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Keller GroupTable of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549Form 10-KANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended December 31, 2016Commission file number: 1‑13011Comfort Systems USA, Inc.(Exact name of registrant as specified in its charter)Delaware(State or Other Jurisdiction ofIncorporation or Organization)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 which Registered Common Stock, $.01 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒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 filing requirementsfor the past 90 days. Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File requiredto 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 shorter period that theregistrant was required to submit and post such files). Yes ☒ No ☐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 to thisForm 10‑K. ☐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):Large accelerated filer ☒Accelerated filer ☐Non‑accelerated filer ☐(Do not check if asmaller reporting company)Smaller reporting company ☐Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b‑2). Yes ☐ No ☒The aggregate market value of the voting stock held by non‑affiliates of the registrant at June 30, 2016 was approximately $1.19 billion, based on the$32.57 last sale price of the registrant’s common stock on the New York Stock Exchange on June 30, 2016.As of February 16, 2017, 37,209,114 shares of the registrant’s common stock were outstanding (excluding treasury shares of 3,914,251).DOCUMENTS INCORPORATED BY REFERENCEThe 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, 2016. Table of ContentsTABLE OF CONTENTSPart I Item 1. Business3 Item 1A. Risk Factors9 Item 1B. Unresolved Staff Comments18 Item 2. Properties19 Item 3. Legal Proceedings19 Item 4. Mine Safety Disclosures19 Item 4A. Executive Officers of the Registrant19 Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities20 Item 6. Selected Financial Data22 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations22 Item 7A. Quantitative and Qualitative Disclosures about Market Risk38 Item 8. Financial Statements and Supplementary Data39 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure71 Item 9A. Controls and Procedures71 Item 9B. Other Information71 Part III Item 10. Directors, Executive Officers and Corporate Governance71 Item 11. Executive Compensation72 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters72 Item 13. Certain Relationships and Related Transactions, and Director Independence72 Item 14. Principal Accounting Fees and Services72 Part IV Item 15. Exhibits and Financial Statement Schedules72 Item 16. Form 10-K Summary72 1 Table of ContentsFORWARD‑LOOKING STATEMENTSCertain statements and information in this Annual Report on Form 10‑K may constitute forward‑looking statementswithin the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “anticipate,”“plan,” “intend,” “foresee,” “should,” “would,” “could,” or other similar expressions are intended to identifyforward‑looking statements, which are generally not historic in nature. These forward‑looking statements are based on thecurrent expectations and beliefs of Comfort Systems USA, Inc. and its subsidiaries (collectively, the “Company”) concerningfuture developments and their effect on the Company. While the Company’s management believes that theseforward‑looking statements are reasonable as and when made, there can be no assurance that future developments affectingthe Company will be those that it anticipates. All comments concerning the Company’s expectations for future revenue andoperating results are based on the Company’s forecasts for its existing operations and do not include the potential impactof any future acquisitions. The Company’s forward‑looking statements involve significant risks and uncertainties (some ofwhich are beyond the Company’s control) and assumptions that could cause actual future results to differ materially fromthe Company’s historical experience and its present expectations or projections. Known material factors that could causethe 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 no obligation to publicly update or revise any forward‑looking statements after the date they aremade, whether as a result of new information, future events, or otherwise.2 Table of Contents PART IThe terms “Comfort Systems,” “we,” “us,” or “the Company” refer to Comfort Systems USA, Inc. or Comfort SystemsUSA, Inc. and its consolidated subsidiaries, as appropriate in the context. ITEM 1. BusinessComfort Systems USA, Inc., a Delaware corporation, was established in 1997. We provide comprehensivemechanical contracting services, which principally includes heating, ventilation and air conditioning (“HVAC”), plumbing,piping and controls, as well as off‑site construction, electrical, monitoring and fire protection. We install, maintain, repair andreplace products and systems throughout our 35 operating units in 84 cities and 91 locations throughout the United States.We operate primarily in the commercial, industrial and institutional HVAC markets and perform most of our servicesin industrial, healthcare, education, office, technology, retail and government facilities. Approximately 99% of ourconsolidated 2016 revenue was derived from commercial, industrial and institutional customers and multi‑family residentialprojects. Approximately 40% of our revenue was attributable to installation services in newly constructed facilities and 60%was attributable to renovation, expansion, maintenance, repair and replacement services in existing buildings. Ourconsolidated 2016 revenue was derived from the following service activities, substantially all of which are in the mechanicalservices industry, the single industry segment we serve: Percentage of Service Activity Revenue HVAC 75%Plumbing 15%Building Automation Control Systems 6%Other 4%Total 100%Our Internet address is http://www.comfortsystemsusa.com. We make available free of charge on or through ourwebsite our annual report on Form 10‑K, quarterly reports on Form 10‑Q, current reports on Form 8‑K, and amendments tothose reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable afterwe electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our website also includesour code of ethics, titled “Corporate Compliance Policy: Standards and Procedures Regarding Business Practices,” togetherwith other governance materials including our corporate governance standards and our Board committee charters. Printedversions of our code of ethics and our corporate governance standards may be obtained upon written request to our CorporateCompliance Officer at our headquarters address.Industry OverviewWe believe that the commercial, industrial, and institutional mechanical contracting generates annual revenue inthe United States of approximately $100 billion. Mechanical systems are necessary to virtually all commercial, industrial andinstitutional buildings. Because most buildings are sealed, HVAC systems provide the primary method of circulating fresh airin such buildings. In many instances, replacing an aging building’s existing systems with modern, energy‑efficient systemssignificantly reduces a building’s operating costs while improving air quality and overall system effectiveness. Oldercommercial, industrial and institutional facilities often have poor air quality as well as inadequate air conditioning, and olderHVAC systems result in significantly higher energy costs than do modern systems.Many factors positively affect mechanical services industry growth, particularly (i) population growth, whichincreases the need for commercial, industrial and institutional space, (ii) an aging installed base of buildings and equipment,(iii) increasing sophistication, complexity and efficiency of mechanical systems, and (iv) growing emphasis onenvironmental and energy efficiency.3 Table of ContentsOur industry can be broadly divided into two categories:·construction of and installation in new buildings, which provided approximately 40% of our revenue in 2016,and·renovation, expansion, maintenance, repair and replacement in existing buildings, which provided theremaining 60% of our 2016 revenue.Construction, Installation, Expansion and Renovation Services— Construction, installation, expansion andrenovation services consist of “design and build” and “plan and spec” projects. In “design and build” projects, thecommercial HVAC company is responsible for designing, engineering and installing a cost‑effective, energy‑efficient systemcustomized to the specific needs of the building owner. Costs and other project terms are normally negotiated between thebuilding owner or its representative and the contracting company. Companies that specialize in “design and build” projectsgenerally have specially trained HVAC engineers, CAD/CAM design systems and in‑house prefabrication capabilities. Thesecompanies use a consultative approach with customers and tend to develop long‑term relationships with building owners anddevelopers, general contractors, architects, consulting engineers and property managers. “Plan and spec” installation refers toprojects in which a third‑party architect or consulting engineer designs the HVAC systems and the installation project is “putout for bid.” We believe that “plan and spec” projects usually take longer to complete than “design and build” projectsbecause the system design and installation process generally are not integrated, thus resulting in more frequent adjustmentsto the technical specifications of the project and corresponding changes in work requirements and schedules. Furthermore, in“plan and spec” projects, the contracting company is not responsible for project design and other parties must also approveany changes, which increases overall project time and cost.Maintenance, Repair and Replacement Services—These services include maintaining, repairing, replacing,reconfiguring and monitoring previously installed systems and building automation controls. The growth and aging of theinstalled base of HVAC and related systems, and the demand for more efficient and sophisticated systems and buildingautomation controls have fueled growth in these services. The increasing complexity of these systems leads manycommercial, industrial and institutional building owners and property managers to outsource maintenance and repair, oftenthrough service agreements with service providers. State‑of‑the‑art control and monitoring systems feature electronic sensorsand microprocessors. These systems require specialized training to install, maintain and repair. Increasingly, mechanicalsystems in commercial, industrial and institutional buildings are being remotely monitored to improve energy efficiency andexpedite problem diagnosis and correction, which can allow us to provide maintenance and repair services at a lower cost.StrategyWe focus on strengthening operating competencies and on increasing profit margins. The key objectives of ourstrategy are to generate growth in our operations, improve the productivity of our workforce and to acquire complementingbusinesses. In order to accomplish our objectives we are currently focused on the following elements:Achieve Excellence in Core Competencies—We have identified six core competencies that we believe are critical toattracting and retaining customers, increasing operating income and cash flow and maximizing the productivity of ourincreasingly valuable skilled labor force. The six core competencies are: (i) customer cultivation and rapport, (ii) design andbuild expertise, (iii) effective pre-construction processes, (iv) job and cost tracking, (v) safety, and (vi) service excellence.Achieve Operating Efficiencies—We think we can achieve operating efficiencies and cost savings throughpurchasing economies, adopting “best practices” operating programs, and focusing on job management to deliver services ina cost‑effective and efficient manner. We emphasize improving the “job loop” at our locations—qualifying, estimating,pricing and executing projects effectively and efficiently, then promptly assessing project experience for applicability tocurrent and future projects. We also use our combined spend to gain purchasing advantages on products and services such asHVAC 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 anenhanced career path from working for a larger company, the opportunity to realize a more stable income and attractivebenefits packages. We have increased our already substantial investments in training, including programs for4 Table of Contentsproject managers, field superintendents, service managers, service technicians, sales managers, estimators, and leadership anddevelopment of key managers and leaders.Focus on Commercial, Industrial and Institutional Markets—We primarily focus on the commercial, industrial andinstitutional markets, including construction, maintenance, repair and replacement services. We believe that these complexmarkets are attractive because of their growth opportunities, large and diverse customer base, attractive margins and potentialfor long‑term relationships with building owners, property managers, general contractors and architects. Approximately 99%of our consolidated 2016 revenue was derived from commercial, industrial and institutional customers and large multi‑familyresidential projects.Leveraging Resources and Capabilities—We believe significant operating efficiencies can be achieved byleveraging resources among our operating locations. For example, we have shifted certain fabrication activities intocentralized locations in order to increase asset utilization. We opportunistically allocate our engineering, field andsupervisory 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 coordinated purchasing, technical innovation, insurance, benefits,bonding and financing activities across our operations.Maintain a Diverse Customer, Geographic and Project Base—We have a distribution of revenue across end‑usesectors that we believe reduces our exposure to negative developments in any given sector. We also have significantgeographical diversification across all regions of the United States, again reducing our exposure to negative developments inany given region. Our distribution of revenue in 2016 by end‑use sector was as follows:Industrial and Distribution 23% Education 19% Office Buildings 12% Healthcare 12% Government 10% Retail and Restaurants 7% Multi-Family 7% Lodging and Entertainment 5% Religious and Not for Profit 2% Residential 1% Other 2% Total 100% Approximately 82% of our revenue is earned on a project basis for installation of systems in newly constructed orexisting facilities. As of December 31, 2016, we had 3,830 projects in process with an aggregate contract value ofapproximately $1,975.0 million. Our average project takes six to nine months to complete, with an average contract price ofapproximately $516,000. This average project size, when taken together with the approximately 18% of our revenue derivedfrom maintenance and service, provides us with a broad base of work in the construction services sector. A stratification ofprojects in progress as of December 31, 2016, by contract price, is as follows: Aggregate Contract No. of Price Value Contract Price of Project Projects (millions) Under $1 million 3,415 $422.9 $1 million - $5 million 328 744.4 $5 million - $10 million 59 397.4 $10 million - $15 million 19 235.9 Greater than $15 million 9 174.4 Total 3,830 $1,975.0 Strategic Service Initiative. Five years ago, we began making substantial incremental investments to expand ourservice and maintenance revenue by increasing the value we can offer to service and maintenance customers. We are activelyconcentrating existing and new managerial and sales resources on training and hiring experienced employees to sell andprofitably perform service work. In many locations we have added or upgraded our capability, and we believe5 Table of Contentsour investments and efforts have provided a compelling customer value offering that stimulates growth in all aspects of ourbusinesses.Seek Growth through Acquisitions—We believe that we can increase our cash flow and operating income bycontinuing to opportunistically enter new markets or service lines through acquisition. We have dedicated a significantportion of our cash flow on an ongoing basis to seeking opportunities to acquire businesses that have strong assembledworkforces, attractive market positions and capabilities and other attractive operational, management, growth andgeographic characteristics.Operations and Services ProvidedWe provide a wide range of construction, renovation, expansion, maintenance, repair and replacement services formechanical and related systems in commercial, industrial and institutional properties. Our local management teams maintainresponsibility for day‑to‑day operating decisions. Local management is augmented by regional leadership that focuses oncore business competencies, regional financial performance, cooperation and coordination between locations, implementingbest practices and corporate initiatives. In addition to senior management, local personnel generally include designengineers, 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 tofocus on pursuing new business opportunities and improving operating efficiencies. We also combine certain back office andadministrative functions at various locations.Construction and Installation Services for New Buildings—Our installation business related to newly constructedfacilities, which comprised approximately 40% of our consolidated 2016 revenue, involves the design, engineering,integration, installation and start‑up of mechanical and related systems. We provide “design and build” and “plan and spec”installation services for office buildings, retail centers, apartment complexes, manufacturing plants, healthcare, educationand government facilities and other commercial, industrial and institutional facilities. In a “design and build” installation,working with the customer, we determine the needed capacity and energy efficiency of the HVAC system that best suits theproposed facility. The final design, terms, price and timing of the project are then negotiated with the customer or itsrepresentatives, after which any necessary modifications are made to the system plan. In “plan and spec” installation, weparticipate in a bid process to provide labor, equipment, materials and installation based on the end user’s plans andengineering specifications.Once an agreement has been reached, we order the necessary materials and equipment for delivery to meet theproject schedule. In many instances, we fabricate ductwork and piping and assemble certain components for the system basedon the mechanical drawing specifications, eliminating the need to subcontract ductwork or piping fabrication. Finally, weinstall the system at the project site, working closely with the owner or general contractor. Our average project takes six tonine months to complete, with an average contract price of approximately $516,000. We also perform larger project work,with 415 contracts in progress at December 31, 2016 with contract prices in excess of $1 million. Our largest project inprogress at December 31, 2016 had a contract price of $26.2 million. Project contracts typically provide for periodic billingsto the customer as we meet progress milestones or incur cost on the project. Project contracts in our industry also frequentlyallow for a small portion of progress billings or contract price to be withheld by the customer until after we have completedthe work. Amounts withheld under this practice are known as retention or retainage.Renovation, Expansion, Maintenance, Repair and Replacement Services for Existing Buildings—Our renovation,expansion, maintenance, repair and replacement services in existing buildings comprised approximately 60% of ourconsolidated 2016 revenue and include the maintenance, repair, replacement, renovation, expansion, reconfiguration andmonitoring of mechanical systems including HVAC systems and industrial process piping. Approximately 42% of ourconsolidated 2016 revenue was derived from renovation, expansion, replacement and reconfiguration of existing systems forcommercial, industrial and institutional customers. Renovation, expansion, replacement and reconfiguration services aretypically performed on a project basis and frequently use consultative expertise similar to that provided in the “design andbuild” installation market.Maintenance and repair services are provided either in response to service calls or under a service agreement.Service calls are coordinated by customer service representatives or dispatchers that use computer and communicationtechnology to process orders, arrange service calls, dispatch technicians and communicate with and invoice customers.6 Table of ContentsService technicians work from service vehicles equipped with commonly used parts, supplies and tools to complete a varietyof jobs. Commercial, industrial and institutional service agreements usually have terms of one or more years, with automaticannual renewals, and frequently include thirty‑ to sixty‑day cancellation notice periods. We also provide remote monitoringof temperature, pressure, humidity and air flow for HVAC systems.Sources of SupplyThe raw materials and components we use include HVAC system components, ductwork, steel, sheet metal andcopper tubing and piping. These raw materials and components are generally available from a variety of domestic or foreignsuppliers at competitive prices. Delivery times are typically short for most raw materials and standard components, but duringperiods of peak demand, may extend to one month or more. We estimate that direct purchase of commodities and finishedproducts comprises between 10% and 15% of our average project cost. We have procedures to reduce commodity costexposure such as; purchasing commodities early for particular projects, as well as frequently using time or market basedescalation and escape provisions in bids and contracts.Chillers for large units typically have the longest delivery time and generally have lead times of up to six months.The major components of commercial HVAC systems are compressors and chillers that are manufactured primarily by Carrier,Lennox, McQuay, Trane and York. The major suppliers of building automation control systems are Schneider, Honeywell,Johnson Controls, Siemens, Trane, York, Automated Logic, Delta, DisTech, Rockwell and Novar. We do not have anysignificant contracts guaranteeing us a supply of raw materials or components.Cyclicality and SeasonalityHistorically, the construction industry has been highly cyclical. As a result, our volume of business, particularly innew construction projects and renovation, may be adversely affected by declines in new installation and replacementprojects in various geographic regions of the United States during periods of economic weakness.The HVAC industry is subject to seasonal variations. The demand for new installation and replacement is generallylower during the winter months (the first quarter of the year) due to reduced construction activity during inclement weatherand less use of air conditioning during the colder months. Demand for HVAC services is generally higher in the second andthird calendar quarters due to increased construction activity and increased use of air conditioning during the warmermonths. Accordingly, we expect our revenue and operating results generally will be lower in the first calendar quarter.Sales and MarketingWe have a diverse customer base, with no single customer accounting for more than 3% of consolidated 2016revenue, and our largest customer often changes from year to year. Management and a dedicated sales force are responsiblefor developing and maintaining successful long‑term relationships with key customers. Customers generally includebuilding owners and developers and property managers, as well as general contractors, architects and consulting engineers.We intend to continue our emphasis on developing and maintaining long‑term relationships with our customers byproviding superior, high‑quality service in a professional manner. We believe we can continue to leverage the diversetechnical and marketing strengths at individual locations to expand the services offered in other local markets. With respectto multi‑location service opportunities, we maintain a national sales force in our national accounts group.EmployeesAs of December 31, 2016, we had approximately 7,700 employees. We have collective bargaining agreementscovering less than ten employees. We have not experienced and do not expect any significant strikes or work stoppages andbelieve our relations with employees covered by collective bargaining agreements are good.Recruiting, Training and SafetyOur continued success depends, in part, on our ability to continue to attract, retain and motivate qualified engineers,service technicians, field supervisors and project managers. We believe our success in retaining qualified employees will bebased on the quality of our recruiting, training, compensation, employee benefits programs and opportunities foradvancement. We provide numerous training programs for management, sales and leadership, as well7 Table of Contentsas on‑the‑job training, technical training, apprenticeship programs, attractive benefit packages and career advancementopportunities within our company.We have established comprehensive safety programs throughout our operations to ensure that all technicianscomply with safety standards we have established and that are established under federal, state and local laws and regulations.Additionally, we have implemented a “best practices” safety program throughout our operations, which provides employeeswith incentives to improve safety performance and decrease workplace accidents. Safety leadership establishes safetyprograms and benchmarking to improve safety across the Company. Finally, our employment screening process seeks todetermine that prospective employees have requisite skills, sufficient background references and acceptable driving records,if applicable. Our rate of incidents recordable under the standards of the Occupational Safety and Health Administration(“OSHA”) per one hundred employees per year, also known as the OSHA recordable rate, was 1.88 during 2016. This levelwas 6% better than the most recently published OSHA rate for our industry.Insurance and LitigationThe 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 healthclaims resulting from uninsured deductibles per incident or occurrence. Because we have very large deductibles, the vastmajority of our claims are paid by us, so as a practical matter we self‑insure the great majority of these risks. Losses up to suchper‑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 variousinsurance coverages to minimize financial risk associated with these claims. We have estimated and provided accruals forprobable losses and related legal fees associated with certain litigation in our consolidated financial statements. While wecannot predict the outcome of these proceedings, in our opinion and based on reports of counsel, any liability arising fromthese matters individually and in the aggregate will not have a material effect on our operating results, cash flows or financialcondition, after giving effect to provisions already recorded.We typically warrant labor for the first year after installation on new HVAC systems and pass through to thecustomer manufacturers’ warranties on equipment. We generally warrant labor for thirty days after servicing existing HVACsystems. We do not expect warranty claims to have a material adverse effect on our financial position or results of operations.CompetitionThe HVAC industry is highly competitive and consists of thousands of local and regional companies. We believethat purchasing decisions in the commercial, industrial and institutional markets are based on (i) competitive price,(ii) relationships, (iii) quality, timeliness and reliability, (iv) tenure, financial strength and access to bonding, (v) range ofcapabilities, and (vi) scale of operation. To improve our competitive position, we focus on both the consultative “design andbuild” installation market and the maintenance, repair and replacement market in order to develop and strengthen customerrelationships. In addition, we believe our ability to provide multi‑location coverage and a broad range of services gives us astrategic advantage over smaller competitors who may have more limited resources and capabilities.We believe that we are larger than most of our competitors, which are generally small, owner‑operated companies ina specific area. However, there are divisions of larger contracting companies, utilities and HVAC equipment manufacturersthat provide HVAC services in some of the same service lines and geographic areas we serve. Some of these competitors andpotential competitors have greater financial resources than we do to finance development opportunities and support theiroperations. We believe our smaller competitors generally compete with us based on price and their long‑term relationshipswith local customers. Our larger competitors compete with us on those factors but may also provide attractive financing andcomprehensive service and product packages.VehiclesWe operate a fleet of various owned or leased service trucks, vans and support vehicles. We believe these vehiclesgenerally are well maintained and sufficient for our current operations.8 Table of ContentsGovernmental Regulation and Environmental MattersOur operations are subject to various federal, state and local laws and regulations, including: (i) licensingrequirements applicable to engineering, construction and service technicians, (ii) building and HVAC codes and zoningordinances, (iii) regulations relating to consumer protection, including those governing residential service agreements,(iv) special bidding and procurement requirements on government projects, (v) wage and hour regulations, and(vi) regulations relating to worker safety and protection of the environment. For example, our operations are subject to therequirements of the Occupational Safety and Health Act, or OSHA, and comparable state laws directed towards protection ofemployees. We believe we have all required licenses to conduct our operations and are in substantial compliance withapplicable regulatory requirements. If we fail to comply with applicable regulations, we could be subject to substantial finesor revocation of our operating licenses.Many state and local regulations governing the HVAC services trades require individuals to hold permits andlicenses. In some cases, a required permit or license held by a single individual may be sufficient to authorize specifiedactivities for all of our service technicians who work in the state or county that issued the permit or license. We seek to ensurethat, where possible, we have two employees who hold any such permits or licenses that may be material to our operations ina particular geographic region.Our operations are subject to the federal Clean Air Act, as amended, which governs air emissions and imposesspecific requirements on the use and handling of ozone‑depleting refrigerants generally classified as chlorofluorocarbons(CFCs) or hydrochlorofluorocarbons (HCFCs). Clean Air Act regulations promulgated by the United States EnvironmentalProtection Agency (USEPA) require the certification of service technicians involved in the service or repair of equipmentcontaining 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 intendedultimately to eliminate the use of ozone‑depleting substances such as CFCs and HCFCs in the United States and to requirealternative refrigerants to be used in replacement HVAC systems. Some replacement refrigerants, already in use, andclassified as hydrofluorocarbons (HFCs) are not ozone‑depleting substances. HFCs are considered by USEPA to have highglobal warming potential. USEPA may at some point require the phase‑out of HFCs and expand existing techniciancertification requirements to cover the handling of HFCs. We do not believe the existing regulations governing techniciancertification requirements for the handling of ozone‑depleting substances or possible future regulations applicable to HFCswill materially affect our business on the whole because, although they require us to incur modest ongoing training costs, ourcompetitors also incur such costs, and such regulations may encourage or require our customers to update their HVACsystems. ITEM 1A. Risk FactorsOur business is subject to a variety of risks. You should carefully consider the risks described below, together with all theinformation included in this report. Our business, financial condition and results of operations could be adverselyaffected by the occurrence of any of these events, which could cause actual results to differ materially from expected andhistorical results, and the trading price of our common stock could decline.Many of the markets we do work in are currently experiencing an economic downturn or might in the future experience aneconomic downturn that may materially and adversely affect our business because our business is dependent on levels ofconstruction activity.The demand for our services is dependent upon the existence of construction projects and service requirementswithin the markets in which we operate. Any period of economic recession affecting a market or industry in which we transactbusiness is likely to adversely impact our business. Many of the projects we work on have long lifecycles from conception tocompletion, and the bulk of our performance generally occurs late in a construction project’s lifecycle. We experience theresults 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.The industries and markets we operate in have always been and will continue to be vulnerable to macroeconomicdownturns because they are cyclical in nature. When there is a reduction in demand, it often leads to greater pricecompetition as well as decreased revenue and profit. The lasting effects of a recession can also increase economic instabilitywith our vendors, subcontractors, developers, and general contractors, which can cause us greater liability exposure and canresult in us not being paid on some projects, as well as decreasing our revenue and profit.9 Table of ContentsFurther, to the extent some of our vendors, subcontractors, developers, or general contractors seek bankruptcy protection, thebankruptcy will likely force us to incur additional costs in attorneys’ fees, as well as other professional consultants, and willresult in decreased revenue and profit. Additionally, a reduction in federal, state, or local government spending in ourindustries and markets could result in decreased revenue and profit for us.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 costs increase above our estimates.Our contract prices are established largely upon estimates and assumptions of our projected costs, includingassumptions about: future economic conditions; prices, including commodities prices; availability of labor, including thecosts of providing labor, equipment, and materials; and other factors outside our control. If our estimates or assumptionsprove to be inaccurate, if circumstances change in a way that renders our assumptions and estimates inaccurate or we fail tosuccessfully execute the work, cost overruns may occur and we could experience reduced profits or a loss for affectedprojects. For instance, unanticipated technical problems may arise, we could have difficulty obtaining permits or approvals,local laws, labor costs or labor conditions could change, bad weather could delay construction, raw materials prices couldincrease, our suppliers or subcontractors may fail to perform as expected or site 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 certaincircumstances, 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 somecases we may also create liability for consequential and liquidated damages. Performance problems for existing and futureprojects could cause our actual results of operations to differ materially from those we anticipate and could damage ourreputation within our industry and our customer base.Our backlog is subject to unexpected adjustments and cancellations, which means that amounts included in our backlogmay not result in actual revenue or translate into profits.The revenue projected from our backlog may not be realized, or, if realized, may not result in profits. Projects mayremain in our backlog for an extended period of time, or project cancellations or scope adjustments may occur with respect tocontracts reflected in our backlog.Intense competition in our industry could reduce our market share and our profit.The markets we serve are highly fragmented and competitive. Our industry is characterized by many smallcompanies whose activities are geographically concentrated. We compete on the basis of our technical expertise andexperience, financial and operational resources, nationwide presence, industry reputation and dependability. While webelieve our customers consider a number of these factors in awarding available contracts, a large portion of our work isawarded through a bid process. Consequently, price is often the principal factor in determining which contractor is selected,especially on smaller, less complex projects. Smaller competitors are sometimes able to win bids for these projects based onprice 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 acceptable profit margins. Wealso expect increased competition from in‑house service providers, because some of our customers have employees whoperform service work similar to the services we provide. Vertical consolidation is also expected to intensify competition inour industry. If we are unable to meet these competitive challenges, we will lose market share to our competitors andexperience an overall reduction in our profits. In addition, our profitability would be impaired if we have to reduce our pricesto 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 locateacquisitions or that we will be able to consummate transactions on terms and conditions acceptable to us, or that acquiredbusinesses will be profitable. Acquisitions may expose us to additional business risks different than those we havetraditionally experienced. We also may encounter difficulties integrating acquired businesses and successfully managing thegrowth we expect to experience from these acquisitions.10 Table of ContentsWe may choose to finance future acquisitions with debt, equity, cash or a combination of the three. Futureacquisitions could dilute earnings or disrupt the payment of a stockholder dividend. To the extent we succeed in makingacquisitions, a number of risks will 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 liabilityexposure from known risks;·the diversion of management’s attention from the management of daily operations to the integration ofoperations;·difficulties in the assimilation and retention of employees, in the assimilation of different cultures and practices,in the assimilation of broad and geographically dispersed personnel and operations, and the retention ofemployees generally;·the risk of additional financial and accounting challenges and complexities in areas such as tax planning,treasury management, financial reporting 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 conditionand results of operations.Information 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 ourday‑to‑day operations and providing services to certain customers. Information technology system failures, includingsuppliers’ or vendors’ system failures, could disrupt our operations by causing transaction errors, processing inefficiencies,the loss of customers, other business disruptions or the loss of employee personal information. In addition, these systems,networks, and infrastructure may be vulnerable to deliberate cyber‑attacks that interfere with their functionality or theconfidentiality of our information or our customers’ data. These events could impact our customers, employees andreputation and lead to financial losses from remediation actions, loss of business or potential liability or an increase inexpense, 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 andmaterials necessary to complete our projects. If we are unable to retain qualified subcontractors or suppliers, or if oursubcontractors or suppliers do not perform as anticipated for any reason, our execution and profitability could be harmed.Earnings for future periods may be impacted by impairment charges 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 price over the fair value of the net assets of acquired businesses. We assess goodwill forimpairment each year, and more frequently if circumstances suggest an impairment may have occurred. We have determinedin the past and may again determine in the future that a significant impairment has occurred in the value of our unamortizedintangible assets or fixed assets, which could require us to write off a portion of our assets and could adversely affect ourfinancial condition or our reported results of operations.11 Table of ContentsActual and potential claims, lawsuits and proceedings could ultimately reduce our profitability and liquidity and weakenour financial condition.We are likely to continue to be named as a defendant in legal proceedings claiming damages from us in connectionwith the operation of our business. These actions and proceedings may involve claims for, among other things, compensationfor alleged personal injury, workers’ compensation, employment discrimination, breach of contract or property damage. Inaddition, we may be subject to class action lawsuits involving allegations of violations of the Fair Labor Standards Act andstate wage and hour laws. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcomeof any such actions or proceedings. We also are, and are likely to continue to be, from time to time a plaintiff in legalproceedings against customers, in which we seek to recover payment of contractual amounts we are owed as well as claims forincreased costs we incur. When appropriate, we establish provisions against possible exposures, and we adjust theseprovisions from time to time according to ongoing exposure. If our assumptions and estimates related to these exposuresprove to be inadequate or inaccurate, we could experience a reduction in our profitability and liquidity and a weakening ofour financial condition. In addition, claims, lawsuits and proceedings may harm our reputation or divert managementresources away from operating our business.We typically warrant the services we provide, guaranteeing the work performed against defects in workmanship andthe material we supply. Historically, warranty claims have not been material as our customers evaluate much of the work weperform for defects shortly after work is completed. However, if warranty claims occur, we could be required to repair orreplace warrantied items at our cost. In addition, our customers may elect to repair or replace the warrantied item by using theservices of another provider and require us to pay for the cost of the repair or replacement. Costs incurred as a result ofwarranty claims could adversely affect our operating results and financial condition.Our use of the percentage‑of‑completion method of accounting could result in a reduction or reversal of previouslyrecorded revenue or profits.A material portion of our revenue is recognized using the percentage‑of‑completion method of accounting, whichresults in our recognizing contract revenue and earnings ratably over the contract term in the proportion that our actual costsbear to our estimated contract costs. The earnings or losses recognized on individual contracts are based on estimates ofcontract revenue, costs and profitability. We review our estimates of contract revenue, costs and profitability on an ongoingbasis. 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 increasedcosts incurred by us due to customer‑induced delays and other factors. Contract losses are recognized in the fiscal periodwhen the loss is determined. Contract profit estimates are also adjusted in the fiscal period in which it is determined that anadjustment is required. As a result of the requirements of the percentage‑of‑completion method of accounting, the possibilityexists, for example, that we could have estimated and reported a profit on a contract over several periods and laterdetermined, usually near contract completion, that all or a portion of such previously estimated and reported profits wereoverstated. If this occurs, the full aggregate amount of the overstatement will be reported for the period in which suchdetermination is made, thereby eliminating all or a portion of any profits from other contracts that would have otherwise beenreported in such period or even resulting in a loss being reported for such period. On a historical basis, we believe that wehave made reasonably reliable estimates of the progress towards completion on our long‑term contracts. However, given theuncertainties associated with these types of contracts, it is possible for actual costs to vary from estimates previously made,which may result in reductions or reversals of previously recorded revenue and profits.A significant portion of our business depends on our ability to provide surety bonds. Any difficulties in the financial andsurety markets may adversely affect 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 totalcontract dollars that require an underlying bond. Historically surety market conditions have experienced times of difficultyas a result of significant losses incurred by many surety companies and the results of macroeconomic trends outside of ourcontrol. Consequently, during times when less overall bonding capacity is available in the market, surety terms have becomemore 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 somecustomers. Additionally, even if we continue to be able to access bonding capacity to sufficiently bond future work, we maybe required to post collateral to secure bonds, which would decrease the liquidity we would have available for otherpurposes. Our surety providers are under no commitment to guarantee our access to12 Table of Contentsnew bonds in the future; thus, our ability to access or increase bonding capacity is at the sole discretion of our suretyproviders. If our surety companies were to limit or eliminate our access to bonds, our alternatives would include seekingbonding capacity from other surety companies, increasing business with clients that do not require bonds and posting otherforms of collateral for project performance, such as letters of credit or cash. We may be unable to secure these alternatives in atimely manner, on acceptable terms, or at all. As such, if we were to experience an interruption or reduction in the availabilityof bonding capacity, it is likely we would be unable to compete for or work on certain projects.We are a decentralized company and place significant decision making powers with our subsidiaries’ management, whichpresents certain risks.We believe that our practice of placing significant decision making powers with local management is important toour successful growth and allows us to be responsive to opportunities and to our customers’ needs. However, this practicepresents 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 toidentify a misalignment between a subsidiary’s and the Company’s overall business strategy. Further, if a subsidiary locationfails to follow the Company’s compliance policies, we could be made party to a contract, arrangement or situation thatrequires the assumption of large liabilities or has less advantageous terms than is typically found in the market.Our insurance policies against many potential liabilities require high deductibles, and our risk management policies andprocedures may leave us exposed to unidentified or unanticipated risks. Additionally, difficulties in the insurance marketsmay adversely affect our ability to obtain necessary insurance.Although we maintain insurance policies with respect to our related exposures, these policies are subject to highdeductibles; as such, we are, in effect, self‑insured for substantially all of our typical claims. We hire an actuary to determineany liabilities for unpaid claims and associated expenses for the three major lines of coverage (workers’ compensation,general liability and auto liability). The determination of these claims and expenses and the appropriateness of the estimatedliability are reviewed and updated quarterly. However, insurance liabilities are difficult to assess and estimate due to themany relevant factors, the effects of which are often unknown, including the severity of an injury, the determination of ourliability in proportion to other parties, the number of incidents that have occurred but are not reported and the effectivenessof our safety program. Our accruals are based on known facts, historical trends (both internal trends and industry averages)and our reasonable estimate of our future expenses. We believe our accruals are adequate. However, our risk managementstrategies and techniques may not be fully effective in mitigating our risk exposure in all market environments or against alltypes of risk. If any of the variety of instruments, processes or strategies we use to manage our exposure to various types ofrisk are not effective, we may incur losses that are not covered by our insurance policies or that exceed our accruals orcoverage limits.Additionally, we typically are contractually required to provide proof of insurance on projects we work on.Historically insurance market conditions become more difficult for insurance consumers during periods when insurancecompanies suffer significant investment losses as well as casualty losses. Consequently, it is possible that insurance marketswill become more expensive and restrictive. Also, our prior casualty loss history might adversely affect our ability to procureinsurance within commercially reasonable ranges. As such, we may not be able to maintain commercially reasonable levels ofinsurance coverage in the future, which could preclude our ability to work on many projects. Our insurance providers areunder no commitment to renew our existing insurance policies in the future; therefore, our ability to obtain necessary levelsor kinds of insurance coverage is subject to market forces outside our control. If we were unable to obtain necessary levels ofinsurance, 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 otherliquidity needs could adversely impact our business.Our credit agreement and related restrictive and financial covenants are more fully described in Note 9 of “Notes tothe Consolidated Financial Statements.” Our failure to comply with any of these covenants, or to pay principal, interest orother amounts when due thereunder, would constitute an event of default under the credit agreement. Default under our creditagreement 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/or13 Table of Contents(4) foreclosure on any collateral securing the obligations under the agreement. If we are unable to service our debtobligations or fund our other liquidity needs, we could be forced to curtail our operations, reorganize our capital structure(including through bankruptcy proceedings) or liquidate some or all of our assets in a manner that could cause holders of oursecurities to experience a partial or total loss of their investment in us.If 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 thecustomer in amounts sufficient to cover expenditures on projects as they are incurred. Delays in customer payments mayrequire us to make a working capital investment. If a customer defaults in making their payments on a project to which wehave 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, whichcould reduce our profitability.Our business is labor intensive, and many of our operations experience a high rate of employment turnover. At timesof low unemployment rates in the United States, it will be more difficult for us to find qualified personnel at low cost in somegeographic areas where we operate. Additionally, our business is managed by a small number of key executive andoperational officers. We may be unable to hire and retain the sufficient skilled labor force necessary to operate efficiently andto support our growth strategy. Our labor expenses may increase as a result of a shortage in the supply of skilled personnel.Labor shortages, increased labor costs or the loss of key personnel could reduce our profitability and negatively impact ourbusiness. Further, our relationship with some customers could suffer if we are unable to retain the employees with whomthose 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 inlower gross margins and, consequently, a decrease in short‑term profitability. On the other hand, overutilization of ourworkforce could negatively impact safety, employee satisfactions and project execution, leading to a potential decline infuture 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 couldharm our reputation, damage our relationships with customers, reduce our revenue and profits, and subject us to criminaland civil enforcement actions.Misconduct, fraud, non‑compliance with applicable laws and regulations, or other improper activities by one ormore of our employees, subcontractors or partners could have a significant negative impact on our business and reputation.Examples of such misconduct include employee or subcontractor theft, the failure to comply with safety standards, laws andregulations, customer requirements, environmental laws and any other applicable laws or regulations. While we takeprecautions to prevent and detect these activities, such precautions may not be effective and are subject to inherentlimitations, including human error and fraud. Our failure to comply with applicable laws or regulations or acts of misconductcould subject us to fines and penalties, harm our reputation, damage our relationships with customers, reduce our revenueand profits and subject us to criminal and civil enforcement actions.Failure or circumvention of our disclosure controls and procedures or internal controls over financial reporting couldseriously harm our financial condition, results of operations, and our business.We plan to continue to maintain and strengthen internal controls and procedures to enhance the effectiveness of ourdisclosure controls and internal controls over financial reporting. Any system of controls, however well designed andoperated, is based in part on certain assumptions and can provide only reasonable, and not absolute, assurances that the14 Table of Contentsobjectives of the system are met. Any failure of our disclosure controls and procedures or internal controls over financialreporting 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 wellas federal laws and requirements applicable to government contractors. Changes in law, regulations or requirements, or amaterial failure of any of our subsidiaries or us to comply with any of them, could increase our costs and have othernegative impacts on our business.Our 91 locations are located in 27 states, which exposes us to a variety of different state and local laws andregulations, particularly those pertaining to contractor licensing requirements. These laws and regulations govern manyaspects of our business, and there are often different standards and requirements in different locations. In addition, oursubsidiaries that perform work for federal government entities are subject to additional federal laws and regulatory andcontractual requirements. Changes in any of these laws, or any of our subsidiaries’ material failure to comply with them, canadversely impact our operations by, among other things, increasing costs, distracting management’s time and attention fromother items, and harming our reputation.As government contractors, our subsidiaries are subject to a number of rules and regulations, and their contracts withgovernment entities are subject to audit. Violations of the applicable rules and regulations could result in a subsidiarybeing barred from future government contracts.Government contractors must comply with many regulations and other requirements that relate to the award,administration and performance of government contracts. A violation of these laws and regulations could result in impositionof fines and penalties, the termination of a government contract or debarment from bidding on government contracts in thefuture. Further, despite our decentralized nature, a violation at one of our locations could impact other locations’ ability tobid 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 futuregovernment contracts could have an adverse 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 reduceour profits.HVAC systems are subject to various environmental statutes and regulations, including the Clean Air Act and thoseregulating the production, servicing and disposal of certain ozone‑depleting refrigerants used in HVAC systems. There canbe no assurance that the regulatory environment in which we operate will not change significantly in the future. Variouslocal, state and federal laws and regulations impose licensing standards on technicians who install and service HVACsystems. And additional laws, regulations and standards apply to contractors who perform work that is being funded bypublic money, particularly federal public funding. Our failure to comply with these laws and regulations could subject us tosubstantial fines, the loss of our licenses or potentially debarment from future publicly funded work. It is impossible topredict the full nature and effect of judicial, legislative or regulatory developments relating to health and safety regulationsand environmental protection regulations applicable to our operations.Unsatisfactory safety performance may subject us to penalties, affect customer relationships, result in higher operatingcosts, negatively impact employee morale and result in higher employee turnover.Our projects are conducted at a variety of sites including construction sites and industrial facilities. Each location issubject to numerous safety risks, including electrocutions, fires, explosions, mechanical failures, weather‑related incidents,transportation accidents and damage to equipment. These hazards can cause personal injury and loss of life, severe damage toor destruction of property and equipment and other consequential damages and could lead to suspension of operations, largedamage 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 additionalaccidents in the future. Serious accidents may subject us to penalties, civil litigation or criminal prosecution. Claims fordamages to persons, including claims for bodily injury or loss of life, could result in significant costs and liabilities, whichcould adversely affect our financial condition and results of operations. Poor safety performance could also jeopardize ourrelationships with our customers and harm our reputation.15 Table of ContentsIf we do not effectively manage the size and cost of our operations, our existing infrastructure may become either strainedor over‑burdensome, and we may be unable to increase revenue growth.The growth that we have experienced in the past, and that we may experience in the future, may provide challengesto our organization, requiring us to expand our personnel and our operations. Future growth may strain our infrastructure,operations and other managerial and operating resources. We have also experienced in the past severe constriction in themarkets in which we operate and, as a result, in our operating requirements. Failing to maintain the appropriate cost structurefor 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 undertake contractual commitments that exceed our labor resources, which could also adversely affect ourearnings and our ability to increase revenue growth.We are susceptible to adverse weather conditions, which may harm our business and financial results.Our business may be adversely affected by severe weather in areas where we have significant operations.Repercussions of severe weather conditions may include:·curtailment of services;·suspension of operations;·inability to meet performance schedules in accordance with contracts and potential liability for liquidateddamages;·injuries or fatalities;·weather related damage to our facilities;·disruption of information systems;·inability to receive machinery, equipment and materials at jobsites; and·loss of productivity.Future climate change could adversely affect us.Climate change may create physical and financial risk. Physical risks from climate change could, among otherthings, include an increase in extreme weather events (such as floods or hurricanes), rising sea levels and limitations on wateravailability and quality. Such extreme weather conditions may limit the availability of resources, increasing the costs of ourprojects, or may cause projects to be delayed or cancelled.Legislation, nationwide protocols, regulation or other restrictions related to climate change could negatively impactour operations or our customers’ operations. Such legislation or restrictions could increase the costs of projects for ourcustomers or, in some cases, prevent a project from going forward, which could in turn have an adverse effect on our financialcondition and results of operations.Force majeure events, including natural disasters and terrorists’ actions, could negatively impact our business, which mayaffect our financial condition, results of operations or cash flows.Force majeure or extraordinary events beyond the control of the contracting parties, such as natural and man‑madedisasters, as well as terrorist actions, could negatively impact us. We typically negotiate contract language where we areallowed certain relief from force majeure events in private client contracts and review and attempt to mitigate force majeureevents in both public and private client contracts. We remain obligated to perform our services after most extraordinaryevents subject to relief that may be available pursuant to a force majeure clause. If we are not able to react quickly to forcemajeure events, our operations may be affected significantly, which would have a negative impact on our financial position,results of operations, cash flows and liquidity.16 Table of ContentsDeliberate, malicious acts, including terrorism and sabotage, could damage our facilities, disrupt our operations or injureemployees, 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 capacityand requiring us to repair or replace our facilities at substantial cost. Additionally, employees, contractors and the publiccould suffer substantial physical injury from acts of terrorism for which we could be liable. Governmental authorities mayalso impose security or other requirements that could make our operations more difficult or costly. The consequences of anysuch actions could adversely affect our financial condition and results of operations.Our common stock, which is listed on the New York Stock Exchange, has from time to time experienced significant priceand volume fluctuations. These fluctuations 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 beyondour control. A variety of events may cause the market price of our common stock to fluctuate significantly, including thefollowing: (i) the risk factors described in this Report on Form 10‑K; (ii) a shortfall in operating revenue or net income fromthat expected by securities analysts and investors; (iii) quarterly fluctuations in our operating results; (iv) changes insecurities analysts’ estimates of our financial performance or that of our competitors or companies in our industry generally;(v) general conditions in our customers’ industries; (vi) general conditions in the securities markets; (vii) our announcementsof significant contracts, milestones, acquisitions; (viii) our relationship with other companies; (ix) our investors’ view of thesectors and markets in which we operate; and (x) additions or departures of key personnel. Some companies that have volatilemarket prices for their securities have been subject to security class action suits filed against them. If a suit were to be filedagainst 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.We are required to assess and report on our internal controls each year. Findings of inadequate internal controls couldreduce investor confidence in the reliability of our financial information.As directed by the Sarbanes‑Oxley Act, the SEC adopted rules generally requiring public companies, including us,to include in their annual reports on Form 10‑K a report of management that contains an assessment by management of theeffectiveness of our internal control over financial reporting. In addition, the independent registered public accounting firmauditing our financial statements must report on the effectiveness of our internal control over financial reporting. Acompany’s internal control over financial reporting is a process designed by, or under the supervision of, the company’sprincipal executive and principal financial officers, or persons performing similar functions, and effected by the company’sboard of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain tothe maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and records of the company; and(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition ofthe company’s assets that could have a material effect on the financial statements.We may discover in the future that we have deficiencies in the design and operation of our internal controls. If anyof the deficiencies in our internal control, either by itself or in combination with other deficiencies, becomes a “materialweakness”, such that there is a reasonable possibility that a material misstatement of the annual or interim financialstatements will not be prevented or detected on a timely basis, we may be unable to conclude that we have effective internalcontrol over financial reporting. In such event, investors could lose confidence in the reliability of our financial statements,which may significantly harm our business and cause our stock price to decline. In addition, the failure to maintain effectiveinternal controls could also result in unauthorized transactions.17 Table of ContentsFuture 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, amember of management or a major stockholder, or the perception that these sales could occur, could depress the market priceof our common stock and impair our ability to raise capital through the sale of additional equity securities.Increases and uncertainty in our health insurance costs could adversely impact our results of operations and cash flows.The costs of employee health insurance have been increasing in recent years due to rising health care costs,legislative changes, and general economic conditions. Additionally, we may incur additional costs as a result of the PatientProtection and Affordable Care Act (the “Affordable Care Act”) that was signed into law in March 2010. It is possible thatfollowing the inauguration of President Trump on January 20, 2017, legislation will be introduced and passed by theRepublican-controlled Congress repealing the Affordable Care Act in whole or in part and signed into law by PresidentTrump, consistent with statements made by him during his presidential campaign indicating his intention to do so within ashort time following his inauguration. Because of the continued uncertainty about the implementation of the AffordableCare Act, including the potential for further legal challenges or repeal of that legislation, we cannot quantify or predict withany certainty the likely impact of the Affordable Care Act or its repeal on our financial position or results of operations.Rising inflation and/or interest rates could have an adverse effect on our business, financial condition and results ofoperations.Economic factors, including inflation and fluctuations in interest rates, could have a negative impact on ourbusiness. If our costs were to become subject to significant inflationary pressures or interest rate increases, we may not be ableto fully offset such higher costs through price increases. Our inability or failure to do so could harm our financial positionand 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 taxrates could be affected by many factors, some of which are outside of our control, including changes in tax laws andregulations in the various tax jurisdictions in which we file income taxes, issues relating to tax audits or examinations andany related interest or penalties, and uncertainty in obtaining deductions or credits claimed in various jurisdictions. Ourresults of operations is reported based on our determination of the amount of taxes we owe in various tax jurisdictions.Significant judgment is required in determining our provision for income taxes and our determination of tax liability isalways subject to review or examination by tax authorities in applicable tax jurisdictions. An adverse outcome of such areview of examination could adversely affect our operating results and financial condition. Further, the results of taxexaminations and audits could have a negative impact on our financial results and cash flows where the results differ from theliabilities recorded in our financial statements.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 moreseries of preferred stock having such preferences, powers and relative, participating, optional and other rights (includingpreferences over the common stock respecting dividends and distributions and voting rights) as the board of directors maydetermine. The issuance of this “blank‑check” preferred stock could render more difficult or discourage an attempt to obtaincontrol 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 CommentsNone.18 Table of Contents ITEM 2. PropertiesAs of December 31, 2016, we owned four properties. Other than these owned properties, we lease the real propertyand buildings from which we operate. Our facilities are located in 27 states 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 becommercially reasonable. A majority of these premises are leased from individuals or entities with whom we have no otherbusiness relationship. In certain instances these leases are with current or former employees. To the extent we renew, enterinto leases or otherwise change leases with current or former employees, we enter into such agreements on terms that reflect afair market valuation for the properties. Leased premises range in size from approximately 1,000 square feet to 110,000square feet. To maximize available capital, we generally intend to continue to lease our properties, but may consider furtherpurchases of property where we believe ownership would be more economical. We believe that our facilities are sufficient forour current needs.We lease our executive and administrative offices in Houston, Texas. ITEM 3. Legal ProceedingsWe are subject to certain claims and lawsuits arising in the normal course of business. We maintain variousinsurance coverages to minimize financial risk associated with these claims. We have estimated and provided accruals forprobable losses and related legal fees associated with certain litigation in our consolidated financial statements. While wecannot predict the outcome of these proceedings, in our opinion and based on reports of counsel, any liability arising fromthese matters individually and in the aggregate will not have a material effect on our operating results, cash flows or financialcondition, after giving effect to provisions already recorded. ITEM 4. Mine Safety DisclosuresNot applicable. ITEM 4A. Executive Officers of the RegistrantExecutive officers are appointed by our Board of Directors and hold office until their successors are elected and dulyqualified. The following persons serve as executive officers of the Company.Brian Lane, age 59, has served as our Chief Executive Officer and President since December 2011 and as a directorsince November 2010. Mr. Lane served as our President and Chief Operating Officer from March 2010 until December 2011.Mr. Lane joined the Company in October 2003 and served as Vice President and then Senior Vice President for Region Oneof the Company until he was named Executive Vice President and Chief Operating Officer in January 2009. Prior to joiningthe Company, Mr. Lane spent fifteen years at Halliburton, the global service and equipment company devoted to energy,industrial, and government customers. During his tenure at Halliburton, he held various positions in business development,strategy, and project initiatives. He departed as the Regional Director of Europe and Africa. Mr. Lane’s additional experienceincluded serving as a Regional Director of Capstone Turbine Corporation, a distributed power manufacturer. He also was aVice President of Kvaerner, an international engineering and construction company where he focused on the chemicalindustry.William George, age 52, has served as our Executive Vice President and Chief Financial Officer since May 2005,was our Senior Vice President, General Counsel and Secretary from May 1998 to May 2005, and was our Vice President,General Counsel and Secretary from March 1997 to April 1998. From October 1995 to February 1997, Mr. George was VicePresident and General Counsel of American Medical Response, Inc., a publicly‑traded healthcare transportation 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 51, has served as our Senior Vice President and Chief Accounting Officer since May 2005, wasour Vice President and Corporate Controller from March 2002 to May 2005, and was our Assistant Corporate Controller fromSeptember 1999 to February 2002. From 1996 to August 1999, Ms. Shaeff was Financial Accounting Manager—CorporateControllers Group for Browning‑Ferris Industries, Inc., a publicly‑traded waste services company. From 1987 to 1995, sheheld various positions with Arthur Andersen LLP. Ms. Shaeff is a Certified Public Accountant.19 Table of ContentsTrent T. McKenna, age 44, has served as our Senior Vice President, General Counsel and Secretary since August2013, was our Vice President, General Counsel and Secretary from May 2005 to August 2013, and was our Associate GeneralCounsel from August 2004 to May 2005. From February 1999 to August 2004, Mr. McKenna was a practicing attorney in thearea of complex commercial litigation in the Houston, Texas office of Akin Gump Strauss Hauer & Feld LLP, an internationallaw firm. PART II ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesThe following table sets forth the reported high and low sales prices of our Common Stock for the quarters indicatedas traded at the New York Stock Exchange. Our Common Stock is traded under the symbol FIX: Cash Dividends High Low Declared Fourth Quarter, 2016 $34.70 $27.21 $0.070 Third Quarter, 2016 $33.48 $26.26 $0.070 Second Quarter, 2016 $33.59 $29.49 $0.070 First Quarter, 2016 $32.27 $24.67 $0.065 Fourth Quarter, 2015 $33.71 $27.47 $0.065 Third Quarter, 2015 $30.12 $22.98 $0.065 Second Quarter, 2015 $23.90 $20.11 $0.060 First Quarter, 2015 $21.18 $15.87 $0.060 As of February 16, 2017 there were approximately 263 stockholders of record of our Common Stock, and the lastreported sale price on that date was $34.05 per share.We expect to continue paying cash dividends quarterly, although there is no assurance as to future dividendsbecause they depend on future earnings, capital requirements, and financial condition. In addition, our revolving creditagreement may limit the amount of dividends we can pay at any time that our Net Leverage Ratio exceeds 1.0.20 Table of ContentsThe following Corporate Performance Graph and related information shall not be deemed “soliciting material” or tobe “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the SecuritiesAct or the Exchange Act, except to the extent that we specifically incorporate 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 12/31/11 in stock or index, including reinvestment of dividends.Fiscal year ending December 31.Copyright© 2017 S&P, a division of McGraw Hill Financial. All rights reserved.Copyright© 2017 Russell Investment Group. All rights reserved.Recent Sales of Unregistered SecuritiesNone.Issuer Purchases of Equity SecuritiesOn March 29, 2007, our Board of Directors (the “Board”) approved a stock repurchase program to acquire up to1.0 million shares of our outstanding common stock. Subsequently, the Board has from time to time approved extensions ofthe program to acquire additional shares. On August 11, 2016, the Board approved an extension to the program by increasingthe shares authorized for repurchase by 0.6 million shares. Since the inception of the repurchase program, the Board hasapproved 8.1 million shares to be repurchased. As of December 31, 2016, we have repurchased a cumulative total of7.3 million shares at an average price of $13.02 per share under the repurchase program.The share repurchases will be made from time to time at our discretion in the open market or privately negotiatedtransactions as permitted by securities laws and other legal requirements, and subject to market conditions and other factors.The Board may modify, suspend, extend or terminate the program at any time. During the twelve months ended December 31,2016, we repurchased 0.5 million shares for approximately $13.1 million at an average price of $28.44 per share.21 Table of ContentsDuring the year ended December 31, 2016, we purchased our common shares in the following amounts at thefollowing weighted‑average prices: Total Number of Shares Maximum Number of Purchased as Part of Shares that May Yet Be Total Number of Average Price Publicly Announced Plans Purchased Under the Plans Period Shares Purchased Paid Per Share or Programs or Programs January 1 - January 31 102,029 $27.84 6,984,350 576,833 February 1 - February 29 — $ — 6,984,350 576,833 March 1 - March 31 — $ — 6,984,350 576,833 April 1 - April 30 — $ — 6,984,350 576,833 May 1 - May 31 66,185 $30.51 7,050,535 510,648 June 1 - June 30 2,094 $30.85 7,052,629 508,554 July 1 - July 31 3,000 $30.92 7,055,629 505,554 August 1 - August 31 133,364 $29.03 7,188,993 923,500 September 1 - September 30 77,614 $26.92 7,266,607 845,886 October 1 - October 31 55,878 $27.62 7,322,485 790,008 November 1 - November 30 20,006 $28.38 7,342,491 770,002 December 1 - December 31 — $ — 7,342,491 770,002 460,170 $28.44 7,342,491 770,002 ITEM 6. Selected Financial DataThe following selected historical financial data has been derived from our audited financial statements and shouldbe read in conjunction with the historical Consolidated Financial Statements and related notes: Year Ended December 31, 2016 2015 2014 2013 2012 (in thousands, except per share amounts) STATEMENT OF OPERATIONS DATA: Revenue $1,634,340 $1,580,519 $1,410,795 $1,357,272 $1,331,185 Operating income (a) $101,569 $90,044 $42,222 $46,258 $22,303 Income from continuing operations $64,896 $57,440 $28,614 $28,632 $11,494 Income (loss) from discontinued operations, net of tax $ — $ — $(15) $(76) $355 Net income including noncontrolling interests $64,896 $57,440 $28,599 $28,556 $11,849 Net income attributable to Comfort Systems USA, Inc. $64,896 $49,364 $23,063 $27,269 $13,463 Income per share attributable to Comfort Systems USA, Inc.: Basic— Income from continuing operations $1.74 $1.32 $0.61 $0.73 $0.35 Income (loss) from discontinued operations — — — — 0.01 Net income $1.74 $1.32 $0.61 $0.73 $0.36 Diluted— Income from continuing operations $1.72 $1.30 $0.61 $0.73 $0.35 Income (loss) from discontinued operations — — — — 0.01 Net income $1.72 $1.30 $0.61 $0.73 $0.36 Cash dividends per share $0.275 $0.250 $0.225 $0.210 $0.200 BALANCE SHEET DATA: Working capital $98,276 $118,882 $111,433 $109,618 $84,349 Total assets $708,903 $691,594 $655,942 $592,789 $573,461 Total debt $2,811 $11,507 $40,346 $2,000 $7,400 Total stockholders’ equity $376,633 $365,005 $321,393 $314,022 $287,306 Total Comfort Systems USA, Inc. stockholders’ equity $376,633 $346,721 $306,281 $295,834 $270,405 (a)Included in operating income is a goodwill impairment charge of $0.7 million for 2014. There were no goodwillimpairment charges for 2016, 2015, 2013 or 2012. ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion and analysis should be read in conjunction with the Consolidated Financial Statementsand related notes included elsewhere in this annual report on Form 10‑K. Also see “Forward‑Looking Statements” discussion.22 Table of ContentsIntroduction and OverviewWe are a national provider of comprehensive mechanical installation, renovation, maintenance, repair andreplacement services within the mechanical services industry. We operate primarily in the commercial, industrial andinstitutional HVAC markets and perform most of our services within office buildings, retail centers, apartment complexes,manufacturing plants, and healthcare, education and government facilities.Nature and Economics of Our BusinessApproximately 82% of our revenue is earned on a project basis for installation of mechanical systems in newlyconstructed facilities or for replacement of systems in existing facilities. Customers hire us to ensure such systems deliverspecified or generally expected heating, cooling, conditioning and circulation of air in a facility. This entails installing coresystem equipment such as packaged heating and air conditioning units, or in the case of larger facilities, separate corecomponents such as chillers, boilers, air handlers, and cooling towers. We also typically install connecting and distributionelements such as piping and ducting. Our responsibilities usually require conforming the systems to pre‑establishedengineering drawings and equipment and performance specifications, which we frequently participate in establishing. Ourproject management responsibilities include staging equipment and materials to project sites, deploying labor to perform thework, and coordinating with other service providers on the project, including any subcontractors we might use to deliver ourportion of the work.When competing for project business, we usually estimate the costs we will incur on a project, and then propose abid to the customer that includes a contract price and other performance and payment terms. Our bid price and terms areintended to cover our estimated costs on the project and provide a profit margin to us commensurate with the value of theinstalled system to the customer, the risk that project costs or duration will vary from estimate, the schedule on which we willbe paid, the opportunities for other work that we might forego by committing capacity to this project, and other costs that weincur to support our operations but which are not specific to the project. Typically, customers will seek pricing fromcompetitors for a given project. While the criteria on which customers select a service provider vary widely and includefactors such as quality, technical expertise, on‑time performance, post‑project support and service, and company history andfinancial strength, we believe that price for value is the most influential factor for most customers in choosing a mechanicalinstallation and service provider.After a customer accepts our bid, we generally enter into a contract with the customer that specifies what we willdeliver on the project, what our related responsibilities are, and how much and when we will be paid. Our overall price for theproject is typically set at a fixed amount in the contract, although changes in project specifications or work conditions thatresult in unexpected additional work are usually subject to additional payment from the customer via what are commonlyknown as change orders. Project contracts typically provide for periodic billings to the customer as we meet progressmilestones or incur cost on the project. Project contracts in our industry also frequently allow for a small portion of progressbillings or contract price to be withheld by the customer until after we have completed the work. Amounts withheld underthis practice are known as retention or retainage.Labor and overhead costs account for the majority of our cost of service. Accordingly, labor management andutilization have the most impact on our project performance. Given the fixed price nature of much of our project work, if ourinitial estimate of project costs is wrong or we incur cost overruns that cannot be recovered in change orders, we canexperience reduced profits or even significant losses on fixed price project work. We also perform some project work on acost‑plus or a time and materials basis, under which we are paid our costs incurred plus an agreed‑upon profit margin, andsuch projects are sometimes subject to a guaranteed maximum cost. These margins are frequently less than fixed‑pricecontract margins because there is less risk of unrecoverable cost overruns in cost‑plus or time and materials work.As of December 31, 2016, we had 3,830 projects in process. Our average project takes six to nine months tocomplete, with an average contract price of approximately $516,000. Our projects generally require working capital fundingof equipment and labor costs. Customer payments on periodic billings generally do not recover these costs until late in thejob. Our average project duration together with typical retention terms as discussed above generally allow us to complete therealization of revenue and earnings in cash within one year. We have what we believe is a well‑diversified distribution ofrevenue across end‑use sectors that we believe reduces our exposure to negative developments in any given sector. Becauseof the integral nature of HVAC and related controls systems to most buildings, we have the legal right in almost all cases toattach liens to buildings or related funding sources when we have23 Table of Contentsnot been fully paid for installing systems, except with respect to some government buildings. The service work that we do,which is discussed further below, usually does not give rise to lien rights.We also perform larger projects. Taken together, projects with contract prices of $1 million or more totaled$1,552.1 million of aggregate contract value as of December 31, 2016, or approximately 80%, out of a total contract valuefor all projects in progress of $1,975.0 million. Generally, projects closer in size to $1 million will be completed in one yearor less. It is unusual for us to work on a project that exceeds two years in length.A stratification of projects in progress as of December 31, 2016, by contract price, is as follows: Aggregate Contract No. of Price Value Contract Price of Project Projects (millions) Under $1 million 3,415 $422.9 $1 million - $5 million 328 744.4 $5 million - $10 million 59 397.4 $10 million - $15 million 19 235.9 Greater than $15 million 9 174.4 Total 3,830 $1,975.0 In addition to project work, approximately 18% of our revenue represents maintenance and repair service on alreadyinstalled HVAC and controls systems. This kind of work usually takes from a few hours to a few days to perform. Prices to thecustomer are based on the equipment and materials used in the service as well as technician labor time. We usually bill thecustomer for service work when it is complete, typically with payment terms of up to thirty days. We also providemaintenance 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 are for one or more yearsand frequently contain thirty‑ to sixty‑day cancellation notice periods.A relatively small portion of our revenue comes from national and regional account customers. These customerstypically have multiple sites, and contract with us to perform maintenance and repair service. These contracts may alsoprovide for us to perform new or replacement systems installation. We operate a national call center to dispatch techniciansto sites requiring service. We perform the majority of this work with our own employees, with the balance beingsubcontracted to third parties that meet our performance qualifications.Profile and Management of Our OperationsWe manage our 35 operating units based on a variety of factors. Financial measures we emphasize includeprofitability, and use of capital as indicated by cash flow and by other measures of working capital principally involvingproject cost, billings and receivables. We also monitor selling, general, administrative and indirect project support expense,backlog, workforce size and mix, growth in revenue and profits, variation of actual project cost from original estimate, andoverall financial performance in comparison to budget and updated forecasts. Operational factors we emphasize includeproject selection, estimating, pricing, management and execution practices, labor utilization, safety, training, and themake‑up of both existing backlog as well as new business being pursued, in terms of project size, technical application andfacility 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 unitmanagers is an important factor in our business, particularly in view of the relative uniqueness of each market and operation,the importance of relationships with customers and other market participants such as architects and consulting engineers, andthe high degree of competition and low barriers to entry in most of our markets. Accordingly, we devote considerableattention to operating unit management quality, stability, and contingency planning, including related considerations ofcompensation, and non‑competition protection where applicable.Economic and Industry FactorsAs a mechanical and building controls services provider, we operate in the broader nonresidential constructionservices industry and are affected by trends in this sector. While we do not have operations in all major cities of the24 Table of ContentsUnited States, we believe our national presence is sufficiently large that we experience trends in demand for and pricing ofour services that are consistent with trends in the national nonresidential construction sector. As a result, we monitor theviews of major construction sector forecasters along with macroeconomic factors they believe drive the sector, includingtrends in gross domestic product, interest rates, business investment, employment, demographics, and the general fiscalcondition of federal, state and local governments.Spending decisions for building construction, renovation and system replacement are generally made on a projectbasis, usually with some degree of discretion as to when and if projects proceed. With larger amounts of capital, time, anddiscretion involved, spending decisions are affected to a significant degree by uncertainty, particularly concerns abouteconomic and financial conditions and trends. We have experienced periods of time when economic weakness caused asignificant slowdown in decisions to proceed with installation and replacement project work.Operating Environment and Management EmphasisNonresidential building construction and renovation activity, as reported by the federal government, declinedsteeply over the four year period from 2009 to 2012, and 2013 and 2014 activity levels were relatively stable at the lowlevels of the preceding years. During 2015 and 2016, there was an increase in overall activity levels and we currently expectthat activity will continue at these improved levels during 2017.As a result of our continued strong emphasis on cash flow, at December 31, 2016 we had no indebtedness under ourrevolving credit facility, with positive uncommitted cash balances, as discussed further in “Liquidity and Capital Resources”below. We have a credit facility in place with considerably less restrictive terms than those of our previous facilities; thisfacility does not expire until February 2021. We have strong surety relationships to support our bonding needs, and webelieve our relationships with the surety markets are strong and benefit from our solid current results and financial position.We have generated positive free cash flow in each of the last eighteen calendar years and will continue our emphasis in thisarea. We believe that the relative size and strength of our balance sheet and surety support as compared to most companies inour industry represent competitive advantages for us.As discussed at greater length in “Results of Operations” below, we expect price competition to continue as ourcustomers and local and regional competitors respond cautiously to improved market conditions. We will continue ourefforts to invest in our service business, to pursue the more active sectors in our markets, and to emphasize our regional andnational account business. Our primary emphasis for 2017 will be on execution and cost control, but we are seeking growthbased on our belief that industry conditions will continue to be strong in 2017, and we believe that activity levels will permitus to earn improved profits while preserving and developing our workforce. We continue to focus on project qualification,estimating, pricing and management; and we are investing in growth and improved performance.Critical Accounting PoliciesOur critical accounting policies are based upon the significance of the accounting policy to our overall financialstatement presentation, as well as the complexity of the accounting policy and our use of estimates and subjectiveassessments. Our most critical accounting policy is revenue recognition. As discussed elsewhere in this annual report onForm 10‑K, our business has two service functions: (i) installation, which we account for under the percentage of completionmethod, and (ii) maintenance, repair and replacement, which we account for as the services are performed, or in the case ofreplacement, under the percentage of completion method. In addition, we identified other critical accounting policies relatedto our allowance for doubtful accounts receivable, the recording of our self‑insurance liabilities, valuation of deferred taxassets, accounting for acquisitions and the recoverability of goodwill and identifiable intangible assets. These accountingpolicies, as well as others, are described in Note 2 to the Consolidated Financial Statements included elsewhere in this annualreport on Form 10‑K.Percentage of Completion Method of AccountingApproximately 82% of our revenue was earned on a project basis and recognized through the percentage ofcompletion method of accounting during 2016. Under this method, contract revenue recognizable at any time during the lifeof a contract is determined by multiplying expected total contract revenue by the percentage of contract costs incurred at anytime to total estimated contract costs. More specifically, as part of the negotiation and bidding process in connection withobtaining installation contracts, we estimate our contract costs, which include all direct materials (exclusive of rebates), laborand subcontract costs and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs anddepreciation costs. These contract costs are included in our results of operations under25 Table of Contentsthe caption “Cost of Services.” Then, as we perform under those contracts, we measure costs incurred, compare them to totalestimated costs to complete the contract, and recognize a corresponding proportion of contract revenue. Labor costs areconsidered to be incurred as the work is performed. Subcontractor labor is recognized as the work is performed, but isgenerally subjected to approval as to milestones or other evidence of completion. Non‑labor project costs consist ofpurchased equipment, prefabricated materials and other materials. Purchased equipment on our projects is substantiallyproduced 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 worksite. Prefabricated materials, such as ductwork and piping, aregenerally performed at our shops and recognized as contract costs when fabricated for the unique specifications of the job.Other materials costs are not significant and are generally recorded when delivered to the worksite. This measurement andcomparison process requires updates to the estimate of total costs to complete the contract, and these updates may includesubjective assessments.We generally do not incur significant costs prior to receiving a contract, and therefore, these costs are expensed asincurred. In limited circumstances, when significant pre‑contract costs are incurred, they are deferred if the costs can bedirectly associated with a specific contract and if their recoverability from the contract is probable. Upon receiving thecontract, these costs are included in contract costs. Deferred costs associated with unsuccessful contract bids are written off inthe 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 agreedupon milestones or as we incur costs. The schedules for such billings usually do not precisely match the schedule on whichcosts are incurred. As a result, contract revenue recognized in the statement of operations can and usually does differ fromamounts that can be billed or invoiced to the customer at any point during the contract. Amounts by which cumulativecontract revenue recognized on a contract as of a given date exceed cumulative billings to the customer under the contractare reflected as a current asset in our balance sheet under the caption “Costs and estimated earnings in excess of billings.”Amounts by which cumulative billings to the customer under a contract as of a given date exceed cumulative contractrevenue recognized on the contract are reflected as a current liability in our balance sheet under the caption “Billings inexcess of costs and estimated earnings.”The percentage of completion method of accounting is also affected by changes in job performance, job conditions,and final contract settlements. These factors may result in revisions to estimated costs and, therefore, revenue. Such revisionsare frequently based on further estimates and subjective assessments. The effects of these revisions are recognized in theperiod in which revisions are determined. When such revisions lead to a conclusion that a loss will be recognized on acontract, the full amount of the estimated ultimate loss is recognized in the period such conclusion is reached, regardless ofthe percentage of completion of the contract.Revisions to project costs and conditions can give rise to change orders under which the customer agrees to payadditional contract price. Revisions can also result in claims we might make against the customer to recover project variancesthat have not been satisfactorily addressed through change orders with the customer. Except in certain circumstances, we donot recognize revenue or margin based on change orders or claims until they have been agreed upon with the customer. Theamount of revenue associated with unapproved change orders and claims was immaterial for the year ended December 31,2016.Variations from estimated project costs could have a significant impact on our operating results, depending onproject size, and the recoverability of the variation via additional customer payments.Accounting for Allowance for Doubtful AccountsWe are required to estimate the collectability of accounts receivable and provide an allowance for doubtful accountsfor receivable amounts we believe we will not ultimately collect. This requires us to make certain judgments and estimatesinvolving, among others, the creditworthiness of our customers, prior collection history with our customers, ongoingrelationships with our customers, the aging of past due balances, our lien rights, if any, in the property where we performedthe work, and the availability, if any, of payment bonds applicable to the contract. These estimates are evaluated andadjusted as needed when additional information is received.Accounting for Self‑Insurance LiabilitiesWe are substantially self‑insured for workers’ compensation, employer’s liability, auto liability, general liability andemployee group health claims in view of the relatively high per‑incident deductibles we absorb under our insurancearrangements for these risks. Losses are estimated and accrued based upon known facts, historical trends and industryaverages. Estimated losses in excess of our deductible, which have not already been paid, are included in our accrual with acorresponding receivable from our insurance carrier. Loss estimates associated with the larger and26 Table of Contentslonger‑developing risks—workers’ compensation, auto liability and general liability—are reviewed by a third party actuaryquarterly.We believe these accruals are adequate. However, insurance liabilities are difficult to estimate due to unknownfactors, including the severity of an injury, the determination of our liability in proportion to other parties, timely reportingof occurrences, ongoing treatment or loss mitigation, general trends in litigation recovery outcomes and the effectiveness ofsafety and risk management programs. Therefore, if actual experience differs from the assumptions and estimates used forrecording the liabilities, adjustments may be required and would be recorded in the period that such experience becomesknown.Accounting for Deferred Tax AssetsWe regularly evaluate valuation allowances established for deferred tax assets for which future realization isuncertain. We perform this evaluation quarterly. In assessing the realizability of deferred tax assets, we must consider whetherit is more likely than not that some portion, or all, of the deferred tax assets will not be realized. We consider all availableevidence, both positive and negative, in determining whether a valuation allowance is required. Such evidence includes thescheduled reversal of deferred tax liabilities, projected future taxable income, taxable income in prior carryback years and taxplanning strategies in making this assessment, and judgment is required in considering the relative weight of negative andpositive evidence.AcquisitionsWe recognize assets acquired and liabilities assumed in business combinations, including contingent assets andliabilities, based on fair value estimates as of the date of acquisition.Contingent Consideration—In certain acquisitions, we agree to pay additional amounts to sellers contingent uponachievement by the acquired businesses of certain predetermined profitability targets. We have recognized liabilities forthese contingent obligations based on their estimated fair value at the date of acquisition with any differences between theacquisition‑date fair value and the ultimate settlement of the obligations being recognized in income from operations.Contingent Assets and Liabilities—Assets and liabilities arising from contingencies are recognized at theiracquisition date fair value when their respective fair values can be determined. If the fair values of such contingencies cannotbe determined, they are recognized at the acquisition date if the contingencies are probable and an amount can be reasonablyestimated. Acquisition date fair value estimates are revised as necessary if, and when, additional information regarding thesecontingencies becomes available to further define and quantify assets acquired and liabilities assumed.Recoverability of Goodwill and Identifiable Intangible AssetsGoodwill is the excess of purchase price over the fair value of the net assets of acquired businesses. We assessgoodwill for impairment each year, and more frequently if circumstances suggest an impairment may have occurred.When the carrying value of a given reporting unit exceeds its fair value, an impairment loss is recorded to the extentthat the implied fair value of the goodwill of the reporting unit is less than its carrying value. If other reporting units havehad increases in fair value, such increases may not be recorded. Accordingly, such increases may not be netted againstimpairments at other reporting units. The requirements for assessing whether goodwill has been impaired involvemarket‑based information. This information, and its use in assessing goodwill, entails some degree of subjective assessment.We perform our annual impairment testing as of October 1 and any impairment charges resulting from this processare reported in the fourth quarter. We segregate our operations into reporting units based on the degree of operating andfinancial independence of each unit and our related management of them. We perform our annual goodwill impairmenttesting at the reporting unit level. Each of our operating units represents an operating segment, and our operating segmentsare our reporting units.In the evaluation of goodwill for impairment, we have the option to first assess qualitative factors to determinewhether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value ofone of our reporting units is greater than its carrying value. If, after completing such assessment, we determine it is morelikely than not that the fair value of a reporting unit is greater than its carrying amount, then there is no need to perform anyfurther testing. If we conclude otherwise, then we perform the first step of a two‑step impairment test by calculating the fairvalue of the reporting unit and comparing the fair value with the carrying value of the reporting unit.27 Table of ContentsWe estimate the fair value of the reporting unit based on a market approach and an income approach, which utilizesdiscounted future cash flows. Assumptions critical to the fair value estimates under the discounted cash flow model includediscount rates, cash flow projections, projected long‑term growth rates and the determination of terminal values. The marketapproach utilized market multiples of invested capital from comparable publicly traded companies (“public companyapproach”). 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 eachreporting unit. While we believe we have made reasonable estimates and assumptions to estimate the fair value of ourreporting units, it is possible that a material change could occur. If actual results are not consistent with our current estimatesand assumptions, or the current economic outlook worsens, 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 marketcondition, may result in adjustments to recorded intangible asset balances or their useful lives.Results of Operations (in thousands): Year Ended December 31, 2016 2015 2014 Revenue $1,634,340 100.0% $1,580,519 100.0% $1,410,795 100.0% Cost of services 1,290,331 79.0% 1,262,390 79.9% 1,161,024 82.3% Gross profit 344,009 21.0% 318,129 20.1% 249,771 17.7% Selling, general and administrative expenses 243,201 14.9% 228,965 14.5% 207,652 14.7% Goodwill impairment — — — — 727 0.1% Gain on sale of assets (761) — (880) (0.1)% (830) (0.1)% Operating income 101,569 6.2% 90,044 5.7% 42,222 3.0% Interest income 9 — 72 — 18 — Interest expense (2,345) (0.1)% (1,753) (0.1)% (1,858) (0.1)% Changes in the fair value of contingent earn-outobligations 731 — 225 — (245) — Other 1,097 0.1% 76 — 91 — Income before income taxes 101,061 6.2% 88,664 5.6% 40,228 2.9% Income tax expense 36,165 31,224 11,614 Income from continuing operations 64,896 4.0% 57,440 3.6% 28,614 2.0%Loss from discontinued operations, net of tax — — (15) Net income including noncontrolling interests 64,896 4.0% 57,440 3.6% 28,599 2.0%Less: Net income attributable to noncontrollinginterests — 8,076 5,536 Net income attributable to Comfort SystemsUSA, Inc. $64,896 $49,364 $23,063 2016 Compared to 2015We had 35 operating locations as of December 31, 2015. During 2016, we completed one acquisition in the firstquarter of 2016, known as “Shoffner”, that reports as a separate operating location in the Knoxville, Tennessee area. Inaddition, we merged four operating locations into two operating locations during the first quarter, and created two operatinglocations out of one existing operating location. As of December 31, 2016, we had 35 operating locations. Acquisitions areincluded in our results of operations from the respective acquisition date. The same‑store comparison from 2016 to 2015, asdescribed below, excludes eleven months of results for Shoffner, which was acquired in February 2016. An operating locationis included in the same‑store comparison on the first day it has comparable prior year operating data. An operating location isexcluded from the same‑store comparison in the current year and comparable prior years when it is properly characterized as adiscontinued operation under applicable accounting standards.28 Table of ContentsRevenue—Revenue increased $53.8 million, or 3.4% to $1,634.3 million in 2016 compared to 2015. The increaseincluded a 4.6% increase related to the acquisition of Shoffner, which was partially offset by a 1.1% decrease in revenuerelated to same‑store activity. The same‑store revenue decrease was primarily due to our Environmental Air Systems, LLC(“EAS”) operation ($48.0 million), which experienced decreased large project work compared to the prior year, specificallyin the manufacturing sector. This decrease was partially offset by increased activity at our Michigan operation ($16.8million) and our Northern Texas operation ($13.1 million).Backlog reflects revenue still to be recognized under contracted or committed installation and replacement projectwork. Project work generally lasts less than one year. Service agreement revenue and service work and short durationprojects, which are generally billed as performed, do not flow through backlog. Accordingly, backlog represents only aportion of our revenue for any given future period, and it represents revenue that is likely to be reflected in our operatingresults over the next six to twelve months. As a result, we believe the predictive value of backlog information is limited toindications of general revenue direction over the near term, and should not be interpreted as indicative of ongoing revenueperformance over several quarters.Backlog as of December 31, 2016 was $763.4 million, a 6.1% increase from September 30, 2016 backlog of$719.3 million and a 7.3% increase from December 31, 2015 backlog of $711.6 million. Sequential backlog increasedprimarily due to increased project bookings at our Colorado operation ($15.9 million), our New Hampshire operation($13.3 million) and one of our Florida operations ($12.9 million). The year‑over‑year backlog increase was primarily due tothe acquisition of Shoffner ($35.3 million or 5.0%). Same-store backlog increased 2.3% primarily due to increased projectbookings at our New Hampshire operation ($28.1 million). This was partially offset by the completion of project work at ourEAS operation ($21.0 million).Gross Profit—Gross profit increased $25.9 million, or 8.1%, to $344.0 million in 2016 as compared to 2015. Theincrease included a $13.3 million, or 4.2%, increase related to the acquisition of Shoffner and a $12.6 million, or 3.9%,increase on a same‑store basis. The same‑store increase in gross profit was primarily due to broad based improvement inproject execution, including our California operation ($4.0 million) and one of our New York operations ($3.5million). Additionally, gross profit was higher due to increased volumes at our Michigan operation ($3.9 million) and one ofour Alabama operations ($3.3 million). This was partially offset by a decrease at our EAS operation ($8.6 million), which hasexperienced a decrease in large project work when compared to the same period in 2015. As a percentage of revenue, grossprofit increased from 20.1% in 2015 to 21.0% in 2016 primarily due to the factors discussed above.Selling, General and Administrative Expenses (“SG&A”)—SG&A increased $14.2 million, or 6.2%, to$243.2 million for 2016 as compared to 2015. On a same‑store basis, excluding amortization expense, SG&A increased$4.2 million, or 1.9%. This increase was primarily due to increased compensation costs ($4.8 million), which are primarilyrelated to an increase in operating results and expanded service activities at multiple locations. This was offset by a decreasein bad debt expense ($1.6 million) primarily due to collections of aged receivables. Amortization expense decreased $0.7million during 2016 compared to the prior year. As a percentage of revenue, SG&A increased from 14.5% in 2015 to 14.9%in 2016, primarily due to the factors discussed above.We have included same‑store SG&A, excluding amortization, because we believe it is an effective measure ofcomparative results of operations. However, same‑store SG&A, excluding amortization, is not considered under generallyaccepted accounting principles to be a primary measure of an entity’s financial results, and accordingly, should not beconsidered an alternative to SG&A as shown in our consolidated statements of operations. Year Ended December 31, 2016 2015 (in thousands) SG&A $243,201 $228,965 Less: SG&A from companies acquired (10,817) — Less: Amortization expense (6,165) (6,897) Same-store SG&A, excluding amortization expense $226,219 $222,068 Interest Expense—Interest expense increased $0.6 million, or 33.8%, in 2016. The increase is due to higher averagenet borrowings on the revolving credit facility in 2016 compared to 2015.29 Table of ContentsChanges in the Fair Value of Contingent Earn‑out Obligations—The contingent earn‑out obligations are measuredat fair value each reporting period and changes in estimates of fair value are recognized in earnings. Income from changes inthe fair value of contingent earn‑out obligations increased $0.5 million in 2016 compared to 2015. Based on updatedmeasurements of estimated future cash flows for our contingent obligations, we reduced our obligation related to the EASacquisition resulting in a gain of $0.8 million. This was partially offset by increases in the fair value of contingent earn-outobligations related to various acquisitions during 2016.Other Income—Other income increased $1.0 million in 2016 compared to 2015. In the fourth quarter of 2016, weentered into a settlement agreement with British Petroleum (“BP”) related to a claim from one of our subsidiaries regardingthe April 2010 BP Deepwater Horizon oil spill. We recorded a $0.6 million gain in the fourth quarter of 2016 in Other Incomeas a result of this settlement. While we still have other subsidiaries with outstanding claims against BP related to this matter,we cannot predict when or if we will receive any further settlement compensation as a result of these outstanding claims.Income Tax Expense—We perform work throughout the United States in virtually all of the fifty states. Our effectivetax rate varies based upon our relative profitability, or lack of profitability, in states with varying state tax rates and rules. Inaddition, discrete events, judgments and legal structures can affect our effective tax rate. These items can include the taxtreatment for impairment of goodwill and other intangible assets and changes in fair value of acquisition related assets andliabilities, tax reserves associated with regulatory audits, accounting for losses associated with underperforming operationsand the partial ownership of consolidated entities.Our effective tax rate for 2016 was 35.8%, as compared to 35.2% in 2015. The effective rate for 2016 was higherthan the federal statutory rate of 35.0% primarily due to state income taxes (4.2%) partially offset by the production activitydeduction (2.0%) and a decrease in the valuation allowance (1.2%). The effective rate for 2015 was slightly higher than thefederal statutory rate of 35.0% primarily due to an increase in state income taxes (3.9%) which was partially offset by adecrease from the impact of the noncontrolling interest of EAS which for tax purposes is treated as a partnership (3.2%). Referto Note 10 in the Consolidated Financial Statements for a reconciliation of the federal statutory income tax rate to theeffective tax rate reflected in our financial statements. The increase in the effective tax rate from 2015 to 2016 was primarilydue to the impact of our noncontrolling interests, which was partially offset by the impact on the rate from the benefits fromdeductions on stock compensation, valuation allowance and state income taxes. We currently estimate our effective tax ratefor 2017 will be between 35% and 40%. We generally expect our tax rate in 2017 to be higher than 2016 due to the benefitsto the 2016 rate from deductions on stock compensation and the valuation allowance.Net Income Attributable to Noncontrolling Interests— There was no net income attributable to noncontrollinginterests for 2016 due to our January 1, 2016 purchase of the remaining 40% noncontrolling interest in Environmental AirSystems, LLC.2015 Compared to 2014We had 37 operating locations as of December 31, 2014. During 2015, we completed two acquisitions in the firstquarter, one in the third quarter and one in the fourth quarter. These acquisitions were not material and were “tucked‑in” withexisting operations. In addition, we merged two operating locations during the first quarter and closed one operating locationduring the third quarter. As of December 31, 2015, we had 35 operating locations. Acquisitions are included in our results ofoperations from the respective acquisition date. The same‑store comparison from 2015 to 2014, as described below, excludesfour months of results for our Northern Texas operation, which was acquired in May 2014. An operating location is includedin the same‑store comparison on the first day it has comparable prior year operating data. An operating location is excludedfrom the same‑store comparison in the current year and comparable prior years when it is properly characterized as adiscontinued operation under applicable accounting standards.Revenue—Revenue increased $169.7 million, or 12.0% to $1,580.5 million in 2015 compared to 2014. The increaseincluded a 10.6% increase in revenue related to same‑store activity and a 1.4% increase related to the acquisition of ourNorthern Texas operation. The same‑store revenue increase was primarily due to our Environmental Air Systems, LLC(“EAS”) operation ($61.3 million), our Arizona operation ($17.7 million), our large operation headquartered in Virginia($12.2 million) and one of our Maryland operations ($12.1 million). These operations, as well as many of our other operatinglocations, experienced increased project work compared to the prior year in multiple markets, but primarily the industrialssector due to improved market conditions.30 Table of ContentsBacklog reflects revenue still to be recognized under contracted or committed installation and replacement projectwork. Project work generally lasts less than one year. Service agreement revenue and service work and short durationprojects, which are generally billed as performed, do not flow through backlog. Accordingly, backlog represents only aportion of our revenue for any given future period, and it represents revenue that is likely to be reflected in our operatingresults over the next six to twelve months. As a result, we believe the predictive value of backlog information is limited toindications of general revenue direction over the near term, and should not be interpreted as indicative of ongoing revenueperformance over several quarters.Backlog as of December 31, 2015 was $711.6 million, a 6.8% increase from September 30, 2015 backlog of$666.3 million and a 6.1% decrease from December 31, 2014 backlog of $757.8 million. Sequential backlog increasedprimarily due to increased project bookings at our EAS operation ($16.8 million), our Michigan operation ($13.6 million)and one of our Florida operations ($12.0 million). The year‑over‑year backlog decrease was primarily due to our EASoperation ($22.2 million), which had unusually large jobs booked in the fourth quarter of 2014, and due to completion ofproject work during the year at our California operation ($19.7 million) and our Arkansas operation ($17.9 million). This waspartially offset by increased project bookings at our Michigan operation ($16.8 million).Gross Profit—Gross profit increased $68.4 million, or 27.4%, to $318.1 million in 2015 as compared to 2014. Theincrease included a $3.4 million, or 1.3%, increase related to the acquisition of our Northern Texas operation and a$65.0 million, or 26.1%, increase on a same‑store basis. The same‑store increase in gross profit was due to overall increasedmargins at a majority of operating locations. Specifically, increases were due to job underperformance at our SouthernCalifornia operation in 2014 ($9.0 million), improved project execution at our large operation headquartered in Virginia($7.0 million), and improved market conditions, which resulted in an increase in volumes at our EAS operation($5.8 million). In addition, in the fourth quarter of 2015, we came to an agreement with customers on multiple jobs andreceived approved change orders, which resulted in additional revenue with minimal additional costs. The resulting impactto the current year was an increase to gross profit of approximately $3.4 million. As a percentage of revenue, gross profitincreased from 17.7% in 2014 to 20.1% in 2015 primarily due to the factors discussed above.Selling, General and Administrative Expenses (“SG&A”)—SG&A increased $21.3 million, or 10.3%, to$229.0 million for 2015 as compared to 2014. On a same‑store basis, excluding amortization expense, SG&A increased$19.4 million, or 9.7%. This increase was primarily due to increased compensation accruals based on operating results($13.3 million) and expanded service activities at certain locations ($4.8 million). Amortization expense remained relativelyflat. As a percentage of revenue, SG&A decreased from 14.7% in 2014 to 14.5% in 2015, primarily due to the higher revenuebase caused by the increase in market activity in 2015.We have included same‑store SG&A, excluding amortization, because we believe it is an effective measure ofcomparative results of operations. However, same‑store SG&A, excluding amortization, is not considered under generallyaccepted accounting principles to be a primary measure of an entity’s financial results, and accordingly, should not beconsidered an alternative to SG&A as shown in our consolidated statements of operations. Year Ended December 31, 2015 2014 (in thousands) SG&A $228,965 $207,652 Less: SG&A from companies acquired (1,843) — Less: Amortization expense (6,897) (6,825) Same-store SG&A, excluding amortization expense $220,225 $200,827 Interest Expense—Interest expense decreased $0.1 million, or 5.7%, in 2015. The decrease was due to lower netborrowings on the revolving credit facility in 2015.Goodwill Impairment—No goodwill impairment was recorded in 2015. We recorded a goodwill impairment chargeof $0.7 million during the second quarter of 2014. Based on market activity declines and write‑downs incurred on severaljobs, we determined that the operating environment, conditions and performance at our operating unit based in SouthernCalifornia could no longer support the related goodwill balance.Changes in the Fair Value of Contingent Earn‑out Obligations—The contingent earn‑out obligations are measuredat fair value each reporting period and changes in estimates of fair value are recognized in earnings. Income31 Table of Contentsfrom changes in the fair value of contingent earn‑out obligations increased $0.5 million in 2015 compared to 2014. Based onupdated measurements of estimated future cash flows for our contingent obligations, we decreased our obligations related toprior year acquisitions resulting in the current year gain of $0.2 million. The $0.3 million loss from changes in the fair valueof contingent earn‑out obligations in the prior year was due to updated measurements of estimated future cash flows for ourcontingent obligation related to the EAS acquisition.Income Tax Expense—We perform work throughout the United States in virtually all of the fifty states. Our effectivetax rate varies based upon our relative profitability, or lack of profitability, in states with varying state tax rates and rules. Inaddition, discrete events, judgments and legal structures can affect our effective tax rate. These items can include the taxtreatment for impairment of goodwill and other intangible assets and changes in fair value of acquisition related assets andliabilities, tax reserves associated with regulatory audits, accounting for losses associated with underperforming operationsand the partial ownership of consolidated entities.Our effective tax rate for 2015 was 35.2%, as compared to 28.9% in 2014. The effective rate for 2015 was slightlyhigher than the federal statutory rate of 35.0% primarily due to an increase in state income taxes (3.9%) which was partiallyoffset by a decrease from the impact of the noncontrolling interest of EAS which for tax purposes is treated as a partnership(3.2%). The effective rate for 2014 was lower than the federal statutory rate of 35.0% primarily due to a decrease in thevaluation 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 productionactivity deduction (1.7%). 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 increase in the effective tax ratefrom 2014 to 2015 was primarily due to the impact on the rate from state income taxes and the valuation allowance, whichwas partially offset by the impact of our noncontrolling interests.Net Income Attributable to Noncontrolling Interests—Net income attributable to noncontrolling interests increased$2.5 million in 2015 to income of $8.1 million as compared to $5.5 million in 2014. This increase reflects the impact ofhigher earnings at EAS, which was due primarily to increased revenue in the current year resulting from large project work atthis location in 2015.OutlookIndustry conditions improved during 2015 and 2016. Our emphasis for 2017 will be on execution, including a focuson cost discipline and efficient project performance, labor force development, and investing in growth, particularly in serviceand small projects. Based on our backlog, and in light of economic conditions for our industry, we expect that revenue andprofitability in 2017 will be similar to or above the levels that we experienced in 2016.Liquidity and Capital Resources Year Ended December 31, 2016 2015 2014 (in thousands) Cash provided by (used in): Operating activities $91,188 $97,867 $42,552 Investing activities (79,318) (25,628) (74,142) Financing activities (36,260) (47,839) 11,600 Net increase (decrease) in cash and cash equivalents $(24,390) $24,400 $(19,990) Free cash flow: Cash provided by operating activities $91,188 $97,867 $42,552 Purchases of property and equipment (23,217) (20,808) (19,183) Proceeds from sales of property and equipment 1,062 1,338 1,355 Free cash flow $69,033 $78,397 $24,724 Cash FlowOur business does not require significant amounts of investment in long‑term fixed assets. The substantial majorityof the capital used in our business is working capital that funds our costs of labor and installed equipment32 Table of Contentsdeployed in project work until our customer pays us. Customary terms in our industry allow customers to withhold a smallportion of the contract price until after we have completed the work, typically for six months. Amounts withheld under thispractice are known as retention or retainage. Our average project duration together with typical retention terms generallyallow us to complete the realization of revenue and earnings in cash within one year.2016 Compared to 2015Cash Provided by Operating Activities—Cash flow from operations is primarily influenced by demand for ourservices and operating margins, but can also be influenced by working capital needs associated with the various types ofservices that we provide. In particular, working capital needs may increase when we commence large volumes of work undercircumstances where project costs, primarily associated with labor, equipment and subcontractors, are required to be paidbefore the receivables resulting from the work performed are billed and collected. Working capital needs are generally higherduring the late winter and spring months as we prepare and plan for the increased project demand when favorable weatherconditions exist in the summer and fall months. Conversely, working capital assets are typically converted to cash during thelate summer and fall months as project completion is underway. These seasonal trends are sometimes offset by changes in thetiming of major projects, which can be impacted by the weather, project delays or accelerations and other economic factorsthat may affect customer spending.We generated $91.2 million of cash flow from operating activities during 2016 compared with $97.9 million during2015. The $6.7 million decrease is primarily due to decreases in billings in excess of costs of $16.3 million, primarily due tothe timing of billings and various project work, and increases in prepaid expenses and other current assets of $9.2 million,primarily due to increases of insurance receivables. These uses of operating cash flow were partially offset by the change inreceivables of $10.6 million primarily related to the timing of customer billings and payments and overall higher net incomein 2016 compared to 2015.Cash Used in Investing Activities—Cash used in investing activities was $79.3 million for 2016 compared to$25.6 million during 2015. The $53.7 million increase in cash used primarily relates to cash paid for the EAS and Shoffneracquisitions that were completed in 2016.Cash Provided by (Used in) Financing Activities—Cash used in financing activities was $36.3 million for 2016compared to cash used in financing activities of $47.8 million during 2015. The $11.6 million decrease in cash used infinancing activities primarily relates to $18.5 million less in net payments on the revolving line of credit in 2016.Additionally, we repurchased $4.8 million of incremental shares in 2016 and did not have distributions to noncontrollinginterests after we acquired the remaining 40% noncontrolling interest in EAS.2015 Compared to 2014Cash Provided by Operating Activities—Cash flow from operations is primarily influenced by demand for ourservices and operating margins, but can also be influenced by working capital needs associated with the various types ofservices that we provide. In particular, working capital needs may increase when we commence large volumes of work undercircumstances where project costs, primarily associated with labor, equipment and subcontractors, are required to be paidbefore the receivables resulting from the work performed are billed and collected. Working capital needs are generally higherduring the late winter and spring months as we prepare and plan for the increased project demand when favorable weatherconditions exist in the summer and fall months. Conversely, working capital assets are typically converted to cash during thelate summer and fall months as project completion is underway. These seasonal trends are sometimes offset by changes in thetiming of major projects, which can be impacted by the weather, project delays or accelerations and other economic factorsthat may affect customer spending.We generated $97.9 million of cash flow from operating activities during 2015 compared with $42.6 million during2014. The $55.3 million increase primarily relates to higher net income in the current year ($57.4 million) compared to theprior year ($28.6 million). In addition, there was an increase in accounts payable and accrued liabilities of $15.7 millioncompared to the prior year, primarily caused by higher compensation accruals and a decrease in net receivables of$14.8 million compared to the prior year, primarily due to the timing of customer billings and payments. This was partiallyoffset by an increase in costs and estimated earnings in excess of billings of $6.4 million compared to the prior year due tothe timing of customer billings.33 Table of ContentsCash Used in Investing Activities—Cash used in investing activities was $25.6 million for 2015 compared to$74.1 million during 2014. The $48.5 million decrease in cash used primarily relates to cash paid for the four acquisitionsthat were completed in 2014.Cash Provided by (Used in) Financing Activities—Cash used in financing activities was $47.8 million for 2015compared to cash provided by financing activities of $11.6 million during 2014. The $59.4 million decrease in cashprovided by financing activities primarily relates to $28.5 million of net payments on the revolving line of credit in 2015compared to $38.5 million of net borrowings in 2014. This decrease in cash provided was partially offset by increases due todecreased distributions to noncontrolling interests of $3.7 million, increased proceeds from options exercised of $2.5 millionand a $2.0 million payment of other debt that occurred in 2014.Free Cash FlowWe define free cash flow as cash provided by operating activities, less customary capital expenditures, plus theproceeds from asset sales and taxes paid related to pre‑acquisition equity transactions of an acquired company. We believefree cash flow, by encompassing both profit margins and the use of working capital over our approximately one year workingcapital cycle, is an effective measure of operating effectiveness and efficiency. We have included free cash flow informationhere 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, andaccordingly free cash flow should not be considered an alternative to operating income, net income, or amounts shown in ourconsolidated statements of cash flows as determined under generally accepted accounting principles. Free cash flow may bedefined differently by other companies.Share Repurchase ProgramOn March 29, 2007, our Board of Directors (the “Board”) approved a stock repurchase program to acquire up to1.0 million shares of our outstanding common stock. Subsequently, the Board has from time to time approved extensions ofthe program to acquire additional shares. On August 11, 2016, the Board approved an extension to the program by increasingthe shares authorized for repurchase by 0.6 million shares. Since the inception of the repurchase program, the Board hasapproved 8.1 million shares to be repurchased. As of December 31, 2016, we have repurchased a cumulative total of7.3 million shares at an average price of $13.02 per share under the repurchase program.The share repurchases will be made from time to time at our discretion in the open market or privately negotiatedtransactions as permitted by securities laws and other legal requirements, and subject to market conditions and other factors.The Board may modify, suspend, extend or terminate the program at any time. During the twelve months ended December 31,2016, we repurchased 0.5 million shares for approximately $13.1 million at an average price of $28.44 per share.DebtRevolving Credit FacilityOn February 22, 2016, we amended our senior credit facility (the “Facility”) provided by a syndicate of banks,increasing our borrowing capacity from $250.0 million to $325.0 million, with a $100 million accordion option. TheFacility, which is available for borrowings and letters of credit, expires in February 2021 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 bycertain unrestricted subsidiaries and a second lien on our assets related to projects subject to surety bonds. In 2016, weincurred approximately $0.8 million in financing and professional costs in connection with an amendment to the Facility,which combined with the previous unamortized costs of $1.1 million, are being amortized on a straight‑line basis as anon‑cash charge to interest expense over the remaining term of the Facility. As of December 31, 2016, we had no outstandingborrowings, $41.5 million in letters of credit outstanding and $283.5 million of credit available.There are two interest rate options for borrowings under the Facility, the Base Rate Loan option and the EurodollarRate Loan option. These rates are floating rates determined by the broad financial markets, meaning they can and do moveup and down from time to time. Additional margins are then added to these two rates. We estimate that the weighted averageinterest rate applicable to the borrowings under the Facility would be approximately 1.8% as of December 31, 2016.34 Table of ContentsCertain of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on ourbehalf, such as to beneficiaries under our self‑funded insurance programs. We have also occasionally used letters of credit toguarantee performance under our contracts and to ensure payment to our subcontractors and vendors under those contracts.Our lenders issue such letters of credit through the Facility for a fee. We have never had a claim made against a letter of creditthat resulted in payments by a lender or by us and believe such claims are unlikely in the foreseeable future. The letter ofcredit fees range from 1.25% to 2.00% per annum, based on the ratio of Consolidated Total Indebtedness to Credit FacilityAdjusted EBITDA, as defined in the credit agreement.Commitment fees are payable on the portion of the revolving loan capacity not in use for borrowings or letters ofcredit at any given time. These fees range from 0.20%‑0.35% per annum, based on the ratio of Consolidated TotalIndebtedness to Credit Facility Adjusted EBITDA, as defined in the credit agreement.Interest expense included the following primary elements (in thousands): Year Ended December 31, 2016 2015 2014 Interest expense on notes to former owners $70 $25 $38 Interest expense on borrowings and unused commitment fees 1,251 692 790 Letter of credit fees 657 719 747 Amortization of debt financing costs 367 317 283 Total $2,345 $1,753 $1,858 The Facility contains financial covenants defining various measures and the levels of these measures with which wemust comply. Covenant compliance is assessed as of each quarter end. Credit Facility Adjusted EBITDA is defined under theFacility for financial covenant purposes as net earnings for the four quarters ending as of any given quarterly covenantcompliance measurement date, plus the corresponding amounts for (a) interest expense; (b) income taxes; (c) depreciationand amortization; (d) stock compensation; (e) other non‑cash charges; and (f) pre‑acquisition results of acquired companies.The following is a reconciliation of Credit Facility Adjusted EBITDA to net income for 2016 (in thousands):Net income including noncontrolling interests $64,896 Income tax expense 36,165 Interest expense, net 2,336 Depreciation and amortization expense 26,166 Stock-based compensation 5,041 Pre-acquisition results of acquired companies, as defined under the Facility 10 Credit Facility Adjusted EBITDA $134,614 The Facility’s principal financial covenants include:Leverage Ratio—The Facility requires that the ratio of our Consolidated Total Indebtedness to our CreditFacility Adjusted EBITDA not exceed (i) 3.00 to 1.00 as of the end of each fiscal quarter through September 30,2017, and (ii) 2.75 to 1.00 as of the end of each fiscal quarter thereafter through maturity. The leverage ratio as ofDecember 31, 2016 was 0.02.Fixed Charge Coverage Ratio— The Facility requires that the ratio of (a) Credit Facility AdjustedEBITDA, less non‑financed capital expenditures, tax provision, dividends and amounts used to repurchase stock to(b) the sum of interest expense and scheduled principal payments of indebtedness be at least 2.00 to 1.00; providedthat the calculation of the fixed charge coverage ratio excludes stock repurchases and the payment of dividends atany time that the Company’s Net Leverage Ratio does not exceed 1.50 to 1.00. The Facility also allows the fixedcharge coverage ratio not to be reduced for stock repurchases through September 30, 2015 in an aggregate amountnot to exceed $25 million and for stock repurchases made after February 22, 2016 but on or prior to December 31,2017 in an aggregate amount not to exceed $25 million, if at the time of and after giving effect to such repurchasethe Company’s Net Leverage Ratio was less than or equal to 1.50 to 1.00. Capital expenditures, tax provision,dividends and stock repurchase payments are defined under the Facility for purposes of this covenant to be amountsfor the four quarters ending as of any given quarterly covenant compliance measurement date. The fixed chargecoverage ratio as of December 31, 2016 was 27.84.35 Table of ContentsOther Restrictions— The Facility permits acquisitions of up to $30.0 million per transaction, provided thatthe aggregate purchase price of all such acquisitions in the same fiscal year does not exceed $65.0 million. However,these limitations only apply when the Company’s Total Leverage Ratio is greater than 2.00 to 1.00.While the Facility’s financial covenants do not specifically govern capacity under the Facility, if our debtlevel under the Facility at a quarter‑end covenant compliance measurement date were to cause us to violate theFacility’s leverage ratio covenant, our borrowing capacity under the Facility and the favorable terms that wecurrently have could be negatively impacted by the lenders.We were in compliance with all of our financial covenants as of December 31, 2016.Notes to Former OwnersAs part of the consideration used to acquire two companies, we have outstanding subordinated notes to the formerowners. These notes had an outstanding balance of $2.3 million as of December 31, 2016. In conjunction with the Shoffneracquisition in the first quarter, we issued a subordinated note to former owners with an outstanding balance of $1.8 million asof December 31, 2016 that bears interest, payable quarterly, at a weighted average interest rate of 3.0%. The principal is duein equal installments in February 2018 and 2019. In conjunction with an immaterial acquisition in the fourth quarter of 2014,we issued a subordinated note to the former owners of the acquired company as part of the consideration used to acquire thecompany. This note had an outstanding balance of $0.5 million as of December 31, 2016 and bears interest, payablequarterly, at a weighted average interest rate of 2.5%. The principal is due in October 2017.Other DebtAs part of the Shoffner acquisition, we acquired debt with an outstanding balance at the acquisition date of $0.4million with principle and interest due the last day of every month; ending on the December 30, 2019 maturity date. Theinterest rate is the one month LIBOR rate plus 2.25%. As of December 31, 2016, $0.3 million of the note was outstanding, ofwhich $0.1 million was considered current.In conjunction with one of our acquisitions, we acquired capital lease obligations. As of December 31, 2016, $0.3million of capital lease obligations were outstanding, of which $0.2 million was considered current.OutlookWe have generated positive net free cash flow for the last eighteen calendar years, much of which occurred duringchallenging economic and industry conditions. We also continue to have significant borrowing capacity under our creditfacility, and we maintain what we feel are reasonable cash balances. We believe these factors will provide us with sufficientliquidity to fund our operations for the foreseeable future.Off‑Balance Sheet Arrangements and Other CommitmentsAs is common in our industry, we have entered into certain off‑balance sheet arrangements in the ordinary course ofbusiness that result in risks not directly reflected in our balance sheets. Our most significant off‑balance sheet transactionsinclude liabilities associated with noncancelable operating leases. We also have other off‑balance sheet obligationsinvolving letters of credit and surety guarantees.We enter into noncancelable operating leases for many of our facility, vehicle and equipment needs. These leasesallow us to conserve cash by paying a monthly lease rental fee for use of facilities, vehicles and equipment rather thanpurchasing them. At the end of the lease, we have no further obligation to the lessor. If we decide to cancel or terminate alease before the end of its term, we would typically owe the lessor the remaining lease payments under the term of the lease.Certain of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on ourbehalf, such as to beneficiaries under our self‑funded insurance programs. We have also occasionally used letters of credit toguarantee performance under our contracts and to ensure payment to our subcontractors and vendors under those contracts.The letters of credit we provide are actually issued by our lenders through the Facility as described above. A letter of creditcommits the lenders to pay specified amounts to the holder of the letter of credit if the holder demonstrates that we havefailed to perform specified actions. If this were to occur, we would be required to reimburse the lenders. Depending on thecircumstances of such a reimbursement, we may also have to record a charge to earnings36 Table of Contentsfor 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 creditare treated as a use of the Facility’s capacity just the same as actual borrowings. Claims against letters of credit are rare in ourindustry. To date we have not had a claim made against a letter of credit that resulted in payments by a lender or by us. Webelieve that it is unlikely that we will have to fund claims under a letter of credit in the foreseeable future.Many customers, particularly in connection with new construction, require us to post performance and paymentbonds issued by a financial institution known as a surety. If we fail to perform under the terms of a contract or to paysubcontractors and vendors who provided goods or services under a contract, the customer may demand that the surety makepayments or provide services under the bond. We must reimburse the sureties for any expenses or outlays they incur. To date,we are not aware of any losses to our sureties in connection with bonds the sureties have posted on our behalf, and we do notexpect such losses 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 issuebonds at any time. Historically, approximately 20% to 30% of our business has required bonds. While we currently havestrong surety relationships to support our bonding needs, future market conditions or changes in our sureties’ assessment ofour operating and financial risk could cause our sureties to decline to issue bonds for our work. If that were to occur, ouralternatives include doing more business that does not require bonds, posting other forms of collateral for projectperformance such as letters of credit or cash, and seeking bonding capacity from other sureties. We would likely alsoencounter concerns from customers, suppliers and other market participants as to our creditworthiness. While we believe ourgeneral operating and financial characteristics would enable us to ultimately respond effectively to an interruption in theavailability of bonding capacity, such an interruption would likely cause our revenue and profits to decline in the near term.Contractual ObligationsThe following recaps the future maturities of our contractual obligations as of December 31, 2016 (in thousands): Twelve Months Ended December 31, 2017 2018 2019 2020 2021 Thereafter Total Revolving credit facility $ — $ — $ — $ — $ — $ — $ — Notes to former owners 500 875 875 — — — 2,250 Other debt 100 100 105 — — — 305 Interest payable 70 33 4 — — — 107 Capital lease obligations 163 71 22 — — — 256 Operating lease obligations 13,098 11,904 9,666 7,204 5,051 9,107 56,030 Total $13,931 $12,983 $10,672 $7,204 $5,051 $9,107 $58,948 As discussed in Note 10 “Income Taxes”, included in our Consolidated Balance Sheet at December 31, 2016 isapproximately $0.2 million of liabilities associated with uncertain tax positions. Due to the uncertain and complexapplication 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, 2016, we also have $41.5 million in letter of credit commitments, of which $17.3 million willexpire in 2017 and $24.2 million will expire in 2018. The substantial majority of these letters of credit are posted withinsurers who disburse funds on our behalf in connection with our workers’ compensation, auto liability and general liabilityinsurance program. These letters of credit provide additional security to the insurers that sufficient financial resources will beavailable to fund claims on our behalf, many of which develop over long periods of time, should we ever encounter financialduress. Posting of letters of credit for this purpose is a common practice for entities that manage their self‑insurance programsthrough third‑party insurers as we do. While many of these letter of credit commitments expire in 2017, we expect nearly allof them, particularly those supporting our insurance programs, will be renewed annually.37 Table of ContentsOther than the operating and capital lease obligations noted above, we have no significant purchase or operatingcommitments outside of commitments to deliver equipment and provide labor in the ordinary course of performing projectwork ITEM 7A. Quantitative and Qualitative Disclosures about Market RiskWe are exposed to market risk primarily related to potential adverse changes in interest rates as discussed below. Weare actively involved in monitoring exposure to market risk and continue to develop and utilize appropriate riskmanagement techniques. We are not exposed to any other significant financial market risks including commodity price risk,foreign currency exchange risk or interest rate risks from the use of derivative financial instruments. We do not use derivativefinancial instruments.We have exposure to changes in interest rates under our revolving credit facility. We have a modest level ofindebtedness under our debt facility and our indebtedness could increase in the future. Our debt with fixed interest ratesconsists of notes to former owners of acquired companies.The following table presents principal amounts (stated in thousands) and related average interest rates by year ofmaturity for our debt obligations and their indicated fair market value at December 31, 2016: Twelve Months Ended December 31, 2017 2018 2019 2020 2021 Thereafter Total Fixed Rate Debt $500 $875 $875 $— $— $— $2,250 Average Interest Rate 2.5% 3.0% 3.0% — — — 2.9% Variable Rate Debt $100 $100 $105 $ — $— $— $305 The interest rate applicable to the variable rate debt was approximately 3.02% as of December 31, 2016. Weestimate that the weighted average interest rate applicable to the borrowings under the Facility would be approximately 1.8%as of December 31, 2016.We measure certain assets at fair value on a nonrecurring basis. These assets are recognized at fair value when theyare deemed to be other‑than‑temporarily impaired. We did not recognize any impairments, in the current year, on those assetsrequired 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 weighteddiscounted cash flow method. This analysis reflects the contractual terms of the purchase agreements (e.g., minimum andmaximum payment, length of earn‑out periods, manner of calculating any amounts due, etc.) and utilizes assumptions withregard to future cash flows, probabilities of achieving such future cash flows and a discount rate.38 Table of Contents ITEM 8. Financial Statements and Supplementary DataINDEX TO FINANCIAL STATEMENTS PageComfort Systems USA, Inc. Management’s Report on Internal Control over Financial Reporting 40 Report of Independent Registered Public Accounting Firm 41 Report of Independent Registered Public Accounting Firm 42 Consolidated Balance Sheets 43 Consolidated Statements of Operations 44 Consolidated Statements of Stockholders’ Equity 45 Consolidated Statements of Cash Flows 46 Notes to Consolidated Financial Statements 47 39 Table of ContentsManagement’s Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting,as such term is defined in Exchange Act Rules 13a‑15(f) and 15d‑15(f). Under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of theeffectiveness of our internal control over financial reporting as of December 31, 2016 based on the framework in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO2013 framework). Based on that evaluation, our management concluded that our internal control over financial reporting waseffective as of December 31, 2016.Because of its inherent limitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures maydeteriorate.Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is includedelsewhere herein, has issued an attestation report auditing the effectiveness of our internal control over financial reporting asof December 31, 2016.40 Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard 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 31,2016 and 2015, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of thethree years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’smanagement. 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 require that we plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidatedfinancial position of Comfort Systems USA, Inc. at December 31, 2016 and 2015, and the consolidated results of itsoperations and its cash flows for each of the three years in the period ended December 31, 2016, 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 Systems USA, Inc.’s internal control over financial reporting as of December 31, 2016, based oncriteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (2013 framework) and our report dated February 23, 2017 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLPHouston, TexasFebruary 23, 201741 Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and StockholdersComfort Systems USA, Inc.We have audited Comfort Systems USA, Inc.’s internal control over financial reporting as of December 31, 2016,based on criteria established in Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (2013 framework) (the COSO criteria). Comfort Systems USA, Inc.’smanagement 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 InternalControl over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control overfinancial 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 require that we plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such otherprocedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for ouropinion.A company’s internal control over financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal control over financial reporting includes those policiesand procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and thatreceipts and expenditures of the company are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures maydeteriorate.In our opinion, Comfort Systems USA, Inc. maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2016, 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 balance sheets of Comfort Systems USA, Inc. as of December 31, 2016 and 2015, and therelated consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the periodended December 31, 2016 of Comfort Systems USA, Inc. and our report dated February 23, 2017 expressed an unqualifiedopinion thereon. /s/ ERNST & YOUNG LLPHouston, TexasFebruary 23, 201742 Table of ContentsCOMFORT SYSTEMS USA, INC.CONSOLIDATED BALANCE SHEETS(In Thousands, Except Share Amounts) December 31, 2016 2015 ASSETS CURRENT ASSETS: Cash and cash equivalents $32,074 $56,464 Accounts receivable, less allowance for doubtful accounts of $4,288 and $5,158,respectively 318,837 302,052 Other receivables 20,363 20,642 Inventories 9,208 7,941 Prepaid expenses and other 6,106 5,836 Costs and estimated earnings in excess of billings 29,369 31,338 Total current assets 415,957 424,273 PROPERTY AND EQUIPMENT, NET 68,195 60,813 GOODWILL 149,208 143,874 IDENTIFIABLE INTANGIBLE ASSETS, NET 42,435 41,079 DEFERRED INCOME TAX ASSETS 27,170 16,276 OTHER NONCURRENT ASSETS 5,938 5,279 Total assets $708,903 $691,594 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $600 $500 Current maturities of long-term capital lease obligations 163 251 Accounts payable 103,440 106,684 Accrued compensation and benefits 61,712 54,079 Billings in excess of costs and estimated earnings 83,985 85,397 Accrued self-insurance 33,520 29,803 Other current liabilities 34,261 28,677 Total current liabilities 317,681 305,391 LONG-TERM DEBT 1,955 10,500 LONG-TERM CAPITAL LEASE OBLIGATIONS 93 256 DEFERRED INCOME TAX LIABILITIES 2,289 1,810 OTHER LONG-TERM LIABILITIES 10,252 8,632 Total liabilities 332,270 326,589 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 41,123,365shares issued, respectively 411 411 Treasury stock, at cost, 3,914,251 and 3,696,781 shares, respectively (57,387) (46,845) Additional paid-in capital 309,625 323,765 Retained earnings 123,984 69,390 Comfort Systems USA, Inc. stockholders’ equity 376,633 346,721 Noncontrolling interests — 18,284 Total stockholders’ equity 376,633 365,005 Total liabilities and stockholders’ equity $708,903 $691,594 The accompanying notes are an integral part of these consolidated financial statements.43 Table of ContentsCOMFORT SYSTEMS USA, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In Thousands, Except Per Share Data) Year Ended December 31, 2016 2015 2014 REVENUE $1,634,340 $1,580,519 $1,410,795 COST OF SERVICES 1,290,331 1,262,390 1,161,024 Gross profit 344,009 318,129 249,771 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 243,201 228,965 207,652 GOODWILL IMPAIRMENT — — 727 GAIN ON SALE OF ASSETS (761) (880) (830) Operating income 101,569 90,044 42,222 OTHER INCOME (EXPENSE): Interest income 9 72 18 Interest expense (2,345) (1,753) (1,858) Changes in the fair value of contingent earn-out obligations 731 225 (245) Other 1,097 76 91 Other income (expense) (508) (1,380) (1,994) INCOME BEFORE INCOME TAXES 101,061 88,664 40,228 INCOME TAX EXPENSE 36,165 31,224 11,614 INCOME FROM CONTINUING OPERATIONS 64,896 57,440 28,614 Loss from discontinued operations, net of income tax benefit of $—, $— and$10 — — (15) NET INCOME INCLUDING NONCONTROLLING INTERESTS 64,896 57,440 28,599 Less: Net income attributable to noncontrolling interests — 8,076 5,536 NET INCOME ATTRIBUTABLE TO COMFORT SYSTEMS USA, INC. $64,896 $49,364 $23,063 INCOME PER SHARE ATTRIBUTABLE TO COMFORT SYSTEMSUSA, INC.: Basic— Income from continuing operations $1.74 $1.32 $0.61 Income from discontinued operations — — — Net Income $1.74 $1.32 $0.61 Diluted— Income from continuing operations $1.72 $1.30 $0.61 Income from discontinued operations — — — Net Income $1.72 $1.30 $0.61 SHARES USED IN COMPUTING INCOME PER SHARE: Basic 37,335 37,442 37,547 Diluted 37,811 37,868 37,797 DIVIDENDS PER SHARE $0.275 $0.250 $0.225 The accompanying notes are an integral part of these consolidated financial statements.44 Table of ContentsCOMFORT SYSTEMS USA, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(In Thousands, Except Share Amounts) Additional Non- Total Common Stock Treasury Stock Paid-In Retained Controlling Stockholders’ Shares Amount Shares Amount Capital Earnings Interests Equity BALANCE AT DECEMBER 31, 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 of Stock: Issuance of shares for options exercised including taxbenefit — — 103,619 1,132 79 — — 1,211 Issuance of restricted stock — — 115,044 1,243 (1,243) — — — Shares received in lieu of tax withholding payment onvested restricted stock — — (34,657) (531) — — — (531) Tax benefit from vesting of restricted stock — — — — 133 — — 133 Stock-based compensation — — — — 2,992 — — 2,992 Dividends — — — — — (8,447) — (8,447) Distribution to noncontrolling interest — — — — — — (8,612) (8,612) Share repurchase — — (549,154) (7,974) — — — (7,974) BALANCE AT DECEMBER 31, 2014 41,123,365 411 (3,853,586) (43,598) 320,084 29,384 15,112 321,393 Net income — — — — — 49,364 8,076 57,440 Issuance of Stock: Issuance of shares for options exercised including taxbenefit — — 317,333 3,728 966 — — 4,694 Issuance of restricted stock & performance stock — — 200,015 2,292 (626) — — 1,666 Shares received in lieu of tax withholding payment onvested restricted stock — — (44,590) (937) — — — (937) Tax benefit from vesting of restricted stock — — — — 284 — — 284 Stock-based compensation — — — — 3,057 — — 3,057 Dividends — — — — — (9,358) — (9,358) Distribution to noncontrolling interest — — — — — — (4,904) (4,904) Share repurchase — — (315,953) (8,330) — — — (8,330) BALANCE AT DECEMBER 31, 2015 41,123,365 411 (3,696,781) (46,845) 323,765 69,390 18,284 365,005 Cumulative effect of change in accounting principle — — — — — (38) — (38) Net income — — — — — 64,896 — 64,896 Issuance of Stock: Issuance of shares for options exercised — — 111,761 1,568 10 — — 1,578 Issuance of restricted stock & performance stock — — 172,727 2,282 (306) — — 1,976 Shares received in lieu of tax withholding payment onvested restricted stock — — (41,788) (1,304) — — — (1,304) Stock-based compensation — — — — 3,502 — — 3,502 Dividends — — — — — (10,264) — (10,264) Acquisition of noncontrolling interests — — — — (17,346) — (18,284) (35,630) Share repurchase — — (460,170) (13,088) — — — (13,088) BALANCE AT DECEMBER 31, 2016 41,123,365 $411 (3,914,251) $(57,387) $309,625 $123,984 $ — $376,633 The accompanying notes are an integral part of these consolidated financial statements.45 Table of ContentsCOMFORT SYSTEMS USA, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In Thousands) Year Ended December 31, 2016 2015 2014 CASH FLOWS FROM OPERATING ACTIVITIES: Net income including noncontrolling interests $64,896 $57,440 $28,599 Adjustments to reconcile net income to net cash provided by operating activities— Amortization of identifiable intangible assets 8,185 7,481 7,653 Depreciation expense 17,981 15,935 13,683 Goodwill impairment — — 727 Bad debt expense (benefit) (27) 1,552 1,275 Deferred tax expense (benefit) (1,239) (414) (4,579) Amortization of debt financing costs 367 317 283 Gain on sale of assets (761) (880) (830) Changes in the fair value of contingent earn-out obligations (731) (225) 245 Stock-based compensation 5,041 5,609 4,806 Changes in operating assets and liabilities, net of effects of acquisitions and divestitures— (Increase) decrease in— Receivables, net 7,038 (3,584) (18,339) Inventories 213 956 281 Prepaid expenses and other current assets (8,850) 364 1,494 Costs and estimated earnings in excess of billings 3,144 (3,630) 2,744 Other noncurrent assets (143) (479) (321) Increase (decrease) in— Accounts payable and accrued liabilities 2,736 11,617 (4,078) Billings in excess of costs and estimated earnings (8,351) 7,908 7,545 Other long-term liabilities 1,689 (2,100) 1,364 Net cash provided by operating activities 91,188 97,867 42,552 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (23,217) (20,808) (19,183) Proceeds from sales of property and equipment 1,062 1,338 1,355 Cash paid for acquisitions, net of cash acquired (57,163) (6,158) (56,314) Net cash used in investing activities (79,318) (25,628) (74,142) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving line of credit 144,000 24,500 128,500 Payments on revolving line of credit (154,000) (53,000) (90,000) Payments on other debt (592) — (2,000) Payments on capital lease obligations (251) (443) (115) Debt financing costs (789) — (568) Payments of dividends to stockholders (10,264) (9,358) (8,444) Share repurchase (13,088) (8,330) (7,974) Shares received in lieu of tax withholding (1,304) (937) (531) Excess tax benefit of stock-based compensation — 1,240 115 Proceeds from exercise of options 1,578 3,738 1,229 Distributions to noncontrolling interests — (4,904) (8,612) Deferred acquisition payments (1,350) — — Payments for contingent consideration arrangements (200) (345) — Net cash provided by (used in) financing activities (36,260) (47,839) 11,600 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (24,390) 24,400 (19,990) CASH AND CASH EQUIVALENTS, beginning of year 56,464 32,064 52,054 CASH AND CASH EQUIVALENTS, end of year $32,074 $56,464 $32,064 The accompanying notes are an integral part of these consolidated financial statements.46 Table of ContentsCOMFORT SYSTEMS USA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 20161. Business and OrganizationComfort Systems USA, Inc., a Delaware corporation, provides comprehensive mechanical contracting services,which principally includes heating, ventilation and air conditioning (“HVAC”), plumbing, piping and controls, as well asoff-site construction, electrical, monitoring and fire protection. We install, maintain, repair and replace products and systemsthroughout the United States. Approximately 40% of our consolidated 2016 revenue is attributable to installation of systemsin newly constructed facilities, with the remaining 60% attributable to maintenance, repair and replacement services.Our consolidated 2016 revenue was derived from the following service activities, all of which are in the mechanicalservices industry, the single industry segment we serve: RevenueService Activity $ in thousands % HVAC $1,225,755 75%Plumbing 245,151 15%Building Automation Control Systems 98,060 6%Other 65,374 4%Total $1,634,340 100%2. Summary of Significant Accounting PoliciesPrinciples of ConsolidationThese financial statements are prepared in accordance with accounting principles generally accepted in the UnitedStates of America. The accompanying consolidated financial statements include our accounts and those of our subsidiaries inwhich we have a controlling interest. All significant intercompany accounts and transactions have been eliminated. Certainamounts in prior periods may have been reclassified to conform to the current period presentation. The effects of thereclassifications were not material to the consolidated financial statements.Use of EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles requires the useof estimates and assumptions by management in determining the reported amounts of assets and liabilities, revenue andexpenses and disclosures regarding contingent assets and liabilities. Actual results could differ from those estimates. Themost significant estimates used in our financial statements affect revenue and cost recognition for construction contracts, theallowance 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. In2015, two operating locations came to an agreement with customers on multiple jobs and received approved change orders,which resulted in the recognition of additional revenue with minimal additional costs resulting in a project gain of $3.4million, on a pre-tax basis. In the twelve months ended December 31, 2014, one of our operating locations recorded arevision 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.47 Table of ContentsCash Flow InformationWe consider all highly liquid investments purchased with an original maturity of three months or less to be cashequivalents.Cash paid (in thousands) for: Year Ended December 31, 2016 2015 2014 Interest $1,864 $1,408 $1,764 Income taxes $29,349 $35,538 $15,366 Recent Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 provides a framework that replaces theexisting revenue recognition guidance. The guidance can be applied on a full retrospective or modified retrospective basiswhereby the entity records a cumulative effect of initially applying this update on the adoption date. We currently plan touse the modified retrospective basis on the adoption date. ASU 2014-09 is effective for annual periods beginning afterDecember 15, 2017, including interim periods within that reporting period. While we are still evaluating the potential impactof this authoritative guidance on our consolidated financial statements, we currently believe the areas that may impact us themost include accounting for variable consideration, capitalization of incremental costs of obtaining a contract and theguidance on the number of performance obligations contained in a contract. The impact on our consolidated financialstatements upon adoption of ASU 2014-09 will be determined in large part by the contracts in progress on our adoption date;however, we currently do not believe the adoption will have a material impact on our consolidated financial statements.In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issue Costs.” Under ASU2015-03, an entity presents debt issue costs related to a note in the balance sheet as a direct deduction from the related debtliability rather than as an asset. Entities would apply the new guidance retrospectively to all prior periods. In August 2015,the FASB issued ASU No. 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated withLine-of-Credit Arrangements.” The amendment clarifies ASU 2015-03 and provides that an entity may defer and present debtissuance costs for a line-of-credit or other revolving credit facility arrangement as an asset and subsequently amortize thedeferred debt issuance costs ratably over the term of the arrangement, regardless of whether there are any outstandingborrowings on the arrangement. As such, we will continue to include debt issuance costs for our revolving credit facilityarrangements in other noncurrent assets. These ASUs are effective for annual periods beginning after December 15, 2015,including interim periods within that reporting period. We early adopted these ASUs on December 31, 2015, which did nothave a material impact on our consolidated financial statements.In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory", which requires thatinventory within the scope of the guidance be measured at the lower of cost and net realizable value. Net realizable value isthe estimated selling prices in the ordinary course of business, less reasonable predictable costs of completion, disposal andtransportation. Inventory measured using last-in, first-out (LIFO) and the retail inventory method (RIM) are not impacted bythe new guidance. Entities should apply the new guidance prospectively with earlier application permitted as of thebeginning of an interim or annual reporting period. It is effective for fiscal years beginning after December 15, 2016,including interim periods within those fiscal years. We early adopted this ASU on December 31, 2016, which did not have amaterial impact on our consolidated financial statements.In September 2015, the FASB issued ASU No. 2015-16, "Simplifying the Accounting for Measurement-PeriodAdjustments", which eliminates the requirement for an acquirer in a business combination to account for measurement-periodadjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in whichthey determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods ifthe accounting had been completed at the acquisition date. It is effective for fiscal years beginning after December 15, 2015,including interim periods within those fiscal years. We early adopted this ASU in the third quarter of 2015 and its adoptiondid not have a material impact on our consolidated financial statements.48 Table of ContentsIn February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The standard requires lessees torecognize assets and liabilities for most leases. ASU 2016-02 is effective for fiscal years, and interim periods within thoseyears, beginning after December 15, 2018. Early adoption is permitted. ASU 2016-02’s transition provisions are appliedusing a modified retrospective approach at the beginning of the earliest comparative period presented in the financialstatements. Full retrospective application is prohibited. We are currently evaluating the potential impact of this authoritativeguidance on our consolidated financial statements. In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718)”. Thestandard changes certain aspects of accounting for share-based payments to employees. Specifically, the new guidancerequires excess tax benefits and tax deficiencies to be recognized in the income statement instead of additional paid-incapital when the awards vest or are settled. Additionally, cash flows related to excess tax benefits will be presented as anoperating activity rather than a financing activity. ASU 2016-09 also allows an employer to repurchase more of anemployee’s shares than it previously could for tax withholding purposes without triggering liability accounting and to makea policy election to account for forfeitures as they occur. ASU 2016-09 is effective for fiscal years, and interim periods withinthose years, beginning after December 15, 2016. Early adoption is permitted, but all of the guidance must be adopted in thesame period. We elected to early adopt ASU 2016-09 in the second quarter of 2016, which required us to reflect any adjustmentsas of January 1, 2016. The primary impact of adoption was the recognition of $0.1 million of excess tax benefits in ourprovision for income taxes rather than additional paid-in capital. We elected to account for forfeitures as they occur todetermine the amount of compensation cost to be recognized. The impact of this change in accounting policy was less than$0.1 million and was recorded as a cumulative effect adjustment to retained earnings for the increase to stock compensationexpense. Amendments to the accounting for minimum statutory withholding tax requirements had no impact to retainedearnings as of January 1, 2016. We elected to apply the presentation requirements for cash flows related to excess tax benefits prospectively, whichresulted in an increase to net cash provided by operations and a decrease to net cash provided by financing of $0.1 millionfor the three months ended March 31, 2016. The presentation requirements for cash flows related to employee taxes paid forwithheld shares had no impact to our consolidated cash flow statement as such cash flows have historically been presented asa financing activity. In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification ofCertain Cash Receipts and Cash Payments”. This standard provides guidance on how certain cash receipts and cash paymentsare presented and classified in the statement of cash flows and is intended to reduce diversity in practice with respect to theseitems. The standard is applied using a retrospective transition method and is effective for fiscal years beginning afterDecember 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We are currentlyevaluating the potential impact of this authoritative guidance on our consolidated financial statements.In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and other (Topic 350): Simplifyingthe Accounting for Goodwill Impairment”. This standard removes Step 2 of the goodwill impairment test, which required ahypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carryingvalue exceeds its fair value, not to exceed the carrying amount of goodwill. Additionally, entities will be required todisclose the amount of goodwill at reporting units with zero or negative carrying amounts. The standard is appliedprospectively and is effective for fiscal years beginning after December 15, 2019, including annual or interim goodwillimpairment tests within those fiscal years. Early adoption is permitted for interim and annual goodwill impairment testsperformed on testing dates after January 1, 2017. We plan to early adopt ASU 2017-04 in the first quarter of 2017.Revenue RecognitionApproximately 82% of our revenue was earned on a project basis and recognized through the percentage ofcompletion method of accounting. Under this method, contract revenue recognizable at any time during the life of a contractis determined by multiplying expected total contract revenue by the percentage of contract costs incurred at any time to totalestimated contract costs. More specifically, as part of the negotiation and bidding process in connection with obtaininginstallation 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 anddepreciation costs. These contract costs are included in our results of operations under the caption49 Table of Contents“Cost of Services.” Then, as we perform under those contracts, we measure costs incurred, compare them to total estimatedcosts to complete the contract and recognize a corresponding proportion of contract revenue. Labor costs are considered tobe incurred as the work is performed. Subcontractor labor is recognized as the work is performed, but is generally subjected toapproval as to milestones or other evidence of completion. Non‑labor project costs consist of purchased equipment,prefabricated materials and other materials. Purchased equipment on our projects is substantially produced to jobspecifications and is a value added element to our work. The costs are considered to be incurred when title is transferred to us,which typically is upon delivery to the work site. Prefabricated materials, such as ductwork and piping, are generallyperformed at our shops and recognized as contract costs when fabricated for the unique specifications of the job. Othermaterials costs are not significant and are generally recorded when delivered to the work site. This measurement andcomparison process requires updates to the estimate of total costs to complete the contract, and these updates may includesubjective assessments.We generally do not incur significant costs prior to receiving a contract, and therefore, these costs are expensed asincurred. In limited circumstances, when significant pre‑contract costs are incurred, they are deferred if the costs can bedirectly associated with a specific contract and if their recoverability from the contract is probable. Upon receiving thecontract, these costs are included in contract costs. Deferred costs associated with unsuccessful contract bids are written off inthe 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 agreedupon milestones or as we incur costs. The schedules for such billings usually do not precisely match the schedule on whichcosts are incurred. As a result, contract revenue recognized in the statement of operations can and usually does differ fromamounts that can be billed or invoiced to the customer at any point during the contract. Amounts by which cumulativecontract revenue recognized on a contract as of a given date exceed cumulative billings to the customer under the contractare reflected as a current asset in our balance sheet under the caption “Costs and estimated earnings in excess of billings.”Amounts by which cumulative billings to the customer under a contract as of a given date exceed cumulative contractrevenue recognized on the contract are reflected as a current liability in our balance sheet under the caption “Billings inexcess of costs and estimated earnings.”Contracts in progress are as follows (in thousands): December 31, 2016 2015 Costs incurred on contracts in progress $1,116,182 $1,135,279 Estimated earnings, net of losses 207,252 188,243 Less—Billings to date (1,378,050) (1,377,581) $(54,616) $(54,059) Costs and estimated earnings in excess of billings $29,369 $31,338 Billings in excess of costs and estimated earnings (83,985) (85,397) $(54,616) $(54,059) Accounts receivable include amounts billed to customers under retention or retainage provisions in constructioncontracts. Such provisions are standard in our industry and usually allow for a small portion of progress billings or thecontract price to be withheld by the customer until after we have completed work on the project, typically for a period of sixmonths. Based on our experience with similar contracts in recent years, the majority of our billings for such retentionbalances at each balance sheet date are finalized and collected within the subsequent year. Retention balances atDecember 31, 2016 and 2015 were $60.7 million and $51.6 million, respectively, and are included in accounts receivable.Accounts payable at December 31, 2016 and 2015 included $10.1 million and $7.8 million of retainage under termsof contracts with subcontractors, respectively. The majority of the retention balances at each balance sheet date are finalizedand paid within the subsequent year.The percentage of completion method of accounting is also affected by changes in job performance, job conditionsand final contract settlements. These factors may result in revisions to estimated costs and, therefore, revenue. Such revisionsare frequently based on further estimates and subjective assessments. The effects of these revisions are recognized in theperiod in which the revisions are determined. When such revisions lead to a conclusion that a loss will50 Table of Contentsbe recognized on a contract, the full amount of the estimated ultimate loss is recognized in the period such a conclusion isreached, regardless of the percentage of completion of the contract.Revisions to project costs and conditions can give rise to change orders under which the customer agrees to payadditional contract price. Revisions can also result in claims we might make against the customer to recover project variancesthat have not been satisfactorily addressed through change orders with the customer. Except in certain circumstances, we donot recognize revenue or margin based on change orders or claims until they have been agreed upon with the customer. Theamount of revenue associated with unapproved change orders and claims was immaterial for the year ended December 31,2016.Variations from estimated project costs could have a significant impact on our operating results, depending onproject size, and the recoverability of the variation via additional customer payments.Revenue associated with maintenance, repair and monitoring services and related contracts are recognized asservices are performed. Amounts associated with unbilled service work orders are reflected as a current asset in our balancesheet under the caption “Costs and estimated earnings in excess of billings” and amounts billed in advance of work ordersbeing performed are reflected as a current liability in our balance sheet under the caption “Billings in excess of costs andestimated earnings.”Accounts ReceivableThe carrying value of our receivables, net of the allowance for doubtful accounts, represents the estimated netrealizable value. We estimate our allowance for doubtful accounts based upon the creditworthiness of our customers, priorcollection history, ongoing relationships with our customers, the aging of past due balances, our lien rights, if any, in theproperty where we performed the work and the availability, if any, of payment bonds applicable to the contract. Thereceivables are written off when they are deemed to be uncollectible.InventoriesInventories consist of parts and supplies that we purchase and hold for use in the ordinary course of business and arestated at the lower of cost or net realizable value using the average-cost method.Property and EquipmentProperty and equipment are stated at cost, and depreciation is computed using the straight‑line method over theestimated useful lives of the assets. Leasehold improvements are capitalized and amortized over the lesser of the expected lifeof the lease or the estimated useful life of the asset.Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewalsand betterments, which extend the useful lives of existing equipment, are capitalized and depreciated over the remaininguseful life of the equipment. Upon retirement or disposition of property and equipment, the cost and related accumulateddepreciation are removed from the accounts and any resulting gain or loss is recognized in “Gain on sale of assets” in thestatement of operations.Recoverability of Goodwill and Identifiable Intangible AssetsGoodwill is the excess of purchase price over the fair value of the net assets of acquired businesses. We assessgoodwill for impairment each year, and more frequently if circumstances suggest an impairment may have occurred.When the carrying value of a given reporting unit exceeds its fair value, an impairment loss is recorded to the extentthat the implied fair value of the goodwill of the reporting unit is less than its carrying value. If other reporting units havehad increases in fair value, such increases may not be recorded. Accordingly, such increases may not be netted againstimpairments at other reporting units. The requirements for assessing whether goodwill has been impaired involvemarket‑based information. This information, and its use in assessing goodwill, entails some degree of subjective assessment.51 Table of ContentsWe perform our annual impairment testing as of October 1 and any impairment charges resulting from this processare reported in the fourth quarter. We segregate our operations into reporting units based on the degree of operating andfinancial independence of each unit and our related management of them. We perform our annual goodwill impairmenttesting at the reporting unit level. Each of our operating units represents an operating segment, and our operating segmentsare our reporting units.In the evaluation of goodwill for impairment, we have the option to first assess qualitative factors to determinewhether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value ofone of our reporting units is greater than its carrying value. If, after completing such assessment, we determine it is morelikely than not that the fair value of a reporting unit is greater than its carrying amount, then there is no need to perform anyfurther testing. If we conclude otherwise, then we perform the first step of a two‑step impairment test by calculating the fairvalue of the reporting unit and comparing the fair value with the carrying value of the reporting unit.We estimate the fair value of the reporting unit based on a market approach and an income approach, which utilizesdiscounted future cash flows. Assumptions critical to the fair value estimates under the discounted cash flow model includediscount rates, cash flow projections, projected long‑term growth rates and the determination of terminal values. The marketapproach utilized market multiples of invested capital from comparable publicly traded companies (“public companyapproach”). 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 marketcondition may result in adjustments to recorded intangible asset balances.Long‑Lived AssetsLong‑lived assets are comprised principally of goodwill, identifiable intangible assets, property and equipment, anddeferred income tax assets. We periodically evaluate whether events and circumstances have occurred that indicate that theremaining balances of these assets may not be recoverable. We use estimates of future income from operations and cash flows,as well as other economic and business factors, to assess the recoverability of these assets.AcquisitionsWe recognize assets acquired and liabilities assumed in business combinations, including contingent assets andliabilities, based on fair value estimates as of the date of acquisition.Contingent Consideration—In certain acquisitions, we agree to pay additional amounts to sellers contingent uponachievement by the acquired businesses of certain predetermined profitability targets. We have recognized liabilities forthese contingent obligations based on their estimated fair value at the date of acquisition with any differences between theacquisition date fair value and the ultimate settlement of the obligations being recognized in income from operations.Contingent Assets and Liabilities—Assets and liabilities arising from contingencies are recognized at theiracquisition date fair value when their respective fair values can be determined. If the fair values of such contingencies cannotbe determined, they are recognized at the acquisition date if the contingencies are probable and an amount can be reasonablyestimated. Acquisition date fair value estimates are revised as necessary if, and when, additional information regarding thesecontingencies becomes available to further define and quantify assets acquired and liabilities assumed.Self‑Insurance LiabilitiesWe are substantially self‑insured for workers’ compensation, employer’s liability, auto liability, general liability andemployee group health claims, in view of the relatively high per‑incident deductibles we absorb under our insurancearrangements for these risks. Losses are estimated and accrued based upon known facts, historical trends and industryaverages. Estimated losses in excess of our deductible, which have not already been paid, are included in our accrual with acorresponding receivable from our insurance carrier. 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. Ourself‑insurance arrangements are further discussed in Note 12 “Commitments and Contingencies.”52 Table of ContentsWarranty CostsWe typically warrant labor for the first year after installation on new HVAC systems. We generally warrant labor forthirty days after servicing of existing HVAC systems. A reserve for warranty costs is estimated and recorded based upon thehistorical level of warranty claims and management’s estimate of future costs.Income TaxesWe are subject to income tax in the United States and Puerto Rico and file a consolidated return for federal incometax purposes. Income taxes are provided for under the liability method, which takes into account differences betweenfinancial 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 andliabilities. The deferred income tax provision represents the change during the reporting period in the deferred tax assets anddeferred tax liabilities, net of the effect of acquisitions and dispositions. Deferred tax assets include tax loss and creditcarryforwards and are reduced by a valuation allowance if, based on available evidence, it is more likely than not that someportion 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 isuncertain. We perform this evaluation quarterly. In assessing the realizability of deferred tax assets, we must consider whetherit is more likely than not that some portion, or all, of the deferred tax assets will not be realized. We consider all availableevidence, both positive and negative, in determining whether a valuation allowance is required. Such evidence includes thescheduled reversal of deferred tax liabilities, projected future taxable income, taxable income in prior carryback years and taxplanning strategies in making this assessment, and judgment is required in considering the relative weight of negative andpositive evidence.Significant judgment is required in assessing the timing and amounts of deductible and taxable items. We establishreserves when, despite our belief that our tax return positions are supportable, we believe that certain positions may bedisallowed. When facts and circumstances change, we adjust these reserves through our provision for income taxes.To the extent interest and penalties may be assessed by taxing authorities on any underpayment of income tax, suchamounts have been accrued and are classified as a component of income tax expense in our Consolidated Statements ofOperations.Segment DisclosureOur activities are within the mechanical services industry, which is the single industry segment we serve. Eachoperating unit represents an operating segment and these segments have been aggregated, as the operating units meet all ofthe aggregation criteria.Concentrations of Credit RiskWe provide services in a broad range of geographic regions. Our credit risk primarily consists of receivables from avariety of customers including general contractors, property owners and developers and commercial and industrialcompanies. We are subject to potential credit risk related to changes in business and economic factors throughout the UnitedStates within the nonresidential construction industry. However, we are entitled to payment for work performed and havecertain lien rights in that work. Further, we believe that our contract acceptance, billing and collection policies are adequateto manage potential credit risk. We regularly review our accounts receivable and estimate an allowance for uncollectibleamounts. We have a diverse customer base, with no single customer accounting for more than 3% of consolidated 2016revenue.Financial InstrumentsOur financial instruments consist of cash and cash equivalents, accounts receivable, other receivables, accountspayable, life insurance policies, notes to former owners, capital leases, and a revolving credit facility. We believe that thecarrying values of these instruments on the accompanying balance sheets approximate their fair values.53 Table of Contents3. Fair Value MeasurementsWe 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 entityto develop its own assumptions.The following table summarizes the fair values, and levels within the fair value hierarchy in which the fair valuemeasurements fall, for assets and liabilities measured on a recurring basis as of December 31, 2016 (in thousands): Balance Fair Value Measurements at Reporting Date December31, 2016 Level 1 Level 2 Level 3 Cash and cash equivalents $32,074 $32,074 $ — $ — Life insurance—cash surrender value $3,697 $ — $3,697 $ — Contingent earn-out obligations $2,531 $ — $ — $2,531 Cash and cash equivalents consist primarily of highly rated money market funds at a variety of well‑knowninstitutions with original maturities of three months or less. The original cost of these assets approximates fair value due totheir short term maturity.One of our operations has life insurance policies covering 48 employees with a combined face value of$44.2 million. The policies are invested in mutual funds and the fair value measurement of the cash surrender balanceassociated with these policies is determined using Level 2 inputs within the fair value hierarchy and will vary withinvestment performance. The cash surrender value of these policies is $3.7 million as of December 31, 2016 and $3.6 millionas of December 31, 2015. 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 fairvalue measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurementwithin the fair value hierarchy. This analysis reflects the contractual terms of the purchase agreements (e.g., minimum andmaximum payments, length of earn‑out periods, manner of calculating any amounts due, etc.) and utilizes assumptions withregard 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 significantunobservable inputs (Level 3) (in thousands).Balance at beginning of year $450 Issuances 3,240 Settlements (428) Adjustments to fair value (731) Balance at December 31, 2016 $2,531 We measure certain assets at fair value on a nonrecurring basis. These assets are recognized at fair value when theyare deemed to be other-than-temporarily impaired. No goodwill or other intangible asset impairments were recorded duringthe years ended December 31, 2016 or 2015. During the year ended December 31, 2014, we recorded a goodwill impairmentcharge of $0.7 million based on Level 3 measurements. See Note 6 “Goodwill and Identifiable Intangible Assets, Net” forfurther discussion. We did not recognize any other impairments on those assets required to be measured at fair value on anonrecurring basis.54 Table of Contents4. AcquisitionsWe completed two acquisitions in the first quarter of 2016. We acquired the remaining 40% noncontrolling interestin Environmental Air Systems, LLC (“EAS”) on January 1, 2016 for $46.6 million, including $42.0 million funded on theclosing date plus a holdback, an earn-out that we will pay if certain financial targets are met after the acquisition date and aworking capital adjustment. Due to our majority ownership and control over EAS on the acquisition date, the differencebetween the purchase price and the noncontrolling interest liability was recorded in Additional Paid-In Capital in ourBalance Sheet. Additionally in the first quarter of 2016, we acquired 100% of the ShoffnerKalthoff family of companies(collectively, “Shoffner”), which reports as a separate operating location in the Knoxville, Tennessee area. Shoffner wasincluded in our consolidated results of operations beginning on its acquisition date, which included revenue of $71.9million. The acquisition date fair value of consideration transferred for this acquisition was $19.8 million, of which $14.8million was allocated to goodwill and identifiable intangible assets. The purchase price included $15.5 million funded onthe closing date plus a note payable to former owners, an earn-out that we will pay if certain financial targets are met after theacquisition date and a working capital adjustment. The acquisitions completed in the current year were not material,individually or in the aggregate.Other AcquisitionsWe completed various other acquisitions in 2016 and 2015 which were not material, individually or in theaggregate, and were “tucked-in” with existing operations. The total purchase price for the “tucked-in” acquisitions,including earn-outs, was $0.1 million in 2016 and $8.3 million in 2015.The results of operations of acquisitions are included in our consolidated financial statements from their respectiveacquisition dates. Additional contingent purchase price (“earn-out”) has been or will be paid if certain acquisitions achievepredetermined profitability targets. Such earn-outs are not subject to the continued employment of the sellers. 5. Discontinued OperationsDuring the fourth quarter of 2012, we substantially completed the shutdown of our operation located in Delaware,which we decided to curtail operating in the fourth quarter of 2011. No activity was reported for the year ended December 31,2016 or for the year ended December 31, 2015. The after tax loss was less than $0.1 million for the year ended December 31,2014. These results have been recorded in discontinued operations under “Loss from discontinued operations, net of incometax benefit.” No interest expense has been allocated to discontinued operations.55 Table of ContentsRevenue and pre‑tax income (loss) related to discontinued operations are as follows (in thousands): Year Ended December 31, 2016 2015 2014 Revenue — — $7 Pre-tax loss — — $(25) 6. Goodwill and Identifiable Intangible Assets, NetGoodwillThe changes in the carrying amount of goodwill are as follows (in thousands): December 31, 2016 2015 Balance at beginning of year $143,874 $140,341 Additions (See Note 4) 5,334 3,533 Balance at end of year $149,208 $143,874 We perform our annual impairment testing on October 1, or more frequently, if events and circumstances indicateimpairment may have occurred. As discussed in Note 2, “Summary of Significant Accounting Policies,” we have the optionto first perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unitis less than the carrying value.During our annual impairment testing on October 1, we performed a quantitative assessment where the fair value ofeach reporting unit was estimated using a discounted cash flow model combined with a market valuation approach. Weassigned a weighting of 50% to the discounted cash flow analysis and 50% to the public company approach for the yearended December 31, 2016. Based on this assessment, we concluded that the fair value of each of the reporting units wasgreater than its carrying value. During 2015 and 2014, we performed a qualitative assessment for each reporting unit, which considered variousfactors, including changes in the carrying value of the reporting unit, forecasted operating results, long-term growth rates anddiscount rates. Additionally, we considered qualitative key events and circumstances (i.e. macroeconomic environment,industry and market specific conditions, cost factors and events specific to the reporting unit, etc.). Based on this assessment,we concluded that it was more likely than not that the fair value of each of the reporting units was greater than its carryingvalue. Accordingly, no further testing was required.Prior to our annual goodwill impairment test in 2014, we recorded a goodwill impairment charge of $0.7 millionduring the second quarter of 2014. Based on market activity declines and write-downs incurred on several jobs, wedetermined that the operating environment, conditions and performance at our operating unit based in California could nolonger support the related goodwill balance. When the carrying value of a given reporting unit exceeds its fair value, animpairment loss is recorded to the extent that the implied fair value of the goodwill of the reporting unit is less than itscarrying value. The fair value was estimated using a discounted cash flow model combined with market valuationapproaches.As of October 1, 2016, the fair value exceeded the carrying value by a significant margin for all of our reportingunits with a goodwill balance.There are significant inherent uncertainties and management judgment involved in estimating the fair value of eachreporting unit. While we believe we have made reasonable estimates and assumptions to estimate the fair value of ourreporting units, it is possible that a material change could occur. If actual results are not consistent with our current estimatesand assumptions, or the current economic outlook worsens, goodwill impairment charges may be recorded in future periods.56 Table of ContentsIdentifiable Intangible Assets, NetIdentifiable intangible assets consist of the following (dollars in thousands): Estimated 2016 2015 Useful Lives GrossBook Accumulated GrossBook Accumulated in Years Value Amortization Value Amortization Customer relationships 1 - 15 $57,230 $(36,758) $53,334 $(31,960) Backlog 1 - 2 3,600 (3,433) 1,600 (1,412) Noncompete agreements 2 - 7 2,890 (2,890) 2,890 (2,890) Tradenames 2 - 25 31,640 (9,844) 27,995 (8,478) Total $95,360 $(52,925) $85,819 $(44,740) The amounts attributable to customer relationships, noncompete agreements and tradenames are amortized to“Selling, General and Administrative Expenses” on a pattern of economic benefit or a straight‑line method over periods fromtwo to twenty‑five years. The amounts attributable to backlog are being amortized to “Cost of Services” on a proportionatemethod over the remaining backlog period. Amortization expense for the years ended December 31, 2016, 2015 and 2014was $8.2 million, $7.5 million and $7.7 million, respectively.At December 31, 2016, future amortization expense of identifiable intangible assets is as follows (in thousands):Year ended December 31— 2017 $5,702 2018 4,861 2019 4,246 2020 3,751 2021 3,300 Thereafter 20,575 Total $42,435 7. Property and EquipmentProperty and equipment consist of the following (dollars in thousands): Estimated Useful Lives December 31, in Years 2016 2015 Land — $2,745 $2,745 Transportation equipment 1 - 7 74,137 64,951 Machinery and equipment 1 - 20 27,843 25,118 Computer and telephone equipment 1 - 10 20,791 21,141 Buildings and leasehold improvements 1 - 40 35,166 30,319 Furniture and fixtures 1 - 17 4,224 4,181 Construction in progress — 425 — 165,331 148,455 Less—Accumulated depreciation (97,136) (87,642) Property and equipment, net $68,195 $60,813 Depreciation expense, including capital lease amortization, for the years ended December 31, 2016, 2015 and 2014was $18.0 million, $15.9 million and $13.7 million, respectively.57 Table of Contents8. Detail of Certain Balance Sheet AccountsActivity in our allowance for doubtful accounts consists of the following (in thousands): December 31, 2016 2015 2014 Balance at beginning of year $5,158 $4,379 $4,460 Bad debt expense (benefit) (27) 1,552 1,275 Deductions for uncollectible receivables written off, net ofrecoveries (876) (798) (1,650) Allowance for doubtful accounts of acquired companies at date ofacquisition 33 25 294 Balance at end of year $4,288 $5,158 $4,379 Other current liabilities consist of the following (in thousands): December 31, 2016 2015 Accrued warranty costs $6,702 $7,746 Accrued job losses 1,269 1,365 Accrued sales and use tax 1,973 2,216 Deferred revenue 5,257 2,175 Liabilities due to former owners 4,196 2,650 Other current liabilities 14,864 12,525 $34,261 $28,677 9. Long‑Term Debt ObligationsLong‑term debt obligations consist of the following (in thousands): December 31, 2016 2015 Revolving credit facility $ — $10,000 Notes to former owners 2,250 1,000 Other debt 305 — Capital lease obligations 256 507 Total debt 2,811 11,507 Less—current portion (763) (751) Total long-term portion of debt $2,048 $10,756 At December 31, 2016, future principal payments of debt are as follows (in thousands):Year ended December 31— 2017 $763 2018 1,046 2019 1,002 2020 — 2021 — Thereafter — $2,811 58 Table of ContentsInterest expense included the following primary elements (in thousands): Year Ended December 31, 2016 2015 2014 Interest expense on notes to former owners $70 $25 $38 Interest expense on borrowings and unused commitment fees 1,251 692 790 Letter of credit fees 657 719 747 Amortization of debt financing costs 367 317 283 Total $2,345 $1,753 $1,858 Revolving Credit FacilityOn February 22, 2016, we amended our senior credit facility (the “Facility”) provided by a syndicate of banks,increasing our borrowing capacity from $250.0 million to $325.0 million, with a $100 million accordion option. TheFacility, which is available for borrowings and letters of credit, expires in February 2021 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 bycertain unrestricted subsidiaries and a second lien on our assets related to projects subject to surety bonds. In 2016, weincurred approximately $0.8 million in financing and professional costs in connection with an amendment to the Facility,which combined with the previous unamortized costs of $1.1 million, are being amortized on a straight‑line basis as anon‑cash charge to interest expense over the remaining term of the Facility. As of December 31, 2016, we had no outstandingborrowings, $41.5 million in letters of credit outstanding and $283.5 million of credit available.CollateralA common practice in our industry is the posting of payment and performance bonds with customers. These bondsare offered by financial institutions known as sureties, and provide assurance to the customer that in the event we encountersignificant financial or operational difficulties, the surety will arrange for the completion of our contractual obligations andfor the payment of our vendors on the projects subject to the bonds. In cooperation with our lenders, we granted our sureties afirst 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 ofDecember 31, 2016, the book value of these assets was approximately $41.5 million.Covenants and RestrictionsThe Facility contains financial covenants defining various measures and the levels of these measures with which wemust comply. Covenant compliance is assessed as of each quarter end. Credit Facility Adjusted EBITDA is defined under theFacility for financial covenant purposes as net earnings for the four quarters ending as of any given quarterly covenantcompliance measurement date, plus the corresponding amounts for (a) interest expense; (b) income taxes; (c) depreciationand amortization; (d) stock compensation; (e) other non‑cash charges; and (f) pre‑acquisition results of acquired companies.The following is a reconciliation of Credit Facility Adjusted EBITDA to net income for 2016 (in thousands):Net income including noncontrolling interests $64,896 Income tax expense 36,165 Interest expense, net 2,336 Depreciation and amortization expense 26,166 Stock-based compensation 5,041 Pre-acquisition results of acquired companies, as defined under the Facility 10 Credit Facility Adjusted EBITDA $134,614 The Facility’s principal financial covenants include:Leverage Ratio—The Facility requires that the ratio of our Consolidated Total Indebtedness to our CreditFacility Adjusted EBITDA not exceed (i) 3.00 to 1.00 as of the end of each fiscal quarter through September 30,2017, and (ii) 2.75 to 1.00 as of the end of each fiscal quarter thereafter through maturity. The leverage ratio as ofDecember 31, 2016 was 0.02.59 Table of ContentsFixed 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 ofinterest expense and scheduled principal payments of indebtedness be at least 2.00 to 1.00; provided that thecalculation of the fixed charge coverage ratio excludes stock repurchases and the payment of dividends at any timethat the Company’s Net Leverage Ratio does not exceed 1.50 to 1.00. The Facility also allows the fixed chargecoverage ratio not to be reduced for stock repurchases through September 30, 2015 in an aggregate amount not toexceed $25 million and for stock repurchases made after February 22, 2016 but on or prior to December 31, 2017 inan aggregate amount not to exceed $25 million, if at the time of and after giving effect to such repurchase theCompany’s Net Leverage Ratio was less than or equal to 1.50 to 1.00. Capital expenditures, tax provision,dividends and stock repurchase payments are defined under the Facility for purposes of this covenant to be amountsfor the four quarters ending as of any given quarterly covenant compliance measurement date. The fixed chargecoverage ratio as of December 31, 2016 was 27.84.Other Restrictions—The Facility permits acquisitions of up to $30.0 million per transaction, provided thatthe aggregate purchase price of such an acquisition and of acquisitions in the same fiscal year does not exceed$65.0 million. However, these limitations only apply when the Company’s Net Leverage Ratio is equal to or greaterthan 2.00 to 1.00.While the Facility’s financial covenants do not specifically govern capacity under the Facility, if our debtlevel under the Facility at a quarter‑end covenant compliance measurement date were to cause us to violate theFacility’s leverage ratio covenant, our borrowing capacity under the Facility and the favorable terms that wecurrently have could be negatively impacted by the lenders.We were in compliance with all of our financial covenants as of December 31, 2016.Interest Rates and FeesThere are two interest rate options for borrowings under the Facility, the Base Rate Loan Option and the EurodollarRate Loan Option. Under the Base Rate Loan Option, the interest rate is determined based on the highest of the FederalFunds Rate plus 0.5%, the prime lending rate offered by Wells Fargo Bank, N.A. or the one‑month Eurodollar Rate plus1.00%. Under the Eurodollar Rate Loan Option, the interest rate is determined based on the one‑ to six‑month EurodollarRate. The Eurodollar Rate corresponds very closely to rates described in various general business media sources as theLondon Interbank Offered Rate or “LIBOR.” Additional margins are then added to these rates. The additional margins aredetermined based on the ratio of our Consolidated Total Indebtedness as of a given quarter end to our “Credit FacilityAdjusted EBITDA” for the twelve months ending as of that quarter end, as defined in the credit agreement and shown below.The interest rates under the Facility are floating rates determined by the broad financial markets, meaning they canand do move up and down from time to time. For illustrative purposes, the following are the respective market rates as ofDecember 31, 2016 relating to interest options under the Facility:Base Rate Loan Option: Federal Funds Rate plus 0.50% 1.16% Wells Fargo Bank, N.A. Prime Rate 3.75% One-month LIBOR plus 1.00% 1.77% Eurodollar Rate Loan Option: One-month LIBOR 0.77% Six-month LIBOR 1.32% Certain of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on ourbehalf, such as to beneficiaries under our self‑funded insurance programs. We have also occasionally used letters of credit toguarantee performance under our contracts and to ensure payment to our subcontractors and vendors under those contracts.Our lenders issue such letters of credit through the Facility. A letter of credit commits the lenders to pay specified amounts tothe holder of the letter of credit if the holder demonstrates that we have failed to perform specified actions. If this were tooccur, we would 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 reserving of funds by us in connection with a letter of credit. However, because a claimon a letter of credit would require immediate reimbursement by us to our lenders,60 Table of Contentsletters of credit are treated as a use of facility capacity just the same as actual borrowings. We have never had a claim madeagainst a letter of credit that resulted in payments by a lender or by us and believe such claim is unlikely in the foreseeablefuture.Commitment fees are payable on the portion of the revolving loan capacity not in use for borrowings or letters ofcredit at any given time. Letter of credit fees and commitment fees are based on the ratio of Consolidated Total Indebtednessto Credit Facility Adjusted EBITDA, as defined in the credit agreement. Consolidated Total Indebtedness to Credit Facility Adjusted EBITDA Less than 0.75 0.75 to 1.50 1.50 to 2.25 2.25 or greater Additional Per Annum Interest Margin Added Under: Base Rate Loan Option 0.25% 0.50% 0.75% 1.00%Eurodollar Rate Loan Option 1.25%1.50%1.75%2.00%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% We estimate that the weighted average interest rate applicable to the borrowings under the Facility would beapproximately 1.8% as of December 31, 2016.Notes to Former OwnersAs part of the consideration used to acquire two companies, we have outstanding subordinated notes to the formerowners. These notes had an outstanding balance of $2.3 million as of December 31, 2016. In conjunction with the Shoffneracquisition in the first quarter, we issued a subordinated note to former owners with an outstanding balance of $1.8 million asof December 31, 2016 that bears interest, payable quarterly, at a weighted average interest rate of 3.0%. The principal is duein equal installments in February 2018 and 2019. In conjunction with an immaterial acquisition in the fourth quarter of 2014,we issued a subordinated note to the former owners of the acquired company as part of the consideration used to acquire thecompany. This note had an outstanding balance of $0.5 million as of December 31, 2016 and bears interest, payablequarterly, at a weighted average interest rate of 2.5%. The principal is due in October 2017.Other DebtAs part of the Shoffner acquisition, we acquired debt with an outstanding balance at the acquisition date of $0.4million with principle and interest due the last day of every month; ending on the December 30, 2019 maturity date. Theinterest rate is the one month LIBOR rate plus 2.25%. As of December 31, 2016, $0.3 million of the note was outstanding, ofwhich $0.1 million was considered current.In conjunction with one of our acquisitions, we acquired capital lease obligations. As of December 31, 2016, $0.3million of capital lease obligations were outstanding, of which $0.2 million was considered current.61 Table of Contents10. Income TaxesProvision for Income TaxesThe provision for income taxes relating to continuing operations consists of the following (in thousands): December 31, 2016 2015 2014 Current— Federal $32,721 $27,564 $13,402 State and Puerto Rico 4,683 4,065 2,810 37,404 31,629 16,212 Deferred— Federal (2,101) (1,481) (308) State and Puerto Rico 862 1,076 (4,290) (1,239) (405) (4,598) $36,165 $31,224 $11,614 The difference in income taxes provided for and the amounts determined by applying the federal statutory tax rateto income before income taxes results from the following (in thousands): December 31, 2016 2015 2014 Income tax expense at the statutory rate of 35% $35,371 $31,032 $14,080 Changes resulting from— State income taxes, net of federal tax effect 4,262 3,432 1,653 Increase (decrease) in valuation allowance (1,254) 463 (1,944) Increase (decrease) in tax contingency reserves 20 (72) (40) Increase (decrease) from noncontrolling interests — (2,827) (1,938) Non-deductible expenses 825 751 704 Equity based stock compensation deduction (885) — — Production activity deduction (2,026) (1,701) (694) Purchase accounting adjustments — — (46) Other (148) 146 (161) $36,165 $31,224 $11,614 62 Table of ContentsDeferred Tax Assets (Liabilities)Significant components of the net deferred tax assets and net deferred tax liabilities as reflected on the balance sheetare as follows (in thousands): Year Ended December 31, 2016 2015 Deferred income tax assets— Accounts receivable and allowance for doubtful accounts $1,627 $1,889 Stock compensation 3,036 3,080 Accrued liabilities and expenses 23,000 19,174 State net operating loss carryforwards 5,053 6,781 Goodwill 875 — Other 759 830 Total deferred income tax assets 34,350 31,754 Deferred income tax liabilities— Property and equipment (4,398) (5,572) Long-term contracts (637) (728) Goodwill — (6,037) Intangible assets (737) (156) Other (513) (357) Total deferred income tax liabilities (6,285) (12,850) Less—Valuation allowance (3,184) (4,438) Net deferred income tax assets $24,881 $14,466 The deferred income tax assets and liabilities reflected above are included in the consolidated balance sheet asfollows (in thousands): December 31, 2016 2015 Deferred income tax assets $27,170 $16,276 Deferred income tax liabilities $2,289 $1,810 As of December 31, 2016, we had $5.1 million of future tax benefits related to $70.4 million of available federal,state and Puerto Rican net operating loss carryforwards (“NOLs”), which expire between 2017 and 2036. A valuationallowance of $3.2 million has been recorded against certain state and Puerto Rican net deferred tax assets. We recorded adecrease in valuation allowances of $1.3 million for the year ended December 31, 2016. Our deferred tax assets for PuertoRico are fully valued. A deferred tax asset for state NOLs, net of related valuation allowance, of $2.2 million reflects ourconclusion that it is likely that this asset will be realized based upon expected future earnings in certain subsidiaries. Weupdate this assessment of the realizability of deferred tax assets relating to state net NOLs annually. A return to profitabilityin our entities with valuation allowances on their NOL’s and deferred tax assets would result in a reversal of a portion of thevaluation 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 theremaining deferred tax asset valuation allowance.As of December 31, 2016 and 2015, approximately $0.2 million 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 consolidatedbalance sheets. We do not expect that the total amount of unrecognized tax benefits will significantly increase or decreasewithin the next twelve months.We recognize potential interest and penalties related to unrecognized tax benefits in income tax expense. We hadaccrued approximately $0.4 million and $0.3 million for the payment of interest and penalties at December 31, 2016 and2015, respectively. Our tax records are subject to review by the Internal Revenue Service for the 2013 tax year forward andby various state authorities for the 2008 tax year forward.63 Table of ContentsLiabilities for Uncertain Tax PositionsA reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding accrued interest andpenalties, is as follows (in thousands): Year Ended December 31, 2016 2015 2014 Balance at beginning of year $240 $343 $413 Additions based on tax positions related to the current year — — — Additions for tax positions of prior years — — — Reductions for tax positions of prior years — (103) (70) Settlements — — — Balance at end of year $240 $240 $343 11. Employee Benefit PlansWe and certain of our subsidiaries sponsor various retirement plans for most full‑time and some part‑time employees.These plans primarily consist of defined contribution plans. The defined contribution plans generally provide forcontributions up to 2.5% of covered employees’ salaries or wages. These contributions totaled $7.8 million in 2016,$7.1 million in 2015 and $6.1 million in 2014. Of these amounts, approximately $0.2 million and $0.1 million was payableto the plans at December 31, 2016 and 2015, respectively.Certain of our subsidiaries also participate or have participated in various multi‑employer pension plans for thebenefit of employees who are union members. As of December 31, 2016 and 2015, we had 5 and 11 employees, respectively,who were union members. There were no contributions made to multi‑employer pension plans in 2016, 2015 or 2014. Thedata available from administrators of other multi‑employer pension plans is not sufficient to determine the accumulatedbenefit obligations, nor the net assets attributable to the multi‑employer plans in which our employees participate orpreviously participated.Certain individuals at one of our operating units are entitled to receive fixed annual payments that reach amaximum amount, as specified in the related agreements, for a 15 year period following retirement or, in some cases, theattainment of 65 years of age. We recognize the unfunded status of the plan as a non‑current liability in our ConsolidatedBalance Sheet. Benefits vest 50% after ten years of service, 75% after fifteen years of service and are fully vested after20 years of service. We had an unfunded benefit liability of $4.0 million and $3.3 million recorded as of December 31, 2016and 2015, respectively.12. Commitments and ContingenciesLeasesWe lease certain facilities and equipment under noncancelable operating leases. Rent expense for the years endedDecember 31, 2016, 2015 and 2014 was $20.6 million, $20.6 million, and $17.8 million, respectively. We recognizeescalating rental payments that are quantifiable at the inception of the lease on a straight‑line basis over the lease term.Concurrent with the acquisitions of certain companies, we entered into various agreements with previous owners to leasebuildings used in our operations. The terms of these leases generally range from three to ten years and certain leases providefor escalations in the rental expenses each year, the majority of which are based on inflation. Included in the 2016, 2015 and2014 rent expense above are approximately $5.1 million, $5.4 million and $3.8 million of rent paid to these related parties,respectively. In addition to the noncancelable operating leases, we have capital lease obligations of $0.3 million as ofDecember 31, 2016, which were attained through our acquisition in Northern Texas.64 Table of ContentsThe following represents future minimum rental payments under noncancelable operating leases (in thousands):Year ended December 31— 2017 $13,098 2018 11,904 2019 9,666 2020 7,204 2021 5,051 Thereafter 9,107 $56,030 Claims and LawsuitsWe are subject to certain legal and regulatory claims, including lawsuits arising in the normal course of business.We maintain various insurance coverages to minimize financial risk associated with these claims. We have estimated andprovided accruals for probable losses and related legal fees associated with certain litigation in the accompanyingconsolidated financial statements. While we cannot predict the outcome of these proceedings, in management’s opinion andbased 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.In the fourth quarter of 2016, we entered into a settlement agreement with British Petroleum (“BP”) related to aclaim from one of our subsidiaries regarding the April 2010 BP Deepwater Horizon oil spill. We recorded a $0.6 million gainin the fourth quarter of 2016 in Other Income as a result of this settlement. While we still have other subsidiaries withoutstanding claims against BP related to this matter, we cannot predict when or if we will receive any further settlementcompensation as a result of these outstanding claims.SuretyMany customers, particularly in connection with new construction, require us to post performance and paymentbonds issued by a financial institution known as a surety. If we fail to perform under the terms of a contract or to paysubcontractors and vendors who provided goods or services under a contract, the customer may demand that the surety makepayments or provide services under the bond. We must reimburse the surety for any expenses or outlays it incurs. To date, weare not aware of any losses to our sureties in connection with bonds the sureties have posted on our behalf, and do not expectsuch losses to be incurred in the foreseeable future.Surety market conditions are favorable and bonding capacity is adequate in the current market conditions alongwith acceptable terms and conditions. Historically, approximately 20% to 30% of our business has required bonds. While wecurrently have strong surety relationships to support our bonding needs, future market conditions or changes in the sureties’assessment of our operating and financial risk could cause the sureties to decline to issue bonds for our work. If that were tooccur, the alternatives include doing more business that does not require bonds, posting other forms of collateral for projectperformance such as letters of credit or cash, and seeking bonding capacity from other sureties. We would likely alsoencounter concerns from customers, suppliers and other market participants as to our creditworthiness. While we believe ourgeneral operating and financial characteristics would enable us to ultimately respond effectively to an interruption in theavailability of bonding capacity, such an interruption would likely cause our revenue and profits to decline in the near term.Self‑InsuranceWe are substantially self‑insured for workers’ compensation, employer’s liability, auto liability, general liability andemployee group health claims, in view of the relatively high per‑incident deductibles we absorb under our insurancearrangements for these risks. Losses are estimated and accrued based upon known facts, historical trends and industryaverages. Estimated losses in excess of our deductible, which have not already been paid, are included in our accrual with acorresponding receivable from our insurance carrier. 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.65 Table of ContentsOur self‑insurance arrangements as of December 31, 2016 were as follows:Workers’ Compensation—The per‑incident deductible for workers’ compensation is $1.0 million. Lossesabove $1.0 million are determined by statutory rules on a state‑by‑state basis, and are fully covered by excessworkers’ compensation insurance.Employer’s Liability—For employer’s liability, the per incident deductible is $1.0 million and then wehave several layers of excess loss insurance policies that cover losses up to $100.0 million in aggregate across thisrisk area (as well as general liability and auto liability noted below).General Liability—For general liability, the per incident deductible is $1.0 million. We are fully insuredfor the next $1.0 million of each loss, and then have several layers of excess loss insurance policies that cover lossesup to $100.0 million in aggregate across this risk area (as well as employer’s liability noted above and auto liabilitynoted below).Auto Liability—For auto liability, the per incident deductible is $0.5 million. We are fully insured for thenext $1.5 million of each loss, and then have several layers of excess loss insurance policies that cover losses up to$100.0 million in aggregate across this risk area (as well as employer’s liability and general liability noted above).Employee Medical—We have two medical plans. The deductible for employee group health claims is$350,000 per person, per policy (calendar) year for each plan. Insurance then covers any responsibility for medicalclaims in excess of the deductible amount.Our $100.0 million of aggregate excess loss coverage above applicable per‑incident deductibles representsone policy limit that applies to all lines of risk; we do not have a separate $100.0 million of excess loss coverage foreach of general liability, employer’s liability and auto liability.13. Stockholders’ Equity2012 Equity Incentive PlanIn May 2012, our stockholders approved our 2012 Equity Incentive Plan (the “2012 Plan”), which provides for thegranting of incentive or non‑qualified stock options, stock appreciation rights, restricted or deferred stock, dividendequivalents or other incentive awards to directors, employees, or consultants. The number of shares authorized and reservedfor issuance under the 2012 Plan is 5.1 million shares. As of December 31, 2016, there were 3.2 million shares available forissuance under this plan. The 2012 Plan will expire in May 2022. Additionally, we have outstanding stock options, stockawards and stock units that were issued under other plans, and no further grants may be made under those plans.Share Repurchase ProgramOn March 29, 2007, our Board of Directors (the “Board”) approved a stock repurchase program to acquire up to1.0 million shares of our outstanding common stock. Subsequently, the Board has from time to time approved extensions ofthe program to acquire additional shares. On August 11, 2016, the Board approved an extension to the program by increasingthe shares authorized for repurchase by 0.6 million shares. Since the inception of the repurchase program, the Board hasapproved 8.1 million shares to be repurchased. As of December 31, 2016, we have repurchased a cumulative total of7.3 million shares at an average price of $13.02 per share under the repurchase program.The share repurchases will be made from time to time at our discretion in the open market or privately negotiatedtransactions as permitted by securities laws and other legal requirements, and subject to market conditions and other factors.The Board may modify, suspend, extend or terminate the program at any time. During the twelve months ended December 31,2016, we repurchased 0.5 million shares for approximately $13.1 million at an average price of $28.44 per share.66 Table of ContentsEarnings Per ShareBasic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of shares ofcommon stock outstanding during the year. Diluted EPS is computed considering the dilutive effect of stock options,restricted stock, restricted stock units and performance stock units. The vesting of unvested contingently issuableperformance stock units is based on the achievement of certain earnings per share targets and total shareholder return. Theseshares are considered contingently issuable shares for purposes of calculating diluted earnings per share. These shares are notincluded in the diluted earnings per share denominator until the performance criteria are met, if it is assumed that the end ofthe reporting period was the end of the contingency period.Unvested restricted stock, restricted stock units and performance stock units are included in diluted earnings pershare, weighted outstanding until the shares and units vest. Upon vesting, the vested restricted stock, restricted stock unitsand performance stock units are included in basic earnings per share weighted outstanding from the vesting date.There were approximately 0.1 million anti-dilutive stock options excluded from the calculation of diluted EPS forthe year ended December 31, 2016. There were no anti-dilutive stock options for the year ended December 31, 2015. Therewere approximately 0.2 million anti-dilutive stock options excluded from the calculation of diluted EPS for the year endedDecember 31, 2014.The following table reconciles the number of shares outstanding with the number of shares used in computing basicand diluted earnings per share for each of the periods presented (in thousands): Year Ended December 31, 2016 2015 2014 Common shares outstanding, end of period 37,209 37,427 37,270 Effect of using weighted average common shares outstanding 126 15 277 Shares used in computing earnings per share—basic 37,335 37,442 37,547 Effect of shares issuable under stock option plans based on the treasury stock method 330 266 147 Effect of restricted and contingently issuable shares 146 160 103 Shares used in computing earnings per share—diluted 37,811 37,868 37,797 14. Stock‑Based CompensationUnder the 2012 Equity Incentive Plan (the “2012 Plan”) grants of stock options, restricted stock and restricted stockunits, and performance share units have been, and will be, determined and administered by the compensation committee ofthe Board of Directors. Total stock‑based compensation expense was $5.0 million, $5.6 million and $4.8 million for the yearsended December 31, 2016, 2015 and 2014, respectively. Stock-based compensation expense is recognized using thestraight‑line method over the vesting period and generally vests over a three‑year vesting period. Certain awards provide foraccelerated vesting when the sum of an employee's age and years of service is at least 75. We recognize forfeitures as theyoccur. Total income tax benefit recognized for stock‑based compensation arrangements was $1.9 million, $2.1 million and$1.8 million for each of the years ended December 31, 2016, 2015 and 2014. Subsequent to our adoption of ASU 2016-09 inthe second quarter of 2016, we elected to apply the presentation requirements for cash flows related to excess tax benefitsprospectively. As such, we present, in the consolidated statements of cash flows, the benefits of tax deductions in excess ofrecognized compensation costs (“excess tax benefits”) as operating cash flows for the year ended 2016 and as financing cashflows for the years ended 2015 and 2014.We generally issue treasury shares for stock options and restricted stock, unless treasury shares are notavailable. Upon the vesting of restricted shares, we have allowed the holder to elect to surrender an amount of shares to meettheir statutory tax withholding requirements. These shares are accounted for as treasury stock based upon the value of thestock on the date of vesting.67 Table of ContentsStock OptionsThe following table summarizes activity under our stock option plans (shares in thousands): Year Ended December 31, 2016 Weighted- Average Stock Options Shares ExercisePrice Outstanding at beginning of year 724 $14.69 Granted 102 $30.36 Exercised (112) $14.11 Forfeited — $ — Expired — $ — Outstanding at end of year 714 $17.01 Options exercisable at end of year 473 The total intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014 was$1.9 million, $3.9 million and $0.4 million, respectively. Stock options exercisable as of December 31, 2016 have aweighted‑average remaining contractual term of 5.3 years and an aggregate intrinsic value of $9.2 million. As ofDecember 31, 2016, we have 0.7 million options that are vested or expected to vest; these options have a weighted averageexercise price of $17.01 per share, have a weighted‑average remaining contractual term of 6.4 years and an aggregateintrinsic value of $11.6 million.The following table summarizes information about stock options outstanding at December 31, 2016 (shares inthousands): Options Outstanding Options Exercisable Weighted- Average Number Remaining Weighted- Number Weighted- Outstandingat Contractual Average Exercisableat Average Range of Exercise Prices 12/31/2016 Life Exercise Price 12/31/2016 Exercise Price $11.00 - $15.00 361 4.63 $12.64 361 $12.64 $15.01 - $20.00 251 7.72 $17.89 112 $17.30 $20.01 - $30.36 102 9.23 $30.36 — $ — $11.00 - $30.36 714 6.37 $17.01 473 $13.74 The fair value of each option award is estimated, based on several assumptions, on the date of grant using theBlack‑Scholes option valuation model. The fair values and the assumptions used for the 2016, 2015 and 2014 grants areshown in the table below: Year Ended December 31, 2016 2015 2014 Weighted-average fair value per share of options granted $9.94 $6.33 $6.24 Fair value assumptions: Expected dividend yield 0.97% 1.51% 1.34% Expected stock price volatility 37.9% 38.4% 45.2% Risk-free interest rate 1.41% 1.50% 1.91% Expected term 5.3 years 5.6 years 5.6 years Stock options are accounted for as equity instruments. As of December 31, 2016, the unrecognized compensationcost related to stock options was $0.8 million, which is expected to be recognized over a weighted‑average period of1.5 years. The total fair value of options vested during the year ended December 31, 2016 was $0.9 million.68 Table of ContentsThe following table summarizes information about nonvested stock option awards as of December 31, 2016 andchanges for the year ended December 31, 2016 (shares in thousands): Weighted-Average Grant Date Stock Options Shares Fair Value Nonvested at December 31, 2015 287 $6.07 Granted 102 $9.94 Vested (148) $5.85 Forfeited — — Nonvested at December 31, 2016 241 $7.83 Restricted Stock and Restricted Stock UnitsThe following table summarizes activity under our restricted stock plans (shares in thousands): Year Ended December 31, 2016 Weighted Average Grant Restricted Stock and Restricted Stock Units Shares Date Fair Value Unvested at beginning of year 149 $17.48 Granted 85 $30.25 Vested (108) $20.61 Forfeited — $ — Unvested at end of year 126 $23.41 Approximately $1.3 million of compensation expense related to restricted stock and restricted stock units will berecognized over a weighted‑average period of 1.6 years. The total fair value of shares vested during the year endedDecember 31, 2016 was $2.2 million. The weighted‑average fair value per share of restricted stock shares and units awardedduring 2016, 2015 and 2014 was $30.25, $20.64 and $15.80, respectively. The aggregate intrinsic value of restricted stockvested during the years ended December 31, 2016, 2015 and 2014 was $3.6 million, $3.4 million and $2.9 million,respectively.Performance Stock UnitsUnder the 2012 Plan, we granted dollar‑denominated performance vesting restricted stock units (“PSUs”), whichcliff vest at the end of a three‑year performance period. The PSUs are subject to two performance measures; 50% of the PSUsare based on the annual performance of our stock price relative to a group of our peers (total shareholder return) and 50% ofthe PSUs are measured based on meeting or exceeding a pre‑determined annual earnings per share target as set by our boardof directors (EPS). Depending on the Company’s performance in relation to the established performance measures, the awardsmay vest at zero to a maximum of 2.0 times the dollar‑denominated award granted at target. Upon achievement of thenecessary performance metrics, the award will be determined in dollars and may be settled in cash or stock based on themarket price of the Company’s common stock at the end of the performance period, at our discretion.Compensation expense for dollar‑denominated performance units will ultimately be equal to the final dollar valueawarded to the grantee upon vesting, settled either in cash or stock. However, throughout the performance period we mustrecord an accrued expense based on an estimate of that future payout. For units determined by EPS performance, the awardsare evaluated quarterly against established targets in order to estimate the liability throughout the vesting period. For unitsdetermined by total shareholder return performance, a Monte Carlo simulation model was used to estimate accrualsthroughout the vesting period. The model simulates our total shareholder return and compares it against our peer group overthe three‑year performance period to produce a predicted distribution of relative share performance. This is applied to thereward criteria to give an expected value of the total shareholder return element. The calculated fair market value as ofDecember 31, 2016 was $4.8 million. Of this amount, $1.8 million relates to the PSUs granted in 2014 whose performanceperiod ended December 31, 2016. These awards will be settled within the upcoming69 Table of Contentsyear either in cash or stock. The expense related to performance stock units for the years ended December 31, 2016, 2015 and2014 was $1.6 million, $2.6 million and $1.8 million, respectively. At the December 31, 2016 calculated fair market value,approximately $1.5 million of compensation expense related to performance stock units will be recognized over aweighted‑average period of 1.1 years.15. Selected Quarterly Financial Data (Unaudited)Quarterly financial information for the years ended December 31, 2016 and 2015 is summarized as follows (inthousands, except per share data): 2016 Q1 Q2 Q3 Q4 Revenue $385,942 $427,538 $428,760 $392,100 Gross profit 73,502 89,426 92,816 88,265 Net income including noncontrolling interests 9,841 17,717 20,471 16,867 Net income attributable to Comfort Systems USA, Inc. 9,841 17,717 20,471 16,867 INCOME PER SHARE ATTRIBUTABLE TO COMFORT SYSTEMSUSA, INC.: Basic— Income from continuing operations $0.26 $0.47 $0.55 $0.45 Income from discontinued operations — — — — Net income $0.26 $0.47 $0.55 $0.45 Diluted— Income from continuing operations $0.26 $0.47 $0.54 $0.45 Income from discontinued operations — — — — Net income $0.26 $0.47 $0.54 $0.45 2015 Q1 Q2 Q3 Q4 Revenue $369,547 $416,567 $410,565 $383,840 Gross profit (1) 64,688 82,049 87,465 83,927 Net income including noncontrolling interests 6,889 15,782 19,886 14,883 Net income attributable to Comfort Systems USA, Inc. 5,066 13,404 17,673 13,221 INCOME PER SHARE ATTRIBUTABLE TO COMFORT SYSTEMSUSA, INC.: Basic— Income from continuing operations $0.14 $0.36 $0.47 $0.35 Income from discontinued operations — — — — Net income $0.14 $0.36 $0.47 $0.35 Diluted— Income from continuing operations $0.13 $0.35 $0.46 $0.35 Income from discontinued operations — — — — Net income $0.13 $0.35 $0.46 $0.35 (1)In the fourth quarter of 2015, we recognized a $3.4 million project gain related to change orders we received.The sums of the individual quarterly earnings per share amounts do not necessarily agree with year‑to‑date earningsper share as each quarter’s computation is based on the weighted average number of shares outstanding during the quarter,the weighted average stock price during the quarter and the dilutive effects of options and contingently issuable restrictedstock in each quarter.16. Subsequent EventsOn February 21, 2017, we entered into a definitive purchase agreement to acquire all of the issued and outstandingstock of BCH Holdings, Inc. and each of its wholly-owned subsidiaries (collectively “BCH”) for $100 million, comprised of$85.7 million in cash at closing and $14.3 million in a promissory note that is payable in two70 Table of Contentsequal installments of $7.15 million on the third and fourth anniversaries of the closing date, plus an earn‑out that we will payif certain financial targets are met after the acquisition date as well as a customary working capital adjustment. BCH is anintegrated, single-source provider of mechanical service, maintenance and construction with headquarters in Tampa, Floridaand operations throughout the southeastern region of the United States. We currently expect this transaction to close aroundthe beginning of the second quarter of 2017. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone. ITEM 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur executive management is responsible for ensuring the effectiveness of the design and operation of ourdisclosure controls and procedures. We carried out an evaluation under the supervision and with the participation of ourmanagement, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design andoperation 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 ExecutiveOfficer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a‑15(e)and 15d‑15(e) of the Securities Exchange Act of 1934) are effective as of the end of the period covered by this report.Internal Controls over Financial ReportingManagement’s report on our internal controls over financial reporting can be found in Item 8 of this report. TheIndependent Registered Public Accounting Firm’s Attestation Report on the effectiveness of our internal controls overfinancial reporting can also be found in Item 8 of this report.Changes in Internal Control over Financial ReportingThere have not been any changes in our internal control over financial reporting (as such term is defined inRules 13a‑15(f) and 15d‑15(f) under the Securities Exchange Act of 1934) during the three months ended December 31, 2016that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting. ITEM 9B. Other InformationNone. PART III ITEM 10. Directors, Executive Officers and Corporate GovernanceWe have adopted a code of ethics that applies to our principal executive officer, our principal financial officer, andour principal accounting officer, as well as to our other employees. This code of ethics consists of our Corporate CompliancePolicy. The Company has made this code of ethics available on our website, as described in Item 1 of this annual report onForm 10‑K. If we make substantive amendments to this code of ethics or grant any waiver, including any implicit waiver, wewill disclose the nature of such amendment or waiver on our website or in a report on Form 8‑K within four business days ofsuch amendment 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 the Commission a definitive proxy statement including the other information to be disclosedunder this item in the 120 days following December 31, 2016 and such information is hereby incorporated by reference.71 Table 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 theCommission a definitive proxy statement including the information to be disclosed under the items in the 120 daysfollowing December 31, 2016 and such information is hereby incorporated 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: The Index to the Consolidated Financial Statements is included underPart II, Item 8 of this 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 incorporatedherein by reference.(c)Excluded financial statements:None. ITEM 16. Form 10-K SummaryThe Company has determined not to include a summary of the information required by the Form 10-K under thisItem 16 of the Form 10-K.72 Table of Contents SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMFORT SYSTEMS USA, INC. By:/s/ BRIAN E. LANE Brian E. Lane President and Chief Executive OfficerDate: February 23, 2017 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the followingpersons on behalf of the registrant and in the capacities and on the dates indicated.Signature Title Date /s/ Brian E. Lane President, Chief Executive Officer, and February 23, 2017 Brian E. Lane Director (Principal Executive Officer) /s/ William George Executive Vice President and Chief Financial February 23, 2017 William George Officer (Principal Financial Officer) /s/ Julie S. Shaeff Senior Vice President and Chief Accounting February 23, 2017 Julie S. Shaeff Officer (Principal Accounting Officer) /s/ Franklin Myers Chairman of the Board February 23, 2017 Franklin Myers /s/ Darcy G. Anderson Director February 23, 2017 Darcy G. Anderson /s/ Herman E. Bulls Director February 23, 2017 Herman E. Bulls /s/ Alfred J. Giardinelli, Jr. Director February 23, 2017 Alfred J. Giardinelli, Jr. /s/ Alan P. Krusi Director February 23, 2017 Alan P. Krusi /s/ James H. Schultz Director February 23, 2017 James H. Schultz /s/ Constance E. Skidmore Director February 23, 2017 Constance E. Skidmore /s/ Vance W. Tang Director February 23, 2017 Vance W. Tang 73 Table of ContentsINDEX OF EXHIBITS Incorporated by Referenceto the Exhibit Indicated Belowand to the Filing with theCommission Indicated BelowExhibitNumber Description of Exhibits ExhibitNumber Filing or File Number3.1 Second Amended and Restated Certificate of Incorporation of theRegistrant 3.1 333‑240213.2 Certificate of Amendment dated May 21, 1998 3.2 1998 Form 10‑K3.3 Certificate of Amendment dated July 9, 2003 3.3 2003 Form 10‑K3.4 Certificate of Amendment dated May 20, 2016 3.1 May 20, 2016Form 8‑K3.5 Amended and Restated Bylaws of Comfort Systems USA, Inc. 3.1 March 26, 2012Form 8‑K3.6 Amended and Restated Bylaws of Comfort Systems USA, Inc. 3.1 March 25 ,2016Form 8-K4.1 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 datedMay 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. 2006Equity Incentive Plan 10.6 2006 Form 10‑K*10.6 Form of Option Award under the Comfort Systems USA, Inc. 2006Stock Options/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 forNon‑Employee Directors 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, 2009Form 8‑K10.13 Second Amended and Restated Credit Agreement by and amongComfort Systems USA, Inc., as Borrower and Wells Fargo Bank,National Association, as Administrative Agent/Wells FargoSecurities LLC, as Sole Lead Arranger and Sole Lead BookRunner/Bank of Texas, N.A., Capital One, N.A., and Regions Bank asCo‑Syndication Agent/and Certain Financial Institutions as Lenders 10.1 July 22, 2010Form 8‑K/A10.14 Stock Purchase Agreement, dated July 28, 2010 10.1 July 30, 2010Form 8‑K 74 Table of Contents Incorporated by Referenceto the Exhibit Indicated Belowand to the Filing with theCommission Indicated BelowExhibitNumber Description of Exhibits ExhibitNumber Filing or File Number*10.15 Summary of 2011 Incentive Compensation Plan 10.1 First Quarter 2011Form 10‑Q*10.16 Form of Performance Restricted Stock Award Agreement datedMarch 24, 2011 10.1 March 28, 2011Form 8‑K*10.17 First Amendment to Comfort Systems USA, Inc. Amended and Restated2006 Equity Compensation Plan for Non‑Employee Directors 10.1 Second Quarter 2011Form 10‑Q10.18 Amendment No. 1 to Second Amended and Restated CreditAgreement, Second Amended and Restated Security Agreement, andSecond Amended and Restated Pledge Agreement 10.1 Third Quarter 2011Form 10‑Q*10.19 Summary of 2012 Incentive Compensation Plan 10.1 First Quarter 2012Form 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 RestrictedStock Unit Agreement 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 Quarter 2013Form 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 RestrictedStock Unit Agreement 10.3 March 22, 2013Form 8‑K10.27 Amendment No. 2 to Second Amended and Restated Credit Agreementand Amendment to Other Loan Documents 10.1 Second Quarter 2013Form 10‑Q*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 RestrictedStock Unit Agreement 10.2 March 21, 2014Form 8‑K*10.33 Form of Option Award under the Comfort Systems USA, Inc. 2012Equity Incentive Plan 10.33 2014 Form 10‑K10.34 Amendment No. 3 to Second Amended and Restated Credit Agreementand Amendment to Other Loan Documents 10.1 Third Quarter 2014Form 10‑Q10.35 Agreement and Plan of Merger between the Company and Dyna TenCorporation, dated April 7, 2014 10.1 April 7, 2014Form 8‑K*10.36 Form of 2015 Restricted Stock Unit Agreement 10.1 April 1, 2015Form 8‑K 75 Table of Contents Incorporated by Referenceto the Exhibit Indicated Belowand to the Filing with theCommission Indicated BelowExhibitNumber Description of Exhibits ExhibitNumber Filing or File Number*10.37 Form of 2015 Dollar‑denominated Performance Vesting RestrictedStock Unit Agreement 10.2 April 1, 2015Form 8‑K*10.38 Summary of 2015 Incentive Compensation Plan 10.1 First Quarter 2015Form 10‑Q*10.39 Form of Amended Change in Control Agreement 10.1 Third Quarter 2015Form 10‑Q10.40 Amendment No. 4 to Second Amended and Restated Credit Agreementand Amendment to Other Loan Documents 10.40 2015 Form 10-K*10.41 Form of 2016 Restricted Stock Unit Agreement 10.1 March 25, 2016Form 8-K*10.42 Form of 2016 Dollar-denominated Performance Restricted Stock UnitAgreement 10.2 March 25, 2016Form 8-K*10.43 Form of 2016 Stock Option Notice 10.3 March 25, 2016Form 8-K21.1 List of subsidiaries of Comfort Systems USA, Inc. Filed Herewith23.1 Consent of Ernst & Young LLP Filed Herewith31.1 Certification of Chief Executive Officer pursuant to Section 302 of theSarbanes‑Oxley Act of 2002 Filed Herewith31.2 Certification of Chief Financial Officer pursuant to Section 302 of theSarbanes‑Oxley Act of 2002 Filed Herewith32.1 Certification of Chief Executive Officer pursuant to Section 906 of theSarbanes‑Oxley Act of 2002 Furnished Herewith32.2 Certification of Chief Financial Officer pursuant to Section 906 of theSarbanes‑Oxley Act of 2002 Furnished Herewith101.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. 76 EXHIBIT 21.1 SUBSIDIARIES OF COMFORT SYSTEMS USA, INC.as of December 31, 2016 ENTITY NAME DOMESTICJURISDICTION FORMATIONDATE 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, 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. Arkansas 03/17/1998 Comfort Systems USA (Baltimore), LLC Delaware 10/15/1998 Comfort Systems USA (Bristol), Inc. Delaware 08/25/1997 Comfort Systems USA Energy Services, Inc. Delaware 08/25/1997 Comfort Systems USA G.P., Inc. Delaware 08/12/1998 Comfort Systems USA (Indiana), LLC Indiana 06/08/2015 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 (Northwest), Inc. Washington 02/14/1984 Comfort Systems USA (Ohio), Inc. Ohio 10/10/1979 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 Strategic Accounts, LLC Indiana 07/28/1998 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 Colorado 10/30/1997 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 Granite State Holdings Company, Inc. Delaware 11/02/2005 Granite State Plumbing & Heating, LLC New Hampshire 07/31/2001 H & M Mechanical, Inc. Alabama 08/06/1998 Helm Corporation Colorado 10/26/1972 Hess Mechanical, LLC 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 ENTITY NAME DOMESTICJURISDICTION FORMATIONDATE Mechanical Technical Services, Inc. Texas 06/22/2007 MJ Mechanical Services, Inc. Virginia 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 Shoffner Acquisition Corp. Tennessee 08/15/2005 ShoffnerKalthoff Mechanical Electrical Service, LLC. Tennessee 11/14/2001 Shoffner Mechanical Services, LLC. Tennessee 07/15/1974 SKMES, LLC. Tennessee 10/24/1978 Temp‑Right Service, Inc. Delaware 09/25/1997 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, 1997Non‑Employee Director’s Stock Plan, and 1998 Employee Stock Purchase Plan of Comfort SystemsUSA, Inc. (2)Registration Statement (Form S‑8 No. 333‑44354) pertaining to the 2000 Incentive Plan of ComfortSystems USA, Inc. (3)Registration Statement (Form S‑8 No. 333‑138377) pertaining to the 2006 Equity Incentive Plan and 2006Stock 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. 2012Equity Incentive Plan. of our reports dated February 23, 2017, with respect to the consolidated financial statements of Comfort Systems USA, Inc.and the effectiveness of internal control over financial reporting of Comfort Systems USA, Inc., included in this AnnualReport (Form 10‑K) for the year ended December 31, 2016./s/ Ernst & Young, LLPHouston, TexasFebruary 23, 2017 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 amaterial fact necessary to make the statements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairlypresent in all material respects the financial 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 controlsand procedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financialreporting (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 bedesigned under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this report is being prepared; b)designed such internal control over financial reporting, or caused such internal control over financialreporting to be designed under our supervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles; c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in thisreport our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of theperiod 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 occurredduring the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of anannual report) that has materially affected, or is reasonably likely to materially affect, the registrant’sinternal control over financial reporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internalcontrol over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board ofdirectors (or persons performing the equivalent functions): a)all significant deficiencies and material weaknesses in the design or operation of internal control overfinancial reporting which are reasonably likely 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 significantrole in the registrant’s internal control over financial reporting. Date: February 23, 2017/s/ BRIAN E. LANE Brian E. Lane President and Chief Executive Officer 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 materialfact necessary to make the statements made, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly presentin all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (asdefined 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 bedesigned under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the period inwhich this report is being prepared; b.designed such internal control over financial reporting, or caused such internal control over financial reportingto be designed under our supervision, to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles; c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periodcovered 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 occurredduring the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annualreport) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controlover financial reporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions): a.all significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarizeand report financial information; and b.any fraud, whether or not material, that involves management or other employees who have a significant role inthe registrant’s internal control over financial reporting. Date: February 23, 2017/s/ WILLIAM GEORGE William George Executive Vice President and Chief Financial Officer 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 fiscalyear ended December 31, 2016, as filed with 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 adoptedpursuant 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 SecuritiesExchange Act of 1934; and 2.The information contained in the Report fairly presents, in all material respects, the financial condition andresults of operations of the Company. Date: February 23, 2017/s/ BRIAN E. LANE Brian E. Lane President and Chief Executive Officer*A signed original of this written statement required by Section 906 has been provided to the Company and will beretained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 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 fiscalyear ended December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,William George, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350,as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002, that: 1.The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the SecuritiesExchange Act of 1934; and 2.The information contained in the Report fairly presents, in all material respects, the financial condition andresults of operations of the Company. Date: February 23, 2017/s/ WILLIAM GEORGE William George Executive Vice President and Chief Financial Officer*A signed original of this written statement required by Section 906 has been provided to the Company and will beretained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
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