COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ ~~EQUITY~~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.~~


	Three Months Ended
	March 31, 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

	Three Months Ended
	March 31, 2020
							Additional				Total
	Common Stock			Treasury Stock			Paid-In		Retained		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Earnings		Equity
BALANCE AT DECEMBER 31, 2019	41,123,365	$	411	(4,465,448)	$	(103,960)	$	320,168	$	368,685	$	585,304
Net income (unaudited)	—		—	—		—		—		17,716		17,716
Cumulative-effect adjustment (1)	—		—	—		—		—		(515)		(515)
Issuance of Stock:
Issuance of shares for options exercised (unaudited)	—		—	—		—		—		—		—
Issuance of restricted stock & performance stock (unaudited)	—		—	43,902		1,054		801		—		1,855
Shares received in lieu of tax withholding payment on vested restricted stock (unaudited)	—		—	(14,722)		(622)		—		—		(622)
Stock-based compensation (unaudited)	—		—	—		—		2,134		—		2,134
Dividends (unaudited)	—		—	—		—		—		(3,844)		(3,844)
Share repurchase (unaudited)	—		—	(237,359)		(8,985)		—		—		(8,985)
BALANCE AT MARCH 31, 2020 (unaudited)	41,123,365	$	411	(4,673,627)	$	(112,513)	$	323,103	$	382,042	$	593,043

(1)

Represents the adjustment to Retained Earnings as a result of adopting Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326),” on January 1, 2020. See Note 2 for more information.

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


Year ending December 31—
2020 (excluding the three months ended March 31, 2020)	$	13,376
2021		15,511
2022		13,261
2023		10,945
2024		9,436
Thereafter		36,982
Total Lease Payments		99,511
Less—Present Value Discount		(14,586)
Present Value of Lease Liabilities	$	84,925

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


	Three Months Ended March 31,
	2020		2019
Cash paid for amounts included in the measurement of lease liabilities	$	4,473	$	3,778
Lease right-of-use assets obtained in exchange for lease liabilities	$	2,278	$	174

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 ~~consolidated financial statements.~~effective tax rates.

For the year ended December 31, 2019, our provision for income taxes was reduced by $2.2 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.

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.~~facility and a term loan. 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.

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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~~March 31, 2020 and December 31, 2019 (in thousands):



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

									Fair Value Measurements at March 31, 2020
									Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	29,496	$	29,496	$	—	$	—	$	133,264	$	—	$	—	$	133,264
Life insurance—cash surrender value	$	3,180	$	—	$	3,180	$	—	$	—	$	3,898	$	—	$	3,898
Contingent earn-out obligations	$	9,863	$	—	$	—	$	9,863	$	—	$	—	$	16,414	$	16,414

									Fair Value Measurements at December 31, 2019
									Level 1		Level 2		Level 3		Total
Cash and cash equivalents									$	50,788	$	—	$	—	$	50,788
Life insurance—cash surrender value									$	—	$	3,905	$	—	$	3,905
Contingent earn-out obligations									$	—	$	—	$	28,497	$	28,497

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 Company’s outstanding term loan held by third-party financial institutions is carried at cost, adjusted for debt issuance costs. The Company’s term loan is not publicly traded and the carrying amount approximates fair value as the loan accrues interest at a variable rate. 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 4474 employees with a combined face value of ~~$37.3~~$54.2 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~~$3.9 million as of ~~September 30, 2017~~March 31, 2020 and ~~$3.7 million as of~~ December 31, ~~2016.~~2019. 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. Significant unobservable inputs that could impact the fair value measurement include our weighted average cost of capital and the forecasted level of operating income for each earn-out measurement. As of March 31, 2020, cash flows were discounted using a weighted average cost of capital ranging from 9.5% - 14.0%.

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	$	2,531	$	28,497
Issuances		11,755		55
Settlements		(2,578)		(9,866)
Adjustments to fair value		(1,845)		(2,272)
Balance at September 30, 2017	$	9,863
Balance at March 31, 2020			$	16,414

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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.

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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.~~ wholly owned subsidiary of the Company reported in our electrical services segment.

The ~~preliminary~~following summarizes the acquisition date fair value of consideration transferred and 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		(7,809)
Notes issued to former owners		25,000
Tax equalization payment		202
Estimated fair value of contingent earn-out payments		19,500
	$	235,393
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		8,225
Other long-term assets		53
Property and equipment		4,970
Goodwill		96,786
Identifiable intangible assets		90,200
Lease right-of-use asset		9,195
Accounts payable		(20,220)
Accrued compensation and benefits		(974)
Billings in excess of costs and estimated earnings		(31,553)
Other current liabilities		(11,305)
Long-term lease liabilities		(7,143)
	$	235,393

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 result of this ~~acquisition~~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 ~~$122.6 million,~~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 ~~which $97.9 million was allocated to goodwill~~the more significant estimates and assumptions inherent in determining the fair value of the identifiable intangible ~~assets. Our~~assets are associated with forecasting cash flows and profitability, which represent Level 3 inputs. 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.

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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, the contingent earn-out obligation is remeasured at fair value each reporting period. Changes in the estimated fair value of the contingent payments subsequent to the acquisition date are recognized immediately in earnings.

Pro Forma Impact of the Acquisition

The following unaudited pro forma information presents the consolidated ~~operating~~ results ~~included revenue~~ of ~~$73.2 million~~the Company and Walker for the ~~six~~three months ~~from~~ended March 31, 2019, with adjustments to give effect to pro forma events that are directly attributable to the acquisition ~~date. BCH~~and have a continuing impact. The unaudited pro forma information is ~~an integrated, single-source provider of mechanical service, maintenance~~presented for illustrative purposes only and ~~construction with headquarters in Tampa, Florida and operations throughout the southeastern region~~is not necessarily indicative of the ~~United States, which reports~~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 ~~a separate operating location.~~follows (in thousands):


	Three Months Ended March 31,
	2019
Revenue	$	626,834
Pre-tax income	$	23,927

Other Acquisitions

We completed ~~two acquisitions~~1 acquisition 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~~2020 with 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 thetotal preliminary purchase price ~~and the noncontrolling interest liability was recorded in Additional Paid-In Capital~~of $41.1 million. This acquisition is reported in our ~~Balance Sheet.~~

~~Additionally~~electrical services segment. In 2019, in addition to the Walker acquisition, we completed 1 acquisition in the first quarter of ~~2016, we acquired 100% of the ShoffnerKalthoff family of companies (collectively, “Shoffner”), which reports as~~2019 with 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 and a working capital adjustment.

~~In addition to the BCH acquisition, we completed three additional acquisitions in the second quarter of 2017. We completed one acquisition in the third quarter of 2017. The~~ total purchase price ~~for these acquisitions, including earn-outs, was $9.6 million for the nine months ended September 30, 2017. These acquisitions were not material and were “tucked-in” with existing operations.~~of $1.6 million.

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 been or will be paid if certain acquisitions achieve predetermined profitability targets.Such earn-outs, when they 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 under which continued employment is a condition to receive payment, then the earn-out is recorded as compensation expense over the period earned.

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5. Goodwill

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

Additions (See Note 4)

55,668

5,334

Impairment adjustment

(1,105)

—

Balance at end of period

$
203,771

$
149,208


	Mechanical Services		Electrical Services
	Segment		Segment		Total
Balance at December 31, 2018	$	235,182	$	—	$	235,182
Acquisitions and purchase price adjustments (See Note 4)		579		96,686		97,265
Impact of segment reorganization		(1,101)		1,101		—
Balance at December 31, 2019		234,660		97,787		332,447
Acquisitions and purchase price adjustments (See Note 4)		—		14,944		14,944
Balance at March 31, 2020	$	234,660	$	112,731	$	347,391

~~We recorded a~~During the fourth quarter of 2019, the Company performed its annual goodwill impairment ~~charge~~test resulting in 0 impairment charges, as the calculated fair values for the majority of ~~$1.1 million during~~the Company’s reporting units that have goodwill were significantly in excess (all greater than 80%) of the respective reporting unit’s carrying value, while 2 reporting units that were recently acquired had calculated fair values in excess of carrying value of at least 27%. During the first quarter of ~~2017. Based on changes~~2020, we considered the economic impacts of COVID-19 to ~~our market strategy that occurred in March 2017 related to~~be a triggering event for review of goodwill impairment at each of our reporting ~~unit based in California,~~units. After performing a qualitative goodwill impairment assessment as of March 31, 2020, we ~~reevaluated our~~

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~~projected future earnings for this operating location. When the carrying value of a given reporting unit exceeds its fair value,~~determined that we did not have a goodwill impairment ~~loss~~as of that date. However, 1 reporting unit’s (Walker) fair value exceeded carrying value by approximately 21%, a reduction from the excess of 27% from our 2019 annual impairment test. Walker’s forecast for the current year is ~~recorded for~~lower than previously estimated, primarily due to the impact of COVID-19 on its business. As a result, this ~~difference, not~~reporting unit is more susceptible to ~~exceed~~impairment risk from additional adverse changes in its operating environment including micro and macroeconomic environment conditions that could negatively impact them. Such adverse changes could include worsening economic conditions in the ~~carrying amount~~locations or markets they primarily serve whether due to COVID-19 or other events and conditions. As of ~~goodwill. Based upon our projected future earnings for this location, we could no longer support the related~~March 31, 2020, Walker had a goodwill balance ~~and therefore the goodwill associated with this location was fully impaired. The fair value was estimated using a discounted cash flow model.~~of $96.8 million.

6. Debt Obligations

Debt obligations consist of the following (in thousands):

September 30,

December 31,

2017

2016

Revolving credit facility

$
66,000

$
—

Notes to former owners

15,330

2,250

Other debt

239

305

Capital lease obligations

123

256

Total debt

81,692

2,811

Less—current portion

(708)

(763)

Total long-term portion of debt

$
80,984

$
2,048


	March 31,		December 31,
	2020		2019
Revolving credit facility	$	150,000	$	28,000
Term loan		140,625		150,000
Notes to former owners		43,667		48,483
Total principal amount		334,292		226,483
Less—unamortized debt issuance costs		(329)		(348)
Total debt, net of unamortized debt issuance costs		333,963		226,135
Less—current portion		(850)		(20,817)
Total long-term portion of debt, net	$	333,113	$	205,318

Revolving Credit Facility and Term Loan

~~We have a $325.0 million~~In December 2019, we amended our senior credit facility (the “Facility”) provided by a syndicate of banks, ~~with~~increasing our borrowing capacity from $400.0 million to $600.0 million. As amended, the Facility is composed of a ~~$100~~revolving credit line in the amount of $450.0 million and a $150.0 million term loan, and the Facility provides for a $150.0 million accordion ~~option.~~or increase option for the revolving portion of the Facility. The amended Facility also includes a sublimit of up to $160.0 million issuable in the form of letters of credit. The Facility ~~which is available for borrowings and letters of credit,~~ expires in ~~February 2021~~January 2025 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 our wholly owned captive insurance company, and a second lien on our assets related to projects subject to surety bonds. In connection with the amendment in December

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2019, we incurred approximately $1.4 million in financing and professional costs which are being amortized over the remaining term of the Facility. Of this amount, $0.4 million is attributable to the term loan and is being amortized using the effective interest method. The remaining $1.0 million is attributable to the revolving credit line, which combined with the previous unamortized costs of $1.3 million, is being amortized over the remaining term of the Facility on a straight-line basis as a non-cash charge to interest expense. For the term loan, we are required to make quarterly payments increasing over time from 1.25% to 3.75% of the original aggregate principal amount of the term loan, with the balance due in January 2025. As of ~~September 30, 2017,~~March 31, 2020, we had ~~$66.0~~$150.0 million of outstanding borrowings ~~$39.6~~on the revolving credit facility, $55.6 million in letters of credit outstanding and ~~$219.4~~$244.4 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~~2 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~~revolving credit facility was approximately ~~2.6%~~2.5% as of ~~September 30, 2017.~~March 31, 2020. The weighted average interest rate applicable to the term loan was approximately 2.5% as of March 31, 2020.

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~~“Credit Facility Adjusted EBITDA,” which shall mean Consolidated EBITDA as such term is 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.

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 leverage ratio as of ~~September 30, 2017~~March 31, 2020 was ~~0.5.~~1.5.

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 when the Company’s Total Leverage Ratio exceeds 2.00 to 1.00 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 does not exceed 1.50 to 1.00. ~~The~~Credit Facility ~~also allows the fixed charge coverage ratio not to be reduced~~Adjusted EBITDA, capital expenditures, provision for stock repurchases through September 30, 2015 in an aggregate amount not to exceed $25 million and for stock repurchases made after February 22, 2016 but on or prior to December 31, 2017 in an aggregate amount not to exceed $25 million, if at the time of and after giving effect to such repurchase the Company’s Net Leverage Ratio was less than or equal to 1.50 to 1.00. Capital expenditures, tax provision,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~~March 31, 2020 was ~~29.5.~~10.7.

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Other Restrictions—The Facility permits acquisitions of up to ~~$30.0~~$5.0 million per transaction, provided that the aggregate purchase price of ~~all~~ such an acquisition and of acquisitions in the same fiscal year does not exceed ~~$65.0~~$10.0 million. However, these limitations only apply when the Company’s Total Leverage Ratio is greater than ~~2.00~~2.50 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.~~March 31, 2020.

Notes to Former Owners

As part of the consideration used to acquire ~~two~~6 companies, we have outstanding notes to the former owners. These notes had an outstanding balance of ~~$15.3~~$43.7 million as of ~~September 30, 2017.~~March 31, 2020. In conjunction with the acquisition of the electrical contractor in North Carolina in the first quarter of 2020, we issued a promissory note to former owners with an outstanding balance of $8.0 million as of March 31, 2020 that bears interest, payable quarterly, at a stated interest rate of 3.0%. The principal is due in equal installments in February 2023 and February 2024. 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 March 31, 2020 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~~$7.2 million as of ~~September 30, 2017~~March 31, 2020 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~~three 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~~$3.5 million as of ~~September 30, 2017~~March 31, 2020 that ~~bears~~bear interest, payable quarterly, at ~~a weighted average~~stated interest ~~rate of~~rates ranging from 3.0% - 3.5%. The principal isamounts are due ~~in equal installments in February 2018 and 2019.~~between May 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 million of the note was outstanding, 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%~~15% to ~~30%~~25% 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

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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.

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.~~ March 31, 2020 and 2019, 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
					March 31,
					2020	2019
Common shares outstanding, end of period	37,134	37,230	37,134	37,230	36,450	36,891
Effect of using weighted average common shares outstanding	98	130	125	150	224	32
Shares used in computing earnings per share—basic	37,232	37,360	37,259	37,380	36,674	36,923
Effect of shares issuable under stock option plans based on the treasury stock method	293	319	312	331	148	230
Effect of restricted and contingently issuable shares	101	142	113	143	83	81
Shares used in computing earnings per share—diluted	37,626	37,821	37,684	37,854	36,905	37,234

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 November 19, 2019, the Board approved an extension to the program ~~to acquire additional~~by increasing the shares authorized for repurchase by 0.8 million shares. Since the inception of the repurchase program, the Board has approved ~~8.1~~9.5 million shares to be repurchased. As

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of March 31, 2020, we have repurchased a cumulative total of ~~7.6~~8.9 million shares at an average price of ~~$13.75~~$18.24 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. In an exercise of such discretion, commencing on March 27, 2020, we have temporarily suspended share repurchases in response to the uncertainty surrounding the current COVID-19 pandemic, as more fully described in “Item 1A. Risk Factors” herein. The Board may modify, suspend, extend or terminate the program at any time. During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2020, we repurchased ~~0.3~~0.2 million shares for approximately ~~$8.9~~$9.0 million at an average price of ~~$34.18~~$37.85 per share.

9. Segment Information

Our activities are within the mechanical services industry and the electrical services industry, which represent our 2 reportable segments. We aggregate our operating segments into 2 reportable segments, as the operating segments meet all of the aggregation criteria. The following table presents information about our reportable segments (in thousands):


	Three Months Ended March 31, 2020
	Mechanical Services		Electrical Services		Corporate		Consolidated
Revenue	$	565,464	$	134,667	$	—	$	700,131
Gross Profit	$	108,922	$	8,171	$	—	$	117,093

	Three Months Ended March 31, 2019
	Mechanical Services		Electrical Services		Corporate		Consolidated
Revenue	$	534,585	$	3,888	$	—	$	538,473
Gross Profit	$	105,852	$	813	$	—	$	106,665

10. Subsequent Events

Effective as of April 1, 2020, we consummated a merger through which TAS Energy Inc. (“TAS Energy”) became a wholly owned subsidiary of the Company. TAS Energy is headquartered in Houston, Texas and is a leading engineering, design and construction provider of modular construction systems serving the technology, power and industrial sectors. We expect TAS Energy to initially contribute annualized revenues of approximately $170 million to $190 million. We borrowed under our Facility the majority of the cash purchase price in late March 2020, which resulted in our cash balances as of March 31, 2020 being higher than normal.

In April 2020, we entered into interest rate swap agreements to reduce our exposure to variable interest rates on our Facility. The notional amount covered by these interest rate swaps is initially $225.0 million, which gradually decreases to $80.0 million by November 30, 2021 until the termination date of September 30, 2022.

During the last two weeks of March this year, we experienced negative impacts to our business due to the business disruption caused by COVID-19. In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. At this time, it is difficult to quantify the impact COVID-19 will have on the rest of 2020, but we currently expect it to negatively impact us more in the second quarter than we experienced in the first quarter. The Company considered the impact of COVID-19 on the assumptions and estimates used to determine our results and asset valuations as of March 31, 2020, and the Company has determined that there were no material or systematic adverse impacts on the Company’s first quarter 2020 balance sheet and results of operations except for diminished revenue, operational inefficiency, and an increase in bad debt expense due to the potential for nonpayment by customers in industries more directly impacted by COVID-19.

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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~~2019 (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 86.6% 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~~March 31, 2020 we had ~~5,210~~5,564 projects in process. Our average project takes six to nine months to complete, with an average contract price of approximately ~~$457,000.~~$824,000. 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.

We also perform larger projects. Taken together, projects with contract prices of $1 million or more totaled $3.9 billion of aggregate contract value as of March 31, 2020, or approximately 85% of a total contract value for all projects in progress, totaling $4.6 billion. Generally, projects closer in size to $1 million will be completed in one year or less. It is unusual for us to work on a project that exceeds two years in length.

A stratification of projects in progress as of ~~September 30, 2017,~~March 31, 2020, 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	4,801	$	654.8
$1 million - $5 million	387		856.8	574		1,262.7
$5 million - $10 million	70		469.5	95		682.1
$10 million - $15 million	19		233.8	43		530.2
Greater than $15 million	12		273.7	51		1,455.8
Total	5,210	$	2,380.5	5,564	$	4,585.6

In addition to project work, approximately ~~20%~~13.4% 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.

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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.

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 five-year period from 2015 ~~and 2016,~~to 2019, there was an increase in overall activity ~~levels and these improved levels have continued during 2017.~~levels.

~~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.~~January 2025. As of March 31, 2020, we had $244.4 million of credit available to borrow under our credit facility. 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-one 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.

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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.~~compete for customers. 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~~2020 is currently on ~~execution and~~right sizing our cost ~~control, but we are seeking growth based~~structure for our current business levels as well as focusing on efficiency on our belief that industry conditions will continue to be strong in the near term, and we believe that activity levels will permit us to earn improved profits while preserving and developing our workforce. We continue to focus on project qualification, estimating, pricing and management; and we are investing in growth and improved performance.jobs.

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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 March 31,
																	2020				2019
Revenue	$	480,851	100.0	%	$	428,760	100.0	%	$	1,326,850	100.0	%	$	1,242,240	100.0	%	$	700,131	100.0	%	$	538,473	100.0	%
Cost of services		379,993	79.0	%		335,944	78.4	%		1,054,300	79.5	%		986,496	79.4	%		583,038	83.3	%		431,808	80.2	%
Gross profit		100,858	21.0	%		92,816	21.6	%		272,550	20.5	%		255,744	20.6	%		117,093	16.7	%		106,665	19.8	%
Selling, general and administrative expenses		66,707	13.9	%		61,032	14.2	%		196,553	14.8	%		180,245	14.5	%		92,924	13.3	%		78,905	14.7	%
Goodwill impairment		—	—			—	—			1,105	0.1	%		—	—
Gain on sale of assets		(184)	—			(166)	—			(464)	—			(523)	—			(554)	(0.1)	%		(219)	—
Operating income		34,335	7.1	%		31,950	7.5	%		75,356	5.7	%		76,022	6.1	%		24,723	3.5	%		27,979	5.2	%
Interest income		16	—			3	—			55	—			6	—			64	—			25	—
Interest expense		(961)	(0.2)	%		(563)	(0.1)	%		(2,392)	(0.2)	%		(1,870)	(0.2)	%		(2,617)	(0.4)	%		(1,062)	(0.2)	%
Changes in the fair value of contingent earn-out obligations		2,469	0.5	%		804	0.2	%		1,845	0.1	%		468	—			2,272	0.3	%		(158)	—
Other income (expense)		10	—			80	—			57	—			455	—			25	—			15	—
Income before income taxes		35,869	7.5	%		32,274	7.5	%		74,921	5.6	%		75,081	6.0	%		24,467	3.5	%		26,799	5.0	%
Income tax expense		13,585				11,803				27,188				27,052
Provision for income taxes																		6,751				6,933
Net income	$	22,284	4.6	%	$	20,471	4.8	%	$	47,733	3.6	%	$	48,029	3.9	%	$	17,716	2.5	%	$	19,866	3.7	%

We had 35 operating locations as of December 31, 2016. We completed one acquisition in the second quarter of 2017, known as “BCH”, that reports as a separate location in the Tampa, Florida area. Other than the addition of BCH, we did not make any changes to operating locations during the first nine months of 2017. As of September 30, 2017, we had 36 operating locations.2019 and March 31, 2020. Acquisitions are included in our results of operations from the respective acquisition date. The ~~same‑store~~same-store comparison from ~~2017~~2020 to ~~2016,~~2019, as described below, excludes ~~six~~three months of results for ~~BCH,~~Walker, which was acquired in April ~~2017~~1, 2019 as well as ~~the first month~~two months of ~~2017~~results for ~~Shoffner,~~our electrical contractor in North Carolina, which was acquired in February ~~2016.~~1, 2020 and reports together with our existing North Carolina operation. 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. While the electrical contractor in North Carolina is tucked-in with our existing North Carolina operation, due to the size of the acquired operations, we have elected to exclude their results from our same-store comparison.

Revenue—Revenue for the first quarter of 2020 increased ~~$52.1~~$161.7 million, or ~~12.1%~~30.0%, to ~~$480.9~~$700.1 million ~~for the third quarter of 2017~~ compared to the same period in ~~2016.~~2019. The increase included a 24.0% increase related to the Walker and North Carolina electrical contractor acquisitions and a 6.0% 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 March 31,
	2020				2019
Revenue:
Mechanical Services	$	565,464	80.8	%	$	534,585	99.3	%
Electrical Services		134,667	19.2	%		3,888	0.7	%
Total	$	700,131	100.0	%	$	538,473	100.0	%

Revenue for our mechanical services segment increased $30.9 million, or 5.8%, to $565.5 million for the first quarter of 2020 compared to the same period in 2019. The increase included an ~~8.0%~~increase in new construction projects in the industrial sector at one of our Texas operations ($14.1 million), our North Carolina operation ($13.8 million) and our Ohio operation ($8.8 million). This increase was offset by the sale of the majority of the assets and ongoing business of our California operation in the third quarter of 2019 ($5.8 million).

Revenue for our electrical services segment increased $130.8 million to $134.7 million for the first quarter of 2020 compared to the same period in 2019. The increase related to the acquisition of ~~BCH~~Walker in April 2019 and ~~a 4.1% increase~~the electrical contractor in revenue related to same‑store activity. The same‑store revenue increase is primarily due to an increase in activity at one of our Virginia operations ($9.3 million) and our Wisconsin operation ($4.8 million).

Revenue increased $84.6 million, or 6.8%, to $1.33 billion for the first nine months of 2017 compared to the same period in 2016. The increase included a 6.4% increase related to the acquisitions of BCH and Shoffner and a 0.4% 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 our New Hampshire 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 million) and one of our Virginia operations ($9.1 million).~~in February 2020.

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.

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


	March 31,				December 31,				March 31,
	2020				2019				2019
Backlog:
Mechanical Services	$	1,376,952	85.1	%	$	1,348,651	84.2	%	$	1,118,711	97.9	%
Electrical Services		241,443	14.9	%		253,135	15.8	%		23,800	2.1	%
Total	$	1,618,395	100.0	%	$	1,601,786	100.0	%	$	1,142,511	100.0	%

Backlog as of ~~September 30, 2017~~March 31, 2020 was ~~$901.2 million,~~$1.62 billion, a ~~3.9% decrease~~1.0% increase from ~~June 30, 2017~~December 31, 2019 backlog of ~~$937.8 million,~~$1.60 billion, and a ~~25.3%~~41.7% increase from ~~September 30, 2016~~March 31, 2019 backlog of ~~$719.3 million.~~$1.14 billion. Sequential backlog included the acquisition of the electrical contractor in North Carolina ($48.3 million) and a same-store decrease of $31.7 million or 2.0%. Sequential same-store backlog decreased primarily due to ~~the~~ completion of project work at ~~one of~~Walker ($64.4 million) and our ~~Texas operations~~North Carolina operation ($~~13.3~~35.0 million), ~~one~~partially offset by increased project bookings at two of our Virginia operations ($~~10.4 million) and one of our Florida operations ($10.4~~43.9 million). The year‑over‑year backlog increase included the Walker acquisition ($176.0 million) and the acquisition of ~~BCH~~the electrical contractor in North Carolina ($~~31.8~~48.3 million) ~~and~~as well as a same-store increase of ~~$150.1~~$251.6 million or ~~20.9%~~22.0%. Same-store year-over-year backlog increased primarily due to increased project bookings at ~~our Colorado operation ($50.6 million),~~ one of our Virginia operations ($~~41.4~~67.7 million), our ~~North Carolina~~Colorado operation ($~~22.3~~50.5 million) and one of our ~~Arizona operation~~Florida operations ($~~22.1~~31.3 million).

Gross Profit—Gross profit increased ~~$8.0~~$10.4 million, or ~~8.7%~~9.8%, to ~~$100.9~~ $117.1 million for the ~~third~~first quarter of ~~2017~~2020 as compared to the same period in ~~2016.~~2019. The increase included a ~~6.1%~~6.7% increase related to the ~~acquisition of BCH~~Walker and North Carolina electrical contractor acquisitions and a ~~2.6%~~3.1% 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 Texas operations ($1.7 million) and our Ohio operation ($1.6 million), offset by decreased volumes at one of our Virginia operations ($~~1.4~~2.9 million). Additionally, we had improvements in project execution at our North Carolina operation ($5.3 million), offset by a decrease at one of our Florida operations ($3.1 million) compared to the prior ~~year as well as improved project execution at one of our Texas operations ($1.2 million).~~year. As a percentage of revenue, gross profit decreased from ~~21.6%~~19.8% in ~~2016~~2019 to ~~21.0%~~

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16.7% in ~~2017 due to an increase in backlog amortization as a result of the BCH acquisition.~~

Gross profit increased $16.8 million, or 6.6%, to $272.6 million for the first nine months of 2017 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 was2020 primarily due to ~~increased volumes~~the factors discussed above, but was also attributable to lower margins on the Walker acquisition. Additionally, preventative and protective actions taken on projects, such as the social distancing and other procedure adjustments caused by COVID-19, did have some negative impact on margins in the month of March 2020. Although we cannot reasonably estimate the total impact at this time, we do not believe such impact was material to 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.financial statements.

Selling, General and Administrative Expenses (“SG&A”)—SG&A increased ~~$5.7~~$14.0 million, or ~~9.3%~~17.8%, to ~~$66.7~~$92.9 million for the ~~third~~first quarter of ~~2017~~2020 as compared to ~~2016.~~2019. SG&A increased primarily due to SG&A from new acquisitions as well as an increase in bad debt expense of $4.3 million. The increase in bad debt expense was primarily driven by concerns about collectability of certain receivables due to the business interruptions caused by COVID-19, specifically with respect to receivables with retail, restaurants and entertainment companies. On a ~~same‑store~~same-store basis, excluding amortization expense, SG&A increased ~~$0.6~~$4.6 million, or ~~1.0%~~6.2%. ~~This increase is primarily due to the~~Additionally, we had an increase in ~~same-store revenue in the current year period. Amortization~~amortization expense ~~increased $1.9~~of $1.4 million during the period as compared to the prior year period, primarily as a result of the ~~BCH acquisition.~~Walker and North Carolina electrical contractor acquisitions. As a percentage of revenue, SG&A decreased to 13.3% in 2020 from ~~14.2%~~14.7% 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 primarily2019 largely due to $0.8 million in compensation costs related to leadership changes, investments in service and an increase in bad debt expense of $0.2 million due 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. Amortization expense increased $3.4 million during the period primarilylower SG&A as ~~a result of the BCH acquisition. As~~ a percentage of revenue ~~SG&A increased from 14.5%~~at Walker, which was acquired in ~~2016 to 14.8% in 2017 primarily due to the factors discussed above.~~April 2019.

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)

									Three Months Ended
									March 31,
									2020		2019
									(in thousands)
SG&A	$	66,707	$	61,032	$	196,553	$	180,245	$	92,924	$	78,905
Less: SG&A from companies acquired		(3,185)		—		(7,516)		—		(8,015)		—
Less: Amortization expense		(3,394)		(1,515)		(8,072)		(4,649)		(5,770)		(4,388)
Same-store SG&A, excluding amortization expense	$	60,128	$	59,517	$	180,965	$	175,596	$	79,139	$	74,517

~~Goodwill Impairment~~Interest Expense—~~We recorded a goodwill impairment charge of $1.1~~Interest expense increased $1.6 million, ~~during~~or 146.4%, to $2.6 million for 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 million, or 70.7%, to $1.0 million for the third quarter of 2017~~2020 as compared to the same period in ~~2016. Interest expense increased $0.5 million, or 27.9%, to $2.4 million for the first nine months of 2017 as compared to the same period in 2016.~~2019. The increase reflects the increased borrowings on the ~~revolving~~senior credit facility ~~as well as~~and notes to former owners ~~used to fund~~as a result of our recent acquisitions, including Walker and the ~~BCH acquisition during the second quarter of 2017.~~North Carolina electrical contractor.

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 from changes in the fair value of contingent ~~earn‑out~~earn-out obligations for the ~~third~~first quarter of ~~2017~~2020 increased ~~$1.7~~ $2.4 million as compared to the same period in ~~2016.~~2019. 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~~caused by credit spreads increasing in the ~~quarter than previously estimated. In the third~~first quarter of ~~2016, based on updated measurements of estimated future cash flows~~this year, which lowered the earn-out liabilities.

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

Income ~~from changes in the fair value of contingent earn‑out obligations~~Taxes—Our provision for income taxes for the first nine months of 2017 increased $1.4 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 Tax Expense~~—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 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.

~~For the nine~~three months ended ~~September 30, 2017, our income tax expense~~March 31, 2020 was ~~$27.2~~$6.8 million with an effective tax rate of ~~36.3%~~27.6% as compared to a provision for income ~~tax expense~~taxes of ~~$27.1~~$6.9 million with an effective tax rate of ~~36.0%~~25.9% for the same period in ~~2016.~~2019. The effective tax rate for ~~2017~~2020 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%~~(5.0%) and nondeductible expenses ~~(0.8%~~(1.9%)

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partially offset by benefits from the ~~domestic production activities~~expected filing of amended returns to claim the energy efficient commercial buildings deduction ~~(1.8%~~(the “179D deduction”) allocated to us (0.3%). The effective tax rate for 2019 was higher than the 21% federal statutory rate primarily due to net state income taxes (4.4%) and ~~a decrease in valuation allowances (0.4%~~nondeductible expenses (1.4%) partially offset by deductions for stock-based compensation (0.9%).

We currently estimate our effective tax rate for the full year ~~2017~~2020 will be between ~~35%~~25% and ~~38%~~30%. However, our effective tax rate in 2020 could be on the low end of this range due to the extension of the 179D deduction through 2020 under the Taxpayer Certainty and Disaster Tax Relief Act of 2019.

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Outlook

~~Outlook~~

Industry conditions improved during the four-year period from 2016 to 2019, and at the beginning of 2020 we expected this strong activity to continue during 2020. However, during the second half of March we experienced negative impacts to our business due to the business disruption caused by Coronavirus Disease 2019 (“COVID-19”). In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. Following these declarations, governmental entities that have jurisdiction over the substantial majority of our operating locations have declared various stay-at-home and other directives and orders that have materially hindered our ability to conduct business to varying degrees.

Our service business experienced the first and most pronounced negative impacts, largely as a result of building closures or decisions by customers to limit building access. Although our construction activities have been classified as essential services in most markets, we have had certain jobs temporarily close due to government action, decisions by owners, or upon positive tests for COVID-19 of workers at various sites. We have ~~seen industry conditions improve during 2015~~also experienced delays in the award of new work in some instances and ~~2016. Our emphasis~~we have been informed of some instances of delayed starts; however, to date we have not experienced material cancellations in our backlog. In addition, we have implemented safety precautions and other COVID-19 related guidelines that have added cost or inefficiency as we work to create a safe environment for ~~2017 is~~our team members and our communities. The Company considered the impact of COVID-19 on ~~execution, including a focus~~the assumptions and estimates used to determine our results and asset valuations as of March 31, 2020, and the Company has determined that there were no material or systematic adverse impacts on ~~cost discipline~~the Company’s first quarter 2020 balance sheet and ~~efficient project performance, labor force development,~~results of operations except for diminished revenue, operational inefficiency, and ~~investing~~an increase in ~~growth, particularly~~bad debt expense due to the potential for nonpayment by customers in ~~service and small projects. Based~~industries more directly impacted by COVID-19.

We expect COVID-19 to have an even more negative impact on our ~~recent acquisitions,~~second quarter results, especially in the April and May timeframe. At this time it is impossible to quantify the potential impact to our second quarter because we do not know how the pandemic and related governmental decisions will unfold, but assuming the pandemic does not materially worsen the economic outlook of our markets, we expect ~~that~~ our ~~2017 revenues will~~earnings to be ~~above~~positive but far below the levels we ~~experienced~~achieved in ~~2016. Additionally,~~the second quarter of 2019. We also expect our earnings for the third and fourth quarters will trend upwards from lower levels in ~~light~~the second quarter, but we do not currently expect third and fourth quarter results of ~~economic conditions for our industry,~~operation to approach the record earnings levels that we ~~expect that profitability~~achieved in ~~2017 will continue to be strong and at levels similar to what we experienced in 2016.~~the same quarters of 2019.

Liquidity and Capital Resources (in thousands):


	Nine Months Ended
	September 30,
	2017		2016


					Three Months Ended
					March 31,
					2020		2019

Cash provided by (used in):
Operating activities	$	65,692	$	49,754	$	21,920	$	991
Investing activities		(110,906)		(74,920)		(15,536)		(9,800)
Financing activities		42,636		(5,961)		76,092		(7,681)
Net increase (decrease) in cash and cash equivalents	$	(2,578)	$	(31,127)	$	82,476	$	(16,490)
Free cash flow:
Cash provided by operating activities	$	65,692	$	49,754	$	21,920	$	991
Purchases of property and equipment		(16,830)		(17,257)		(7,497)		(8,844)
Proceeds from sales of property and equipment		784		847		690		357
Free cash flow	$	49,646	$	33,344	$	15,113	$	(7,496)

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.

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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~~$21.9 million during the first ~~nine~~three months of ~~2017~~2020 compared with ~~$49.8~~$1.0 million during the same period in ~~2016. The $15.9~~2019. This increase was primarily driven by a $46.1 million ~~increase is primarily due to a $21.0 million increase in accounts payable and accrued liabilities and a $21.2 million increase~~change in billings in excess of costs ~~and estimated earnings, primarily due to the~~driven by timing of payments and project billings and ~~various project work. The $21.0~~a $13.5 million ~~increase~~change 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~~liabilities. These increases were partially offset by ~~$33.8~~a $46.2 million ~~increase~~change 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.~~net.

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Cash Used in Investing Activities—During the first ~~nine~~three months of ~~2017,~~2020, cash used in investing activities was ~~$110.9~~$15.5 million compared to ~~$74.9~~$9.8 million during the same period in ~~2016.~~2019. The ~~$36.0~~$5.7 million increase in cash used primarily relates to cash paid (net of cash acquired) for acquisitions, including the ~~BCH~~ acquisition of the electrical contractor in ~~2017 of $86.1 million compared to the EAS and Shoffner acquisitions in 2016 ($56.3 million).~~North Carolina.

Cash Provided by (Used in) Financing Activities—Cash provided by financing activities was ~~$42.6~~$76.1 million for the first ~~nine~~three months of ~~2017~~2020 compared to cash used in financing activities of ~~$6.0~~$7.7 million during the same period in ~~2016.~~2019. The ~~$48.6~~$83.8 million increase in cash provided by financing activities is primarily due to ~~$51.0~~$111.6 million ~~of additional~~more in net proceeds from the ~~revolving line~~senior credit facility compared to the prior year, primarily used to fund the acquisition of ~~credit during~~the electrical contractor acquired in the first ~~nine months~~quarter of ~~2017.~~2020 as well as the acquisition of the mechanical contractor in Texas, which closed on April 1, 2020.

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 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

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the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2020, we repurchased ~~0.3~~0.2 million shares for approximately ~~$8.9~~$9.0 million at an average price of ~~$34.18~~$37.85 per share.

Debt

Revolving Credit Facility and Term Loan

We have a ~~$325.0~~$600.0 million senior credit facility (the “Facility”) provided by a syndicate of ~~banks, with~~banks. The Facility is composed of a ~~$100~~revolving credit line in the amount of $450.0 million and a $150.0 million term loan, and the Facility provides for a $150.0 million accordion ~~option.~~or increase option for the revolving portion of the Facility. The Facility ~~which is available for borrowings and~~also includes a sublimit of up to $160.0 million issuable in the form of letters of ~~credit,~~credit. The Facility expires in ~~February 2021~~January 2025 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 our wholly owned captive insurance company and a second lien on our assets related to projects subject to surety bonds. In 2019, we incurred approximately $1.4 million in financing and professional costs in connection with an amendment to the Facility, which are being amortized over the remaining term of the Facility. Of this amount, $0.4 million is attributable to the term loan and is being amortized using the effective interest method. The remaining $1.0 million is attributable to the revolving credit line, which combined with the previous unamortized costs of $1.3 million, is being amortized over the remaining term of the Facility on a straight-line basis as a non-cash charge to interest expense. For the term loan, we are required to make quarterly payments increasing over time from 1.25% to 3.75% of the original aggregate principal amount of the term loan, with the balance due in January 2025. As of ~~September 30, 2017,~~March 31, 2020, we had ~~$66.0~~$150.0 million of outstanding borrowings ~~$39.6~~on the revolving credit facility, $55.6 million in letters of credit outstanding and ~~$219.4~~$244.4 million of credit available.

There are two interest rate options for borrowings under the Facility, the Base Rate Loan ~~Option~~option and the Eurodollar Rate Loan ~~Option.~~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~~“Credit Facility Adjusted EBITDA”, which shall mean Consolidated EBITDA as such term is defined in the credit agreement.

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

The Facility’s principal financial covenants include:

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~~March 31, 2020 was ~~0.5.~~1.5.

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 when the Company’s Total Leverage Ratio exceeds 2.00 to 1.00, 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 does not exceed 1.50 to 1.00. ~~The~~Credit Facility ~~also allows the fixed charge coverage ratio not to be reduced~~Adjusted EBITDA, capital expenditures, provision for stock repurchases through September 30, 2015 in an aggregate amount not to exceed $25 million and for stock repurchases made after February 22, 2016 but on or prior to December 31, 2017 in an aggregate amount not to exceed $25 million, if at the time of and after giving effect to such repurchase the Company’s Net Leverage Ratio was less than or equal to 1.50 to 1.00. Capital expenditures, tax provision,income taxes, dividends, ~~and~~ stock repurchase payments, interest expense, and scheduled principal payments are defined

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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~~March 31, 2020 was ~~29.5.~~10.7.

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.~~March 31, 2020.

Notes to Former Owners

As part of the consideration used to acquire ~~two~~six companies, we have outstanding notes to the former owners. These notes had an outstanding balance of ~~$15.3~~$43.7 million as of ~~September 30, 2017.~~March 31, 2020. In conjunction with the acquisition of the electrical contractor in North Carolina in the first quarter of 2020, we issued a promissory note to former owners with an outstanding balance of $8.0 million as of March 31, 2020 that bears interest, payable quarterly, at a stated interest rate of 3.0%. The principal is due in equal installments in February 2023 and February 2024. 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 March 31, 2020 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~~$7.2 million as of ~~September 30, 2017~~March 31, 2020 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~~three 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~~$3.5 million as of ~~September 30, 2017~~March 31, 2020 that ~~bears~~bear interest, payable quarterly, at ~~a weighted average~~stated interest ~~rate of~~rates ranging from 3.0% - 3.5%. The principal isamounts are due ~~in equal installments in February 2018 and 2019.~~between May 2020 – July 2021.

~~Other Debt~~Outlook

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

~~Outlook~~

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

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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%~~15% to ~~30%~~25% 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

~~Table of Contents~~

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,~~March 31, 2020, we have ~~$39.6~~$55.6 million in letter of credit commitments, of which ~~$11.3~~$18.6 million will expire in ~~2017~~2020 and ~~$28.3~~$37.0 million will expire in ~~2018.~~2021. 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,~~the next twelve months, 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 price risk, or foreign currency exchange risk ~~or interest rate risks~~ from the use of derivative financial instruments. ~~We do not~~At times, we use derivative financial ~~instruments.~~instruments to manage our interest rate risk.

We have exposure to changes in interest rates under our ~~revolving~~senior 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.

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~~the Company’s 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.

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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~~March 31, 2020 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,~~2019, which could materially affect our business, financial condition, or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results. Except as updated below, there were no material changes from the risk factors disclosed in Part 1, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.

The Company’s business has been and may continue to be negatively affected by health crises or outbreaks of disease, such as epidemics or pandemics, including the ongoing COVID-19 pandemic.

The Company’s operations have and continue to be affected by the ongoing global COVID-19 pandemic (the “virus”), which was declared a “pandemic” by the World Health Organization in March 2020, and the resulting volatility and uncertainty it has caused in the U.S. and other markets. The full impact of COVID-19 is unknown and rapidly evolving; the pandemic could result in a prolonged economic downturn and has disrupted, and is expected to continue to disrupt, the Company’s business. The outbreak and any preventative or protective actions that the Company or its customers, suppliers, vendors and other third parties may take in respect of this virus, including those required by regulatory authorities, have and may continue to result in a period of disruption. The Company cannot reasonably estimate the length or severity of the COVID-19 pandemic or the related response, or the extent to which the disruption may materially impact the Company’s business, financial position, results of operations, cash flows and liquidity.

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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. In an exercise of such discretion, commencing on March 27, 2020, we have temporarily suspended share repurchases in response to the uncertainty surrounding the current COVID-19 pandemic, as more fully described in “Item 1A. Risk Factors” herein. The Board may modify, suspend, extend or terminate the program at any time. During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2020, we repurchased ~~0.3~~0.2 million shares for approximately ~~$8.9~~ $9.0 million at an average price of ~~$34.18~~$37.85 per share.

~~Table of Contents~~

During the quarter ended ~~September 30, 2017,~~March 31, 2020, 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

Period

Shares Purchased

Paid Per Share

or Programs

or Programs

July 1 - July 31

—

$
—

7,449,784

662,709

August 1 - August 31

143,667

$
33.18

7,593,451

519,042

September 1 - September 30

9,737

$
33.56

7,603,188

509,305

153,404

$
33.20

7,603,188

509,305


				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 (1)	or Programs
January 1 - January 31	26,606	$	49.04	8,653,973	894,196
February 1 - February 29	17,724	$	47.58	8,671,697	876,472
March 1 - March 31	193,029	$	35.42	8,864,726	683,443
	237,359	$	37.85	8,864,726	683,443

(1)

Purchased as part of a program announced on March 29, 2007 under which, since the inception of this program, 9.5 million shares have been approved for repurchase.

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.

2533

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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
2.1	Agreement and Plan of Merger dated as of March 9, 2020 among Comfort Systems USA, Inc., OSC Acquisition Corp., TAS Energy Inc., and Element Partners II, L.P., as Stockholder Representative	2.1	March 13, 2020 Form 8-K
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*	Inline XBRL Instance Document
101.SCH*	Inline XBRL Taxonomy Extension Schema Document
101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	Inline 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~~April 27, 2020	By:	/s/ Brian E. Lane
		Brian E. Lane
		President, Chief Executive Officer and Director

~~October 26, 2017~~April 27, 2020	By:	/s/ William George
		William George
		Executive Vice President and Chief Financial Officer

~~October 26, 2017~~April 27, 2020	By:	/s/ Julie S. Shaeff
		Julie S. Shaeff
		Senior Vice President and Chief Accounting Officer

2735


(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~~March 31, 2020
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to


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

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~~ ☐


		Page
~~Part I—Financial Information~~
~~Item 1—Financial Statements~~
~~Consolidated Balance Sheets~~Part I—Financial Information		1 2
Item 1—Financial Statements		2
Consolidated Balance Sheets		2
Consolidated Statements of Operations		2 3
Consolidated Statements of Stockholders’ Equity		3 4
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 21
Item 3—Quantitative and Qualitative Disclosures about Market Risk		23 31
Item 4—Controls and Procedures		23 32
Part II—Other Information		24 32
Item 1—Legal Proceedings		24 32
Item 1A—Risk Factors		24 32
Item 2—Unregistered Sales of Equity Securities and Use of Proceeds		24 33
Item 6—Exhibits		26 34
Signatures		27 35


	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


~~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)


							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	%


	Three Months Ended March 31,
Revenue by Service Provided	2020				2019
Mechanical Services	$	565,464	80.8	%	$	534,585	99.3	%
Electrical Services		134,667	19.2	%		3,888	0.7	%
Total	$	700,131	100.0	%	$	538,473	100.0	%

	Three Months Ended March 31,
Revenue by Type of Customer	2020				2019
Industrial	$	275,198	39.3	%	$	168,660	31.3	%
Education		109,584	15.7	%		66,743	12.4	%
Office Buildings		75,572	10.8	%		66,212	12.3	%
Healthcare		99,259	14.2	%		92,023	17.1	%
Government		38,981	5.6	%		32,279	6.0	%
Retail, Restaurants and Entertainment		61,203	8.7	%		59,391	11.0	%
Multi-Family and Residential		18,731	2.7	%		30,235	5.6	%
Other		21,603	3.0	%		22,930	4.3	%
Total	$	700,131	100.0	%	$	538,473	100.0	%

	Three Months Ended March 31,
Revenue by Activity Type	2020				2019
New Construction	$	347,400	49.6	%	$	223,960	41.6	%
Existing Building Construction		207,166	29.6	%		182,296	33.8	%
Service Projects		51,648	7.4	%		50,384	9.4	%
Service Calls, Maintenance and Monitoring		93,917	13.4	%		81,833	15.2	%
Total	$	700,131	100.0	%	$	538,473	100.0	%


	Service		Construction		Other		Total
Balance at beginning of year	$	3,192	$	3,400	$	315	$	6,907
Impact of new accounting standard		310		331		54		695
Bad debt expense (benefit)		2,754		1,797		—		4,551
Deductions for uncollectible receivables written off, net of recoveries		(234)		(6)		—		(240)
Credit allowance of acquired companies on the acquisition date		—		352		—		352
Purchase accounting adjustments		—		72		—		72
Reclass to other current liabilities		—		—		(315)		(315)
Balance at March 31, 2020	$	6,022	$	5,946	$	54	$	12,022


	Three Months Ended March 31,					Year Ended December 31,
	2020				2019
	Contract		Contract		Contract		Contract
	Assets		Liabilities		Assets		Liabilities
Balance at beginning of period	$	2,736	$	166,918	$	10,213	$	130,986
Change due to acquisitions / disposals		436		12,851		6,573		31,556
Change due to conditional versus unconditional		4,394		—		(14,050)		—
Change in timing for performance obligation to be satisfied		—		35,337		—		4,376
Change related to credit allowance		(25)		—		—		—
Balance at end of period	$	7,541	$	215,106	$	2,736	$	166,918


	March 31, 2020		December 31, 2019
Lease right-of-use assets	$	82,301	$	84,073
Lease liabilities:
Other current liabilities		14,515		14,016
Long-term lease liabilities		70,410		72,697
Total lease liabilities	$	84,925	$	86,713


				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
July 1 - July 31	—	$	—	7,449,784	662,709
August 1 - August 31	143,667	$	33.18	7,593,451	519,042
September 1 - September 30	9,737	$	33.56	7,603,188	509,305
	153,404	$	33.20	7,603,188	509,305


		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