Comfort Systems USA Annual Report 2014

Plain-text annual report

Use these links to rapidly review the documentTABLE OF CONTENTS ITEM 8. Financial Statements and Supplementary DataTable of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549Form 10-KCommission file number: 1-13011Comfort Systems USA, Inc.(Exact name of registrant as specified in its charter)Delaware(State or Other Jurisdiction ofIncorporation orOrganization) 76-0526487(I.R.S. EmployerIdentification No.)675 Bering DriveSuite 400Houston, Texas 77057(713) 830-9600(Address and telephone number of Principal Executive Offices) Securities registered pursuant to Section 12(b) of the Act:Title of Each Class Name of Each Exchange on whichRegisteredCommon Stock, $.01 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No ý 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 1934during 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 filingrequirements for the past 90 days. Yes ý No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). Yes ý No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation SK is not contained herein, and will not be contained, to thebest of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. 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. Seedefinitions of "large accelerated filer," "accelerated filer" and "smaller reporting company," in Rule 12b-2 of the Exchange Act. (Check one): Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No ýANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended December 31, 2014Large accelerated filer o Accelerated filer ý Non-accelerated filer o(Do not check if asmaller reporting company) Smaller reporting company o The aggregate market value of the voting stock held by non-affiliates of the registrant at June 30, 2014 was approximately $596.4 million, based on the$15.80 last sale price of the registrant's common stock on the New York Stock Exchange on June 30, 2014. As of February 20, 2015, 37,269,779 shares of the registrant's common stock were outstanding (excluding treasury shares of 3,853,586).DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III (other than the required information regarding executive officers) is incorporated by reference from the registrant'sdefinitive proxy statement, which will be filed with the Commission not later than 120 days following December 31, 2014. Table of Contents TABLE OF CONTENTS 1Part I Item 1. Business 2 Item 1A. Risk Factors 11 Item 1B. Unresolved Staff Comments 21 Item 2. Properties 21 Item 3. Legal Proceedings 21 Item 4. Mine Safety Disclosures 21 Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities 22 Item 6. Selected Financial Data 25 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 26 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 45 Item 8. Financial Statements and Supplementary Data 46 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 86 Item 9A. Controls and Procedures 86 Item 9B. Other Information 86 Part III Item 10. Directors, Executive Officers and Corporate Governance 86 Item 11. Executive Compensation 87 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 87 Item 13. Certain Relationships and Related Transactions, and Director Independence 87 Item 14. Principal Accounting Fees and Services 87 Part IV Item 15. Exhibits and Financial Statement Schedules 87 Table of Contents FORWARD-LOOKING STATEMENTS Certain statements and information in this Annual Report on Form 10-K may constitute forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. The words "believe," "expect," "anticipate," "plan," "intend," "foresee," "should," "would," "could," or other similarexpressions are intended to identify forward-looking statements, which are generally not historic in nature. These forward-looking statements are based onthe current expectations and beliefs of Comfort Systems USA, Inc. and its subsidiaries (collectively, the "Company") concerning future developments andtheir effect on the Company. While the Company's management believes that these forward-looking statements are reasonable as and when made, there canbe no assurance that future developments affecting the Company will be those that it anticipates. All comments concerning the Company's expectations forfuture revenue and operating results are based on the Company's forecasts for its existing operations and do not include the potential impact of any futureacquisitions. The Company's forward-looking statements involve significant risks and uncertainties (some of which are beyond the Company's control) andassumptions that could cause actual future results to differ materially from the Company's historical experience and its present expectations or projections.Known material factors that could cause the Company's actual results to differ from those in the forward-looking statements are those described in Part I,"Item 1A. Risk Factors."Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. The Company undertakes noobligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events,or otherwise. PART I The terms "Comfort Systems," "we," "us," or "the Company" refer to Comfort Systems USA, Inc. or Comfort Systems USA, Inc. and its consolidatedsubsidiaries, as appropriate in the context. ITEM 1. Business Comfort Systems USA, Inc., a Delaware corporation, was established in 1997. We provide comprehensive heating, ventilation and air conditioning("HVAC") installation, maintenance, repair and replacement services within the mechanical services industry. We have 37 operating units in 83 cities and 92locations throughout the United States. We operate primarily in the commercial, industrial and institutional HVAC markets and perform most of our services in industrial, healthcare, education,office, technology, retail and government facilities. In addition to standard HVAC services, we provide specialized applications such as building automationcontrol systems, fire protection, process cooling, electronic monitoring and process piping. Certain locations also perform related activities such as electricalservice and plumbing. Approximately 99% of our consolidated 2014 revenue was derived from commercial, industrial and institutional customers and largemulti-family residential projects. Approximately 44% of our revenue was attributable to installation services in newly constructed facilities and 56% wasattributable to maintenance, repair and replacement services. Our consolidated 2014 revenue was derived from the2Table of Contentsfollowing service activities, all of which are in the mechanical services industry, the single industry segment we serve: Our Internet address is http://www.comfortsystemsusa.com. We make available free of charge on or through our website our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of theExchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Ourwebsite also includes our code of ethics, titled "Corporate Compliance Policy: Standards and Procedures Regarding Business Practices," together with othergovernance materials including our corporate governance standards and our Board committee charters. Printed versions of our code of ethics and ourcorporate governance standards may be obtained upon written request to our Corporate Compliance Officer at our headquarters address.Industry Overview We believe that the commercial, industrial, and institutional HVAC industry has historically generated annual revenue in excess of $40 billion. HVACsystems are necessary to virtually all commercial, industrial and institutional buildings as well as homes. Because most buildings are sealed, HVAC systemsprovide the primary method of circulating fresh air in such buildings. In many instances, replacing an aging system with a modern, energy-efficient HVACsystem significantly reduces a building's operating costs and improves air quality and HVAC system effectiveness. Older commercial, industrial andinstitutional facilities often have poor air quality as well as inadequate air conditioning, and older HVAC systems result in significantly higher energy coststhan do modern systems. These factors cause many facility owners to consider replacing older systems before the end of their functioning lives. Many factors positively affect HVAC industry growth, particularly (i) population growth, which has increased the need for commercial, industrial andinstitutional space, (ii) an aging installed base of buildings and HVAC environmental and energy efficiency equipment, (iii) increasing sophistication,complexity and efficiency of HVAC systems, (iv) growing emphasis on environmental and energy efficiency, and (v) reduction or elimination of therefrigerants commonly used in older HVAC systems. We believe these factors should increase demand for the reconfiguration or replacement of existingHVAC systems and may also mitigate, to some extent, the effect on the HVAC industry of the cyclicality inherent in the traditional construction industry. The HVAC industry can be broadly divided into two functions:•installation in newly constructed facilities, which provided approximately 44% of our revenue in 2014, and •maintenance, repair and replacement in existing facilities, which provided the remaining 56% of our 2014 revenue. Installation Services—Installation services consist of "design and build" and "plan and spec" projects. In "design and build" projects, the commercialHVAC company is responsible for designing, engineering and installing a cost-effective, energy-efficient system customized to the specific needs of3Service Activity Percentage ofRevenue HVAC 74%Plumbing 16%Building Automation Control Systems 6%Other 4%Total 100%Table of Contentsthe building owner. Costs and other project terms are normally negotiated between the building owner or its representative and the HVAC company.Companies that specialize in "design and build" projects generally have specially trained HVAC engineers, CAD/CAM design systems and in-house sheetmetal and prefabrication capabilities. These companies use a consultative approach with customers and tend to develop long-term relationships withbuilding owners and developers, general contractors, architects, consulting engineers and property managers. "Plan and spec" installation refers to projects inwhich a third-party architect or consulting engineer designs the HVAC systems and the installation project is "put out for bid." We believe that "plan andspec" projects usually take longer to complete than "design and build" projects because the system design and installation process generally are notintegrated, thus resulting in more frequent adjustments to the technical specifications of the project and corresponding changes in work requirements andschedules. Furthermore, in "plan and spec" projects, the HVAC company is not responsible for project design and other parties must also approve anychanges, thereby increasing overall project time and cost. Maintenance, Repair and Replacement Services—These services include maintaining, repairing, replacing, reconfiguring and monitoring previouslyinstalled HVAC systems and building automation controls. The growth and aging of the installed base of HVAC systems and the demand for more efficientand sophisticated systems and building automation controls have fueled growth in this service line. The increasing complexity of these HVAC systems isleading many commercial, industrial and institutional building owners and property managers to increase attention to maintenance and to outsourcemaintenance and repair, often through service agreements with HVAC service providers. State-of-the-art control and monitoring systems feature electronicsensors and microprocessors. These systems require specialized training to install, maintain and repair, and the typical building engineer employed directlyby a building owner or manager has not received this training. Increasingly, HVAC systems in commercial, industrial and institutional buildings are beingremotely monitored through computer-based communications systems to improve energy efficiency and expedite problem diagnosis and correction, therebyallowing us to provide maintenance and repair services at a lower cost.Strategy We focus on strengthening operating competencies and on increasing profit margins. The key objectives of our strategy are to generate growth in ourconstruction and service operations, improve productivity through innovation and to acquire complementing businesses. In order to accomplish ourobjectives we are currently focused on the following elements: Achieve Excellence in Core Competencies—We have identified six core competencies that we believe are critical to attracting and retaining customers,increasing operating income and cash flow and creating additional employment opportunities. The six core competencies are: (i) customer cultivation andrapport, (ii) design and build expertise, (iii) estimating, (iv) job and cost tracking, (v) safety, and (vi) service capability. Achieve Operating Efficiencies—We think we can achieve operating efficiencies and cost savings through purchasing economies, adopting "bestpractices" operating programs, and focusing on job management to deliver services in a cost-effective and efficient manner. We have placed great emphasison improving the "job loop" at our locations—qualifying, estimating, pricing and executing projects effectively and efficiently, then promptly assessingproject experience for applicability to current and future projects. We also use our combined purchasing to gain volume discounts on products and servicessuch as HVAC components, raw materials, services, vehicles, bonding, insurance and employee benefits. Attract, Retain and Invest in our Employees—We seek to attract and retain quality employees by providing them an enhanced career path from workingfor a larger company, the opportunity to realize a more stable income and attractive benefits packages. Over the past few years we have increased our4Table of Contentsalready substantial investments in training, including programs for project managers, field superintendents, service managers, sales managers, estimators, andmore recently, leadership and development of key managers and leaders. We believe these programs can lead to significantly increased efficiency andgrowth. Focus on Commercial, Industrial and Institutional Markets—We primarily focus on the commercial, industrial and institutional markets, with particularemphasis on "design and build" installation services, and on maintenance, repair and replacement services. We believe that the commercial, industrial andinstitutional HVAC markets are attractive because of their growth opportunities, large and diverse customer base, attractive margins and potential for long-term relationships with building owners, property managers, general contractors and architects. Approximately 99% of our consolidated 2014 revenue wasderived from commercial, industrial and institutional customers and large multi-family residential projects. Leveraging Resources and Capabilities—We believe significant operating efficiencies can be achieved by leveraging resources among our operatinglocations. For example, we have shifted certain fabrication activities into centralized locations in order to increase asset utilization. We opportunisticallyallocate our engineering, field and supervisory labor from one operation to another to more fully use our employee base, meet our customers' needs and shareexpertise. We believe we have realized scale benefits from combining purchasing, insurance, benefits, bonding and financing activities across our operations.We also believe larger regional and national commercial, industrial and institutional entities can benefit from consolidating their HVAC needs through ournational service business and we operate a national call center to dispatch technicians to regional and national sites requiring service and small projects. Maintain a Diverse Customer, Geographic and Project Base—We have a well-diversified distribution of revenue across end-use sectors that we believereduces our exposure to negative developments in any given sector. We also have significant geographical diversification across all regions of the UnitedStates, again reducing our exposure to negative developments in any given region. Our distribution of revenue in 2014 by end-use sector was as follows: Approximately 82% of our revenue is earned on a project basis for installation of HVAC systems in newly constructed facilities or for replacement ofHVAC systems in existing facilities. As of December 31, 2014, we had 4,074 projects in process with an aggregate contract value of approximately$1,988.3 million. Our average project takes six to nine months to complete, with an average contract price of approximately $488,000. This average projectsize, when taken together with the approximately 18% of our revenue derived from maintenance and service, provides us with a broad base of work in5Manufacturing 24%Education 17%Healthcare 12%Office Buildings 12%Government 11%Retail/Restaurants 7%Multi-Family 7%Lodging and Entertainment 5%Distribution 1%Religious/Not for profit 1%Residential 1%Other 2%Total 100%Table of Contentsthe construction services sector. A stratification of projects in progress as of December 31, 2014, by contract price, is as follows: Strategic Service Initiative. Over the last two years we have made substantial incremental investments to expand our service revenue. We are activelyconcentrating existing and new managerial and sales resources on training and hiring experienced employees to sell and profitably perform service work. Inmany locations we have added or upgraded our service capability, and we believe our investments and efforts are providing a compelling customer valueoffering that will ultimately stimulate growth in all aspects of our construction, service and repair businesses. Seek Growth through Expansion and Acquisitions—We believe that we can increase our cash flow and operating income by opportunistically enteringnew markets or service lines through expansion and acquisition. We continually seek opportunities to acquire businesses that have attractive valuations andmeet other criteria involving financial, operational, management and geographic considerations.Operations and Services Provided We provide a wide range of installation, maintenance, repair and replacement services for HVAC and related systems in commercial, industrial andinstitutional properties. We manage our locations on a decentralized basis, with local management maintaining responsibility for day-to-day operatingdecisions. Our local management is augmented by regional leadership that focuses on core business competencies, regional financial performance,cooperation and coordination between locations, implementing best practices and corporate initiatives. In addition to senior management, local personnelgenerally include design engineers, sales personnel, customer service personnel, installation and service technicians, sheet metal and prefabricationtechnicians, estimators and administrative personnel. We have centralized certain administrative functions such as insurance, employee benefits, training,safety programs, marketing and cash management to enable our local operating management to focus on pursuing new business opportunities and improvingoperating efficiencies. We also combine certain back office and administrative functions at various locations. Installation Services—Our installation business related to newly constructed facilities, which comprised approximately 44% of our consolidated 2014revenue, involves the design, engineering, integration, installation and start-up of HVAC, building automation controls and related systems. We provide"design and build" and "plan and spec" installation services for office buildings, retail centers, apartment complexes, manufacturing plants, healthcare,education and government facilities and other commercial, industrial and institutional facilities. In a "design and build" installation, working with thecustomer, we determine the needed capacity and energy efficiency of the HVAC system that best suits the proposed facility. We then estimate the amount oftime, labor, materials and equipment needed to build the specified system. The final design, terms, price and timing of the project are then negotiated with thecustomer or its representatives, after which any necessary modifications are made to the system plan. In "plan and spec" installation, we participate in a bidprocess to provide labor,6Contract Price of Project No. ofProjects AggregateContractPrice Value(millions) Under $1 million 3,683 $380.8 $1 million - $5 million 297 683.4 $5 million - $10 million 64 442.5 $10 million - $15 million 14 172.3 Greater than $15 million 16 309.3 Total 4,074 $1,988.3 Table of Contentsequipment, materials and installation based on plans and engineering specifications provided by a customer, general contractor or consulting engineer. Once an agreement has been reached, we order the necessary materials and equipment for delivery to meet the project schedule. In many instances, wefabricate the ductwork and piping and assemble certain components for the system based on the mechanical drawing specifications, eliminating the need tosubcontract ductwork or piping fabrication. Then we install the system at the project site, working closely with the general contractor. Our average projecttakes six to nine months to complete, with an average contract price of approximately $488,000. We also perform larger project work, with 391 contracts inprogress at December 31, 2014 with contract prices in excess of $1 million. Our largest project currently in progress has a contract price of $30.9 million.Project contracts typically provide for periodic billings to the customer as we meet progress milestones or incur cost on the project. Project contracts in ourindustry 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. We also install process cooling systems and building automation controls and monitoring systems. Process cooling systems are used primarily inindustrial facilities to provide heating and/or cooling to precise temperature and climate standards for products being manufactured and for themanufacturing equipment. Building automation control systems are used in HVAC and process cooling systems to maintain pre-established temperature orclimate standards for commercial or industrial facilities. Building automation control systems are capable not only of controlling a facility's entire HVACsystem, often on a room-by-room basis, but can also be programmed to integrate energy management, and monitoring for purposes of security, fire, card keyaccess, lighting and other building systems. This monitoring can be performed on-site or remotely through a computer-based communications system. Themonitoring system communicates an exception when a system is operating outside pre-established parameters. Diagnosis of potential problems and remedialadjustments can often be performed remotely from system monitoring terminals. Maintenance, Repair and Replacement Services—Our maintenance, repair and replacement services comprised approximately 56% of our consolidated2014 revenue and include the maintenance, repair, replacement, reconfiguration and monitoring of HVAC systems and industrial process piping.Approximately 68% of our maintenance, repair and replacement revenue were derived from replacing and reconfiguring existing HVAC systems forcommercial, industrial and institutional customers. Replacement and reconfiguration are usually performed on a project basis and often use consultativeexpertise similar to that provided in the "design and build" installation market. Maintenance and repair services are provided either in response to service calls or under a service agreement. Service calls are coordinated by customerservice representatives or dispatchers that use computer and communication technology to process orders, arrange service calls, communicate with customers,dispatch technicians and invoice customers. Service technicians work from service vehicles equipped with commonly used parts, supplies and tools tocomplete a variety of jobs. Commercial, industrial and institutional service agreements usually have terms of one to three years, with automatic annualrenewals, and typically with thirty- to sixty-day cancellation notice periods. We also provide remote monitoring of temperature, pressure, humidity and airflow for HVAC systems. If the system is not operating within the specifications set forth by the customer and cannot be remotely adjusted, a service crew isdispatched to analyze and repair the system.Sources of Supply The raw materials and components we use include HVAC system components, ductwork, steel, sheet metal and copper tubing and piping. These rawmaterials and components are generally available from a variety of domestic or foreign suppliers at competitive prices. Delivery times are typically short7Table of Contentsfor most raw materials and standard components, but during periods of peak demand, may extend to one month or more. We estimate that direct purchase ofcommodities and finished products comprises between 10% and 15% of our average project cost. We have procedures to reduce commodity cost exposure;early buying of commodities for particular projects, or for general inventory, as well as including escalation and escape provisions in project bids andcontracts wherever possible. The negative effects of unrecovered commodity cost inflation in our project results have been modest, and are reviewed furtherin Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" later in this report. Chillers for large units typically have the longest delivery time and generally have lead times of up to six months. The major components of commercialHVAC systems are compressors and chillers that are manufactured primarily by Carrier, Lennox, McQuay, Trane and York. The major suppliers of buildingautomation control systems are Honeywell, Johnson Controls, Siemens, York, Automated Logic, Novar and Andover Control Corporation. We do not haveany significant contracts guaranteeing us a supply of raw materials or components.Cyclicality and Seasonality Historically, the construction industry has been highly cyclical. As a result, our volume of business may generally be adversely affected by declines innew 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 wintermonths (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 airconditioning during the warmer months. Accordingly, we expect our revenue and operating results generally will be lower in the first and fourth calendarquarters.Sales and Marketing We have a diverse customer base, with no single customer accounting for more than 3% of consolidated 2014 revenue. Management and a dedicatedsales force are responsible for developing and maintaining successful long-term relationships with key customers. Customers generally include buildingowners and developers and property managers, as well as general contractors, architects and consulting engineers. We intend to continue our emphasis ondeveloping and maintaining long-term relationships with our customers by providing superior, high-quality service in a professional manner. We believe wecan continue to leverage the diverse technical and marketing strengths at individual locations to expand the services offered in other local markets. Withrespect to multi-location service opportunities, we maintain a national sales force in our national accounts group.Employees As of December 31, 2014, we had 7,077 employees. We have collective bargaining agreements covering six employees. We have not experienced and donot expect any significant strikes or work stoppages and believe our relations with employees covered by collective bargaining agreements are good.Recruiting, Training and Safety Our continued success depends, in part, on our ability to continue to attract, retain and motivate qualified engineers, service technicians, fieldsupervisors and project managers. We believe our success in retaining qualified employees will be based on the quality of our recruiting, training,compensation, employee benefits programs and opportunities for advancement. We provide numerous training programs for management, sales andleadership, as well as on-the-job training, technical training, apprenticeship programs, attractive benefit packages and career advancement opportunitieswithin our company.8Table of Contents We have established comprehensive safety programs throughout our operations to ensure that all technicians comply with safety standards we haveestablished and that are established under federal, state and local laws and regulations. Additionally, we have implemented a "best practices" safety programthroughout our operations, which provides employees with incentives to improve safety performance and decrease workplace accidents. Safety leadershipestablishes safety programs and benchmarking to improve safety across the company. Finally, our employment screening process seeks to determine thatprospective employees have requisite skills, sufficient background references and acceptable driving records, if applicable. Our rate of incidents recordableunder the standards of the Occupational Safety and Health Administration ("OSHA") per one hundred employees per year, also known as the OSHArecordable rate, was 2.05 during 2014. This level was 29% better than the most recently published OSHA rate for our industry.Insurance and Litigation The primary insured risks in our operations are bodily injury, property damage and workers' compensation injuries. We retain the risk for workers'compensation, employer's liability, auto liability, general liability and employee group health claims resulting from uninsured deductibles per incident oroccurrence. Because we have very large deductibles, the vast majority of our claims are paid by us, so as a practical matter we self-insure the great majority ofthese risks. Losses up to such per-incident deductible amounts are estimated and accrued based upon known facts, historical trends and industry averagesusing the assistance of an actuary to project the extent of these obligations. We are subject to certain claims and lawsuits arising in the normal course of business. We maintain various insurance coverages to minimize financialrisk associated with these claims. We have estimated and provided accruals for probable losses and related legal fees associated with certain litigation in ourconsolidated financial statements. While we cannot predict the outcome of these proceedings, in our opinion and based on reports of counsel, any liabilityarising from these matters individually and in the aggregate will not have a material effect on our operating results, cash flows or financial condition, aftergiving effect to provisions already recorded. We typically warrant labor for the first year after installation on new HVAC systems and pass through to the customer manufacturers' warranties onequipment. We generally warrant labor for thirty days after servicing existing HVAC systems. We do not expect warranty claims to have a material adverseeffect on our financial position or results of operations.Competition The HVAC industry is highly competitive and consists of thousands of local and regional companies. We believe that purchasing decisions in thecommercial, industrial and institutional markets are based on (i) competitive price, (ii) long-term customer relationships, (iii) quality, timeliness andreliability of services provided, (iv) an organization's perceived stability based on years in business, financial strength and access to bonding, (v) range ofservices provided, and (vi) scale of operation. To improve our competitive position we focus on both the consultative "design and build" installation marketand the maintenance, repair and replacement market to promote first the development and then the strengthening of long-term customer relationships. Inaddition, we believe our ability to provide multi-location coverage, access to project financing and specialized technical skills for facilities owners gives us astrategic advantage over smaller competitors who may be unable to provide these services to customers at a competitive price. We believe that we are larger than most of our competitors, which are generally small, owner-operated companies that typically operate in a limitedgeographic area. However, there are divisions of larger contracting companies, utilities and HVAC equipment manufacturers that provide HVAC services insome of the same service lines and geographic areas we serve. Some of these competitors and9Table of Contentspotential competitors have greater financial resources than we do to finance development opportunities and support their operations. We believe our smallercompetitors generally compete with us based on price and their long-term relationships with local customers. Our larger competitors compete with us onthose factors but may also provide attractive financing and comprehensive service and product packages.Vehicles We operate a fleet of various owned or leased service trucks, vans and support vehicles. We believe these vehicles generally are well maintained andsufficient for our current operations.Governmental Regulation and Environmental Matters Our operations are subject to various federal, state and local laws and regulations, including: (i) licensing requirements applicable to engineering,construction and service technicians, (ii) building and HVAC codes and zoning ordinances, (iii) regulations relating to consumer protection, including thosegoverning residential service agreements, and (iv) regulations relating to worker safety and protection of the environment. We believe we have all requiredlicenses to conduct our operations and are in substantial compliance with applicable regulatory requirements. If we fail to comply with applicable regulationswe could be subject to substantial fines or revocation of our operating licenses. Many state and local regulations governing the HVAC services trades require individuals to hold permits and licenses. In some cases, a required permitor license held by a single individual may be sufficient to authorize specified activities for all of our service technicians who work in the state or county thatissued the permit or license. We seek to ensure that, where possible, we have two employees who hold any such permits or licenses that may be material to ouroperations in a particular geographic region. Our operations are subject to the federal Clean Air Act, as amended, which governs air emissions and imposes specific requirements on the use andhandling of chlorofluorocarbons, or CFCs, and certain other refrigerants. Clean Air Act regulations require the certification of service technicians involved inthe service or repair of equipment containing these refrigerants and also regulate the containment and recycling of these refrigerants. These requirements haveincreased our training expenses and expenditures for containment and recycling equipment. The Clean Air Act is intended ultimately to eliminate the use ofCFCs in the United States and to require alternative refrigerants to be used in replacement HVAC systems. We do not believe these regulations involvingCFCs will materially affect our business on the whole because, although they require us to incur modest ongoing training costs, our competitors also incursuch costs, and the regulations may encourage our customers to update their HVAC systems.Executive Officers We have five executive officers. Brian Lane, age 57, has served as our Chief Executive Officer and President since December 2011 and as a director since 2010. Mr. Lane served as ourPresident and Chief Operating Officer from March 2010 until December 2011. Mr. Lane joined the Company in October 2003 and served as Vice Presidentand then Senior Vice President for Region One of the Company until he was named Executive Vice President and Chief Operating Officer in January 2009.Prior to joining the Company, Mr. Lane spent fifteen years at Halliburton, a global provider of products and services to energy, industrial, and governmentcustomers, including employment by Brown and Root, an engineering and construction company. During his tenure, he held various positions in businessdevelopment, strategy, and project activities, including the position of Regional Director of Europe and Africa. Additionally,10Table of Contentshe held the position of Vice President at Kvaerner, an international engineering and construction company. William George, age 50, has served as our Executive Vice President and Chief Financial Officer since May 2005, was our Senior Vice President, GeneralCounsel and Secretary from May 1998 to May 2005, and was our Vice President, General Counsel and Secretary from March 1997 to April 1998. FromOctober 1995 to February 1997, Mr. George was Vice President and General Counsel of American Medical Response, Inc., a publicly-traded healthcaretransportation company. From September 1992 to September 1995, Mr. George practiced corporate and antitrust law at Ropes & Gray, a Boston,Massachusetts law firm. Julie S. Shaeff, age 49, has served as our Senior Vice President and Chief Accounting Officer since May 2005, was our Vice President and CorporateController from March 2002 to May 2005, and was our Assistant Corporate Controller from September 1999 to February 2002. From 1996 to August 1999,Ms. Shaeff was Financial Accounting Manager—Corporate Controllers Group for Browning-Ferris Industries, Inc., a publicly-traded waste services company.From 1987 to 1995, she held various positions with Arthur Andersen LLP. Ms. Shaeff is a Certified Public Accountant. Trent T. McKenna, age 42, has served as our Senior Vice President, General Counsel and Secretary since August 2013, was our Vice President, GeneralCounsel and Secretary from May 2005 to August 2013, and was our Associate General Counsel from August 2004 to May 2005. From February 1999 toAugust 2004, Mr. McKenna was a practicing attorney in the area of complex commercial litigation in the Houston, Texas office of Akin Gump StraussHauer & Feld LLP, an international law firm. James Mylett, age 51, has served as our Senior Vice President of Service since October 2013. Prior to joining the Company, Mr. Mylett spent fourteenyears at Johnson Controls, which manufactures, installs, and services automatic temperature regulation systems for buildings. During his time at JohnsonControls, Mr. Mylett held various positions, including that of Vice President and General Manager—North America Service Operations from August 2011 toOctober 2013. From October 2010 to August 2011, he served as Vice President and General Manager—West Region, and from December 2005 to September2010, he served as Vice President of Service and Solutions—South Region. Previously, Mr. Mylett worked for Carrier Corporation, where he established anddeveloped the company's national accounts service business. ITEM 1A. Risk Factors Our business is subject to a variety of risks. You should carefully consider the risks described below, together with all the information included inthis report. Our business, financial condition and results of operations could be adversely affected by the occurrence of any of these events, which couldcause actual results to differ materially from expected and historical results, and the trading price of our common stock could decline.Many of the markets we do work in are currently experiencing or have recently experienced an economic downturn that may materially and adverselyaffect our business because our business is dependent on levels of construction activity. The demand for our services is dependent upon the existence of construction projects and service requirements within the markets in which we operate.Any period of economic recession affecting a market or industry in which we transact business is likely to adversely impact our business. Many of theprojects we work on have long lifecycles from conception to completion, and the bulk of our performance generally occurs late in a construction project'slifecycle. We experience the results of economic trends well after an economic cycle begins, and therefore will continue to experience the results of aneconomic recession well after conditions in the general economy have improved. Further, some of the local or regional markets we do work in have yet toenter a period of sustained recovery.11Table of Contents We cannot predict the severity or lasting effects of the recent recession, particularly in some local or regional markets that have not yet entered a periodof sustained recovery. We believe that the current uncertainty about economic conditions caused by the recent recession means that many of our customersare likely to continue to postpone spending while credit markets remain disinclined to fund commercial and industrial developments. The industries andmarkets we operate in have always been and will continue to be vulnerable to these general macroeconomic downturns because they are cyclical in nature.The recent recession caused a drop off in the demand for projects within our markets and industries in some regions and continues to cause a similar drop offin other regions. The drop off in demand has led to and will likely continue to lead to greater price competition as well as decreased revenue and profit. Thelasting effects of the recent recession have increased economic instability with our vendors, subcontractors, developers, and general contractors, which hascaused us greater liability exposure and has resulted in us not being paid on some projects, as well as decreasing our revenue and profit. Further, to the extentmore of our vendors, subcontractors, developers, or general contractors seek bankruptcy protection, the bankruptcy will likely force us to incur additionalcosts in attorneys' fees, as well as other professional consultants, and will result in decreased revenue and profit. The percentage of our profits and revenue attributable to projects performed directly or indirectly for federal, state, and local government entitiesincreased during and as a result of the economic downturn, in part because the private-sector decreased its investment in construction and building projects,but has decreased during 2014. A continuing reduction in federal, state, or local government spending in our industries and markets could result in decreasedrevenue and profit.Because we bear the risk of cost overruns in most of our contracts, we may experience reduced profits or, in some cases, losses under these contracts if costsincrease above our estimates. Our contract prices are established largely upon estimates and assumptions of our projected costs, including assumptions about: future economicconditions; prices, including commodities prices; availability of labor, including the costs of providing labor, equipment, and materials; and other factorsoutside our control. If our estimates or assumptions prove to be inaccurate, if circumstances change in a way that renders our assumptions and estimatesinaccurate or we fail to successfully execute the work, cost overruns may occur and we could experience reduced profits or a loss for affected projects. Forinstance, unanticipated technical problems may arise, we could have difficulty obtaining permits or approvals, local laws, labor costs or labor conditionscould change, bad weather could delay construction, raw materials prices could increase, our suppliers' or subcontractors' may fail to perform as expected orsite conditions may be different than we expected. We are also exposed to increases in energy prices, particularly as they relate to gasoline prices.Additionally, in certain circumstances, we guarantee project completion or the achievement of certain acceptance and performance testing levels by ascheduled date. Failure to meet schedule or performance requirements typically results in additional costs to us, and in some cases we may also createliability for consequential and liquidated damages. Performance problems for existing and future projects could cause our actual results of operations to differmaterially from those we anticipate and could damage our reputation within our industry and our customer base.Our backlog is subject to unexpected adjustments and cancellations, which means that amounts included in our backlog may not result in actual revenueor translate into profits. The revenue projected from our backlog may not be realized, or, if realized, may not result in profits. Projects may remain in our backlog for an extendedperiod of time, or project cancellations or scope adjustments may occur with respect to contracts reflected in our backlog.12Table of ContentsIntense competition in our industry could reduce our market share and our profit. The markets we serve are highly competitive. Our industry is characterized by many small companies whose activities are geographically concentrated.We compete on the basis of our technical expertise and experience, financial and operational resources, nationwide presence, industry reputation anddependability. While we believe our customers consider a number of these factors in awarding available contracts, a large portion of our work is awardedthrough a bid process. Consequently, price is often the principal factor in determining which contractor is selected, especially on smaller, less complexprojects. Smaller competitors are sometimes able to win bids for these projects based on price alone due to their lower cost and financial return requirements.We expect competition to intensify in our industry, presenting us with significant challenges in our ability to maintain strong growth rates and acceptableprofit margins. We also expect increased competition from in-house service providers, because some of our customers have employees who perform servicework similar to the services we provide. Vertical consolidation is also expected to intensify competition in our industry. If we are unable to meet thesecompetitive challenges, we will lose market share to our competitors and experience an overall reduction in our profits. In addition, our profitability wouldbe impaired if we have to reduce our prices to remain competitive.Our recent and future acquisitions may not be successful. We expect to continue pursuing selective acquisitions of businesses. We cannot assure that we will be able to locate acquisitions or that we will be ableto consummate transactions on terms and conditions acceptable to us, or that acquired businesses will be profitable. Acquisitions may expose us to additionalbusiness risks different than those we have traditionally experienced. We also may encounter difficulties integrating acquired businesses and successfullymanaging the growth we expect to experience from these acquisitions. We may choose to finance future acquisitions with debt, equity, cash or a combination of the three. We can give no assurances that any futureacquisitions will not dilute earnings or disrupt the payment of a stockholder dividend. To the extent we succeed in making acquisitions, a number of riskswill result, including:•the assumption of material liabilities (including for environmental-related costs); •failure of due diligence to uncover situations that could result in legal exposure or to quantify the true liability exposure from known risks; •the diversion of management's attention from the management of daily operations to the integration of operations; •difficulties in the assimilation and retention of employees, in the assimilation of different cultures and practices, in the assimilation of broadand geographically dispersed personnel and operations, and the retention of employees generally; •the risk of additional financial and accounting challenges and complexities in areas such as tax planning, treasury management, financialreporting and internal controls; and •we may not be able to realize the cost savings or other financial benefits we anticipated prior to the acquisition. The failure to successfully integrate acquisitions could have an adverse effect on our business, financial condition and results of operations.13Table of ContentsInformation technology system failures, network disruptions or cyber security breaches could adversely affect our business. We use sophisticated information technology systems, networks, and infrastructure in conducting some of our day-to-day operations and providingservices to certain customers. Information technology system failures, including suppliers' or vendors' system failures, could disrupt our operations bycausing transaction errors, processing inefficiencies, the loss of customers, other business disruptions or the loss of employee personal information. Inaddition, these systems, networks, and infrastructure may be vulnerable to deliberate cyber-attacks that interfere with their functionality or the confidentialityof our information or our customers' data. These events could impact our customers, employees and reputation and lead to financial losses from remediationactions, loss of business or potential liability or an increase in expense, all of which may have a material adverse effect on our business.Third parties contribute significantly to our completion of many projects. We hire third-party subcontractors to perform work and depend on third-party suppliers to provide equipment and materials necessary to complete ourprojects. If we are unable to retain qualified subcontractors or suppliers, or if our subcontractors or suppliers do not perform as anticipated for any reason, ourexecution and profitability could be harmed.Goodwill impairment charges negatively impacted our earnings in 2011 and in previous years. Earnings for future periods may be impacted by additionalcharges for goodwill and intangible assets. We carry a significant amount of goodwill and identifiable intangible assets on our consolidated balance sheets. Goodwill is the excess of purchase priceover the fair value of the net assets of acquired businesses. We assess goodwill for impairment each year, and more frequently if circumstances suggest animpairment may have occurred. The recent recession, along with other factors, caused the fair value of some of our assets to be lower than their carrying value,resulting in an impairment to goodwill. We may determine at a future date that an additional significant impairment has occurred in the value of ourunamortized intangible assets or fixed assets, which could require us to write off an additional portion of our assets and could adversely affect our financialcondition or our reported results of operations.Actual and potential claims, lawsuits and proceedings could ultimately reduce our profitability and liquidity and weaken our financial condition. We are likely to continue to be named as a defendant in legal proceedings claiming damages from us in connection with the operation of our business.These actions and proceedings may involve claims for, among other things, compensation for alleged personal injury, workers' compensation, employmentdiscrimination, breach of contract or property damage. In addition, we may be subject to class action lawsuits involving allegations of violations of the FairLabor Standards Act and state wage and hour laws. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of anysuch actions or proceedings. We also are, and are likely to continue to be, from time to time a plaintiff in legal proceedings against customers, in which weseek to recover payment of contractual amounts we are owed as well as claims for increased costs we incur. When appropriate, we establish provisions againstpossible exposures, and we adjust these provisions from time to time according to ongoing exposure. If our assumptions and estimates related to theseexposures prove to be inadequate or inaccurate, we could experience a reduction in our profitability and liquidity and a weakening of our financialcondition. In addition, claims, lawsuits and proceedings may harm our reputation or divert management resources away from operating our business.14Table of ContentsA significant portion of our business depends on our ability to provide surety bonds. Any difficulties in the financial and surety markets may adverselyaffect our bonding capacity and availability. In the past we have expanded, and it is possible we will continue to expand, the number and percentage of total contract dollars that require anunderlying bond. Historically surety market conditions have experienced times of difficulty as a result of significant losses incurred by many suretycompanies and the results of macroeconomic trends outside of our control. Consequently, during times when less overall bonding capacity is available in themarket, surety terms have become more expensive and more restrictive. As such, we cannot guarantee our ability to maintain a sufficient level of bondingcapacity in the future, which could preclude our ability to bid for certain contracts or successfully contract with some customers. Additionally, even if wecontinue to be able to access bonding capacity to sufficiently bond future work, we may be required to post collateral to secure bonds, which would decreasethe liquidity we would have available for other purposes. Our surety providers are under no commitment to guarantee our access to new bonds in the future;thus, our ability to access or increase bonding capacity is at the sole discretion of our surety providers. If our surety companies were to limit or eliminate ouraccess to bonds, our alternatives would include seeking bonding capacity from other surety companies, increasing business with clients that do not requirebonds and posting other forms of collateral for project performance, such as letters of credit or cash. We may be unable to secure these alternatives in a timelymanner, on acceptable terms, or at all. As such, if we were to experience an interruption or reduction in the availability of bonding capacity, it is likely wewould be unable to compete for or work on certain projects.Our use of the percentage-of-completion method of accounting could result in a reduction or reversal of previously recorded revenue or profits. A material portion of our revenue is recognized using the percentage-of-completion method of accounting, which results in our recognizing contractrevenue and earnings ratably over the contract term in the proportion that our actual costs bear to our estimated contract costs. The earnings or lossesrecognized on individual contracts are based on estimates of contract revenue, costs and profitability. We review our estimates of contract revenue, costs andprofitability on an ongoing basis. Prior to contract completion, we may adjust our estimates on one or more occasions as a result of change orders to theoriginal contract, collection disputes with the customer on amounts invoiced or claims against the customer for increased costs incurred by us due tocustomer-induced delays and other factors. Contract losses are recognized in the fiscal period when the loss is determined. Contract profit estimates are alsoadjusted in the fiscal period in which it is determined that an adjustment is required. As a result of the requirements of the percentage-of-completion methodof accounting, the possibility exists, for example, that we could have estimated and reported a profit on a contract over several periods and later determined,usually near contract completion, that all or a portion of such previously estimated and reported profits were overstated. If this occurs, the full aggregateamount of the overstatement will be reported for the period in which such determination is made, thereby eliminating all or a portion of any profits from othercontracts that would have otherwise been reported in such period or even resulting in a loss being reported for such period. On a historical basis, we believethat we have made reasonably reliable estimates of the progress towards completion on our long-term contracts. However, given the uncertainties associatedwith these types of contracts, it is possible for actual costs to vary from estimates previously made, which may result in reductions or reversals of previouslyrecorded revenue and profits.We are a decentralized company and place significant decision making powers with our subsidiaries' management, which presents certain risks. We believe that our practice of placing significant decision making powers with local management is important to our successful growth and allows us tobe responsive to opportunities and to our15Table of Contentscustomers' needs. However, this practice presents certain risks, including the risk that we may be slower or less effective in our attempts to identify or react toproblems affecting an important business than we would under a more centralized structure or that we would be slower to identify a misalignment between asubsidiary's and the Company's overall business strategy. Further, if a subsidiary location fails to follow the Company's compliance policies, we could bemade party to a contract, arrangement or situation that requires the assumption of large liabilities or has less advantageous terms than is typically found in themarket.Our insurance policies against many potential liabilities require high deductibles, and our risk management policies and procedures may leave us exposedto unidentified or unanticipated risks. Additionally, difficulties in the insurance markets may adversely affect our ability to obtain necessary insurance. Although we maintain insurance policies with respect to our related exposures, these policies are subject to high deductibles; as such, we are, in effect,self-insured for substantially all of our typical claims. We hire an actuary to determine any liabilities for unpaid claims and associated expenses for the threemajor lines of coverage (workers' compensation, general liability and auto liability). The determination of these claims and expenses and the appropriatenessof the estimated liability are reviewed and updated quarterly. However, insurance liabilities are difficult to assess and estimate due to the many relevantfactors, the effects of which are often unknown, including the severity of an injury, the determination of our liability in proportion to other parties, thenumber of incidents that have occurred but are not reported and the effectiveness of our safety program. Our accruals are based on known facts, historicaltrends (both internal trends and industry averages) and our reasonable estimate of our future expenses. We believe our accruals are adequate. However, ourrisk management strategies and techniques may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk. Ifany of the variety of instruments, processes or strategies we use to manage our exposure to various types of risk are not effective, we may incur losses that arenot covered by our insurance policies or that exceed our accruals or coverage limits. Additionally, we typically are contractually required to provide proof of insurance on projects we work on. Historically insurance market conditionsbecome more difficult for insurance consumers during periods when insurance companies suffer significant investment losses as well as casualty losses.Consequently, it is possible that insurance markets will become more expensive and restrictive. Also, our prior casualty loss history might adversely affectour ability to procure insurance within commercially reasonable ranges. As such, we may not be able to maintain commercially reasonable levels of insurancecoverage in the future, which could preclude our ability to work on many projects. Our insurance providers are under no commitment to renew our existinginsurance policies in the future; therefore, our ability to obtain necessary levels or kinds of insurance coverage is subject to market forces outside our control.If we were unable to obtain necessary levels of insurance, it is likely we would be unable to compete for or work on most projects.Failure to remain in compliance with covenants under our credit agreement, service our indebtedness, or fund our other liquidity needs could adverselyimpact our business. Our credit agreement and related restrictive and financial covenants are more fully described in Note 9 of "Notes to the Consolidated FinancialStatements." Our failure to comply with any of these covenants, or to pay principal, interest or other amounts when due thereunder, would constitute an eventof default under the credit agreement. Default under our credit agreement could result in (1) us no longer being entitled to borrow under the agreement;(2) termination of the agreement; (3) acceleration of the maturity of outstanding indebtedness under the agreement; and/or (4) foreclosure on any collateralsecuring the obligations under the agreement. On July 22, 2014, we executed an amendment to the credit agreement, which terms include, among otherthings a revised maximum Total Leverage Ratio. If we are unable to service our debt obligations or fund our other liquidity needs, we could be forced tocurtail our operations, reorganize our capital structure (including through bankruptcy proceedings) or liquidate some or all of our assets in a manner thatcould cause holders of our securities to experience a partial or total loss of their investment in us.16Table of ContentsIf we experience delays and/or defaults in customer payments, we could be unable to recover all expenditures. Because of the nature of our contracts, at times we commit resources to projects prior to receiving payments from the customer in amounts sufficient tocover expenditures on projects as they are incurred. Delays in customer payments may require us to make a working capital investment. If a customer defaultsin making their payments on a project to which we have devoted resources, it could have a material negative effect on our results of operations.If we are unable to attract and retain qualified managers and employees, we will be unable to operate efficiently, which could reduce our profitability. Our business is labor intensive, and many of our operations experience a high rate of employment turnover. At times of low unemployment rates in theUnited States, it will be more difficult for us to find qualified personnel at low cost in some geographic areas where we operate. Additionally, our business ismanaged by a small number of key executive and operational officers. We may be unable to hire and retain the sufficient skilled labor force necessary tooperate efficiently and to support our growth strategy. Our labor expenses may increase as a result of a shortage in the supply of skilled personnel. Laborshortages, increased labor costs or the loss of key personnel could reduce our profitability and negatively impact our business. Further, our relationship withsome customers could suffer if we are unable to retain the employees with whom those customers primarily work and have established relationships.Our inability to properly utilize our workforce could have a negative impact on our profitability The extent to which we utilize our workforce affects our profitability. Underutilizing our workforce could result in lower gross margins and,consequently, a decrease in short-term profitability. On the other hand, overutilization of our workforce could negatively impact safety, employeesatisfactions and project execution, leading to a potential decline in future project awards. The utilization of our workforce is impacted by numerous factors,including:•our estimate of headcount requirements and our ability to manage attrition; •efficiency in scheduling projects and our ability to minimize downtime between project assignments; and •productivity.Misconduct by our employees, subcontractors or partners or our overall failure to comply with laws or regulations could harm our reputation, damage ourrelationships with customers, reduce our revenues and profits, and subject us to criminal and civil enforcement actions. Misconduct, fraud, non-compliance with applicable laws and regulations, or other improper activities by one or more of our employees, subcontractors orpartners could have a significant negative impact on our business and reputation. Examples of such misconduct include employee or subcontractor theft, thefailure to comply with safety standards, laws and regulations, customer requirements, environmental laws and any other applicable laws or regulations. Whilewe take precautions to prevent and detect these activities, such precautions may not be effective and are subject to inherent limitations, including humanerror and fraud. Our failure to comply with applicable laws or regulations or acts of misconduct could subject us to fines and penalties, harm our reputation,damage our relationships with customers, reduce our revenues and profits and subject us to criminal and civil enforcement actions.17Table of ContentsFailure or circumvention of our disclosure controls and procedures or internal controls over financial reporting could seriously harm our financialcondition, results of operations, and our business. We plan to continue to maintain and strengthen internal controls and procedures to enhance the effectiveness of our disclosure controls and internalcontrols over financial reporting. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide onlyreasonable, and not absolute, assurances that the objectives of the system are met. Any failure of our disclosure controls and procedures or internal controlsover financial reporting could harm our financial condition and results of operations.We have subsidiary operations through the United States and are exposed to multiple state and local regulations, as well as federal laws and requirementsapplicable to government contractors. Changes in law, regulations or requirements, or a material failure of any of our subsidiaries or us to comply withany of them, could increase our costs and have other negative impacts on our business. Our 92 locations are located in 29 states, which exposes us to a variety of different state and local laws and regulations, particularly those pertaining tocontractor licensing requirements. These laws and regulations govern many aspects of our business, and there are often different standards and requirementsin different locations. In addition, our subsidiaries that perform work for federal government entities are subject to additional federal laws and regulatory andcontractual requirements. Changes in any of these laws, or our or any of our subsidiaries' material failure to comply with them, can adversely impact ouroperations by, among other things, increasing costs, distracting management's time and attention from other items, and harming our reputation.As government contractors, our subsidiaries are subject to a number of rules and regulations, and their contracts with government entities are subject toaudit. Violations of the applicable rules and regulations could result in a subsidiary being barred from future government contracts. Government contractors must comply with many regulations and other requirements that relate to the award, administration and performance ofgovernment contracts. A violation of these laws and regulations could result in imposition of fines and penalties, the termination of a government contract ordebarment from bidding on government contracts in the future. Further, despite our decentralized nature, a violation at one of our locations could impactother locations' ability to bid on and perform government contracts; additionally, because of our decentralized nature, we face risks in maintainingcompliance with all local, state and federal government contracting requirements. Prohibition against bidding on future government contracts could have anadverse effect on our financial condition and results of operations.Past and future environmental, safety and health regulations could impose significant additional costs on us that reduce our profits. HVAC systems are subject to various environmental statutes and regulations, including the Clean Air Act and those regulating the production, servicingand disposal of certain ozone-depleting refrigerants used in HVAC systems. There can be no assurance that the regulatory environment in which we operatewill not change significantly in the future. Various local, state and federal laws and regulations impose licensing standards on technicians who install andservice HVAC systems. And additional laws, regulations and standards apply to contractors who perform work that is being funded by public money,particularly federal public funding. Our failure to comply with these laws and regulations could subject us to substantial fines, the loss of our licenses orpotentially debarment from future publicly funded work. It is impossible to predict the full nature and effect of judicial, legislative or regulatorydevelopments relating to health and safety regulations and environmental protection regulations applicable to our operations.18Table of ContentsUnsatisfactory safety performance may subject us to penalties, affect customer relationships, result in higher operating costs, negatively impact employeemorale and result in higher employee turnover. Our projects are conducted at a variety of sites including construction sites and industrial facilities. Each location is subject to numerous safety risks,including electrocutions, fires, explosions, mechanical failures, weather-related incidents, transportation accidents and damage to equipment. These hazardscan cause personal injury and loss of life, severe damage to or destruction of property and equipment and other consequential damages and could lead tosuspension of operations, large damage claims and, in extreme cases, criminal liability. While we have taken what we believe are appropriate precautions tominimize safety risks, we have experienced serious accidents, including fatalities, in the past and may experience additional accidents in the future. Seriousaccidents may subject us to penalties, civil litigation or criminal prosecution. Claims for damages to persons, including claims for bodily injury or loss of life,could result in significant costs and liabilities, which could adversely affect our financial condition and results of operations. Poor safety performance couldalso jeopardize our relationships with our customers and harm our reputation.If we do not effectively manage the size and cost of our operations, our existing infrastructure may become either strained or over-burdensome, and we maybe unable to increase revenue growth. The growth that we have experienced in the past, and that we may experience in the future, may provide challenges to our organization, requiring us toexpand our personnel and our operations. Future growth may strain our infrastructure, operations and other managerial and operating resources. We have alsoexperienced in the past severe constriction in the markets in which we operate and, as a result, in our operating requirements. Failing to maintain theappropriate cost structure for a particular economic cycle may result in our incurring costs that affect our profitability. If our business resources becomestrained or over-burdensome, our earnings may be adversely affected and we may be unable to increase revenue growth. Further, we may undertakecontractual commitments that exceed our labor resources, which could also adversely affect our earnings and our ability to increase revenue growth.Future climate change could adversely affect us. Climate change may create physical and financial risk. Physical risks from climate change could, among other things, include an increase in extremeweather events (such as floods or hurricanes), rising sea levels and limitations on water availability and quality. Such extreme weather conditions may limitthe availability of resources, increasing the costs of our projects, or may cause projects to be delayed or cancelled. Legislation, nationwide protocols, regulation or other restrictions related to climate change could negatively impact our operations or our customers'operations. Such legislation or restrictions could increase the costs of projects for our customers or, in some cases, prevent a project from going forward,which could in turn have an adverse effect on our financial condition and results of operations.Deliberate, malicious acts, including terrorism and sabotage, could damage our facilities, disrupt our operations or injure employees, contractors,customers or the public and result in liability to us. Intentional acts of destruction could damage or destroy our facilities, reducing our operational production capacity and requiring us to repair or replaceour facilities at substantial cost. Additionally, employees, contractors and the public could suffer substantial physical injury from acts of terrorism for whichwe could be liable. Governmental authorities may also impose security or other requirements that could make our operations more difficult or costly. Theconsequences of any such actions could adversely affect our financial condition and results of operations.19Table of ContentsOur common stock, which is listed on the New York Stock Exchange, has from time to time experienced significant price and volume fluctuations. Thesefluctuations are likely to continue in the future, and our stockholders may suffer losses. The market price of our common stock may change significantly in response to various factors and events beyond our control. A variety of events maycause the market price of our common stock to fluctuate significantly, including the following: (i) the risk factors described in this Report on Form 10-K;(ii) a shortfall in operating revenue or net income from that expected by securities analysts and investors; (iii) quarterly fluctuations in our operating results;(iv) changes in securities analysts' estimates of our financial performance or that of our competitors or companies in our industry generally; (v) generalconditions in our customers' industries; (vi) general conditions in the securities markets; (vii) our announcements of significant contracts, milestones,acquisitions; (viii) our relationship with other companies; (ix) our investors' view of the sectors and markets in which we operate; and (x) additions ordepartures of key personnel. Some companies that have volatile market prices for their securities have been subject to security class action suits filed againstthem. If a suit were to be filed against us, regardless of the outcome, it could result in substantial costs and a diversion of our management's attention andresources. This could have a material adverse effect on our business, results of operations and financial condition.Future sales of our common stock may depress our stock price. Sales of a substantial number of shares of our common stock in the public market or otherwise, either by us, a member of management or a majorstockholder, or the perception that these sales could occur, could depress the market price of our common stock and impair our ability to raise capital throughthe sale of additional equity securities.Increases in our health insurance costs could adversely impact our results of operations and cash flows. The costs of employee health care insurance have been increasing in recent years due to rising health care costs, legislative changes, and generaleconomic conditions. Additionally, we may incur additional costs as a result of the Patient Protection and Affordable Care Act (the "Affordable Care Act")that was signed into law in March 2010. A continued increase in health care costs or additional costs incurred as a result of the Affordable Care Act couldhave a negative impact on our financial position and results of operations.Rising inflation and/or interest rates could have an adverse effect on our business, financial condition and results of operations. Economic factors, including inflation and fluctuations in interest rates, could have a negative impact on our business. If our costs were to become subjectto significant inflationary pressures or interest rate increases, we may not be able to fully offset such higher costs through price increases. Our inability orfailure to do so could harm our financial position and results of operations.Our effective tax rate may increase. We conduct business across the United States and file income taxes in various tax jurisdictions. Our effective tax rates could be affected by many factors,some of which are outside of our control, including changes in tax laws and regulations in the various tax jurisdictions in which we file income taxes, issuesrelating to tax audits or examinations and any related interest or penalties, and uncertainty in obtaining deductions or credits claimed in variousjurisdictions. Our results of operations is reported based on our determination of the amount of taxes we owe in various tax jurisdictions. Significantjudgment is required in determining our provision for income taxes and our determination of tax liability is always subject to review or examination by taxauthorities in applicable tax jurisdictions. An20Table of Contentsadverse outcome of such a review of examination could adversely affect our operating results and financial condition. Further, the results of tax examinationsand audits could have a negative impact on our financial results and cash flows where the results differ from the liabilities recorded in our financialstatements.Our charter contains certain anti-takeover provisions that may inhibit or delay a change in control. Our certificate of incorporation authorizes our board of directors to issue, without stockholder approval, one or more series of preferred stock having suchpreferences, powers and relative, participating, optional and other rights (including preferences over the common stock respecting dividends anddistributions and voting rights) as the board of directors may determine. The issuance of this "blank-check" preferred stock could render more difficult ordiscourage an attempt to obtain control by means of a tender offer, merger, proxy contest or otherwise. Additionally, certain provisions of the DelawareGeneral Corporation Law may also discourage takeover attempts that have not been approved by the Board of Directors. ITEM 1B. Unresolved Staff Comments None. ITEM 2. Properties We own five properties, three of which we acquired through acquisition and two that we formerly leased. Other than these five properties, we lease thereal property and buildings from which we operate. Our facilities are located in 29 states and Puerto Rico and consist of offices, shops and fabrication,maintenance and warehouse facilities. Generally, leases range from three to ten years and are on terms we believe to be commercially reasonable. A majorityof these premises are leased from individuals or entities with whom we have no other business relationship. In certain instances these leases are with current orformer employees. To the extent we renew, enter into leases or otherwise change leases with current or former employees, we enter into such agreements onterms that reflect a fair market valuation for the properties. Leased premises range in size from approximately 1,000 square feet to 110,000 square feet. Tomaximize available capital, we generally intend to continue to lease our properties, but may consider further purchases of property where we believeownership would be more economical. We believe that our facilities are sufficient for our current needs. We lease our executive and administrative offices in Houston, Texas. ITEM 3. Legal Proceedings We are subject to certain claims and lawsuits arising in the normal course of business. We maintain various insurance coverages to minimize financialrisk associated with these claims. We have estimated and provided accruals for probable losses and related legal fees associated with certain litigation in ourconsolidated financial statements. While we cannot predict the outcome of these proceedings, in our opinion and based on reports of counsel, any liabilityarising from these matters individually and in the aggregate will not have a material effect on our operating results, cash flows or financial condition, aftergiving effect to provisions already recorded. ITEM 4. Mine Safety Disclosures Not applicable.21Table of Contents PART II ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The following table sets forth the reported high and low sales prices of our Common Stock for the quarters indicated as traded at the New York StockExchange. Our Common Stock is traded under the symbol FIX: As of February 20, 2015 there were approximately 294 stockholders of record of our Common Stock, and the last reported sale price on that date was$16.66 per share. We expect to continue paying cash dividends quarterly, although there is no assurance as to future dividends because they depend on future earnings,capital requirements, and financial condition. In addition, our revolving credit agreement limits the amount of dividends we can pay at any time that our NetLeverage Ratio exceeds 1.0.22 High Low CashDividendsDeclared Fourth Quarter, 2014 $17.42 $12.81 $0.060 Third Quarter, 2014 $16.38 $13.55 $0.055 Second Quarter, 2014 $17.14 $14.61 $0.055 First Quarter, 2014 $19.62 $15.24 $0.055 Fourth Quarter, 2013 $20.58 $16.16 $0.055 Third Quarter, 2013 $16.98 $15.10 $0.055 Second Quarter, 2013 $15.33 $11.70 $0.050 First Quarter, 2013 $14.19 $11.90 $0.050 Table of Contents The following Corporate Performance Graph and related information shall not be deemed "soliciting material" or to be "filed" with the SEC, nor shallsuch information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that we specificallyincorporate it by reference into such filing. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among Comfort Systems USA, Inc., the S&P 500 Index, and the Russell 2000 Index *$100 invested on 12/31/09 in stock or index, including reinvestment of dividends.Fiscal year ending December 31.Copyright© 2015 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.Copyright© 2015 Russell Investment Group. All rights reserved.Recent Sales of Unregistered Securities None.Issuer Purchases of Equity Securities On March 29, 2007, our Board of Directors (the "Board") approved a stock repurchase program to acquire up to 1.0 million shares of our outstandingcommon stock. Subsequently, the Board has from time to time approved extensions of the program to acquire additional shares. On October 24, 2014, theBoard approved an extension to the program by increasing the shares authorized for repurchase by 1.0 million shares. Since the inception of the repurchaseprogram, the Board has approved 7.6 million shares to be repurchased. The share repurchases will be made from time to time at our discretion in the open market or privately negotiated transactions as permitted by securitieslaws and other legal requirements, and subject to market conditions and other factors. The Board may modify, suspend, extend or terminate the program atany time. Since the inception of the program in 2007 and as of December 31, 2014, we have repurchased a cumulative total of 6.6 million shares at an averageprice of $11.30 per share.23Table of Contents During the year ended December 31, 2014, we purchased our common shares in the following amounts at the following weighted-average prices:24Period Total NumberofSharesPurchased Weighted-Average PricePaid PerShare Total Number ofSharesPurchased as Part ofPublicly AnnouncedPlansor Programs Maximum Number ofShares that May Yet BePurchased Under thePlansor Programs January 1 -January 31 — $— 6,017,214 583,323 February 1 -February 28 — $— 6,017,214 583,323 March 1 -March 31 25,000 $16.64 6,042,214 558,323 April 1 -April 30 6,037 $14.86 6,048,251 552,286 May 1 - May 31 — $— 6,048,251 552,286 June 1 - June 30 — $— 6,048,251 552,286 July 1 - July 31 — $— 6,048,251 552,286 August 1 -August 31 191,222 $14.69 6,239,473 361,064 September 1 -September 30 204,428 $14.52 6,443,901 156,636 October 1 -October 31 117,282 $13.79 6,561,183 1,000,000 November 1 -November 30 5,185 $14.26 6,566,368 994,815 December 1 -December 31 — $— 6,566,368 994,815 549,154 $14.52 6,566,368 994,815 Table of Contents ITEM 6. Selected Financial Data The following selected historical financial data has been derived from our audited financial statements and should be read in conjunction with thehistorical Consolidated Financial Statements and related notes:25 Year Ended December 31, 2014 2013 2012 2011 2010 (in thousands, except per share amounts) STATEMENT OFOPERATIONS DATA: Revenue $1,410,795 $1,357,272 $1,331,185 $1,216,654 $1,063,520 Operating income (loss)(a) $42,222 $46,258 $22,303 $(42,641)$31,442 Income (loss) fromcontinuing operations $28,614 $28,632 $11,494 $(32,474)$20,564 Discontinued operations— Operating income (loss),net of tax $(15)$(76)$355 $(4,018)$(6,547)Gain (loss) on disposition,net of tax — — — — $723 Net income (loss) includingnoncontrolling interests $28,599 $28,556 $11,849 $(36,492)$14,740 Net income (loss)attributable to ComfortSystems USA, Inc. $23,063 $27,269 $13,463 $(36,830)$14,740 Income (loss) per shareattributable to ComfortSystems USA, Inc.: Basic— Income (loss) fromcontinuing operations $0.61 $0.73 $0.35 $(0.88)$0.54 Discontinued operations— Income (loss) fromoperations — — 0.01 (0.11) (0.17)Gain (loss) on disposition — — — — 0.02 Net income (loss) $0.61 $0.73 $0.36 $(0.99)$0.39 Diluted— Income (loss) fromcontinuing operations $0.61 $0.73 $0.35 $(0.88)$0.54 Discontinued operations— Income (loss) fromoperations — — 0.01 (0.11) (0.17)Gain (loss) on disposition — — — — 0.02 Net income (loss) $0.61 $0.73 $0.36 $(0.99)$0.39 Cash dividends per share $0.225 $0.210 $0.200 $0.200 $0.200 BALANCE SHEET DATA: Working capital $130,555 $127,559 $103,966 $109,766 $134,738 Total assets $665,750 $601,822 $580,754 $593,980 $640,020 Total debt $40,346 $2,000 $7,400 $15,381 $29,936 Total stockholders' equity $321,393 $314,022 $287,306 $283,106 $312,784 Total Comfort SystemsUSA, Inc. stockholders'equity $306,281 $295,834 $270,405 $264,591 $312,784 (a)Included in operating income are goodwill impairment charges of $0.7 million and $57.3 million for 2014 and 2011, respectively.There were no goodwill impairment charges for 2013, 2012 or 2010.Table of Contents ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related notes included elsewherein this annual report on Form 10-K. Also see "Forward-Looking Statements" discussion.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 providespecialized applications such as building automation control systems, fire protection, process cooling, electronic monitoring and process piping. Certainlocations 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 ofHVAC systems in existing facilities. Customers hire us to ensure such systems deliver specified or generally expected heating, cooling, conditioning andcirculation of air in a facility. This entails installing core system equipment such as packaged heating and air conditioning units, or in the case of largerfacilities, separate core components such as chillers, boilers, air handlers, and cooling towers. We also typically install connecting and distribution elementssuch as piping and ducting. Our responsibilities usually require conforming the systems to pre-established engineering drawings and equipment andperformance specifications, which we frequently participate in establishing. Our project management responsibilities include staging equipment andmaterials to project sites, deploying labor to perform the work, and coordinating with other service providers on the project, including any subcontractors wemight 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 acontract 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 profitmargin 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 scheduleon 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 morebroadly to support our operations but which are not specific to the project. Typically customers will seek bids from competitors for a given project. While thecriteria on which customers select the winning bid vary widely and include factors such as quality, technical expertise, on-time performance, post-projectsupport and service, and company history and financial strength, we believe that price is the most influential factor for most customers in choosing an HVACinstallation and service provider. 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 relatedresponsibilities 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, althoughchanges in project specifications or work conditions that result in unexpected additional work are usually subject to additional payment from the customervia what are commonly known as change orders. Project contracts typically provide for periodic billings to the customer as we meet progress milestones orincur 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 thecustomer until after we have26Table of Contentscompleted 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 ourproject 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 thatcannot be recovered in change orders, we can experience reduced profits or even significant losses on fixed price project work. We also perform some projectwork on a cost-plus or a time and materials basis, under which we are paid our costs incurred plus an agreed upon profit margin, although such projects aresometimes subject to a guaranteed maximum cost. These margins are frequently less than fixed-price contract margins because there is less risk ofunrecoverable cost overruns in cost-plus or time and materials work. As of December 31, 2014, we had 4,074 projects in process. Our average project takes six to nine months to complete, with an average contract price ofapproximately $488,000. Our projects generally require working capital funding of equipment and labor costs. Customer payments on periodic billingsgenerally do not recover these costs until late in the job. Our average project duration together with typical retention terms as discussed above generallyallow 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 revenueacross end-use sectors that we believe reduces our exposure to negative developments in any given sector. Because of the integral nature of HVAC andrelated 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 notbeen fully paid for installing systems, except with respect to some government buildings. The service work that we do, which is discussed further below,usually does not give rise to lien rights. We also perform larger HVAC projects. As of December 31, 2014, we had 16 projects in process with a contract price greater than $15 million, 14 projectsbetween $10 million and $15 million, 64 projects between $5 million and $10 million, and 297 projects between $1 million and $5 million. Taken together,projects with contract prices of $1 million or more totaled $1,607.5 million of aggregate contract value as of December 31, 2014, or approximately 81%, outof a total contract value for all projects in progress of $1,988.3 million. Generally, projects closer in size to $1 million will be completed in one year or less. Itis unusual for us to work on a project that exceeds two years in length. In addition to project work, approximately 18% of our revenue represent maintenance and repair service on already installed HVAC and controlssystems. 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 materialsused 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 tothirty days. We also provide maintenance and repair service under ongoing contracts. Under these contracts, we are paid regular monthly or quarterlyamounts 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, andcontract with us to perform maintenance and repair service. These contracts may also provide for us to perform new or replacement systems installation. Weoperate a national call center to dispatch technicians to sites requiring service. We perform the majority of this work with our own employees, with thebalance being subcontracted to third parties that meet our performance qualifications. We will also typically use proprietary information systems to maintaininformation on the customers' sites and equipment, including performance and service records, and related cost data. These systems track the status ofongoing service and installation work,27Table of Contentsand may also monitor system performance data. Under these contractual relationships, we usually provide consolidated billing and credit payment terms tothe 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 bycash 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 fromoriginal estimate, and overall financial performance in comparison to budget and updated forecasts. Operational factors we emphasize include projectselection, estimating, pricing, management and execution practices, labor utilization, safety, training, and the make-up of both existing backlog as well asnew 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 ourbusiness, particularly in view of the relative uniqueness of each market and operation, the importance of relationships with customers and other marketparticipants such as architects and consulting engineers, and the high degree of competition and low barriers to entry in most of our markets. Accordingly, wedevote 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 trendsin 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 weexperience trends in demand for and pricing of our services that are consistent with trends in the national nonresidential construction sector. As a result, wemonitor the views of major construction sector forecasters along with macroeconomic factors they believe drive the sector, including trends in gross domesticproduct, 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 ofdiscretion as to when and if projects proceed. With larger amounts of capital, time, and discretion involved, spending decisions are affected to a significantdegree by uncertainty, particularly concerns about economic and financial conditions and trends. We have experienced periods of time when economicweakness caused a significant slowdown in decisions to proceed with installation and replacement project work.Operating Environment and Management Emphasis Nonresidential building construction and renovation activity, as reported by the federal government, declined over the four year period from 2009 to2012, and 2013 and 2014 activity levels have been relatively stable at the low levels of the preceding years. During these periods of decline, we responded tomarket challenges by pursuing work in sectors less affected by the downturn, such as government, educational, and healthcare facilities, and by establishingmarketing initiatives that take advantage of our size and range of expertise. We also responded to declining gross profits by emphasizing discipline in projectselection, and by emphasizing efficiency in execution while also reducing our selling, general, and administrative expenses. We believe our efforts in theseareas partially offset the decline in our profitability over that period.28Table of Contents As a result of our continued strong emphasis on cash flow, we currently have modest indebtedness under our revolving credit facility and we havesubstantial uncommitted cash balances, as discussed further in "Liquidity and Capital Resources" below. We have a credit facility in place with considerablyless restrictive terms than those of our previous facilities; this facility does not expire until October 2019. We have strong surety relationships to support ourbonding needs, and we believe our relationships with the surety markets are strong and benefit from our solid current results and financial position. We havegenerated positive free cash flow in each of the last sixteen calendar years and will continue our emphasis in this area. We believe that the relative size andstrength 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 expect price competition to continue as our customers and local and regionalcompetitors respond cautiously to changing conditions. We will continue our efforts to expand and improve our service business, to find the more activesectors in our markets, and to increase our regional and national account business. Our primary emphasis for 2015 will be on execution and cost control, butwe are beginning to seek growth based on our belief that industry conditions are beginning to improve, and we believe that activity levels will permit us toearn reasonable profits while preserving our core workforce. We have increased our focus on project qualification, estimating, pricing and management; andoverall we are investing in service growth and improved performance.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 thecomplexity of the accounting policy and our use of estimates and subjective assessments. Our most critical accounting policy is revenue recognition. Asdiscussed elsewhere in this annual report on Form 10-K, our business has two service functions: (i) installation, which we account for under the percentage ofcompletion method, and (ii) maintenance, repair and replacement, which we account for as the services are performed, or in the case of replacement, under thepercentage of completion method. In addition, we identified other critical accounting policies related to our allowance for doubtful accounts receivable, therecording of our self-insurance liabilities, valuation of deferred tax assets, accounting for acquisitions and the recoverability of goodwill and identifiableintangible assets. These accounting policies, as well as others, are described in Note 2 to the Consolidated Financial Statements included elsewhere in thisannual report on Form 10-K.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. Underthis method contract revenue recognizable at any time during the life of a contract is determined by multiplying expected total contract revenue by thepercentage of contract costs incurred at any time to total estimated contract costs. More specifically, as part of the negotiation and bidding process inconnection with obtaining installation contracts, we estimate our contract costs, which include all direct materials (exclusive of rebates), labor andsubcontract costs and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. These contract costsare included in our results of operations under the caption "Cost of Services." Then, as we perform under those contracts, we measure costs incurred, comparethem to total estimated costs to complete the contract, and recognize a corresponding proportion of contract revenue. Labor costs are considered to beincurred as the work is performed. Subcontractor labor is recognized as the work is performed, but is generally subjected to approval as to milestones or otherevidence of completion. Non-labor project costs consist of purchased equipment, prefabricated materials and other materials. Purchased equipment on ourprojects is29Table of Contentssubstantially 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 recognizedas contract costs when fabricated for the unique specifications of the job. Other materials costs are not significant and are generally recorded when deliveredto the worksite. This measurement and comparison process requires updates to the estimate of total costs to complete the contract, and these updates mayinclude 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 recoverabilityfrom the contract is probable. Upon receiving the contract, these costs are included in contract costs. Deferred costs associated with unsuccessful contract bidsare 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 thestatement 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 bywhich cumulative contract revenue recognized on a contract as of a given date exceed cumulative billings to the customer under the contract are reflected asa current asset in our balance sheet under the caption "Costs and estimated earnings in excess of billings." Amounts by which cumulative billings to thecustomer under a contract as of a given date exceed cumulative contract revenue recognized on the contract are reflected as a current liability in our balancesheet 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. Thesefactors may result in revisions to estimated costs and, therefore, revenue. Such revisions are frequently based on further estimates and 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 berecognized on a contract, the full amount of the estimated ultimate loss is recognized in the period such conclusion is reached, regardless of the percentage ofcompletion 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 canalso result in claims we might make against the customer to recover project variances that have not been satisfactorily addressed through change orders withthe customer. Except in certain circumstances, we do not recognize revenue or margin based on change orders or claims until they have been agreed uponwith 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 thevariation 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 believewe will not ultimately collect. This requires us to make certain judgments and estimates involving, among others, the creditworthiness of our customers, priorcollection history with our customers, ongoing relationships with our customers, the aging of past due balances, our lien rights, if any, in the property wherewe performed the work, and the availability, if any, of payment bonds applicable to the contract. These estimates are evaluated and adjusted as needed whenadditional information is received.30Table of ContentsAccounting for Self-Insurance Liabilities We are substantially self-insured for workers' compensation, employer's liability, auto liability, general liability and employee group health claims inview of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses up to deductible amounts areestimated 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 aninjury, the determination of our liability in proportion to other parties, timely reporting of occurrences, ongoing treatment or loss mitigation, general trendsin litigation recovery outcomes and the effectiveness of safety and risk management programs. Therefore, if actual experience differs from the assumptionsand estimates used for recording the liabilities, adjustments may be required and would be recorded in the period that such experience becomes known.Accounting for Deferred Tax Assets We regularly evaluate valuation allowances established for deferred tax assets for which future realization is uncertain. We perform this evaluationquarterly. In assessing the realizability of deferred tax assets, we must consider whether it is more likely than not that some portion, or all, of the deferred taxassets will not be realized. We consider all available evidence, both positive and negative, in determining whether a valuation allowance is required. Suchevidence includes the scheduled reversal of deferred tax liabilities, projected future taxable income, taxable income in prior carryback years and tax planningstrategies in making this assessment, and judgment is required in considering the relative weight of negative and positive evidence.Acquisitions We recognize assets acquired and liabilities assumed in business combinations, including contingent assets and liabilities, based on fair value estimatesas of the date of acquisition. Contingent Consideration—In certain acquisitions, we agree to pay additional amounts to sellers contingent upon achievement by the acquiredbusinesses of certain predetermined profitability targets. We have recognized liabilities for these contingent obligations based on their estimated fair value atthe date of acquisition with any differences between the acquisition-date fair value and the ultimate settlement of the obligations being recognized in incomefrom operations. Contingent Assets and Liabilities—Assets and liabilities arising from contingencies are recognized at their acquisition date fair value when theirrespective fair values can be determined. If the fair values of such contingencies cannot be determined, they are recognized at the acquisition date if thecontingencies are probable and an amount can be reasonably estimated. Acquisition date fair value estimates are revised as necessary if, and when, additionalinformation 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 price over the fair value of the net assets of acquired businesses. We assess goodwill for impairment each year, andmore frequently if circumstances suggest an impairment may have occurred. When the carrying value of a given reporting unit exceeds its fair value, an impairment loss is recorded to the extent that the implied fair value of thegoodwill of the reporting unit is less than its carrying value. If other reporting units have had increases in fair value, such increases may not be31Table of Contentsrecorded. Accordingly, such increases may not be netted against impairments at other reporting units. The requirements for assessing whether goodwill hasbeen impaired involve market-based information. This information, and its use in assessing goodwill, entails some degree of subjective assessment. We currently perform our annual impairment testing as of October 1 and any impairment charges resulting from this process are reported in the fourthquarter. We segregate our operations into reporting units based on the degree of operating and financial independence of each unit and our relatedmanagement of them. We perform our annual goodwill impairment testing at the reporting unit level. In the evaluation of goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events orcircumstances lead to a determination that it is more likely than not that the fair value of one of our reporting units is greater than its carrying value. If, aftercompleting such assessment, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then there is noneed to perform any further testing. If we conclude otherwise, then we perform the first step of a two-step impairment test by calculating the fair value of thereporting unit and comparing the fair value with the carrying value of the reporting unit. We estimate the fair value of the reporting unit based on two market approaches and an income approach, which utilizes discounted future cash flows.Assumptions critical to the fair value estimates under the discounted cash flow model include discount rates, cash flow projections, projected long-termgrowth rates and the determination of terminal values. The market approaches utilized market multiples of invested capital from comparable publicly tradedcompanies ("public company approach") and comparable transactions ("transaction approach"). The market multiples from invested capital include revenue,book equity plus debt and earnings before interest, taxes, depreciation and amortization ("EBITDA"). There are significant inherent uncertainties and management judgment involved in estimating the fair value of each reporting unit. While we believe wehave made reasonable estimates and assumptions to estimate the fair value of our reporting units, it is possible that a material change could occur. If actualresults are not consistent with our current estimates and assumptions, or the current economic downturn worsens or the projected recovery is significantlydelayed beyond our projections, goodwill impairment charges may be recorded in future periods. We amortize identifiable intangible assets with finite lives over their useful lives. Changes in strategy and/or market condition, may result in adjustmentsto recorded intangible asset balances or their useful lives.32 Table of ContentsResults of Operations (in thousands):2014 Compared to 2013 We had 36 operating locations as of December 31, 2013. We completed one acquisition in the first quarter of 2014. This acquisition was not material andwas "tucked-in" with existing operations. We completed two acquisitions in the second quarter of 2014, one of which was "tucked-in" with existingoperations and the second reports as a separate operating location in northern Texas. No acquisitions were completed in the third quarter of 2014. Animmaterial acquisition was completed and "tucked-in" with existing operations in the fourth quarter of 2014. As of December 31, 2014, we had 37 operatinglocations. Acquisitions are included in our results of operations from the respective acquisition date. The same-store comparison from 2014 to 2013, asdescribed below, excludes eight months of results for our Northern Texas operation, which was acquired in May 2014. An operating location is included inthe same-store comparison on the first day it has comparable prior year operating data. An operating location is excluded from the same-store comparison inthe current year and comparable prior years when it is properly characterized as a discontinued operation under applicable accounting standards. Revenue—Revenue increased $53.5 million, or 3.9% to $1,410.8 million in 2014 compared to 2013. The increase included a 0.6% increase in revenuerelated to same-store activity and a 3.3% increase related to the acquisition of our Northern Texas operation. The same-store revenue increase is primarily dueto our Arkansas operation ($16.1 million) and one of our Virginia operations33 Year Ended December 31, 2014 2013 2012 Revenue $1,410,795 100.0%$1,357,272 100.0%$1,331,185 100.0%Cost of services 1,161,024 82.3% 1,117,389 82.3% 1,123,564 84.4%Gross profit 249,771 17.7% 239,883 17.7% 207,621 15.6%Selling, generalandadministrativeexpenses 207,652 14.7% 194,214 14.3% 185,809 14.0%Goodwillimpairment 727 0.1% — — — — Gain on sale ofassets (830) (0.1)% (589) — (491) — Operating income 42,222 3.0% 46,258 3.4% 22,303 1.7%Interest income 18 — 23 — 24 — Interest expense (1,858) (0.1)% (1,351) (0.1)% (1,595) (0.1)%Changes in the fairvalue ofcontingent earn-out obligations (245) — 1,646 0.1% 662 — Other income 91 — 204 — 145 — Income beforeincome taxes 40,228 2.9% 46,780 3.4% 21,539 1.6%Income tax expense 11,614 18,148 10,045 Income (loss) fromcontinuingoperations 28,614 2.0% 28,632 2.1% 11,494 0.9%Discontinuedoperations—Operatingincome (loss),net of tax (15) (76) 355 Net incomeincludingnoncontrollinginterests 28,599 28,556 11,849 Less: Net income(loss)attributable tononcontrollinginterests 5,536 1,287 (1,614) Net incomeattributable toComfort SystemsUSA, Inc. $23,063 $27,269 $13,463 Table of Contents($12.9 million) which both performed a significant amount of project work for the institutional sector during 2014. This increase was partially offset by lowerrevenues at our Arizona operation ($23.8 million) which performed a significant amount of project work during 2013 which has not reoccurred in 2014 dueto its completion. Backlog reflects revenue still to be recognized under contracted or committed installation and replacement project work. Project work generally lasts lessthan 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 ouroperating results over the next six to twelve months. As a result, we believe the predictive value of backlog information is limited to indications of generalrevenue direction over the near term, and should not be interpreted as indicative of ongoing revenue performance over several quarters. Backlog as of December 31, 2014 was $757.8 million, a 15.4% increase from September 30, 2014 backlog of $656.8 million and a 25.5% increase fromDecember 31, 2013 backlog of $603.6 million. Sequential backlog increased primarily due to our EAS operation ($37.3 million) and one of our Virginiaoperations ($17.2 million) which had increased project bookings. The year-over-year backlog increase was primarily due to a same-store increase of 17.1%largely related to increased project bookings at many of our operating locations, including our EAS operation ($30.6 million) and one of our Marylandoperations ($25.4 million). In addition, an 8.4% increase was due to the aforementioned acquisition of our Northern Texas operation ($50.8 million) duringthe current year. Gross Profit—Gross profit increased $9.9 million, or 4.1%, to $249.8 million in 2014 as compared to 2013. The increase included a $5.6 million, or2.3%, increase related to the acquisition of our Northern Texas operation and a $4.3 million, or 1.8%, increase on a same-store basis. The same-store increasein gross profit was primarily due to a $9.8 million increase in profitability at our EAS operation due to improved project execution. This was partially offsetby a decrease in project volumes at our Arizona operation ($4.2 million) and job underperformance at our Southern California operation ($3.9 million) whichincluded a revision in contract estimate on a project in a loss position resulting in a $4.4 million writedown. As a percentage of revenue, gross profit wasstable at 17.7% in 2014 compared to 2013 primarily due to the factors discussed above. Selling, General and Administrative Expenses ("SG&A")—SG&A increased $13.4 million, or 6.9%, to $207.7 million for 2014 as compared to 2013. Ona same-store basis, excluding amortization expense, SG&A increased $9.4 million, or 5.0%. This increase is primarily due to higher compensation expense($6.5 million) primarily as a result of our increased investment in service growth and information technology, higher training costs ($2.6 million) and a$1.3 million increase in bad debt expense as a result of a $0.8 million gain recorded in the prior year as a result of a receivable settlement. Amortizationexpense decreased $0.2 million, or 2.4%. As a percentage of revenue, SG&A increased from 14.3% in 2013 to 14.7% in 2014, primarily due to the factorsdiscussed above. We have included same-store SG&A, excluding amortization, because we believe it is an effective measure of comparative results of operations.However, same-store SG&A, excluding amortization, is not considered under generally accepted accounting principles to be a primary measure of an entity's34Table of Contentsfinancial results, and accordingly, should not be considered an alternative to SG&A as shown in our consolidated statements of operations. Interest Expense—Interest expense increased $0.5 million, or 37.5%, in 2014. The increase is due to the increase in borrowings on the revolving creditfacility. Goodwill Impairment—We recorded a goodwill impairment charge of $0.7 million during the second quarter of 2014. Based on market activity declinesand write-downs incurred on several jobs, we determined that the operating environment, conditions and performance at our operating location based inSouthern California could no longer support the related goodwill balance. No goodwill impairment was recorded in 2013. Changes in the Fair Value of Contingent Earn-out Obligations—The contingent earn-out obligations are measured at fair value each reporting periodand changes in estimates of fair value are recognized in earnings. Income from changes in the fair value of contingent earn-out obligations decreased$1.9 million in 2014 compared to 2013. The primary reason for the decrease was an overall reduction of estimated future cash flows in 2013 related to the2010 acquisition of ColonialWebb and the 2011 acquisition of EAS. This change in estimate was the result of a writedown of $1.6 million which did notreoccur in the current year. In addition, based on updated measurements of estimated future cash flows in the current year, primarily for our EAS location, werecorded a $0.3 million increase to the earn-out obligation. Income Tax Expense—We perform work throughout the United States in virtually all of the fifty states as well as in Puerto Rico. Our effective tax ratevaries based upon our relative profitability, or lack of profitability, in states with varying state tax rates and rules. In addition, discrete events, judgments andlegal structures can affect our effective tax rate. These items can include the tax treatment for impairment of goodwill and other intangible assets and changesin fair value of acquisition related assets and liabilities, tax reserves associated with regulatory audits, accounting for losses associated with underperformingoperations and the partial ownership of consolidated entities. Our effective tax rate for 2014 was 28.9%, as compared to 38.8% in 2013. The effective rate for 2014 is lower than the federal statutory rate of 35.0%primarily due to a decrease in the valuation allowance primarily associated with our operations in Maryland and Virginia (4.8%), by the impact of thenoncontrolling interest of EAS which for tax purposes is treated as a partnership (4.8%) and the effect of the production activity deduction (1.7%). Theeffective rate for 2013 is higher than the federal statutory rate of 35.0% primarily due to state income taxes (4.1%), the effect of non-deductible expenses(1.3%) and an increase in the valuation allowance primarily associated with our operations in Puerto Rico (3.1%). These increases were partially offset by theimpact of the noncontrolling interest of EAS which for tax purposes is treated as a partnership (1.0%), the effect of the production activity deduction (1.1%)and the effect of purchase accounting adjustments (1.0%). Refer to Note 10 in the Consolidated Financial Statements for a reconciliation of the federalstatutory income tax rate to the effective tax rate reflected in our financial statements. The decrease in the effective tax rate from 201335 Year EndedDecember 31, 2014 2013 (in thousands) SG&A $207,652 $194,214 Less: SG&A from companies acquired (4,204) — Less: Amortization expense (6,825) (6,992)Same-store SG&A, excluding amortization expense $196,623 $187,222 Table of Contentsto 2014 is primarily due to impact on the rate from valuation allowance and from noncontrolling interests. We currently estimate our effective tax rate for2015 will be between 35% and 40%. Discontinued Operations—During the fourth quarter of 2012, we substantially completed the shutdown of our operation located in Delaware. The aftertax loss of less than $0.1 million for the year ended December 31, 2014 and the after tax loss of $0.1 million for the year ended December 31, 2013 have beenrecorded in discontinued operations under "Operating income (loss), net of tax expense (benefit)." Net Income (Loss) Attributable to Noncontrolling Interests—Net income (loss) attributable to noncontrolling interests increased $4.2 million in 2014 toincome of $5.5 million as compared to $1.3 million in 2013. This increase reflects the impact of higher earnings at EAS, our non-wholly owned consolidatedsubsidiary, which was due primarily to increased margins on jobs performed in the current year.2013 Compared to 2012 We had 37 operating locations as of December 31, 2012. During the first quarter of 2013, we consolidated one company into other operations. As ofDecember 31, 2013, we had 36 operating locations. Revenue—Revenue increased $26.1 million, or 2.0% to $1,357.3 million in 2013 compared to 2012. The increase is primarily due to our Arizonaoperation ($23.5 million) and our EAS operation ($47.3 million) which performed a significant amount of project work during 2013. This increase waspartially offset by lower revenue in our large operation headquartered in Virginia ($53.1 million), which had a fast-paced, large data center project in the firsthalf of 2012 which did not reoccur in 2013 due to its completion in the prior year. Backlog reflects revenue still to be recognized under contracted or committed installation and replacement project work. Project work generally lasts lessthan 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 ouroperating results over the next six to twelve months. As a result, we believe the predictive value of backlog information is limited to indications of generalrevenue direction over the near term, and should not be interpreted as indicative of ongoing revenue performance over several quarters. Backlog as of December 31, 2013 was $603.6 million, a 5.7% increase from September 30, 2013 backlog of $570.9 million and a 2.3% decrease fromDecember 31, 2012 backlog of $618.0 million. Sequential backlog increased primarily due to our EAS operation ($22.9 million) which had increased projectbookings. The year-over-year backlog decrease was primarily due to our Arizona operation ($22.7 million) which performed a significant amount of projectwork during the current year. Gross Profit—Gross profit increased $32.3 million, or 15.5%, to $239.9 million in 2013 as compared to 2012. The increase in gross profit was due toimproved profitability at a majority of our operations in 2013 but primarily at our EAS operation (approximately $5.7 million), improved market conditionswhich resulted in an increase in volumes at our Arizona operation (approximately $5.6 million) and job underperformance at one of our Maryland operationsin 2012 (approximately $5.7 million). Also, gross profit increased approximately $2.5 million due to a prior period accounting adjustment. These correctionsare reflected on a pretax basis in revenue and cost of sales, which include $3.3 million and $0.8 million, respectively. These accounting adjustments aredescribed in Note 2 to the Consolidated Financial Statements included elsewhere in this annual report on Form 10-K. As a percentage of revenue, gross profitincreased from 15.6% in 2012 to 17.7% in 2013 primarily due to the factors discussed above. In addition, the gross profit percentage increased due toimproved profitability at our36Table of Contentslarge operation headquartered in Virginia despite lower revenues, and included a claim settled during the first quarter of 2013 with the general contractor ona large data center project that had been accelerated by the owner on which we recognized approximately $1.6 million of additional gross profit during thecurrent year. Selling, General and Administrative Expenses ("SG&A")—SG&A increased $8.4 million, or 4.5%, to $194.2 million for 2013 as compared to 2012.Excluding amortization expense, SG&A increased $8.9 million, or 5.0%. This increase is primarily due to increased salary expense ($4.6 million) as a resultof an increased portion of our work in maintenance, repair and replacement services that has higher SG&A costs, and increased bonuses payable($3.6 million) as a result of improved operating results. These increases were partially offset by a decrease in bad debt expense ($2.4 million) as a result of areceivable settlement for a gain of $0.8 million, and higher than normal bad debt expense in the prior year due to specific collectability concerns at ouroperations in Maryland and Tennessee which do not represent trends we expect to continue in the future. As a percentage of revenue, SG&A increased from14.0% in 2012 to 14.3% in 2013, primarily due to the factors discussed above. We have included SG&A, excluding amortization, because we believe it is an effective measure of comparative results of operations. However, SG&A,excluding amortization, is not considered under generally accepted accounting principles to be a primary measure of an entity's financial results, andaccordingly, should not be considered an alternative to SG&A as shown in our consolidated statements of operations. Interest Expense—Interest expense decreased $0.2 million, or 15.3%, in 2013. The decrease is due to the decrease in notes to former owners andborrowings on the revolving credit facility. Changes in the Fair Value of Contingent Earn-out Obligations—The contingent earn-out obligations are measured at fair value each reporting periodand changes in estimates of fair value are recognized in earnings. Income from changes in the fair value of contingent earn-out obligations increased$1.0 million in 2013 to $1.6 million. The primary reason for the increase is a reduction of estimated future cash flows during 2013 related to the 2010acquisition of ColonialWebb and the 2011 acquisition of EAS. At the time that we valued our contingent obligations for these acquisitions we did notanticipate the duration of weak market conditions and as a result the initial value of the earnout payments was higher than what we currently expect to incur.Based on updated measurements in 2013, this change in estimate resulted in a $1.6 million writedown of the fair value of the liability. In 2012, we incurred asmaller writedown of $0.6 million related to ColonialWebb based on updated measurements at that time. Income Tax Expense—We perform work throughout the United States in virtually all of the fifty states as well as in Puerto Rico. Our effective tax ratevaries based upon our relative profitability, or lack of profitability, in states with varying state tax rates and rules. In addition, discrete events, judgments andlegal structures can affect our effective tax rate. These items can include the tax treatment for impairment of goodwill and other intangible assets and changesin fair value of acquisition related assets and liabilities, tax reserves associated with regulatory audits, accounting for losses associated with underperformingoperations and the partial ownership of consolidated entities.37 Year EndedDecember 31, 2013 2012 (in thousands) SG&A $194,214 $185,809 Less: Amortization expense (6,992) (7,461)SG&A, excluding amortization expense $187,222 $178,348 Table of Contents Our effective tax rate for 2013 was 38.8%, as compared to 46.6% in 2012. The effective rate for 2013 is higher than the federal statutory rate of 35.0%primarily due to state income taxes (4.1%), the effect of non-deductible expenses (1.3%) and an increase in the valuation allowance primarily associated withour operations in Puerto Rico (3.1%). These increases were partially offset by the impact of the noncontrolling interest of EAS which for tax purposes istreated as a partnership (1.0%), the effect of the production activity deduction (1.1%) and the effect of purchase accounting adjustments (1.0%). The effectiverate for 2012 is higher than the federal statutory rate of 35.0% primarily due to state income taxes (4.7%), the impact of the noncontrolling interest of EASwhich for tax purposes is treated as a partnership (2.6%), the effect of non-deductible expenses (2.2%) and an increase in the valuation allowance primarilyassociated with our operations in Puerto Rico (2.1%). Refer to Note 10 to the Consolidated Financial Statements for a reconciliation of the federal statutoryincome tax rate to the effective tax rate reflected in our financial statements. The decrease in the effective tax rate from 2012 to 2013 is primarily due to lessimpact on the rate from valuation allowance, contingency reserves, non-deductible expenses and from noncontrolling interests switching from an increase toa decrease in the effective rate. Discontinued Operations—During the fourth quarter of 2012, we substantially completed the shutdown of our operation located in Delaware. The aftertax loss of $0.1 million for the year ended December 31, 2013 and the after tax income of $0.1 million for the year ended December 31, 2012 have beenrecorded in discontinued operations under "Operating income (loss), net of tax expense (benefit)." In addition, we recorded after tax income of $0.3 million in 2012 associated with the reduction of estimated liabilities associated with the sale andshutdown of previous discontinued operations. This amount is reflected in 2012 discontinued operations under "Operating income (loss), net of tax expense(benefit)" in addition to those mentioned above. Net Income (Loss) Attributable to Noncontrolling Interests—Net income (loss) attributable to noncontrolling interests increased $2.9 million in 2013 toincome of $1.3 million as compared to a loss in 2012. This increase reflects the impact of higher earnings at EAS, our non-wholly owned consolidatedsubsidiary, which was due primarily to higher revenues and better absorption of overhead costs in the current year.Outlook We expect that activity levels and the underlying environment for nonresidential construction activity will remain substantially below prior peaks, butwe believe that industry conditions will begin to improve in 2015. Our backlog has recently begun to increase. Our emphasis for 2015 will be on execution,including a focus on cost discipline and efficient project performance, labor force development, and we are investing in growth, particularly in service andsmall projects. Based on our backlog, and in light of economic conditions for our industry, we expect that revenues will continue at or somewhat above thelevels that we have experienced in recent years, and that 2015 profitability is likely to improve as compared to 2014.38Table of ContentsLiquidity and Capital ResourcesCash Flow Our business does not require significant amounts of investment in long-term fixed assets. The substantial majority of the capital used in our business isworking capital that funds our costs of labor and installed equipment deployed in project work until our customer pays us. Customary terms in our industryallow customers to withhold a small portion of the contract price until after we have completed the work, typically for six months. Amounts withheld underthis practice are known as retention or retainage. Our average project duration together with typical retention terms generally allow us to complete therealization of revenue and earnings in cash within one year.2014 Compared to 2013 Cash Provided by Operating Activities—Cash flow from operations is primarily influenced by demand for our services and operating margins, but canalso be influenced by working capital needs associated with the various types of services that we provide. In particular, working capital needs may increasewhen we commence large volumes of work under circumstances where project costs, primarily associated with labor, equipment and subcontractors, arerequired to be paid before the receivables resulting from the work performed are billed and collected. Working capital needs are generally higher during thelate winter and spring months as we prepare and plan for the increased project demand when favorable weather conditions exist in the summer and fallmonths. Conversely, working capital assets are typically converted to cash during the late summer and fall months as project completion is underway. Theseseasonal trends are sometimes offset by changes in the timing of major projects which can be impacted by the weather, project delays or accelerations andother economic factors that may affect customer spending. We generated $42.6 million of cash flow from operating activities during 2014 compared with $38.4 million during 2013. The $4.1 million increase isprimarily due to billings in excess of costs and estimated earnings which had a positive impact of $16.8 million on the comparison of cash flows due to theachievement of contract milestones that affected the timing of customer billings. This was partially offset by a $10.9 million negative impact related toaccounts payables and accrued liabilities. During the year ended December 31, 2014, accounts payable balances decreased due to timing of payments ascompared to increased accrued compensation due to higher earnings for the year ended December 31, 2013.39 Year Ended December 31, 2014 2013 2012 (in thousands) Cash provided by (used in): Operating activities $42,552 $38,423 $30,510 Investing activities (74,142) (16,253) (23,168)Financing activities 11,600 (10,873) (17,822)Net increase (decrease) in cash and cash equivalents $(19,990)$11,297 $(10,480)Free cash flow: Cash provided by operating activities $42,552 $38,423 $30,510 Purchases of property and equipment (19,183) (17,403) (11,782)Proceeds from sales of property and equipment 1,355 1,107 1,106 Free cash flow $24,724 $22,127 $19,834 Table of Contents Cash Used in Investing Activities—Cash used in investing activities was $74.1 million for 2014 compared to $16.3 million during 2013. The$57.9 million increase in cash used primarily relates to cash paid for four acquisitions that were completed in 2014 ($52.0 million) and deferred purchaseprice costs related to previous acquisitions which were completed in 2012 and 2011 ($4.3 million). Cash Provided by (Used in) Financing Activities—Cash provided by financing activities was $11.6 million for 2014 compared to cash used in financingactivities of $10.9 million during 2013. The $22.5 million increase in cash provided by financing activities primarily relates to $38.5 million of netborrowings on the revolving line of credit in 2014 compared to no net borrowings in 2013. This was partially offset by cumulative cash distributions of$8.6 million to our noncontrolling partners as well as an incremental increase of $6.1 million related to share repurchases.2013 Compared to 2012 Cash Provided by Operating Activities—We generated $38.4 million of cash flow from operating activities during 2013 compared with $30.5 millionduring 2012. The $7.9 million increase is primarily due to higher net income in 2013 of $16.7 million and by an increase in accounts payable and accruedliabilities of $22.3 million which relates to the timing of vendor payments and increased bonus accruals based on improved operating results. This increasewas partially offset by increased receivable balances of $15.3 million due to the timing of customer billings and payments and a decrease in billings in excessof costs of $11.0 million due to the timing of project billings. Cash Used in Investing Activities—During 2013, cash used in investing activities was $16.3 million compared with $23.2 million during 2012. The$6.9 million decrease in cash used primarily relates to cash paid for acquisitions in 2012 ($12.7 million) which was partially offset by a $5.6 million increasein capital expenditures in the current year primarily related to transportation equipment. Cash Used in Financing Activities—Cash used in financing activities was $10.9 million for 2013 compared to $17.8 million during 2012. Werepurchased approximately 0.1 million shares in 2013 for $1.8 million as compared to 0.3 million shares in 2012 for $2.9 million. Additionally, we paid$5.4 million of debt related to acquisitions in 2013 as compared to $7.3 million in 2012. In addition, proceeds from the exercise of options provided anincrease in cash flow of $4.9 million in 2013 compared to $0.3 million in 2012. This increase was due to higher options exercised in 2013 due to a favorablestock price.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 paidrelated to pre-acquisition equity transactions of an acquired company. We believe free cash flow, by encompassing both profit margins and the use ofworking capital over our approximately one year working capital cycle, is an effective measure of operating effectiveness and efficiency. We have includedfree 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 notconsidered under generally accepted accounting principles to be a primary measure of an entity's financial results, and accordingly free cash flow should notbe considered an alternative to operating income, net income, or amounts shown in our consolidated statements of cash flows as determined under generallyaccepted accounting principles. Free cash flow may be defined differently by other companies.Share Repurchase Program On March 29, 2007, our Board of Directors (the "Board") approved a stock repurchase program to acquire up to 1.0 million shares of our outstandingcommon stock. Subsequently, the Board has from40Table of Contentstime to time approved extensions of the program to acquire additional shares. On October 24, 2014, the Board approved an extension to the program byincreasing the shares authorized for repurchase by 1.0 million shares. Since the inception of the repurchase program, the Board has approved 7.6 millionshares to be repurchased. The share repurchases will be made from time to time at our discretion in the open market or privately negotiated transactions as permitted by securitieslaws and other legal requirements, and subject to market conditions and other factors. The Board may modify, suspend, extend or terminate the program atany time. We repurchased 0.5 million shares for approximately $8.0 million for the year ended December 31, 2014 at an average price of $14.52 per share. Werepurchased 0.1 million shares for approximately $1.8 million and 0.3 million shares for approximately $2.9 million under our share repurchase program forthe years ended December 31, 2013 and 2012, respectively. Since the inception of the program in 2007 and as of December 31, 2014, we have repurchased acumulative total of 6.6 million shares at an average price of $11.30 per share.DebtRevolving Credit Facility On July 22, 2014, we amended our senior credit facility (the "Facility") provided by a syndicate of banks increasing our borrowing capacity from$175.0 million to $250.0 million. The Facility, which is available for borrowings and letters of credit, expires in October 2019 and is secured by a first lien onsubstantially all of our personal property except for assets related to projects subject to surety bonds and assets held by certain unrestricted subsidiaries and asecond lien on our assets related to projects subject to surety bonds. The Facility provides that availability under the Facility will be limited to the lesser ofthe face amount of $250.0 million, or indebtedness less certain exclusions equal to 2.75 times trailing twelve month Credit Facility Adjusted EBITDA, whichcalculates to availability of $222.4 million as of December 31, 2014. We incurred approximately $0.6 million in financing and professional costs inconnection with the amendment to the Facility, which combined with the previous unamortized costs of $1.0 million, will be amortized on a straight-linebasis as a non-cash charge to interest expense over the remaining term of the Facility. As of December 31, 2014, we had $38.5 million of outstandingborrowings, $45.0 million in letters of credit outstanding and $138.9 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 arefloating rates determined by the broad financial markets, meaning they can and do move up and down from time to time. Additional margins are then addedto these two rates. The weighted average interest rate applicable to the borrowings under the Facility was approximately 1.4% as of December 31, 2014. Certain of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on our behalf, such as to beneficiaries under ourself-funded insurance programs. We have also occasionally used letters of credit to guarantee performance under our contracts and to ensure payment to oursubcontractors and vendors under those contracts. Our lenders issue such letters of credit through the Facility for a fee. We have never had a claim madeagainst 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 feesrange from 1.25% to 2.00% per annum, based on the ratio of Consolidated Total Indebtedness to Credit Facility Adjusted EBITDA, as defined in the creditagreement. 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 feesrange from 0.20%-0.35% per annum, based on the ratio of Consolidated Total Indebtedness to Credit Facility Adjusted EBITDA, as defined in the creditagreement.41Table of Contents Interest expense included the following primary elements (in thousands): The Facility contains financial covenants defining various measures and the levels of these measures with which we must comply. Covenant complianceis assessed as of each quarter end. Credit Facility Adjusted EBITDA is defined under the Facility for financial covenant purposes as net earnings for the fourquarters 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 ofCredit Facility Adjusted EBITDA to net income (in thousands): The Facility's principal financial covenants include: Leverage Ratio—The Facility requires that the ratio of our Consolidated Total Indebtedness to our Credit Facility Adjusted EBITDA not exceed 2.75through maturity. The leverage ratio as of December 31, 2014 was 0.62. Fixed Charge Coverage Ratio—The Facility requires that the ratio of Credit Facility Adjusted EBITDA, less non-financed capital expenditures, taxprovision, 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 NetLeverage Ratio does not exceed 1.50. The Facility also allows the fixed charge coverage ratio not to be reduced for stock repurchases through September 30,2015 in an aggregate amount not to exceed $25 million if at the time of and after giving effect to such repurchase the Company's Net Leverage Ratio was lessthan or equal to 1.50. Capital expenditures, tax provision, dividends and stock repurchase payments are defined under the Facility for purposes of thiscovenant to be amounts for the four quarters ending as of any given quarterly covenant compliance measurement date. The fixed charge coverage ratio as ofDecember 31, 2014 was 18.90. Other Restrictions—The Facility permits acquisitions of up to $25.0 million per transaction, provided that the aggregate purchase price of such anacquisition and of acquisitions in the same fiscal42 Year Ended December 31, 2014 2013 2012 Interest expense on notes to former owners $38 $97 $255 Interest expense on borrowings and unused commitment fees 790 279 444 Letter of credit fees 747 731 667 Amortization of deferred debt arrangement costs 283 244 229 Total $1,858 $1,351 $1,595 Net income including noncontrolling interests $28,599 Income taxes—continuing operations 11,614 Interest expense, net 1,840 Depreciation and amortization expense 21,336 Stock compensation expense 4,806 Income taxes—discontinued operations (10)Goodwill impairment 727 EBITDA attributable to noncontrolling interests (6,471)Pre-acquisition results of acquired companies, as defined under the Facility 2,746 Credit Facility Adjusted EBITDA $65,187 Table of Contentsyear does not exceed $60.0 million. However, these limitations only apply when the Company's Net Leverage Ratio is equal to or greater than 2.00. While the Facility's financial covenants do not specifically govern capacity under the Facility, if our debt level under the Facility at a quarter-endcovenant compliance measurement date were to cause us to violate the Facility's leverage ratio covenant, our borrowing capacity under the Facility and thefavorable terms that we currently have could be negatively impacted by the lenders. We are in compliance with all of our financial covenants as of December 31, 2014.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 bearinterest, payable annually, at a weighted average interest rate of 3.3%. In June 2014, we paid the outstanding balance of $2.0 million. In conjunction with animmaterial acquisition, in the fourth quarter of 2014, we issued subordinated notes to the former owners as part of the consideration. These notes had anoutstanding balance of $1.0 million as of December 31, 2014 and bear interest, payable annually, at a weighted average interest rate of 2.5%. The principal isdue in equal installments on October 2016 and 2017.Other Debt In conjunction with our acquisition of our northern Texas operation, we acquired capital lease obligations of $0.7 million. Currently, $0.8 million ofcapital lease obligations are outstanding, of which $0.3 million is considered current. Our majority owned subsidiary, EAS, has a revolving $2.5 million credit line that is available for temporary working capital needs and expires July 31,2015. As of December 31, 2014, we had no outstanding borrowings and, therefore, $2.5 million of credit available. We estimate that the weighted averageinterest rate applicable to borrowings under this variable rate credit line would be approximately 2.7% as of December 31, 2014.Outlook We have generated positive net free cash flow for the last sixteen calendar years, much of which occurred during challenging economic and industryconditions. We also continue to have significant borrowing capacity under our credit facility, and we maintain what we feel are reasonable cash balances. Webelieve these factors will provide us with sufficient liquidity to fund our operations for the foreseeable future.Off-Balance Sheet Arrangements and Other Commitments As is common in our industry, we have entered into certain off-balance sheet arrangements in the ordinary course of business that result in risks notdirectly 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 amonthly 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 thelessor. 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 ofthe lease.43Table of Contents Certain of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on our behalf, such as to beneficiaries under ourself-funded insurance programs. We have also occasionally used letters of credit to guarantee performance under our contracts and to ensure payment to oursubcontractors 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 performspecified actions. If this were to occur, we would be required to reimburse the lenders. Depending on the circumstances of such a reimbursement, we may alsohave 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'scapacity 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 ofcredit 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 foreseeablefuture. Many customers, particularly in connection with new construction, require us to post performance and payment bonds issued by a financial institutionknown 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 theyincur. 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 suchlosses to be incurred in the foreseeable future. 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 currently have strong surety relationships to support our bonding needs, futuremarket conditions or changes in our sureties' assessment of our operating and financial risk could cause our sureties to decline to issue bonds for our work. Ifthat were to occur, our alternatives include doing more business that does not require bonds, posting other forms of collateral for project performance such asletters of credit or cash, and seeking bonding capacity from other sureties. We would likely also encounter concerns from customers, suppliers and othermarket participants as to our creditworthiness. While we believe our general operating and financial characteristics would enable us to ultimately respondeffectively to an interruption in the availability of bonding capacity, such an interruption would likely cause our revenue and profits to decline in the nearterm.Contractual Obligations The following recaps the future maturities of our contractual obligations as of December 31, 2014 (in thousands): As discussed in Note 10 "Income Taxes", included in our Consolidated Balance Sheet at December 31, 2014 is approximately $0.3 million of liabilitiesassociated with uncertain tax positions.44 Twelve Months Ended December 31, 2015 2016 2017 2018 2019 Thereafter Total Revolvingcreditfacility $— $— $— $— $38,500 $— $38,500 Notes toformerowners — 500 500 — — — 1,000 Interestpayable 564 564 551 539 539 — 2,757 Capital leaseobligations 317 255 173 76 25 — 846 Operatingleaseobligations 11,683 10,078 9,111 7,644 5,647 6,526 50,689 Total $12,564 $11,397 $10,335 $8,259 $44,711 $6,526 $93,792 Table of ContentsDue to the uncertain and complex application of tax regulations, combined with the difficulty in predicting when tax audits may be concluded, we cannotmake reliable estimates of the timing of cash outflows relating to these liabilities. As of December 31, 2014, we also have $45.0 million in letter of credit commitments, of which $23.8 million will expire in 2015 and $21.2 million willexpire in 2016. 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 financialresources will be available to fund claims on our behalf, many of which develop over long periods of time, should we ever encounter financial duress. Postingof 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 themajority of these letter of credit commitments expire in 2015, we expect nearly all of them, particularly those supporting our insurance programs, will berenewed annually. Other than the operating and capital lease obligations noted above, we have no significant purchase or operating commitments outside of commitmentsto deliver equipment and provide labor in the ordinary course of performing project work. ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk We are exposed to market risk primarily related to potential adverse changes in interest rates as discussed below. We are actively involved in monitoringexposure to market risk and continue to develop and utilize appropriate risk management techniques. We are not exposed to any other significant financialmarket risks including commodity price risk, foreign currency exchange risk or interest rate risks from the use of derivative financial instruments. We do notuse derivative financial instruments. We have exposure to changes in interest rates under our revolving credit facility and the EAS credit line. We have a modest level of indebtedness underour debt facility and our indebtedness could increase in the future. Our debt with fixed interest rates consists of notes to former owners of acquired companies. The following table presents principal amounts (stated in thousands) and related average interest rates by year of maturity for our debt obligations andtheir indicated fair market value at December 31, 2014: The weighted average interest rate applicable to borrowings under the Facility was approximately 1.4% as of December 31, 2014. We measure certain assets at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the quarter ended June 30, 2014, we recorded a goodwill impairment charge of $0.7 million based on Level 3 measurements.We did not recognize any other impairments, in the current quarter, on those assets required to be measured at fair value on a nonrecurring basis. The valuation of the Company's contingent earn-out payments is determined using a probability weighted discounted cash flow method. This analysisreflects the contractual terms of the purchase agreements (e.g., minimum and maximum payment, length of earn-out periods, manner of calculating anyamounts due, etc.) and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate.45 Twelve Months Ended December 31, 2015 2016 2017 2018 2019 Thereafter Total Fixed Rate Debt $— $500 $500 $— $— $— $1,000 Average Interest Rate — 2.5% 2.5% — — — 2.5%Variable Rate Debt $— $— $— $— $38,500 $— $38,500 Table of Contents ITEM 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS 46 Page Comfort Systems USA, Inc. Management's Report on Internal Control over Financial Reporting 47 Report of Independent Registered Public Accounting Firm 48 Report of Independent Registered Public Accounting Firm 49 Consolidated Balance Sheets 50 Consolidated Statements of Operations 51 Consolidated Statements of Stockholders' Equity 52 Consolidated Statements of Cash Flows 53 Notes to Consolidated Financial Statements 54 Table of Contents Management's Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in ExchangeAct Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and ChiefFinancial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2014 based on theframework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013framework). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2014. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate. Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included elsewhere herein, has issued anattestation report auditing the effectiveness of our internal control over financial reporting as of December 31, 2014.47Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders of Comfort Systems USA, Inc. We have audited the accompanying consolidated balance sheets of Comfort Systems USA, Inc. as of December 31, 2014 and 2013, and the relatedconsolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2014. These financialstatements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Comfort SystemsUSA, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period endedDecember 31, 2014, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Comfort SystemsUSA, Inc.'s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2015 expressed anunqualified opinion thereon.48 /s/ ERNST & YOUNG LLPHouston, TexasFebruary 26, 2015 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and StockholdersComfort Systems USA, Inc. We have audited Comfort Systems USA, Inc.'s internal control over financial reporting as of December 31, 2014, based on criteria established in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).Comfort Systems USA, Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of theeffectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting.Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures aswe considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internalcontrol over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately andfairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the companyare being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financialstatements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate. In our opinion, Comfort Systems USA, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31,2014, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balancesheets of Comfort Systems USA, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations, stockholders' equity and cashflows for each of the three years in the period ended December 31, 2014 of Comfort Systems USA, Inc. and our report dated February 26, 2015 expressed anunqualified opinion thereon.49 /s/ ERNST & YOUNG LLPHouston, TexasFebruary 26, 2015 Table of Contents COMFORT SYSTEMS USA, INC. CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share Amounts) The accompanying notes are an integral part of these consolidated financial statements.50 December 31, 2014 2013 ASSETS CURRENT ASSETS: Cash and cash equivalents $32,064 $52,054 Accounts receivable, less allowance for doubtful accounts of $4,379 and $4,460, respectively 303,575 267,470 Other receivables 15,520 16,373 Inventories 8,646 8,430 Prepaid expenses and other 25,591 24,209 Costs and estimated earnings in excess of billings 27,620 28,122 Assets related to discontinued operations 176 339 Total current assets 413,192 396,997 PROPERTY AND EQUIPMENT, NET 55,759 46,861 GOODWILL 140,341 114,588 IDENTIFIABLE INTANGIBLE ASSETS, NET 45,666 37,383 OTHER NONCURRENT ASSETS 10,792 5,993 Total assets $665,750 $601,822 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $— $2,000 Current maturities of long-term capital lease obligations 317 — Accounts payable 106,211 100,825 Accrued compensation and benefits 44,683 44,093 Billings in excess of costs and estimated earnings 77,446 64,588 Accrued self-insurance expense 28,903 29,398 Other current liabilities 24,814 28,168 Liabilities related to discontinued operations 263 366 Total current liabilities 282,637 269,438 LONG-TERM DEBT 39,500 — LONG-TERM CAPITAL LEASE OBLIGATIONS 529 — DEFERRED INCOME TAX LIABILITIES 10,817 9,941 OTHER LONG-TERM LIABILITIES 10,874 8,421 Total liabilities 344,357 287,800 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.01 par, 5,000,000 shares authorized, none issued and outstanding — — Common stock, $.01 par, 102,969,912 shares authorized, 41,123,365 and 41,123,365 sharesissued, respectively 411 411 Treasury stock, at cost, 3,853,586 and 3,488,438 shares, respectively (43,598) (37,468)Additional paid-in capital 320,084 318,123 Retained earnings 29,384 14,768 Comfort Systems USA, Inc. stockholders' equity 306,281 295,834 Noncontrolling interests 15,112 18,188 Total stockholders' equity 321,393 314,022 Total liabilities and stockholders' equity $665,750 $601,822 Table of Contents COMFORT SYSTEMS USA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Data) The accompanying notes are an integral part of these consolidated financial statements.51 Year Ended December 31, 2014 2013 2012 REVENUE $1,410,795 $1,357,272 $1,331,185 COST OF SERVICES 1,161,024 1,117,389 1,123,564 Gross profit 249,771 239,883 207,621 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 207,652 194,214 185,809 GOODWILL IMPAIRMENT 727 — — GAIN ON SALE OF ASSETS (830) (589) (491)Operating income 42,222 46,258 22,303 OTHER INCOME (EXPENSE): Interest income 18 23 24 Interest expense (1,858) (1,351) (1,595)Changes in the fair value of contingent earn-out obligations (245) 1,646 662 Other 91 204 145 Other income (expense) (1,994) 522 (764)INCOME BEFORE INCOME TAXES 40,228 46,780 21,539 INCOME TAX EXPENSE 11,614 18,148 10,045 INCOME FROM CONTINUING OPERATIONS 28,614 28,632 11,494 Income (loss) from discontinued operations, net of income tax expense(benefit) of $(10), $(119) and $212 (15) (76) 355 NET INCOME INCLUDING NONCONTROLLING INTERESTS 28,599 28,556 11,849 Less: Net income (loss) attributable to noncontrolling interests 5,536 1,287 (1,614)NET INCOME ATTRIBUTABLE TO COMFORT SYSTEMS USA, INC $23,063 $27,269 $13,463 INCOME PER SHARE ATTRIBUTABLE TO COMFORT SYSTEMSUSA, INC.: Basic— Income from continuing operations $0.61 $0.73 $0.35 Income from discontinued operations — — 0.01 Net income $0.61 $0.73 $0.36 Diluted— Income from continuing operations $0.61 $0.73 $0.35 Income from discontinued operations — — 0.01 Net income $0.61 $0.73 $0.36 SHARES USED IN COMPUTING INCOME PER SHARE: Basic 37,547 37,245 37,112 Diluted 37,797 37,536 37,259 DIVIDENDS PER SHARE $0.225 $0.210 $0.200 Table of Contents COMFORT SYSTEMS USA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In Thousands, Except Share Amounts) Common Stock Treasury Stock AdditionalPaid-InCapital RetainedEarnings(Deficit) Non-ControllingInterests TotalStockholders'Equity Shares Amount Shares Amount BALANCE ATDECEMBER31, 2011 41,123,365 $411 (3,714,506)$(39,437)$323,608 $(19,991)$18,515 $283,106 Net income(loss) — — — — — 13,463 (1,614) 11,849 Issuance ofStock: Issuance ofshares foroptionsexercisedincludingtax benefit — — 102,750 1,087 (714) — — 373 Issuance ofrestrictedstock — — 70,000 742 (742) — — — Shares receivedin lieu of taxwithholdingpayment onvestedrestrictedstock — — (51,507) (544) — — — (544)Tax benefit fromvesting ofrestrictedstock — — — — 56 — — 56 Stock-basedcompensationexpense — — — — 2,797 — — 2,797 Dividends — — — — (7,471) — — (7,471)Share repurchase — — (286,036) (2,860) — — — (2,860)BALANCE ATDECEMBER31, 2012 41,123,365 411 (3,879,299) (41,012) 317,534 (6,528) 16,901 287,306 Net income — — — — — 27,269 1,287 28,556 Issuance ofStock: Issuance ofshares foroptionsexercisedincludingtax benefit — — 439,762 4,711 522 — — 5,233 Issuance ofrestrictedstock — — 122,375 1,301 (1,301) — — — Shares receivedin lieu of taxwithholdingpayment onvestedrestrictedstock — — (45,266) (631) — — — (631)Tax benefit fromvesting ofrestrictedstock — — — — 184 — — 184 Forfeiture ofunvestedrestrictedstock — — (469) (5) 5 — — — Stock-basedcompensationexpense — — — — 3,041 — — 3,041 Dividends — — — — (1,862) (5,973) — (7,835)Share repurchase — — (125,541) (1,832) — — — (1,832)BALANCE ATDECEMBER31, 2013 41,123,365 411 (3,488,438) (37,468) 318,123 14,768 18,188 314,022 Net income — — — — — 23,063 5,536 28,599 Issuance ofStock: Issuance ofshares foroptionsexercisedincludingtax benefit — — 103,619 1,132 79 — — 1,211 The accompanying notes are an integral part of these consolidated financial statements.52Issuance ofrestrictedstock — — 115,044 1,243 (1,243) — — — Shares receivedin lieu of taxwithholdingpayment onvestedrestrictedstock — — (34,657) (531) — — — (531)Tax benefit fromvesting ofrestrictedstock — — — — 133 — — 133 Stock-basedcompensationexpense — — — — 2,992 — — 2,992 Dividends — — — — — (8,447) — (8,447)Distribution tononcontrollinginterest — — — — — — (8,612) (8,612)Share repurchase — — (549,154) (7,974) — — — (7,974)BALANCE ATDECEMBER31, 2014 41,123,365 $411 (3,853,586)$(43,598)$320,084 $29,384 $15,112 $321,393 Table of Contents COMFORT SYSTEMS USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) The accompanying notes are an integral part of these consolidated financial statements.53 Year Ended December 31, 2014 2013 2012 CASH FLOWS FROM OPERATING ACTIVITIES: Net income including noncontrolling interests $28,599 $28,556 $11,849 Adjustments to reconcile net income to net cash provided by operating activities— Amortization of identifiable intangible assets 7,653 7,132 8,837 Depreciation expense 13,683 11,440 11,793 Goodwill impairment 727 — — Bad debt expense 1,275 19 2,453 Deferred tax expense (benefit) (4,579) 4,514 3,541 Amortization of debt financing costs 283 245 229 Gain on sale of assets (830) (589) (607)Changes in the fair value of contingent earn-out obligations 245 (1,646) (662)Stock-based compensation expense 4,806 3,974 2,797 Changes in operating assets and liabilities, net of effects of acquisitions anddivestitures— (Increase) decrease in— Receivables, net (18,339) (12,427) 2,913 Inventories 281 1,208 1,195 Prepaid expenses and other current assets 1,494 (109) 370 Costs and estimated earnings in excess of billings 2,744 (1,918) 1,636 Other noncurrent assets (321) (491) (3,334)Increase (decrease) in— Accounts payable and accrued liabilities (4,078) 6,776 (15,507)Billings in excess of costs and estimated earnings 7,545 (9,226) 1,776 Other long-term liabilities 1,364 965 1,231 Net cash provided by operating activities 42,552 38,423 30,510 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (19,183) (17,403) (11,782)Proceeds from sales of property and equipment 1,355 1,107 1,106 Proceeds from businesses sold — 43 164 Cash paid for acquisitions, earn-outs and intangible assets, net of cash acquired (56,314) — (12,656)Net cash used in investing activities (74,142) (16,253) (23,168)CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving line of credit 128,500 43,000 62,000 Payments on revolving line of credit (90,000) (43,000) (62,000)Payments on other long-term debt (2,000) (5,400) (7,349)Payments on capital lease obligations (115) — — Debt financing costs (568) (552) — Payments of dividends to shareholders (8,444) (7,875) (7,498)Share repurchase program (7,974) (1,832) (2,860)Shares received in lieu of tax withholding (531) (631) (544)Excess tax benefit of stock-based compensation 115 534 100 Proceeds from exercise of options 1,229 4,883 329 Distributions to noncontrolling interests (8,612) — — Net cash provided by (used in) financing activities 11,600 (10,873) (17,822)NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (19,990) 11,297 (10,480)CASH AND CASH EQUIVALENTS, beginning of year—continuing operations anddiscontinued operations 52,054 40,757 51,237 CASH AND CASH EQUIVALENTS, end of year—continuing operations anddiscontinued operations $32,064 $52,054 $40,757 Table of Contents COMFORT SYSTEMS USA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2014 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 institutionalHVAC markets and perform most of our services within office buildings, retail centers, apartment complexes, manufacturing plants and healthcare, educationand government facilities. In addition to standard HVAC services, we provide specialized applications such as building automation control systems, fireprotection, process cooling, electronic monitoring and process piping. Certain locations also perform related activities such as electrical service andplumbing. Approximately 44% of our consolidated 2014 revenue is attributable to installation of systems in newly constructed facilities, with the remaining56% attributable to maintenance, repair and replacement services. The following activities account for our consolidated 2014 revenue: HVAC 74%,plumbing 16%, building automation control systems 6% and other 4%. These activities are within the mechanical services industry which is the singleindustry segment we serve.2. Summary of Significant Accounting PoliciesPrinciples of Consolidation These financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The accompanyingconsolidated financial statements include our accounts and those of our subsidiaries in which we have a controlling interest. All significant intercompanyaccounts and transactions have been eliminated.Reclassifications Certain reclassifications have been made in prior period financial statements to conform to current period presentation. These reclassifications are eitherof a normal and recurring nature or are due to discontinued operations accounting related to the shutdown of our Delaware operation in 2012. Neither haveresulted in any changes to previously reported net income for any periods.Accounting Adjustment Related to 2013 As reported in the prior year, the accompanying financial statements for the year ended December 31, 2013 includes the correction of prior periodaccounting errors which resulted in additional net after-tax income in the period of approximately $1.3 million. We determined that the errors primarilyimpacted years prior to 2010. These corrections are reflected on a pretax basis in revenue, cost of sales and selling, general, and administrative expenses,which include $3.3 million, $0.8 million and $0.3 million, respectively. We have considered the guidance found in ASC 250-10 and ASC 270-10 (SEC Staff Accounting Bulletin No. 99, Materiality, Accounting BulletinNo. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), in evaluating whether arestatement of prior financial statements is required as a result of the misstatement to such financial statements. ASC 250 requires that corrections of errors berecorded by restatement of prior periods if the error is material. We quantitatively and qualitatively assessed the materiality of the errors54Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 20142. Summary of Significant Accounting Policies (Continued)and concluded that the errors were not material to our earnings for the year ended December 31, 2013, and any of our previously issued financial statements.Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions bymanagement 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 forconstruction contracts, the allowance for doubtful accounts, self-insurance accruals, deferred tax assets, warranty accruals, fair value accounting foracquisitions and the quantification of fair value for reporting units in connection with our goodwill impairment testing. Our operation in Southern Californiarecorded a revision in contract estimate on a project in a loss position resulting in a writedown to this individual project of $4.4 million, on a pre-tax basis,for the twelve months ended December 31, 2014.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:Recent Accounting Pronouncements In April 2014, the FASB issued ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360):Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU 2014-08 raises the threshold for a disposal to qualify asa discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of adiscontinued operation. It is effective for annual periods beginning on or after December 15, 2014. Early adoption is permitted but only for disposals thathave not been reported in financial statements previously issued. We do not believe this pronouncement will have a material impact on our consolidatedfinancial statements. In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 provides a framework thatreplaces the existing revenue recognition guidance. The guidance can be applied on a full retrospective or modified retrospective basis whereby the entityrecords a cumulative effect of initially applying this update at the date of initial application,55 Year Ended December 31, 2014 2013 2012 Interest $1,764 $799 $1,326 Income taxes for continuing operations 15,366 15,821 13,948 Income taxes for discontinued operations — — 5 Total $17,130 $16,620 $15,279 Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 20142. Summary of Significant Accounting Policies (Continued)and early adoption is not permitted. It is effective for annual periods beginning after December 15, 2016, including interim periods within that reportingperiod. We are currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements.Revenue Recognition Approximately 82% of our revenue was earned on a project basis and recognized through the percentage of completion method of accounting. Underthis method, contract revenue recognizable at any time during the life of a contract is determined by multiplying expected total contract revenue by thepercentage of contract costs incurred at any time to total estimated contract costs. More specifically, as part of the negotiation and bidding process inconnection with obtaining installation contracts, we estimate our contract costs, which include all direct materials (exclusive of rebates), labor andsubcontract costs and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. These contract costsare included in our results of operations under the caption "Cost of Services." Then, as we perform under those contracts, we measure costs incurred, comparethem to total estimated costs to complete the contract and recognize a corresponding proportion of contract revenue. Labor costs are considered to beincurred as the work is performed. Subcontractor labor is recognized as the work is performed, but is generally subjected to approval as to milestones or otherevidence of completion. Non-labor project costs consist of purchased equipment, prefabricated materials and other materials. Purchased equipment on ourprojects is substantially produced to job specifications and is a value added element to our work. The costs are considered to be incurred when title istransferred to us, which typically is upon delivery to the work site. Prefabricated materials, such as ductwork and piping, are generally performed at our shopsand recognized as contract costs when fabricated for the unique specifications of the job. Other materials costs are not significant and are generally recordedwhen delivered to the work site. This measurement and comparison process requires updates to the estimate of total costs to complete the contract, and theseupdates 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 recoverabilityfrom the contract is probable. Upon receiving the contract, these costs are included in contract costs. Deferred costs associated with unsuccessful contract bidsare 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 thestatement 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 bywhich cumulative contract revenue recognized on a contract as of a given date exceed cumulative billings to the customer under the contract are reflected asa current asset in our balance sheet under the caption "Costs and estimated earnings in excess of billings." Amounts by which cumulative billings to thecustomer under a contract as of a given date exceed cumulative contract revenue recognized on the contract are reflected as a56Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 20142. Summary of Significant Accounting Policies (Continued)current liability in our balance sheet under the caption "Billings in excess of costs and estimated earnings." Contracts in progress are as follows (in thousands): Accounts receivable include amounts billed to customers under retention or retainage provisions in construction contracts. Such provisions are standardin our industry and usually allow for a small portion of progress billings or the contract price to be withheld by the customer until after we have completedwork on the project, typically for a period of six months. Based on our experience with similar contracts in recent years, the majority of our billings for suchretention balances at each balance sheet date are finalized and collected within the subsequent year. Retention balances at December 31, 2014 and 2013 are$50.5 million and $51.4 million, respectively, and are included in accounts receivable. Accounts payable at December 31, 2014 and 2013 included $8.9 million and $10.3 million of retainage under terms of contracts with subcontractors,respectively. The majority of the retention balances at each balance sheet date are finalized and paid within the subsequent year. The percentage of completion method of accounting is also affected by changes in job performance, job conditions and final contract settlements. Thesefactors may result in revisions to estimated costs and, therefore, revenue. Such revisions are frequently based on further estimates and subjective assessments.The effects of these revisions are recognized in the period in which the revisions are determined. When such revisions lead to a conclusion that a loss will berecognized on a contract, the full amount of the estimated ultimate loss is recognized in the period such a conclusion is reached, regardless of the percentageof 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 canalso result in claims we might make against the customer to recover project variances that have not been satisfactorily addressed through change orders withthe customer. Except in certain circumstances, we do not recognize revenue or margin based on change orders or claims until they have been agreed uponwith 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 thevariation via additional customer payments.57 December 31, 2014 2013 Costs incurred on contracts in progress $1,193,857 $989,072 Estimated earnings, net of losses 151,950 126,431 Less—Billings to date (1,395,633) (1,151,969) $(49,826)$(36,466)Costs and estimated earnings in excess of billings $27,620 $28,122 Billings in excess of costs and estimated earnings (77,446) (64,588) $(49,826)$(36,466)Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 20142. Summary of Significant Accounting Policies (Continued) Revenue associated with maintenance, repair and monitoring services and related contracts are recognized as services are performed. Amounts associatedwith unbilled service work orders are reflected as a current asset in our balance sheet under the caption "Costs and estimated earnings in excess of billings"and amounts billed in advance of work orders being performed are reflected as a current liability in our balance sheet under the caption "Billings in excess ofcosts and estimated earnings."Accounts Receivable The carrying value of our receivables, net of the allowance for doubtful accounts, represents the estimated net realizable value. We estimate ourallowance for doubtful accounts based upon the creditworthiness of our customers, prior collection history, ongoing relationships with our customers, theaging 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 tothe contract. The receivables are written off when they are deemed to be uncollectible.Inventories Inventories consist of parts and supplies that we purchase and hold for use in the ordinary course of business and are stated at the lower of cost or marketusing the first-in, first-out method.Property and Equipment Property and equipment are stated at cost, and depreciation is computed using the straight-line method over the estimated useful lives of the assets.Leasehold improvements are capitalized and amortized over the lesser of the expected life of the lease or the estimated useful life of the asset. Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments, which extend theuseful lives of existing equipment, are capitalized and depreciated over the remaining useful life of the equipment. Upon retirement or disposition of propertyand equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in "Gain on sale ofassets" in the statement of operations.Recoverability of Goodwill and Identifiable Intangible Assets Goodwill is the excess of purchase price over the fair value of the net assets of acquired businesses. We assess goodwill for impairment each year, andmore frequently if circumstances suggest an impairment may have occurred. When the carrying value of a given reporting unit exceeds its fair value, an impairment loss is recorded to the extent that the implied fair value of thegoodwill of the reporting unit is less than its carrying value. If other reporting units have had increases in fair value, such increases may not be recorded.Accordingly, such increases may not be netted against impairments at other reporting units. The requirements for assessing whether goodwill has beenimpaired involve market-based information. This information, and its use in assessing goodwill, entails some degree of subjective assessment.58Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 20142. Summary of Significant Accounting Policies (Continued) We currently perform our annual impairment testing as of October 1 and any impairment charges resulting from this process are reported in the fourthquarter. We segregate our operations into reporting units based on the degree of operating and financial independence of each unit and our relatedmanagement of them. We perform our annual goodwill impairment testing at the reporting unit level. In the evaluation of goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events orcircumstances lead to a determination that it is more likely than not that the fair value of one of our reporting units is greater than its carrying value. If, aftercompleting such assessment, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then there is noneed to perform any further testing. If we conclude otherwise, then we perform the first step of a two-step impairment test by calculating the fair value of thereporting unit and comparing the fair value with the carrying value of the reporting unit. We estimate the fair value of the reporting unit based on two market approaches and an income approach, which utilizes discounted future cash flows.Assumptions critical to the fair value estimates under the discounted cash flow model include discount rates, cash flow projections, projected long-termgrowth rates and the determination of terminal values. The market approaches utilized market multiples of invested capital from comparable publicly tradedcompanies ("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"). We amortize identifiable intangible assets with finite lives over their useful lives. Changes in strategy and/or market condition may result in adjustmentsto recorded intangible asset balances.Long-Lived Assets Long-lived assets are comprised principally of goodwill, identifiable intangible assets, property and equipment, and deferred income tax assets. Weperiodically evaluate whether events and circumstances have occurred that indicate that the remaining balances of these assets may not be recoverable. Weuse estimates of future income from operations and cash flows, as well as other economic and business factors, to assess the recoverability of these assets.Acquisitions We recognize assets acquired and liabilities assumed in business combinations, including contingent assets and liabilities, based on fair value estimatesas of the date of acquisition. Contingent Consideration—In certain acquisitions, we agree to pay additional amounts to sellers contingent upon achievement by the acquiredbusinesses of certain predetermined profitability targets. We have recognized liabilities for these contingent obligations based on their estimated fair value atthe date of acquisition with any differences between the acquisition date fair value and the ultimate settlement of the obligations being recognized in incomefrom operations.59Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 20142. Summary of Significant Accounting Policies (Continued) Contingent Assets and Liabilities—Assets and liabilities arising from contingencies are recognized at their acquisition date fair value when theirrespective fair values can be determined. If the fair values of such contingencies cannot be determined, they are recognized at the acquisition date if thecontingencies are probable and an amount can be reasonably estimated. Acquisition date fair value estimates are revised as necessary if, and when, additionalinformation regarding these contingencies becomes available to further define and quantify assets acquired and liabilities assumed.Self-Insurance Liabilities We are substantially self-insured for workers' compensation, employer's liability, auto liability, general liability and employee group health claims, inview of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses up to deductible amounts areestimated 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. Our self-insurance arrangements are furtherdiscussed in Note 12 "Commitments and Contingencies."Warranty Costs We typically warrant labor for the first year after installation on new HVAC systems. We generally warrant labor for thirty days after servicing of existingHVAC systems. A reserve for warranty costs is estimated and recorded based upon the historical level of warranty claims and management's estimate of futurecosts.Income Taxes We are subject to income tax in the United States and Puerto Rico and file a consolidated return for federal income tax purposes. Income taxes areprovided 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 taxprovision represents the change during the reporting period in the deferred tax assets and deferred tax liabilities, net of the effect of acquisitions anddispositions. Deferred tax assets include tax loss and credit carryforwards and are reduced by a valuation allowance if, based on available evidence, it is morelikely 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 evaluationquarterly. In assessing the realizability of deferred tax assets, we must consider whether it is more likely than not that some portion, or all, of the deferred taxassets will not be realized. We consider all available evidence, both positive and negative, in determining whether a valuation allowance is required. Suchevidence includes the scheduled reversal of deferred tax liabilities, projected future taxable income, taxable income in prior carryback years and tax planningstrategies in making this assessment, and judgment is required in considering the relative weight of negative and positive evidence.60 Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 20142. Summary of Significant Accounting Policies (Continued) Significant judgment is required in assessing the timing and amounts of deductible and taxable items. We establish reserves when, despite our belief thatour tax return positions are fully supportable, we believe that certain positions may be disallowed. When facts and circumstances change, we adjust thesereserves 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 areclassified as a component of income tax expense in our Consolidated Statements of Operations.Segment Disclosure Our activities are within the mechanical services industry, which is the single industry segment we serve. Each operating subsidiary represents anoperating segment and these segments have been aggregated, as the operating units meet all of the aggregation criteria.Concentrations of Credit Risk We provide services in a broad range of geographic regions. Our credit risk primarily consists of receivables from a variety of customers includinggeneral contractors, property owners and developers and commercial and industrial companies. We are subject to potential credit risk related to changes inbusiness and economic factors throughout the United States within the nonresidential construction industry. However, we are entitled to payment for workperformed and have certain lien rights in that work. Further, we believe that our contract acceptance, billing and collection policies are adequate to managepotential credit risk. We regularly review our accounts receivable and estimate an allowance for uncollectible amounts. We have a diverse customer base,with no single customer accounting for more than 3% of consolidated 2014 revenue.Financial Instruments Our financial instruments consist of cash and cash equivalents, accounts receivable, other receivables, accounts payable, life insurance policies, notes toformer owners, capital leases, and a revolving credit facility. We believe that the carrying values of these instruments on the accompanying balance sheetsapproximate their fair values.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.61Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 20143. 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 andliabilities measured on a recurring basis as of December 31, 2014 (in thousands): Cash and cash equivalents consist primarily of highly rated money market funds at a variety of well-known institutions with original maturities of threemonths or less. The original cost of these assets approximates fair value due to their short term maturity. One of our operations has life insurance policies covering 43 employees with a combined face value of $39.6 million. The policies are invested inmutual funds and the fair value measurement of the cash surrender balance associated with these policies is determined using Level 2 inputs within the fairvalue hierarchy and will vary with investment performance. The cash surrender value of these policies is $3.2 million as of December 31, 2014 and$2.9 million as of December 31, 2013. These assets are included in "Other Noncurrent Assets" in our consolidated balance sheets. We value contingent earn-out obligations using a probability weighted discounted cash flow method. This fair value measurement is based onsignificant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. This analysis reflects the contractualterms of the purchase agreements (e.g., minimum and maximum payments, length of earn-out periods, manner of calculating any amounts due, etc.) andutilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate. The contingent earn-outobligations 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) (inthousands).62 Fair Value Measurements atReporting Date Using BalanceDecember 31, 2014 Quoted Prices inActive Marketsfor IdenticalAssets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) Cash and cash equivalents $32,064 $32,064 $— $— Life insurance—cash surrender value $3,218 $— $3,218 $— Contingent earn-out obligations $670 $— $— $670 December 31, 2014 2013 Balance at beginning of year $320 $1,966 Issuances 200 — Settlements (95) — Adjustments to fair value 245 (1,646)Balance at end of year $670 $320 Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 20143. Fair Value Measurements (Continued) 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 year ended December 31, 2014, we recorded a goodwill impairment charge of $0.7 million based on Level 3 measurements.No goodwill or other intangible asset impairments were recorded during the year ended December 31, 2013. See Note 6 "Goodwill and Identifiable IntangibleAssets, Net" for further discussion. We did not recognize any other impairments on those assets required to be measured at fair value on a nonrecurring basis.4. AcquisitionsDescription of Transaction On May 1, 2014, we closed a transaction to acquire DynaTen Corportation ("DynaTen") which reports as a separate operating location in northern Texas.DynaTen is a regional mechanical contractor based in Fort Worth, Texas which engages in a broad range of mechanical contracting projects, HVAC servicesand controls, in the Dallas/Fort Worth metroplex and in surrounding areas.Fair Value The following summarizes the acquisition date fair value of consideration transferred and identifiable assets acquired and liabilities assumed, includingan amount for goodwill (in thousands): The total purchase price was $40.5 million, including $40.3 million in cash and a $0.2 million contingent earn-out obligation. The contingent earn-out obligation is based upon exceeding specified earnings milestones each year during a three-year period and the range ofestimated milestone payments is from zero to $2 million (undiscounted). We determined the initial fair value of the contingent earn-out obligation based on aprobability-weighted income approach, which represents a Level 3 measurement. The resulting probability-weighted cash flows were discounted using a 3%discount rate, which we believe is appropriate and representative of a market participant assumption. We measure the contingent63Cash and cash equivalents $387 Receivables 15,516 Costs and estimated earnings in excess of billings 1,481 Other current assets 601 Property and equipment 3,239 Other non-current assets 6 Goodwill 19,379 Identifiable intangible assets 10,900 Accounts payable and other current liabilities (5,634)Billings in excess of costs and estimated earnings (4,703)Capital lease obligations (711)Total purchase price $40,461 Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 20144. Acquisitions (Continued)earn-out obligation at fair value each reporting period and changes in the estimated fair value of the contingent payments are recognized in earnings. Goodwill represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized.All of the goodwill recognized as a result of this transaction is tax deductible. The acquired assets include the following (in thousands): In estimating the fair value of the acquired intangible assets, we utilized the valuation methodology determined to be the most appropriate for theindividual intangible asset. In order to estimate the fair value of the backlog and customer relationships, we utilized an excess earnings methodology, whichconsisted of the projected cash flows attributable to these assets discounted to present value using a risk-adjusted discount rate that represented the requiredrate of return. The tradename value was determined based on the relief-from-royalty method, which applies a royalty rate to the revenue stream attributable tothis asset and the resulting royalty payment is tax effected and discounted to present value. Some of the more significant estimates and assumptions inherentin determining the fair value of the identifiable intangible assets are associated with forecasting cash flows and profitability, which represent Level 3 inputs.The primary assumptions used were generally based upon the present value of anticipated cash flows discounted at rates ranging from 12%-16%. Estimatedyears of projected earnings generally follow the range of estimated remaining useful lives for each intangible asset class.Other Acquisitions We completed various other acquisitions in 2014 and 2012, which were not material, individually or in the aggregate, and were "tucked-in" with existingoperations. The total purchase price for the "tucked-in" acquisitions, including earn-outs, was $15.4 million in 2014 and $14.2 million in 2012. Noacquisitions were completed in 2013. One of the "tucked-in" acquisitions was completed in the fourth quarter of 2014. Our consolidated balance sheetincludes preliminary allocations of the purchase price to the assets acquired and liabilities assumed for this acquisition pending the completion of the finalvaluation of intangible assets and purchase price adjustments. The results of operations of acquisitions are included in our consolidated financial statementsfrom their respective acquisition dates. Additional contingent purchase price ("earn-out") has been or will be paid if certain acquisitions achievepredetermined profitability targets.5. Discontinued Operations During the fourth quarter of 2012, we substantially completed the shutdown of our operation located in Delaware which we decided to curtail operatingin the fourth quarter of 2011. The after tax64 ValuationMethod EstimatedAmortization Life EstimatedValue Customer relationships Excess earnings 15 years $5,600 Backlog Excess earnings 2 years $1,200 Tradenames Relief-from-royalty 25 years $4,100 Total acquired intangible assets $10,900 Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 20145. Discontinued Operations (Continued)loss was less than $0.1 million for the year ended December 31, 2014 and $0.1 million for the year ended December 31, 2013. For the year endedDecember 31, 2012, after tax income was recorded for this operation of $0.1 million. These results have been recorded in discontinued operations under"Operating income (loss), net of tax expense (benefit)." In addition, we recorded after tax income of $0.3 million for the year ended December 31, 2012 which was associated with the reduction of estimatedliabilities associated with the sale and shutdown of previous discontinued operations. This amount is reflected in discontinued operations under "Operatingincome (loss), net of tax expense (benefit)" in addition to those mentioned above. Our consolidated statements of operations and the related earnings per share amounts have been restated to reflect the effects of the discontinuedoperations. No interest expense is allocated to discontinued operations. Revenue and pre-tax income (loss) related to discontinued operations are as follows (in thousands):6. Goodwill and Identifiable Intangible Assets, NetGoodwill The changes in the carrying amount of goodwill are as follows (in thousands): We perform our annual impairment testing on October 1, or more frequently, if events and circumstances indicate impairment may have occurred. Asdiscussed in Note 2, "Summary of Significant Accounting Policies," we have the option to first perform a qualitative assessment to determine whether it ismore likely than not that the fair value of the reporting unit is less than the carrying value. During our annual impairment testing on October 1, we performed a qualitative assessment for each reporting unit which considered various factors,including changes in the carrying value of the reporting unit, forecasted operating results, long-term growth rates and discount rates. Additionally, weconsidered qualitative key events and circumstances (i.e. macroeconomic environment, industry and market specific conditions, cost factors and eventsspecific to the reporting unit, etc.). Based on this65 Year Ended December 31, 2014 2013 2012 Revenue $7 $49 $4,668 Pre-tax income (loss) $(25)$(195)$567 December 31, 2014 2013 Balance at beginning of year $114,588 $114,588 Additions (See Note 4) 26,480 — Impairment adjustment (727) — Balance at end of year $140,341 $114,588 Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 20146. Goodwill and Identifiable Intangible Assets, Net (Continued)assessment, we concluded that it was more likely than not that the fair value of each of the reporting units was greater than its carrying value. Accordingly, nofurther testing was required. There was no impairment of goodwill as a result of our annual goodwill impairment test in 2014 and 2013. Prior to our annual goodwill impairment test,we recorded a goodwill impairment charge of $0.7 million during the second quarter of 2014. Based on market activity declines and write-downs incurred onseveral jobs, we determined that the operating environment, conditions and performance at our operating location based in California could no longersupport the related goodwill balance. When the carrying value of a given reporting unit exceeds its fair value, an impairment loss is recorded to the extentthat the implied fair value of the goodwill of the reporting unit is less than its carrying value. The fair value was estimated using a discounted cash flowmodel combined with market valuation approaches. We did not encounter any events or changes in circumstances that indicated an impairment was morelikely than not during interim periods in 2013. During 2012, the fair value of each reporting unit was estimated using a discounted cash flow model combined with market valuation approaches. Weassigned a weighting of 50% to the discounted cash flow analysis, 40% to the public company approach and 10% to the transaction approach for the yearended December 31, 2012. In certain instances, there was no weighting assigned to the transaction approach due to a lack of comparable market data and aweighting of 50% was assigned to the public company approach for those impacted reporting units. There was no impairment of goodwill as a result of ourannual goodwill impairment test in 2012. There are significant inherent uncertainties and management judgment involved in estimating the fair value of each reporting unit. While we believe wehave made reasonable estimates and assumptions to estimate the fair value of our reporting units, it is possible that a material change could occur. If actualresults are not consistent with our current estimates and assumptions, or the current economic downturn worsens or the projected recovery is significantlydelayed beyond our projections, goodwill impairment charges may be recorded in future periods.Identifiable Intangible Assets, Net Identifiable intangible assets consist of the following (dollars in thousands): The amounts attributable to customer relationships, noncompete agreements and tradenames are amortized to "Selling, General and AdministrativeExpenses" on a pattern of economic benefit or a straight-line method over periods from two to twenty-five years. The amounts attributable to backlog arebeing amortized to "Cost of Services" on a proportionate method over the remaining backlog period. Amortization expense for the years ended December 31,2014, 2013 and 2012 was $7.7 million, $7.1 million and $8.8 million, respectively.66 December 31, 2014 2013 EstimatedUseful Livesin Years Gross BookValue AccumulatedAmortization Gross BookValue AccumulatedAmortization Customer relationships 2 - 15 $50,440 $(26,287)$40,404 $(20,978)Backlog 1 - 2 1,600 (829) 6,515 (6,515)Noncompete agreements 2 - 7 2,890 (2,868) 2,890 (2,649)Tradenames 2 - 25 27,995 (7,275) 23,695 (5,979)Total $82,925 $(37,259)$73,504 $(36,121)Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 20146. Goodwill and Identifiable Intangible Assets, Net (Continued) At December 31, 2014, future amortization expense of identifiable intangible assets is as follows (in thousands):7. Property and Equipment Property and equipment consist of the following (dollars in thousands): Depreciation expense, including capital lease amortization, for the years ended December 31, 2014, 2013 and 2012 was $13.7 million, $11.4 million and$11.7 million, respectively.8. Detail of Certain Balance Sheet Accounts Activity in our allowance for doubtful accounts consists of the following (in thousands):67Year ended December 31— 2015 $7,131 2016 5,492 2017 4,340 2018 3,550 2019 3,076 Thereafter 22,077 Total $45,666 December 31, EstimatedUseful Livesin Years 2014 2013 Land — $2,745 $2,404 Transportation equipment 1 - 7 56,229 46,233 Machinery and equipment 1 - 20 24,430 22,920 Computer and telephone equipment 1 - 10 19,812 19,012 Buildings and leasehold improvements 1 - 40 27,720 25,371 Furniture and fixtures 1 - 15 4,461 5,036 135,397 120,976 Less—Accumulated depreciation (79,638) (74,115)Property and equipment, net $55,759 $46,861 December 31, 2014 2013 2012 Balance at beginning of year $4,460 $6,333 $4,615 Additions for bad debt expense 1,275 19 2,753 Deductions for uncollectible receivables written off, net of recoveries (1,650) (1,892) (1,090)Allowance for doubtful accounts of acquired companies at date ofacquisition 294 — 55 Balance at end of year $4,379 $4,460 $6,333 Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 20148. Detail of Certain Balance Sheet Accounts (Continued) Other current liabilities consist of the following (in thousands):9. Long-Term Debt Obligations Long-term debt obligations consist of the following (in thousands): At December 31, 2014, future principal payments of debt are as follows (in thousands):68 December 31, 2014 2013 Accrued warranty costs $7,227 $6,795 Accrued job losses 1,329 758 Accrued rent and lease obligations 953 673 Accrued sales and use tax 1,945 1,821 Deferred revenue 1,538 1,320 Liabilities due to former owners 520 4,054 Other current liabilities 11,302 12,747 $24,814 $28,168 December 31, 2014 2013 Revolving credit facility $38,500 $— Notes to former owners 1,000 2,000 Capital lease obligations 846 — Total debt 40,346 2,000 Less—current portion (317) (2,000)Total long-term portion of debt $40,029 $— Year ended December 31— 2015 $317 2016 755 2017 673 2018 76 2019 38,525 Thereafter — $40,346 Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 20149. Long-Term Debt Obligations (Continued) Interest expense included the following primary elements (in thousands):Revolving Credit Facility On July 22, 2014, we amended our senior credit facility (the "Facility") provided by a syndicate of banks increasing our borrowing capacity from$175.0 million to $250.0 million. The Facility, which is available for borrowings and letters of credit, expires in October 2019 and is secured by a first lien onsubstantially all of our personal property except for assets related to projects subject to surety bonds and assets held by certain unrestricted subsidiaries and asecond lien on our assets related to projects subject to surety bonds. The Facility provides that availability under the Facility will be limited to the lesser ofthe face amount of $250.0 million, or indebtedness less certain exclusions equal to 2.75 times trailing twelve month Credit Facility Adjusted EBITDA, whichcalculates to availability of $222.4 million as of December 31, 2014. We incurred approximately $0.6 million in financing and professional costs inconnection with the amendment to the Facility, which combined with the previous unamortized costs of $1.0 million, will be amortized on a straight-linebasis as a non-cash charge to interest expense over the remaining term of the Facility. As of December 31, 2014, we had $38.5 million of outstandingborrowings, $45.0 million in letters of credit outstanding and $138.9 million of credit available.Collateral A common practice in our industry is the posting of payment and performance bonds with customers. These bonds are offered by financial institutionsknown as sureties, and provide assurance to the customer that in the event we encounter significant financial or operational difficulties, the surety willarrange for the completion of our contractual obligations and for the payment of our vendors on the projects subject to the bonds. In cooperation with ourlenders, we granted our sureties a first lien on assets such as receivables, costs and estimated earnings in excess of billings, and equipment specificallyidentifiable to projects for which bonds are outstanding, as collateral for potential obligations under bonds. As of December 31, 2014, the book value of theseassets was approximately $57.6 million.Covenants and Restrictions The Facility contains financial covenants defining various measures and the levels of these measures with which we must comply. Covenant complianceis assessed as of each quarter end. Credit69 Year Ended December 31, 2014 2013 2012 Interest expense on notes to former owners $38 $97 $255 Interest expense on borrowings and unused commitment fees 790 278 444 Letter of credit fees 747 731 667 Amortization of debt financing costs 283 245 229 Total $1,858 $1,351 $1,595 Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 20149. Long-Term Debt Obligations (Continued)Facility Adjusted EBITDA is defined under the Facility for financial covenant purposes as net earnings for the four quarters ending as of any given quarterlycovenant 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 netincome (in thousands): 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 exceed2.75 through maturity. The leverage ratio as of December 31, 2014 was 0.62. 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 atleast 2.00; provided that the calculation of the fixed charge coverage ratio excludes stock repurchases and the payment of dividends at any time thatthe Company's Net Leverage Ratio does not exceed 1.50. The Facility also allows the fixed charge coverage ratio not to be reduced for stockrepurchases through September 30, 2015 in an aggregate amount not to exceed $25 million if at the time of and after giving effect to such repurchasethe Company's Net Leverage Ratio was less than or equal to 1.50. Capital expenditures, tax provision, dividends and stock repurchase payments aredefined under the Facility for purposes of this covenant to be amounts for the four quarters ending as of any given quarterly covenant compliancemeasurement date. The fixed charge coverage ratio as of December 31, 2014 was 18.90. Other Restrictions— The Facility permits acquisitions of up to $25.0 million per transaction, provided that the aggregate purchase price of suchan acquisition and of acquisitions in the same fiscal year does not exceed $60.0 million. However, these limitations only apply when the Company'sNet Leverage Ratio is equal to or greater than 2.00. While the Facility's financial covenants do not specifically govern capacity under the Facility, if our debt level under the Facility at a quarter-endcovenant compliance measurement date were to cause us to violate the Facility's leverage ratio covenant, our borrowing capacity under the Facilityand the favorable terms that we currently have could be negatively impacted by the lenders.70Net income including noncontrolling interests $28,599 Income taxes—continuing operations 11,614 Interest expense, net 1,840 Depreciation and amortization expense 21,336 Stock compensation expense 4,806 Income taxes—discontinued operations (10)Goodwill impairment 727 EBITDA attributable to noncontrolling interests (6,471)Pre-acquisition results of acquired companies, as defined under the Facility 2,746 Credit Facility Adjusted EBITDA $65,187 Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 20149. Long-Term Debt Obligations (Continued) We are in compliance with all of our financial covenants as of December 31, 2014.Interest Rates and Fees There are two interest rate options for borrowings under the Facility, the Base Rate Loan Option and the Eurodollar Rate Loan Option. Under the BaseRate Loan Option, the interest rate is determined based on the highest of the Federal Funds Rate plus 0.5%, the prime lending rate offered by Wells FargoBank, N.A. or the one-month Eurodollar Rate plus 1.00%. Under the Eurodollar Rate Loan Option, the interest rate is determined based on the one- to six-month Eurodollar Rate. The Eurodollar Rate corresponds very closely to rates described in various general business media sources as the London InterbankOffered Rate or "LIBOR." Additional margins are then added to these rates. The additional margins are determined based on the ratio of our ConsolidatedTotal Indebtedness as of a given quarter end to our "Credit Facility Adjusted EBITDA" for the twelve months ending as of that quarter end, as defined in thecredit agreement and shown below. The interest rates under the Facility are floating rates determined by the broad financial markets, meaning they can and do move up and down from timeto time. For illustrative purposes, the following are the respective market rates as of December 31, 2014 relating to interest options under the Facility: Certain of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on our behalf, such as to beneficiaries under ourself-funded insurance programs. We have also occasionally used letters of credit to guarantee performance under our contracts and to ensure payment to oursubcontractors and vendors under those contracts. Our lenders issue such letters of credit through the Facility. A letter of credit commits the lenders to payspecified 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, wewould be required to reimburse the lenders for amounts they fund to honor the letter of credit holder's claim. Absent a claim, there is no payment or reservingof 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 ourlenders, letters of credit are treated as a use of facility capacity just the same as actual borrowings. We have never had a claim made against a letter of creditthat resulted in payments by a lender or by us and believe such claim is unlikely in the foreseeable future. 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. Letter of creditfees and commitment fees are based71Base Rate Loan Option: Federal Funds Rate plus 0.50% 0.63%Wells Fargo Bank, N.A. Prime Rate 3.25%One-month LIBOR plus 1.00% 1.17%Eurodollar Rate Loan Option: One-month LIBOR 0.17%Six-month LIBOR 0.36%Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 20149. Long-Term Debt Obligations (Continued)on the ratio of Consolidated Total Indebtedness to Credit Facility Adjusted EBITDA, as defined in the credit agreement. The weighted average interest rate applicable to the borrowings under the Facility was approximately 1.4% as of December 31, 2014.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 bearinterest, payable annually, at a weighted average interest rate of 3.3%. In June 2014, we paid the outstanding balance of $2.0 million. In conjunction with animmaterial acquisition in the fourth quarter of 2014, we issued subordinated notes to the former owners as part of the consideration. These notes had anoutstanding balance of $1.0 million as of December 31, 2014 and bear interest, payable quarterly, at a weighted average interest rate of 2.5%. The principal isdue in equal installments on October 2016 and 2017.Other Debt In conjunction with our acquisition of our northern Texas operation, we acquired capital lease obligations of $0.7 million. Currently, $0.8 million ofcapital lease obligations are outstanding, of which $0.3 million is considered current. Our majority owned subsidiary, EAS, has a revolving $2.5 million credit line that is available for temporary working capital needs and expires July 31,2015. As of December 31, 2014, we had no outstanding borrowings and, therefore, $2.5 million of credit available. We estimate that the weighted averageinterest rate applicable to borrowings under this variable rate credit line would be approximately 2.7% as of December 31, 2014.72 Consolidated Total Indebtedness toCredit Facility Adjusted EBITDA Less than 0.75 0.75 to 1.50 1.50 to 2.25 2.25 or greater Additional Per Annum Interest Margin Added Under: Base Rate Loan Option 0.25% 0.50% 0.75% 1.00%Eurodollar Rate Loan Option 1.25% 1.50% 1.75% 2.00%Letter of credit fees 1.25% 1.50% 1.75% 2.00%Commitment fees on any portion of the Revolving Loancapacity not in use for borrowings or letters of credit at anygiven time 0.20% 0.25% 0.30% 0.35%Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 201410. Income TaxesProvision for Income Taxes The provision for income taxes relating to continuing operations consists of the following (in thousands): The difference in income taxes provided for and the amounts determined by applying the federal statutory tax rate to income before income taxes resultsfrom the following (in thousands):73 December 31, 2014 2013 2012 Current— Federal $13,402 $11,707 $5,679 State and Puerto Rico 2,810 1,954 1,151 16,212 13,661 6,830 Deferred— Federal (308) 3,254 2,897 State and Puerto Rico (4,290) 1,233 318 (4,598) 4,487 3,215 $11,614 $18,148 $10,045 December 31, 2014 2013 2012 Income tax expense at the statutory rate of 35% $14,080 $16,373 $7,539 Changes resulting from— State income taxes, net of federal tax effect 1,653 1,910 1,011 Increase (decrease) in valuation allowance (1,944) 1,465 455 Increase (decrease) in tax contingency reserves (40) (145) 198 Increase (decrease) from noncontrolling interests (1,938) (450) 565 Non-deductible expenses 704 594 481 Production activity deduction (694) (520) (378)Purchase accounting adjustments (46) (472) (210)Other (161) (607) 384 $11,614 $18,148 $10,045 Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 201410. Income Taxes (Continued)Deferred Tax Assets (Liabilities) Significant components of the net deferred tax assets and net deferred tax liabilities as reflected on the balance sheet are as follows (in thousands): The deferred income tax assets and liabilities reflected above are included in the consolidated balance sheets as follows (in thousands): As of December 31, 2014, we had $7.0 million of future tax benefits related to $115.0 million of available state and Puerto Rican net operating losscarryforwards ("NOLs") which expire between 2015 and 2034. A valuation allowance of $4.0 million has been recorded against net deferred tax assets of74 Year EndedDecember 31, 2014 2013 Deferred income tax assets— Accounts receivable and allowance for doubtful accounts $1,626 $1,660 Stock compensation 2,793 2,165 Accrued liabilities and expenses 18,670 19,290 State net operating loss carryforwards 6,958 6,107 Other 761 613 Total deferred income tax assets 30,808 29,835 Deferred income tax liabilities— Property and equipment (7,035) (6,660)Long-term contracts (535) (671)Goodwill (3,562) (3,364)Intangible assets (1,378) (2,803)Other (271) (947)Total deferred income tax liabilities (12,781) (14,445)Less—Valuation allowance (3,975) (5,918)Net deferred income tax assets $14,052 $9,472 December 31, 2014 2013 Deferred income tax assets— Prepaid expenses and other $19,423 $18,279 Other noncurrent assets 5,747 1,472 Total deferred income tax assets $25,170 $19,751 Deferred income tax liabilities— Other current liabilities $301 $338 Deferred income tax liabilities 10,817 9,941 Total deferred income tax liabilities $11,118 $10,279 Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 201410. Income Taxes (Continued)state and Puerto Rico. We recorded a decrease in valuation allowances of $1.9 million for the year ended December 31, 2014. Our deferred tax assets forPuerto Rico are fully valued. A deferred tax asset for state NOLs, net of related valuation allowance, of $3.6 million reflects our conclusion that it is likelythat this asset will be realized based upon expected future earnings in certain subsidiaries. We update this assessment of the realizability of deferred tax assetsrelating to state net NOLs annually. A return to profitability in our entities with valuation allowances on their NOL's and deferred tax assets would result in areversal of a portion of the valuation allowance relating to realized deferred tax assets. A sustained period of profitability could cause a change in ourjudgment of the remaining deferred tax assets. If that were to occur then it is likely that we would reverse some or all of the remaining deferred tax assetvaluation allowance. As of December 31, 2014 and 2013, approximately $0.3 million and $0.3 million, respectively, of unrecognized tax benefits, if recognized in futureperiods, would impact our effective tax rate. This liability is included in "Other Long-Term Liabilities" in the consolidated balance sheets. We do not expectthat the total amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months. We recognize potential interest and penalties related to unrecognized tax benefits in income tax expense. We recognized $0.4 million and $0.4 millionin interest during the year ended December 31, 2014 and 2013, respectively. We had accrued approximately $0.3 million and $0.3 million for the payment ofinterest and penalties at December 31, 2014 and 2013, respectively. Our tax records are subject to review by the Internal Revenue Service for the 2011 taxyear forward and by various state authorities for the 2006 tax year forward.Liabilities for Uncertain Tax Positions A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding accrued interest and penalties, is as follows (in thousands):11. Employee Benefit Plans We and certain of our subsidiaries sponsor various retirement plans for most full-time and some part-time employees. These plans primarily consist ofdefined contribution plans. The defined contribution plans generally provide for contributions up to 2.5% of covered employees' salaries or wages. Thesecontributions totaled $6.1 million in 2014, $5.5 million in 2013 and $5.2 million in 2012. Of these amounts, approximately $0.1 million was payable to theplans at December 31, 2014 and 2013.75 Year EndedDecember 31, 2014 2013 2012 Balance at beginning of year $413 $499 $696 Additions based on tax positions related to the current year — — — Additions for tax positions of prior years — — — Reductions for tax positions of prior years (70) (86) (197)Settlements — — — Balance at end of year $343 $413 $499 Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 201411. Employee Benefit Plans (Continued) Certain of our subsidiaries also participate or have participated in various multi-employer pension plans for the benefit of employees who are unionmembers. As of December 31, 2014 and 2013, we had 6 and 6 employees, respectively, who were union members. There were no contributions made to multi-employer pension plans in 2014, 2013 or 2012. The data available from administrators of other multi-employer pension plans is not sufficient to determinethe accumulated benefit obligations, nor the net assets attributable to the multi-employer plans in which our employees participate or previouslyparticipated. Certain individuals at one of our operations are entitled to receive fixed annual payments that reach a maximum amount, as specified in the relatedagreements, for a 15 year period following retirement or, in some cases, the attainment of 65 years of age. We recognize the unfunded status of the plan as anon-current liability in our Consolidated Balance Sheet. Benefits vest 50% after ten years of service, 75% after fifteen years of service and are fully vestedafter 20 years of service. We had an unfunded benefit liability of $3.0 million and $3.2 million recorded as of December 31, 2014 and 2013, respectively.12. Commitments and ContingenciesLeases We lease certain facilities and equipment under noncancelable operating leases. Rent expense for the years ended December 31, 2014, 2013 and 2012was $17.8 million, $16.2 million, and $15.2 million, respectively. We recognize escalating rental payments that are quantifiable at the inception of the leaseon a straight-line basis over the lease term. Concurrent with the acquisitions of certain companies, we entered into various agreements with previous ownersto lease buildings used in our operations. The terms of these leases generally range from three to ten years and certain leases provide for escalations in therental expenses each year, the majority of which are based on inflation. Included in the 2014, 2013 and 2012 rent expense above are approximately$3.8 million, $3.8 million and $3.4 million of rent paid to these related parties, respectively. In addition to the noncancelable operating leases, we havecapital lease obligations of $0.8 million as of December 31, 2014 which were attained through our acquisition in northern Texas. The following represents future minimum rental payments under noncancelable operating leases (in thousands):76Year ended December 31— 2015 $11,683 2016 10,078 2017 9,111 2018 7,644 2019 5,647 Thereafter 6,526 $50,689 Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 201412. Commitments and Contingencies (Continued)Claims and Lawsuits We are subject to certain legal and regulatory claims, including lawsuits arising in the normal course of business. We maintain various insurancecoverages to minimize financial risk associated with these claims. We have estimated and provided accruals for probable losses and related legal feesassociated with certain litigation in the accompanying consolidated financial statements. While we cannot predict the outcome of these proceedings, inmanagement's opinion and based on reports of counsel, any liability arising from these matters individually and in the aggregate will not have a materialeffect on our operating results, cash flows or financial condition, after giving effect to provisions already recorded.Surety Many customers, particularly in connection with new construction, require us to post performance and payment bonds issued by a financial institutionknown 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 itincurs. 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 lossesto 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 constructionindustry as well as in certain larger corporate bankruptcies. As a result, less bonding capacity is available in the market and terms have become morerestrictive. 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, currentmarket 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 ourwork. If that were to occur, the alternatives include doing more business that does not require bonds, posting other forms of collateral for project performancesuch as letters of credit or cash, and seeking bonding capacity from other sureties. We would likely also encounter concerns from customers, suppliers andother market participants as to our creditworthiness. While we believe our general operating and financial characteristics, including a significant amount ofcash on our balance sheet, would enable us to ultimately respond effectively to an interruption in the availability of bonding capacity, such an interruptionwould 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, inview of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses up to deductible amounts areestimated 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.77Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 201412. Commitments and Contingencies (Continued) 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 bystatutory 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 generalliability 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, andthen 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'sliability noted above and auto liability noted below). 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 thenhave several layers of excess loss insurance policies that cover losses up to $100 million in aggregate across this risk area (as well as employer'sliability and general liability noted above). Employee Medical— We have two medical plans. The deductible for employee group health claims is $350,000 per person, per policy (calendar)year for each 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 linesof risk; we do not have a separate $100 million of excess loss coverage for each of general liability, employer's liability and auto liability.13. Stockholders' Equity2012 Equity Incentive Plan In May 2012, our stockholders approved our 2012 Equity Incentive Plan (the "2012 Plan"), which provides for the granting of incentive or non-qualifiedstock options, stock appreciation rights, restricted or deferred stock, dividend equivalents or other incentive awards to directors, employees, or consultants.The number of shares authorized and reserved for issuance under the 2012 Plan is 5.1 million shares. As of December 31, 2014, there were 3.8 million sharesavailable for issuance under this plan. The 2012 Plan will expire in May 2022. Additionally, we have outstanding stock options, stock awards and stock unitsthat were issued under other plans, and no further grants may be made under those plans.Share Repurchase Program On March 29, 2007, our Board of Directors (the "Board") approved a stock repurchase program to acquire up to 1.0 million shares of our outstandingcommon stock. Subsequently, the Board has from time to time approved extensions of the program to acquire additional shares. On October 24, 2014,78Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 201413. Stockholders' Equity (Continued)the Board approved an extension to the program by increasing the shares authorized for repurchase by 1.0 million shares. Since the inception of therepurchase program, the Board has approved 7.6 million shares to be repurchased. The share repurchases will be made from time to time at our discretion in the open market or privately negotiated transactions as permitted by securitieslaws and other legal requirements, and subject to market conditions and other factors. The Board may modify, suspend, extend or terminate the program atany time. We repurchased 0.5 million shares for the year ended December 31, 2014 at an average price of $14.52 per share. Since the inception of the programin 2007 and as of December 31, 2014, we have repurchased a cumulative total of 6.6 million shares at an average price of $11.30 per share.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 theyear. Diluted EPS is computed considering the dilutive effect of stock options, contingently issuable restricted stock, restricted stock units and performancestock units. The vesting of unvested contingently issuable restricted stock is based on the achievement of certain earnings per share targets. These shares areconsidered contingently issuable shares for purposes of calculating diluted earnings per share. These shares are not included in the diluted earnings per sharedenominator until the performance criteria are met, if it is assumed that the end of the reporting period was the end of the contingency period. Unvested restricted stock, restricted stock units and performance stock units are included in diluted earnings per share, weighted outstanding until theshares and units vest. Upon vesting, the vested restricted stock, restricted stock units and performance stock units are included in basic earnings per shareweighted outstanding from the vesting date. There were approximately 0.2 million anti-dilutive stock options excluded from the calculation of diluted EPS for the year ended December 31, 2014.There were no anti-dilutive stock options for the year ended December 31, 2013. There were approximately 1.0 million anti-dilutive stock options excludedfrom the calculation of diluted EPS for the year ended December 31, 2012.79Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 201413. 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 foreach of the periods presented (in thousands):14. Stock-Based Compensation Under the 2012 Equity Incentive Plan (the "2012 Plan") grants of stock options, restricted stock and restricted stock units, and performance share unitshave been, and will be, determined and administered by the compensation committee of the Board of Directors. Total stock-based compensation expense was$4.8 million, $4.0 million and $2.8 million for the years ended December 31, 2014, 2013 and 2012, respectively. Total income tax benefit recognized forstock-based compensation arrangements was $1.8 million, $1.5 million and $1.0 million for each of the years ended December 31, 2014, 2013 and 2012. Wepresent the benefits of tax deductions in excess of recognized compensation costs ("excess tax benefits") as financing cash flows in the consolidatedstatements of cash flows. Upon the vesting of restricted shares, we have allowed the holder to elect to surrender an amount of shares to meet their minimum statutory taxwithholding requirements. These shares are accounted for as treasury stock based upon the value of the stock on the date of vesting.80 Year Ended December 31, 2014 2013 2012 Common shares outstanding, end of period(a) 37,270 37,578 37,069 Effect of using weighted average common shares outstanding 277 (333) 43 Shares used in computing earnings per share—basic 37,547 37,245 37,112 Effect of shares issuable under stock option plans based on the treasurystock method 147 183 87 Effect of contingently issuable restricted shares 103 108 60 Shares used in computing earnings per share—diluted 37,797 37,536 37,259 (a)Excludes 0.1 million and 0.2 million shares of unvested contingently issuable restricted stock outstanding for the years endedDecember 31, 2013 and 2012, respectively (see Note 14 "Stock-Based Compensation").Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 201414. Stock-Based Compensation (Continued)Stock Options The following table summarizes activity under our stock option plans (shares in thousands): The total intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 was $0.4 million, $3.0 million and $0.8 million,respectively. Stock options exercisable as of December 31, 2014 have a weighted-average remaining contractual term of 5.0 years and an aggregate intrinsicvalue of $2.9 million. As of December 31, 2014, we have 0.9 million options that are vested or expected to vest; these options have a weighted averageexercise price of $12.95 per share, have a weighted-average remaining contractual term of 6.2 years and an aggregate intrinsic value of $3.8 million. The following table summarizes information about stock options outstanding at December 31, 2014 (shares in thousands):81 Year Ended December 31, 2014 2013 2012 Stock Options Shares Weighted-AverageExercise Price Shares Weighted-AverageExercise Price Shares Weighted-AverageExercise Price Outstanding atbeginning ofyear 858 $12.24 1,143 $11.59 1,056 $10.84 Granted 156 $16.15 156 $13.86 190 $11.19 Exercised (104)$11.87 (440)$11.10 (103)$3.20 Forfeited — $— (1)$13.87 — $— Expired — $— — $— — $— Outstanding atend of year 910 $12.95 858 $12.24 1,143 $11.59 Optionsexercisable atend of year 587 528 810 Options Outstanding Options Exercisable Range of Exercise Prices NumberOutstandingat 12/31/14 Weighted-AverageRemainingContractualLife Weighted-AverageExercise Price NumberExercisableat 12/31/14 Weighted-AverageExercise Price $6.38 - $7.94 28 0.38 $6.42 28 $6.42 $10.73 - $12.90 404 5.31 $11.57 340 $11.64 $13.15 - $16.15 478 7.33 $14.51 219 $13.65 $6.38 - $16.15 910 6.22 $12.95 587 $12.14 Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 201414. Stock-Based Compensation (Continued) The fair value of each option award is estimated, based on several assumptions, on the date of grant using the Black-Scholes option valuation model. Thefair values and the assumptions used for the 2014, 2013 and 2012 grants are shown in the table below: Stock options are accounted for as equity instruments, and compensation cost is recognized using the straight-line method over the vesting period. Stockoptions generally vest over a three-year vesting period. Certain stock option and restricted stock awards provide for accelerated vesting if the employeeretires at any time when the sum of their age and years of service is at least 75. As of December 31, 2014, the unrecognized compensation cost related to stockoptions was $0.8 million, which is expected to be recognized over a weighted-average period of 1.7 years. The total fair value of options vested during theyear ended December 31, 2014 was $0.8 million. The following table summarizes information about nonvested stock option awards as of December 31, 2014 and changes for the year endedDecember 31, 2014 (shares in thousands): We generally issue treasury shares for stock options and restricted stock, unless treasury shares are not available.82 Year Ended December 31, 2014 2013 2012 Weighted-average fair value per share of options granted $6.24 $5.06 $4.03 Fair value assumptions: Expected dividend yield 1.34% 1.82% 1.86%Expected stock price volatility 45.2% 46.6% 46.5%Risk-free interest rate 1.91% 0.96% 1.17%Expected term 5.6 years 5.6 years 5.3 years Stock Options Shares Weighted-AverageGrant DateFair Value Nonvested at December 31, 2013 330 $4.66 Granted 156 $6.24 Vested (163)$4.65 Forfeited — — Nonvested at December 31, 2014 323 $5.43 Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 201414. Stock-Based Compensation (Continued)Restricted Stock and Restricted Stock Units The following table summarizes activity under our restricted stock plans (shares in thousands): Approximately $1.2 million of compensation expense related to restricted stock and restricted stock units will be recognized over a weighted-averageperiod of 1.6 years. The total fair value of shares vested during the year ended December 31, 2014 was $2.4 million. The weighted-average fair value per shareof restricted stock shares and units awarded during 2014, 2013 and 2012 was $15.80, $13.57 and $10.78, respectively. The aggregate intrinsic value ofrestricted stock vested during the years ended December 31, 2014, 2013 and 2012 was $2.9 million, $4.7 million and $3.1 million, respectively.Performance Stock Units Under the 2012 Plan, we granted dollar-denominated performance vesting restricted stock units ("PSUs") which cliff vest at the end of a three-yearperformance period. The PSUs are subject to two performance measures; 50% of the PSUs are based on the annual performance of our stock price relative to agroup of our peers (total shareholder return) and 50% of the PSUs are measured based on meeting or exceeding a pre-determined annual earnings per sharetarget as set by our board of directors (EPS). Depending on the Company's performance in relation to the established performance measures, the awards mayvest at zero to a maximum of 2.0 times the dollar-denominated award granted at target. Upon achievement of the necessary performance metrics, the awardwill be determined in dollars and may be settled in cash or stock based on the market price of the Company's common stock at the end of the performanceperiod, at our discretion. Compensation expense for dollar-denominated performance units will ultimately be equal to the final dollar value awarded to the grantee upon vesting,settled either in cash or stock. However, throughout the performance period we must record an accrued expense based on an estimate of that future payout.For units determined by EPS performance, the awards are evaluated quarterly against established targets in order to estimate the liability throughout thevesting period. For units determined by total shareholder return performance, a Monte Carlo simulation model was used to estimate accruals throughout thevesting period. The model simulates our total shareholder return and compares it against our peer group over the three-year performance period to produce apredicted distribution of relative share performance. This is applied to the reward criteria to give an expected value of the total shareholder return element.During 2013, the vesting criteria was set for both 2013 and 2012 grants. The calculated fair market value as of December 31, 2014 was $4.1 million. Of thisamount, $1.7 million relates to the PSUs granted in 2012 whose performance period ended December 31, 2014. These awards will be settled within theupcoming year either in cash or stock. The calculated fair83 Shares Restricted Stock and Restricted Stock Units 2014 2013 2012 Unvested at beginning of year 199 272 302 Granted 133 169 224 Vested (172) (240) (254)Forfeited — (2) — Unvested at end of year 160 199 272 Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 201414. Stock-Based Compensation (Continued)market value as of December 31, 2013 was $2.4 million. The accrued expense related to performance stock units for the years ended December 31, 2014 and2013 was $1.8 million and $0.9 million, respectively. Approximately $1.3 million of compensation expense related to performance stock units will berecognized over a weighted-average period of 1.1 years. We generally issue treasury shares for stock compensation purposes, unless treasury shares are not available.15. Quarterly Results of Operations (Unaudited) Quarterly financial information for the years ended December 31, 2014 and 2013 is summarized as follows (in thousands, except per share data):84 2014 Q1 Q2 Q3 Q4 Revenue $321,381 $362,801 $370,145 $356,468 Gross profit 52,149 61,859 66,459 69,304 Operating income 1,897 10,648 14,785 14,892 Income from continuing operations 1,078 6,336 9,379 11,821 Income (loss) from discontinued operations, net of tax (15) — — — Net income including noncontrolling interests 1,063 6,336 9,379 11,821 Less: Net income attributable to noncontrolling interests 688 1,935 1,774 1,139 Net income attributable to Comfort Systems USA, Inc. 375 4,401 7,605 10,682 INCOME PER SHARE ATTRIBUTABLE TO COMFORT SYSTEMSUSA, INC.: Basic— Income from continuing operations $0.01 $0.12 $0.20 $0.29 Income from discontinued operations — — — — Net income $0.01 $0.12 $0.20 $0.29 Diluted— Income from continuing operations $0.01 $0.12 $0.20 $0.29 Income from discontinued operations — — — — Net income $0.01 $0.12 $0.20 $0.29 Net cash provided by (used in) operating activities $(8,784)$22,385 $23,881 $5,070 Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)December 31, 201415. Quarterly Results of Operations (Unaudited) (Continued) The sums of the individual quarterly earnings per share amounts do not necessarily agree with year-to-date earnings per share as each quarter'scomputation is based on the weighted average number of shares outstanding during the quarter, the weighted average stock price during the quarter and thedilutive effects of options and contingently issuable restricted stock in each quarter.85 2013 Q1 Q2 Q3(a) Q4 Revenue $325,890 $351,053 $349,989 $330,340 Gross profit 51,467 59,967 67,021 61,428 Operating income 5,086 14,379 17,734 9,059 Income from continuing operations 2,749 8,314 11,637 5,932 Income (loss) from discontinued operations, net of tax (54) — (25) 3 Net income including noncontrolling interests 2,695 8,314 11,612 5,935 Less: Net income attributable to noncontrolling interests 163 552 233 339 Net income attributable to Comfort Systems USA, Inc. 2,532 7,762 11,379 5,596 INCOME PER SHARE ATTRIBUTABLE TO COMFORT SYSTEMSUSA, INC.: Basic— Income from continuing operations $0.07 $0.21 $0.31 $0.15 Income from discontinued operations — — — — Net income $0.07 $0.21 $0.31 $0.15 Diluted— Income from continuing operations $0.07 $0.21 $0.30 $0.15 Income from discontinued operations — — — — Net income $0.07 $0.21 $0.30 $0.15 Net cash provided by (used in) operating activities $(10,351)$6,700 $27,433 $14,641 (a)Included in unaudited quarterly results of operations for the third quarter of 2013 is the correction of prior period accounting errorswhich resulted in net after-tax income of approximately $1.3 million, or $0.03 per diluted share. Refer to Footnote 2 for additionaldisclosure.Table of Contents ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. ITEM 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our executive management is responsible for ensuring the effectiveness of the design and operation of our disclosure controls and procedures. We carriedout an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, ofthe 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 SecuritiesExchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officerhave 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) areeffective as of the end of the period covered by this report.Internal Controls over Financial Reporting Management's report on our internal controls over financial reporting can be found in Item 8 of this report. The Independent Registered PublicAccounting Firm's Attestation Report on the effectiveness of our internal controls over financial reporting can also be found in Item 8 of this report.Changes in Internal Control over Financial Reporting There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under theSecurities Exchange Act of 1934) during the three months ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect,internal control over financial reporting. ITEM 9B. Other Information None. PART III ITEM 10. Directors, Executive Officers and Corporate Governance We have adopted a code of ethics that applies to our principal executive officer, our principal financial officer, and our principal accounting officer, aswell as to our other employees. This code of ethics consists of our Corporate Compliance Policy. The Company has made this code of ethics available on ourwebsite, as described in Item 1 of this annual report on Form 10-K. If we make substantive amendments to this code of ethics or grant any waiver, includingany implicit waiver, we will disclose the nature of such amendment or waiver on our website or in a report on Form 8-K within four business days of suchamendment or waiver. The other information called for by this item has been omitted in accordance with the instructions to Form 10-K. The Company will file with theCommission a definitive proxy statement including the other information to be disclosed under this item in the 120 days following December 31, 2014 andsuch information is hereby incorporated by reference.86Table of Contents ITEMS 11, 12, 13 AND 14. These items have been omitted in accordance with the instructions to Form 10-K. The Company will file with the Commission a definitive proxystatement including the information to be disclosed under the items in the 120 days following December 31, 2014 and such information is herebyincorporated by reference. PART IV ITEM 15. Exhibits and Financial Statement Schedules (a)The following documents are filed as part of this annual report on Form 10-K: (1)Consolidated Financial Statements (Included Under Item 8): The Index to the Consolidated Financial Statements is included on page 37 ofthis annual report on Form 10-K and is incorporated herein by reference. (2)Financial Statement Schedules:None.(b)ExhibitsReference is made to the Index of Exhibits immediately following the signature page thereof, which is incorporated herein by reference.(c)Excluded financial statements:None.87Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.Date: February 26, 2015 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant andin the capacities and on the dates indicated.88 COMFORT SYSTEMS USA, INC. By: /s/ BRIAN E. LANEBrian E. LanePresident and Chief Executive OfficerSignature Title Date /s/ BRIAN E. LANEBrian E. Lane President, Chief Executive Officer, and Director(Principal Executive Officer) February 26, 2015 /s/ WILLIAM GEORGEWilliam George Executive Vice President and Chief FinancialOfficer (Principal Financial Officer) February 26, 2015 /s/ JULIE S. SHAEFFJulie S. Shaeff Senior Vice President and Chief AccountingOfficer (Principal Accounting Officer) February 26, 2015 /s/ FRANKLIN MYERSFranklin Myers Chairman of the Board February 26, 2015 /s/ DARCY G. ANDERSONDarcy G. Anderson Director February 26, 2015 /s/ HERMAN E. BULLSHerman E. Bulls Director February 26, 2015 /s/ ALFRED J. GIARDINELLI, JR.Alfred J. Giardinelli, Jr. Director February 26, 2015 Table of Contents89Signature Title Date /s/ ALAN P. KRUSIAlan P. Krusi Director February 26, 2015 /s/ JAMES H. SCHULTZJames H. Schultz Director February 26, 2015 /s/ CONSTANCE E. SKIDMOREConstance E. Skidmore Director February 26, 2015 /s/ VANCE W. TANGVance W. Tang Director February 26, 2015 Table of Contents INDEX OF EXHIBITS 90 Incorporated by Reference to theExhibit Indicated Below and to theFiling with the CommissionIndicated BelowExhibitNumber Description of Exhibits ExhibitNumber Filing orFile Number 3.1 Second Amended and Restated Certificate of Incorporation of the Registrant 3.1 333-24021 3.2 Certificate of Amendment dated May 21, 1998 3.2 1998 Form 10-K 3.3 Certificate of Amendment dated July 9, 2003 3.3 2003 Form 10-K 3.4 Amended and Restated Bylaws of Comfort Systems USA, Inc. 3.1 March 26, 2012Form 8-K 4.1 Form of certificate evidencing ownership of Common Stock of theRegistrant 4.1 333-24021 *10.1 Comfort Systems USA, Inc. 1997 Long-Term Incentive Plan 10.1 333-24021 *10.2 Comfort Systems USA, Inc. 1997 Non-Employee Directors' Stock Plan 10.2 333-24021 *10.3 Amendment to the 1997 Non-Employee Directors' Stock Plan dated May 23,2002 10.3 Second Quarter 2002Form 10-Q/A *10.4 Comfort Systems USA, Inc. 2006 Equity Incentive Plan 4.5 333-138377 *10.5 Form of Option Award under the Comfort Systems USA, Inc. 2006 EquityIncentive Plan 10.6 2006 Form 10-K *10.6 Form of Option Award under the Comfort Systems USA, Inc. 2006 StockOptions/SAR Plan for Non-Employee Directors 10.7 2006 Form 10-K *10.7 Employment Agreement between the Company, Eastern Heating &Cooling, Inc. and Alfred J. Giardinelli, Jr. 10.1 Second Quarter 2003Form 10-Q *10.8 Amended and Restated 2006 Equity Compensation Plan for Non-EmployeeDirectors A Proxy StatementApril 10, 2008 *10.9 2008 Senior Management Annual Performance Plan B Proxy StatementApril 10, 2008 *10.10 Form of Change in Control Agreement 10.2 First Quarter 2008Form 10-Q *10.11 Form of Comfort Systems USA, Inc. Executive Severance Policy 10.3 First Quarter 2008Form 10-Q *10.12 Form of Directors and Officers Indemnification Agreement 10.1 May 19, 2009 Form 8-KTable of Contents91 Incorporated by Reference to theExhibit Indicated Below and to theFiling with the CommissionIndicated BelowExhibitNumber Description of Exhibits ExhibitNumber Filing orFile Number 10.13 Second Amended and Restated Credit Agreement by and among Comfort SystemsUSA, Inc., as Borrower and Wells Fargo Bank, National Association, asAdministrative Agent/Wells Fargo Securities LLC, as Sole Lead Arranger andSole Lead Book Runner/Bank of Texas, N.A., Capital One, N.A., and RegionsBank as Co-Syndication Agent/and Certain Financial Institutions as Lenders 10.1 July 22, 2010Form 8-K/A 10.14 Stock Purchase Agreement, dated July 28, 2010 10.1 July 30, 2010Form 8-K *10.15 Summary of 2011 Incentive Compensation Plan 10.1 First Quarter2011 Form 10-Q *10.16 Form of Performance Restricted Stock Award Agreement dated March 24, 2011 10.1 March 28, 2011Form 8-K *10.17 First Amendment to Comfort Systems USA, Inc. Amended and Restated 2006Equity Compensation Plan for Non-Employee Directors 10.1 Second Quarter2011 Form 10-Q 10.18 Amendment No. 1 to Second Amended and Restated Credit Agreement, SecondAmended and Restated Security Agreement, and Second Amended and RestatedPledge Agreement 10.1 Third Quarter2011 Form 10-Q *10.19 Summary of 2012 Incentive Compensation Plan 10.1 First Quarter2012 Form 10-Q *10.20 Form of 2012 Restricted Stock Unit Agreement 10.1 March 30, 2012Form 8-K *10.21 Form of 2012 Dollar-denominated Performance Vesting Restricted Stock UnitAgreement 10.2 March 30, 2012Form 8-K *10.22 2012 Equity Incentive Plan A Proxy StatementApril 9, 2012 *10.23 2012 Senior Management Annual Performance Plan B Proxy StatementApril 9, 2012 *10.24 Summary of 2013 Incentive Compensation Plan 10.1 First Quarter2013 Form 10-Q *10.25 Form of 2013 Restricted Stock Unit Agreement 10.2 March 22, 2013Form 8-K *10.26 Form of 2013 Dollar-denominated Performance Vesting Restricted Stock UnitAgreement 10.3 March 22, 2013Form 8-K 10.27 Amendment No. 2 to Second Amended and Restated Credit Agreement andAmendment to Other Loan Documents 10.1 Second Quarter2013Form 10-QTable of Contents92 Incorporated by Reference to theExhibit Indicated Below and to theFiling with the CommissionIndicated BelowExhibitNumber Description of Exhibits ExhibitNumber Filing orFile Number *10.28 Letter Agreement between the Company and James Mylett 10.28 2013 Form 10-K *10.29 Form of Change in Control Agreement (2013) 10.29 2013 Form 10-K *10.30 Summary of 2014 Incentive Compensation Plan 10.1 First Quarter 2014Form 10-Q *10.31 Form of 2014 Restricted Stock Unit Agreement 10.1 March 21, 2014Form 8-K *10.32 Form of 2014 Dollar-denominated Performance Vesting Restricted Stock UnitAgreement 10.2 March 21, 2014Form 8-K *10.33 Form of Option Award under the Comfort Systems USA, Inc. 2012 EquityIncentive Plan Filed Herewith 10.34 Amendment No. 3 to Second Amended and Restated Credit Agreement andAmendment to Other Loan Documents 10.1 Third Quarter 2014Form 10-Q 10.35 Agreement and Plan of Merger between the Company and Dyna TenCorporation, dated April 7, 2014 10.1 April 7, 2014Form 8-K 21.1 List of subsidiaries of Comfort Systems USA, Inc. Filed Herewith 23.1 Consent of Ernst & Young LLP Filed Herewith 31.1 Certification of Chief Executive Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002 Filed Herewith 31.2 Certification of Chief Financial Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002 Filed Herewith 32.1 Certification of Chief Executive Officer pursuant to Section 906 of theSarbanes-Oxley Act of 2002 Furnished Herewith 32.2 Certification of Chief Financial Officer pursuant to Section 906 of theSarbanes-Oxley Act of 2002 Furnished Herewith 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document *Management contract or compensatory plan.QuickLinks -- Click here to rapidly navigate through this document EXHIBIT 10.33 Comfort Systems USA, Inc. 2012 Equity Incentive PlanNon-Qualified Stock Option Notice We are pleased to inform you that you have been granted an option to purchase Comfort Systems USA, Inc. (the "Company") common stock. Your granthas been made under the Company's 2012 Equity Incentive Plan (the "Plan"), which together with the terms contained in this Notice, sets forth the terms andconditions of your grant and is incorporated herein by reference. If this is your first grant, a copy of the 2012 Equity Incentive Plan and of the Prospectus isenclosed. Please review these documents carefully.Vesting: Subject to the terms of the Plan, the option vests according to the following schedule:Exercise: You may exercise this Option, in whole or in part, to purchase a whole number of vested shares at any time, by following the exercise procedures set upby the Company. All exercises must take place before the Last Date to Exercise, or such earlier date as is set out in the Plan following your death, disability oryour ceasing to be an employee. The number of shares you may purchase as of any date cannot exceed the total number of shares vested by that date, less anyshares you have previously acquired by exercising this Option.Employment Requirements: In the event of your separation from the Company, except in the event of retirement as described below, for any reason and under anycircumstances, all further vesting of shares under this grant stops, and all unvested shares are canceled. As set out in the Plan, you will have 3 monthsafter your employment ceases or is suspended to exercise your vested options, and in the event of your death or total disability you or your estate willhave a period of 3 months to exercise any vested options. Notwithstanding the foregoing, if you retire from the Company at a time when the sum of yourage, in whole years, and your years of service with the Company (as determined in a manner consistent with the method used for purposes of determiningvesting under the Comfort Systems USA, Inc. 401(k) Plan) is at least 75, you shall be deemed to satisfy the continuous employment condition as requiredabove on each vesting date following retirement. The Plan sets out the terms and conditions that govern this grant in the event of your termination ofemployment, death or disability.Taxes and Withholding: This option is not intended to be an Incentive Stock Option, as defined under Section 422(b) of the Internal Revenue Code. Any exercise of this option isnormally a taxable event, and if the Company determines that any federal, state, local or foreign tax or withholding payment is required relating to theexercise or sale of shares arising from this grant, the Company shall have the right to require such payments from you, or to withhold such amounts from otherpayments due to you from the Company.NAME Grant Date: March 19, 2014STREET Options Granted: [·]CITY Option Price: $[·] Last Date to Exercise: 03/19/2024Vesting Date Shares Vesting04/01/2015 [·]04/01/2016 [·]04/01/2017 [·]QuickLinksEXHIBIT 10.33Comfort Systems USA, Inc. 2012 Equity Incentive Plan Non-Qualified Stock Option NoticeQuickLinks -- Click here to rapidly navigate through this document EXHIBIT 21.1 SUBSIDIARIES OF COMFORT SYSTEMS USA, INC. ENTITY NAME DOMESTICJURISDICTION 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, LLC North Carolina 01/03/1997 Air Systems Engineering, Inc. Washington 05/18/1973 AirTemp, Inc. Maine 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 ColonialWebb Contractors Company Virginia 03/30/1972 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 (Carolinas), LLC North Carolina 01/01/2011 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 (Pasadena), Inc. Texas 06/28/2007 Comfort Systems USA Puerto Rico, Inc. Puerto Rico 08/09/1991 Comfort Systems USA (South Central), Inc. Texas 06/22/2007 Comfort Systems USA (Southeast), Inc. Delaware 03/24/1998 Comfort Systems USA (Southwest), Inc. Arizona 12/23/1977 Comfort Systems USA (Syracuse), Inc. New York 03/08/1965 Comfort Systems USA (Texas), L.P. Texas 08/14/1998 Comfort Systems USA (Western Michigan), Inc. Michigan 07/21/1989 Control Concepts, LLC Georgia 12/16/1996 Control Concepts Mechanical Services, LLC Georgia 01/17/2008 CS53 Acquisition Corp. Delaware 01/26/1999 CSUSA (10), LLC North Carolina 10/21/2011 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 Dyna Ten Corporation Texas 06/26/1980 Dyna Ten Maintenance Services, LLC Texas 08/07/2006 Eastern Heating & Cooling, Inc. New York 12/19/1988 Eastern Refrigeration Co., Inc. New York 01/30/1990 Environmental Air Systems, LLC North Carolina 10/07/2011 Envirotrol, LLC North Carolina 10/27/2011 EnvirotrolSC, LLC South Carolina 01/29/2009 ENTITY NAME DOMESTICJURISDICTION FORMATION DATE Granite State Holdings Company, Inc. Delaware 11/02/2005 Granite State Plumbing & Heating, LLC Delaware 07/31/2001 H & M Mechanical, Inc. Delaware 06/25/1998 Helm Corporation Colorado 10/26/1972 Hess Mechanical Corporation Delaware 03/17/1998 Hudson River Heating and Cooling, Inc. Delaware 08/19/2005 H-VAC Supply, L.L.C. Puerto Rico 10/18/2006 Mechanical Technical Services, Inc. Texas 06/22/2007 Merit Mechanical, Inc. Washington 02/14/1984 MJ Mechanical Services, Inc. Delaware 12/12/1997 North American Mechanical, Inc. Delaware 03/17/1998 Plant Services Incorporated Iowa 07/02/1986 Quality Air Heating and Cooling, Inc. Michigan 09/10/1980 Riddleberger Brothers, Inc. Virginia 12/22/1958 S.I. Goldman Company, Inc. Florida 10/04/1976 S.M. Lawrence Company, Inc. Tennessee 03/08/1973 SA Associates, Inc. Utah 03/27/1984 Salmon & Alder, L.L.C. Utah 07/08/1996 Seasonair, Inc. Maryland 10/28/1966 Temp-Right Service, Inc. Delaware 09/25/1997 The Capital Refrigeration Company Delaware 08/06/1998 QuickLinksEXHIBIT 21.1SUBSIDIARIES OF COMFORT SYSTEMS USA, INC.QuickLinks -- Click here to rapidly navigate through this document Exhibit 23.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the following Registration Statements:(1)Registration Statement (Form S-8 No. 333-38011) pertaining to the 1997 Long-Term Incentive Plan, 1997 Non-Employee Director's StockPlan, and 1998 Employee Stock Purchase Plan of Comfort Systems USA, Inc. (2)Registration Statement (Form S-8 No. 333-44354) pertaining to the 2000 Incentive Plan of Comfort Systems USA, Inc. (3)Registration Statement (Form S-8 No. 333-138377) pertaining to the 2006 Equity Incentive Plan and 2006 Stock Options/SAR Plan for Non-Employee Directors of Comfort Systems USA, Inc. (4)Registration Statement (Form S-8 No. 333-188302) pertaining to the Comfort Systems USA, Inc. 2012 Equity Incentive Plan.of our reports dated February 26, 2015, with respect to the consolidated financial statements of Comfort Systems USA, Inc. and the effectiveness of internalcontrol over financial reporting of Comfort Systems USA, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2014./s/ Ernst & Young, LLPHouston, TexasFebruary 26, 2015QuickLinksExhibit 23.1Consent of Independent Registered Public Accounting FirmQuickLinks -- Click here to rapidly navigate through this document Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICERPursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Brian E. Lane, certify that:1.I have reviewed this annual report on Form 10-K of Comfort Systems USA, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and 5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting.Date: February 26, 2015 /s/ BRIAN E. LANEBrian E. LanePresident and Chief Executive OfficerQuickLinksExhibit 31.1CERTIFICATION OF CHIEF EXECUTIVE OFFICER Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002QuickLinks -- Click here to rapidly navigate through this document Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICERPursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, William George, certify that:1.I have reviewed this annual report on Form 10-K of Comfort Systems USA, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c.evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and 5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting.Date: February 26, 2015 /s/ WILLIAM GEORGEWilliam GeorgeExecutive Vice President and Chief Financial OfficerQuickLinksExhibit 31.2CERTIFICATION OF CHIEF FINANCIAL OFFICER Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002QuickLinks -- Click here to rapidly navigate through this document Exhibit 32.1 CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002* In connection with the Annual Report of Comfort Systems USA, Inc. (the "Company") on Form 10-K for the fiscal year ended December 31, 2014, as filedwith the Securities and Exchange Commission on the date hereof (the "Report"), I, Brian E. Lane, President and Chief Executive 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:1.The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and 2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. *A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company andfurnished to the Securities and Exchange Commission or its staff upon request.Date: February 26, 2015 /s/ BRIAN E. LANEBrian E. LanePresident and Chief Executive OfficerQuickLinksExhibit 32.1CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002QuickLinks -- Click here to rapidly navigate through this document Exhibit 32.2 CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002* In connection with the Annual Report of Comfort Systems USA, Inc. (the "Company") on Form 10-K for the fiscal year ended December 31, 2014, as filedwith the Securities and Exchange Commission on the date hereof (the "Report"), I, William George, Executive Vice President and Chief Financial Officer ofthe Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:1.The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and 2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. *A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company andfurnished to the Securities and Exchange Commission or its staff upon request.Date: February 26, 2015 /s/ WILLIAM GEORGEWilliam GeorgeExecutive Vice President and Chief Financial OfficerQuickLinksExhibit 32.2CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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