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

Form 10-Q

(Mark One)    

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

OR

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                             to                            

Commission file number: 1-13011

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

DELAWARE
(State or other jurisdiction of
Incorporation or Organization)
  76-0526487
(I.R.S. Employer
Identification No.)

675 Bering Drive
Suite 400
Houston, Texas 77057

(Address of Principal Executive Offices) (Zip Code)

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

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

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

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

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

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

        The number of shares outstanding of the issuer's common stock as of October 22, 2014 was 37,255,464 (excluding treasury shares of 3,867,901).

   


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COMFORT SYSTEMS USA, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2014

 
  Page  

Part I—Financial Information

       

Item 1—Financial Statements

       

Consolidated Balance Sheets

    1  

Consolidated Statements of Operations

    2  

Consolidated Statements of Stockholders' Equity

    3  

Consolidated Statements of Cash Flows

    4  

Condensed Notes to Consolidated Financial Statements

    5  

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

    16  

Item 3—Quantitative and Qualitative Disclosures about Market Risk

    33  

Item 4—Controls and Procedures

    34  

Part II—Other Information

       

Item 1—Legal Proceedings

    35  

Item 1A—Risk Factors

    35  

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

    35  

Item 6—Exhibits

    36  

Signatures

    37  

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COMFORT SYSTEMS USA, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

 
  September 30,
2014
  December 31,
2013
 
 
  (Unaudited)
   
 

ASSETS

             

CURRENT ASSETS:

             

Cash and cash equivalents

  $ 43,882   $ 52,054  

Accounts receivable, less allowance for doubtful accounts of $4,232 and $4,460, respectively

    290,021     267,470  

Other receivables

    9,675     16,373  

Inventories

    8,937     8,430  

Prepaid expenses and other

    25,138     24,209  

Costs and estimated earnings in excess of billings

    32,069     28,122  

Assets related to discontinued operations

    278     339  
           

Total current assets

    410,000     396,997  

PROPERTY AND EQUIPMENT, NET

    55,708     46,861  

GOODWILL

    138,052     114,588  

IDENTIFIABLE INTANGIBLE ASSETS, NET

    46,259     37,383  

OTHER NONCURRENT ASSETS

    6,387     5,993  
           

Total assets

  $ 656,406   $ 601,822  
           
           

LIABILITIES AND STOCKHOLDERS' EQUITY

             

CURRENT LIABILITIES:

             

Current maturities of notes to former owners

  $   $ 2,000  

Current maturities of capital lease obligations

    328      

Accounts payable

    99,232     100,825  

Accrued compensation and benefits

    45,845     44,093  

Billings in excess of costs and estimated earnings

    72,856     64,588  

Accrued self-insurance expense

    30,466     29,398  

Other current liabilities

    29,973     28,168  

Liabilities related to discontinued operations

    283     366  
           

Total current liabilities

    278,983     269,438  

LONG-TERM DEBT

    42,000      

LONG-TERM CAPITAL LEASE OBLIGATIONS

    606      

DEFERRED INCOME TAX LIABILITIES

    7,167     9,941  

OTHER LONG-TERM LIABILITIES

    10,898     8,421  
           

Total liabilities

    339,654     287,800  

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, 3,750,619 and 3,488,438 shares, respectively

    (42,127 )   (37,468 )

Additional paid-in capital

    319,659     318,123  

Retained earnings

    20,937     14,768  
           

Comfort Systems USA, Inc. stockholders' equity

    298,880     295,834  

Noncontrolling interests

    17,872     18,188  
           

Total stockholders' equity

    316,752     314,022  
           

Total liabilities and stockholders' equity

  $ 656,406   $ 601,822  
           
           

   

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

1


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COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(Unaudited)

 
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2014   2013   2014   2013  

REVENUE

  $ 370,145   $ 349,989   $ 1,054,327   $ 1,026,932  

COST OF SERVICES

    303,686     282,968     873,860     848,477  
                   

Gross profit

    66,459     67,021     180,467     178,455  

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

    52,200     49,404     153,158     141,623  

GOODWILL IMPAIRMENT

            727      

GAIN ON SALE OF ASSETS

    (526 )   (117 )   (748 )   (367 )
                   

Operating income

    14,785     17,734     27,330     37,199  

OTHER INCOME (EXPENSE):

   
 
   
 
   
 
   
 
 

Interest income

    2     5     15     19  

Interest expense

    (561 )   (347 )   (1,359 )   (1,032 )

Changes in the fair value of contingent earn-out obligations

    (210 )   750     (210 )   696  

Other

    12     83     104     184  
                   

Other income (expense)

    (757 )   491     (1,450 )   (133 )
                   

INCOME BEFORE INCOME TAXES

    14,028     18,225     25,880     37,066  

INCOME TAX EXPENSE

    4,649     6,588     9,087     14,366  
                   

INCOME FROM CONTINUING OPERATIONS

    9,379     11,637     16,793     22,700  

Loss from discontinued operations, net of income tax benefit of $—, $(18), $(10) and $(57)

        (25 )   (15 )   (79 )
                   

NET INCOME INCLUDING NONCONTROLLING INTERESTS

    9,379     11,612     16,778     22,621  

Less: Net income attributable to noncontrolling interests

    1,774     233     4,397     948  
                   

NET INCOME ATTRIBUTABLE TO COMFORT SYSTEMS USA, INC. 

  $ 7,605   $ 11,379   $ 12,381   $ 21,673  
                   
                   

INCOME PER SHARE ATTRIBUTABLE TO COMFORT SYSTEMS USA, INC.:

                         

Basic—

                         

Income from continuing operations

  $ 0.20   $ 0.31   $ 0.33   $ 0.58  

Loss from discontinued operations

                 
                   

Net income

  $ 0.20   $ 0.31   $ 0.33   $ 0.58  
                   
                   

Diluted—

                         

Income from continuing operations

  $ 0.20   $ 0.30   $ 0.33   $ 0.58  

Loss from discontinued operations

                 
                   

Net income

  $ 0.20   $ 0.30   $ 0.33   $ 0.58  
                   
                   

SHARES USED IN COMPUTING INCOME PER SHARE:

                         

Basic

    37,637     37,293     37,642     37,184  
                   
                   

Diluted

    37,924     37,631     37,917     37,444  
                   
                   

DIVIDENDS PER SHARE

  $ 0.055   $ 0.055   $ 0.165   $ 0.155  
                   
                   

   

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

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COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In Thousands, Except Share Amounts)

 
  Common Stock   Treasury Stock    
   
   
   
 
 
  Additional
Paid-In
Capital
  Retained
Earnings
(Deficit)
  Non-
Controlling
Interests
  Total
Stockholders'
Equity
 
 
  Shares   Amount   Shares   Amount  

BALANCE AT DECEMBER 31, 2012

    41,123,365   $ 411     (3,879,299 ) $ (41,012 ) $ 317,534   $ (6,528 ) $ 16,901   $ 287,306  

Net income

                        27,269     1,287     28,556  

Issuance of Stock:

                                                 

Issuance of shares for options exercised including tax benefit

            439,762     4,711     522             5,233  

Issuance of restricted stock

            122,375     1,301     (1,301 )            

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

            (45,266 )   (631 )               (631 )

Tax benefit from vesting of restricted stock

                    184             184  

Forfeiture of unvested restricted stock

            (469 )   (5 )   5              

Stock-based compensation

                    3,041             3,041  

Dividends

                    (1,862 )   (5,973 )       (7,835 )

Share repurchase

            (125,541 )   (1,832 )               (1,832 )
                                   

BALANCE AT DECEMBER 31, 2013

    41,123,365     411     (3,488,438 )   (37,468 )   318,123     14,768     18,188     314,022  

Net income (unaudited)

                        12,381     4,397     16,778  

Issuance of Stock:

                                                 

Issuance of shares for options exercised including tax benefit (unaudited)

            84,119     911     158             1,069  

Issuance of restricted stock (unaudited)

            115,044     1,243     (1,243 )            

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

            (34,657 )   (531 )               (531 )

Tax benefit from vesting of restricted stock (unaudited)

                    133             133  

Stock-based compensation (unaudited)

                    2,488             2,488  

Dividends (unaudited)

                        (6,212 )       (6,212 )

Distribution to noncontrolling interest (unaudited)

                            (4,713 )   (4,713 )

Share repurchase (unaudited)

            (426,687 )   (6,282 )               (6,282 )
                                   

BALANCE AT SEPTEMBER 30, 2014 (unaudited)

    41,123,365   $ 411     (3,750,619 ) $ (42,127 ) $ 319,659   $ 20,937   $ 17,872   $ 316,752  
                                   
                                   

   

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

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COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 
  Three Months
Ended
September 30,
  Nine Months
Ended
September 30,
 
 
  2014   2013   2014   2013  

CASH FLOWS FROM OPERATING ACTIVITIES

                         

Net income including noncontrolling interests

  $ 9,379   $ 11,612   $ 16,778   $ 22,621  

Adjustments to reconcile net income to net cash provided by (used in) operating activities—

                         

Amortization of identifiable intangible assets

    2,060     1,739     5,445     5,408  

Depreciation expense

    3,648     2,866     9,917     8,511  

Goodwill impairment

            727      

Bad debt expense

    532     (60 )   767     (378 )

Deferred tax expense (benefit)

    (2,276 )   692     (3,899 )   1,168  

Amortization of debt financing costs

    83     65     213     180  

Gain on sale of assets

    (526 )   (117 )   (748 )   (367 )

Changes in the fair value of contingent earn-out obligations

    210     (750 )   210     (696 )

Stock-based compensation expense

    622     523     3,492     3,243  

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

                         

(Increase) decrease in—

                         

Receivables, net

    47     23,944     (428 )   (6,976 )

Inventories

    147     315     (111 )   302  

Prepaid expenses and other current assets

    1,104     (122 )   2,755     (11 )

Costs and estimated earnings in excess of billings

    6,283     (886 )   (1,976 )   (3,996 )

Other noncurrent assets

    (52 )   (186 )   46     63  

Increase (decrease) in—

                         

Accounts payable and accrued liabilities

    1,473     671     (529 )   5,413  

Billings in excess of costs and estimated earnings

    (918 )   (13,517 )   2,955     (11,248 )

Other long-term liabilities

    2,065     644     1,868     545  
                   

Net cash provided by (used in) operating activities

    23,881     27,433     37,482     23,782  
                   

CASH FLOWS FROM INVESTING ACTIVITIES:

                         

Purchases of property and equipment

    (7,033 )   (5,234 )   (15,367 )   (12,471 )

Proceeds from sales of property and equipment

    692     64     1,232     566  

Proceeds from businesses sold

                43  

Cash paid for acquisitions, earn-outs and intangible assets, net of cash acquired

    (2,845 )       (54,204 )    
                   

Net cash used in investing activities

    (9,186 )   (5,170 )   (68,339 )   (11,862 )
                   

CASH FLOWS FROM FINANCING ACTIVITIES:

                         

Net borrowings (payments) on revolving line of credit

    (10,000 )   5,000     42,000     5,000  

Payments on other long-term debt

        (3,400 )   (2,000 )   (5,400 )

Payments on capital lease obligations

    (219 )       (219 )    

Debt financing costs

    (563 )       (563 )   (552 )

Payments of dividends to shareholders

    (2,070 )   (2,052 )   (6,209 )   (5,818 )

Share repurchase program

    (5,777 )   (1,177 )   (6,282 )   (1,832 )

Shares received in lieu of tax withholding

        8     (531 )   (614 )

Excess tax benefit of stock-based compensation

    (7 )   (17 )   98     226  

Proceeds from exercise of options

    278     1,334     1,104     1,618  

Distributions to noncontrolling interests

    (2,214 )       (4,713 )    
                   

Net cash provided by (used in) financing activities

    (20,572 )   (304 )   22,685     (7,372 )
                   

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

    (5,877 )   21,959     (8,172 )   4,548  
                   

CASH AND CASH EQUIVALENTS, beginning of period

    49,759     23,346     52,054     40,757  
                   

CASH AND CASH EQUIVALENTS, end of period

  $ 43,882   $ 45,305   $ 43,882   $ 45,305  
                   
                   

   

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

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

(Unaudited)

1. Business and Organization

        Comfort Systems USA, Inc., a Delaware corporation, provides comprehensive heating, ventilation and air conditioning ("HVAC") installation, maintenance, repair and replacement services within the mechanical services industry. We operate primarily in the commercial, industrial and institutional HVAC markets and perform most of our services within office buildings, retail centers, apartment complexes, manufacturing plants and healthcare, education and government facilities. In addition to standard HVAC services, we provide specialized applications such as building automation control systems, fire protection, process cooling, electronic monitoring and process piping. Certain locations also perform related activities such as electrical service and plumbing. Approximately 43% of our consolidated 2014 revenue is attributable to installation of systems in newly constructed facilities, with the remaining 57% attributable to maintenance, repair and replacement services. The following service activities account for our consolidated 2014 revenue: HVAC 74%, plumbing 16%, building automation control systems 6% and other 4%. These service activities are within the mechanical services industry, which is the single industry segment we serve.

2. Summary of Significant Accounting Policies

        These interim statements should be read in conjunction with the historical Consolidated Financial Statements and related notes of Comfort Systems included in the Annual Report on Form 10-K as filed with the Securities and Exchange Commission ("SEC") for the year ended December 31, 2013 (the "Form 10-K").

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

        The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities, revenue and expenses and disclosures regarding contingent assets and liabilities. Actual results could differ from those estimates. The most significant estimates used in our financial statements affect revenue and cost recognition for construction contracts, the allowance for doubtful accounts, self-insurance accruals, deferred tax assets, warranty accruals, fair value accounting for acquisitions and the quantification of fair value for reporting units in connection with our goodwill impairment testing. Our operation in Southern California recorded a revision in contract estimate on a project in a loss position resulting in a writedown to this individual project for $2.2 million and $4.4 million, on a pre-tax basis, for the three and nine months ended September 30, 2014, respectively.

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2014

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

        We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

        Cash paid (in thousands) for:

 
  Three Months
Ended
September 30,
  Nine Months
Ended
September 30,
 
 
  2014   2013   2014   2013  

Interest

  $ 197   $ 269   $ 1,081   $ 789  

Income taxes

    307     1,928     1,231     5,051  
                   

Total

  $ 504   $ 2,197   $ 2,312   $ 5,840  
                   
                   

        We are subject to income tax in the United States and Puerto Rico and we file a consolidated return for federal income tax purposes. Income taxes are provided for under the liability method, which takes into account differences between financial statement treatment and tax treatment of certain transactions.

        Deferred income taxes are based on the difference between the financial reporting and tax basis of assets and liabilities. The deferred income tax provision represents the change during the reporting period in the deferred tax assets and deferred tax liabilities, net of the effect of acquisitions and dispositions. Deferred tax assets include tax loss and credit carry-forwards and are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

        We regularly evaluate valuation allowances established for deferred tax assets for which future realization is uncertain. We perform this evaluation quarterly. In assessing the realizability of deferred tax assets, we must consider whether it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. We consider all available evidence, both positive and negative, in determining whether a valuation allowance is required. Such evidence includes the scheduled reversal of deferred tax liabilities, projected future taxable income, taxable income in prior carryback years and tax planning strategies in making this assessment, and judgment is required in considering the relative weight of negative and positive evidence.

        Significant judgment is required in assessing the timing and amounts of deductible and taxable items. We establish reserves when, despite our belief that our tax return positions are supportable, we believe that certain positions may be challenged and potentially disallowed. When facts and circumstances change, we adjust these reserves through our provision for income taxes.

        To the extent interest and penalties may be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and are classified as a component of income tax expense in our consolidated statements of operations.

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2014

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

        For the nine months ended September 30, 2014 our tax expense is $9.1 million with an effective tax rate of 35.1% as compared to tax expense of $14.4 million with an effective tax rate of 38.8% for the nine months ended September 30, 2013. The effective rate for 2014 is higher than the federal statutory rate of 35.0% primarily due to state income taxes (4.2%) and non-deductible expenses (1.7%) which were partially offset by the impact of the noncontrolling interest of EAS which for tax purposes is treated as a partnership (4.5%). The effective rate for 2013 is higher than the federal statutory rate of 35.0% primarily due to state income taxes (3.8%). Tax reserves are analyzed and adjusted quarterly as events occur to warrant such changes. Adjustments to tax reserves are a component of the effective tax rate.

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

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

        Certain reclassifications have been made in prior period financial statements to conform to current period presentation. These reclassifications are of a normal and recurring nature and have not resulted in any changes to previously reported net income for any periods.

        In April 2014, the FASB issued ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It is effective for annual periods beginning on or after December 15, 2014. Early adoption is permitted but only for disposals that have not been reported in financial statements previously issued. We do not believe this pronouncement will have a material impact on our consolidated financial statements.

        In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 provides a framework that replaces the existing revenue recognition guidance. It is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. We are currently reviewing the effect of ASU No. 2014-09 on our revenue recognition.

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2014

(Unaudited)

3. Fair Value Measurements

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

        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, 2014 (in thousands):

 
   
  Fair Value Measurements at
Reporting Date Using
 
 
  Total   Quoted Prices In
Active Markets
for Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 

Cash and cash equivalents

  $ 43,882   $ 43,882   $   $  

Life insurance—cash surrender value

  $ 3,034   $   $ 3,034   $  

Contingent earn-out obligations

  $ 635   $   $   $ 635  

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

        One of our operations has life insurance policies covering 41 employees with a combined face value of $38.9 million. The policy is invested in mutual funds and the fair value measurement is determined using level 2 inputs within the fair value hierarchy and will vary with investment performance. The cash surrender value of these policies is $3.0 million as of September 30, 2014 and $2.9 million as of December 31, 2013. These assets are included in "Other Noncurrent Assets" in our consolidated balance sheets.

        The valuation of our contingent earn-out obligations is determined 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.

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2014

(Unaudited)

3. Fair Value Measurements (Continued)

        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

  $ 320  

Issuances

    200  

Settlements

    (95 )

Adjustments to fair value

    210  
       

Balance at end of period

  $ 635  
       
       

        We measure certain assets at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the nine months ended September 30, 2014, we recorded a goodwill impairment charge of $0.7 million based on Level 3 measurements. See Note 6 "Goodwill and Identifiable Intangible Assets, Net" for further discussion. We did not recognize any impairments, in the current quarter, on those assets required to be measured at fair value on a nonrecurring basis.

4. Acquisitions

        No acquisitions were completed in the third quarter of 2014. We completed two acquisitions in the second quarter of 2014, one of which was "tucked-in" with existing operations and the second reports as a separate operating location in northern Texas. The acquisition date fair value of consideration transferred for the operation in northern Texas was $40.2 million, of which $30.4 million was allocated to goodwill and identifiable intangible assets. We completed one acquisition in the first quarter of 2014 which was "tucked-in" with existing operations. No acquisitions were completed in 2013. The completed acquisitions were not material, individually or in the aggregate. Our consolidated balance sheet includes preliminary allocations of the purchase price to the assets acquired and liabilities assumed based on estimates of fair value, pending completion of final valuation and purchase price adjustments. The results of operations of acquisitions are included in our consolidated financial statements from their respective acquisition dates. Additional contingent purchase price ("earn-out") has been or will be paid if certain acquisitions achieve predetermined profitability targets.

5. Discontinued Operations

        During the fourth quarter of 2012, we substantially completed the shutdown of our operation located in Delaware. Discontinued operations were breakeven for the three months ended September 30, 2014. The after tax loss for the three months ended September 30, 2013 was less than $0.1 million. The after tax loss for the nine months ended September 30, 2014 and 2013 was less than $0.1 million and $0.1 million, respectively. These results have been recorded in discontinued operations under "Loss from discontinued operations, net of income tax benefit."

        Our consolidated statements of operations and the related earnings per share amounts have been restated to reflect the effects of the discontinued operations. No interest expense is allocated to discontinued operations.

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2014

(Unaudited)

5. Discontinued Operations (Continued)

        Revenue and pre-tax loss related to discontinued operations are as follows (in thousands):

 
  Three Months
Ended
September 30,
  Nine Months
Ended
September 30,
 
 
  2014   2013   2014   2013  

Revenue

  $ (5 ) $   $ 7   $ 22  

Pre-tax loss

  $   $ (43 ) $ (25 ) $ (136 )

6. Goodwill and Identifiable Intangible Assets, Net

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

 
  September 30,
2014
  December 31,
2013
 

Balance at beginning of year

  $ 114,588   $ 114,588  

Additions

    24,191      

Impairment adjustment

    (727 )    
           

Balance at end of period

  $ 138,052   $ 114,588  
           
           

        We recorded a goodwill impairment charge of $0.7 million during the second quarter of 2014. Based on market activity declines and write-downs incurred on several jobs, we determined that the operating environment, conditions and performance at our operating location based in California could no longer support the related goodwill balance. When the carrying value of a given reporting unit exceeds its fair value, an impairment loss is recorded to the extent that the implied fair value of the goodwill of the reporting unit is less than its carrying value. The fair value was estimated using a discounted cash flow model combined with market valuation approaches.

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

 
   
  September 30, 2014   December 31, 2013  
 
  Estimated
Useful Lives
in Years
  Gross
Book Value
  Accumulated
Amortization
  Gross
Book Value
  Accumulated
Amortization
 

Customer relationships

  1 - 15   $ 48,825   $ (24,829 ) $ 40,404   $ (20,978 )

Backlog

  1 - 2     1,600     (473 )   6,515     (6,515 )

Noncompete agreements

  2 - 7     2,890     (2,813 )   2,890     (2,649 )

Tradenames

  2 - 25     27,995     (6,936 )   23,695     (5,979 )
                       

Total

      $ 81,310   $ (35,051 ) $ 73,504   $ (36,121 )
                       
                       

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2014

(Unaudited)

7. Long-Term Debt Obligations

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

 
  September 30,
2014
  December 31,
2013
 

Revolving credit facility

  $ 42,000   $  

Notes to former owners

        2,000  
           

Total debt

    42,000     2,000  

Less—current portion

        (2,000 )
           

Total long-term portion of debt

  $ 42,000   $  
           
           

        On July 22, 2014, we amended our senior credit facility (the "Facility") provided by a syndicate of banks increasing our borrowing capacity from $175.0 million to $250.0 million. The Facility, which is available for borrowings and letters of credit, expires in October 2019 and is secured by a first lien on substantially all of our personal property except for assets related to projects subject to surety bonds and assets held by certain unrestricted subsidiaries and a second lien on our assets related to projects subject to surety bonds. The Facility provides that availability under the Facility will be limited to the lesser of the face amount of $250.0 million, or indebtedness less certain exclusions equal to 2.5 times trailing twelve month Credit Facility Adjusted EBITDA, which calculates to availability of $222.1 million as of September 30, 2014. We incurred approximately $0.6 million in financing and professional costs in connection with the amendment to the Facility, which combined with the previous unamortized costs of $1.0 million, will be amortized on a straight-line basis as a non-cash charge to interest expense over the remaining term of the Facility. As of September 30, 2014, we had $42.0 million of outstanding borrowings, $50.6 million in letters of credit outstanding and $129.5 million of credit available.

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

        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
 

Additional Per Annum Interest Margin Added Under:

                         

Base Rate Loan Option

    0.25 %   0.50 %   0.75 %   1.00 %

Eurodollar Rate Loan Option

    1.25 %   1.50 %   1.75 %   2.00 %

        The weighted average interest rate applicable to the borrowings under the Facility was approximately 1.4% as of September 30, 2014.

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2014

(Unaudited)

7. Long-Term Debt Obligations (Continued)

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

        Commitment fees are payable on the portion of the revolving loan capacity not in use for borrowings or letters of credit at any given time. These fees range from 0.20% to 0.35% per annum, based on the ratio of Consolidated Total Indebtedness to Credit Facility Adjusted EBITDA, as defined in the credit agreement.

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

        The Facility's principal financial covenants include:

        Leverage Ratio—The Facility requires that the ratio of our Consolidated Total Indebtedness to our Credit Facility Adjusted EBITDA not exceed 2.75 through maturity. The leverage ratio as of September 30, 2014 was 0.68.

        Fixed Charge Coverage Ratio—The Facility requires that the ratio of Credit Facility Adjusted EBITDA, less non-financed capital expenditures, tax provision, dividends and amounts used to repurchase stock to the sum of interest expense and scheduled principal payments of indebtedness be at least 2.00; 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. The Facility also allows the fixed charge coverage ratio not to be reduced for stock repurchases through June 30, 2015 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. Capital expenditures, tax provision, dividends and stock repurchase payments are defined under the Facility for purposes of this covenant to be amounts for the four quarters ending as of any given quarterly covenant compliance measurement date. The fixed charge coverage ratio as of September 30, 2014 was 18.15.

        Other Restrictions—The Facility permits acquisitions of up to $25.0 million per transaction, provided that the aggregate purchase price of such an acquisition and of acquisitions in the same fiscal year does not exceed $60.0 million. However, these limitations only apply when the Company's Net Leverage Ratio is equal to or greater than 2.00.

        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 are in compliance with all of our financial covenants as of September 30, 2014.

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2014

(Unaudited)

7. Long-Term Debt Obligations (Continued)

        We issued subordinated notes to the former owners of acquired companies as part of the consideration used to acquire these companies. These notes bear interest, payable annually, at a weighted average interest rate of 3.3%. In June 2014, we paid the outstanding balance of $2.0 million.

        Our majority owned subsidiary, EAS, has a revolving $2.5 million credit line that is available for temporary working capital needs and expires July 31, 2015. As of September 30, 2014, we had no outstanding borrowings and, therefore, $2.5 million of credit available. We estimate that the weighted average interest rate applicable to borrowings under this variable rate credit line would be approximately 2.7% as of September 30, 2014.

8. Commitments and Contingencies

        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.

        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 market conditions remain challenging as a result of significant losses incurred by many sureties in recent periods, both in the construction industry as well as in certain larger corporate bankruptcies. As a result, less bonding capacity is available in the market and terms have become more restrictive. Further, under standard terms in the surety market, sureties issue bonds on a project-by-project basis, and can decline to issue bonds at any time. Historically, approximately 25% to 35% of our business has required bonds. While we have strong surety relationships to support our bonding needs, current market conditions as well as 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

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2014

(Unaudited)

8. Commitments and Contingencies (Continued)

to occur, the alternatives include doing more business that does not require bonds, posting other forms of collateral for project performance such as letters of credit or cash, and seeking bonding capacity from other sureties. We would likely also encounter concerns from customers, suppliers and other market participants as to our creditworthiness. While we believe our general operating and financial characteristics, including a significant amount of cash on our balance sheet, would enable us to ultimately respond effectively to an interruption in the availability of bonding capacity, such an interruption would likely cause our revenue and profits to decline in the near term.

        We are substantially self-insured for workers' compensation, employer's liability, auto liability, general liability and employee group health claims, in view of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses up to deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages. Loss estimates associated with the larger and longer-developing risks, such as workers' compensation, auto liability and general liability, are reviewed by a third-party actuary quarterly.

9. Stockholders' Equity

        Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed considering the dilutive effect of stock options, contingently issuable restricted stock and restricted stock units.

        There were approximately 0.2 million anti-dilutive stock options excluded from the calculation of diluted EPS for the three and nine months ended September 30, 2014. There were no anti-dilutive stock options for the three and nine months ended September 30, 2013.

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2014

(Unaudited)

9. Stockholders' Equity (Continued)

        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
September 30,
  Nine Months
Ended
September 30,
 
 
  2014   2013   2014   2013  

Common shares outstanding, end of period(a)

    37,373     37,296     37,373     37,296  

Effect of using weighted average common shares outstanding

    264     (3 )   269     (112 )
                   

Shares used in computing earnings per share—basic

    37,637     37,293     37,642     37,184  

Effect of shares issuable under stock option plans based on the treasury stock method

    129     245     153     153  

Effect of contingently issuable restricted shares

    158     93     122     107  
                   

Shares used in computing earnings per share—diluted

    37,924     37,631     37,917     37,444  
                   
                   

(a)
Excludes 0.1 million shares of unvested contingently issuable restricted stock outstanding as of September 30, 2013.

        On March 29, 2007, our Board of Directors (the "Board") approved a stock repurchase program to acquire up to 1.0 million shares of our outstanding common stock. Subsequently, the Board has from time to time approved extensions of the program to acquire additional shares. On October 24, 2014, the Board approved an extension to the program by increasing the shares authorized for repurchase by 1.0 million shares. Since the inception of the repurchase program, the Board has approved 7.6 million shares to be repurchased.

        The share repurchases will be made from time to time at our discretion in the open market or privately negotiated transactions as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. The Board may modify, suspend, extend or terminate the program at any time. During the nine months ended September 30, 2014, we repurchased 0.4 million shares for approximately $6.3 million at an average price of $14.73 per share. Since the inception of the program in 2007 and as of September 30, 2014, we have repurchased a cumulative total of 6.4 million shares at an average price of $11.25 per share.

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

        The following discussion should be read in conjunction with our historical Consolidated Financial Statements and related notes included elsewhere in this Form 10-Q and the Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2013 (the "Form 10-K"). This discussion contains "forward-looking statements" regarding our business and industry within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on our current plans and expectations and involve risks and uncertainties that could cause our actual future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual results to differ include risks set forth in "Item 1A. Risk Factors" included in our Form 10-K. The terms "Comfort Systems," "we," "us," or "the Company," refer to Comfort Systems USA, Inc. or Comfort Systems USA, Inc. and its consolidated subsidiaries, as appropriate in the context.

        We are a national provider of comprehensive HVAC installation, maintenance, repair and replacement services within the mechanical services industry. We operate primarily in the commercial, industrial and institutional HVAC markets and perform most of our services within office buildings, retail centers, apartment complexes, manufacturing plants, and healthcare, education and government facilities. In addition to standard HVAC services, we provide specialized applications such as building automation control systems, fire protection, process cooling, electronic monitoring and process piping. Certain locations also perform related activities such as electrical service and plumbing.

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

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

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

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

        Our average project takes six to nine months to complete, with an average contract price of approximately $491,000. We also perform larger HVAC projects. Generally, projects closer in size to $1 million will be completed in one year or less. It is unusual for us to work on a project that exceeds two years in length. Our projects generally require working capital funding of equipment and labor costs. Customer payments on periodic billings generally do not recover these costs until late in the job. Our average project duration together with typical retention terms as discussed above generally allow us to complete the realization of revenue and earnings in cash within one year. We have what we believe is a well-diversified distribution of revenue across end-use sectors that we believe reduces our exposure to negative developments in any given sector. Because of the integral nature of HVAC and related controls systems to most buildings, we have the legal right in almost all cases to attach liens to buildings or related funding sources when we have not been fully paid for installing systems, except with respect to some government buildings. The service work that we do, which is discussed further below, usually does not give rise to lien rights.

        A stratification of projects in progress as of September 30, 2014, by contract price, is as follows:

Contract Price of Project
  No. of
Projects
  Aggregate
Contract
Price Value
(millions)
 

Under $1 million

    3,798   $ 404.7  

$1 million - $5 million

    317     741.3  

$5 million - $10 million

    58     408.2  

$10 million - $15 million

    16     194.8  

Greater than $15 million

    16     313.8  
           

Total

    4,205   $ 2,062.8  
           
           

        In addition to project work, approximately 18% of our revenue represents maintenance and repair service on already-installed HVAC and controls systems. This kind of work usually takes from a few hours to a few days to perform. Prices to the customer are usually based on the equipment and materials used in the service as well as technician labor time. We usually bill the customer for service work when it is complete, typically with payment terms of up to thirty days. We also provide maintenance and repair service under ongoing contracts. Under these contracts, we are paid regular

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monthly or quarterly amounts and provide specified service based on customer requirements. These agreements typically cover periods ranging from one to three years with thirty- to sixty-day cancellation notice periods.

        A relatively small portion of our revenue comes from national and regional account customers. These customers typically have multiple sites, and contract with us to perform maintenance and repair service. These contracts may also provide for us to perform new or replacement systems installation. We operate a national call center to dispatch technicians to sites requiring service. We perform the majority of this work with our own employees, with the balance being subcontracted to third parties that meet our performance qualifications. We will also typically use proprietary information systems to maintain information on the customer's sites and equipment, including performance and service records, and related cost data. These systems track the status of ongoing service and installation work, and may also monitor system performance data. Under these contractual relationships, we usually provide consolidated billing and credit payment terms to the customer.

        We manage our 37 operating units based on a variety of factors. Financial measures we emphasize include profitability, and use of capital as indicated by cash flow and by other measures of working capital principally involving project cost, billings and receivables. We also monitor selling, general, administrative and indirect project support expense, backlog, workforce size and mix, growth in revenue and profits, variation of actual project cost from original estimate, and overall financial performance in comparison to budget and updated forecasts. Operational factors we emphasize include project selection, estimating, pricing, management and execution practices, labor utilization, safety, training, and the make-up of both existing backlog as well as new business being pursued, in terms of project size, technical application and facility type, end-use customers and industries, and location of the work.

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

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

        Spending decisions for building construction, renovation and system replacement are generally made on a project basis, usually with some degree of discretion as to when and if projects proceed. With larger amounts of capital, time, and discretion involved, spending decisions are affected to a significant degree by uncertainty, particularly concerns about economic and financial conditions and trends. We have experienced periods of time when economic weakness caused a significant slowdown in decisions to proceed with installation and replacement project work.

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        Nonresidential building construction and renovation activity, as reported by the federal government, declined over the three year period of 2001 to 2003, expanded moderately during 2004 and 2005, and was strong over the three year period from 2006 to 2008. We experienced significant industry activity declines over the four year period from 2009 to 2012, with 2013 and 2014 activity levels stable at the low levels of the preceding years. During the periods of decline, we responded to market challenges by pursuing work in sectors less affected by the downturn, such as government, educational, and healthcare facilities, and by establishing marketing initiatives that take advantage of our size and range of expertise. We also responded to declining gross profits over those years by reducing our selling, general, and administrative expenses, and our indirect project and service overhead costs. We believe our efforts in these areas partially offset the decline in our profitability over that period.

        As a result of our continued strong emphasis on cash flow, we currently have modest indebtedness under our revolving credit facility and we have uncommitted cash balances, as discussed further in "Liquidity and Capital Resources" below. We have a credit facility in place with considerably less restrictive terms than those of our previous facilities; this facility does not expire until October 2019. We have strong surety relationships to support our bonding needs, and we believe our relationships with the surety markets are positive in light of our strong current results and financial position. We have generated positive free cash flow in each of the last fifteen calendar years and will continue our emphasis in this area. We believe that the relative size and strength of our balance sheet and surety support as compared to most companies in our industry represent competitive advantages for us.

        As discussed at greater length in "Results of Operations" below, we have seen declining and lower activity levels in our industry since late 2008 and we expect price competition to continue to be strong, as local and regional competitors respond cautiously to changing conditions. We will continue our efforts to find the more active sectors in our markets, and to increase our regional and national account business. Our primary emphasis for the remainder of 2014 will be on execution and cost control, and on maintaining activity levels that will permit us to earn reasonable profits while preserving our core workforce. We have increased our focus on project qualification, estimating, pricing and management; and we are investing in service growth and improved performance.

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

        Our critical accounting policies are based upon the significance of the accounting policy to our overall financial statement presentation, as well as the complexity of the accounting policy and our use of estimates and subjective assessments. Our most critical accounting policy is revenue recognition. As discussed elsewhere in this quarterly report on Form 10-Q, our business has two service functions: (i) installation, which we account for under the percentage of completion method, and (ii) maintenance, repair and replacement, which we account for as the services are performed, or in the

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case of replacement, under the percentage of completion method. In addition, we identified other critical accounting policies related to our allowance for doubtful accounts receivable, the recording of our self-insurance liabilities, valuation of deferred tax assets, accounting for acquisitions and the recoverability of goodwill and identifiable intangible assets. These accounting policies, as well as others, are described as follows and in Note 2 to the Consolidated Financial Statements included elsewhere in this quarterly report on Form 10-Q.

        Approximately 82% of our revenue was earned on a project basis and recognized through the percentage of completion method of accounting. Under this method contract revenue recognizable at any time during the life of a contract is determined by multiplying expected total contract revenue by the percentage of contract costs incurred at any time to total estimated contract costs. More specifically, as part of the negotiation and bidding process in which we engage in connection with obtaining installation contracts, we estimate our contract costs, which include all direct materials (exclusive of rebates), labor and subcontract costs and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. These contract costs are included in our results of operations under the caption "Cost of Services." Then, as we perform under those contracts, we measure costs incurred, compare them to total estimated costs to complete the contract, and recognize a corresponding proportion of contract revenue. Labor costs are considered to be incurred as the work is performed. Subcontractor labor is recognized as the work is performed, but is generally subjected to approval as to milestones or other evidence of completion. Non-labor project costs consist of purchased equipment, prefabricated materials and other materials. Purchased equipment on our projects is substantially produced to job specifications and is a value added element to our work. The costs are considered to be incurred when title is transferred to us, which typically is upon delivery to the worksite. Prefabricated materials, such as ductwork and piping, are generally performed at our shops and recognized as contract costs when fabricated for the unique specifications of the job. Other materials cost are not significant and are generally recorded when delivered to the worksite. This measurement and comparison process requires updates to the estimate of total costs to complete the contract, and these updates may include subjective assessments.

        We generally do not incur significant costs prior to receiving a contract, and therefore, these costs are expensed as incurred. In limited circumstances, when significant pre-contract costs are incurred, they are deferred if the costs can be directly associated with a specific contract and if their recoverability from the contract is probable. Upon receiving the contract, these costs are included in contract costs. Deferred costs associated with unsuccessful contract bids are written off in the period that we are informed that we will not be awarded the contract.

        Project contracts typically provide for a schedule of billings or invoices to the customer based on reaching agreed-upon milestones or as we incur costs. The schedules for such billings usually do not precisely match the schedule on which costs are incurred. As a result, contract revenue recognized in the statement of operations can and usually do differ from amounts that can be billed or invoiced to the customer at any point during the contract. Amounts by which cumulative contract revenue recognized on a contract as of a given date exceed cumulative billings to the customer under the contract are reflected as a current asset in our balance sheet under the caption "Costs and estimated earnings in excess of billings." Amounts by which cumulative billings to the customer under a contract as of a given date exceed cumulative contract revenue recognized on the contract are reflected as a current liability in our balance sheet under the caption "Billings in excess of costs and estimated earnings."

        The percentage of completion method of accounting is also affected by changes in job performance, job conditions, and final contract settlements. These factors may result in revisions to estimated costs and, therefore, revenue. Such revisions are frequently based on further estimates and

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subjective assessments. The effects of these revisions are recognized in the period in which revisions are determined. When such revisions lead to a conclusion that a loss will be recognized on a contract, the full amount of the estimated ultimate loss is recognized in the period such conclusion is reached, regardless of the percentage of completion of the contract.

        Revisions to project costs and conditions can give rise to change orders under which the customer agrees to pay additional contract price. Revisions can also result in claims we might make against the customer to recover project variances that have not been satisfactorily addressed through change orders with the customer. Except in certain circumstances, we do not recognize revenue or margin based on change orders or claims until they have been agreed upon with the customer. The amount of revenue associated with unapproved change orders and claims is currently immaterial. Variations from estimated project costs could have a significant impact on our operating results, depending on project size, and the recoverability of the variation via additional customer payments.

        We are required to estimate the collectability of accounts receivable and provide an allowance for doubtful accounts for receivable amounts we believe we will not ultimately collect. This requires us to make certain judgments and estimates involving, among others, the creditworthiness of our customers, prior collection history with our customers, ongoing relationships with our customers, the aging of past due balances, our lien rights, if any, in the property where we performed the work, and the availability, if any, of payment bonds applicable to the contract. These estimates are evaluated and adjusted as needed when additional information is received.

        We are substantially self-insured for workers' compensation, employer's liability, auto liability, general liability and employee group health claims in view of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses up to deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages. Loss estimates associated with the larger and longer-developing risks—workers' compensation, auto liability and general liability—are reviewed by a third party actuary quarterly. We believe these accruals are adequate. However, insurance liabilities are difficult to estimate due to unknown factors, including the severity of an injury, the determination of our liability in proportion to other parties, timely reporting of occurrences, ongoing treatment or loss mitigation, general trends in litigation recovery outcomes and the effectiveness of safety and risk management programs. Therefore, if actual experience differs from the assumptions and estimates used for recording the liabilities, adjustments may be required and would be recorded in the period that such experience becomes known.

        Our self-insurance arrangements currently are as follows:

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        We regularly evaluate valuation allowances established for deferred tax assets for which future realization is uncertain. We perform this evaluation quarterly. In assessing the realizability of deferred tax assets, we must consider whether it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. We consider all available evidence, both positive and negative, in determining whether a valuation allowance is required. Such evidence includes the scheduled reversal of deferred tax liabilities, projected future taxable income, taxable income in prior carryback years and tax planning strategies in making this assessment, and judgment is required in considering the relative weight of negative and positive evidence.

        We generally recognize assets acquired and liabilities assumed in business combinations, including contingent assets and liabilities, based on fair value estimates as of the date of acquisition.

        Contingent Consideration—In certain acquisitions, we agree to pay additional amounts to sellers contingent upon achievement by the acquired businesses of certain predetermined profitability targets. We have recognized liabilities for these contingent obligations based on their estimated fair value at the date of acquisition with any differences between the acquisition date fair value and the ultimate settlement of the obligations being recognized in income from operations.

        Contingent Assets and Liabilities—Assets and liabilities arising from contingencies are recognized at their acquisition date fair value when their respective fair values can be determined. If the fair values of such contingencies cannot be determined, they are recognized at the acquisition date if the contingencies are probable and an amount can be reasonably estimated. Acquisition date fair value estimates are revised as necessary if, and when, additional information regarding these contingencies becomes available to further define and quantify assets acquired and liabilities assumed.

        Goodwill is the excess of purchase price over the fair value of the net assets of acquired businesses. We assess goodwill for impairment each year, and more frequently if circumstances suggest an impairment may have occurred.

        When the carrying value of a given reporting unit exceeds its fair value, an impairment loss is recorded to the extent that the implied fair value of the goodwill of the reporting unit is less than its carrying value. If other reporting units have had increases in fair value, such increases may not be recorded. Accordingly, such increases may not be netted against impairments at other reporting units. The requirements for assessing whether goodwill has been impaired involve market-based information. This information, and its use in assessing goodwill, entails some degree of subjective assessment.

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        We currently perform our annual impairment assessment as of October 1 and any impairment charges resulting from this process are reported in the fourth quarter. We segregate our operations into reporting units based on the degree of operating and financial independence of each unit and our related management of them. We perform our annual goodwill impairment assessment at the reporting unit level.

        In the evaluation of goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of one of our reporting units is greater than its carrying value. If, after completing such assessment, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then there is no need to perform any further testing. If we conclude otherwise, then we perform the first step of a two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying value of the reporting unit.

        We estimate the fair value of the reporting unit based on two market approaches and an income approach, which utilizes discounted future cash flows. Assumptions critical to the fair value estimates under the discounted cash flow model include discount rates, cash flow projections, projected long-term growth rates and the determination of terminal values. The market approaches utilized market multiples of invested capital from comparable publicly traded companies ("public company approach") and comparable transactions ("transaction approach"). The market multiples from invested capital include revenue, book equity plus debt and earnings before interest, taxes, depreciation and amortization ("EBITDA").

        There are significant inherent uncertainties and management judgment involved in estimating the fair value of each reporting unit. While we believe we have made reasonable estimates and assumptions to estimate the fair value of our reporting units, it is possible that a material change could occur. If actual results are not consistent with our current estimates and assumptions, or the current economic downturn worsens or the projected recovery is significantly delayed beyond our projections, goodwill impairment charges may be recorded in future periods.

        We amortize identifiable intangible assets with finite lives over their useful lives. Changes in strategy and/or market condition may result in adjustments to recorded intangible asset balances or their useful lives.

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Results of Operations (dollars in thousands):

 
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2014   %   2013   %   2014   %   2013   %  

Revenue

  $ 370,145     100.0 % $ 349,989     100.0 % $ 1,054,327     100.0 % $ 1,026,932     100.0 %

Cost of services

    303,686     82.0 %   282,968     80.9 %   873,860     82.9 %   848,477     82.6 %
                                           

Gross profit

    66,459     18.0 %   67,021     19.1 %   180,467     17.1 %   178,455     17.4 %

Selling, general and administrative expenses

    52,200     14.1 %   49,404     14.1 %   153,158     14.5 %   141,623     13.8 %

Goodwill impairment

                    727     0.1 %        

Gain on sale of assets

    (526 )   (0.1 )%   (117 )       (748 )   (0.1 )%   (367 )    
                                           

Operating income

    14,785     4.0 %   17,734     5.1 %   27,330     2.6 %   37,199     3.6 %

Interest income

    2         5         15         19      

Interest expense

    (561 )   (0.2 )%   (347 )   (0.1 )%   (1,359 )   (0.1 )%   (1,032 )   (0.1 )%

Changes in the fair value of contingent earn-out obligations

    (210 )   (0.1 )%   750     0.2 %   (210 )       696     0.1 %

Other income (expense)

    12         83         104         184      
                                           

Income before income taxes

    14,028     3.8 %   18,225     5.2 %   25,880     2.5 %   37,066     3.6 %

Income tax expense

    4,649           6,588           9,087           14,366        
                                           

Income from continuing operations

    9,379           11,637           16,793           22,700        

Loss from discontinued operations, net of tax

              (25 )         (15 )         (79 )      
                                           

Net income including noncontrolling interests

    9,379     2.5 %   11,612     3.3 %   16,778     1.6 %   22,621     2.2 %

Less: Net income attributable to noncontrolling interests

    1,774     0.5 %   233     0.1 %   4,397     0.4 %   948     0.1 %
                                           

Net income attributable to Comfort Systems USA, Inc. 

  $ 7,605         $ 11,379         $ 12,381         $ 21,673        
                                           
                                           

        We had 36 operating locations as of December 31, 2013. We completed one acquisition in the first quarter of 2014. This acquisition was not material and was "tucked-in" with existing operations. We completed two acquisitions in the second quarter of 2014, one of which was "tucked-in" with existing operations and the second reports as a separate operating location in Northern Texas. No acquisitions were completed in the third quarter of 2014. As of September 30, 2014, we had 37 operating locations. Acquisitions are included in our results of operations from the respective acquisition date. The same-store comparison from 2014 to 2013, as described below, excludes five months of results for our Northern Texas operation, which was acquired in May 2014. An operating location is included in the same-store comparison on the first day it has comparable prior year operating data. An operating location is excluded from the same-store comparison in the current year and comparable prior years when it is properly characterized as a discontinued operation under applicable accounting standards.

        Revenue—Revenue increased $20.2 million, or 5.8%, to $370.1 million for the third quarter of 2014 compared to the same period in 2013. The increase included a 0.7% increase in revenue related to same-store activity and a 5.1% increase related to the acquisition of our Northern Texas operation. The same-store revenue increase is primarily due to our Arkansas operations ($6.5 million), one of our Virginia operations ($4.2 million) and our Central Texas operations ($4.0 million) which performed a significant amount of project work for the institutional sector during the current quarter. This increase was partially offset by lower revenues at our Arizona operation ($11.2 million) as a result of less projects in progress in the current quarter compared to the same period in 2013.

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        Revenue increased $27.4 million, or 2.7%, to $1,054.3 million for the first nine months of 2014 compared to the same period in 2013. Same-store activity remained flat while the 2.7% increase was driven by the acquisition of our Northern Texas operation. The same-store revenue increased primarily due to one of our Florida operations ($12.5 million) and one of our Virginia operations ($10.4 million) which both performed a significant amount of project work during the current year. This increase was offset primarily due to our Arizona operation ($22.4 million) which performed a significant amount of project work during the first nine months of 2013 which has not reoccurred in 2014 due to its completion.

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

        Backlog as of September 30, 2014 was $656.8 million, a 2.5% decrease from June 30, 2014 backlog of $673.7 million, and a 15.0% increase from September 30, 2013 backlog of $570.9 million. Sequential backlog decreased primarily due to our Wisconsin operation ($9.6 million), one of our Florida operations ($6.7 million) and our large operation headquartered in Virginia ($5.5 million) which had decreased project bookings during the current quarter. This was partially offset by increased bookings at our Colorado operation ($13.4 million). Our year-over-year backlog increased primarily due to the aforementioned acquisition ($38.3 million). In addition, a same-store increase of 8.3% was primarily due to increased project bookings at our Arkansas operation ($24.7 million) and our EAS operation ($17.9 million) during the current year.

        Following the three year period of industry activity declines from 2001 through 2003, we saw modest year-over-year revenue increases at our ongoing operations beginning in mid-2003 and continuing throughout 2008. We experienced significant industry activity declines in 2009 through 2012 with activity levels stabilizing in 2013. Based on our backlog and forecasts from industry construction analysts, we expect that activity levels in our industry are likely to remain flat over the next twelve months, particularly in the area of new construction.

        Gross Profit—Gross profit decreased $0.6 million, or 0.8%, to $66.5 million for the third quarter of 2014 as compared to the same period in 2013. The decrease included a $3.0 million, or 4.4% decrease related to same-store activity. This was partially offset by a $2.4 million, or 3.6%, increase related to the acquisition of our Northern Texas operation. The third quarter of 2013 included additional gross profit of $2.5 million related to a prior period accounting adjustment. The remaining same-store decrease related to lower level of construction projects at our Arizona operation ($2.0 million) and job underperformance at our Southern California operation ($1.9 million) which included a revision in contract estimate on a project in a loss position resulting in a $2.2 million writedown. Our EAS operation had increased gross profit of $4.0 million related to improved execution on its projects. As a percentage of revenue, gross profit decreased from 19.1% in the third quarter of 2013 to 18.0% in the third quarter of 2014 primarily due to the factors discussed above. Excluding the prior period adjustment, our gross profit percentage for the third quarter of 2013 would have been 18.6%.

        Gross profit increased $2.0 million, or 1.1%, to $180.5 million for the first nine months of 2014 as compared to the same period in 2013. The increase included a $3.6 million, or 2.0%, increase related to the acquisition of our Northern Texas operation and a $1.6 million, or 0.9%, decrease on a same-store basis. The same-store decrease in gross profit was primarily due to a decrease in project volume at our Arizona operation ($3.7 million) and job underperformance at our Southern California

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operation ($5.8 million) which included a revision in contract estimate on a project in a loss position resulting in a $4.4 million writedown. This was partially offset by an $8.0 million increase in profitability in 2014 at our EAS operation due to improved project execution. As a percentage of revenue, gross profit decreased from 17.4% in 2013 to 17.1% in 2014 primarily due to the factors discussed above.

        Selling, General and Administrative Expenses ("SG&A")—SG&A increased $2.8 million, or 5.7%, to $52.2 million for the third quarter of 2014 as compared to the same period in 2013. On a same-store basis, excluding amortization expense, SG&A increased $1.0 million, or 2.1%. This increase is primarily due to higher compensation expense ($1.2 million) as a result of our increased investment in service growth and information technology. Amortization expense remained relatively flat. As a percentage of revenue, SG&A remained flat at 14.1% in both 2013 and 2014 primarily due to the factors discussed above.

        SG&A increased $11.5 million, or 8.1%, to $153.2 million for the first nine months of 2014 as compared to the same period in 2013. On a same-store basis, excluding amortization expense, SG&A increased $8.9 million, or 6.5%. This increase is primarily due to higher compensation expense ($5.4 million) primarily as a result of our increased investment in service growth and information technology, higher training costs ($2.4 million) and a $1.1 million increase in bad debt expense as a result of a $0.8 million gain recorded in the prior year as a result of a receivable settlement. Amortization expense decreased $0.3 million, or 5.6%. As a percentage of revenue, SG&A increased from 13.8% in 2013 to 14.5% in 2014 primarily due to the factors discussed above.

        We have included same-store SG&A, excluding amortization, because we believe it is an effective measure of comparative results of operations. However, same-store SG&A, excluding amortization, is not considered under 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
September 30,
  Nine Months Ended
September 30,
 
 
  2014   2013   2014   2013  
 
  (in thousands)
 

SG&A

  $ 52,200   $ 49,404   $ 153,158   $ 141,623  

Less: SG&A from companies acquired

    (1,825 )       (2,904 )    

Less: Amortization expense

    (1,703 )   (1,739 )   (4,971 )   (5,268 )
                   

Same-store SG&A, excluding amortization expense

  $ 48,672   $ 47,665   $ 145,283   $ 136,355  
                   
                   

        Goodwill Impairment—We recorded a goodwill impairment charge of $0.7 million during the second quarter of 2014. Based on market activity declines and write-downs incurred on several jobs, we determined that the operating environment, conditions and performance at our operating location based in Southern California could no longer support the related goodwill balance. No goodwill impairment was recorded in 2013.

        Changes in the Fair Value of Contingent Earn-out Obligations—The contingent 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 obligations decreased $1.0 million for the third quarter of 2014 as compared to the same period in 2013. The primary reason for the decrease was an overall reduction of estimated future cash flows in the third quarter of 2013 related to the 2010 acquisition of ColonialWebb. This change in estimate was the result of a writedown of $0.8 million in 2013 which did not reoccur in the current quarter. In addition, based on updated measurements of estimated future cash flows for our EAS location in the current quarter, this change in estimate resulted in a $0.2 million increase of the fair value of the liability.

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        Income from changes in the fair value of contingent earn-out obligations decreased $0.9 million for the first nine months of 2014 as compared to the same period in 2013. The primary reason for the decrease relates to third quarter activity which is discussed above. In addition, based on updated measurements for ColonialWebb in the first quarter of 2014, this change in estimate resulted in a writedown of $0.1 million. This was offset in the second quarter of 2014, by changes to estimated future cash flows in 2014 related to the 2011 acquisition of EAS. This change in estimate resulted in an increase of $0.1 million to the EAS earn-out obligation.

        Income Tax Expense—We perform work throughout the United States in virtually all of the fifty states as well as in Puerto Rico. Our effective tax rate varies based upon our relative profitability, or lack of profitability, in states with varying state tax rates and rules. In addition, discrete events, judgments and legal structures can affect our effective tax rate. These items can include the tax treatment for impairment of goodwill and other intangible assets and changes in fair value of acquisition related assets and liabilities, tax reserves associated with regulatory audits, accounting for losses associated with underperforming operations and the partial ownership of consolidated entities.

        For the nine months ended September 30, 2014 our tax expense is $9.1 million with an effective tax rate of 35.1% as compared to tax expense of $14.4 million with an effective tax rate of 38.8% for the nine months ended September 30, 2013. The effective rate for 2014 is higher than the federal statutory rate of 35.0% primarily due to state income taxes (4.2%) and non-deductible expenses (1.7%) which were partially offset by the impact of the noncontrolling interest of EAS which for tax purposes is treated as a partnership (4.5%). The effective rate for 2013 is higher than the federal statutory rate of 35.0% primarily due to state income taxes (3.8%). Tax reserves are analyzed and adjusted quarterly as events occur to warrant such changes. Adjustments to tax reserves are a component of the effective tax rate. We currently estimate our effective tax rate for 2014 will be between 35% and 40%.

        Discontinued Operations—During the fourth quarter of 2012, we substantially completed the shutdown of our operation located in Delaware. Discontinued operations were breakeven for the three months ended September 30, 2014. The after tax loss for the three months ended September 30, 2013 was less than $0.1 million. The after tax loss for the nine months ended September 30, 2014 and 2013 was less than $0.1 million and $0.1 million, respectively. These results have been recorded in discontinued operations under "Loss from discontinued operations, net of income tax benefit."

        Net Income Attributable to Noncontrolling Interests—Net income attributable to noncontrolling interests increased $1.5 million to $1.8 million for the third quarter of 2014 as compared to the same quarter in 2013. This increase reflects the impact of higher earnings at EAS, our non-wholly owned consolidated subsidiary, which was due primarily to increased margins on jobs performed in the current quarter.

        Net income attributable to noncontrolling interests increased $3.4 million to $4.4 million for the first nine months of 2014 as compared to the same period in 2013. The increase was primarily due to higher earnings at EAS in the current year caused by increased margins on jobs performed in 2014.

        We expect that weakness in the underlying environment for nonresidential construction activity will continue to affect our industry in 2014 and early 2015, with the overall activity remaining at levels similar to recent years. Our backlog is steady, remaining at solid levels in light of ongoing industry conditions. Our primary emphasis for the remainder of 2014 will be on execution, including a focus on cost discipline and efficient project performance, and we are investing in service growth. Based on our backlog, and in light of economic conditions for our industry, we expect that revenues will continue at the levels that we have experienced in recent years. We expect that we will be solidly profitable for 2014, although our net profitability will be lower than we reported for 2013.

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Liquidity and Capital Resources (in thousands):

 
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2014   2013   2014   2013  

Cash provided by (used in):

                         

Operating activities

  $ 23,881   $ 27,433   $ 37,482   $ 23,782  

Investing activities

    (9,186 )   (5,170 )   (68,339 )   (11,862 )

Financing activities

    (20,572 )   (304 )   22,685     (7,372 )
                   

Net increase (decrease) in cash and cash equivalents

  $ (5,877 ) $ 21,959   $ (8,172 ) $ 4,548  
                   
                   

Free cash flow:

                         

Cash provided by (used in) operating activities

  $ 23,881   $ 27,433   $ 37,482   $ 23,782  

Purchases of property and equipment

    (7,033 )   (5,234 )   (15,367 )   (12,471 )

Proceeds from sales of property and equipment

    692     64     1,232     566  
                   

Free cash flow

  $ 17,540   $ 22,263   $ 23,347   $ 11,877  
                   
                   

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

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

        Cash provided by operating activities during the third quarter of 2014 was $23.9 million compared with $27.4 million during 2013. The $3.5 million decrease in cash provided by operations is primarily due to receivables which had a negative impact of $23.9 million on the comparison of cash flows due to collections from ongoing project work. This was partially offset by a $12.6 million positive impact on the comparison of cash flows in billings in excess of costs and estimated earnings and a $7.2 million positive impact on costs and estimated earnings in excess of billings due to the timing of customer billings and payments.

        Cash provided by operating activities during the first nine months of 2014 was $37.5 million compared with $23.8 million during 2013. The $13.7 million increase in cash provided by operations primarily relates to billings in excess of costs and estimated earnings which had a positive impact of $14.2 million on the comparison of cash flows due to the timing of customer billings and payments. In

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addition, receivables which had a positive impact of $6.5 million on the comparison of cash flows due to collections from ongoing project work. This was partially offset by a $6.8 million negative impact due to lower profitability in the current year.

        Cash Used in Investing Activities—During the third quarter of 2014, cash used in investing activities was $9.2 million compared with the third quarter of 2013 at $5.2 million. The $4.0 million increase in cash used primarily relates to deferred purchase price costs related to previous acquisitions which were completed in 2012 and 2011 ($2.8 million). In addition, capital expenditures increased due to vehicle purchases ($1.8 million).

        Cash used in investing activities was $68.3 million for the first nine months of 2014 compared to $11.9 million during 2013. The $56.4 million increase in cash used primarily relates to cash paid for the three acquisitions that were completed in the first nine months of 2014. No acquisitions were completed in 2013.

        Cash Provided by (Used in) Financing Activities—Cash used in financing activities was $20.6 million for the third quarter of 2014 compared to cash used in financing activities of $0.3 million during 2013. The most significant items affecting the comparison of our financing cash flows for these periods primarily relates to a net payment on the revolving line of credit in 2014 of $10.0 million compared to a net borrowing on the revolving line of credit in 2013 of $5.0 million and a $4.6 million increase in share repurchases in the current quarter.

        Cash provided by financing activities was $22.7 million for the first nine months of 2014 compared to cash used in financing activities of $7.4 million during 2013. The $30.1 million increase in cash provided by financing activities primarily relates to $42.0 million of net borrowings on the revolving line of credit in 2014 compared to $5.0 million of net borrowings in 2013. This was partially offset by cumulative cash distributions of $4.7 to our noncontrolling partners.

        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.

        On March 29, 2007, our Board of Directors (the "Board") approved a stock repurchase program to acquire up to 1.0 million shares of our outstanding common stock. Subsequently, the Board has from time to time approved extensions of the program to acquire additional shares. On October 24, 2014, the Board approved an extension to the program by increasing the shares authorized for repurchase by 1.0 million shares. Since the inception of the repurchase program, the Board has approved 7.6 million shares to be repurchased.

        The share repurchases will be made from time to time at our discretion in the open market or privately negotiated transactions as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. The Board may modify, suspend, extend or terminate the program at any time. During the nine months ended September 30, 2014, we repurchased 0.4 million shares for approximately $6.3 million at an average price of $14.73 per share. Since the

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inception of the program in 2007 and as of September 30, 2014, we have repurchased a cumulative total of 6.4 million shares at an average price of $11.25 per share.

        On July 22, 2014, we amended our senior credit facility (the "Facility") provided by a syndicate of banks increasing our borrowing capacity from $175.0 million to $250.0 million. The Facility, which is available for borrowings and letters of credit, expires in October 2019 and is secured by a first lien on substantially all of our personal property except for assets related to projects subject to surety bonds and assets held by certain unrestricted subsidiaries and a second lien on our assets related to projects subject to surety bonds. The Facility provides that availability under the Facility will be limited to the lesser of the face amount of $250.0 million, or indebtedness less certain exclusions equal to 2.5 times trailing twelve month Credit Facility Adjusted EBITDA, which calculates to availability of $222.1 million as of September 30, 2014. We incurred approximately $0.6 million in financing and professional costs in connection with the amendment to the Facility, which combined with the previous unamortized costs of $1.0 million, will be amortized on a straight-line basis as a non-cash charge to interest expense over the remaining term of the Facility. As of September 30, 2014, we had $42.0 million of outstanding borrowings, $50.6 million in letters of credit outstanding and $129.5 million of credit available.

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

        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
 

Additional Per Annum Interest Margin Added Under:

                         

Base Rate Loan Option

    0.25 %   0.50 %   0.75 %   1.00 %

Eurodollar Rate Loan Option

    1.25 %   1.50 %   1.75 %   2.00 %

        The weighted average interest rate applicable to the borrowings under the Facility was approximately 1.4% as of September 30, 2014.

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

        Commitment fees are payable on the portion of the revolving loan capacity not in use for borrowings or letters of credit at any given time. These fees range from 0.20% to 0.35% per annum, based on the ratio of Consolidated Total Indebtedness to Credit Facility Adjusted EBITDA, as defined in the credit agreement.

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

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        The Facility's principal financial covenants include:

        Leverage Ratio—The Facility requires that the ratio of our Consolidated Total Indebtedness to our Credit Facility Adjusted EBITDA not exceed 2.75 through maturity. The leverage ratio as of September 30, 2014 was 0.68.

        Fixed Charge Coverage Ratio—The Facility requires that the ratio of Credit Facility Adjusted EBITDA, less non-financed capital expenditures, tax provision, dividends and amounts used to repurchase stock to the sum of interest expense and scheduled principal payments of indebtedness be at least 2.00; 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. The Facility also allows the fixed charge coverage ratio not to be reduced for stock repurchases through June 30, 2015 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. Capital expenditures, tax provision, dividends and stock repurchase payments are defined under the Facility for purposes of this covenant to be amounts for the four quarters ending as of any given quarterly covenant compliance measurement date. The fixed charge coverage ratio as of September 30, 2014 was 18.15.

        Other Restrictions—The Facility permits acquisitions of up to $25.0 million per transaction, provided that the aggregate purchase price of such an acquisition and of acquisitions in the same fiscal year does not exceed $60.0 million. However, these limitations only apply when the Company's Net Leverage Ratio is equal to or greater than 2.00.

        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 are in compliance with all of our financial covenants as of September 30, 2014.

        We issued subordinated notes to the former owners of acquired companies as part of the consideration used to acquire these companies. These notes bear interest, payable annually, at a weighted average interest rate of 3.3%. In June 2014, we paid the outstanding balance of $2.0 million.

        Our majority owned subsidiary, EAS, has a revolving $2.5 million credit line that is available for temporary working capital needs and expires July 31, 2015. As of September 30, 2014, we had no outstanding borrowings and, therefore, $2.5 million of credit available. We estimate that the weighted average interest rate applicable to borrowings under this variable rate credit line would be approximately 2.7% as of September 30, 2014.

        We have generated positive net free cash flow for the last fifteen 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.

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

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

        Surety market conditions are currently challenging as a result of significant losses incurred by many sureties in recent periods, both in the construction industry as well as in certain larger corporate bankruptcies. As a result, less bonding capacity is available in the market and terms have become more restrictive. Further, under standard terms in the surety market, sureties issue bonds on a project-by-project basis, and can decline to issue bonds at any time. Historically, approximately 25% to 35% of our business has required bonds. While we have strong surety relationships to support our bonding needs, current market conditions as well as 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, including a significant amount of cash on our balance sheet, would enable us to ultimately respond effectively to an interruption in the availability of bonding capacity, such an interruption would likely cause our revenue and profits to decline in the near term.

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Contractual Obligations

        The following recaps the future maturities of our contractual obligations as of September 30, 2014 (in thousands):

 
  Twelve Months Ended September 30,    
   
 
 
  2015   2016   2017   2018   2019   Thereafter   Total  

Revolving credit facility

  $   $   $   $   $   $ 42,000   $ 42,000  

Capital lease obligations

    328     273     199     95     39         934  

Interest payable

    1,470     1,470     1,470     1,470     1,470         7,350  

Operating lease obligations

    11,190     9,887     8,824     7,261     4,822     9,013     50,997  
                               

Total

  $ 12,988   $ 11,630   $ 10,493   $ 8,826   $ 6,331   $ 51,013   $ 101,281  
                               
                               

        As of September 30, 2014, we had $50.6 million in letter of credit commitments, of which $24.6 million will expire in 2014 and $26.0 million will expire in 2015. 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 programs through third-party insurers as we do. While many of these letter of credit commitments expire in 2014, we expect nearly all of them, particularly those supporting our insurance programs, will be renewed annually.

        Other than the operating and capital lease obligations noted above, we have no significant purchase or operating commitments outside of commitments to deliver equipment and provide labor in the ordinary course of performing project work.

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

        We have limited exposure to changes in interest rates under our revolving credit facility and the EAS credit line. We have a debt facility under which we may borrow additional funds in the future.

        The following table presents principal amounts (stated in thousands) and related average interest rates by year of maturity for our debt obligations and their indicated fair market value at September 30, 2014:

 
  Twelve Months Ended
September 30,
   
   
 
 
  2015   2016   2017   2018   2019   Thereafter   Fair Value  

Variable Rate Debt

  $   $   $   $   $   $ 42,000   $ 42,000  

        The weighted average interest rate applicable to borrowings under the Facility was approximately 1.4% as of September 30, 2014.

        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 quarter ended June 30,

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2014, we recorded a goodwill impairment charge of $0.7 million based on Level 3 measurements. We did not recognize any other impairments, in the current quarter, on those assets required to be measured at fair value on a nonrecurring basis.

        The valuation of our contingent 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 periods, manner of calculating any amounts due, etc.) and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate.

Item 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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) and 15d-15(f) under the Securities Exchange Act of 1934) during the three months ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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COMFORT SYSTEMS USA, INC.
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 of our litigation in our consolidated financial statements. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact on our operating results, cash flows or financial condition, these matters are subject to inherent uncertainties and management's view of these matters may change in the future.

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 for the year ended December 31, 2013, 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.

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

Recent Sales of Unregistered Securities

        None.

Issuer Purchases of Equity Securities

        On March 29, 2007, our Board of Directors (the "Board") approved a stock repurchase program to acquire up to 1.0 million shares of our outstanding common stock. Subsequently, the Board has from time to time approved extensions of the program to acquire additional shares. On October 24, 2014, the Board approved an extension to the program by increasing the shares authorized for repurchase by 1.0 million shares. Since the inception of the repurchase program, the Board has approved 7.6 million shares to be repurchased.

        The share repurchases will be made from time to time at our discretion in the open market or privately negotiated transactions as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. The Board may modify, suspend, extend or terminate the program at any time. During the nine months ended September 30, 2014, we repurchased 0.4 million shares for approximately $6.3 million at an average price of $14.73 per share. Since the inception of the program in 2007 and as of September 30, 2014, we have repurchased a cumulative total of 6.4 million shares at an average price of $11.25 per share.

        During the quarter ended September 30, 2014, we purchased our common shares in the following amounts at the following average prices:

Period
  Total
Number of
Shares
Purchased
  Average Price
Paid
Per Share
  Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
  Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
 

July 1 - July 31

      $     6,048,251     552,286  

August 1 - August 31

    191,222   $ 14.69     6,239,473     361,064  

September 1 - September 30

    204,428   $ 14.52     6,443,901     156,636  
                   

    395,650   $ 14.60     6,443,901     156,636  
                   
                   

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        Under our restricted share plan, employees may elect to have us withhold common shares to satisfy minimum 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.

Item 6.    Exhibits

  10.1   Amendment No. 3 to Second Amended and Restated Credit Agreement and Amendment to Other Loan Documents.

 

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. (Furnished herewith, but not filed.)

 

32.2

 

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Furnished herewith, but not filed.)

 

*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

*
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections.

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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 29, 2014

 

By:

 

/s/ BRIAN E. LANE

Brian E. Lane
President, Chief Executive Officer and Director

October 29, 2014

 

By:

 

/s/ WILLIAM GEORGE

William George
Executive Vice President and Chief Financial
Officer

October 29, 2014

 

By:

 

/s/ JULIE S. SHAEFF

Julie S. Shaeff
Senior Vice President and Chief Accounting
Officer

37




Exhibit 10.1

 

EXECUTION VERSION

 

AMENDMENT NO. 3 TO

SECOND AMENDED AND RESTATED CREDIT AGREEMENT

AND

AMENDMENT TO OTHER LOAN DOCUMENTS

 

THIS AMENDMENT NO. 3 TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT AND AMENDMENT TO OTHER LOAN DOCUMENTS (this “Amendment”) dated as of July 22, 2014, is among COMFORT SYSTEMS USA, INC., a Delaware corporation (the “Borrower”), the other entities identified as Guarantors on the signature pages hereto (the “Guarantors”), the several banks and other financial institutions signatories hereto (the “Lenders”) and WELLS FARGO BANK, NATIONAL ASSOCIATION, a national banking association, as Agent for the Lenders (the “Agent”).

 

RECITALS

 

A.                                    The Borrower, the Lenders and the Agent are parties to a Second Amended and Restated Credit Agreement dated as of July 16, 2010 (as amended, modified and supplemented prior to the date hereof, the “Credit Agreement”).

 

B.                                    The Borrower, the Guarantors, and the Agent are parties to a Second Amended and Restated Security Agreement dated as of July 16, 2010 (as amended, modified and supplemented prior to the date hereof, the “Security Agreement”).

 

C.                                    The Borrower, the Guarantors and the Agent are parties to a Second Amended and Restated Pledge Agreement dated as of July 16, 2010 (as amended, modified and supplemented prior to the date hereof, the “Pledge Agreement”).

 

D.                                    The Borrower and the Guarantors have requested that the Lenders approve this Amendment to amend certain terms and provisions of the Credit Agreement, Security Agreement and Pledge Agreement, as set forth herein.

 

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants set forth in this Amendment, the Borrower, the Guarantors, the Agent and the Lenders agree as follows:

 

1.                                      Defined Terms.  Unless otherwise defined in this Amendment, capitalized terms used in this Amendment have the meanings assigned to those terms in the Credit Agreement.

 

2.                                      Amendments to Credit Agreement.  The Credit Agreement is hereby amended as follows:

 

(a)                                 The dollar amount set forth on the cover page of the Credit Agreement is hereby amended to be shown as $250,000,000.

 

(b)                                 Section 1.1 of the Credit Agreement is hereby amended by deleting the second sentence of the definition of “Aggregate Commitment” in its entirety and substituting therefor the following:

 



 

“As of the Amendment No. 3 Effective Date, the Aggregate Commitment is equal to $250,000,000.”

 

(c)                                  Section 1.1 of the Credit Agreement is hereby amended by adding the following definition in alphabetical order:

 

Amendment No. 3 Effective Date” means July 22, 2014.

 

(d)                                 Section 1.1 of the Credit Agreement is hereby amended by deleting the definition of “Excluded Assets” in its entirety and substituting the following definition therefor:

 

Excluded Assets” means, collectively, (a) equity interests in any Unrestricted Subsidiary (including the Southeast Acquisition Entity), so long as a pledge or transfer of such equity interests would be prohibited or restricted under, or would require consent of a third party that is not an Affiliate pursuant to, the governing documents of such Unrestricted Subsidiary or any other agreement binding on the Restricted Persons or their assets; provided that (except with respect to the equity interests in the Southeast Acquisition Entity) in the event such pledge or transfer is not prohibited but is so restricted or would require such consent of a third party that is not an Affiliate, Borrower shall have used commercially reasonable efforts to satisfy such restriction or obtain such consent, (b) assets, a security interest in which would be prohibited by contract or applicable Law unless such prohibition is not effective under applicable Law and (c) assets as to which the Agent has determined in its sole discretion that the costs of obtaining a lien or security interest therein are excessive in relation to the value of the security to be afforded thereby.

 

(e)                                  Section 1.1 of the Credit Agreement is hereby amended by deleting the definition of “Guarantors” in its entirety and substituting the following definition therefor:

 

Guarantors” means, collectively, (a) each Subsidiary of the Borrower existing on the Amendment No. 3 Effective Date, other than an Immaterial Subsidiary or an Unrestricted Subsidiary, and (b) any Subsidiary of the Borrower that executes and delivers a Guaranty to the Agent after the Amendment No. 3 Effective Date, pursuant to Section 6.15.

 

(f)                                   Section 1.1 of the Credit Agreement is hereby amended by deleting clauses (b), (i) and (j) of the definition of “Indebtedness” and substituting the following therefor:

 

“(b)                           an obligation to pay the deferred purchase price of property or services (other than trade payables incurred in the ordinary course of business);

 

2



 

(i)                                     obligations to purchase or redeem securities or other property, if such obligations arise out of or in connection with the sale or issuance of the same or similar securities or property (for example, repurchase agreements, mandatorily redeemable preferred stock and sale/leaseback agreements), except to the extent such purchase or redemption is to be made with the proceeds of a substantially concurrent issuance of Equity of such Person;

 

(j)                                    obligations with respect to letters of credit or applications or reimbursement agreements therefor (but, for the avoidance of doubt, excluding any obligations with respect to (i) letters of credit to the extent they support other obligations constituting Indebtedness of a Restricted Person under this definition and (ii) letters of credit that support performance obligations); or”.

 

(g)                                  Section 1.1 of the Credit Agreement is hereby amended by deleting the proviso at the end of the definition of “Indebtedness” and substituting the following therefor:

 

“provided, however, that the “Indebtedness” of any Person shall not include (i) obligations incurred by such Person in the ordinary course of its business under purchasing cards or similar arrangements, or (ii) obligations under operating leases as defined under GAAP on the date of this Agreement.”

 

(h)                                 Section 1.1 of the Credit Agreement is hereby amended by deleting the definition of “Intercreditor Agreement” and substituting the following definition therefor:

 

Intercreditor Agreement” means (i) that certain Intercreditor Agreement dated as of June 24, 2009 among Zurich American Insurance Company, a New York corporation, and Wachovia Bank, N.A., a national banking association, as predecessor to Lender Agent (as therein defined), as amended from time to time, and (ii) any other agreement to which Borrower, the Agent and any surety are parties that establishes the priorities of the parties with respect to the Bonded Receivables.

 

(i)                                     Section 1.1 of the Credit Agreement is hereby amended by deleting the definition of “Maturity Date” in its entirety and substituting the following definition therefor:

 

Maturity Date” means October 1, 2019.

 

(j)                                    Section 1.1 of the Credit Agreement is hereby amended by deleting clause (d) of the definition of “Permitted Liens” and substituting the following therefor:

 

“(d)                           pledges or deposits of cash or securities to secure (i) the performance of bids, trade contracts, leases, statutory obligations and other obligations of a like nature (excluding appeal bonds

 

3



 

incurred in the ordinary course of business); (ii) obligations under worker’s compensation, unemployment insurance, social security or public Laws or similar legislation (excluding Liens arising under ERISA); or (iii) letters of credit that support obligations described in clause (i) or (ii) above;”.

 

(k)                                 Section 1.1 of the Credit Agreement is hereby amended by (i) deleting the word “and” at the end of clause (l) of the definition of “Permitted Liens”, (ii) deleting the period at the end of clause (m) thereof and substituting a semicolon in its place, and (iii) adding the following new clauses (n) and (o) to the end of said definition:

 

“(n)                           Liens securing Indebtedness permitted by Section 7.1(i), provided that (i) such Liens existed at the time such Person became a Subsidiary of the Borrower or at the time such assets were acquired, as the case may be, and were not created in anticipation thereof, (ii) such Liens do not apply to any property or assets of the Borrower or its Subsidiaries, as the case may be, other than (A) the assets of such Person that has become a Subsidiary of the Borrower and such Person’s Subsidiaries or (B) such acquired assets and their proceeds, and (iii) such Liens secure only those obligations that they secured on the date such Person became a Subsidiary of the Borrower or at the time such assets were acquired, as the case may be; and

 

(o)                                 Liens securing Indebtedness permitted by Section 7.1(k).”

 

(l)                                     Section 2.17(b) of the Credit Agreement is hereby amended by deleting clause (v) thereof in its entirety and substituting therefor the following:

 

“(v)                           the cumulative increase in the Revolving Loan Commitments pursuant to this Section 2.17 shall not exceed $100,000,000;”.

 

(m)                             Section 2.17(b) of the Credit Agreement is hereby further amended by deleting clause (viii) thereof in its entirety and substituting therefor the following:

 

“(viii)                  the aggregate amount of the Lenders’ Revolving Loan Commitments shall not exceed $350,000,000 without the approval of all Lenders; and”.

 

(n)                                 Section 3.2 of the Credit Agreement is hereby amended by inserting the phrase “or liquidity” immediately after the first instance of the word “capital”.

 

(o)                                 Section 4.2 of the Credit Agreement is hereby amended by deleting clause (d) thereof in its entirety and substituting therefor the following:

 

“(d)                           No Material Adverse Change shall have occurred since December 31, 2013.”

 

4



 

(p)                                 Section 5.13 of the Credit Agreement is hereby amended to replace each reference therein to “Amendment No. 2 Effective Date” with a reference to “Amendment No. 3 Effective Date” and to insert the word “or” after the phrase “Disclosure Schedule” in the last sentence thereof.

 

(q)                                 Section 7.1 of the Credit Agreement is hereby amended by deleting clauses (b), (c), (d) and (k) thereof in their entirety and substituting therefor the following:

 

“(b)                           unsecured Indebtedness among Borrower and the Guarantors;

 

(c)                                  purchase money Indebtedness and Capital Lease Obligations in an aggregate principal amount not to exceed $15,000,000 at any time, provided that the original principal amount of any such Indebtedness shall not be in excess of the purchase price of the assets acquired with the proceeds thereof and such Indebtedness shall be secured only by the acquired assets;

 

(d)                                 Indebtedness existing on the Amendment No. 3 Effective Date and listed on Schedule 7.1, and renewals and extensions thereof;

 

(k)                                 any other Indebtedness not to exceed $10,000,000 in the aggregate at any time outstanding.”

 

(r)                                    Section 7.6 of the Credit Agreement is hereby amended by deleting subsection (a) thereof in its entirety and substituting therefor the following:

 

“(a)                           No Restricted Person will declare or make any Distribution except, in each case, so long as no Default or Event of Default exists at the time thereof or would result therefrom:

 

(i)                                     Distributions made at any time when the Net Leverage Ratio is less than or equal to 1.00 to 1.00;

 

(ii)                                  regularly scheduled dividends in an amount per share paid in any Fiscal Quarter not to exceed 125% of the amount per share paid during the immediately preceding Fiscal Quarter; provided that all such increases paid in any Fiscal Year shall not exceed $1,300,000; and

 

(iii)                               repurchases of the Borrower’s common stock made on or prior to September 30, 2015, in an aggregate amount not to exceed $25,000,000.”

 

(s)                                   Section 7.7(a) of the Credit Agreement is hereby amended by deleting clause (ii) thereof in its entirety and substituting therefor the following:

 

5



 

(ii)                                  investments in Unrestricted Subsidiaries not in excess of $10,000,000 during any Fiscal Year, and”.

 

(t)                                    Section 7.7(c) of the Credit Agreement is hereby amended by deleting clause (iii) thereof in its entirety and substituting therefor the following:

 

“(iii)                         either (A) the Total Leverage Ratio is less than or equal to 2.00 to 1.00 after giving pro forma effect to the Acquisition or (B) the purchase price for such Acquisition is less than or equal to $25,000,000 and the aggregate purchase price for such Acquisition and all prior Acquisitions made during the Fiscal Year when such Acquisition is consummated is less than or equal to $60,000,000; or”.

 

(u)                                 Section 7.11 of the Credit Agreement is hereby amended by deleting paragraph (c) in its entirety and substituting therefor the following:

 

“(c)                            Total Leverage Ratio.  The Borrower will not permit its Total Leverage Ratio, determined as of the end of each of its Fiscal Quarters, for the then most-recently ended four Fiscal Quarters, to be greater than 2.75 to 1.00.”

 

(v)                                 Section 10.4(a) of the Credit Agreement is hereby amended by deleting the word “and” immediately before clause (iii) thereof and by deleting clause (iii) thereof in its entirety and substituting therefor the following:

 

“(iii) all reasonable costs and expenses incurred by the Agent on behalf of any Lender Party (including without limitation reasonable attorneys’ fees, reasonable consultants’ fees and reasonable accounting fees) in connection with the conduct of an annual field audit and (iv) all reasonable costs and expenses incurred by the Agent and any Lender Party in connection with the enforcement of its rights (A) in connection with this Agreement (including its rights under this Section) or any of the Loan Documents, or (B) in connection with the Loans made or Letters of Credit issued hereunder, including all such reasonable out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect such Loans or Letters of Credit.”

 

(w)                               The Credit Agreement is hereby amended such that reference to “Amendment No. 2 Effective Date” in the “Pricing Schedule” attached thereto is hereby replaced with a reference to “Amendment No. 3 Effective Date”.

 

(x)                                 Schedule 3.1 to the Credit Agreement and Sections 5.13 and 5.14 of Schedule 5 to the Credit Agreement and Schedule 7.1 to the Credit Agreement are hereby replaced in their entirety with Schedule 3.1 and Sections 5.13 and 5.14 of Schedule 5 and Schedule 7.1 attached to this Amendment.

 

6



 

3.                                      Amendments to Security Agreement.

 

(a)                                 Section 2(a) of the Security Agreement is hereby amended by deleting the proviso at the end of said Section and substituting therefor the following:

 

provided that, notwithstanding the foregoing, the Collateral in which a security interest is granted pursuant to this Security Agreement specifically excludes the Excluded Assets.”

 

(b)                                 Schedules I and III to the Security Agreement are hereby replaced in their entirety with Schedules I and III to the Second Amended and Restated Security Agreement attached to this Amendment.

 

4.                                      Amendment to Pledge Agreement.  Schedule I to the Pledge Agreement is hereby replaced in its entirety with Schedule I to the Second Amended and Restated Pledge Agreement attached to this Amendment.

 

5.                                      Conditions to Effectiveness.  This Amendment will become effective on the date that the following conditions have been satisfied or waived:

 

(a)                                 the Agent shall have received counterparts of this Amendment, executed and delivered by the Borrower, the Guarantors, the Agent and the Lenders;

 

(b)                                 the Agent shall have received a Revolving Note for each Lender substantially in the form of Exhibit 2.1 to the Credit Agreement in the principal amount of each such Lender’s Revolving Loan Commitment as set forth on Schedule 3.1 attached hereto;

 

(c)                                  the representations and warranties of the Borrower and the Guarantors in Section 6 of this Amendment shall be true and correct;

 

(d)                                 the Agent shall have received, or shall concurrently receive, payment of all fees payable in connection with this Amendment including, without limitation, the fees payable to pursuant to that certain Fee Letter dated June 25, 2014;

 

(e)                                  the Agent shall have received the following certificates of Borrower and, as appropriate, the Guarantors:

 

(i)                                     an “Omnibus Certificate” of the Secretary or Assistant Secretary of the Borrower and each Guarantor, which shall (i) contain the names and signatures of the officers of Borrower and each Guarantor authorized to execute Loan Documents, (ii) certify that there have been no changes to the charter documents or bylaws of the Borrower and each Guarantor previously delivered to the Agent (or, to the extent any such documents have changed, attach and certify to the truth, correctness and completeness of such documents) and (iii) attach and certify to the truth, correctness and completeness of a copy of resolutions duly adopted by the Board of Directors of Borrower and each Guarantor and in full force and effect at the time this Amendment is entered into, authorizing the execution of this

 

7



 

Amendment and the other Loan Documents delivered or to be delivered in connection herewith and the consummation of the transactions contemplated herein and therein; and

 

(ii)                                  a “Closing Certificate” of the chief financial officer of Borrower, as of the date of this Amendment, certifying that (A) the conditions set out in subsections (a), (b), and (c) of Section 4.2 of the Credit Agreement have been satisfied and (B) the financial information of Borrower most recently delivered to the Agent pursuant to Section 6.2(b) of the Credit Agreement fairly present the Consolidated financial position of Borrower for the periods covered thereby;

 

(f)                                   a certificate of existence and good standing for Borrower issued by the Secretary of State of Delaware, a certificate of due qualification to do business for the Borrower issued by the Secretary of State of Texas and evidence that the Borrower’s authority to transact business in the State of Texas is active;

 

(g)                                  a favorable opinion of (i) Bracewell & Giuliani LLP, counsel for Restricted Persons, in form and substance reasonably satisfactory to the Agent; and (ii) Trent McKenna, in-house counsel for Restricted Persons, in form and substance reasonably satisfactory to the Agent; and

 

(h)                                 the Agent shall have received, in form and substance reasonably satisfactory to the Agent, projections prepared by management of balance sheets, income statements and cashflow statements of the Borrower and its Subsidiaries for the term of the Credit Agreement, as amended hereby.

 

Representations and Warranties.  The Borrower and the Guarantors hereby represent and warrant to the Agent and each of the Lenders as follows:

 

(i)                                     This Amendment has been duly authorized by all necessary corporate or other action and constitutes the binding obligation of the Borrower and the Guarantors.

 

(j)                                    Each of the representations and warranties made by the Borrower and the Guarantors in or pursuant to the Credit Agreement and the other Loan Documents is true and correct in all material respects as of the date hereof, as if made (after giving effect to this Amendment) on and as of such date, except for any representations and warranties made as of a specified date, which were true and correct in all material respects as of such specified date.

 

(k)                                 After giving effect to this Amendment, no Default or Event of Default has occurred and is continuing as of the date hereof.

 

(l)                                     Since December 31, 2013, there has occurred no Material Adverse Change.

 

8



 

6.                                      New Lenders.

 

(a)                                 By its execution of this Amendment, each of U.S. Bank National Association and Cadence Bank, N.A. (each, a “New Lender”) agrees to become a Lender for all purposes and to the same extent as if originally a party to the Credit Agreement and agrees to be bound by and entitled to the benefits of the Credit Agreement.

 

(b)                                 Each New Lender, severally and not jointly, hereby (i) represents and warrants that it is legally authorized to enter into this Amendment and become a “Lender” under the Credit Agreement; (ii) confirms that it has received a copy of the Credit Agreement, together with the copies of the most recent financial statements delivered pursuant to Section 6.2 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Amendment and become a “Lender” under the Credit Agreement; (iii) agrees that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iv) appoints and authorizes the Agent to take any action as agent on its behalf and to exercise any powers under the Loan Documents that are delegated to the Agent by the terms of the Loan Documents, together with all powers that are reasonably incidental thereto; and (v) agrees that it shall perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender.

 

7.                                      Continuing Effect of the Credit Agreement and Other Loan Documents.  This Amendment does not constitute a waiver of any provision of the Credit Agreement or any other Loan Document and, except as expressly provided herein, is not to be construed as a consent to any action on the part of the Borrower or the Guarantors that would require a waiver or consent of the Lenders or an amendment or modification to any term of the Loan Documents.  The Borrower and the Guarantors hereby confirm and ratify the Credit Agreement as amended hereby and each of the other Loan Documents to which it is a party and acknowledges and agrees that the same continue in full force and effect as amended hereby (as applicable).

 

8.                                      Reference to the Credit Agreement, Security Agreement or Pledge Agreement.  Upon the effectiveness of this Amendment, each reference in the Credit Agreement, Security Agreement or Pledge Agreement to “this Agreement”, “this Security Agreement”, “hereunder”, “herein” or words of like import refer to the Credit Agreement, Security Agreement or Pledge Agreement, as applicable, as amended and affected hereby.

 

9.                                      Designation as Loan Document.  This Amendment is a Loan Document.

 

10.                               Counterparts.  This Amendment may be executed by all parties hereto in any number of separate counterparts each of which may be delivered in original, facsimile or other electronic (e.g., “.pdf”) form and all of such counterparts taken together constitute one instrument.

 

11.                               References.  The words “hereby,” “herein,” “hereinabove,” “hereinafter,” “hereinbelow,” “hereof,” “hereunder” and words of similar import when used in this Amendment refer to this Amendment as a whole and not to any particular article, section or provision of this

 

9



 

Amendment.  References in this Amendment to a section number are to such sections of the Credit Agreement unless otherwise specified.

 

12.                               Headings Descriptive.  The headings of the several sections of this Amendment are inserted for convenience only and do not in any way affect the meaning or construction of any provision of this Amendment.

 

13.                               Governing Law.  This Amendment is governed by and will be construed in accordance with the law of the State of Texas.

 

14.                               Payment of Expenses.  The Borrower shall pay or reimburse the Agent for all of its reasonable out-of-pocket costs and reasonable expenses incurred in connection with this Amendment, any other documents prepared in connection herewith and the transactions contemplated hereby, including, without limitation, the reasonable fees and disbursements of counsel to the Agent.

 

15.                               Final Agreement of the Parties.  THIS AMENDMENT, THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.  THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

 

[Signature Pages Follow]

 

10


 

IN WITNESS WHEREOF, the parties are signing this Amendment as of the date first above written.

 

 

 

COMFORT SYSTEMS USA, INC.,

 

Borrower

 

 

 

 

 

By:

/s/ Trent McKenna

 

 

Trent McKenna

 

 

Senior Vice President, General Counsel and Secretary

 

 

 

 

 

Address:

 

 

 

 

 

Comfort Systems USA, Inc.

 

675 Bering, Suite 400

 

Houston, Texas 77057

 

Attention: William George III

 

Telephone: (713) 830-9650

 

Fax: (713) 830-9659

 

Signature Page to Amendment No. 3

 



 

ACKNOWLEDGMENT OF GUARANTORS

 

Each of the undersigned Guarantors hereby executes this Amendment to evidence its agreement to the modification of the Loan Documents to which it is a party and to confirm that each Loan Document (as the same may be amended or amended and restated, as the case may be, pursuant to and in connection with this Amendment) to which it is a party or otherwise bound remains in full force and effect and that all Collateral encumbered thereby will continue to secure, to the fullest extent possible, the payment and performance of all “Obligations”, “Secured Obligations” and “Guaranteed Obligations” (in each case as such term is defined in the applicable Loan Document), including without limitation the payment and performance of all such “Obligations”, “Secured Obligations” and “Guaranteed Obligations” in respect of the Obligations now or hereafter existing under or in respect of the Credit Agreement and the other Loan Documents.  The Guarantors specifically reaffirm and extend their obligations under each of their applicable Guaranties to cover all indebtedness evidenced by the Credit Agreement as same has been created, amended and/or restated by or in connection with this Amendment.  The Guaranties and all the terms thereof shall remain in full force and effect and the Guarantors hereby acknowledge and agree that same are valid and existing and that each of the Guarantors’ obligations thereunder shall not be impaired or limited by the execution or effectiveness of this Amendment, except as expressly provided herein.  Each Guarantor hereby represents and warrants that all representations and warranties contained in this Amendment and the other Loan Documents to which it is a party or otherwise bound are true, correct and complete in all material respects on and as of the dated of this Amendment, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date.  The Agent on behalf of the Lenders hereby preserves all its rights against each Guarantor under its applicable Guaranty and the other Loan Documents to which each applicable Guarantor is a party.

 

Each Guarantor acknowledges and agrees that (i) notwithstanding the conditions to the effectiveness set forth in this Amendment, such Guarantor is not required by the terms of the Credit Agreement, this Amendment or any other Loan Document to consent to the amendments of the Credit Agreement effected pursuant to this Amendment; and (ii) nothing in the Credit Agreement, this Amendment or any other Loan Document shall be deemed to require the consent of such Guarantor to any future amendments to the Credit Agreement.

 

 

ACCU-TEMP GP, INC.

 

ACCU-TEMP LP, INC.

 

ACI MECHANICAL, INC.

 

ACORN INDUSTRIAL, LLC, by Comfort Systems USA (MidAtlantic), LLC, as Sole Managing Member

 

AIR SYSTEMS ENGINEERING, INC.

 

AIRTEMP, INC.

 

ARC COMFORT SYSTEMS USA, INC.

 

ATLAS-ACCURATE HOLDINGS, L.L.C., by CS53 Acquisition Corp., as Sole Managing Member

 

ATLAS COMFORT SYSTEMS USA, L.L.C., by Hess Mechanical Corporation, as Sole Managing Member

 

Signature Page to Amendment No. 3

 



 

 

BATCHELOR’S MECHANICAL CONTRACTORS, LLC, by H & M Mechanical, Inc., as Sole Managing Member

 

BCM CONTROLS CORPORATION

 

COLONIALWEBB CONTRACTORS COMPANY

 

CALIFORNIA COMFORT SYSTEMS USA, INC.

 

COMFORT SYSTEMS USA (ARKANSAS), INC.

 

COMFORT SYSTEMS USA (BALTIMORE), LLC, by Hess Mechanical Corporation, as Sole Managing Member

 

COMFORT SYSTEMS USA (BRISTOL), INC.

 

COMFORT SYSTEMS USA ENERGY SERVICES, INC.

 

COMFORT SYSTEMS USA G.P., INC.

 

COMFORT SYSTEMS USA (INTERMOUNTAIN), INC.

 

COMFORT SYSTEMS USA (KENTUCKY), INC.

 

COMFORT SYSTEMS USA (MIDATLANTIC), LLC, by Riddleberger Brothers, Inc., as Sole Managing Member

 

COMFORT SYSTEMS USA (MIDWEST), LLC, by Plant Services Incorporated, as Sole Managing Member

 

COMFORT SYSTEMS USA NATIONAL ACCOUNTS, LLC, by Accu-Temp LP, Inc., as Managing Member

 

COMFORT SYSTEMS USA (OHIO), INC.

 

COMFORT SYSTEMS USA PUERTO RICO, INC.

 

COMFORT SYSTEMS USA (SOUTH CENTRAL), INC.

 

COMFORT SYSTEMS USA (SOUTHEAST), INC.

 

COMFORT SYSTEMS USA (SOUTHWEST), INC.

 

COMFORT SYSTEMS USA (SYRACUSE), INC.

 

COMFORT SYSTEMS USA (TEXAS), L.P., by Comfort Systems USA G.P., Inc., as general partner

 

COMFORT SYSTEMS USA (TWIN CITIES), INC.

 

COMFORT SYSTEMS USA (WESTERN MICHIGAN), INC.

 

CONTROL CONCEPTS, LLC, by Comfort Systems USA (Southeast), Inc., as Sole Managing Member

 

CONTROL CONCEPTS MECHANICAL SERVICES, LLC, by Comfort Systems USA (Southeast), Inc., as Sole Managing Member

 

CS53 ACQUISITION CORP.

 

DELCARD ASSOCIATES, LLC, by Seasonair, Inc., as Sole Managing Member

 

DESIGN MECHANICAL INCORPORATED

 

DILLINGHAM & SMITH MECHANICAL AND SHEET METAL CONTRACTORS, LLC, by S.M. Lawrence Company, Inc., as Sole Managing Member

 

DYNA TEN CORPORATION

 

DYNA TEN MAINTENANCE SERVICES, LLC

 

EASTERN HEATING & COOLING, INC.

 

EASTERN REFRIGERATION CO., INC.

 

GRANITE STATE HOLDINGS COMPANY, INC.

 

Signature Page to Amendment No. 3

 



 

 

GRANITE STATE PLUMBING & HEATING, LLC, by Granite State Holdings Company, Inc., as Sole Managing Member

 

H&M MECHANICAL, INC.

 

HELM CORPORATION

 

HESS MECHANICAL CORPORATION

 

HUDSON RIVER HEATING AND COOLING, INC.

 

H-VAC SUPPLY, L.L.C., by Comfort Systems USA Puerto Rico, Inc., as Sole Managing Member

 

MECHANICAL TECHNICAL SERVICES, INC.

 

MERIT MECHANICAL, INC.

 

MJ MECHANICAL SERVICES, INC.

 

NORTH AMERICAN MECHANICAL, INC.

 

PLANT SERVICES INCORPORATED

 

QUALITY AIR HEATING & COOLING, INC.

 

RIDDLEBERGER BROTHERS, INC.

 

S.I. GOLDMAN COMPANY, INC.

 

S.M. LAWRENCE COMPANY, INC.

 

SA ASSOCIATES, INC.

 

SALMON & ALDER, L.L.C., by SA Associates, Inc., as Sole Managing Member

 

SEASONAIR, INC.

 

TEMP RIGHT SERVICE, INC.

 

THE CAPITAL REFRIGERATION COMPANY

 

 

 

 

 

 

By:

/s/ Trent McKenna

 

 

 

Trent McKenna

 

 

 

Senior Vice President, General Counsel, and Secretary

 

Signature Page to Amendment No. 3

 



 

 

WELLS FARGO BANK, NATIONAL ASSOCIATION,

 

Agent and a Lender

 

 

 

 

 

By:

/s/ Gregory C. Crowe

 

 

Gregory C. Crowe

 

 

Senior Vice President

 

 

 

 

 

Address:

 

 

 

Wells Fargo Bank, National Association

 

1000 Louisiana, 3rd Floor

 

Houston, Texas 77002

 

Attention:

Gregory C. Crowe

 

Telephone:

713-319-1630

 

Fax:

713-739-1086

 

Signature Page to Amendment No. 3

 



 

 

CAPITAL ONE, N.A.,

 

Lender

 

 

 

 

 

By:

/s/ Yasmin Elhatib

 

Name:

Yasmin Elkhatib

 

Title:

Vice President

 

 

 

 

 

Address:

 

 

 

Capital One, N.A.

 

5718 Westheimer, Suite 600

 

Houston, Texas 77057

 

Attention:

Yasmin Elkhatib

 

Telephone:

713-435-5265

 

Fax:

713-706-5499

 

Signature Page to Amendment No. 3

 



 

 

BOKF, NA dba Bank of Texas,

 

Lender

 

 

 

 

 

By:

/s/ H. Mike Sultanik

 

Name:

H. Mike Sultanik

 

Title:

Senior Vice President

 

 

 

 

 

Address:

 

 

 

BOKF, NA dba Bank of Texas

 

5 Houston Center

 

1401 McKinney, Suite 1650

 

Houston, Texas 77010

 

Attention:

Mike Sultanik

 

Telephone:

713-289-5886

 

Fax:

713-289-5825

 

Signature Page to Amendment No. 3

 



 

 

REGIONS BANK,

 

Lender

 

 

 

 

 

By:

/s/ Joey Powell

 

Name:

Joey Powell

 

Title:

Senior Vice President

 

 

 

 

 

Address:

 

 

 

Regions Bank

 

5005 Woodway Drive, Suite 110

 

Houston, Texas 77479

 

Attention:

Joey Powell

 

Telephone:

713-426-7236

 

Fax:

713-426-7180

 

Signature Page to Amendment No. 3

 


 

 

BRANCH BANK AND TRUST COMPANY,

 

Lender

 

 

 

 

 

 

 

By:

/s/ Elizabeth Willis

 

Name:

Elizabeth Willis

 

Title:

Vice President

 

 

 

 

 

 

 

Address:

 

 

 

Branch Bank and Trust Company

 

200 West Second Street, 16th Floor

 

Winston-Salem, North Carolina 27101

 

Attention:

Eric Searls

 

Telephone:

336-733-2741

 

Fax:

336-733-2740

 

Signature Page to Amendment No. 3

 



 

 

U.S. BANK NATIONAL ASSOCIATION,

 

Lender

 

 

 

 

 

 

 

By:

/s/ Michael E Temnick

 

Name:

Michael E Temnick

 

Title:

Vice President

 

 

 

 

 

 

Address:

 

 

 

U.S. Bank National Association

 

425 Walnut St.

 

CN-OH-W8

 

Cincinnati, Ohio 45202

 

Attention:

Michael Temnick

 

Telephone:

513-632-4133

 

Fax:

513-632-4894

 

Signature Page to Amendment No. 3

 



 

 

CADENCE BANK, N.A.,

 

Lender

 

 

 

 

 

 

 

By:

/s/ H. Gale Smith, Jr.

 

Name:

H. Gale Smith, Jr.

 

Title:

Executive Vice President

 

 

 

 

 

 

 

Address:

 

 

 

Cadence Bank, N.A.

 

2800 Post Oak Boulevard, Suite 3800

 

Houston, Texas 77056

 

Attention:

Gale Smith

 

Telephone:

713-871-3941

 

Fax:

713-634-4963

 

Signature Page to Amendment No. 3

 



 

PRICING SCHEDULE

 

The applicable Eurodollar Margin, Base Rate Margin, Commitment Fee Rate and Letter of Credit Fee Rate shall be determined by the Agent in accordance with the following tables:

 

APPLICABLE
MARGIN FOR
REVOLVING
LOAN
ADVANCES

 

LEVEL I
STATUS

 

LEVEL II
STATUS

 

LEVEL III
STATUS

 

LEVEL IV
STATUS

 

Eurodollar Rate Margin

 

1.25

%

1.50

%

1.75

%

2.00

%

Base Rate Margin

 

0.25

%

0.50

%

0.75

%

1.00

%

 

APPLICABLE
COMMITMENT
FEE
RATE

 

LEVEL I
STATUS

 

LEVEL II
STATUS

 

LEVEL III
STATUS

 

LEVEL IV
STATUS

 

Commitment Fee Rate

 

0.20

%

0.25

%

0.30

%

0.35

%

 

LETTER OF
CREDIT
FEE RATE

 

LEVEL I
STATUS

 

LEVEL II
STATUS

 

LEVEL III
STATUS

 

LEVEL IV
STATUS

 

LC Fee Rate

 

1.25

%

1.50

%

1.75

%

2.00

%

 

For the period beginning on the Amendment No. 3 Effective Date and continuing to the date on which the financial statements and certificates are first delivered by the Borrower thereafter pursuant to Section 6.2(a) and Section 6.2(b), as applicable, Level I Status shall apply.  Notwithstanding the foregoing if the Borrower has failed to deliver the financial statements and certificates required by Section 6.2(a) and Section 6.2(b) then Level IV Status will be deemed to exist after two Business Days’ notice from the Agent to the Borrower.

 

For the purposes of this Pricing Schedule, the following terms have the following meanings, subject to the final paragraph of this Pricing Schedule:

 

“Level I Status” exists for any day that the Total Leverage Ratio is less than 0.75 to 1.00.

 

“Level II Status” exists for any day that the Total Leverage Ratio is greater than or equal to 0.75 to 1.00 but is less than 1.50 to 1.00.

 

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“Level III Status” exists for any day that the Total Leverage Ratio is greater than or equal to 1.50 to 1.00 but is less than 2.25 to 1.00.

 

“Level IV Status” exists for any day that the Total Leverage Ratio is greater than or equal to 2.25 to 1.00.

 

“Status” means either Level I Status, Level II Status, Level III Status or Level IV Status.

 

In the event that any financial statement delivered pursuant to this Agreement is shown to be inaccurate (regardless of whether this Agreement or the Commitments are in effect when such inaccuracy is discovered), and such inaccuracy, if corrected, would have led to the application of a higher Eurodollar Rate Margin or Base Rate Margin, as applicable, for any period (an “Applicable Period”) than the Eurodollar Rate Margin or Base Rate Margin, as applicable, applied for such Applicable Period, and only in such case, then the Borrower shall immediately (i) deliver to the Agent a corrected financial statement for such Applicable Period, (ii) determine the Eurodollar Rate Margin or Base Rate Margin, as applicable, for such Applicable Period based upon the corrected financial statement, and (iii) immediately pay to the Agent the accrued additional interest owing as a result of such increased Eurodollar Rate Margin or Base Rate Margin, as applicable for such Applicable Period, which payment shall be promptly applied by the Agent in accordance with the terms of this Agreement.  This provision is in addition to rights of the Agent and Lenders with respect to Sections 2.5, 2.11, 6.10 and 8.1 and other of their respective rights under this Agreement.

 

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