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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2019

OR

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

For the transition period from to

Commission file number: 1-13011

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: (713830-9600

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

FIX

New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes  No 

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

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

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

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

The number of shares outstanding of the issuer’s common stock as of October 18, 2019 was 36,675,927 (excluding treasury shares of 4,447,438).

Table of Contents

COMFORT SYSTEMS USA, INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2019

    

Page

Part I—Financial Information

1

Item 1—Financial Statements

1

Consolidated Balance Sheets

1

Consolidated Statements of Operations

2

Consolidated Statements of Stockholders’ Equity

3

Consolidated Statements of Cash Flows

5

Condensed Notes to Consolidated Financial Statements

6

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

23

Item 3—Quantitative and Qualitative Disclosures about Market Risk

33

Item 4—Controls and Procedures

34

Part II—Other Information

34

Item 1—Legal Proceedings

34

Item 1A—Risk Factors

34

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

35

Item 6—Exhibits

36

Signatures

37

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

COMFORT SYSTEMS USA, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

September 30,

December 31,

    

2019

    

2018

 

(Unaudited)

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$

40,363

$

45,620

Billed accounts receivable, less allowance for doubtful accounts of $6,526 and $5,898, respectively

 

607,061

 

481,366

Unbilled accounts receivable

 

49,926

 

37,180

Other receivables

 

25,476

 

16,361

Inventories

 

12,667

 

12,416

Prepaid expenses and other

 

8,788

 

6,544

Costs and estimated earnings in excess of billings

 

6,121

 

10,213

Total current assets

 

750,402

 

609,700

PROPERTY AND EQUIPMENT, NET

 

108,129

 

99,618

LEASE RIGHT-OF-USE ASSET

84,281

GOODWILL

 

332,200

 

235,182

IDENTIFIABLE INTANGIBLE ASSETS, NET

 

166,736

 

95,275

DEFERRED TAX ASSETS

20,254

17,634

OTHER NONCURRENT ASSETS

 

5,458

 

5,155

Total assets

$

1,467,460

$

1,062,564

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Current maturities of long-term debt

$

13,847

$

3,279

Accounts payable

 

176,624

 

176,167

Accrued compensation and benefits

 

100,390

 

87,388

Billings in excess of costs and estimated earnings

 

167,097

 

130,986

Accrued self-insurance

 

40,750

 

36,386

Other current liabilities

 

79,024

 

32,852

Total current liabilities

 

577,732

 

467,058

LONG-TERM DEBT

 

228,167

 

73,639

LEASE LIABILITIES

73,213

 

DEFERRED TAX LIABILITIES

 

1,387

 

1,387

OTHER LONG-TERM LIABILITIES

 

29,331

 

22,433

Total liabilities

 

909,830

 

564,517

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY:

Preferred stock, $.01 par, 5,000,000 shares authorized, 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, 4,447,438 and 4,229,653 shares, respectively

 

(101,243)

 

(87,747)

Additional paid-in capital

 

320,157

 

316,479

Retained earnings

 

338,305

 

268,904

Total stockholders’ equity

 

557,630

 

498,047

Total liabilities and stockholders’ equity

$

1,467,460

$

1,062,564

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

1

Table of Contents

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,

    

2019

    

2018

    

2019

    

2018

 

REVENUE

$

706,918

$

594,536

$

1,895,693

$

1,594,520

COST OF SERVICES

 

564,216

 

466,668

 

1,526,310

 

1,266,416

Gross profit

 

142,702

 

127,868

 

369,383

 

328,104

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

90,006

 

75,297

 

253,417

 

216,528

GAIN ON SALE OF ASSETS

 

(708)

 

(219)

 

(1,119)

 

(630)

Operating income

 

53,404

 

52,790

 

117,085

 

112,206

OTHER INCOME (EXPENSE):

Interest income

 

82

 

25

 

174

 

53

Interest expense

 

(2,779)

 

(1,152)

 

(6,891)

 

(2,601)

Changes in the fair value of contingent earn-out obligations

 

(2,004)

 

434

 

(3,924)

 

493

Other

 

3

 

39

 

167

 

4,062

Other income (expense)

 

(4,698)

 

(654)

 

(10,474)

 

2,007

INCOME BEFORE INCOME TAXES

 

48,706

 

52,136

 

106,611

 

114,213

PROVISION FOR INCOME TAXES

 

12,473

 

13,595

 

26,339

 

26,466

NET INCOME

$

36,233

$

38,541

$

80,272

$

87,747

INCOME PER SHARE:

Basic

$

0.98

$

1.03

$

2.18

$

2.36

Diluted

$

0.98

$

1.02

$

2.16

$

2.33

SHARES USED IN COMPUTING INCOME PER SHARE:

Basic

 

36,805

 

37,294

 

36,891

 

37,236

Diluted

 

37,051

 

37,667

 

37,170

 

37,634

DIVIDENDS PER SHARE

$

0.100

$

0.085

$

0.295

$

0.240

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

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COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In Thousands, Except Share Amounts)

Nine Months Ended

September 30, 2018

Additional

Total

 

    

Common Stock

    

Treasury Stock

    

Paid-In

Retained

    

Stockholders’

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Earnings

    

Equity

 

BALANCE AT DECEMBER 31, 2017

 

41,123,365

$

411

 

(3,936,291)

$

(63,519)

$

312,784

$

168,269

 

$

417,945

Net income (unaudited)

 

16,659

 

16,659

Issuance of Stock:

Issuance of shares for options exercised (unaudited)

 

19,124

326

(88)

 

238

Issuance of restricted stock & performance stock (unaudited)

 

52,306

892

1,331

 

2,223

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

 

(19,921)

(846)

 

(846)

Stock-based compensation (unaudited)

 

1,880

 

1,880

Dividends (unaudited)

 

(2,786)

 

(2,786)

Share repurchase (unaudited)

 

(150,481)

(6,175)

 

(6,175)

BALANCE AT MARCH 31, 2018 (unaudited)

41,123,365

411

(4,035,263)

(69,323)

315,907

182,142

429,138

Net income (unaudited)

 

32,547

 

32,547

Issuance of Stock:

Issuance of shares for options exercised (unaudited)

 

112,616

1,949

(29)

 

1,920

Issuance of restricted stock & performance stock (unaudited)

 

77,263

1,335

(1,335)

 

(0)

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

 

(17,046)

(693)

 

(693)

Stock-based compensation (unaudited)

 

1,692

 

1,692

Dividends (unaudited)

 

(2,974)

 

(2,974)

Share repurchase (unaudited)

 

(15,326)

(654)

 

(654)

BALANCE AT JUNE 30, 2018 (unaudited)

41,123,365

411

(3,877,756)

(67,386)

316,235

211,715

460,975

Net income (unaudited)

 

38,541

 

38,541

Issuance of Stock:

Issuance of shares for options exercised (unaudited)

 

60,135

1,046

(305)

 

741

Issuance of restricted stock & performance stock (unaudited)

 

 

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

 

 

Stock-based compensation (unaudited)

 

424

 

424

Dividends (unaudited)

 

(3,170)

 

(3,170)

Share repurchase (unaudited)

 

(85,222)

(4,744)

 

(4,744)

BALANCE AT SEPTEMBER 30, 2018 (unaudited)

41,123,365

$

411

(3,902,843)

$

(71,084)

$

316,354

$

247,086

$

492,767

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

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COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In Thousands, Except Share Amounts)

Nine Months Ended

September 30, 2019

Additional

Total

    

Common Stock

    

Treasury Stock

    

Paid-In

Retained

    

Stockholders’

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Earnings

    

Equity

 

BALANCE AT DECEMBER 31, 2018

 

41,123,365

$

411

 

(4,229,653)

$

(87,747)

$

316,479

$

268,904

 

$

498,047

Net income (unaudited)

 

19,866

 

19,866

Issuance of Stock:

Issuance of shares for options exercised (unaudited)

 

41,103

861

(61)

 

800

Issuance of restricted stock & performance stock (unaudited)

 

38,539

817

1,189

 

2,006

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

 

(15,013)

(781)

 

(781)

Stock-based compensation (unaudited)

 

2,084

 

2,084

Dividends (unaudited)

 

(3,506)

 

(3,506)

Share repurchase (unaudited)

 

(67,394)

(3,321)

 

(3,321)

BALANCE AT MARCH 31, 2019 (unaudited)

 

41,123,365

411

 

(4,232,418)

(90,171)

319,691

285,264

515,195

Net income (unaudited)

24,173

24,173

Issuance of Stock:

Issuance of shares for options exercised (unaudited)

1,408

31

(11)

20

Issuance of restricted stock & performance stock (unaudited)

69,067

1,486

(1,486)

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

(13,573)

(717)

(717)

Stock-based compensation (unaudited)

1,685

1,685

Dividends (unaudited)

(3,692)

(3,692)

Share repurchase (unaudited)

(93,468)

(4,576)

(4,576)

BALANCE AT JUNE 30, 2019 (unaudited)

41,123,365

411

(4,268,984)

(93,947)

319,879

305,745

532,088

Net income (unaudited)

 

36,233

 

36,233

Issuance of Stock:

Issuance of shares for options exercised (unaudited)

 

5,426

124

57

 

181

Issuance of restricted stock & performance stock (unaudited)

 

 

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

 

 

Stock-based compensation (unaudited)

 

221

 

221

Dividends (unaudited)

 

(3,673)

 

(3,673)

Share repurchase (unaudited)

 

(183,880)

(7,420)

 

(7,420)

BALANCE AT SEPTEMBER 30, 2019 (unaudited)

41,123,365

$

411

(4,447,438)

$

(101,243)

$

320,157

$

338,305

$

557,630

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

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COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

Nine Months Ended

September 30,

    

2019

    

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$

80,272

$

87,747

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

Amortization of identifiable intangible assets

 

20,221

 

14,102

Depreciation expense

 

18,222

 

16,630

Change in right-of-use assets

10,552

Bad debt expense

 

2,093

 

2,905

Deferred tax provision (benefit)

 

(2,620)

 

5,520

Amortization of debt financing costs

 

287

 

288

Gain on sale of assets

 

(1,119)

 

(630)

Changes in the fair value of contingent earn-out obligations

 

3,924

 

(493)

Stock-based compensation

 

4,861

 

6,021

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

(Increase) decrease in—

Receivables, net

 

(31,647)

 

(80,726)

Inventories

 

(248)

 

(1,917)

Prepaid expenses and other current assets

 

(4,625)

 

3,085

Costs and estimated earnings in excess of billings and unbilled accounts receivable

 

(2,081)

 

(18,328)

Other noncurrent assets

 

(544)

 

(199)

Increase (decrease) in—

Accounts payable and accrued liabilities

 

6,635

 

19,537

Billings in excess of costs and estimated earnings

 

4,555

 

17,682

Other long-term liabilities

 

(9,023)

 

(3,222)

Net cash provided by operating activities

 

99,715

 

68,002

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment

 

(22,641)

 

(22,059)

Proceeds from sales of property and equipment

 

1,447

 

1,077

Proceeds from sale of business

1,611

Cash paid for acquisitions, net of cash acquired

 

(196,470)

 

(65,287)

Net cash used in investing activities

 

(216,053)

 

(86,269)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from revolving line of credit

 

320,000

 

104,000

Payments on revolving line of credit

 

(177,000)

 

(79,000)

Payments on other debt

 

(3,254)

 

(1,094)

Debt financing costs

 

 

(844)

Payments of dividends to stockholders

 

(10,871)

 

(8,930)

Share repurchase

 

(15,317)

 

(11,573)

Shares received in lieu of tax withholding

 

(1,498)

 

(1,540)

Proceeds from exercise of options

 

1,001

 

2,899

Deferred acquisition payments

(637)

(750)

Payments for contingent consideration arrangements

 

(1,343)

 

(2,195)

Net cash provided by financing activities

 

111,081

 

973

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(5,257)

 

(17,294)

CASH AND CASH EQUIVALENTS, beginning of period

 

45,620

 

36,542

CASH AND CASH EQUIVALENTS, end of period

$

40,363

$

19,248

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

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

1. Business and Organization

Comfort Systems USA, Inc., a Delaware corporation, provides comprehensive mechanical and electrical contracting services, which principally includes heating, ventilation and air conditioning (“HVAC”), plumbing, electrical, piping and controls, as well as off-site construction, monitoring and fire protection. We install, maintain, repair and replace products and systems throughout the United States. 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.

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, 2018 (the “Form 10-K”).

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

Use of Estimates

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

Recent Accounting Pronouncements

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

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

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

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement.” This standard removes certain disclosure requirements including the valuation processes for Level 3 fair value measurements, the policy for timing of transfers between levels and the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The standard requires certain additional disclosures for public entities, including disclosure of the changes in unrealized gains and losses included in Other Comprehensive Income for Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those years. Certain amendments, including the amendment on changes in unrealized gains and losses and the range and weighted average of significant unobservable inputs, should be applied prospectively while other amendments should be applied retrospectively to all periods presented upon their effective date. We are currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements.

Revenue Recognition

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

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

For fixed price agreements, we use the percentage of completion method of accounting under which contract revenue recognizable at any time during the life of a contract is determined by multiplying expected total contract revenue by the percentage of contract costs incurred at any time to total estimated contract costs. More specifically, as part of the negotiation and bidding process to obtain installation contracts, we estimate our contract costs, which include all direct materials, labor and subcontract costs and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. These contract costs are included in our results of operations under the caption “Cost of Services.” Then, as we perform under those contracts, we measure costs incurred, compare them to total estimated costs to complete the contract and recognize a corresponding proportion of contract revenue. Labor costs are considered to be incurred as the work is performed. Subcontractor labor is recognized as the work is performed. Non-labor project costs consist of purchased equipment, prefabricated materials and other materials. Purchased equipment on our projects is substantially produced to job specifications and is a value-added element to our work. The costs are considered to be incurred when title is transferred to us, which typically is upon delivery to the work site. Prefabricated materials, such as ductwork and piping, are generally performed at our shops and recognized as contract costs when fabricated for the unique specifications of the job. Other materials costs are generally recorded when delivered to the work site. This measurement and comparison process requires updates to the estimate of total costs to complete the contract, and these updates may include subjective assessments and judgments.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Disaggregation of Revenue

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

Three Months Ended September 30,

Nine Months Ended September 30,

Revenue by Service Provided

   

2019

   

2018

   

2019

   

2018

HVAC and Plumbing

$

545,088

   

77.1

%

$

540,733

   

91.0

%

$

1,531,331

   

80.8

%

$

1,448,761

   

90.9

%

Electrical Services

116,902

16.5

%

1,611

0.3

%

218,061

11.5

%

1,611

0.1

%

Building Automation Control Systems

24,540

3.5

%

25,822

4.3

%

73,816

3.9

%

72,128

4.5

%

Other

20,388

2.9

%

26,370

4.4

%

72,485

3.8

%

72,020

4.5

%

Total

$

706,918

100.0

%

$

594,536

100.0

%

$

1,895,693

100.0

%

$

1,594,520

100.0

%

Three Months Ended September 30,

Nine Months Ended September 30,

Revenue by Type of Customer

2019

2018

 

2019

2018

 

Industrial

$

222,156

31.4

%

$

184,174

31.0

%

$

588,818

31.1

%

$

398,351

25.0

%

Education

125,836

17.8

%

115,202

19.4

%

292,799

15.4

%

312,852

19.6

%

Office Buildings

83,271

11.8

%

75,871

12.8

%

254,966

13.5

%

224,300

14.1

%

Healthcare

126,909

18.0

%

79,424

13.3

%

306,810

16.2

%