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TABLE OF CONTENTS

Table of Contents

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, 2011
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 31, 2011 was 37,455,699 (excluding treasury shares of 3,667,666).

Table of Contents

COMFORT SYSTEMS USA, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2011

			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		17
	Item 3—Quantitative and Qualitative Disclosures about Market Risk		32
	Item 4—Controls and Procedures		33
Part II—Other Information
	Item 1—Legal Proceedings		34
	Item 2—Unregistered Sales of Equity Securities and Use of Proceeds		34
	Item 6—Exhibits		35
	Signatures		36

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COMFORT SYSTEMS USA, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

			September 30, 2011			December 31, 2010

			(Unaudited)
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	43,692		$	86,346
	Accounts receivable, less allowance for doubtful accounts of $4,766 and $5,096, respectively			259,769			233,893
	Other receivables			9,598			6,682
	Income tax receivable			11,478			9,544
	Inventories			9,742			9,365
	Prepaid expenses and other			24,602			30,470
	Costs and estimated earnings in excess of billings			29,121			26,648

		Total current assets		388,002			402,948
PROPERTY AND EQUIPMENT, NET				40,475			43,620
GOODWILL				93,640			147,818
IDENTIFIABLE INTANGIBLE ASSETS, NET				36,099			39,616
OTHER NONCURRENT ASSETS				7,430			6,018

		Total assets	$	565,646		$	640,020

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
	Current maturities of long-term debt		$	300		$	300
	Current maturities of notes to former owners			510			967
	Accounts payable			101,421			101,134
	Accrued compensation and benefits			36,805			42,577
	Billings in excess of costs and estimated earnings			62,218			63,422
	Accrued self-insurance expense			30,799			28,994
	Other current liabilities			23,699			30,816

		Total current liabilities		255,752			268,210
LONG-TERM DEBT, NET OF CURRENT MATURITIES				2,400			2,700
NOTES TO FORMER OWNERS, NET OF CURRENT MATURITIES				24,969			25,969
DEFERRED INCOME TAX LIABILITIES				11,599			18,871
OTHER LONG-TERM LIABILITIES				6,278			11,486

		Total liabilities		300,998			327,236
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, 3,626,473 and 3,221,775 shares, respectively			(38,642	)		(34,714	)
	Additional paid-in capital			324,617			326,467
	Retained earnings (deficit)			(21,738	)		20,620

		Total stockholders' equity		264,648			312,784

		Total liabilities and stockholders' equity	$	565,646		$	640,020

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

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COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(Unaudited)

				Three Months Ended September 30,						Nine Months Ended September 30,

				2011			2010			2011			2010
REVENUE				$	328,113		$	307,648		$	922,320		$	793,711
COST OF SERVICES					279,005			257,339			791,493			661,929

			Gross profit		49,108			50,309			130,827			131,782
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES					41,493			41,885			126,043			114,905
GOODWILL IMPAIRMENT					55,134			—			55,134			4,446
GAIN ON SALE OF ASSETS					(58	)		(29	)		(162	)		(502	)

			Operating income (loss)		(47,461	)		8,453			(50,188	)		12,933
OTHER INCOME (EXPENSE):
	Interest income				16			39			65			183
	Interest expense				(478	)		(832	)		(1,431	)		(1,406	)
	Changes in the fair value of contingent earn-out obligations				5,077			650			5,566			650
	Other				(16	)		19			(68	)		25

			Other income (expense)		4,599			(124	)		4,132			(548	)

INCOME (LOSS) BEFORE INCOME TAXES					(42,862	)		8,329			(46,056	)		12,385
INCOME TAX EXPENSE (BENEFIT)					(6,293	)		2,919			(7,479	)		4,164

INCOME (LOSS) FROM CONTINUING OPERATIONS					(36,569	)		5,410			(38,577	)		8,221
GAIN (LOSS) ON DISPOSITION OF DISCONTINUED OPERATION, NET OF INCOME TAX EXPENSE OF $—, $195, $— AND $166					—			(39	)		—			723

NET INCOME (LOSS)				$	(36,569	)	$	5,371		$	(38,577	)	$	8,944

INCOME (LOSS) PER SHARE:
	Basic—
		Income (loss) from continuing operations		$	(0.98	)	$	0.14		$	(1.03	)	$	0.22
		Gain on disposition of discontinued operation			—			—			—			0.02

		Net income (loss)		$	(0.98	)	$	0.14		$	(1.03	)	$	0.24

	Diluted—
		Income (loss) from continuing operations		$	(0.98	)	$	0.14		$	(1.03	)	$	0.22
		Gain on disposition of discontinued operation			—			—			—			0.02

		Net income (loss)		$	(0.98	)	$	0.14		$	(1.03	)	$	0.24

SHARES USED IN COMPUTING INCOME PER SHARE:
	Basic				37,325			37,560			37,496			37,564

	Diluted				37,325			37,794			37,496			37,821

DIVIDENDS PER SHARE				$	0.050		$	0.050		$	0.150		$	0.150

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)

							STOCKHOLDERS' EQUITY

							Common Stock				Treasury Stock									Accumulated Other Comprehensive Income (Loss)
				Comprehensive Income (Loss)			Common Stock				Treasury Stock						Additional Paid-In Capital						Retained Earnings (Deficit)			Total Stockholders' Equity
				Comprehensive Income (Loss)			Shares		Amount		Shares			Amount			Additional Paid-In Capital						Retained Earnings (Deficit)			Total Stockholders' Equity
BALANCE AT DECEMBER 31, 2009								41,123,365	$	411		(3,129,460	)	$	(33,810	)	$	326,103		$	(181	)	$	13,461		$	305,984
	Comprehensive income:
			Net income	$	14,740			—		—		—			—			—			—			14,740			14,740
			Realized gain on marketable securities reclassified into earnings, net of tax		181			—		—		—			—			—			181			—			181

			Comprehensive income	$	14,921

	Issuance of Stock:
		Issuance of shares for options exercised including tax benefit						—		—		183,686			1,982			(875	)		—			—			1,107
		Issuance of restricted stock						—		—		235,122			2,864			(2,614	)		—			—			250
	Shares received in lieu of tax withholding payment on vested restricted stock							—		—		(50,575	)		(616	)		—			—			—			(616	)
	Tax benefit from vesting of restricted stock							—		—		—			—			106			—			—			106
	Forfeiture of unvested restricted stock							—		—		(5,610	)		(60	)		60			—			—			—
	Stock-based compensation expense							—		—		—			—			3,687			—			—			3,687
	Dividends							—		—		—			—			—			—			(7,581	)		(7,581	)
	Share repurchase							—		—		(454,938	)		(5,074	)		—			—			—			(5,074	)

BALANCE AT DECEMBER 31, 2010								41,123,365		411		(3,221,775	)		(34,714	)		326,467			—			20,620			312,784
	Comprehensive income (loss):
			Net loss (unaudited)	$	(38,577	)		—		—		—			—			—			—			(38,577	)		(38,577	)

	Issuance of Stock:
		Issuance of shares for options exercised including tax benefit (unaudited)						—		—		51,950			559			(188	)		—			—			371
		Issuance of restricted stock (unaudited)						—		—		230,702			2,488			(2,488	)		—			—			—
	Shares received in lieu of tax withholding payment on vested restricted stock (unaudited)							—		—		(49,911	)		(654	)		—			—			—			(654	)
	Tax benefit from vesting of restricted stock (unaudited)							—		—		—			—			54			—			—			54
	Stock-based compensation expense (unaudited)							—		—		—			—			2,672			—			—			2,672
	Dividends (unaudited)							—		—		—			—			(1,900	)		—			(3,781	)		(5,681	)
	Share repurchase (unaudited)							—		—		(637,439	)		(6,321	)		—			—			—			(6,321	)

BALANCE AT SEPTEMBER 30, 2011 (unaudited)								41,123,365	$	411		(3,626,473	)	$	(38,642	)	$	324,617		$	—		$	(21,738	)	$	264,648

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,

					2011			2010			2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)					$	(36,569	)	$	5,371		$	(38,577	)	$	8,944
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities—
	Loss (gain) on disposition of discontinued operation					—			39			—			(723	)
	Write-off of debt financing costs					—			181			—			181
	Amortization of identifiable intangible assets					1,722			1,877			5,080			4,023
	Depreciation expense					2,974			2,925			9,148			7,859
	Goodwill impairment					55,134			—			55,134			4,446
	Bad debt expense					(202	)		578			509			701
	Deferred tax benefit					(4,939	)		(1,484	)		(6,255	)		(4,750	)
	Amortization of debt financing costs					56			48			168			102
	Gain on sale of assets					(58	)		(29	)		(162	)		(502	)
	Changes in the fair value of contingent earn-out obligations					(5,077	)		(650	)		(5,566	)		(650	)
	Stock-based compensation expense					340			517			2,672			2,591
	Changes in operating assets and liabilities, net of effects of acquisitions—
		(Increase) decrease in—
			Receivables, net			(3,226	)		(19,814	)		(25,781	)		(21,483	)
			Inventories			320			230			(199	)		762
			Prepaid expenses and other current assets			(4,172	)		(6,777	)		(1,969	)		(4,448	)
			Costs and estimated earnings in excess of billings			(2,698	)		5,875			(2,473	)		4,254
			Other noncurrent assets			3,049			(747	)		726			(1,079	)
		Increase (decrease) in—
			Accounts payable and accrued liabilities			(5,622	)		11,656			(13,468	)		(4,634	)
			Billings in excess of costs and estimated earnings			660			3,385			(1,204	)		(2,988	)
			Taxes paid related to pre-acquisition equity transactions of an acquired company			—			(7,056	)		—			(7,056	)
			Other long-term liabilities			(214	)		103			252			(21	)

				Net cash provided by (used in) operating activities		1,478			(3,772	)		(21,965	)		(14,471	)

CASH FLOWS FROM INVESTING ACTIVITIES:
		Purchases of property and equipment				(2,548	)		(2,021	)		(6,452	)		(4,103	)
		Proceeds from sales of property and equipment				230			11			611			1,229
		Proceeds from businesses sold				39			203			117			1,467
		Sale of marketable securities				—			1,000			2,000			2,925
		Cash paid for acquisitions, earn-outs and intangible assets, net of cash acquired				(288	)		(38,358	)		(2,609	)		(41,935	)

				Net cash used in investing activities		(2,567	)		(39,165	)		(6,333	)		(40,417	)

CASH FLOWS FROM FINANCING ACTIVITIES:
		Net borrowings on revolving line of credit				—			—			—			—
		Payments on other long-term debt				(300	)		(16,382	)		(1,589	)		(17,299	)
		Debt financing costs				(550	)		(911	)		(550	)		(911	)
		Payments of dividends to shareholders				(1,864	)		(1,881	)		(5,667	)		(5,652	)
		Share repurchase program				(2,609	)		(851	)		(6,321	)		(4,504	)
		Shares received in lieu of tax withholding				—			(10	)		(654	)		(619	)
		Excess tax benefit of stock-based compensation				2			15			206			447
		Proceeds from exercise of options				1			16			219			237

				Net cash used in financing activities		(5,320	)		(20,004	)		(14,356	)		(28,301	)

NET DECREASE IN CASH AND CASH EQUIVALENTS						(6,409	)		(62,941	)		(42,654	)		(83,189	)

CASH AND CASH EQUIVALENTS, beginning of period—continuing and discontinued operations						50,101			107,602			86,346			127,850

CASH AND CASH EQUIVALENTS, end of period—continuing and discontinued operations					$	43,692		$	44,661		$	43,692		$	44,661

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, 2011

(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 42% of our consolidated 2011 revenue is attributable to installation of systems in newly constructed facilities, with the remaining 58% attributable to maintenance, repair and replacement services. The following service activities account for our consolidated 2011 revenue: HVAC 74%, plumbing 16%, building automation control systems 4% and other 6%. These service activities are within the mechanical services industry which is the single industry segment we serve.

2. Summary of Significant Accounting Policies

Basis of Presentation

These interim statements should be read in conjunction with the historical Consolidated Financial Statements and related notes of Comfort Systems included in the Annual Report on Form 10-K as filed with the Securities and Exchange Commission ("SEC") for the year ended December 31, 2010 (the "Form 10-K").

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

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities, revenue and expenses and disclosures regarding contingent assets and liabilities. Actual results could differ from those estimates. The most significant estimates used in our financial statements affect revenue and cost recognition for construction contracts, the allowance for doubtful accounts, self-insurance accruals, deferred tax assets, warranty accruals, fair value accounting for acquisitions and the quantification of fair value for reporting units in connection with our goodwill impairment testing.

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2011

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

Cash Flow Information

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,

		2011		2010		2011		2010
Interest		$	388	$	308	$	1,198	$	720
Income taxes for continuing operations			118		655		1,116		2,308

	Total	$	506	$	963	$	2,314	$	3,028

Income Taxes

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 each quarter. Estimations of required valuation allowances include estimates of future taxable income. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the activity underlying these assets becomes deductible. We consider projected future taxable income and tax planning strategies in making this assessment. If actual future taxable income is less than the estimates, we may not realize all or a portion of the recorded deferred tax assets.

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 fully 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, 2011

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

For the nine months ended September 30, 2011 our tax benefit is $7,479 with an effective tax rate of 16.2% as compared to tax expense of $4,164 with an effective tax rate of 33.6% for the nine months ended September 30, 2010. The effective tax rate in the current year was lower than the federal statutory rate primarily due to the impact of a permanent difference related to the portion of the goodwill impairment charge that is not deductible for tax purposes and an increase in valuation allowances related to certain state net operating loss carryforwards. This was partially offset by permanent differences generated by acquisition related fair value adjustments. The effective tax rate in 2010 was lower than the federal statutory rate due to the release of certain valuation allowances during the second quarter of 2010. 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.

Financial Instruments

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.

Segment Disclosure

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.

Reclassifications

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.

3. Fair Value Measurements

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

•: Level 1—quoted prices in active markets for identical assets and liabilities;
•: Level 2—observable market based inputs or unobservable inputs that are corroborated by market data; and
•: Level 3—significant unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2011

(Unaudited)

3. Fair Value Measurements (Continued)

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, 2011 (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	$	43,692	$	43,692	$	—	$	—
Contingent earn-out obligations	$	1,900	$	—	$	—	$	1,900

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.

As of December 31, 2010, our marketable securities consisted of $2.0 million of auction rate securities, which are variable rate debt instruments, having long-term maturities (with final maturities up to June 2032). We sold the entire $2.0 million of these auction rate securities (Level 2) during the first quarter of 2011 at face value.

The valuation of the Company's 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.

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


Balance at beginning of year		$	7,466
	Issuances		—
	Settlements		—
	Adjustments to fair value		(5,566	)

Balance at end of period		$	1,900

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, 2011, we recorded a goodwill impairment charge of $55.1 million as discussed in Note 5 "Goodwill and Identifiable Intangible Assets, Net". We did not recognize any other impairments on those assets required to be measured at fair value on a nonrecurring basis.

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2011

(Unaudited)

4. Acquisitions

Acquisition of ColonialWebb

On July 28, 2010, we entered into a stock purchase agreement to purchase all of the issued and outstanding stock of ColonialWebb Contractors Company ("ColonialWebb"). ColonialWebb operates as a comprehensive, single-source construction, service, manufacturing and refrigeration service firm servicing the Mid-Atlantic region. ColonialWebb is headquartered in Richmond, Virginia with seven other locations. The acquisition date fair value of consideration transferred was $110.3 million, of which $49.9 million was allocated to goodwill. See Note 5 "Goodwill and Identifiable Intangible Assets, Net" for discussion of the goodwill impairment of ColonialWebb recorded during the third quarter of 2011.

Other Acquisitions

We completed one acquisition in the first quarter and one in the third quarter of 2011. There were two acquisitions for the nine months ending September 30, 2010. These acquisitions were not material, individually or in the aggregate, and were "tucked-in" with existing operations. 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. Goodwill and Identifiable Intangible Assets, Net

Goodwill

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

	September 30, 2011			December 31, 2010

Balance at beginning of year	$	147,818		$	100,194
Additions		956			53,358
Impairment adjustment		(55,134	)		(5,734	)

Balance at end of period	$	93,640		$	147,818

During the third quarter of 2011 and prior to our annual impairment testing on October 1, we concluded that impairment indicators existed at four reporting units serving the Virginia, Maryland and North Carolina markets, including ColonialWebb, based upon year to date results and recent forecasts. Significant declines in year to date revenues and operating margins through the summer months when the demand for new installation and replacement services is generally higher caused us to revise our expectations in our financial models for these reporting units.

We performed a step one goodwill impairment test for these four reporting units and concluded that the carrying value exceeded the fair value for each of the units tested. Therefore, we commenced the required second step of the assessment for these four reporting units in which the implied fair value of the goodwill is compared to the book value of the goodwill. There is a significant amount of

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2011

(Unaudited)

5. Goodwill and Identifiable Intangible Assets, Net (Continued)

work required to perform the second step of the impairment assessment and that work has not been completed as of the date of filing these financial statements. Our preliminary assessment is that the book value of each of the reporting units' goodwill exceeded the implied fair value. These reporting units had a total goodwill balance of $75.7 million. Our best estimate of the impairment is a $55.1 million non-cash goodwill impairment charge which we recorded during the third quarter of 2011. Any adjustments to this estimated goodwill impairment charge will be recognized in the fourth quarter of 2011.

There were no changes in our methodologies for valuing goodwill during the current year. The fair value of each reporting unit was estimated using a discounted cash flow model combined with market valuation approaches. We assigned a weighting of 50% to the discounted cash flow analysis, 50% to the public company approach and 0% to the transaction approach due to the lack of comparable market data. The material assumptions used for the income approach included a weighted average cost of capital of 13% and a long-term growth rate of 2-3%.

Under the income approach which is weighted 50%, a one percentage point increase in the discount rate and a one percentage point decrease in the long-term growth rate would have decreased the fair value of each of these reporting units ranging from $0.1 million to $1.8 million. Under the public company market approach which has a weighting of 50%, a 10% decrease in the market approach multiples would have decreased the fair value of each of these reporting units by $0.2 million to $2.5 million.

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.

During 2010, we recorded a goodwill impairment charge of $4.4 million during the second quarter and an impairment charge for $1.3 million in the fourth quarter. 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 Delaware could no longer support the related goodwill balance.

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2011

(Unaudited)

5. Goodwill and Identifiable Intangible Assets, Net (Continued)

Identifiable Intangible Assets, Net

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

			September 30, 2011					December 31, 2010

		Estimated Useful Lives in Years	Gross Book Value		Accumulated Amortization			Gross Book Value		Accumulated Amortization
Customer relationships		2 - 15	$	27,451	$	(8,695	)	$	25,948	$	(5,378	)
Backlog		1 - 2		4,790		(4,639	)		4,740		(4,253	)
Noncompete agreements		2 - 7		3,500		(2,190	)		3,490		(1,710	)
Tradenames		2 - 25		19,570		(3,688	)		19,570		(2,791	)

	Total		$	55,311	$	(19,212	)	$	53,748	$	(14,132	)

6. Long-Term Debt Obligations

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

		September 30, 2011			December 31, 2010

Revolving credit facility		$	—		$	—
Other debt			2,700			3,000
Notes to former owners			25,479			26,936

	Total debt		28,179			29,936
	Less—current portion		(810	)		(1,267	)

	Total long-term portion of debt	$	27,369		$	28,669

Revolving Credit Facility

On September 23, 2011, we amended our $125.0 million senior credit facility (the "Facility") provided by a syndicate of banks. The Facility, which is available for borrowings and letters of credit, now expires in September 2016 and is secured by the capital stock of our current and future subsidiaries. As of September 30, 2011, we had no outstanding borrowings, $42.7 million in letters of credit outstanding, and $82.3 million of credit available.

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

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2011

(Unaudited)

6. Long-Term Debt Obligations (Continued)

The following is a summary of the additional margins:

	Consolidated Total Indebtedness to Credit Facility Adjusted EBITDA

	Less than 0.75			0.75 to 1.25			1.25 to 2.00			2.00 to 2.50			2.50 or greater
Additional Per Annum Interest Margin Added Under:
Base Rate Loan Option		0.75	%		1.00	%		1.25	%		1.50	%		1.75	%
Eurodollar Rate Loan Option		1.75	%		2.00	%		2.25	%		2.50	%		2.75	%

We estimate that the interest rate applicable to the borrowings under the Facility would be approximately 2.3% as of September 30, 2011.

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 1.30% to 2.10% 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 0.25% to 0.50% 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. Credit Facility Adjusted EBITDA is defined under the Facility for financial covenant purposes as net earnings for the four quarters ending as of any given quarterly covenant compliance measurement date, plus the corresponding amounts for (a) interest expense; (b) income taxes; (c) depreciation and amortization; (d) other non-cash charges and (e) pre-acquisition results of acquired companies.

The following is a reconciliation of Credit Facility Adjusted EBITDA to net income (in thousands):


Net loss	$	(32,781	)
Interest expense, net		1,649
Income taxes—continuing operations		(5,283	)
Depreciation and amortization expense		19,788
Stock compensation expense		3,768
Goodwill impairment		56,422
Pre-acquisition results of acquired companies, as defined in the credit agreement		—

Credit Facility Adjusted EBITDA	$	43,563

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2011

(Unaudited)

6. Long-Term Debt Obligations (Continued)

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 3.00 through December 31, 2013, 2.75 through June 30, 2014 and 2.50 through maturity. The leverage ratio as of September 30, 2011 was 0.65.

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 2.0 through December 31, 2013, 1.5 through June 30, 2014 and 1.0 through maturity. 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, 2011 was 12.95.

Other Restrictions—The Facility permits acquisitions of up to $15.0 million per transaction, provided that the aggregate purchase price of such an acquisition and of acquisitions in the preceding 12 month period does not exceed $30.0 million. However, these limitations only apply when the Company's Net Leverage Ratio is equal to or greater than 2.0.

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, 2011.

Notes to Former Owners

We issued subordinated notes to the former owners of acquired companies as part of the consideration used to acquire these companies. These notes had an outstanding balance of $25.5 million as of September 30, 2011, of which $0.5 million is current, and bear interest, payable annually, at a weighted average interest rate of 3.3%.

Other Debt

In conjunction with our acquisition of ColonialWebb, we acquired long-term debt related to an industrial revenue bond associated with its office building and warehouse. The outstanding balance as of September 30, 2011 was $2.7 million, of which $0.3 million is current. The weighted average interest rate on this variable rate debt as of September 30, 2011 was approximately 0.5%.

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2011

(Unaudited)

7. Commitments and Contingencies

Claims and Lawsuits

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

In addition to the matters described above, we had accrued $7.1 million as of June 30, 2011 for potential and asserted backcharges from several customers of our large multi-family operation based in Texas. During the third quarter of 2011, the Company reached an agreement related to certain backcharges, and this resulted in a $4.8 million payment and a $0.2 million recovery in the third quarter of 2011. The additions and reductions to the accrual are included in "Cost of Services."

The following summarizes the backcharge activity during the nine months ended September 30, 2011 (in thousands):


Balance at December 31, 2010		$	6,489
	Additions		600
	Cash payments, net of recovery		(4,593	)
	Non-cash reduction		(2,496	)

Balance at September 30, 2011		$	—

Surety

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

Surety 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, 2011

(Unaudited)

7. 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.

Self-Insurance

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

8. Stockholders' Equity

Earnings Per Share

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

The effect of 0.1 million and 0.2 million of common stock equivalents have been excluded from the calculation of diluted EPS for the three and nine months ended September 30, 2011, respectively, due to our net loss position in these periods. Assuming dilution, there were approximately 0.8 million and 0.7 million anti-dilutive stock options excluded from the calculation of diluted EPS for the three and nine months ended September 30, 2011, respectively. There were approximately 0.7 million and 0.5 million of anti-dilutive stock options that were excluded from the calculation of diluted EPS for the three and nine months ended September 30, 2010, respectively.

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2011

(Unaudited)

8. 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,

	2011		2010		2011		2010
Common shares outstanding, end of period(a)		37,134		37,491		37,134		37,491
Effect of using weighted average common shares outstanding		191		69		362		73

Shares used in computing earnings per share—basic		37,325		37,560		37,496		37,564
Effect of shares issuable under stock option plans based on the treasury stock method		—		234		—		257
Effect of contingently issuable restricted stock		—		—		—		—

Shares used in computing earnings per share—diluted		37,325		37,794		37,496		37,821

(a): Excludes 0.4 million and 0.4 million shares of unvested contingently issuable restricted stock outstanding as of September 30, 2011 and 2010, respectively.

Share Repurchase Program

On March 29, 2007, our Board of Directors (the "Board") approved a stock repurchase program to acquire up to one million shares of our outstanding common stock. As of September 30, 2011, the Board approved extensions of the program to acquire up to 5.6 million shares.

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. We repurchased 0.6 million shares during the nine months ended September 30, 2011 at an average price of $9.92 per share. Since the inception of the program in 2007 and as of September 30, 2011, we have repurchased a cumulative total of 5.5 million shares at an average price of $11.00 per share.

9. Subsequent Events

In October 2011, the Company entered into an agreement to settle a legal matter. This settlement will result in the Company recognizing a gain of approximately $1.0 million in the fourth quarter of 2011. The cash settlement was received in October 2011.

On November 2, 2011, we acquired a 60% majority interest in Environmental Air Systems ("EAS"), headquartered in Greensboro, North Carolina. EAS had 2010 revenue of approximately $67.8 million and pre-tax income of approximately $1.9 million. The purchase price was approximately $30.0 million in cash. Further, the agreement includes a working capital adjustment based upon the balance sheet as of the acquisition date, as well as contingent consideration based upon future earnings.

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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 thereto included elsewhere in this Form 10-Q and the Annual Report on Form 10-K as filed with the Securities and Exchange Commission for the year ended December 31, 2010 (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. Company 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.

Introduction and Overview

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.

Nature and Economics of Our Business

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 $350,000. 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, 2011, by contract price, is as follows:

Contract Price of Project		Aggregate Contract Price Value (millions)

Under $1 million	4,979	$	1,294
$1 million - $5 million	172		311
$5 million - $10 million	39		102
$10 million - $15 million	16		39
Greater than $15 million	5		81

Total	5,211	$	1,827

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.

Profile and Management of Our Operations

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.

Economic and Industry Factors

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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Operating Environment and Management Emphasis

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 in 2009 and 2010, which have continued in 2011. 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, our debt outstanding under our revolving credit facility is zero, and we have a significant level of 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 September 2016. 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 twelve 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 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 2011 will be on execution and cost control, and on maintaining activity levels that will permit us to earn reasonable profits while preserving our core workforce. We have increased our focus on project qualification, estimating, pricing and management, and on service performance.

Cyclicality and Seasonality

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.

Critical Accounting Policies

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.

Percentage of Completion Method of Accounting

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.

Accounting for Allowance for Doubtful Accounts

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.

Accounting for Self-Insurance Liabilities

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:

Workers' Compensation— The per-incident deductible for workers' compensation is $500,000. Losses above $500,000 are determined by statutory rules on a state-by-state basis, and are fully covered by excess workers' compensation insurance.

Employer's Liability— For employer's liability, the per incident deductible is $500,000. We are fully insured for the next $500,000 of each loss, and then have several layers of excess loss insurance policies that cover losses up to $100 million in aggregate across this risk area (as well as general liability and auto liability noted below).

General Liability— For general liability, the per incident deductible is $500,000. We are fully insured for the next $1.5 million of each loss, and then have several layers of excess loss insurance policies that cover losses up to $100 million in aggregate across this risk area (as well as employer's liability and auto liability noted below).

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Auto Liability— For auto liability, the per incident deductible is $500,000. We are fully insured for the next $1.5 million of each loss, and then have several layers of excess loss insurance policies that cover losses up to $100 million in aggregate across this risk area (as well as employer's liability and general liability noted above).

Employee Medical— We have two medical plans. The deductible for employee group health claims is $300,000 per person, per policy (calendar) year for one plan and $200,000 per person, per policy (calendar) year for the other plan. Insurance then covers any responsibility for medical claims in excess of the deductible amount.

Our $100 million of aggregate excess loss coverage above applicable per-incident deductibles represents one policy limit that applies to all lines of risk; we do not have a separate $100 million of excess loss coverage for each of general liability, employer's liability and auto liability.

Accounting for Deferred Tax Assets

We regularly evaluate valuation allowances established for deferred tax assets for which future realization is uncertain. We perform this evaluation quarterly. Estimations of required valuation allowances include estimates of future taxable income. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the activity underlying these assets becomes deductible. We consider projected future taxable income and tax planning strategies in making this assessment. If actual future taxable income is less than the estimates, we may not realize all or a portion of the recorded deferred tax assets.

Acquisitions

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. For acquisitions completed beginning in 2009, 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. For acquisitions completed before 2009, these obligations are recognized as incurred and accounted for as an adjustment to the initial purchase price of the acquired assets.

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.

Recoverability of Goodwill and Identifiable Intangible Assets

Goodwill is the excess of purchase cost over the fair value of the net assets of acquired businesses. We do not amortize goodwill. 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 business unit exceeds its fair value, an impairment loss is recorded to the extent that the implied fair value of the goodwill of the business unit is less than its carrying value. If other business units have had increases in fair value, such increases may not be recorded. Accordingly, such increases may not be netted against impairments at other business 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 testing 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 testing at the reporting unit level. These reporting units are tested for impairment by comparing each unit's fair value to its carrying value.

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"). These assumptions are evaluated and updated on an annual basis.

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.

Results of Operations (dollars in thousands):

		Three Months Ended September 30,												Nine Months Ended September 30,

		2011			%			2010			%			2011			%			2010			%
Revenue		$	328,113			100.0	%	$	307,648			100.0	%	$	922,320			100.0	%	$	793,711			100.0	%
Cost of services			279,005			85.0	%		257,339			83.6	%		791,493			85.8	%		661,929			83.4	%

Gross profit			49,108			15.0	%		50,309			16.4	%		130,827			14.2	%		131,782			16.6	%
Selling, general and administrative expenses			41,493			12.6	%		41,885			13.6	%		126,043			13.7	%		114,905			14.5	%
Goodwill impairment			55,134			16.8	%		—			—			55,134			6.0	%		4,446			0.6	%
Gain on sale of assets			(58	)		—			(29	)		—			(162	)		—			(502	)		(0.1	)%

Operating income (loss)			(47,461	)		(14.5	)%		8,453			2.7	%		(50,188	)		(5.4	)%		12,933			1.6	%
Interest income			16			—			39			—			65			—			183			—
Interest expense			(478	)		(0.1	)%		(832	)		(0.3	)%		(1,431	)		(0.2	)%		(1,406	)		(0.2	)%
Changes in the fair value of contingent earn-out obligations			5,077			1.5	%		650			0.2	%		5,566			0.6	%		650			0.1	%
Other income (expense)			(16	)		—			19			—			(68	)		—			25			—

Income (loss) before income taxes			(42,862	)		(13.1	)%		8,329			2.7	%		(46,056	)		(5.0	)%		12,385			1.6	%
Income tax expense (benefit)			(6,293	)					2,919						(7,479	)					4,164

Income (loss) from continuing operations			(36,569	)		(11.1	)%		5,410			1.8	%		(38,577	)		(4.2	)%		8,221			1.0	%
Gain(loss) on disposition of discontinued operation, net of tax			—						(39	)					—						723

	Net income (loss)	$	(36,569	)				$	5,371					$	(38,577	)				$	8,944

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We had 39 operating locations as of December 31, 2010. During the first quarter of 2011, we consolidated two companies into other operations. As of September 30, 2011, we had 37 operating locations. Acquisitions are included in our results of operations from the respective acquisition date. The same-store comparison from 2011 to 2010, as described below, excludes the results of ColonialWebb, which was acquired in July 2010, for the nine months ended September 30, 2011 and for the two months ended September 30, 2010.

Revenue—Revenue increased $20.5 million, or 6.7%, to $328.1 million for the third quarter of 2011 compared to the same period in 2010. The increase included a 5.1% increase in revenue related to the same-store activity as well as a 1.6% increase from the acquisition of ColonialWebb. The same-store revenue increase is primarily from the manufacturing sector (approximately $9.8 million). We have seen increased activity, primarily in our Maryland operations. During the third quarter of 2011, ColonialWebb contributed revenue of approximately $43.6 million.

Revenue increased $128.6 million, or 16.2%, to $922.3 million for the first nine months of 2011 compared to the same period in 2010. The increase included a 5.2% increase in revenue related to the same-store activity as well as a 11.0% increase from the acquisition of ColonialWebb. The same-store revenue increase is primarily from the manufacturing sector (approximately $15.8 million) and the office buildings sector (approximately $13.5 million). We have seen increased activity, primarily in our Maryland operations. During the first nine months of 2011, ColonialWebb contributed revenue of approximately $126.3 million.

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, 2011 was $636.1 million, a 2.4% increase from June 30, 2011 backlog of $621.2 million, and remained flat with September 30, 2010 backlog of $635.8 million. On a same-store basis, backlog decreased 3.5% from September 30, 2010. The sequential increase in backlog primarily relates to ColonialWebb. The year-over-year decrease was primarily related to our Delaware and Virginia operations.

Following the three-year period of industry activity declines from 2001-2003 noted previously, 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 and 2010, which have continued in 2011. 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.

We continue to experience a noticeable amount of price competition in our markets, which restrains our ability to profitably increase revenue.

Gross Profit—Gross profit decreased $1.2 million, or 2.4%, to $49.1 million for the third quarter of 2011 as compared to the same period in 2010. The decrease included a $2.6 million, or 5.8%, decrease in gross profit on a same-store basis offset by a $7.6 million, or 15.1%, increase related to the acquisition of ColonialWebb. As a percentage of revenue, gross profit decreased from 16.4% in 2010 to 15.0% in 2011. The quarter over quarter decrease in gross profit percentage resulted from job write-downs combined with lower profitability at our Maryland operations (approximately $2.7 million).

Gross profit decreased $1.0 million, or 0.7%, to $130.8 million for the first nine months of 2011 as compared to the same period in 2010. The decrease included a $15.4 million, or 12.2%, decrease in gross profit on a same-store basis offset by a $20.6 million, or 15.7%, increase related to the acquisition of ColonialWebb. As a percentage of revenue, gross profit decreased from 16.6% in 2010 to 14.2% in 2011. The year-over-year decrease in gross profit percentage resulted primarily from a difficult pricing environment. The largest decline was at our Maryland operation (approximately $11.3 million) which was impacted by job write-downs combined with lower profitability due to a difficult pricing environment. We also had job write-downs at our Southern Alabama operation (approximately $4.0 million), which has been consolidated into a neighboring operation in the Florida Panhandle.

Selling, General and Administrative Expenses ("SG&A")—SG&A decreased $0.4 million, or 0.9%, to $41.5 million for the third quarter of 2011 as compared to 2010. On a same-store basis, excluding amortization expense, SG&A decreased $1.6 million, or 4.6%. The decrease is primarily due to overhead reductions and lower compensation accruals. Amortization expense remained flat at $1.6 million. As a percentage of revenue, SG&A decreased from 13.6% in 2010 to 12.6% in 2011.

SG&A increased $11.1 million, or 9.7%, to $126.0 million for the first nine months of 2011 as compared to 2010. On a same-store basis, excluding amortization expense, SG&A decreased $5.3 million, or 5.0%. The decrease is primarily due to overhead reductions and lower compensation accruals. Amortization expense increased $1.3 million, or 39.0%, primarily related to the ColonialWebb acquisition in 2010. As a percentage of revenue, SG&A decreased from 14.5% in 2010 to 13.7% in 2011.

We have included SG&A on a same-store basis, excluding amortization, because we believe it is an effective measure of comparative results of operations prior to factoring in charges incurred for recent acquisitions. However, 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.

Goodwill Impairment—We performed a step one goodwill impairment test for four of our reporting units and concluded that the carrying value exceeded the fair value for each of the units tested. Therefore, we commenced the required second step of the assessment for these four reporting units in which the implied fair value of the goodwill is compared to the book value of the goodwill. There is a significant amount of work required to perform the second step of the impairment assessment and that work has not been completed as of the date of filing these financial statements. Our preliminary assessment is that the book value of each of the reporting units' goodwill exceeded the implied fair value. These reporting units had a total goodwill balance of $75.7 million. Our best estimate of the impairment is a $55.1 million non-cash goodwill impairment charge which we recorded during the third quarter of 2011. Any adjustments to this estimated goodwill impairment charge will be recognized in the fourth quarter of 2011.

Changes in the fair value of contingent earn-out obligations—Changes in the fair value of contingent earn-out obligations was $5.1 million for the third quarter as compared to $0.6 million in the prior year. The increase relates to updated fair value measurements based on estimated future cash flows.

Changes in the fair value of contingent earn-out obligations was $5.6 million for the first nine months of 2011 as compared to $0.7 million in the same period of the prior year. The increase relates to updated fair value measurements based on estimated future cash flows.

Income Tax Expense—For the nine months ended September 30, 2011 our tax benefit is $7,479 with an effective tax rate of 16.2% as compared to tax expense of $4,164 with an effective tax rate of 33.6% for the nine months ended September 30, 2010. The effective tax rate in the current year was lower than the federal statutory rate primarily due to the impact of a permanent difference related to the portion of the goodwill impairment charge that is not deductible for tax purposes and an increase in valuation allowances related to certain state net operating loss carryforwards. This was partially offset by permanent differences generated by acquisition related fair value adjustments. The effective tax rate in 2010 was lower than the federal statutory rate due to the release of certain valuation allowances during the second quarter of 2010. 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 annual effective tax rate for 2011 will be between 15% and 25%.

Outlook—We expect that weakness in the underlying environment for nonresidential construction activity will continue to adversely impact activity levels in our industry in 2012. Our backlog, while still at solid levels by historical standards, declined substantially through early 2011 and has stabilized recently, although at lower levels. Our primary emphasis for the remainder of 2011 and for 2012 will be on execution, including a focus on cost controls and efficient project and service performance at the unit level. Based on our backlog, and despite weak economic conditions for our industry, we continue to expect to be profitable in 2011 and we currently expect modest levels of profitability to continue throughout 2012.

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 Used in Operating Activities—Cash provided by operating activities during the third quarter of 2011 was $1.5 million compared with $3.8 million of cash used for operating activities during 2010. The increase in cash provided by operations primarily relates to a $1.2 million cash inflow from working capital.

Cash used for operating activities during the first nine months of 2011 was $22.0 million compared with $14.5 million during 2010. The $7.5 million incremental use of cash is primarily due to a $7.4 million investment in working capital.

Cash Used in Investing Activities—During the third quarter of 2011, cash used for investing activities was $2.6 million compared with $39.2 million during 2010. The most significant item affecting the comparison of our investing cash flows for these quarters primarily related to the acquisition of ColonialWebb in 2010.

During the first nine months of 2011, cash used for investing activities was $6.3 million compared with $40.4 million during 2010. The additional cash used for investing activities in 2010 was primarily related to the acquisition of ColonialWebb.

Cash Used in Financing Activities—Cash used for financing activities was $5.3 million for the third quarter of 2011 compared to $20.0 million during 2010. The most significant item affecting the comparison of our financing cash flows for these quarters primarily related to payments on other long-term debt.

Cash used for financing activities was $14.4 million for the first nine months of 2011 compared to $28.3 million during 2010. The most significant item affecting the comparison of our financing cash flows for these periods primarily related to payments on other long-term debt.

Free Cash Flow—We define free cash flow as cash provided by operating activities, less customary capital expenditures, plus the proceeds from asset sales and taxes paid related to pre-acquisition equity. 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.

In March 2007, our Board of Directors (the "Board") approved a stock repurchase program to acquire up to one million shares of our outstanding common stock. As of September 30, 2011, the Board approved extensions of the program to acquire up to 5.6 million shares.

We estimate that the interest rate applicable to the borrowings under the Facility would be approximately 2.3% as of September 30, 2011.

(d) other non-cash charges and (e) pre-acquisition results of acquired companies. The following is a reconciliation of Credit Facility Adjusted EBITDA to net income (in thousands):

Leverage Ratio—The Facility requires that the ratio of our Consolidated Total Indebtedness to our Credit Facility Adjusted EBITDA not exceed 3.0 through December 31, 2013, 2.75 through June 30, 2014 and 2.50 through maturity. The leverage ratio as of September 30, 2011 was 0.65.

We are in compliance with all of our financial covenants as of September 30, 2011.

We issued subordinated notes to the former owners of acquired companies as part of the consideration used to acquire these companies. These notes had an outstanding balance of $25.5 million, of which $0.5 million is current, as of September 30, 2011. These notes bear interest, payable annually, at a weighted average interest rate of 3.3%.

We have generated positive net free cash flow for the last twelve calendar years, much of which occurred during challenging economic and industry conditions. We also expect to have significant borrowing capacity under our credit facility and we continue to maintain a significant level of uncommitted cash balances. We believe these factors will provide us with sufficient liquidity to fund our operations for the foreseeable future.

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.

The following recaps the future maturities of our contractual obligations as of September 30, 2011 (in thousands):

Absent any significant commitments of capital for items such as capital expenditures, acquisitions, dividends and share repurchases, it is reasonable to expect us to continue to maintain excess cash on our balance sheet. Therefore, we assumed that we would continue our current status of not utilizing any borrowings under our revolving credit facility.

As of September 30, 2011, we have $42.7 million in letter of credit commitments, of which $40.0 million will expire in 2011 and $8.7 million will expire in 2012. 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 most of these letter of credit commitments expire in 2011, we expect nearly all of them, particularly those supporting our insurance programs, will be renewed annually.

Other than the operating 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.

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, the notes to former owners and the industrial revenue bond. We have a debt facility under which we may borrow

funds in the future. We do not currently foresee any borrowing needs. Our debt with fixed interest rates consists of notes to former owners of acquired companies.

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, 2011:

The weighted average interest rate on the variable rate debt as of September 30, 2011 was approximately 0.5%.

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. We did not recognize any impairments on those assets required to be measured at fair value on a nonrecurring basis.

The valuation of the Company's 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.

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.

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, 2011 that have materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

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. While we cannot predict the outcome of these proceedings, in our opinion and based on reports of counsel, any liability arising from these matters individually and in the aggregate will not have a material effect on our operating results or financial condition, after giving effect to provisions already recorded.

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. We repurchased 0.6 million shares during the nine months ended September 30, 2011 at an average price of $9.92 per share. Since the inception of the program and as of September 30, 2011, we have repurchased a cumulative total of 5.5 million shares at an average price of $11.00 per share.

During the quarter ended September 30, 2011, we purchased our common shares in the following amounts at the following average prices:

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.

During the three months ended September 30, 2011, we withheld common shares to satisfy these tax withholding obligations as follows:

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.

28	Comfort Systems USA (South Central), Inc.	Common	CS1	100	100 % of shares owned by Borrower
29	Comfort Systems USA (Southeast), Inc.	Common	CS1	100	100 % of shares owned by Borrower
30	Comfort Systems USA (Southwest), Inc.	Common	CS1	100	100 % of shares owned by Borrower
31	Comfort Systems USA (Syracuse), Inc.	Common	CS1	100	100 % of shares owned by Borrower
32	Comfort Systems USA (Texas), L.P.	N/A	N/A	N/A	1% general partner interest — Comfort Systems USA GP, Inc. 99% limited partner interest — Comfort Systems USA (Southwest), Inc.
33	Comfort Systems USA (Twin Cities), Inc.	Common	CS1	100	100 % of shares owned by Borrower
34	Comfort Systems USA (Western Michigan), Inc.	Common	CS1		100 % of shares owned by Borrower
35	CS53 Acquisition Corporation	Common	CS1	100	100 % of shares owned by Borrower
36	Delcard Associates, LLC	N/A	N/A	N/A	100 % of shares owned by Seasonair, Inc.
37	Design Mechanical Incorporated	Common	CS1	100	100 % of shares owned by Borrower
38	Dillingham & Smith Mechanical and Sheet Metal Contractors, LLC	N/A	N/A	N/A	100% member interest — S.M. Lawrence Company, Inc.
39	Eastern Heating & Cooling, Inc.	Common	CS1	100	100 % of shares owned by Borrower
40	Eastern Refrigeration Co., Inc.	Common	CS1	100	100 % of shares owned by Borrower
41	Granite State Holdings Company, Inc.	Common	CS1	100	100 % of shares owned by Borrower
42	Granite State Plumbing & Heating, LLC	N/A	N/A	N/A	100% membership interest — Granite State Holdings Company, Inc.
43	H & M Mechanical, Inc.	Common	CS1	100	100 % of shares owned by Borrower
44	Helm Corporation	Common	CS1	100	100 % of shares owned by Borrower
45	Hess Mechanical Corporation	Common	CS1	100	100 % of shares owned by Borrower
46	Hudson River Heating and Cooling, Inc.	Common	CS1	100	100 % of shares owned by Borrower
47	H-VAC Supply, L.L.C.	N/A	N/A	N/A	100% member interest — Comfort Systems USA Puerto Rico, Inc.
48	Mechanical Technical Services, Inc.	Common	CS1	100	100 % of shares owned by Borrower
49	Merit Mechanical, Inc.	Common	CS1	100	100 % of shares owned by Borrower
50	MJ Mechanical Services, Inc.	Common	CS1	100	100 % of shares owned by Borrower
51	North American Mechanical, Inc.	Common	CS1	100	100 % of shares owned by Borrower
52	Plant Services Incorporated	Common	CS1	100	100 % of shares owned by ACI Mechanical, Inc.
53	Quality Air Heating & Cooling, Inc.	Common	CS1	100	100 % of shares owned by Borrower
54	Riddleberger Brothers, Inc.	Common	CS1	100	100 % of shares owned by Borrower
55	S.I. Goldman Company, Inc.	Common	CS1	750	100 % of shares owned by Borrower
56	S.M. Lawrence Company, Inc.	Common	CS1	100	100 % of shares owned by Borrower
57	SA Associates, Inc.	Common	CS1	100	100 % of shares owned by Borrower
58	Salmon & Alder, L.L.C.	N/A	N/A	N/A	100% membership interest — SA Associates, Inc.
59	Seasonair, Inc.	Common	CS1	1,544,000	100 % of shares owned by Borrower
60	Temp-Right Service, Inc.	Common	CS1	100	100 % of shares owned by Borrower

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Rule 13a-14(a)/15d-14(a)

CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Rule 13a-14(a)/15d-14(a)

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002*

In connection with the Quarterly Report of Comfort Systems USA, Inc. (the "Company") on Form 10-Q for the quarter ended September 30, 2011, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William George, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

	Three Months Ended September 30,						Nine Months Ended September 30,

	2011			2010			2011			2010
SG&A	$	41,493		$	41,885		$	126,043		$	114,905
Less: SG&A from companies acquired		(6,239	)		(4,976	)		(20,122	)		(4,976	)
Less: Amortization expense		(1,593	)		(1,616	)		(4,695	)		(3,376	)

Same-store SG&A, excluding amortization expense	$	33,661		$	35,293		$	101,226		$	106,553

		Twelve Months Ended September 30,

		2012		2013		2014		2015		2016		Thereafter		Total
Notes to former owners		$	510	$	12,569	$	12,400	$	—	$	—	$	—	$	25,479
Other debt			300		300		300		300		300		1,200		2,700
Interest payable			852		786		460		2		2		8		2,110
Operating lease obligations			10,103		8,832		6,241		4,194		3,235		6,261		38,866

	Total	$	11,765	$	22,487	$	19,401	$	4,496	$	3,537	$	7,469	$	69,155

Period		Average Price Paid Per Share

July 1 - July 30	—	$	—	5,224,539	375,998
August 1 - August 31	159,488	$	9.51	5,384,027	216,510
September 1 - September 30	120,459	$	9.07	5,504,486	96,051

	279,947	$	9.32	5,504,486	96,051


	10.1		Amendment No. 1 to Second Amended and Restated Credit Agreement, Second Amended and Restated Security Agreement, and Second Amended and Restated Pledge Agreement.
	31.1		Rule 13a-14(a) Certification of William F. Murdy pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2		Rule 13a-14(a) Certification of William George pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1		Section 1350 Certification of William F. Murdy pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2		Section 1350 Certification of William George pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	COMFORT SYSTEMS USA, INC.
November 7, 2011	By:	/s/ WILLIAM F. MURDY William F. Murdy Chairman of the Board and Chief Executive Officer
November 7, 2011	By:	/s/ WILLIAM GEORGE William George Executive Vice President and Chief Financial Officer
November 7, 2011	By:	/s/ JULIE S. SHAEFF Julie S. Shaeff Senior Vice President and Chief Accounting Officer

Period	Number of Shares Purchased		Average Price Paid Per Share

July 1 - July 31	$	—	$	—
August 1 - August 31		—		—
September 1 - September 30		—		—

	$	—	$	—

Four Fiscal Quarters Ending		Maximum Total Leverage Ratio
September 30, 2011 through December 31, 2013		3.00 to 1.00
March 31, 2014 through June 30, 2014		2.75 to 1.00
September 30, 2014 through maturity		2.50 to 1.00

	COMFORT SYSTEMS USA, INC.,
	Borrower


	By:	/s/ William George III
		William George III
		Executive Vice President and
		Chief Financial Officer


	Address:
	675 Bering, Suite 400
	Houston, Texas 77057
	Attention: William George III

	Telephone: (713) 830-9650
	Fax: (713) 830-9659

	ACCU-TEMP GP, INC.
	ACCU-TEMP LP, INC.
	ACI MECHANICAL, INC.
	ACORN INDUSTRIAL, INC.
	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, INC.
	ATLAS COMFORT SYSTEMS USA, L.L.C., by Hess Mechanical Corporation, as Sole Managing Member

	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 (CS1), 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.
	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
	EASTERN HEATING & COOLING, INC.
	EASTERN REFRIGERATION CO., INC.
	GRANITE STATE HOLDINGS COMPANY, INC.

	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/ William George III
		William George III
		Vice President & Assistant Secretary

	WELLS FARGO BANK, NATIONAL ASSOCIATION,
	Agent and a Lender


	By:	/s/ William S. Austin

	Name:	William S. Austin

	Title:	Senior Vice President


	Address:
	Wells Fargo Bank, National Association
	1000 Louisiana, 3rd Floor
	Houston, Texas 77002
	Attention: William S. Austin
	Telephone: 713-319-1464
	Fax: 713-739-1086

	CAPITAL ONE, N.A.,
	Lender


	By:	/s/ Don Backer

	Name:	Don Backer

	Title:	Senior Vice President


	Address:

	Capital One, N.A.
	5718 Westheimer, Suite 600
	Houston, Texas 77057
	Attention: Emily Gehrig
	Telephone: 713-435-5489
	Fax: 713-706-5499

	BOKF, NA dba
	BANK OF TEXAS,
	Lender


	By:	/s/ Mike Sultanik

	Name:	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

	REGIONS BANK,
	Lender


	By:	/s/ H. Gale Smith, Jr.

	Name:	H. Gale Smith, Jr.

	Title:	Senior Vice President


	Address:

	Regions Bank
	5005 Woodway Drive, Suite 110
	Houston, Texas 77479
	Attention: Gale Smith
	Telephone: 713-426-7157
	Fax: 713-426-7180

	BRANCH BANK & TRUST COMPANY,
	Lender


	By:	/s/ Roberts Bass

	Name:	Roberts Bass

	Title:	Senior Vice President


	Address:

	Branch Bank & Trust Company
	200 West Second Street, 16th Floor
	Winston-Salem, North Carolina 27101
	Attention: Eric Searls
	Telephone: 336-733-2741
	Fax: 336-733-2740

APPLICABLE MARGIN FOR REVOLVING LOAN ADVANCES	LEVEL I STATUS		LEVEL II STATUS		LEVEL III STATUS		LEVEL IV STATUS		LEVEL V STATUS
Eurodollar Rate Margin	1.75	%	2.00	%	2.25	%	2.50	%	2.75	%
Base Rate Margin	0.75	%	1.00	%	1.25	%	1.50	%	1.75	%

APPLICABLE COMMITMENT FEE RATE		LEVEL I STATUS		LEVEL II STATUS		LEVEL III STATUS		LEVEL IV STATUS		LEVEL V STATUS
Commitment Fee Rate		0.25	%	0.30	%	0.35	%	0.45	%	0.50	%

LETTER OF CREDIT FEE RATE		LEVEL I STATUS		LEVEL II STATUS		LEVEL III STATUS		LEVEL IV STATUS		LEVEL V STATUS
LC Fee Rate		1.30	%	1.50	%	1.70	%	1.90	%	2.10	%

			PRIOR	PRIOR NAMES
ENTITY NAME	ADDRESS TYPE	ADDRESS	ADDRESSES	& TRADE NAMES
Comfort Systems USA, Inc.	Principal Place of Business	675 Bering Drive, Suite 400, Houston, Texas 77057	777 Post Oak Blvd Suite 500, Houston, Texas 77056
ACI Mechanical, Inc.	Principal Place of Business	3116 S. Duff Avenue, Ames, Iowa 50010
ARC Comfort Systems USA, Inc.	Principal Place of Business	675 Bering Drive, Suite 400, Houston, Texas 77057	777 Post Oak Blvd., Suite 500, Houston, TX 77056
Accu-Temp GP, Inc.	Principal Place of Business	675 Bering Drive, Suite 400, Houston, Texas 77057	777 Post Oak Blvd Suite 500, Houston, Texas 77056
Accu-Temp LP, Inc.	Principal Place of Business	675 Bering Drive, Suite 400, Houston, Texas 77057	777 Post Oak Blvd Suite 500, Houston, Texas 77056
Acorn Industrial, Inc.	Principal Place of Business	7311 ACC Boulevard, Raleigh, North Carolina 27617
Air Systems Engineering, Inc.	Principal Place of Business	3602 South Pine Street, Tacoma, Washington 98409
AirTemp, Inc.	Principal Place of Business	11 Wallace Avenue, South Portland, Maine 04106
Atlas-Accurate Holdings, L.L.C.	Principal Place of Business	675 Bering Drive, Suite 400, Houston, Texas 77057	777 Post Oak Blvd. Suite 500, Houston, Texas 77056
Atlas Comfort Systems USA, Inc.	Principal Place of Business	675 Bering Drive, Suite 400, Houston, Texas 77057	4133 Southerland, Houston, Texas 77092
Atlas Comfort Systems USA, L.L.C.	Principal Place of Business	9745 Bent Oak Drive, Houston, Texas 77040	4133 Southerland, Houston, Texas 77092	Atlas Air Conditioning Company, L.P. Atlas Comfort Systems USA, L.P. Atlas Comfort Systems USA

ENTITY NAME	JURISDICTION OF ORGANIZATION	FORMATION DATE
ACI Mechanical, Inc.	Delaware	06/26/1998
ARC Comfort Systems USA, Inc.	Delaware	03/17/1998
Accu-Temp GP, Inc.	Delaware	05/21/1998
Accu-Temp LP, Inc.	Delaware	05/20/1998
Acorn Industrial, Inc.	North Carolina	01/03/1997
Air Systems Engineering, Inc.	Washington	05/18/1973
AirTemp, Inc.	Delaware	10/15/1998
Atlas-Accurate Holdings, L.L.C.	Delaware	12/28/1998
Atlas Comfort Systems USA, Inc.	California	07/31/2007
Atlas Comfort Systems USA, L.L.C.	Delaware	06/08/2007
Batchelor’s Mechanical Contractors, LLC	Alabama	03/16/1981
BCM Controls Corporation	Massachusetts	10/03/1984
California Comfort Systems USA, Inc.	California	05/18/1983
Comfort Systems USA (Arkansas), Inc.	Delaware	03/17/1998
Comfort Systems USA (Baltimore), LLC	Delaware	10/15/1998
Comfort Systems USA (Bristol), Inc.	Delaware	08/25/1997
Comfort Systems USA (CS1), Inc.	Delaware	12/14/2009
Comfort Systems USA Energy Services, Inc.	Delaware	08/25/1997
Comfort Systems USA G.P., Inc.	Delaware	08/12/1998
Comfort Systems USA (Intermountain), Inc.	Utah	05/06/1969
Comfort Systems USA (Kentucky), Inc.	Kentucky	02/10/1981
Comfort Systems USA (MidAtlantic), LLC	Virginia	01/01/2010
Comfort Systems USA (Midwest), LLC	Iowa	10/13/2009
Comfort Systems USA National Accounts, LLC	Indiana	07/28/1998
Comfort Systems USA (Ohio), Inc.	Ohio	10/10/1979
Comfort Systems USA Puerto Rico, Inc.	Puerto Rico	07/02/1991
Comfort Systems USA (South Central), Inc.	Delaware	5/24/2007
Comfort Systems USA (Southeast), Inc.	Delaware	03/24/1998
Comfort Systems USA (Southwest), Inc.	Arizona	12/23/1997
Comfort Systems USA (Syracuse), Inc.	New York	03/08/1965
Comfort Systems USA (Texas), L.P.	Texas	08/14/1998
Comfort Systems USA (Twin Cities), Inc.	Minnesota	08/01/2001
Comfort Systems USA (Western Michigan), Inc.	Michigan	07/21/1989
CS53 Acquisition Corp.	Delaware	01/26/1999
Delcard Associates, LLC	Delaware	06/23/2000
Design Mechanical Incorporated	Delaware	10/30/1997
Dillingham & Smith Mechanical and Sheet Metal Contractors, LLC	Tennessee	12/31/2003
Eastern Heating & Cooling, Inc.	New York	12/19/1988
Eastern Refrigeration Co., Inc.	New York	01/30/1990

Entity/Assets Acquired	Remaining Balance
ColonialWebb Contractors Company	$	23,269,129.00
ColonialWebb Contractors Company (Bonds)	$	2,700,000.00
Dillingham & Smith Mechanical and Sheet Metal Contractors, LLC	$	1,477,875.00
Acorn Industrial, Inc.	$	632,107.00
Total	$	28,079,111.00

ENTITY NAME	DOMESTIC JURISDICTION	FORMATION DATE
Accu-Temp GP, Inc. 675 Bering, Suite 400 Houston, TX 77057	Delaware	05/21/1998
Accu-Temp LP, Inc. 675 Bering, Suite 400 Houston, TX 77057	Delaware	05/20/1998
ACI Mechanical, Inc. 3116 S. Duff Avenue Ames, IA 50010	Delaware	06/26/1998
Acorn Industrial, Inc. 7311 ACC Boulevard Raleigh, NC 27617	North Carolina	01/03/1997
Air Systems Engineering, Inc. 3602 South Pine Street Tacoma, WA 98409	Washington	05/18/1973
AIRTEMP, INC. 11 Wallace Avenue South Portland, ME 04106	Delaware	10/15/1998
ARC Comfort Systems USA, Inc. 675 Bering, Suite 400 Houston, TX 77057	Delaware	03/17/1998
Atlas-Accurate Holdings, L.L.C. 675 Bering, Suite 400 Houston, TX 77057	Delaware	12/28/1998
Atlas Comfort Systems USA, Inc. 675 Bering, Suite 400 Houston, TX 77057	California	07/31/2007
Atlas Comfort Systems USA, L.L.C. 9745 Bent Oak Dr. Houston, TX 77040	Delaware	06/08/2007
Batchelor’s Mechanical Contractors, LLC 15444 Industrial Drive Loxley, AL 36551	Alabama	03/16/1981
BCM Controls Corporation 30 Commerce Way Woburn, MA 01801	Massachusetts	10/03/1984
California Comfort Systems USA, Inc. 9750 Distribution Avenue San Diego, CA 92121	California	05/18/1983
ColonialWebb Contractors Company 2820 Ackley Avenue Richmond, VA 23228	Virginia	02/18/1977
Comfort Systems USA (Arkansas), Inc. 4806 Rixey Road North Little Rock, AR 72117	Delaware	03/17/1998
Comfort Systems USA (Baltimore), LLC 675 Bering, Suite 400 Houston, TX 77057	Delaware	10/15/1998
Comfort Systems USA (Bristol), Inc. 294 Blevins Blvd. Bristol, VA 24202	Delaware	08/25/1997

Grantor Official Name, Address of Principal Place of Business and Location of Records of Collateral	State of Organization	Entity Type	Charter/ID Number	Prior Names & Trade Names
Accu-Temp GP, Inc. 675 Bering, Suite 400 Houston, TX 77057	Delaware	Corporation	2898499
Accu-Temp LP, Inc. 675 Bering, Suite 400 Houston, TX 77057	Delaware	Corporation	2898748
ACI Mechanical, Inc. 3116 S. Duff Avenue Ames, IA 50010	Delaware	Corporation	2913899
Acorn Industrial, Inc. 7311 ACC Boulevard Raleigh, NC 27617	North Carolina	Corporation	0414387
Air Systems Engineering, Inc. 3602 South Pine Street Tacoma, WA 98409	Washington	Corporation	600099211
AIRTEMP, INC. 11 Wallace Avenue South Portland, ME 04106	Delaware	Corporation	2955773
ARC Comfort Systems USA, Inc. 675 Bering, Suite 400 Houston, TX 77057	Delaware	Corporation	2872674
Atlas-Accurate Holdings, L.L.C. 675 Bering, Suite 400 Houston, TX 77057	Delaware	Limited Liability Company	2985409
Atlas Comfort Systems USA, Inc. 675 Bering, Suite 400 Houston, TX 77057	California	Corporation	C3009313
Atlas Comfort Systems USA, L.L.C. 9745 Bent Oak Dr. Houston, TX 77040	Delaware	Limited Liability Company	4357073	Atlas Air Conditioning Company, L.P.; Atlas Comfort Systems USA, L.P.; Atlas Comfort Systems USA; Atlas Comfort Systems Nevada; Comfort Systems USA Las Vegas
Batchelor’s Mechanical Contractors, LLC 15444 Industrial Drive, Loxley, AL 36551	Alabama	Limited Liability Company	D/C 081 557
BCM Controls Corporation 30 Commerce Way Woburn, MA 01801	Massachusetts	Corporation	042842193

Pledged Entity		Class of Common Stock	Stock Certificate Number(s)	Number of Shares	Pledgor(s)/Percentage of Outstanding Shares
1	Accu-Temp GP, Inc.	Common	CS1	100	100 % of shares owned by Borrower
2	Accu-Temp LP, Inc.	Common	CS1	100	100 % of shares owned by Borrower
3	ACI Mechanical, Inc.	Common	CS1	100	100 % of shares owned by Borrower
4	Acorn Industrial, Inc.	Common	CS1	100	100 % of shares owned by Comfort Systems USA (CS1), Inc.
5	Air Systems Engineering, Inc.	Common	CS1	100	100 % of shares owned by Borrower
6	AIRTEMP, INC.	Common	CS1	100	100 % of shares owned by Borrower
7	ARC Comfort Systems USA, Inc.	Common	CS1	100	100 % of shares owned by Borrower
8	Atlas-Accurate Holdings, L.L.C.	N/A	N/A	N/A	100% member interest — CS53 Acquisition Corp.
9	Atlas Comfort Systems USA, Inc.	Common	CS1	100	100 % of shares owned by Borrower
10	Atlas Comfort Systems USA, L.L.C.	N/A	N/A	N/A	100% member interest — Hess Mechanical Corporation
11	Batchelor’s Mechanical Contractors, LLC	N/A	N/A	N/A	100 % of shares owned by H & M Mechanical, Inc.
12	BCM Controls Corporation	Common	CS1	100	100 % of shares owned by Borrower
13	California Comfort Systems USA, Inc.	Common	CS1	100	100 % of shares owned by Borrower
14	ColonialWebb Contractors Company	Common	CS1	100	100% of shares owned by Borrower
15	Comfort Systems USA (Arkansas), Inc.	Common	CS1	100	100 % of shares owned by Borrower
16	Comfort Systems USA (Baltimore), LLC	N/A	N/A	N/A	100 % member interest — Hess Mechanical Corporation
17	Comfort Systems USA (Bristol), Inc.	Common	CS1	100	100 % of shares owned by Borrower
18	Comfort Systems USA (CS1), Inc.	Common	CS1	100	100 % of shares owned by Borrower
19	Comfort Systems USA Energy Services, Inc.	Common	CS1	100	100 % of shares owned by Borrower
20	Comfort Systems USA G.P., Inc.	Common	CS1	100	100 % of shares owned by Borrower
21	Comfort Systems USA (Intermountain), Inc.	Common	CS1	100	100 % of shares owned by Borrower
22	Comfort Systems USA (Kentucky), Inc.	Common	CS1	N/A	100% of shares owned by Borrower
23	Comfort Systems USA (MidAtlantic), LLC	N/A	N/A	N/A	100% member interest — Riddleberger Brothers, Inc.
24	Comfort Systems USA (Midwest), LLC	N/A	N/A	N/A	100% member interest — ACI Mechanical, Inc.
25	Comfort Systems USA National Accounts, LLC	N/A	N/A	N/A	1% member interest — Accu-Temp GP, Inc. 99% member interest — Accu-Temp LP, Inc.
26	Comfort Systems USA (Ohio), Inc.	Common	CS1	100	100 % of shares owned by Borrower
27	Comfort Systems USA Puerto Rico, Inc.	Common	CS1	100	100 % of shares owned by Borrower


Date: November 7, 2011		/s/ WILLIAM F. MURDY William F. Murdy Chairman of the Board and Chief Executive Officer


Date: November 7, 2011		/s/ WILLIAM GEORGE William George Executive Vice President and Chief Financial Officer