefits from the ~~domestic production activities~~filing, and expected filing, of amended returns to claim the energy efficient commercial buildings deduction ~~(1.8%~~(the “179D deduction”) allocated to us (1.9%) and deductions for stock-based compensation (0.4%). The effective tax rate for 2018 was higher than the 21% federal statutory rate primarily due to net state income taxes (4.5%) and nondeductible expenses (1.1%) partially offset by a decrease in ~~valuation allowances (0.4%~~unrecognized tax benefits from the filing of a federal income tax automatic accounting method change application (2.4%) and deductions for stock-based compensation (1.0%).

We currently estimate our effective tax rate for the full year ~~2017~~2019 will be between ~~35%~~24% and ~~38%~~27%, which includes the benefits of the 179D deduction. Starting in 2020, we expect our effective tax rate will be between 25% and 30%.

Outlook

~~We have seen industry~~Industry conditions ~~improve~~improved during ~~2015~~the three-year period from 2016 to 2018 and ~~2016.~~we currently expect that strong activity will continue during 2019 and for the first half of 2020. Our emphasis for ~~2017~~2019 and 2020 is ~~on execution, including a focus~~ on cost discipline and efficient project performance, labor force development, and investing in growth, particularly in service and small projects. Based on our ~~recent acquisitions, we expect that our 2017 revenues will be above levels we experienced in 2016. Additionally,~~backlog, and in light of economic conditions, we are optimistic that revenue and net earnings for ~~our industry, we expect that profitability in 2017~~the fourth quarter of 2019 and during 2020 will continue ~~to be strong and~~ at the favorable levels ~~similar to what~~that we have experienced ~~in 2016.~~since the start of 2018.

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Liquidity and Capital Resources (in thousands):


	Nine Months Ended
	September 30,
	2017		2016


					Nine Months Ended
					September 30,
					2019		2018

Cash provided by (used in):
Operating activities	$	65,692	$	49,754	$	99,715	$	68,002
Investing activities		(110,906)		(74,920)		(216,053)		(86,269)
Financing activities		42,636		(5,961)		111,081		973
Net increase (decrease) in cash and cash equivalents	$	(2,578)	$	(31,127)	$	(5,257)	$	(17,294)
Free cash flow:
Cash provided by operating activities	$	65,692	$	49,754	$	99,715	$	68,002
Purchases of property and equipment		(16,830)		(17,257)		(22,641)		(22,059)
Proceeds from sales of property and equipment		784		847		1,447		1,077
Free cash flow	$	49,646	$	33,344	$	78,521	$	47,020

Cash Flow

Our business does not require significant amounts of investment in ~~long‑term~~long-term fixed assets. The substantial majority of the capital used in our business is working capital that funds our costs of labor and installed equipment deployed in project work until our customer pays us. Customary terms in our industry allow customers to withhold a small portion of the contract price until after we have completed the work, typically for six months. Amounts withheld under this practice are known as retention or retainage. Our average project duration, together with typical retention terms, generally allow us to complete the realization of revenue and earnings in cash within one year.

Cash Provided by Operating Activities—Cash flow from operations is primarily influenced by demand for our services and operating margins but can also be influenced by working capital needs associated with the various types of services that we provide. In particular, working capital needs may increase when we commence large volumes of work under circumstances where project costs, primarily associated with labor, equipment and subcontractors, are required to be paid before the receivables resulting from the work performed are billed and collected. Working capital needs are generally higher during the late winter and spring months as we prepare and plan for the increased project demand when favorable weather conditions exist in the summer and fall months. Conversely, working capital assets are typically converted to cash during the late summer and fall months as project completion is underway. These seasonal trends are sometimes offset by changes in the timing of major projects, which can be impacted by the weather, project delays or accelerations and other economic factors that may affect customer spending.

Cash provided by operating activities was ~~$65.7~~$99.7 million during the first nine months of ~~2017~~2019 compared with ~~$49.8~~$68.0 million during the same period in ~~2016. The $15.9~~2018. This increase was primarily driven by a $49.1 million ~~increase is primarily due to~~decrease in receivables, net and a ~~$21.0~~$16.2 million ~~increase~~change in costs in excess of billings driven by timing of customer billings and payments. These increases were partially offset by a $12.9 million change in accounts payable and accrued liabilities and a ~~$21.2~~$13.1 million ~~increase~~change in costs in billings in excess of costs ~~and estimated earnings, primarily due to the~~driven by timing of timing of billings and various project work. The $21.0 million increase in accounts payable and accrued liabilities included approximately $6.0 million for postponed income tax payments without penalty due to relief granted by the IRS for companies affected by Hurricane Harvey. This was offset by $33.8 million increase in receivables related to project work timing and the schedule for billings as well as the increase in revenue compared to the same period in 2016.

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Cash Used in Investing Activities—During the first nine months of ~~2017,~~2019, cash used in investing activities was ~~$110.9~~$216.1 million compared to ~~$74.9~~$86.3 million during the same period in ~~2016.~~2018. The ~~$36.0~~$129.8 million increase in cash used primarily relates to cash paid (net of cash acquired) for acquisitions, including the ~~BCH~~Walker acquisition ~~in 2017 of $86.1 million compared to the EAS and Shoffner acquisitions in 2016~~ ($~~56.3~~193.7 million).

Cash Provided by ~~(Used in)~~ Financing Activities—Cash provided by financing activities was ~~$42.6~~$111.1 million for the first nine months of ~~2017~~2019 compared to ~~cash used in financing activities of $6.0~~$1.0 million during the same period in ~~2016.~~2018. The ~~$48.6~~$110.1 million increase in cash provided ~~by financing activities~~ is primarily due to ~~$51.0~~$118.0 million ~~of additional~~more in net proceeds from the revolving line of credit ~~during~~compared to the ~~first nine months of 2017.~~prior year, primarily to fund the Walker acquisition.

Free Cash Flow—We define free cash flow as cash provided by operating activities, less customary capital expenditures, plus the proceeds from asset sales. We believe free cash flow, by encompassing both profit margins and the use of working capital over our approximately one year working capital cycle, is an effective measure of operating

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effectiveness and efficiency. We have included free cash flow information here for this reason, and because we are often asked about it by third parties evaluating us. However, free cash flow is not considered under generally accepted accounting principles to be a primary measure of an entity’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. Free cash flow may be defined differently by other companies.

Share Repurchase Program

Debt

Revolving Credit Facility

~~We have a $325.0 million~~On April 18, 2018, we amended our senior credit facility (the “Facility”) provided by a syndicate of banks, increasing our borrowing capacity from $325.0 million to $400.0 million, with a $100 million accordion option. The Facility, which is available for borrowings and letters of credit, expires in ~~February 2021~~April 2023 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, ~~2017,~~2019, we had ~~$66.0~~$193.0 million of outstanding borrowings, ~~$39.6~~$33.6 million in letters of credit outstanding and ~~$219.4~~$173.4 million of credit available.

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.

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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.

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.

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The Facility’s principal financial covenants include:

Fixed Charge Coverage Ratio—The Facility requires that the ratio of (a) Credit Facility Adjusted EBITDA, less ~~non‑financed~~non-financed capital expenditures, ~~tax~~ provision for income taxes, dividends and amounts used to repurchase stock to (b) the sum of interest expense and scheduled principal payments of indebtedness be at least 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, as defined in the credit agreement, does not exceed ~~1.50~~1.75 to 1.00. The Facility also allows the fixed charge coverage ratio not to be reduced for stock repurchases ~~through September 30, 2015~~made after the effective date of the Facility 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~~$30 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 ~~1.50~~1.75 to 1.00. ~~Capital~~Credit Facility Adjusted EBITDA, capital expenditures, ~~tax~~ provision for income taxes, dividends, ~~and~~ stock repurchase payments, interest expense and scheduled principal 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, ~~2017~~2019 was ~~29.5.~~13.1.

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~~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.

We were in compliance with all of our financial covenants as of September 30, ~~2017.~~2019.

Notes to Former Owners

As part of the consideration used to acquire ~~two~~seven companies, we have outstanding notes to the former owners. These notes had an outstanding balance of ~~$15.3~~$49.0 million as of September 30, ~~2017.~~2019. In conjunction with the Walker acquisition in the second quarter of 2019, we issued a promissory note to former owners with an outstanding balance of $25.0 million as of September 30, 2019 that bears interest, payable quarterly, at a stated interest rate of 4.0%. The principal is due in equal installments in April 2022 and April 2023. In conjunction with the BCH acquisition in the second quarter of 2017, we issued a promissory note to former owners with an outstanding balance of $14.3 million as of September 30, ~~2017~~2019 that bears interest, payable quarterly, at a ~~weighted average~~stated interest rate of 3.0%. The principal is due in equal installments in April 2020 and 2021. In conjunction with ~~the Shoffner acquisition~~five immaterial acquisitions in ~~the first quarter of 2016,~~2018 and 2019, we issued ~~a subordinated note~~notes to former owners with an outstanding balance of ~~$1.0~~$9.7 million as of September 30, ~~2017~~2019 that ~~bears~~bear interest, payable quarterly, at ~~a weighted average~~stated interest ~~rate of 3.0%~~rates ranging from 2.5% - 3.5%. The ~~principal is~~principals are due ~~in equal installments in February 2018 and 2019.~~between January 2020 – July 2021.

Other Debt

As part of the Shoffner acquisition, we acquired debt with an outstanding balance at the acquisition date of $0.4 million with principal and interest due the last day of every ~~month;~~month, ending on the December 30, 2019 maturity date. The

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interest rate is the one month LIBOR rate plus 2.25%. As of September 30, ~~2017, $0.2~~2019, less than $0.1 million of the note was outstanding, all of which ~~$0.1 million~~ was considered current.

~~Outlook~~

We have generated positive net free cash flow for the last ~~eighteen~~twenty calendar years, much of which occurred during challenging economic and industry conditions. We also continue to have significant borrowing capacity under our

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credit facility, and we maintain what we feel are reasonable cash balances. We believe these factors will provide us with sufficient liquidity to fund our operations for the foreseeable future.

~~Off‑Balance~~Off-Balance Sheet Arrangements and Other Commitments

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.

We enter into noncancelable operating leases for many of our facility, vehicle and equipment needs. These leases allow us to conserve cash by paying a monthly lease rental fee for use of facilities, vehicles and equipment rather than purchasing them. At the end of the lease, we have no further obligation to the lessor. If we decide to cancel or terminate a lease before the end of its term, we would typically owe the lessor the remaining lease payments under the term of the lease.

Certain of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on our behalf, such as to beneficiaries under our ~~self‑funded~~self-funded insurance programs. We have also occasionally used letters of credit to guarantee performance under our contracts and to ensure payment to our subcontractors and vendors under those contracts. The letters of credit we provide are actually issued by our lenders through the Facility as described above. A letter of credit commits the lenders to pay specified amounts to the holder of the letter of credit if the holder demonstrates that we have failed to perform specified actions. If this were to occur, we would be required to reimburse the lenders. Depending on the circumstances of such a reimbursement, we may also have to record a charge to earnings for the reimbursement. Absent a claim, there is no payment or reserving of funds by us in connection with a letter of credit. However, because a claim on a letter of credit would require immediate reimbursement by us to our lenders, letters of credit are treated as a use of the Facility’s capacity just the same as actual borrowings. Claims against letters of credit are rare in our industry. To date, we have not had a claim made against a letter of credit that resulted in payments by a lender or by us. We believe that it is unlikely that we will have to fund claims under a letter of credit in the foreseeable future.

Many customers, particularly in connection with new construction, require us to post performance and payment bonds issued by a financial institution known as a surety. If we fail to perform under the terms of a contract or to pay subcontractors and vendors who provided goods or services under a contract, the customer may demand that the surety make payments or provide services under the bond. We must reimburse the sureties for any expenses or outlays they incur. To date, we are not aware of any losses to our sureties in connection with bonds the sureties have posted on our behalf, and we do not expect such losses to be incurred in the foreseeable future.

Under standard terms in the surety market, sureties issue bonds on a ~~project‑by‑project~~project-by-project basis, and can decline to issue bonds at any time. Historically, approximately 20% to 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 our sureties’ assessment of our operating and financial risk could cause our sureties to decline to issue bonds for our work. If that were to occur, our alternatives include doing more business that does not require bonds, posting other forms of collateral for project performance, such as letters of credit or cash, and seeking bonding capacity from other sureties. We would likely also encounter concerns from customers, suppliers and other market participants as to our creditworthiness. While we believe our general operating and financial characteristics would enable us to ultimately respond effectively to an

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interruption in the availability of bonding capacity, such an interruption would likely cause our revenue and profits to decline in the near term.

Contractual Obligations

As of September 30, ~~2017,~~2019, we have ~~$39.6~~$33.6 million in letter of credit commitments, of which ~~$11.3~~$6.0 million will expire in ~~2017~~2019 and ~~$28.3~~$27.6 million will expire in ~~2018.~~2020. The substantial majority of these letters of credit are posted with insurers who disburse funds on our behalf in connection with our workers’ compensation, auto liability and general liability insurance program. These letters of credit provide additional security to the insurers that sufficient financial resources will be available to fund claims on our behalf, many of which develop over long periods of time, should we ever encounter financial duress. Posting of letters of credit for this purpose is a common practice for entities that manage their ~~self‑insurance~~self-insurance programs through ~~third‑party~~third-party insurers as we do. While many of these letter of credit commitments expire in ~~2017,~~2019, we expect nearly all of them, particularly those supporting our insurance programs, will be renewed annually.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk primarily related to potential adverse changes in interest rates, as discussed below. We are actively involved in monitoring exposure to market risk and continue to develop and utilize appropriate risk management techniques. We are not exposed to any other significant financial market risks, including commodity

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price risk, foreign currency exchange risk or interest rate risks from the use of derivative financial instruments. We do not use derivative financial instruments.

We have exposure to changes in interest rates under our revolving credit facility. ~~We have a modest level of indebtedness under our debt facility and our indebtedness could increase in the future.~~ Our debt with fixed interest rates consists of notes to former owners of acquired companies.

The weighted average interest rate applicable to the borrowings under the Facility was approximately ~~2.6%~~3.6% as of September 30, ~~2017.~~2019.

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 first quarter of 2017 we recorded a goodwill impairment charge of $1.1 million based on Level 3 measurements. See Note 5 “Goodwill” for further discussion.~~ We did not recognize any ~~other~~ impairments in the ~~first nine months of 2017,~~current year on those assets required to be measured at fair value on a nonrecurring basis.

The valuation of our contingent ~~earn‑out~~earn-out payments is determined using a probability weighted discounted cash flow method. This analysis reflects the contractual terms of the purchase agreements (e.g., minimum and maximum payment, length of ~~earn‑out~~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.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our executive management is responsible for ensuring the effectiveness of the design and operation of our disclosure controls and procedures. We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules ~~13a‑15(e)~~13a-15(e) and ~~15d‑15(e)~~15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules ~~13a‑15(e)~~13a-15(e) and ~~15d‑15(e)~~15d-15(e) of the Securities Exchange Act of 1934) are effective as of the end of the period covered by this report.

~~Table of Contents~~

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules ~~13a‑15(f)~~13a-15(f) and ~~15d‑15(f)~~15d-15(f) under the Securities Exchange Act of 1934) during the three months ended September 30, ~~2017~~2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to certain claims and lawsuits arising in the normal course of business. We maintain various insurance coverages to minimize financial risk associated with these claims. We have estimated and provided accruals for probable losses and related legal fees associated with certain litigation in our consolidated financial statements. While we cannot predict the outcome of these proceedings, in our opinion and based on reports of counsel, any liability arising from these matters individually and in the aggregate will not have a material effect on our operating results, cash flows or financial condition, after giving effect to provisions already recorded.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual Report on Form ~~10‑K~~10-K for the year ended December 31, ~~2016,~~2018, which could materially affect our business, financial condition, or future results. Additional risks and uncertainties not currently

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known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities

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, ~~2017,~~2019, we repurchased 0.3 million shares for approximately ~~$8.9~~ $15.3 million at an average price of ~~$34.18~~$44.43 per share.

~~Table of Contents~~

During the quarter ended September 30, ~~2017,~~2019, we purchased our common shares in the following amounts at the following average prices:


				Total Number of Shares	Maximum Number of
				Purchased as Part of	Shares that May Yet Be
	Total Number of	Average Price		Publicly Announced Plans	Purchased Under the Plans

									Total Number of Shares	Maximum Number of
									Purchased as Part of	Shares that May Yet Be
						Total Number of	Average Price		Publicly Announced Plans	Purchased Under the Plans
Period	Shares Purchased	Paid Per Share		or Programs	or Programs	Shares Purchased	Paid Per Share		or Programs (1)	or Programs
July 1 - July 31	—	$	—	7,449,784	662,709	29,000	$	43.16	8,388,289	395,120
August 1 - August 31	143,667	$	33.18	7,593,451	519,042	141,957	$	39.97	8,530,246	253,163
September 1 - September 30	9,737	$	33.56	7,603,188	509,305	12,923	$	38.19	8,543,169	240,240
	153,404	$	33.20	7,603,188	509,305
						183,880	$	40.35	8,543,169	240,240

Under our 2012 Equity Incentive Plan and 2017 Omnibus Incentive Plan, employees may elect to have us withhold common shares to satisfy statutory federal, state and local tax withholding obligations arising on the vesting of restricted stock awards and exercise of options. When we withhold these shares, we are required to remit to the appropriate taxing authorities the market price of the shares withheld, which could be deemed a purchase of the common shares by us on the date of withholding.

2535

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Item 6. Exhibits


			Incorporated by Reference to the Exhibit Indicated Below and to the Filing with the Commission Indicated Below
Exhibit Number	Description of Exhibits		Exhibit Number	Filing or File Number
3.1	Second Amended and Restated Certificate of Incorporation of the Registrant		3.1	333-24021
3.2	Certificate of Amendment dated May 21, 1998		3.2	1998 Form 10-K
3.3	Certificate of Amendment dated July 9, 2003		3.3	2003 Form 10-K
3.4	Certificate of Amendment dated May 20, 2016		3.1	May 20, 2016 Form 8-K
3.5	Amended and Restated Bylaws of Comfort Systems USA, Inc.		3.1	March 25, 2016 Form 8-K
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	��
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*	XBRL Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase
104	Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document)

* Filed herewith.

** Furnished herewith.

~~Item 6.~~ ~~Exhibits~~

Incorporated by Reference
to the Exhibit Indicated Below
and to the Filing with the
Commission Indicated Below
Exhibit
Number

Description of Exhibits

Exhibit
Number

Filing or
File Number
3.1

Second Amended and Restated Certificate of Incorporation of the Registrant

3.1

333‑24021
3.2

Certificate of Amendment dated May 21, 1998

3.2

1998 Form 10‑K
3.3

Certificate of Amendment dated July 9, 2003

3.3

2003 Form 10‑K
3.4

Certificate of Amendment dated May 20, 2016

3.1

May 20, 2016
Form 8‑K
3.5

Amended and Restated Bylaws of Comfort Systems USA, Inc.

3.1

March 25, 2016 Form 8‑K
31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002

Filed Herewith
31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002

Filed Herewith
32.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002

Furnished Herewith
32.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002

Furnished Herewith
101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

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SIGNATURES

~~SIGNATURES~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Comfort Systems USA, Inc.

October ~~26, 2017~~24, 2019	By:	/s/ Brian E. Lane
		Brian E. Lane
		President, Chief Executive Officer and Director

October ~~26, 2017~~24, 2019	By:	/s/ William George
		William George
		Executive Vice President and Chief Financial Officer

October ~~26, 2017~~24, 2019	By:	/s/ Julie S. Shaeff
		Julie S. Shaeff
		Senior Vice President and Chief Accounting Officer

2737


		Page
~~Part I—Financial Information~~
~~Item 1—Financial Statements~~
~~Consolidated Balance Sheets~~Part I—Financial Information		1
Item 1—Financial Statements		1
Consolidated Balance Sheets		1
Consolidated Statements of Operations		2
Consolidated Statements of Stockholders’ Equity		3
Consolidated Statements of Cash Flows		4 5
Condensed Notes to Consolidated Financial Statements		5 6
Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations		13 23
Item 3—Quantitative and Qualitative Disclosures about Market Risk		23 33
Item 4—Controls and Procedures		23 34
Part II—Other Information		24 34
Item 1—Legal Proceedings		24 34
Item 1A—Risk Factors		24 34
Item 2—Unregistered Sales of Equity Securities and Use of Proceeds		24 35
Item 6—Exhibits		26 36
Signatures		27 37


							Additional				Non-		Total
	Common Stock			Treasury Stock			Paid-In		Retained		Controlling		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Earnings		Interests		Equity
BALANCE AT DECEMBER 31, 2015	41,123,365	$	411	(3,696,781)	$	(46,845)	$	323,765	$	69,390	$	18,284	$	365,005
Cumulative effect of change in accounting principle	—		—	—		—		—		(38)		—		(38)
Net income	—		—	—		—		—		64,896		—		64,896
Issuance of Stock:
Issuance of shares for options exercised	—		—	111,761		1,568		10		—		—		1,578
Issuance of restricted stock & performance stock	—		—	172,727		2,282		(306)		—		—		1,976
Shares received in lieu of tax withholding payment on vested restricted stock	—		—	(41,788)		(1,304)		—		—		—		(1,304)
Stock-based compensation	—		—	—		—		3,502		—		—		3,502
Dividends	—		—	—		—		—		(10,264)		—		(10,264)
Acquisition of noncontrolling interest	—		—	—		—		(17,346)		—		(18,284)		(35,630)
Share repurchase	—		—	(460,170)		(13,088)		—		—		—		(13,088)
BALANCE AT DECEMBER 31, 2016	41,123,365		411	(3,914,251)		(57,387)		309,625		123,984		—		376,633
Net income (unaudited)	—		—	—		—		—		47,733		—		47,733
Issuance of Stock:
Issuance of shares for options exercised (unaudited)	—		—	90,498		1,366		(70)		—		—		1,296
Issuance of restricted stock & performance stock (unaudited)	—		—	134,646		2,037		(421)		—		—		1,616
Shares received in lieu of tax withholding payment on vested restricted stock (unaudited)	—		—	(39,335)		(1,419)		—		—		—		(1,419)
Stock-based compensation (unaudited)	—		—	—		—		3,178		—		—		3,178
Dividends (unaudited)	—		—	—		—		—		(8,199)		—		(8,199)
Share repurchase (unaudited)	—		—	(260,697)		(8,909)		—		—		—		(8,909)
BALANCE AT SEPTEMBER 30, 2017 (unaudited)	41,123,365	$	411	(3,989,139)	$	(64,312)	$	312,312	$	163,518	$	—	$	411,929


	Revenue
Service Activity	$ in thousands		%
HVAC and Plumbing	$	1,207,434	91	%
Building Automation Control Systems		66,343	5	%
Other		53,073	4	%
Total	$	1,326,850	100	%


Balance at beginning of year	$	2,531
Issuances		11,755
Settlements		(2,578)
Adjustments to fair value		(1,845)
Balance at September 30, 2017	$	9,863


		Incorporated by Reference to the Exhibit Indicated Below and to the Filing with the Commission Indicated Below
Exhibit Number	Description of Exhibits	Exhibit Number	Filing or File Number
3.1	Second Amended and Restated Certificate of Incorporation of the Registrant	3.1	333‑24021
3.2	Certificate of Amendment dated May 21, 1998	3.2	1998 Form 10‑K
3.3	Certificate of Amendment dated July 9, 2003	3.3	2003 Form 10‑K
3.4	Certificate of Amendment dated May 20, 2016	3.1	May 20, 2016 Form 8‑K
3.5	Amended and Restated Bylaws of Comfort Systems USA, Inc.	3.1	March 25, 2016 Form 8‑K
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002		Filed Herewith
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002		Filed Herewith
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002		Furnished Herewith
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002		Furnished Herewith
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
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