2017 Annual Report
Comfort Systems USA is a leading national installation and
service provider for heating, ventilation, and air conditioning
systems, and related mechanical services in the commercial,
industrial, and institutional markets.
Dear Fellow Stockholders
For Comfort Systems USA, 2017 was a year of continued strong profitability,
unprecedented free cash flow, and increased bookings.
We achieved new milestones for revenue, gross profit, and cash flow in 2017.
Our 2017 revenue was $1.79 billion, compared with $1.63 billion in 2016. We earned
net income of $55.3 million, or $1.47 per share, in 2017, including the effects of a
$9.5 million expense from a revaluation of our deferred assets in light of a new lower
tax rate due to tax reform. That non-cash write-off reduced our reported EPS by
$0.25 per share. Our operating cash flow in 2017 was $114.1 million, and our free
cash flow was $80.0 million.
We ended the year with modest debt of $60.5 million and a cash balance of
$36.5 million. Our backlog on December 31, 2017 was $948 million, compared with
a backlog of $763 million a year earlier. Our year-end backlog was a record by a large
margin, 24% higher than at the end 2016, and 20% higher on a same-store basis.
Investing In Growth
For several years we have been acting on our belief that the two best routes to
increasing the value of Comfort Systems USA are growing our service business and
expanding our construction capabilities and execution.
We continually invest in our abilities to serve more customers, deliver more
value, provide superior building outcomes, innovate, make successful acquisitions,
and develop our people. We are confident that we have the best workforce in our
industry, and we invest robustly in training throughout our organization.
Mechanical systems require care and maintenance, and they need to be optimized
or replaced as they age. Because of our large workforce of service technicians and
installers, Comfort Systems USA has an industry-leading delivery capability. Every
job we do benefits from an excellent workforce,
financial strength, and a network of operating
companies with unmatched experience.
We are investing to continue to improve
our computer-aided design capabilities and to
leverage best practices in our estimation and
work acquisition processes.
Investing In Our Workforce
As activity levels increase, owners and general
contractors are challenged to meet the demand
for a quality workforce. We have one of the
largest skilled workforces in the building
construction industry.
We are confident that we have the best workforce in our industry, and
we invest robustly in training throughout our organization.
We continue to propagate our job loop
approach, which emphasizes accountability
and continual improvement in execution.
During 2017 we strengthened our basic training curricula for project managers, super-
intendents, and foremen; and we added an advanced class for our most accomplished
project managers.
No individual company can single-handedly address the declining number
of skilled workers, but we work hard to attract, train, and retain the best workers
in our industry.
In 2017 we improved our OSHA recordable incident rate, which was
already well below the most recently published rates for our industry.
Investing In New Partners
Making prudent acquisitions is a key way we deploy the cash we generate to improve
Comfort Systems USA and ultimately reward our stakeholders. We continue to invest
when we find strong new partner organizations, and we added a strong new partner
in Tampa during 2017.
The best companies in the areas in which we choose to expand commonly share
our values and have well-established businesses and workforces. We are confident that
such organizations can benefit from our resources and being part of a larger organiza-
tion, and we have found that new team members help us to improve.
We are certain that Comfort Systems USA provides the best possible partner for
owners who believe in our industry, care about their businesses, and want to provide
growth opportunities to their employees.
Investing In Safety
Our commitment to safety is greater than ever, and as a result we are getting ever bet-
ter at sending our employees home safely every day. In 2017 we improved our OSHA
recordable incident rate, which was already well below the most recently published
rates for our industry.
Our employees are our key asset and constitute the very substance of our business.
We compromise our future if we do not work safely.
Looking Ahead
Looking ahead, we are optimistic about prospects in our construction business. Our
investment in service growth continues to benefit our overall results, as we reported
record service revenue and a record recurring preventive maintenance base.
After two decades of experiencing some of the highest effective tax rates of pub-
licly traded corporations due to our domestic
focus and cash-oriented business, we look
forward to the opportunity that lower rates
in 2018 and beyond will give us to invest even
more in our business and workforce.
Constructing a building is the ultimate
manifestation of business confidence. During
and since the financial crisis, our markets
experienced very little growth. We feel that
confidence is returning. Indeed, we saw signs
of revenue growth opportunities late in 2017.
In the fourth quarter of 2017, our revenue
was more than 10% higher than in the same
period in 2016 on both an actual and same-
store basis.
With our backlog at an all-time high,
We continue to invest when we find strong new partner organizations,
and we added a strong new partner in Tampa during 2017.
signs of continuing strength in most of our markets, and continued benefits from our
ongoing investments, we are optimistic about our future.
“We achieved record revenue,
gross profit, cash flow, and
backlog in 2017.”
The factors that drive our industry are increasingly positive. Our investment
in service growth continues to benefit our overall results.
Thank You
Thank you for your investment in Comfort Systems USA. We are working to deserve
your investment and to reward the faith that you have shown in us. The factors that
drive our industry are increasingly positive. Although none of us can know what the
economy holds in the years to come, we believe that we can improve and grow. In
light of our fantastic workforce and our commitment to invest in our business, we
believe that the best is yet to come.
We will be here every day working to make Comfort Systems USA better and
better.
Respectfully,
Brian E. Lane
President and
Chief Executive Officer
William George
Executive Vice President and
Chief Financial Officer
SELECTED FINANCIAL INFORMATION FROM FORM 10-K
(in thousands, except per share amounts)
2017
2016
2015
Revenue
Operating income
$ 1,787,922
$ 1,634,340
$ 1,580,519
$ 99,260
$ 101,569
$ 90,044
Net income attributable to Comfort Systems USA
$ 55,272
$ 64,896
$ 49,364
Net income attributable to Comfort Systems USA
per diluted share
Operating cash flow
Debt
Year-ending cash balance
Stockholders’ equity
Total assets
$
1.47
$
1.72
$
1.30
$ 114,090
$ 91,188
$ 97,867
$ 60,539
$
2,811
$ 11,507
$ 36,542
$ 32,074
$ 56,464
$ 417,945
$ 376,633
$ 365,005
$ 881,120
$ 708,903
$ 691,594
Explanation of Our Form 10-K
Comfort Systems USA is committed to providing clear and comprehensive
information about our financial performance. Our 2017 Annual Report includes
the complete Form 10-K, which is the report that all U.S. publicly held companies
are required to file annually with the Securities and Exchange Commission (SEC).
The information contained in the Form 10-K is separated into Parts, which
are then separated into Items. Our Form 10-K has four parts:
Part I: Our Business
In-depth descriptions of our business and segments, strategy, competition, employees,
company risk factors, and properties.
Part II: Our Financial Performance
Management’s discussion of our results of operations and financial condition, our
financial statements, notes, and supplementary data.
Part III: Our Management
A discussion of our code of ethics and directions for those who wish to obtain
further information.
Part IV: Exhibits
Certain executives’ and directors’ signatures and a list of exhibits.
In light of our fantastic workforce and our commitment to invest
in our business, we believe that the best is yet to come.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2017
Commission file number: 1-13011
Comfort Systems USA, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
76-0526487
(I.R.S. Employer
Identification No.)
675 Bering Drive
Suite 400
Houston, Texas 77057
(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
Common Stock, $.01 par value
Name of Each Exchange on which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes 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 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant 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 the best 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 this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a
smaller reporting company)
Smaller reporting company Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes No
The aggregate market value of the voting stock held by non-affiliates of the registrant at June 30, 2017 was approximately $1.35 billion, based
on the $37.10 last sale price of the registrant’s common stock on the New York Stock Exchange on June 30, 2017.
As of February 15, 2018, 37,175,074 shares of the registrant’s common stock were outstanding (excluding treasury shares of 3,948,291).
The information required by Part III (other than the required information regarding executive officers) is incorporated by reference from the
registrant’s definitive proxy statement, which will be filed with the Commission not later than 120 days following December 31, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
Part I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 4A.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . .
Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part III
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part IV
Item 15.
Item 16.
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
9
18
18
19
19
19
20
22
23
38
39
70
70
71
71
71
71
71
71
71
72
1
FORWARD-LOOKING STATEMENTS
Certain statements and information in this Annual Report on Form 10-K may constitute forward-looking
statements within the meaning of the 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
identify forward-looking statements, which are generally not historic in nature. These forward-looking statements are
based on the current expectations and beliefs of Comfort Systems USA, Inc. and its subsidiaries (collectively, the
“Company”) concerning future developments and their effect on the Company. While the Company’s management
believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future
developments affecting the Company will be those that it anticipates. All comments concerning the Company’s
expectations for future revenue and operating results are based on the Company’s forecasts for its existing operations
and do not include the potential impact of any future acquisitions. The Company’s forward-looking statements involve
significant risks and uncertainties (some of which are beyond the Company’s control) and assumptions that could cause
actual future results to differ materially from the Company’s historical experience and its present expectations or
projections. Known material factors that could cause the Company’s actual results to differ from those in the
forward-looking statements are those described in Part I, “Item 1A. Risk Factors.”
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly update or revise any forward-looking statements after the
date they are made, whether as a result of new information, future events, or otherwise.
2
PART I
The terms “Comfort Systems,” “we,” “us,” or “the Company” refer to Comfort Systems USA, Inc. or Comfort
Systems USA, Inc. and its consolidated subsidiaries, as appropriate in the context.
ITEM 1. Business
Comfort Systems USA, Inc., a Delaware corporation, was established in 1997. We provide comprehensive
mechanical 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 and replace products and systems throughout our 36 operating units with 115 locations in 102 cities
throughout the United States.
We operate primarily in the commercial, industrial and institutional HVAC markets and perform most of our
services in industrial, healthcare, education, office, technology, retail and government facilities. Approximately 99% of
our consolidated 2017 revenue was derived from commercial, industrial and institutional customers and multi-family
residential projects. Approximately 38% of our revenue was attributable to installation services in newly constructed
facilities and 62% was attributable to renovation, expansion, maintenance, repair and replacement services in existing
buildings. Our consolidated 2017 revenue was derived from the following service activities, substantially all of which
are in the mechanical services industry, the single industry segment we serve:
Service Activity
HVAC and Plumbing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building Automation Control Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percentage of
Revenue
90 %
5 %
5 %
100 %
Industry Overview
We believe that the commercial, industrial, and institutional mechanical contracting generates annual revenue in
the United States of approximately $100 billion. Mechanical systems are necessary to virtually all commercial, industrial
and institutional buildings. Because most buildings are sealed, HVAC systems provide the primary method of circulating
fresh air in such buildings. In many instances, replacing an aging building’s existing systems with modern,
energy-efficient systems significantly reduces a building’s operating costs while improving air quality and overall
system effectiveness. Older commercial, industrial and institutional facilities often have poor air quality as well as
inadequate air conditioning, and older HVAC systems result in significantly higher energy costs than do modern
systems.
Many factors positively affect mechanical services industry growth, particularly (i) population growth, which
increases 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
on environmental and energy efficiency.
Our industry can be broadly divided into two categories:
•
•
construction of and installation in new buildings, which provided approximately 38% of our revenue in
2017, and
renovation, expansion, maintenance, repair and replacement in existing buildings, which provided the
remaining 62% of our 2017 revenue.
Construction, Installation, Expansion and Renovation Services—Construction, installation, expansion and
renovation services consist of “design and build” and “plan and spec” projects. In “design and build” projects, the
commercial HVAC company is responsible for designing, engineering and installing a cost-effective, energy-efficient
system customized to the specific needs of the building owner. Costs and other project terms are normally negotiated
between the building owner or its representative and the contracting company. Companies that specialize in “design and
3
build” projects use a consultative approach with customers and tend to develop long-term relationships with building
owners and developers, general contractors, architects, consulting engineers and property managers. “Plan and spec”
installation refers to projects in which a third-party architect or consulting engineer designs the HVAC systems and the
installation project is “put out for bid.” We believe that “plan and spec” projects usually take longer to complete than
“design and build” projects because the system design and installation process are not integrated, thus resulting in more
frequent adjustments to project specifications, work requirements and schedules.
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
the installed base of HVAC and related systems, and the demand for more efficient and sophisticated systems and
building automation controls have fueled growth in these services. The increasing complexity of these systems leads
many commercial, industrial and institutional building owners and property managers to outsource maintenance and
repair, often through service agreements with service providers. State-of-the-art control and monitoring systems feature
electronic sensors and microprocessors. These systems require specialized training to install, maintain and repair.
Strategy
We focus on strengthening operating competencies and on increasing profit margins. The key objectives of our
strategy are to generate growth in our operations, improve the productivity of our workforce and to acquire
complementary businesses. 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 to attracting and retaining customers, increasing operating income and cash flow and maximizing the
productivity of our increasingly valuable skilled labor force. The six core competencies are: (i) customer cultivation and
rapport, (ii) design and build 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 through
purchasing economies, adopting “best practices” operating programs, and focusing on job management to deliver
services in a 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 to current and future projects. We also use our combined spend to gain purchasing advantages on products
and services such as HVAC components, raw materials, services, vehicles, bonding, insurance and employee benefits.
Attract, Retain and Invest in our Employees—We seek to attract and retain quality employees by providing
them an enhanced career path from working for a larger company, the opportunity to realize a more stable income and
attractive benefits packages. We continually invest in training, including programs for project managers, field
superintendents, service managers, service technicians, sales managers, estimators, and leadership and development of
key managers and leaders. We are also increasing our national and local focus on skills training for our hourly workers.
Focus on Commercial, Industrial and Institutional Markets—We focus on the commercial, industrial and
institutional building markets, including construction, maintenance, repair and replacement services. We believe that
these complex markets are attractive because of their growth opportunities, large and diverse customer base, attractive
margins and potential for long-term relationships with building owners, property managers, general contractors and
architects. Approximately 99% of our consolidated 2017 revenue was derived from commercial, industrial and
institutional customers and large multi-family residential projects.
Leveraging Resources and Capabilities—We believe significant operating efficiencies can be achieved by
leveraging resources among our operating locations. For example, we have shifted certain fabrication activities to
centralized locations in order to increase asset utilization. We opportunistically allocate our engineering, field and
supervisory labor from one operation to another to more fully use our employee base, meet our customers’ needs and
share expertise. 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-use sectors that we believe reduces our exposure to negative developments in any given sector. We also have
4
significant geographical diversification across all regions of the United States, again reducing our exposure to negative
developments in any given region. Our distribution of revenue in 2017 by end-use sector was as follows:
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Healthcare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail and Restaurants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-Family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lodging and Entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Religious and Not for Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22 %
20 %
14 %
13 %
8 %
8 %
6 %
5 %
2 %
1 %
1 %
100 %
Approximately 81% of our revenue is earned on a project basis for installation of systems in newly constructed
or existing facilities. As of December 31, 2017, we had 4,690 projects in process with an aggregate contract value of
approximately $2.36 billion. Our average project takes six to nine months to complete, with an average contract price of
approximately $504,000. This average project size, when taken together with the approximately 19% of our revenue
derived from maintenance and service, provides us with a broad base of work in the construction services sector. A
stratification of projects in progress as of December 31, 2017, by contract price, is as follows:
Aggregate
Contract
No. of Price Value
Contract Price of Project
(millions)
Projects
Under $1 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,221 $ 529.8
828.6
$1 million - $5 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
464.7
$5 million - $10 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
221.3
$10 million - $15 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Greater than $15 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
319.6
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,690 $ 2,364.0
368
70
18
13
Strategic Service Initiative. Over the last several years we have made substantial incremental investments to
expand our service and maintenance revenue by increasing the value we can offer to service and maintenance customers.
We are actively concentrating existing and new managerial and sales resources on training and hiring experienced
employees to sell and profitably perform service work. In many locations we have added or upgraded our capability, and
we believe our investments and efforts have provided a compelling customer value offering that stimulates growth in all
aspects of our businesses.
Seek Growth through Acquisitions—We believe that we can increase our cash flow and operating income by
continuing to opportunistically enter new markets or service lines through acquisition. We have dedicated a significant
portion of our cash flow on an ongoing basis to seeking opportunities to acquire businesses that have strong assembled
workforces, attractive market positions and capabilities and other attractive operational, management, growth and
geographic characteristics.
Operations and Services Provided
We provide a wide range of construction, renovation, expansion, maintenance, repair and replacement services
for mechanical and related systems in commercial, industrial and institutional properties. Our local management teams
maintain responsibility for day-to-day operating decisions. Local management is augmented by regional leadership that
focuses on core business competencies, regional financial performance, cooperation and coordination between locations,
implementing best practices and corporate initiatives. In addition to senior management, local personnel generally
include design engineers, sales personnel, customer service personnel, installation and service technicians, sheet metal
and prefabrication technicians, 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
5
local operating management to focus on pursuing new business opportunities and improving operating efficiencies. We
also combine certain back office and administrative functions at various locations.
Construction and Installation Services for New Buildings—Our installation business related to newly
constructed facilities, which comprised approximately 38% of our consolidated 2017 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, education and 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 the proposed facility. The final design, terms, price and timing of the project are then
negotiated with the customer or its representatives, after which any necessary modifications are made to the system plan.
In “plan and spec” installation, we participate in a bid process to provide labor, equipment, materials and installation
based on the end user’s plans and engineering specifications.
Once an agreement has been reached, we order the necessary materials and equipment for delivery to meet the
project schedule. In many instances, we fabricate ductwork and piping and assemble certain components for the system
based on the mechanical drawing specifications, eliminating the need to subcontract ductwork or piping fabrication.
Finally, we install the system at the project site, working closely with the owner or general contractor. Our average
project takes six to nine months to complete, with an average contract price of approximately $504,000. We also perform
larger project work, with 469 contracts in progress at December 31, 2017 with contract prices in excess of $1 million.
Our largest project in progress at December 31, 2017 had a contract price of $46.4 million. Project contracts typically
provide for periodic billings to the customer as we meet progress milestones or incur cost on the project. Project
contracts in our industry also frequently allow for a small portion of progress billings or contract price to be withheld by
the customer until after we have completed the work. 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 62%
of our consolidated 2017 revenue and include the maintenance, repair, replacement, renovation, expansion,
reconfiguration and monitoring of mechanical systems including HVAC systems and industrial process piping.
Approximately 43% of our consolidated 2017 revenue was derived from renovation, expansion, replacement and
reconfiguration of existing systems for commercial, industrial and institutional customers.
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 communication
technology to process orders, arrange service calls, dispatch technicians and communicate with and invoice customers.
Service technicians work from service vehicles equipped with commonly used parts, supplies and tools to complete a
variety of jobs. Commercial, industrial and institutional service agreements usually have terms of one or more years,
with automatic annual renewals, and frequently include thirty- to sixty-day cancellation notice periods. We also provide
remote monitoring of temperature, pressure, humidity and air flow for HVAC systems.
Sources of Supply
The raw materials and components we use include HVAC system components, ductwork, steel, sheet metal and
copper tubing and piping. These raw materials and components are generally available from a variety of domestic or
foreign suppliers at competitive prices. Delivery times are typically short for most raw materials and standard
components, but during periods of peak demand, may extend to one month or more. We estimate that direct purchase of
commodities and finished products comprises between 10% and 15% of our average project cost. We have procedures to
reduce commodity cost exposure such as; purchasing commodities early for particular projects, as well as frequently
using time or market based escalation 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 any significant contracts guaranteeing us a supply of raw materials or components.
6
Cyclicality and Seasonality
Historically, the construction industry has been highly cyclical. As a result, our volume of business, particularly
in new construction projects and renovation, may be adversely affected by declines in new installation and replacement
projects in various geographic regions of the United States during periods of economic weakness.
The HVAC industry is subject to seasonal variations. The demand for new installation and replacement is
generally lower during the winter months (the first quarter of the year) due to reduced construction activity during
inclement weather and less use of air conditioning during the colder months. Demand for HVAC services is generally
higher in the second and third calendar quarters due to increased construction activity and increased use of air
conditioning during the warmer months. Accordingly, we expect our revenue and operating results generally will be
lower in the first calendar quarter.
Sales and Marketing
We have a diverse customer base, with no single customer accounting for more than 2% of consolidated 2017
revenue, and our largest customer often changes from year to year. Management and a dedicated sales force are
responsible for developing and maintaining successful long-term relationships with key customers. Customers generally
include building 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 by providing superior, high-quality service in a professional manner. We believe we can continue to leverage
the diverse technical and marketing strengths at individual locations to expand the services offered in other local
markets. With respect to multi-location service opportunities, we maintain a national sales force in our national accounts
group.
Employees
As of December 31, 2017, we had approximately 8,700 employees. We have collective bargaining agreements
covering less than ten employees. We have not experienced and do not expect any significant strikes or work stoppages
and believe our relations with employees covered by collective bargaining agreements are good.
Recruiting, Training and Safety
Our continued success depends, in part, on our ability to continue to attract, retain and motivate qualified
engineers, service technicians, field supervisors and project managers. We believe our success in retaining qualified
employees will be based on the quality of our recruiting, training, compensation, employee benefits programs and
opportunities for advancement. We provide numerous training programs for management, sales and leadership, as well
as on-the-job training, technical training, apprenticeship programs, attractive benefit packages and career advancement
opportunities within our company.
We have established comprehensive safety programs throughout our operations to ensure that all technicians
comply 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 employees with incentives to improve safety performance and decrease workplace accidents. Safety leadership
establishes safety programs and benchmarking to improve safety across the Company. Finally, our employment
screening process seeks to determine 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 1.67 during 2017. This level was 2% better than the most recently published OSHA rate for our industry.
Insurance and Litigation
The primary insured risks in our operations are bodily injury, property damage and workers’ compensation
injuries. We retain the risk for workers’ compensation, employer’s liability, auto liability, general liability and employee
group health claims resulting from uninsured deductibles per-incident or occurrence. Because we have very large
deductibles, the vast majority of our claims are paid by us, so as a practical matter we self-insure the great majority of
these risks. Losses up to such per-incident deductible amounts are estimated and accrued based upon known facts,
historical trends and industry averages using the assistance of an actuary to project the extent of these obligations.
7
We are subject to certain claims and lawsuits arising in the normal course of business. We maintain various
insurance coverages to minimize financial risk associated with these claims. We have estimated and provided accruals
for probable losses and related legal fees associated with certain litigation in our consolidated financial statements.
While we cannot predict the outcome of these proceedings, in our opinion and based on reports of counsel, any liability
arising from these matters individually and in the aggregate will not have a material effect on our operating results, cash
flows or financial condition, 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 the
customer manufacturers’ warranties on equipment. We generally warrant labor for thirty days after servicing existing
HVAC systems. We do not expect warranty claims to have a material adverse effect on our financial position or results
of operations.
Competition
The HVAC industry is highly competitive and consists of thousands of local and regional companies. We
believe that purchasing decisions in 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 of capabilities, and (vi) scale of operation. To improve our competitive position, we focus on both the
consultative “design and build” installation market and the maintenance, repair and replacement market in order to
develop and strengthen customer relationships. In addition, we believe our ability to provide multi-location coverage and
a broad range of services gives us a strategic 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 in a specific area. However, there are divisions of larger contracting companies, utilities and HVAC
equipment manufacturers that provide HVAC services in some of the same service lines and geographic areas we serve.
Some of these competitors and potential competitors have greater financial resources than we do to finance development
opportunities and support their operations. We believe our smaller competitors generally compete with us based on price
and their long-term relationships with local customers. Our larger competitors compete with us on those factors but may
also provide attractive financing and comprehensive service and product packages.
Vehicles
We operate a fleet of various owned or leased service trucks, vans and support vehicles. We believe these
vehicles generally are well maintained and sufficient for our current operations.
Governmental Regulation and Environmental Matters
Our operations are subject to various federal, state and local laws and regulations, including: (i) licensing
requirements applicable to engineering, construction and service technicians, (ii) building and HVAC codes and zoning
ordinances, (iii) regulations relating to consumer protection, including 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
the requirements of the Occupational Safety and Health Act, or OSHA, and comparable state laws directed towards
protection of employees. We believe we have all required licenses to conduct our operations and are in substantial
compliance with applicable regulatory requirements. If we fail to comply with applicable regulations, we could be
subject to substantial fines or revocation of our operating licenses.
Many state and local regulations governing the HVAC services trades require individuals to hold permits and
licenses. In some cases, a required permit or license held by a single individual may be sufficient to authorize specified
activities for all of our service technicians who work in the state or county that issued the permit or license. We seek to
ensure that, where possible, we have two employees who hold any such permits or licenses that may be material to our
operations in a particular geographic region.
Our operations are subject to the federal Clean Air Act, as amended, which governs air emissions and imposes
specific requirements on the use and handling of ozone-depleting refrigerants generally classified as chlorofluorocarbons
(CFCs) or hydrochlorofluorocarbons (HCFCs). Clean Air Act regulations promulgated by the United States
Environmental Protection Agency (USEPA) require the certification of service technicians involved in the service or
8
repair of equipment containing these refrigerants and also regulate the containment and recycling of these refrigerants.
These requirements have increased our training expenses and expenditures for containment and recycling equipment.
The Clean Air Act is intended ultimately to eliminate the use of ozone-depleting substances such as CFCs and HCFCs in
the United States and to require alternative refrigerants to be used in replacement HVAC systems. Some replacement
refrigerants, already in use, and classified as hydrofluorocarbons (HFCs) are not ozone-depleting substances. HFCs are
considered by USEPA to have high global warming potential. USEPA may at some point require the phase-out of HFCs
and expand existing technician certification requirements to cover the handling of HFCs. We do not believe the existing
regulations governing technician certification requirements for the handling of ozone-depleting substances or possible
future regulations applicable to HFCs will materially affect our business on the whole because, although they require us
to incur modest ongoing training costs, our competitors also incur such costs, and such regulations may encourage or
require our customers to update their HVAC systems.
Additional Information
Our Internet address is www.comfortsystemsusa.com. We make available free of charge on or through our
website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our
website also includes our code of ethics, titled “Corporate Compliance Policy: Standards and Procedures Regarding
Business Practices,” together with other governance materials including our corporate governance standards and our
Board committee charters. Printed versions of our code of ethics and our corporate governance standards may be
obtained upon written request to our Corporate Compliance Officer at our headquarters address.
You may read and copy any materials filed with the Securities and Exchange Commission at the Securities and
Exchange Commission’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain
information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at
1-800-SEC-0330. This information is also available at www.sec.gov. The reference to these website addresses does not
constitute incorporation by reference of the information contained on the websites and should not be considered part of
this document.
ITEM 1A. Risk Factors
Our business is subject to a variety of risks. You should carefully consider the risks described below, together
with all the information included in this report. Our business, financial condition and results of operations could
be adversely affected by the occurrence of any of these events, which could cause actual results to differ
materially from expected and historical results, and the trading price of our common stock could decline.
Many of the markets we do work in are currently experiencing an economic downturn or might in the future
experience an economic downturn that may materially and adversely affect our business because our business is
dependent on levels of construction activity.
The demand for our services is dependent upon the existence of construction projects and service requirements
within the markets in which we operate. Any period of economic recession affecting a market or industry in which we
transact business is likely to adversely impact our business. Many of the projects we work on have long lifecycles from
conception to completion, and the bulk of our performance generally occurs late in a construction project’s lifecycle. We
experience the results of economic trends well after an economic cycle begins, and therefore will continue to experience
the results of an economic 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
macroeconomic downturns because they are cyclical in nature. When there is a reduction in demand, it often leads to
greater price competition as well as decreased revenue and profit. The lasting effects of a recession can also increase
economic instability with our vendors, subcontractors, developers, and general contractors, which can cause us greater
liability exposure and can result in us not being paid on some projects, as well as decreasing our revenue and profit.
Further, to the extent some of our vendors, subcontractors, developers, or general contractors seek bankruptcy
protection, the bankruptcy will likely force us to incur additional costs in attorneys’ fees, as well as other professional
consultants, and will result in decreased revenue and profit. Additionally, a reduction in federal, state, or local
government spending in our industries and markets could result in decreased revenue and profit for us.
9
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, including
assumptions about: future economic conditions; prices, including commodities prices; availability of labor, including the
costs of providing labor, equipment, and materials; and other factors outside our control. If our estimates or assumptions
prove to be inaccurate, if circumstances change in a way that renders our assumptions and estimates inaccurate or we fail
to successfully execute the work, cost overruns may occur and we could experience reduced profits or a loss for affected
projects. 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 could increase, 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 certain circumstances, we guarantee project completion or the achievement of certain acceptance and
performance testing levels by a scheduled date. Failure to meet schedule or performance requirements typically results in
additional costs to us, and in some cases we may also create liability for consequential and liquidated damages.
Performance problems for existing and future projects could cause our actual results of operations to differ materially
from those we anticipate and could damage our reputation within our industry and our customer base.
Our backlog is subject to unexpected adjustments and cancellations, which means that amounts included in our
backlog may not result in actual revenue or translate into profits.
The revenue projected from our backlog may not be realized, or, if realized, may not result in profits. Projects
may remain in our backlog for an extended period of time, or project cancellations or scope adjustments may occur with
respect to contracts 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 small
companies whose activities are geographically concentrated. We compete on the basis of our technical expertise and
experience, financial and operational resources, nationwide presence, industry reputation and dependability. While we
believe our customers consider a number of these factors in awarding available contracts, a large portion of our work is
awarded 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 on price alone due to their lower cost and financial return requirements. We expect competition to
intensify in our industry, presenting us with significant challenges in our ability to maintain strong growth rates and
acceptable profit margins. We also expect increased competition from in-house service providers, because some of our
customers have employees who perform service work similar to the services we provide. Vertical consolidation is also
expected to intensify competition in our industry. If we are unable to meet these competitive challenges, we will lose
market share to our competitors and experience an overall reduction in our profits. In addition, our profitability would be
impaired if we have to reduce our prices to remain competitive.
If we are unable to attract and retain qualified managers and employees, we will be unable to operate efficiently,
which could reduce our profitability.
Our business is labor intensive, and many of our operations experience a high rate of employment turnover. At
times of low unemployment rates in the United States, it will be more difficult for us to find qualified personnel at low
cost in some geographic areas where we operate. Additionally, our business is managed by a small number of key
executive and operational officers. We may be unable to hire and retain the sufficient skilled labor force necessary to
operate efficiently and to 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 our business. Further, our relationship with some customers could suffer if we are
unable to retain the employees with whom those customers primarily work and have established relationships.
Our recent and future acquisitions may not be successful.
We expect to continue pursuing selective acquisitions of businesses. We cannot assure that we will be able to
locate acquisitions or that we will be able to consummate transactions on terms and conditions acceptable to us, or that
10
acquired businesses will be profitable. Acquisitions may expose us to additional business risks different than those we
have traditionally experienced. We also may encounter difficulties integrating acquired businesses and successfully
managing the growth we expect to experience from these acquisitions.
We may choose to finance future acquisitions with debt, equity, cash or a combination of the three. Future
acquisitions could dilute earnings or disrupt the payment of a stockholder dividend. To the extent we succeed in making
acquisitions, 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
liability exposure from known risks;
the diversion of management’s attention from the management of daily operations to the integration of
operations;
difficulties in the assimilation and retention of employees, in the assimilation of different cultures and
practices, in the assimilation of broad and geographically dispersed personnel and operations, and the
retention of employees generally;
the risk of additional financial and accounting challenges and complexities in areas such as tax planning,
treasury management, 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
condition and 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 our
day-to-day operations and providing services to certain customers. Information technology system failures, including
suppliers’ 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 the confidentiality of our information or our customers’ data. These events could impact our customers,
employees and reputation and lead to financial losses from remediation actions, loss of business or potential liability or
an increase in expense, all of which may have a material adverse effect on our business.
Third parties contribute significantly to our completion of many projects.
We hire third-party subcontractors to perform work and depend on third-party suppliers to provide equipment
and materials necessary to complete our projects. If we are unable to retain qualified subcontractors or suppliers, or if
our subcontractors 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
for impairment each year, and more frequently if circumstances suggest an impairment may have occurred. We have
determined in the past and may again determine in the future that a significant impairment has occurred in the value of
our unamortized intangible assets or fixed assets, which could require us to write off a portion of our assets and could
adversely affect our financial condition or our reported results of operations.
11
Actual and potential claims, lawsuits and proceedings could ultimately reduce our profitability and liquidity and
weaken our financial condition.
We are likely to continue to be named as a defendant in legal proceedings claiming damages from us in
connection with the operation of our business. These actions and proceedings may involve claims for, among other
things, compensation for alleged personal injury, workers’ compensation, employment discrimination, breach of contract
or property damage. In addition, we may be subject to class action lawsuits involving allegations of violations of the Fair
Labor Standards Act and state wage and hour laws. Due to the inherent uncertainties of litigation, we cannot accurately
predict the ultimate outcome of any such actions or proceedings. We also are, and are likely to continue to be, from time
to time a plaintiff in legal proceedings against customers, in which we seek to recover payment of contractual amounts
we are owed as well as claims for increased costs we incur. When appropriate, we establish provisions against possible
exposures, and we adjust these provisions from time to time according to ongoing exposure. If our assumptions and
estimates related to these exposures prove to be inadequate or inaccurate, we could experience a reduction in our
profitability and liquidity and a weakening of our financial condition. In addition, claims, lawsuits and proceedings may
harm our reputation or divert management resources away from operating our business.
We typically warrant the services we provide, guaranteeing the work performed against defects in workmanship
and the material we supply. Historically, warranty claims have not been material as our customers evaluate much of the
work we perform for defects shortly after work is completed. However, if warranty claims occur, we could be required
to repair or replace warrantied items at our cost. In addition, our customers may elect to repair or replace the warrantied
item by using the services of another provider and require us to pay for the cost of the repair or replacement. Costs
incurred as a result of warranty 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 previously
recorded revenue or profits.
A material portion of our revenue is recognized using the percentage-of-completion method of accounting,
which results in our recognizing contract revenue and earnings ratably over the contract term in the proportion that our
actual costs bear to our estimated contract costs. The earnings or losses recognized on individual contracts are based on
estimates of contract revenue, costs and profitability. We review our estimates of contract revenue, costs and profitability
on an ongoing basis. Prior to contract completion, we may adjust our estimates on one or more occasions as a result of
change orders to the original contract, collection disputes with the customer on amounts invoiced or claims against the
customer for increased costs incurred by us due to customer-induced delays and other factors. Contract losses are
recognized in the fiscal period when the loss is determined. Contract profit estimates are also adjusted in the fiscal period
in which it is determined that an adjustment is required. As a result of the requirements of the percentage-of-completion
method of accounting, the possibility exists, for example, that we could have estimated and reported a profit on a
contract over several periods and later determined, usually near contract completion, that all or a portion of such
previously estimated and reported profits were overstated. If this occurs, the full aggregate amount of the overstatement
will be reported for the period in which such determination is made, thereby eliminating all or a portion of any profits
from other contracts that would have otherwise been reported in such period or even resulting in a loss being reported for
such period. On a historical basis, we believe that we have made reasonably reliable estimates of the progress towards
completion on our long-term contracts. However, given the uncertainties 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
and surety 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 total
contract dollars that require an underlying bond. Historically surety market conditions have experienced times of
difficulty as a result of significant losses incurred by many surety companies and the results of macroeconomic trends
outside of our control. Consequently, during times when less overall bonding capacity is available in the market, surety
terms have become more expensive and more restrictive. As such, we cannot guarantee our ability to maintain a
sufficient level of bonding capacity in the future, which could preclude our ability to bid for certain contracts or
successfully contract with some customers. Additionally, even if we continue to be able to access bonding capacity to
sufficiently bond future work, we may be required to post collateral to secure bonds, which would decrease the liquidity
we would have available for other purposes. Our surety providers are under no commitment to guarantee our access to
12
new bonds in the future; thus, our ability to access or increase bonding capacity is at the sole discretion of our surety
providers. If our surety companies were to limit or eliminate our access to bonds, our alternatives would include seeking
bonding capacity from other surety companies, increasing business with clients that do not require bonds and posting
other forms of collateral for project performance, such as letters of credit or cash. We may be unable to secure these
alternatives in a timely manner, on acceptable terms, or at all. As such, if we were to experience an interruption or
reduction in the availability of bonding capacity, it is likely 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,
which presents certain risks.
We believe that our practice of placing significant decision making powers with local management is important
to our successful growth and allows us to be responsive to opportunities and to our customers’ needs. However, this
practice presents certain risks, including the risk that we may be slower or less effective in our attempts to identify or
react to problems affecting an important business than we would under a more centralized structure or that we would be
slower to identify a misalignment between a subsidiary’s and the Company’s overall business strategy. Further, if a
subsidiary location fails to follow the Company’s compliance policies, we could be made party to a contract,
arrangement or situation that requires 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
and procedures may leave us exposed to unidentified or unanticipated risks. Additionally, difficulties in the insurance
markets may adversely affect our ability to obtain necessary insurance.
Although we maintain insurance policies with respect to our related exposures, these policies are subject to high
deductibles; as such, we are, in effect, self-insured for substantially all of our typical claims. We hire an actuary to
determine any liabilities for unpaid claims and associated expenses for the three major lines of coverage (workers’
compensation, general liability and auto liability). The determination of these claims and expenses and the
appropriateness of the estimated liability are reviewed and updated quarterly. However, insurance liabilities are difficult
to assess and estimate due to the many relevant factors, the effects of which are often unknown, including the severity of
an injury, the determination of our liability in proportion to other parties, the number of incidents that have occurred but
are not reported and the effectiveness of 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 management strategies and techniques may not be fully effective in mitigating our risk
exposure in all market environments or against all types of risk. If any of the variety of instruments, processes or
strategies we use to manage our exposure to various types of risk are not effective, we may incur losses that are not
covered by our insurance policies or that exceed our accruals or coverage limits.
Additionally, we typically are contractually required to provide proof of insurance on projects we work on.
Historically insurance market conditions become more difficult for insurance consumers during periods when insurance
companies suffer significant investment losses as well as casualty losses. Consequently, it is possible that insurance
markets will become more expensive and restrictive. Also, our prior casualty loss history might adversely affect our
ability to procure insurance within commercially reasonable ranges. As such, we may not be able to maintain
commercially reasonable levels of insurance coverage in the future, which could preclude our ability to work on many
projects. Our insurance providers are under no commitment to renew our existing insurance policies in the future;
therefore, our ability to obtain necessary levels or kinds of insurance coverage is subject to market forces outside our
control. If we were unable to obtain necessary levels of insurance, it is likely we would be unable to compete for or work
on most projects.
Failure to remain in compliance with covenants under our credit agreement, service our indebtedness, or fund our
other liquidity needs could adversely impact our business.
Our credit agreement and related restrictive and financial covenants are more fully described in Note 8 of
“Notes to the Consolidated Financial Statements.” Our failure to comply with any of these covenants, or to pay principal,
interest or other amounts when due thereunder, would constitute an event of default under the credit agreement. Default
under our credit agreement could result in (1) us no longer being entitled to borrow under the agreement; (2) termination
of the agreement; (3) acceleration of the maturity of outstanding indebtedness under the agreement; and/or
13
(4) foreclosure on any collateral securing the obligations under the agreement. If we are unable to service our debt
obligations 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 our securities 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 the customer in amounts sufficient to cover expenditures on projects as they are incurred. Delays in customer
payments may require us to make a working capital investment. If a customer defaults in making their payments on a
project to which we have devoted resources, it could have a material negative effect on our results of operations.
Our inability to properly utilize our workforce could have a negative impact on our profitability.
The extent to which we utilize our workforce affects our profitability. Underutilizing our workforce could result
in lower gross margins and, consequently, a decrease in short-term profitability. On the other hand, overutilization of our
workforce could negatively impact safety, employee satisfactions and project execution, leading to a potential decline in
future project awards. The utilization of our workforce is impacted by numerous factors, including:
•
•
•
our estimate of headcount requirements and our ability to manage attrition;
efficiency in scheduling projects and our ability to minimize downtime between project assignments; and
productivity.
Misconduct by our employees, subcontractors or partners or our overall failure to comply with laws or regulations
could harm our reputation, damage our relationships with customers, reduce our revenue and profits, and subject us
to criminal and civil enforcement actions.
Misconduct, fraud, non-compliance with applicable laws and regulations, or other improper activities by one or
more of our employees, subcontractors 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 and regulations, customer requirements, environmental laws and any other applicable laws or
regulations. While we take precautions to prevent and detect these activities, such precautions may not be effective and
are subject to inherent limitations, including human error and fraud. Our failure to comply with applicable laws or
regulations or acts of misconduct could subject us to fines and penalties, harm our reputation, damage our relationships
with customers, reduce our revenue and 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
could seriously 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
our disclosure controls and internal controls over financial reporting. Any system of controls, however well designed and
operated, is based in part on certain assumptions and can provide only reasonable, and not absolute, assurances that the
objectives of the system are met. Any failure of our disclosure controls and procedures or internal controls over financial
reporting could harm our financial condition and results of operations.
We have subsidiary operations through the United States and are exposed to multiple state and local regulations, as
well as federal laws and requirements applicable to government contractors. Changes in law, regulations or
requirements, or a material failure of any of our subsidiaries or us to comply with any of them, could increase our
costs and have other negative impacts on our business.
Our 115 locations are located in 27 states, which exposes us to a variety of different state and local laws and
regulations, particularly those pertaining to contractor licensing requirements. These laws and regulations govern many
aspects of our business, and there are often different standards and requirements in different locations. In addition, our
subsidiaries that perform work for federal government entities are subject to additional federal laws and regulatory and
contractual requirements. Changes in any of these laws, or any of our subsidiaries’ material failure to comply with them,
14
can adversely impact our operations by, among other things, increasing costs, distracting management’s time and
attention from other items, and harming our reputation.
As government contractors, our subsidiaries are subject to a number of rules and regulations, and their contracts
with government entities are subject to audit. Violations of the applicable rules and regulations could result in a
subsidiary being barred from future government contracts.
Government contractors must comply with many regulations and other requirements that relate to the award,
administration and performance of government contracts. A violation of these laws and regulations could result in
imposition of fines and penalties, the termination of a government contract or debarment from bidding on government
contracts in the future. Further, despite our decentralized nature, a violation at one of our locations could impact other
locations’ ability to bid on and perform government contracts; additionally, because of our decentralized nature, we face
risks in maintaining compliance with all local, state and federal government contracting requirements. Prohibition
against bidding on future government 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
reduce our profits.
HVAC systems are subject to various environmental statutes and regulations, including the Clean Air Act and
those regulating the production, servicing and disposal of certain ozone-depleting refrigerants used in HVAC systems.
There can be no assurance that the regulatory environment in which we operate will not change significantly in the
future. Various local, state and federal laws and regulations impose licensing standards on technicians who install and
service HVAC systems. And additional laws, regulations and standards apply to contractors who perform work that is
being funded by public money, particularly federal public funding. Our failure to comply with these laws and regulations
could subject us to substantial fines, the loss of our licenses or potentially debarment from future publicly funded work.
It is impossible to predict the full nature and effect of judicial, legislative or regulatory developments relating to health
and safety regulations and environmental protection regulations applicable to our operations.
Unsatisfactory safety performance may subject us to penalties, affect customer relationships, result in higher
operating costs, 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 is subject 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 to or destruction of property and equipment and other consequential damages and could
lead to suspension of operations, large damage claims and, in extreme cases, criminal liability. While we have taken
what we believe are appropriate precautions to minimize safety risks, we have experienced serious accidents, including
fatalities, in the past and may experience additional accidents in the future. Serious accidents may subject us to penalties,
civil litigation or criminal prosecution. Claims for damages to persons, including claims for bodily injury or loss of life,
could result in significant costs and liabilities, which could adversely affect our financial condition and results of
operations. Poor safety performance could also jeopardize our relationships with our customers and harm our reputation.
If we do not effectively manage the size and cost of our operations, our existing infrastructure may become either
strained or over-burdensome, and we 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
challenges to 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 the markets in which we operate and, as a result, in our operating requirements. Failing to maintain the
appropriate cost structure for a particular economic cycle may result in our incurring costs that affect our profitability. If
our business resources become strained 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 our earnings and our ability to increase revenue growth.
15
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 liquidated
damages;
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 other
things, include an increase in extreme weather events (such as floods or hurricanes), rising sea levels and limitations on
water availability and quality. Such extreme weather conditions may limit the availability of resources, increasing the
costs of our projects, or may cause projects to be delayed or cancelled.
Legislation, nationwide protocols, regulation or other restrictions related to climate change could negatively
impact our operations or our customers’ operations. Such legislation or restrictions could increase the costs of projects
for our customers or, in some cases, prevent a project from going forward, which could in turn have an adverse effect on
our financial condition and results of operations.
Force majeure events, including natural disasters and terrorists’ actions, could negatively impact our business, which
may affect 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-made disasters, as well as terrorist actions, could negatively impact us. We typically negotiate contract language
where we are allowed certain relief from force majeure events in private client contracts and review and attempt to
mitigate force majeure events in both public and private client contracts. We remain obligated to perform our services
after most extraordinary events subject to relief that may be available pursuant to a force majeure clause. If we are not
able to react quickly to force majeure events, our operations may be affected significantly, which would have a negative
impact on our financial position, results of operations, cash flows and liquidity.
Deliberate, malicious acts, including terrorism and sabotage, could damage our facilities, disrupt our operations or
injure employees, contractors, customers or the public and result in liability to us.
Intentional acts of destruction could damage or destroy our facilities, reducing our operational production
capacity and requiring us to repair or replace our facilities at substantial cost. Additionally, employees, contractors and
the public could suffer substantial physical injury from acts of terrorism for which we could be liable. Governmental
authorities may also impose security or other requirements that could make our operations more difficult or costly. The
consequences of any such actions could adversely affect our financial condition and results of operations.
16
Our common stock, which is listed on the New York Stock Exchange, has from time to time experienced significant
price and 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
beyond our control. A variety of events may cause the market price of our common stock to fluctuate significantly,
including the following: (i) the risk factors described in this Report on Form 10-K; (ii) a shortfall in operating revenue or
net income from that expected by securities analysts and investors; (iii) quarterly fluctuations in our operating results;
(iv) changes in securities analysts’ estimates of our financial performance or that of our competitors or companies in our
industry generally; (v) general conditions in our customers’ industries; (vi) general conditions in the securities markets;
(vii) our announcements of significant contracts, milestones, acquisitions; (viii) our relationship with other companies;
(ix) our investors’ view of the sectors and markets in which we operate; and (x) additions or departures of key personnel.
Some companies that have volatile market prices for their securities have been subject to security class action suits filed
against them. If a suit were to be filed against us, regardless of the outcome, it could result in substantial costs and a
diversion of our management’s attention and resources. 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
could reduce 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 the effectiveness of our internal control over financial reporting. In addition, the independent registered public
accounting firm auditing our financial statements must report on the effectiveness of our internal control over financial
reporting. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the
company’s principal executive and principal financial officers, or persons performing similar functions, and effected by
the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles and that receipts and expenditures of the company 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 of the 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
any of the deficiencies in our internal control, either by itself or in combination with other deficiencies, becomes a
“material weakness”, such that there is a reasonable possibility that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely basis, we may be unable to conclude that we have
effective internal control 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 effective internal controls could also result in unauthorized transactions.
Future sales of our common stock may depress our stock price.
Sales of a substantial number of shares of our common stock in the public market or otherwise, either by us, a
member of management or a major stockholder, or the perception that these sales could occur, could depress the market
price of 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
Patient Protection and Affordable Care Act (the “Affordable Care Act”) that was signed into law in March 2010. Future
17
legislation could also have an impact on our business. For example, Government officials have made statements that
suggest the current White House administration supports the repeal of all or portions of the Affordable Care Act, and
Congress has introduced, and may introduce and pass in the future, new legislation to repeal or replace portions of the
Affordable Care Act. Because of the continued uncertainty about the implementation of the Affordable Care Act,
including the potential for further legal challenges or repeal of that legislation, it is unclear what the impact of the
Affordable Care Act or its potential repeal will have 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 of
operations.
Economic factors, including inflation and fluctuations in interest rates, could have a negative impact on our
business. If our costs were to become subject to significant inflationary pressures or interest rate increases, we may not
be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our financial
position and results of operations.
Tax matters, including changes in corporate tax rates and disagreements with taxing authorities, could impact our
results of operations and financial condition.
We conduct business across the United States and file income taxes in various tax jurisdictions. Our effective
tax rates could be affected by many factors, some of which are outside of our control, including changes in tax laws and
regulations in the various tax jurisdictions in which we file income taxes. For instance, the Tax Cuts and Jobs Act was
enacted into law in December 2017. While certain portions of the law may have a positive impact on the Company’s
results of operations, the overall impact of the new federal tax law is uncertain and our business and financial condition
could be adversely affected. It is also unknown if and to what extent various states will conform to the newly enacted
federal tax law.
Issues relating to tax audits or examinations and any related interest or penalties and uncertainty in obtaining
deductions or credits claimed in various jurisdictions could also impact our effective tax rates. Our results of operations
are 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 is always subject to
review or examination by tax authorities in applicable tax jurisdictions. An adverse outcome of such a review of
examination could adversely affect our operating results and financial condition. Further, the results of tax examinations
and audits could have a negative impact on our financial results and cash flows where the results differ from the
liabilities 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
more series of preferred stock having such preferences, powers and relative, participating, optional and other rights
(including preferences over the common stock respecting dividends and distributions and voting rights) as the board of
directors may determine. The issuance of this “blank-check” preferred stock could render more difficult or discourage an
attempt to obtain control by means of a tender offer, merger, proxy contest or otherwise. Additionally, certain provisions
of the Delaware General Corporation Law may also discourage takeover attempts that have not been approved by the
Board of Directors.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
As of December 31, 2017, we owned five properties. Other than these owned properties, we lease the real
property and 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 be commercially reasonable. A majority of these premises are leased from individuals or entities with whom
we have no other business relationship. In certain instances these leases are with current or former employees. To the
extent we renew, enter into leases or otherwise change leases with current or former employees, we enter into such
18
agreements on terms that reflect a fair market valuation for the properties. Leased premises range in size from
approximately 1,000 square feet to 110,000 square feet. To maximize available capital, we generally intend to continue
to lease our properties, but may consider further purchases of property where we believe ownership would be more
economical. We believe that our facilities are sufficient for our current needs.
We lease our executive and administrative offices in Houston, Texas.
ITEM 3. Legal Proceedings
We are subject to certain claims and lawsuits arising in the normal course of business. We maintain various
insurance coverages to minimize financial risk associated with these claims. We have estimated and provided accruals
for probable losses and related legal fees associated with certain litigation in our consolidated financial statements.
While we cannot predict the outcome of these proceedings, in our opinion and based on reports of counsel, any liability
arising from these matters individually and in the aggregate will not have a material effect on our operating results, cash
flows or financial condition, after giving effect to provisions already recorded.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 4A. Executive Officers of the Registrant
Executive officers are appointed by our Board of Directors and hold office until their successors are elected and
duly qualified. The following persons serve as executive officers of the Company.
Brian Lane, age 60, has served as our Chief Executive Officer and President since December 2011 and as a
director since 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 One of the Company until he was named Executive Vice President and Chief Operating Officer in
January 2009. Prior to joining the Company, Mr. Lane spent fifteen years at Halliburton, 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 experience included serving as a Regional Director of Capstone Turbine
Corporation, a distributed power manufacturer. He also was a Vice President of Kvaerner, an international engineering
and construction company where he focused on the chemical industry.
William George, age 53, 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 Vice President 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 52, has served as our Senior Vice President and Chief Accounting Officer since May 2005,
was our Vice President and Corporate Controller from March 2002 to May 2005, and was our Assistant Corporate
Controller from September 1999 to February 2002. From 1996 to August 1999, Ms. Shaeff was Financial Accounting
Manager—Corporate Controllers Group for Browning-Ferris Industries, Inc., a publicly-traded waste services company.
From 1987 to 1995, she held various positions with Arthur Andersen LLP. Ms. Shaeff is a Certified Public Accountant.
Trent T. McKenna, age 45, has served as our Senior Vice President, General Counsel and Secretary since
August 2013, was our Vice President, General Counsel and Secretary from May 2005 to August 2013, and was our
Associate General Counsel from August 2004 to May 2005. From February 1999 to August 2004, Mr. McKenna was a
practicing attorney in the area of complex commercial litigation in the Houston, Texas office of Akin Gump Strauss
Hauer & Feld LLP, an international law firm.
19
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
The following table sets forth the reported high and low sales prices of our Common Stock for the quarters
indicated as traded at the New York Stock Exchange. Our Common Stock is traded under the symbol FIX:
Cash
Dividends
Declared
Fourth Quarter, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44.65 $ 35.70 $ 0.075
Third Quarter, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37.15 $ 32.55 $ 0.075
Second Quarter, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37.10 $ 34.30 $ 0.075
First Quarter, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38.65 $ 32.30 $ 0.070
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
High
Low
As of February 15, 2018 there were approximately 364 stockholders of record of our Common Stock, and the
last reported sale price on that date was $41.45 per share.
We expect to continue paying cash dividends quarterly, although there is no assurance as to future dividends
because they depend on future earnings, capital requirements, and financial condition. In addition, our revolving credit
agreement may limit the amount of dividends we can pay at any time that our Net Leverage Ratio exceeds 1.0.
20
The following Corporate Performance Graph and related information shall not be deemed “soliciting material”
or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the
Securities Act 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
$400
$350
$300
$250
$200
$150
$100
$50
$0
12/12
12/13
12/14
12/15
12/16
12/17
Comfort Systems USA, Inc.
S&P 500
Russell 2000
*$100 invested on 12/31/12 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2018 Standard & Poor's, a division of S&P Global. All rights reserved.
Copyright© 2018 Russell Investment Group. All rights reserved.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
On March 29, 2007, our Board of Directors (the “Board”) approved a stock repurchase program to acquire up to
1.0 million shares of our outstanding common stock. Subsequently, the Board has from time to time increased the
number of shares that may be acquired under the program and approved extensions of the program. Since the inception
of the repurchase program, the Board has approved 8.1 million shares to be repurchased. As of December 31, 2017, we
have repurchased a cumulative total of 7.6 million shares at an average price of $13.75 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
negotiated transactions as permitted by securities laws and other legal requirements, and subject to market conditions
and other factors. The Board may modify, suspend, extend or terminate the program at any time. During the twelve
21
months ended December 31, 2017, we repurchased 0.3 million shares for approximately $9.0 million at an average price
of $34.23 per share.
During the year ended December 31, 2017, we purchased our common shares in the following amounts at the
following weighted-average prices:
Total Number of Shares Maximum Number of
Period
January 1 - January 31 . . . . . . . . . . . .
February 1 - February 28 . . . . . . . . . .
March 1 - March 31 . . . . . . . . . . . . . . .
April 1 - April 30 . . . . . . . . . . . . . . . . .
May 1 - May 31 . . . . . . . . . . . . . . . . . .
June 1 - June 30 . . . . . . . . . . . . . . . . . .
July 1 - July 31 . . . . . . . . . . . . . . . . . .
August 1 - August 31 . . . . . . . . . . . . .
September 1 - September 30 . . . . . . . .
October 1 - October 31 . . . . . . . . . . . .
November 1 - November 30 . . . . . . . .
December 1 - December 31 . . . . . . . .
or Programs
or Programs (1)
Purchased as Part of
Shares that May Yet Be
Total Number of Average Price Publicly Announced Plans Purchased Under the Plans
Shares Purchased Paid Per Share
—
— $
—
— $
35.78
61,412 $
34.73
500 $
35.28
45,381 $
— $
—
—
— $
33.18
143,667 $
33.56
9,737 $
—
— $
40.58
2,400 $
—
— $
34.23
263,097 $
7,342,491
7,342,491
7,403,903
7,404,403
7,449,784
7,449,784
7,449,784
7,593,451
7,603,188
7,603,188
7,605,588
7,605,588
7,605,588
770,002
770,002
708,590
708,090
662,709
662,709
662,709
519,042
509,305
509,305
506,905
506,905
506,905
(1) Purchased as part of a program announced on March 29, 2007 under which, since the inception of this program,
8.1 million shares have been approved for repurchase.
ITEM 6. Selected Financial Data
The following selected historical financial data has been derived from our audited financial statements and
should be read in conjunction with the historical Consolidated Financial Statements and related notes:
2017
Year Ended December 31,
2015
(in thousands, except per share amounts)
2014
2016
2013
90,044 $
57,440 $
— $
57,440 $
49,364 $
99,260 $ 101,569 $
64,896 $
55,272 $
— $
— $
64,896 $
55,272 $
64,896 $
55,272 $
STATEMENT OF OPERATIONS DATA:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,787,922 $ 1,634,340 $ 1,580,519 $ 1,410,795 $ 1,357,272
46,258
Operating income (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
28,632
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(76)
Income (loss) from discontinued operations, net of tax . . . . . . . . . . . . . . $
28,556
Net income including noncontrolling interests . . . . . . . . . . . . . . . . . . . . $
Net income attributable to Comfort Systems USA, Inc. . . . . . . . . . . . . . . $
27,269
Income per share attributable to Comfort Systems USA, Inc.:
Basic—
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted—
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
BALANCE SHEET DATA:
98,276 $ 118,882 $ 111,433 $
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 115,629 $
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 881,120 $ 708,903 $ 691,594 $ 655,942 $
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
40,346 $
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 417,945 $ 376,633 $ 365,005 $ 321,393 $
Total Comfort Systems USA, Inc. stockholders’ equity. . . . . . . . . . . . . . $ 417,945 $ 376,633 $ 346,721 $ 306,281 $
42,222 $
28,614 $
(15) $
28,599 $
23,063 $
109,618
592,789
2,000
314,022
295,834
0.61 $
—
0.61 $
0.225 $
1.30 $
—
1.30 $
0.250 $
1.47 $
—
1.47 $
0.295 $
1.72 $
—
1.72 $
0.275 $
0.73
—
0.73
0.210
1.32 $
—
1.32 $
1.74 $
—
1.74 $
1.48 $
—
1.48 $
0.61 $
—
0.61 $
0.73
—
0.73
11,507 $
60,539 $
2,811 $
(1) Included in operating income is a goodwill impairment charge of $1.1 million for 2017 and $0.7 million for
2014. There were no goodwill impairment charges for 2016, 2015 or 2013.
22
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the Consolidated Financial
Statements and related notes included elsewhere in this annual report on Form 10-K. Also see “Forward-Looking
Statements” discussion.
Introduction and Overview
We are a national provider of comprehensive mechanical installation, renovation, maintenance, repair and
replacement services within the mechanical services industry. We operate primarily in the commercial, industrial and
institutional HVAC markets and perform most of our services within office buildings, retail centers, apartment
complexes, manufacturing plants, and healthcare, education and government facilities.
Nature and Economics of Our Business
Approximately 81% of our revenue is earned on a project basis for installation of mechanical systems in newly
constructed facilities or for replacement of systems in existing facilities. Customers hire us to ensure such systems
deliver specified or generally expected heating, cooling, conditioning and circulation of air in a facility. This entails
installing core system equipment such as packaged heating and air conditioning units, or in the case of larger facilities,
separate core components such as chillers, boilers, air handlers, and cooling towers. We also typically install connecting
and distribution elements such as piping and ducting. Our responsibilities usually require conforming the systems to
pre-established engineering drawings and equipment and performance specifications, which we frequently participate in
establishing. Our project management responsibilities include staging equipment and materials to project sites, deploying
labor to perform the work, and coordinating with other service providers on the project, including any subcontractors we
might use to deliver our portion of the work.
When competing for project business, we usually estimate the costs we will incur on a project, and then propose
a bid to the customer that includes a contract price and other performance and payment terms. Our bid price and terms
are intended to cover our estimated costs on the project and provide a profit margin to us commensurate with the value
of the installed system to the customer, the risk that project costs or duration will vary from estimate, the schedule on
which we will be paid, the opportunities for other work that we might forego by committing capacity to this project, and
other costs that we incur to support our operations but which are not specific to the project. Typically, customers will
seek pricing from competitors for a given project. While the criteria on which customers select a service provider vary
widely and include factors such as quality, technical expertise, on-time performance, post-project support and service,
and company history and financial strength, we believe that price for value is the most influential factor for most
customers in choosing a mechanical installation and service provider.
After a customer accepts our bid, we generally enter into a contract with the customer that specifies what we
will deliver on the project, what our related responsibilities are, and how much and when we will be paid. Our overall
price for the project is typically set at a fixed amount in the contract, although changes in project specifications or work
conditions that result in unexpected additional work are usually subject to additional payment from the customer via
what are commonly known as change orders. Project contracts typically provide for periodic billings to the customer as
we meet progress milestones or incur cost on the project. Project contracts in our industry also frequently allow for a
small portion of progress billings or contract price to be withheld by the customer until after we have completed the
work. Amounts withheld under this practice are known as retention or retainage.
Labor and overhead costs account for the majority of our cost of service. Accordingly, labor management and
utilization have the most impact on our project performance. Given the fixed price nature of much of our project work, if
our initial estimate of project costs is wrong or we incur cost overruns that cannot be recovered in change orders, we can
experience reduced profits or even significant losses on fixed price project work. We also perform some project work on
a cost-plus or a time and materials basis, under which we are paid our costs incurred plus an agreed-upon profit margin,
and such projects are sometimes subject to a guaranteed maximum cost. These margins are frequently less than
fixed-price contract margins because there is less risk of unrecoverable cost overruns in cost-plus or time and materials
work.
As of December 31, 2017, we had 4,690 projects in process. Our average project takes six to nine months to
complete, with an average contract price of approximately $504,000. Our projects generally require working capital
23
funding of equipment and labor costs. Customer payments on periodic billings generally do not recover these costs until
late in the job. Our average project duration together with typical retention terms as discussed above generally allow us
to complete the realization of revenue and earnings in cash within one year. We have what we believe is a
well-diversified distribution of revenue across end-use sectors that we believe reduces our exposure to negative
developments in any given sector. Because of the integral nature of HVAC and related controls systems to most
buildings, we have the legal right in almost all cases to attach liens to buildings or related funding sources when we have
not been fully paid for installing systems, except with respect to some government buildings. The service work that we
do, which is discussed further below, usually does not give rise to lien rights.
We also perform larger projects. Taken together, projects with contract prices of $1 million or more totaled
$1.83 billion of aggregate contract value as of December 31, 2017, or approximately 80%, out of a total contract value
for all projects in progress of $2.36 billion. Generally, projects closer in size to $1 million will be completed in one year
or less. It is unusual for us to work on a project that exceeds two years in length.
A stratification of projects in progress as of December 31, 2017, by contract price, is as follows:
Aggregate
Contract
No. of Price Value
(millions)
Projects
Contract Price of Project
Under $1 million . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,221 $ 529.8
828.6
$1 million - $5 million . . . . . . . . . . . . . . . . . . . . . .
464.7
$5 million - $10 million . . . . . . . . . . . . . . . . . . . . .
221.3
$10 million - $15 million . . . . . . . . . . . . . . . . . . . .
Greater than $15 million . . . . . . . . . . . . . . . . . . . . .
319.6
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,690 $ 2,364.0
368
70
18
13
In addition to project work, approximately 19% of our revenue represents maintenance and repair service on
already installed HVAC and controls systems. This kind of work usually takes from a few hours to a few days to
perform. Prices to the customer are based on the equipment and materials used in the service as well as technician labor
time. We usually bill the customer for service work when it is complete, typically with payment terms of up to thirty
days. We also provide maintenance and repair service under ongoing contracts. Under these contracts, we are paid
regular monthly or quarterly amounts and provide specified service based on customer requirements. These agreements
typically are for one or more years and frequently contain thirty- to sixty-day cancellation notice periods.
A relatively small portion of our revenue comes from national and regional account customers. These
customers typically have multiple sites, and contract with us to perform maintenance and repair service. These contracts
may also provide for us to perform new or replacement systems installation. We operate a national call center to dispatch
technicians to sites requiring service. We perform the majority of this work with our own employees, with the balance
being subcontracted to third parties that meet our performance qualifications.
Profile and Management of Our Operations
We manage our 36 operating units based on a variety of factors. Financial measures we emphasize include
profitability, and use of capital as indicated by cash flow and by other measures of working capital principally involving
project cost, billings and receivables. We also monitor selling, general, administrative and indirect project support
expense, backlog, workforce size and mix, growth in revenue and profits, variation of actual project cost from original
estimate, and overall financial performance in comparison to budget and updated forecasts. Operational factors we
emphasize include project selection, estimating, pricing, management and execution practices, labor utilization, safety,
training, and the make-up of both existing backlog as well as new business being pursued, in terms of project size,
technical application and facility type, end-use customers and industries, and location of the work.
Most of our operations compete on a local or regional basis. Attracting and retaining effective operating unit
managers is an important factor in our business, particularly in view of the relative uniqueness of each market and
operation, the importance of relationships with customers and other market participants such as architects and consulting
engineers, and the high degree of competition and low barriers to entry in most of our markets. Accordingly, we devote
considerable attention to operating unit management quality, stability, and contingency planning, including related
considerations of compensation, and non-competition protection where applicable.
24
Economic and Industry Factors
As a mechanical and building controls services provider, we operate in the broader nonresidential construction
services industry and are affected by trends in this sector. While we do not have operations in all major cities of the
United States, we believe our national presence is sufficiently large that we experience trends in demand for and pricing
of our services that are consistent with trends in the national nonresidential construction sector. As a result, we monitor
the views of major construction sector forecasters along with macroeconomic factors they believe drive the sector,
including trends in gross domestic product, interest rates, business investment, employment, demographics, and the
general fiscal condition of federal, state and local governments.
Spending decisions for building construction, renovation and system replacement are generally made on a
project basis, usually with some degree of discretion as to when and if projects proceed. With larger amounts of capital,
time, and discretion involved, spending decisions are affected to a significant degree by uncertainty, particularly
concerns about economic and financial conditions and trends. We have experienced periods of time when economic
weakness caused a significant slowdown in decisions to proceed with installation and replacement project work.
Operating Environment and Management Emphasis
Nonresidential building construction and renovation activity, as reported by the federal government, declined
steeply over the four-year period from 2009 to 2012, and 2013 and 2014 activity levels were relatively stable at the low
levels of the preceding years. During the three-year period from 2015 to 2017, there was an increase in overall activity
levels and we currently expect that activity will continue at these improved levels during 2018.
As a result of our continued strong emphasis on cash flow, at December 31, 2017 we had modest indebtedness
under our revolving 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; this facility does not expire until February 2021. We have strong surety relationships to support our
bonding needs, and we believe 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 nineteen calendar years and
will continue our emphasis in this area. We believe that the relative size and strength of our balance sheet and surety
support as compared to most companies in our industry represent competitive advantages for us.
As discussed at greater length in “Results of Operations” below, we expect price competition to continue as our
customers and local and regional competitors respond cautiously to improved market conditions. We will continue to
invest in our service business, to pursue the more active sectors in our markets, and to emphasize our regional and
national account business. Our primary emphasis for 2018 will be on execution and cost control, but we are seeking
growth based on our belief that industry conditions will continue to be strong in the near term, and we believe that
activity levels will permit us to continue to earn solid 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 Policies
Our critical accounting policies are based upon the significance of the accounting policy to our overall financial
statement presentation, as well as the complexity of the accounting policy and our use of estimates and subjective
assessments. Our most critical accounting policy is revenue recognition. As discussed elsewhere in this annual report on
Form 10-K, our business has two service functions: (i) installation, which we account for under the percentage of
completion method, and (ii) maintenance, repair and replacement, which we account for as the services are performed, or
in the case of replacement, under the percentage of completion method. In addition, we identified other critical
accounting policies related to our allowance for doubtful accounts receivable, the recording of our self-insurance
liabilities, valuation of deferred tax assets, accounting for acquisitions and the recoverability of goodwill and identifiable
intangible assets. These accounting policies, as well as others, are described in Note 2 to the Consolidated Financial
Statements included elsewhere in this annual report on Form 10-K.
Percentage of Completion Method of Accounting
Approximately 81% of our revenue was earned on a project basis and recognized through the percentage of
completion method of accounting during 2017. Under this method, contract revenue recognizable at any time during the
25
life of a contract is determined by multiplying expected total contract revenue by the percentage of contract costs
incurred at any time to total estimated contract costs. More specifically, as part of the negotiation and bidding process in
connection with obtaining installation contracts, we estimate our contract costs, which include all direct materials
(exclusive of rebates), labor and subcontract costs and indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs and depreciation costs. These contract costs are included in our results of operations under
the caption “Cost of Services.” Then, as we perform under those contracts, we measure costs incurred, compare them to
total estimated costs to complete the contract, and recognize a corresponding proportion of contract revenue. Labor costs
are considered to be incurred as the work is performed. Subcontractor labor is recognized as the work is performed, but
is generally subjected to approval as to milestones or other evidence of completion. Non-labor project costs consist of
purchased equipment, prefabricated materials and other materials. Purchased equipment on our projects is substantially
produced to job specifications and is a value added element to our work. The costs are considered to be incurred when
title is transferred to us, which typically is upon delivery to the worksite. Prefabricated materials, such as ductwork and
piping, are generally performed at our shops and recognized as contract costs when fabricated for the unique
specifications of the job. Other materials costs are not significant and are generally recorded when delivered to the
worksite. This measurement and comparison process requires updates to the estimate of total costs to complete the
contract, and these updates may include subjective assessments.
We generally do not incur significant costs prior to receiving a contract, and therefore, these costs are expensed
as incurred. In limited circumstances, when significant pre-contract costs are incurred, they are deferred if the costs can
be directly associated with a specific contract and if their recoverability from the contract is probable. Upon receiving
the contract, these costs are included in contract costs. Deferred costs associated with unsuccessful contract bids are
written off in the period that we are informed that we will not be awarded the contract.
Project contracts typically provide for a schedule of billings or invoices to the customer based on reaching
agreed upon milestones or as we incur costs. The schedules for such billings usually do not precisely match the schedule
on which costs are incurred. As a result, contract revenue recognized in the statement of operations can and usually does
differ from amounts that can be billed or invoiced to the customer at any point during the contract. Amounts by which
cumulative contract revenue recognized on a contract as of a given date exceed cumulative billings to the customer
under the contract are reflected as a current asset in our balance sheet under the caption “Costs and estimated earnings in
excess of billings.” Amounts by which cumulative billings to the customer under a contract as of a given date exceed
cumulative contract revenue recognized on the contract are reflected as a current liability in our balance sheet under the
caption “Billings in excess of costs and estimated earnings.”
The percentage of completion method of accounting is also affected by changes in job performance, job
conditions, and final contract settlements. These factors may result in revisions to estimated costs and, therefore,
revenue. Such revisions are frequently based on further estimates and subjective assessments. The effects of these
revisions are recognized in the period in which revisions are determined. When such revisions lead to a conclusion that a
loss will be recognized on a contract, the full amount of the estimated ultimate loss is recognized in the period such
conclusion is reached, regardless of the percentage of completion of the contract.
Revisions to project costs and conditions can give rise to change orders under which the customer agrees to pay
additional contract price. Revisions can also result in claims we might make against the customer to recover project
variances that have not been satisfactorily addressed through change orders with the customer. Except in certain
circumstances, we do not recognize revenue or margin based on change orders or claims until they have been agreed
upon with the customer. The amount of revenue associated with unapproved change orders and claims was immaterial
for the year ended December 31, 2017.
Variations from estimated project costs could have a significant impact on our operating results, depending on
project size, and the recoverability of the variation via additional customer payments.
Accounting for Allowance for Doubtful Accounts
We are required to estimate the collectability of accounts receivable and provide an allowance for doubtful
accounts for receivable amounts we believe we will not ultimately collect. This requires us to make certain judgments
and estimates involving, among others, the creditworthiness of our customers, prior collection history with our
customers, ongoing relationships with our customers, the aging of past due balances, our lien rights, if any, in the
property where we performed the work, and the availability, if any, of payment bonds applicable to the contract. These
estimates are evaluated and adjusted as needed when additional information is received.
26
Accounting for Self-Insurance Liabilities
We are substantially self-insured for workers’ compensation, employer’s liability, auto liability, general liability
and employee group health claims in view of the relatively high per-incident deductibles we absorb under our insurance
arrangements for these risks. Losses are estimated and accrued based upon known facts, historical trends and industry
averages. Estimated losses in excess of our deductible, which have not already been paid, are included in our accrual
with a corresponding 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.
We believe these accruals are adequate. However, insurance liabilities are difficult to estimate due to unknown
factors, including the severity of an injury, the determination of our liability in proportion to other parties, timely
reporting of occurrences, ongoing treatment or loss mitigation, general trends in litigation recovery outcomes and the
effectiveness of safety and risk management programs. Therefore, if actual experience differs from the assumptions and
estimates used for recording the liabilities, adjustments may be required and would be recorded in the period that such
experience becomes known.
Accounting for Deferred Tax Assets
We regularly evaluate valuation allowances established for deferred tax assets for which future realization is
uncertain. We perform this evaluation quarterly. In assessing the realizability of deferred tax assets, we must consider
whether it is more-likely-than-not some portion, or all, of the deferred tax assets will not be realized. We consider all
available evidence, both positive and negative, in determining whether a valuation allowance is required. Such evidence
includes the scheduled reversal of deferred tax liabilities, projected future taxable income, taxable income in prior
carryback years and tax planning strategies in making this assessment, and judgment is required in considering the
relative weight of negative and positive evidence.
Acquisitions
We recognize assets acquired and liabilities assumed in business combinations, including contingent assets and
liabilities, based on fair value estimates as of the date of acquisition.
Contingent Consideration—In certain acquisitions, we agree to pay additional amounts to sellers contingent
upon achievement by the acquired businesses of certain predetermined profitability targets. We have recognized
liabilities for these contingent obligations based on their estimated fair value at the date of acquisition with any
differences between the acquisition-date fair value and the ultimate settlement of the obligations being recognized in
income from operations.
Contingent Assets and Liabilities—Assets and liabilities arising from contingencies are recognized at their
acquisition date fair value when their respective fair values can be determined. If the fair values of such contingencies
cannot be determined, they are recognized at the acquisition date if the contingencies are probable and an amount can be
reasonably estimated. Acquisition date fair value estimates are revised as necessary if, and when, additional information
regarding these contingencies becomes available to further define and quantify assets acquired and liabilities assumed.
Recoverability of Goodwill and Identifiable Intangible Assets
Goodwill is the excess of purchase price over the fair value of the net assets of acquired businesses. We assess
goodwill for impairment each year, and more frequently if circumstances suggest an impairment may have occurred.
When the carrying value of a given reporting unit exceeds its fair value, an impairment loss is recorded to the
extent that the implied fair value of the goodwill of the reporting unit is less than its carrying value. If other reporting
units have had increases in fair value, such increases may not be recorded. Accordingly, such increases may not be
netted against impairments at other reporting units. The requirements for assessing whether goodwill has been impaired
involve market-based information. This information, and its use in assessing goodwill, entails some degree of subjective
assessment.
We perform our annual impairment testing as of October 1 and any impairment charges resulting from this
process are reported in the fourth quarter. We segregate our operations into reporting units based on the degree of
operating and financial independence of each unit and our related management of them. We perform our annual
goodwill impairment testing at the reporting unit level. Each of our operating units represents an operating segment, and
our operating segments are our reporting units.
27
In the evaluation of goodwill for impairment, we have the option to first assess qualitative factors to determine
whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value
of one of our reporting units is greater than its carrying value. If, after completing such assessment, we determine it is
more likely than not that the fair value of a reporting unit is greater than its carrying amount, then there is no need to
perform any further testing. If we conclude otherwise, then we perform the first step of a two-step impairment test by
calculating the fair value of the reporting unit and comparing the fair value with the carrying value of the reporting unit.
We estimate the fair value of the reporting unit based on a market approach and an income approach, which
utilizes discounted future cash flows. Assumptions critical to the fair value estimates under the discounted cash flow
model include discount rates, cash flow projections, projected long-term growth rates and the determination of terminal
values. The market approach utilized market multiples of invested capital from comparable publicly traded companies
(“public company approach”). The market multiples from invested capital include revenue, book equity plus debt and
earnings before interest, provision for income taxes, depreciation and amortization (“EBITDA”).
There are significant inherent uncertainties and management judgment involved in estimating the fair value of
each reporting unit. While we believe we have made reasonable estimates and assumptions to estimate the fair value of
our reporting units, it is possible that a material change could occur. If actual results are not consistent with our current
estimates and assumptions, or the current economic 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
market condition, may result in adjustments to recorded intangible asset balances or their useful lives.
Results of Operations (in thousands):
2017
Year Ended December 31,
2016
2015
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,787,922 100.0 % $ 1,634,340 100.0 % $ 1,580,519 100.0 %
79.9 %
Cost of services . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . .
20.1 %
Selling, general and administrative
79.5 % 1,290,331
344,009
20.5 %
79.0 % 1,262,390
318,129
21.0 %
1,421,641
366,281
expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . .
Gain on sale of assets . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . .
Changes in the fair value of contingent
earn-out obligations . . . . . . . . . . . . . . . .
Other income (expense) . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . .
Net income including noncontrolling
266,586
1,105
(670) —
14.9 %
0.1 %
243,201
14.9 %
— —
(761) —
99,260
5.6 %
101,569
6.2 %
228,965
—
(880)
90,044
14.5 %
—
(0.1)%
5.7 %
70 —
9 —
72 —
(3,156)
(0.2) %
(2,345)
(0.1)%
(1,753)
(0.1)%
3,715
1,049
100,938
45,666
0.2 %
0.1 %
5.6 %
731
1,097
101,061
36,165
—
0.1 %
6.2 %
225 —
76 —
88,664
31,224
5.6 %
interests . . . . . . . . . . . . . . . . . . . . . . . . . .
55,272
3.1 %
64,896
4.0 %
57,440
3.6 %
Less: Net income attributable to
noncontrolling interests . . . . . . . . . . . . .
—
—
8,076
Net income attributable to Comfort
Systems USA, Inc. . . . . . . . . . . . . . . . . . $
55,272
$
64,896
$
49,364
2017 Compared to 2016
We had 35 operating locations as of December 31, 2016. During 2017, we completed one acquisition in the
second quarter of 2017, known as “BCH”, that reports as a separate operating location in the Tampa, Florida area. Other
than the addition of BCH, we did not make any changes to operating locations. As of December 31, 2017, we had 36
operating locations. Acquisitions are included in our results of operations from the respective acquisition date. The
28
same-store comparison from 2017 to 2016, as described below, excludes nine months of results for BCH, which was
acquired in April 2017 as well as the first month of 2017 for Shoffner, which was acquired in February 2016. An
operating location is included in the same-store comparison on the first day it has comparable prior year operating data.
Revenue—Revenue increased $153.6 million, or 9.4% to $1.79 billion in 2017 compared to 2016. The increase
included a 6.4% increase related to the acquisitions of BCH and Shoffner and a 3.0% increase in revenue related to
same-store activity. The same-store revenue increase was primarily due to one of our Virginia operations ($24.1 million)
and our Wisconsin operation ($22.9 million), which experienced increased large project work compared to the prior
year, specifically in the industrial sector.
Backlog reflects revenue still to be recognized under contracted or committed installation and replacement
project work. Project work generally lasts less than one year. Service agreement revenue and service work and short
duration projects, which are generally billed as performed, do not flow through backlog. Accordingly, backlog represents
only a portion of our revenue for any given future period, and it represents revenue that is likely to be reflected in our
operating results over the next six to twelve months. As a result, we believe the predictive value of backlog information
is limited to indications of general revenue direction over the near term, and should not be interpreted as indicative of
ongoing revenue performance over several quarters.
Backlog as of December 31, 2017 was $948.4 million, a 5.2% increase from September 30, 2017 backlog of
$901.2 million and a 24.2% increase from December 31, 2016 backlog of $763.4 million. Sequential backlog increased
primarily due to increased project bookings at our North Carolina operation ($43.0 million). The year-over-year backlog
increase included the acquisition of BCH ($30.0 million or 3.9%). Same-store backlog increased 20.3% primarily due to
increased project bookings at our North Carolina operation ($63.3 million), one of our Virginia operations
($39.0 million) and our Colorado operation ($37.3 million).
Gross Profit—Gross profit increased $22.3 million, or 6.5%, to $366.3 million in 2017 as compared to 2016.
The increase included a $18.3 million, or 5.3%, increase related to the acquisitions of BCH and Shoffner and a
$4.0 million, or 1.2%, increase on a same-store basis. The same-store increase in gross profit was primarily due to
increased volumes at our Wisconsin operation ($6.9 million) and our New Hampshire operation ($3.7 million). This was
partially offset by a decrease at our North Carolina operation ($6.4 million), which has experienced lower project
activity when compared to the same period in 2016. As a percentage of revenue, gross profit decreased from 21.0% in
2016 to 20.5% in 2017 primarily due to a $3.6 million increase in amortization expense, primarily related to the BCH
acquisition, as well as the factors discussed above.
Selling, General and Administrative Expenses (“SG&A”)—SG&A increased $23.4 million, or 9.6%, to
$266.6 million for 2017 as compared to 2016. On a same-store basis, excluding amortization expense, SG&A increased
$7.3 million, or 3.1%. This increase is primarily due to $0.8 million in compensation costs related to leadership changes
and the increase in same-store revenue. Additionally, we incurred $0.4 million in expenses in the first quarter of 2017
related to the acquisition of BCH completed on April 1, 2017. Amortization expense increased $5.6 million during the
period primarily as a result of the BCH acquisition. As a percentage of revenue, SG&A was 14.9% in both 2017 and
2016.
We have included same-store SG&A, excluding amortization, because we believe it is an effective measure of
comparative results of operations. However, same-store SG&A, excluding amortization, is not considered under
29
generally accepted accounting principles to be a primary measure of an entity’s financial results, and accordingly, should
not be considered an alternative to SG&A as shown in our consolidated statements of operations.
SG&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: SG&A from companies acquired . . . . . . . . . . . . . . . .
Less: Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . .
Same-store SG&A, excluding amortization expense . . . . .
$
$
266,586
(10,493)
(11,759)
244,334
$
$
243,201
—
(6,165)
237,036
Year Ended
December 31,
2017
2016
(in thousands)
Interest Expense—Interest expense increased $0.8 million, or 34.6%, in 2017. The increase reflects the
increased borrowings on the revolving credit facility as well as notes to former owners used to fund the BCH acquisition
during the second quarter of 2017.
Changes in the Fair Value of Contingent Earn-out Obligations—The contingent earn-out obligations are
measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings. Income
from changes in the fair value of contingent earn-out obligations increased $3.0 million in 2017 compared to 2016. This
increase was the result of reducing our obligation related to the BCH acquisition primarily due to results being below the
initial estimate as a result of the impact of Hurricane Irma and less project activity than previously estimated. In 2016,
based on updated measurements of estimated future cash flows for our contingent obligations, we reduced our obligation
related to the EAS acquisition resulting in a gain of $0.8 million.
Other Income—Other income remained relatively flat in 2017 compared to 2016. In the fourth quarter of 2017,
we entered into settlement agreements with British Petroleum (“BP”) related to two claims from one of our subsidiaries
regarding the April 2010 BP Deepwater Horizon oil spill. We recorded a $1.0 million gain in the fourth quarter of 2017
in “Other Income” as a result of these settlements. Additionally, in the fourth quarter of 2016, we entered into a separate
settlement agreement with BP related to a claim from another one of our subsidiaries and recorded a $0.6 million gain in
the fourth quarter of 2016 in “Other Income”. 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.
Provision for Income Taxes—We conduct business throughout the United States in virtually all fifty states. Our
effective tax rate changes based upon our relative profitability, or lack thereof, in states with varying tax rates and rules.
In addition, discrete items, such as tax law changes, judgments and legal structures can impact our effective tax rate.
These items can also include the tax treatment for impairment of goodwill and other intangible assets, changes in fair
value of acquisition-related assets and liabilities, tax reserves for uncertain tax positions, accounting for losses associated
with underperforming operations and noncontrolling interests.
Our effective tax rate for 2017 was 45.2%, as compared to 35.8% in 2016. The effective rate for 2017 was
higher than the 35% federal statutory rate primarily due to the remeasurement of net deferred tax assets for the corporate
tax rate reduction to 21% (9.4%), net state income taxes (2.8%) partially offset by the domestic production activities
deduction (2.1%) and deductions for stock-based compensation (1.3%). The effective rate for 2016 was higher than the
35% federal statutory rate primarily due to net state income taxes (4.2%) partially offset by the domestic production
activities deduction (2.0%) and a decrease in valuation allowances (1.2%). Refer to Note 9 in the Consolidated Financial
Statements for a reconciliation of the federal statutory rate to the effective tax rate reflected in our financial statements.
The increase in the effective tax rate from 2016 to 2017 was primarily due to the impact from the
remeasurement of net deferred tax assets for the corporate tax rate reduction to 21% pursuant to the recently enacted Tax
Cuts and Jobs Act. While we believe we were able to make reasonable estimates of the impact of the Tax Cuts and Jobs
Act in these financial statements, the amounts recorded are provisional and the final impact may differ from these
estimates due to, among other things, changes in our interpretations and assumptions and additional guidance that may
be issued by regulatory authorities.
We currently estimate our effective tax rate for 2018 will be between 22% and 27%. This includes the impact of
a decrease in unrecognized tax benefits of up to $8.7 million that is expected within the next twelve months due to the
30
filing of a federal income tax automatic accounting method change application. Approximately $3.0 million of the
decrease is expected to impact our effective tax rate. Starting in 2019, we currently estimate our effective tax rate will be
between 25% and 30%. We expect our future tax rates to be lower than 2017 primarily due to the corporate tax rate
reduction to 21% effective January 1, 2018. These estimates also reflect the repeal of the domestic production activities
deduction and other items of the Tax Cuts and Jobs Act that partially offset the benefit from the reduction in the
corporate tax rate.
2016 Compared to 2015
We had 35 operating locations as of December 31, 2015. During 2016, we completed one acquisition in the first
quarter of 2016, known as “Shoffner”, that reports as a separate operating location in the Knoxville, Tennessee area. In
addition, we merged four operating locations into two operating locations during the first quarter, and created two
operating locations out of one existing operating location. As of December 31, 2016, we had 35 operating locations.
Acquisitions are included in our results of operations from the respective acquisition date. The same-store comparison
from 2016 to 2015, as described below, excludes eleven months of results for Shoffner, which was acquired in February
2016. An operating location is included in the same-store comparison on the first day it has comparable prior year
operating data. An operating location is excluded from the same-store comparison in the current year and comparable
prior years when it is properly characterized as a discontinued operation under applicable accounting standards.
Revenue—Revenue increased $53.8 million, or 3.4% to $1,634.3 million in 2016 compared to 2015. The
increase included a 4.6% increase related to the acquisition of Shoffner, which was partially offset by a 1.1% decrease in
revenue related 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, specifically in the manufacturing sector. This decrease was partially offset by increased activity at our Michigan
operation ($16.8 million) and our Northern Texas operation ($13.1 million).
Backlog reflects revenue still to be recognized under contracted or committed installation and replacement
project work. Project work generally lasts less than one year. Service agreement revenue and service work and short
duration projects, which are generally billed as performed, do not flow through backlog. Accordingly, backlog represents
only a portion of our revenue for any given future period, and it represents revenue that is likely to be reflected in our
operating results over the next six to twelve months. As a result, we believe the predictive value of backlog information
is limited to indications of general revenue direction over the near term, and should not be interpreted as indicative of
ongoing revenue performance over several quarters.
Backlog as of 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 increased
primarily 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 to the acquisition of Shoffner ($35.3 million or 5.0%). Same-store backlog increased 2.3% primarily due to
increased project bookings at our New Hampshire operation ($28.1 million). This was partially offset by the completion
of project work at our EAS 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.
The increase 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 in project execution, including our California operation ($4.0 million) and one of our New York operations
($3.5 million). Additionally, gross profit was higher due to increased volumes at our Michigan operation ($3.9 million)
and one of our Alabama operations ($3.3 million). This was partially offset by a decrease at our EAS operation
($8.6 million), which has experienced a decrease in large project work when compared to the same period in 2015. As a
percentage of revenue, gross profit 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
primarily related to an increase in operating results and expanded service activities at multiple locations. This was offset
by a decrease in bad debt expense ($1.6 million) primarily due to collections of aged receivables. Amortization expense
31
decreased $0.7 million 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 of
comparative results of operations. However, same-store SG&A, excluding amortization, is not considered under
generally accepted accounting principles to be a primary measure of an entity’s financial results, and accordingly, should
not be considered an alternative to SG&A as shown in our consolidated statements of operations.
SG&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Less: SG&A from companies acquired . . . . . . . . . . . . . . . . . .
Less: Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Same-store SG&A, excluding amortization expense . . . . . . .
$
243,201 $
(10,817)
(6,165)
226,219
$
228,965
—
(6,897)
222,068
Year Ended
December 31,
2016
2015
(in thousands)
Interest Expense—Interest expense increased $0.6 million, or 33.8%, in 2016. The increase is due to higher
average net borrowings on the revolving credit facility in 2016 compared to 2015.
Changes in the Fair Value of Contingent Earn-out Obligations—The contingent earn-out obligations are
measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings. Income
from changes in the fair value of contingent earn-out obligations increased $0.5 million in 2016 compared to 2015.
Based on updated measurements of estimated future cash flows for our contingent obligations, we reduced our obligation
related to the EAS acquisition resulting in a gain of $0.8 million. This was partially offset by increases in the fair value
of contingent earn-out obligations 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,
we entered into a settlement agreement with British Petroleum (“BP”) related to a claim from one of our subsidiaries
regarding the April 2010 BP Deepwater Horizon oil spill. We recorded a $0.6 million gain in the fourth quarter of 2016
in “Other Income” as a result of this settlement.
Provision for Income Taxes—We conduct business throughout the United States in virtually all fifty states. Our
effective tax rate changes based upon our relative profitability, or lack thereof, in states with varying tax rates and rules.
In addition, discrete items, such as tax law changes, judgments and legal structures can impact our effective tax rate.
These items can also include the tax treatment for impairment of goodwill and other intangible assets, changes in fair
value of acquisition-related assets and liabilities, tax reserves for uncertain tax positions, accounting for losses associated
with underperforming operations and noncontrolling interests.
Our effective tax rate for 2016 was 35.8%, as compared to 35.2% in 2015. The effective rate for 2016 was
higher than the 35% federal statutory rate primarily due to net state income taxes (4.2%) partially offset by the domestic
production activities deduction (2.0%) and a decrease in valuation allowances (1.2%). The effective rate for 2015 was
slightly higher than the 35% federal statutory rate primarily due to an increase in net state income taxes (3.9%) which
was partially offset by a decrease from the impact of the noncontrolling interest of EAS which for federal tax purposes is
treated as a partnership (3.2%). Refer to Note 9 in the Consolidated Financial Statements for a reconciliation of the
federal statutory rate to the effective tax rate reflected in our financial statements. The increase in the effective tax rate
from 2015 to 2016 was primarily due to the impact of our noncontrolling interests, which was partially offset by the
impact on the rate from the benefits from deductions on stock-based compensation, valuation allowances and net state
income taxes.
Net Income Attributable to Noncontrolling Interests— There was no net income attributable to noncontrolling
interests for 2016 due to our January 1, 2016 purchase of the remaining 40% noncontrolling interest in Environmental
Air Systems, LLC.
32
Outlook
Industry conditions improved during the three-year period from 2015 to 2017 and we currently expect that
activity will continue at these improved levels during 2018. Our emphasis for 2018 will be on cost discipline and
efficient project performance, labor force development, and investing in growth, particularly in service and small
projects. Based on our backlog, and in light of economic conditions, we currently expect improvement in our revenue
and net earnings in 2018.
Liquidity and Capital Resources
Cash provided by (used in):
2017
Year Ended December 31,
2016
(in thousands)
2015
Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 114,090 $ 91,188 $ 97,867
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(25,628)
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
(47,839)
Net increase (decrease) in cash and cash equivalents . . . $
4,468 $ (24,390) $ 24,400
Free cash flow:
(128,968)
19,346
(79,318)
(36,260)
Cash provided by operating activities . . . . . . . . . . . . . $ 114,090 $ 91,188 $ 97,867
Purchases of property and equipment . . . . . . . . . . . . .
(20,808)
(23,217)
(35,467)
Proceeds from sales of property and equipment . . . .
1,359
1,338
1,062
79,982 $ 69,033 $ 78,397
Free cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash Flow
Our business does not require significant amounts of investment in long-term fixed assets. The substantial
majority of the capital used in our business is working capital that funds our costs of labor and installed equipment
deployed in project work until our customer pays us. Customary terms in our industry allow customers to withhold a
small portion of the contract price until after we have completed the work, typically for six months. Amounts withheld
under this practice are known as retention or retainage. Our average project duration together with typical retention
terms generally allow us to complete the realization of revenue and earnings in cash within one year.
2017 Compared to 2016
Cash Provided by Operating Activities—Cash flow from operations is primarily influenced by demand for our
services and operating margins, but can also be influenced by working capital needs associated with the various types of
services that we provide. In particular, working capital needs may increase when we commence large volumes of work
under circumstances where project costs, primarily associated with labor, equipment and subcontractors, are required to
be paid before the receivables resulting from the work performed are billed and collected. Working capital needs are
generally higher during the late winter and spring months as we prepare and plan for the increased project demand when
favorable weather conditions exist in the summer and fall months. Conversely, working capital assets are typically
converted to cash during the late summer and fall months as project completion is underway. These seasonal trends are
sometimes offset by changes in the timing of major projects, which can be impacted by the weather, project delays or
accelerations and other economic factors that may affect customer spending.
We generated $114.1 million of cash flow from operating activities during 2017 compared with $91.2 million
during 2016. The $22.9 million increase is primarily due to the $22.3 million increase in gross profit, increases in
billings in excess of costs of $21.6 million, primarily due to the timing of billings and various project work, and
increases in accounts payable and accrued liabilities of $19.3 million due to increased activity and revenue as well as
increased compensation accruals. These increases to operating cash flow were partially offset by the change in
receivables of $44.8 million primarily related to the timing of customer billings and payments.
Cash Used in Investing Activities—Cash used in investing activities was $129.0 million for 2017 compared to
$79.3 million during 2016. The $49.7 million increase in cash used primarily relates to cash paid (net of cash acquired)
33
for the BCH acquisition in 2017 of $86.1 million compared to the EAS and Shoffner acquisitions in 2016
($56.3 million).
Cash Provided by (Used in) Financing Activities—Cash provided by financing activities was $19.3 million for
2017 compared to cash used in financing activities of $36.3 million during 2016. The $55.6 million increase in cash
provided by financing activities primarily relates to $55.0 million of additional net proceeds from the revolving line of
credit in 2017 compared to the prior year.
2016 Compared to 2015
Cash Provided by Operating Activities—We generated $91.2 million of cash flow from operating activities
during 2016 compared with $97.9 million during 2015. The $6.7 million decrease is primarily due to decreases in
billings in excess of costs of $16.3 million, primarily due to the 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 in receivables of $10.6 million
primarily related to the timing of customer billings and payments and overall higher net income in 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
Shoffner acquisitions that were completed in 2016.
Cash Used in Financing Activities—Cash used in financing activities was $36.3 million for 2016 compared to
$47.8 million during 2015. The $11.6 million decrease in cash used in financing 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 noncontrolling interests after we acquired the remaining
40% noncontrolling interest in EAS.
Free Cash Flow
We define free cash flow as cash provided by operating activities, less customary capital expenditures, plus the
proceeds from asset sales and taxes paid related to pre-acquisition equity transactions of an acquired company. We
believe free cash flow, by encompassing both profit margins and the use of working capital over our approximately one
year working capital cycle, is an effective measure of operating effectiveness and efficiency. We have included free cash
flow information here for this reason, and because we are often asked about it by third parties evaluating us. However,
free cash flow is not considered under generally accepted accounting principles to be a primary measure of an entity’s
financial results, and accordingly free cash flow should not be considered an alternative to operating income, net income,
or amounts shown in our consolidated statements of cash flows as determined under generally accepted accounting
principles. Free cash flow may be defined differently by other companies.
Share Repurchase Program
On March 29, 2007, our Board of Directors (the “Board”) approved a stock repurchase program to acquire up to
1.0 million shares of our outstanding common stock. Subsequently, the Board has from time to time increased the
number of shares that may be acquired under the program and approved extensions of the program. Since the inception
of the repurchase program, the Board has approved 8.1 million shares to be repurchased. As of December 31, 2017, we
have repurchased a cumulative total of 7.6 million shares at an average price of $13.75 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
negotiated transactions as permitted by securities laws and other legal requirements, and subject to market conditions
and other factors. The Board may modify, suspend, extend or terminate the program at any time. During the twelve
months ended December 31, 2017, we repurchased 0.3 million shares for approximately $9.0 million at an average price
of $34.23 per share.
34
Debt
Revolving Credit Facility
We have a $325.0 million senior credit facility (the “Facility”) provided by a syndicate of banks, with a
$100 million accordion option. The Facility, which is available for borrowings and letters of credit, expires in February
2021 and is secured by a first lien on substantially all of our personal property except for assets related to projects
subject to surety bonds and assets held by certain unrestricted subsidiaries and a second lien on our assets related to
projects subject to surety bonds. As of December 31, 2017, we had $45.0 million of outstanding borrowings,
$39.6 million in letters of credit outstanding and $240.4 million of credit available.
There are two interest rate options for borrowings under the Facility, the Base Rate Loan option and the
Eurodollar Rate Loan option. These rates are floating rates determined by the broad financial markets, meaning they can
and do move up and down from time to time. Additional margins are then added to these two rates. The weighted
average interest rate applicable to the borrowings under the Facility was approximately 2.8% as of December 31, 2017.
Certain of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on our
behalf, such as to beneficiaries under our self-funded insurance programs. We have also occasionally used letters of
credit to guarantee performance under our contracts and to ensure payment to our subcontractors and vendors under
those contracts. Our lenders issue such letters of credit through the Facility for a fee. We have never had a claim made
against a letter of credit that resulted in payments by a lender or by us and believe such claims are unlikely in the
foreseeable future. The letter of credit fees range from 1.25% to 2.00% per annum, based on the ratio of Consolidated
Total Indebtedness to Credit Facility Adjusted EBITDA, as defined in the credit agreement.
Commitment fees are payable on the portion of the revolving loan capacity not in use for borrowings or letters
of credit at any given time. These fees range from 0.20%-0.35% per annum, based on the ratio of Consolidated Total
Indebtedness to Credit Facility Adjusted EBITDA, as defined in the credit agreement.
Interest expense included the following primary elements (in thousands):
25
Interest expense on notes to former owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
692
Interest expense on borrowings and unused commitment fees . . . . . . . . . . . . . . .
719
Letter of credit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
317
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,156 $ 2,345 $ 1,753
1,862
553
376
1,251
657
367
70 $
Year Ended December 31,
2016
2015
2017
365 $
The Facility contains financial covenants defining various measures and the levels of these measures with
which we must comply. Covenant compliance is assessed as of each quarter end. Credit Facility Adjusted EBITDA is
defined under the Facility for financial covenant purposes as net earnings for the four quarters ending as of any given
quarterly covenant compliance measurement date, plus the corresponding amounts for (a) interest expense; (b) provision
for income taxes; (c) depreciation and 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 2017 (in thousands):
Net income including noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55,272
45,666
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,086
37,456
Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,377
1,105
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pre-acquisition results of acquired companies, as defined under the Facility . . . . .
4,597
Credit Facility Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 153,559
35
The Facility’s principal financial covenants include:
Leverage Ratio—The Facility requires that the ratio of our Consolidated Total Indebtedness to our
Credit Facility Adjusted EBITDA not exceed 2.75 to 1.00 as of the end of each fiscal quarter. The leverage ratio
as of December 31, 2017 was 0.4.
Fixed Charge Coverage Ratio— The Facility requires that the ratio of (a) Credit Facility Adjusted
EBITDA, less non-financed capital expenditures, provision for income taxes, 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; provided that the calculation of the fixed charge coverage ratio excludes stock repurchases and the
payment of dividends at any time that the Company’s Net Leverage Ratio does not exceed 1.50 to 1.00. The
Facility also allows the fixed charge coverage ratio not to be reduced for stock repurchases through
September 30, 2015 in an aggregate amount not to exceed $25 million 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 repurchase the Company’s Net Leverage Ratio was less than or equal
to 1.50 to 1.00. Capital expenditures, provision for income taxes, dividends and stock repurchase payments are
defined under the Facility for purposes of this covenant to be amounts for the four quarters ending as of any
given quarterly covenant compliance measurement date. The fixed charge coverage ratio as of December 31,
2017 was 21.8.
Other Restrictions— The Facility permits acquisitions of up to $30.0 million per transaction, provided
that the 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
debt level under the Facility at a quarter-end covenant compliance measurement date were to cause us to violate
the Facility’s leverage ratio covenant, our borrowing capacity under the Facility and the favorable terms that we
currently have could be negatively impacted by the lenders.
We were in compliance with all of our financial covenants as of December 31, 2017.
Notes to Former Owners
As part of the consideration used to acquire two companies, we have outstanding notes to the former owners.
These notes had an outstanding balance of $15.3 million as of December 31, 2017. In conjunction with the BCH
acquisition in the second quarter of 2017, we issued a promissory note to the former owners with an outstanding balance
of $14.3 million as of December 31, 2017 that bears interest, payable quarterly, at a weighted average interest rate of
3.0%. The principal is due in equal installments in April 2020 and 2021. In conjunction with the Shoffner acquisition in
the first quarter of 2016, we issued a subordinated note to former owners with an outstanding balance of $1.0 million as
of December 31, 2017 that bears interest, payable quarterly, at a weighted average interest rate of 3.0%. The principal is
due in equal installments in February 2018 and 2019.
Other Debt
As part of the Shoffner acquisition, we acquired debt with an outstanding balance at the acquisition date of
$0.4 million with principal and interest due the last day of every month; ending on the December 30, 2019 maturity date.
The interest rate is the one month LIBOR rate plus 2.25%. As of December 31, 2017, $0.2 million of the note was
outstanding, of which $0.1 million was considered current.
Outlook
We have generated positive net free cash flow for the last nineteen calendar years, much of which occurred
during challenging economic and industry conditions. We also continue to have significant borrowing capacity under our
credit facility, and we maintain what we feel are reasonable cash balances. We believe these factors will provide us with
sufficient liquidity to fund our operations for the foreseeable future.
Off-Balance Sheet Arrangements and Other Commitments
As is common in our industry, we have entered into certain off-balance sheet arrangements in the ordinary
course of business that result in risks not directly reflected in our balance sheets. Our most significant off-balance sheet
36
transactions include liabilities associated with noncancelable operating leases. We also have other off-balance sheet
obligations involving letters of credit and surety guarantees.
We enter into noncancelable operating leases for many of our facility, vehicle and equipment needs. These
leases allow us to conserve cash by paying a monthly lease rental fee for use of facilities, vehicles and equipment rather
than purchasing them. At the end of the lease, we have no further obligation to the lessor. If we decide to cancel or
terminate a lease before the end of its term, we would typically owe the lessor the remaining lease payments under the
term of the lease.
Certain of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on our
behalf, such as to beneficiaries under our self-funded insurance programs. We have also occasionally used letters of
credit to guarantee performance under our contracts and to ensure payment to our subcontractors and vendors under
those contracts. The letters of credit we provide are actually issued by our lenders through the Facility as described
above. A letter of credit commits the lenders to pay specified amounts to the holder of the letter of credit if the holder
demonstrates that we have failed to perform specified actions. If this were to occur, we would be required to reimburse
the lenders. Depending on the circumstances of such a reimbursement, we may also have to record a charge to earnings
for the reimbursement. Absent a claim, there is no payment or reserving of funds by us in connection with a letter of
credit. However, because a claim on a letter of credit would require immediate reimbursement by us to our lenders,
letters of credit are treated as a use of the Facility’s capacity just the same as actual borrowings. Claims against letters of
credit are rare in our industry. To date we have not had a claim made against a letter of credit that resulted in payments
by a lender or by us. We believe that it is unlikely that we will have to fund claims under a letter of credit in the
foreseeable future.
Many customers, particularly in connection with new construction, require us to post performance and payment
bonds issued by a financial institution known as a surety. If we fail to perform under the terms of a contract or to pay
subcontractors and vendors who provided goods or services under a contract, the customer may demand that the surety
make payments or provide services under the bond. We must reimburse the sureties for any expenses or outlays they
incur. To date, we are not aware of any losses to our sureties in connection with bonds the sureties have posted on our
behalf, and we do not expect such losses to be incurred in the foreseeable future.
Under standard terms in the surety market, sureties issue bonds on a project-by-project basis and can decline to
issue bonds at any time. Historically, approximately 20% to 30% of our business has required bonds. While we currently
have strong surety relationships to support our bonding needs, future market conditions or changes in our sureties’
assessment of our operating and financial risk could cause our sureties to decline to issue bonds for our work. If that
were to occur, our alternatives include doing more business that does not require bonds, posting other forms of collateral
for project performance such as letters of credit or cash, and seeking bonding capacity from other sureties. We would
likely also encounter concerns from customers, suppliers and other market participants as to our creditworthiness. While
we believe our general operating and financial characteristics would enable us to ultimately respond effectively to an
interruption in the availability of bonding capacity, such an interruption would likely cause our revenue and profits to
decline in the near term.
Contractual Obligations
The following recaps the future maturities of our contractual obligations as of December 31, 2017 (in
thousands):
2018
Twelve Months Ended December 31,
2021
2020
2019
2022
Thereafter
Total
Revolving credit facility . . . . . . . . $
Notes to former owners . . . . . . . . .
Other debt . . . . . . . . . . . . . . . . . . .
Interest payable . . . . . . . . . . . . . . .
Operating lease obligations . . . . . .
— $ 45,000
15,325
—
214
—
5,210
—
71,606
21,726
Total . . . . . . . . . . . . . . . . . . . . . $ 16,292 $ 14,215 $ 18,521 $ 60,335 $ 6,266 $ 21,726 $ 137,355
— $
—
—
—
6,266
513
100
1,716
13,963
512
114
1,697
11,892
7,150
—
1,533
9,838
7,150
—
264
7,921
— $ 45,000 $
— $
— $
As discussed in Note 9 “Income Taxes”, included in our Consolidated Balance Sheet at December 31, 2017 is
approximately $8.9 million of unrecognized tax benefits. Due to the uncertain and complex application of tax
37
regulations, combined with the difficulty in predicting when tax audits may be concluded, we generally cannot make
reliable estimates of the timing of cash outflows relating to these liabilities. We, however, expect to recognize a decrease
in unrecognized tax benefits of up to $8.7 million within the next twelve months due to the filing of a federal income tax
automatic accounting method change application. Approximately $3.0 million of the decrease is expected to impact our
effective tax rate.
As of December 31, 2017, we also have $39.6 million in letter of credit commitments, of which $15.1 million
will expire in 2018 and $24.5 million will expire in 2019. The substantial majority of these letters of credit are posted
with insurers who disburse funds on our behalf in connection with our workers’ compensation, auto liability and general
liability insurance program. These letters of credit provide additional security to the insurers that sufficient financial
resources will be available to fund claims on our behalf, many of which develop over long periods of time, should we
ever encounter financial duress. Posting of letters of credit for this purpose is a common practice for entities that manage
their self-insurance programs through third-party insurers as we do. While many of these letter of credit commitments
expire in 2018, we expect nearly all of them, particularly those supporting our insurance programs, will be renewed
annually.
Other than the operating and capital lease obligations noted above, we have no significant purchase or operating
commitments outside of commitments to deliver equipment and provide labor in the ordinary course of performing
project work
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk primarily related to potential adverse changes in interest rates as discussed
below. We are actively involved in monitoring exposure to market risk and continue to develop and utilize appropriate
risk management techniques. We are not exposed to any other significant financial market risks including commodity
price risk, foreign currency exchange risk or interest rate risks from the use of derivative financial instruments. We do
not use derivative financial instruments.
We have exposure to changes in interest rates under our revolving credit facility. We have a modest level of
indebtedness under our debt facility and our indebtedness could increase in the future. Our debt with fixed interest rates
consists of notes to former owners of acquired companies.
The following table presents principal amounts (stated in thousands) and related average interest rates by year
of maturity for our debt obligations and their indicated fair market value at December 31, 2017:
Twelve Months Ended December 31,
2020
2019
Fixed Rate Debt . . . . . . . . . . . . . . . . . . . . . . . . . $ 513 $ 512 $ 7,150 $ 7,150 $ — $ — $ 15,325
Average Interest Rate . . . . . . . . . . . . . . . . . . . .
3.0%
Variable Rate Debt . . . . . . . . . . . . . . . . . . . . . . $ 100 $ 114 $
— $ 45,000 $ — $ — $ 45,214
2022 Thereafter Total
3.0%
—
3.0%
3.0%
3.0%
2018
—
2021
The interest rate applicable to the variable rate debt was approximately 3.8% as of December 31, 2017. The
weighted average interest rate applicable to the borrowings under the Facility was approximately 2.8% as of
December 31, 2017.
We measure certain assets at fair value on a nonrecurring basis. These assets are recognized at fair value when
they are deemed to be other-than-temporarily impaired. During the year ended December 31, 2017, we recorded a
goodwill impairment charge of $1.1 million based on Level 3 measurements. We did not recognize any other
impairments, in the current year, on those assets required to be measured at fair value on a nonrecurring basis.
The valuation of the Company’s contingent earn-out payments is determined using a probability weighted
discounted cash flow method. This analysis reflects the contractual terms of the purchase agreements (e.g., minimum
and maximum payment, length of earn-out periods, manner of calculating any amounts due, etc.) and utilizes
assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate.
38
ITEM 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Comfort Systems USA, Inc.
Management’s Report on Internal Control over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40
41
42
43
44
45
46
47
Page
39
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017 based on the
framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO 2013 framework). Based on that evaluation, our management concluded that our internal
control over financial reporting was effective as of December 31, 2017.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is
included elsewhere herein, has issued an attestation report auditing the effectiveness of our internal control over financial
reporting as of December 31, 2017.
40
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Comfort Systems USA, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Comfort Systems USA, Inc. (the Company) as of
December 31, 2017 and 2016, the related consolidated statements of operations, stockholders’ equity and cash flows for
each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2017, 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) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework), and our report dated February 22, 2018 expressed an unqualified opinion
thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
Houston, Texas
February 22, 2018
41
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Comfort Systems USA, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Comfort Systems USA, Inc.’s internal control over financial reporting as of December 31, 2017, based
on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Comfort Systems USA, Inc. (the
Company) maintained, in all material respects, effective internal control over financial reporting as of December 31,
2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related
consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended
December 31, 2017, and the related notes and our report dated February 22, 2018 expressed an unqualified opinion
thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, 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 detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ Ernst & Young LLP
Houston, Texas
February 22, 2018
42
COMFORT SYSTEMS USA, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
December 31,
2017
2016
CURRENT ASSETS:
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, less allowance for doubtful accounts of $3,400 and $4,288,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs and estimated earnings in excess of billings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPERTY AND EQUIPMENT, NET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GOODWILL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IDENTIFIABLE INTANGIBLE ASSETS, NET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DEFERRED TAX ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER NONCURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
36,542 $
32,074
382,867
21,235
10,303
8,294
30,116
489,357
87,591
200,584
76,044
22,966
4,578
318,837
20,363
9,208
6,106
29,369
415,957
68,195
149,208
42,435
27,170
5,938
$ 881,120 $ 708,903
CURRENT LIABILITIES:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current maturities of long-term capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Billings in excess of costs and estimated earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued self-insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LONG-TERM CAPITAL LEASE OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DEFERRED TAX LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER LONG-TERM LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
613 $
—
132,011
69,217
106,005
32,228
33,654
373,728
59,926
—
2,263
27,258
463,175
600
163
103,440
61,712
83,985
33,520
34,261
317,681
1,955
93
2,289
10,252
332,270
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par, 5,000,000 shares authorized, none issued and outstanding . .
Common stock, $.01 par, 102,969,912 shares authorized, 41,123,365 and
41,123,365 shares issued, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost, 3,936,291 and 3,914,251 shares, respectively . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
411
411
(57,387)
(63,519)
309,625
312,784
123,984
168,269
417,945
376,633
$ 881,120 $ 708,903
The accompanying notes are an integral part of these consolidated financial statements.
43
COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
Year Ended December 31,
2016
2015
2017
REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,787,922 $ 1,634,340 $ 1,580,519
1,262,390
COST OF SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
318,129
228,965
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES . . . . . . . . . .
GOODWILL IMPAIRMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(880)
GAIN ON SALE OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
90,044
1,290,331
344,009
243,201
—
(761)
101,569
1,421,641
366,281
266,586
1,105
(670)
99,260
OTHER INCOME (EXPENSE):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in the fair value of contingent earn-out obligations . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME INCLUDING NONCONTROLLING INTERESTS . . . . . . .
Less: Net income attributable to noncontrolling interests . . . . . . . . . . . . . . . .
NET INCOME ATTRIBUTABLE TO COMFORT SYSTEMS USA, INC. . $
70
(3,156)
3,715
1,049
1,678
100,938
45,666
55,272
—
55,272 $
9
(2,345)
731
1,097
(508)
101,061
36,165
64,896
—
64,896 $
72
(1,753)
225
76
(1,380)
88,664
31,224
57,440
8,076
49,364
INCOME PER SHARE ATTRIBUTABLE TO COMFORT SYSTEMS
USA, INC.:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.48 $
1.47 $
1.74 $
1.72 $
1.32
1.30
SHARES USED IN COMPUTING INCOME PER SHARE:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DIVIDENDS PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
37,239
37,672
37,335
37,811
0.295 $
0.275 $
37,442
37,868
0.250
The accompanying notes are an integral part of these consolidated financial statements.
44
COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands, Except Share Amounts)
Common Stock
Treasury Stock
Additional
Paid-In Retained Controlling Stockholders’
Total
Non-
Shares
Amount Shares
Amount Capital Earnings Interests
Equity
411
—
(3,853,586) $ (43,598) $ 320,084 $ 29,384 $
—
—
—
49,364
15,112 $
8,076
321,393
57,440
BALANCE AT DECEMBER 31, 2014 . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of Stock:
Issuance of shares for options exercised including
tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of restricted stock & performance stock .
Shares received in lieu of tax withholding payment on
vested restricted stock . . . . . . . . . . . . . . . . . . .
Tax benefit from vesting of restricted stock . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution to noncontrolling interest . . . . . . . . . .
Share repurchase . . . . . . . . . . . . . . . . . . . . . . . . .
BALANCE AT DECEMBER 31, 2015 . . . . . . . . . . . .
Cumulative effect of change in accounting principle.
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of Stock:
Issuance of shares for options exercised . . . . . . .
Issuance of restricted stock & performance stock .
Shares received in lieu of tax withholding payment on
vested restricted stock . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of noncontrolling interest. . . . . . . . . . .
Share repurchase . . . . . . . . . . . . . . . . . . . . . . . . .
BALANCE AT DECEMBER 31, 2016 . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of Stock:
Issuance of shares for options exercised . . . . . . .
Issuance of restricted stock & performance stock .
Shares received in lieu of tax withholding payment on
vested restricted stock . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share repurchase . . . . . . . . . . . . . . . . . . . . . . . .
BALANCE AT DECEMBER 31, 2017 . . . . . . . . . . . .
41,123,365 $
—
—
—
—
—
317,333
200,015
3,728
2,292
966
(626)
—
—
—
—
—
—
—
—
—
—
41,123,365
—
—
—
—
—
—
—
—
411
—
—
(44,590)
—
—
—
—
(315,953)
(3,696,781)
—
—
(937)
—
—
—
—
(8,330)
(46,845)
—
—
—
284
3,057
—
—
—
323,765
—
—
—
—
—
(9,358)
—
—
69,390
(38)
64,896
—
—
—
—
(4,904)
—
18,284
—
—
—
—
—
—
111,761
172,727
1,568
2,282
10
(306)
—
—
—
—
—
—
—
—
—
41,123,365
—
—
—
—
—
—
411
—
(41,788)
—
—
—
(460,170)
(3,914,251)
—
(1,304)
—
—
—
(13,088)
(57,387)
—
—
3,502
—
(17,346)
—
309,625
—
—
—
(10,264)
—
—
123,984
55,272
—
—
—
(18,284)
—
—
—
4,694
1,666
(937)
284
3,057
(9,358)
(4,904)
(8,330)
365,005
(38)
64,896
1,578
1,976
(1,304)
3,502
(10,264)
(35,630)
(13,088)
376,633
55,272
2,052
1,616
—
—
—
—
—
—
41,123,365 $
—
—
145,746
134,646
2,257
2,037
(205)
(421)
—
—
—
—
—
—
—
—
411
(39,335)
—
—
(263,097)
(1,419)
—
—
(9,007)
—
3,785
—
—
—
—
(10,987)
—
(3,936,291) $ (63,519) $ 312,784 $ 168,269 $
—
—
—
—
— $
(1,419)
3,785
(10,987)
(9,007)
417,945
The accompanying notes are an integral part of these consolidated financial statements.
45
COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended December 31,
2016
2015
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income including noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash provided by operating activities—
55,272 $
64,896 $
57,440
Amortization of identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bad debt expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in the fair value of contingent earn-out obligations . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities, net of effects of acquisitions and
17,404
20,052
1,105
182
4,178
376
(670)
(3,715)
6,377
divestitures—
(Increase) decrease in—
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs and estimated earnings in excess of billings . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(37,799)
(584)
2,467
1,869
1,005
Increase (decrease) in—
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Billings in excess of costs and estimated earnings . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,068
13,265
11,238
114,090
8,185
17,981
—
(27)
(1,239)
367
(761)
(731)
5,041
7,038
213
(8,850)
3,144
(143)
2,736
(8,351)
1,689
91,188
7,481
15,935
—
1,552
(414)
317
(880)
(225)
5,609
(3,584)
956
364
(3,630)
(479)
11,617
7,908
(2,100)
97,867
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(35,467)
1,359
(94,860)
(128,968)
(23,217)
1,062
(57,163)
(79,318)
(20,808)
1,338
(6,158)
(25,628)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on revolving line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of dividends to stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares received in lieu of tax withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit of stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions to noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for contingent consideration arrangements . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . .
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
177,000
(132,000)
(835)
(256)
—
(10,987)
(9,007)
(1,419)
—
2,052
—
(2,802)
(2,400)
19,346
4,468
32,074
36,542 $
144,000
(154,000)
(592)
(251)
(789)
(10,264)
(13,088)
(1,304)
—
1,578
—
(1,350)
(200)
(36,260)
(24,390)
56,464
32,074 $
24,500
(53,000)
—
(443)
—
(9,358)
(8,330)
(937)
1,240
3,738
(4,904)
—
(345)
(47,839)
24,400
32,064
56,464
The accompanying notes are an integral part of these consolidated financial statements.
46
COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
1. Business and Organization
Comfort 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 as
off-site construction, electrical, monitoring and fire protection. We install, maintain, repair and replace products and
systems throughout the United States. Approximately 38% of our consolidated 2017 revenue is attributable to
installation of systems in newly constructed facilities, with the remaining 62% attributable to maintenance, repair and
replacement services.
Our consolidated 2017 revenue was derived from the following service activities, all of which are in the
mechanical services industry, the single industry segment we serve:
Revenue
Service Activity
HVAC and Plumbing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,615,468
94,041
Building Automation Control Systems . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78,413
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,787,922
$ in thousands %
90 %
5 %
5 %
100 %
2. Summary of Significant Accounting Policies
Principles of Consolidation
These financial statements are prepared in accordance with accounting principles generally accepted in the
United States of America. The accompanying consolidated financial statements include our accounts and those of our
subsidiaries in which we have a controlling interest. All significant intercompany accounts and transactions have been
eliminated. Certain amounts in prior periods may have been reclassified to conform to the current period presentation.
The effects of the reclassifications were not material to the consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires the
use of estimates and assumptions by management in determining the reported amounts of assets and liabilities, revenue
and expenses and disclosures regarding contingent assets and liabilities. Actual results could differ from those estimates.
The most significant estimates used in our financial statements affect revenue and cost recognition for construction
contracts, the allowance for doubtful accounts, self-insurance accruals, deferred tax assets, warranty accruals, fair value
accounting for acquisitions and the quantification of fair value for reporting units in connection with our goodwill
impairment testing. In 2015, 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 $3.4 million, on a pre-tax basis.
47
Cash Flow Information
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash
equivalents.
Cash paid (in thousands) for:
Year Ended December 31,
2015
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,832 $ 1,864 $
1,408
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,144 $ 29,349 $ 35,538
2017
2016
Recent Accounting Pronouncements
In 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 the existing revenue recognition guidance. The guidance can be applied on a full retrospective or modified
retrospective basis whereby the entity records a cumulative effect of initially applying this update on the adoption date.
We plan to use the modified retrospective basis on the adoption date. ASU 2014-09 is effective for annual periods
beginning after December 15, 2017, including interim periods within that reporting period. We believe the areas that
may impact us the most include accounting for variable consideration, capitalization of incremental costs of obtaining a
contract and the guidance on the number of performance obligations contained in a contract. We currently expect the
adoption of ASU 2014-09 to have an impact of less than $0.5 million on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The standard requires lessees to
recognize assets and liabilities for most leases. ASU 2016-02 is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2018. Early adoption is permitted. ASU 2016-02’s transition provisions are
applied using a modified retrospective approach at the beginning of the earliest comparative period presented in the
financial statements. Full retrospective application is prohibited. We are currently evaluating the potential impact of this
authoritative guidance on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments”. This standard provides guidance on how certain cash receipts and cash
payments are presented and classified in the statement of cash flows and is intended to reduce diversity in practice with
respect to these items. The standard is applied using a retrospective transition method and is effective for fiscal years
beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We
currently do not believe the adoption will have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and other (Topic 350):
Simplifying the Accounting for Goodwill Impairment”. This standard removes Step 2 of the goodwill impairment test,
which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a
reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Additionally,
entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts.
The standard is applied prospectively and is effective for fiscal years beginning after December 15, 2019, including
annual or interim goodwill impairment tests within those fiscal years. Early adoption is permitted for interim and annual
goodwill impairment tests performed on testing dates after January 1, 2017. We early adopted ASU 2017-04 in the first
quarter of 2017, which did not have a material impact on our consolidated financial statements.
Revenue Recognition
Approximately 81% of our revenue was earned on a project basis and recognized through the percentage of
completion method of accounting. Under this method, contract revenue recognizable at any time during the life of a
contract is determined by multiplying expected total contract revenue by the percentage of contract costs incurred at any
time to total estimated contract costs. More specifically, as part of the negotiation and bidding process in connection
with obtaining installation contracts, we estimate our contract costs, which include all direct materials (exclusive of
rebates), labor and subcontract costs and indirect costs related to contract performance, such as indirect labor, supplies,
tools, repairs and depreciation costs. These contract costs are included in our results of operations under the caption
48
“Cost of Services.” Then, as we perform under those contracts, we measure costs incurred, compare them to total
estimated costs to complete the contract and recognize a corresponding proportion of contract revenue. Labor costs are
considered to be incurred as the work is performed. Subcontractor labor is recognized as the work is performed, but is
generally subjected to approval as to milestones or other evidence of completion. Non-labor project costs consist of
purchased equipment, prefabricated materials and other materials. Purchased equipment on our projects is substantially
produced to job specifications and is a value added element to our work. The costs are considered to be incurred when
title is transferred to us, which typically is upon delivery to the work site. Prefabricated materials, such as ductwork and
piping, are generally performed at our shops and recognized as contract costs when fabricated for the unique
specifications of the job. Other material costs are not significant and are generally recorded when delivered to the work
site. This measurement and comparison process requires updates to the estimate of total costs to complete the contract,
and these updates may include subjective assessments.
We generally do not incur significant costs prior to receiving a contract, and therefore, these costs are expensed
as incurred. In limited circumstances, when significant pre-contract costs are incurred, they are deferred if the costs can
be directly associated with a specific contract and if their recoverability from the contract is probable. Upon receiving
the contract, these costs are included in contract costs. Deferred costs associated with unsuccessful contract bids are
written off in the period that we are informed that we will not be awarded the contract.
Project contracts typically provide for a schedule of billings or invoices to the customer based on reaching
agreed upon milestones or as we incur costs. The schedules for such billings usually do not precisely match the schedule
on which costs are incurred. As a result, contract revenue recognized in the statement of operations can and usually does
differ from amounts that can be billed or invoiced to the customer at any point during the contract. Amounts by which
cumulative contract revenue recognized on a contract as of a given date exceed cumulative billings to the customer
under the contract are reflected as a current asset in our balance sheet under the caption “Costs and estimated earnings in
excess of billings.” Amounts by which cumulative billings to the customer under a contract as of a given date exceed
cumulative contract revenue recognized on the contract are reflected as a current liability in our balance sheet under the
caption “Billings in excess of costs and estimated earnings.”
Contracts in progress are as follows (in thousands):
December 31,
2017
Costs incurred on contracts in progress . . . . . . . . . . . . . . . . . $
Estimated earnings, net of losses . . . . . . . . . . . . . . . . . . . . . .
Less—Billings to date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,288,330 $
253,641
(1,617,860)
$
Costs and estimated earnings in excess of billings . . . . . . . . $
Billings in excess of costs and estimated earnings . . . . . . . .
$
(75,889) $
30,116 $
(106,005)
(75,889) $
2016
1,116,182
207,252
(1,378,050)
(54,616)
29,369
(83,985)
(54,616)
Accounts receivable include amounts billed to customers under retention or retainage provisions in construction
contracts. Such provisions are standard in our industry and usually allow for a small portion of progress billings or the
contract price to be withheld by the customer until after we have completed work on the project, typically for a period of
six months. Based on our experience with similar contracts in recent years, the majority of our billings for such retention
balances at each balance sheet date are finalized and collected within the subsequent year. Retention balances at
December 31, 2017 and 2016 were $68.7 million and $60.7 million, respectively, and are included in accounts
receivable.
Accounts payable at December 31, 2017 and 2016 included $11.9 million and $10.1 million of retainage under
terms of contracts with subcontractors, respectively. The majority of the retention balances at each balance sheet date are
finalized and paid within the subsequent year.
The percentage of completion method of accounting is also affected by changes in job performance, job
conditions and final contract settlements. These factors may result in revisions to estimated costs and, therefore, revenue.
Such revisions are frequently based on further estimates and subjective assessments. The effects of these revisions are
recognized in the period in which the revisions are determined. When such revisions lead to a conclusion that a loss will
49
be recognized on a contract, the full amount of the estimated ultimate loss is recognized in the period such a conclusion
is reached, regardless of the percentage of completion of the contract.
Revisions to project costs and conditions can give rise to change orders under which the customer agrees to pay
additional contract price. Revisions can also result in claims we might make against the customer to recover project
variances that have not been satisfactorily addressed through change orders with the customer. Except in certain
circumstances, we do not recognize revenue or margin based on change orders or claims until they have been agreed
upon with the customer. The amount of revenue associated with unapproved change orders and claims was immaterial
for the year ended December 31, 2017.
Variations from estimated project costs could have a significant impact on our operating results, depending on
project size, and the recoverability of the variation via additional customer payments.
Revenue associated with maintenance, repair and monitoring services and related contracts are recognized as
services are performed. Amounts associated with unbilled service work orders are reflected as a current asset in our
balance sheet under the caption “Costs and estimated earnings in excess of billings” and amounts billed in advance of
work orders being performed are reflected as a current liability in our balance sheet under the caption “Billings in excess
of costs and estimated earnings.”
Accounts Receivable
The carrying value of our receivables, net of the allowance for doubtful accounts, represents the estimated net
realizable value. We estimate our allowance for doubtful accounts based upon the creditworthiness of our customers,
prior collection history, ongoing relationships with our customers, the aging of past due balances, our lien rights, if any,
in the property where we performed the work and the availability, if any, of payment bonds applicable to the contract.
The receivables are written off when they are deemed to be uncollectible.
Inventories
Inventories consist of parts and supplies that we purchase and hold for use in the ordinary course of business
and are stated at the lower of cost or net realizable value using the average-cost method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are capitalized and amortized over the lesser of the
expected life of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major
renewals and betterments, which extend the useful lives of existing equipment, are capitalized and depreciated over the
remaining useful life of the equipment. Upon retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in “Gain on sale of
assets” in the statement of operations.
Recoverability of Goodwill and Identifiable Intangible Assets
Goodwill is the excess of purchase price over the fair value of the net assets of acquired businesses. We assess
goodwill for impairment each year, and more frequently if circumstances suggest an impairment may have occurred.
When the carrying value of a given reporting unit exceeds its fair value, an impairment loss is recorded to the
extent that the implied fair value of the goodwill of the reporting unit is less than its carrying value. If other reporting
units have had increases in fair value, such increases may not be recorded. Accordingly, such increases may not be
netted against impairments at other reporting units. The requirements for assessing whether goodwill has been impaired
involve market-based information. This information, and its use in assessing goodwill, entails some degree of subjective
assessment.
50
We perform our annual impairment testing as of October 1 and any impairment charges resulting from this
process are reported in the fourth quarter. We segregate our operations into reporting units based on the degree of
operating and financial independence of each unit and our related management of them. We perform our annual
goodwill impairment testing at the reporting unit level. Each of our operating units represents an operating segment, and
our operating segments are our reporting units.
In the evaluation of goodwill for impairment, we have the option to first assess qualitative factors to determine
whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value
of one of our reporting units is greater than its carrying value. If, after completing such assessment, we determine it is
more likely than not that the fair value of a reporting unit is greater than its carrying amount, then there is no need to
perform any further testing. If we conclude otherwise, then we perform the first step of a two-step impairment test by
calculating the fair value of the reporting unit and comparing the fair value with the carrying value of the reporting unit.
We estimate the fair value of the reporting unit based on a market approach and an income approach, which
utilizes discounted future cash flows. Assumptions critical to the fair value estimates under the discounted cash flow
model include discount rates, cash flow projections, projected long-term growth rates and the determination of terminal
values. The market approach utilizes market multiples of invested capital from comparable publicly traded companies
(“public company approach”). The market multiples from invested capital include revenue, book equity plus debt and
earnings before interest, provision for income taxes, depreciation and amortization (“EBITDA”).
We amortize identifiable intangible assets with finite lives over their useful lives. Changes in strategy and/or
market condition may result in adjustments to recorded intangible asset balances.
Long-Lived Assets
Long-lived assets are comprised principally of goodwill, identifiable intangible assets, property and equipment,
and deferred tax assets. We periodically evaluate whether events and circumstances have occurred that indicate that the
remaining 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.
Acquisitions
We recognize assets acquired and liabilities assumed in business combinations, including contingent assets and
liabilities, based on fair value estimates as of the date of acquisition.
Contingent Consideration—In certain acquisitions, we agree to pay additional amounts to sellers contingent
upon achievement by the acquired businesses of certain predetermined profitability targets. We have recognized
liabilities for these contingent obligations based on their estimated fair value at the date of acquisition with any
differences between the acquisition date fair value and the ultimate settlement of the obligations being recognized in
income from operations.
Contingent Assets and Liabilities—Assets and liabilities arising from contingencies are recognized at their
acquisition date fair value when their respective fair values can be determined. If the fair values of such contingencies
cannot be determined, they are recognized at the acquisition date if the contingencies are probable and an amount can be
reasonably estimated. Acquisition date fair value estimates are revised as necessary if, and when, additional information
regarding these contingencies becomes available to further define and quantify assets acquired and liabilities assumed.
Self-Insurance Liabilities
We are substantially self-insured for workers’ compensation, employer’s liability, auto liability, general liability
and employee group health claims, in view of the relatively high per-incident deductibles we absorb under our insurance
arrangements for these risks. Losses are estimated and accrued based upon known facts, historical trends and industry
averages. Estimated losses in excess of our deductible, which have not already been paid, are included in our accrual
with a corresponding 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. Our self-insurance arrangements are further discussed in Note 11 “Commitments and Contingencies.”
51
Warranty Costs
We typically warrant labor for the first year after installation on new HVAC systems. We generally warrant
labor for thirty days after servicing of existing HVAC systems. A reserve for warranty costs is estimated and recorded
based upon the historical level of warranty claims and management’s estimate of future costs.
Income Taxes
We are subject to income tax in the United States and Puerto Rico and file a consolidated return for federal
income tax purposes. Income taxes are provided for under the liability method, which takes into account differences
between financial statement treatment and tax treatment of certain transactions.
Deferred taxes are based on the difference between the financial reporting and tax basis of assets and liabilities.
The deferred tax provision represents the change during the reporting period in the deferred tax assets and deferred tax
liabilities, net of the effect of acquisitions and dispositions. Deferred tax assets include tax loss and credit carryforwards
and are reduced by a valuation allowance if, based on available evidence, it is more-likely-than-not some portion or all
of the deferred tax assets will not be realized.
We regularly evaluate valuation allowances established for deferred tax assets for which future realization is
uncertain. We perform this evaluation quarterly. In assessing the realizability of deferred tax assets, we must consider
whether it is more-likely-than-not some portion, or all, of the deferred tax assets will not be realized. We consider all
available evidence, both positive and negative, in determining whether a valuation allowance is required. Such evidence
includes the scheduled reversal of deferred tax liabilities, projected future taxable income, taxable income in prior
carryback years and tax planning strategies in making this assessment, and judgment is required in considering the
relative weight of negative and positive evidence.
Significant judgment is required in assessing the timing and amounts of deductible and taxable items. We
establish reserves when, despite our belief that our tax return positions are supportable, we believe that certain positions
may be disallowed. When facts and circumstances change, we adjust these reserves through our provision for income
taxes.
To the extent interest and penalties may be assessed by taxing authorities on any underpayment of income tax,
such amounts have been accrued and are classified as a component in provision for income taxes in our Consolidated
Statements of Operations.
Segment Disclosure
Our activities are within the mechanical services industry, which is the single industry segment we serve. Each
operating unit represents an operating segment and these segments have been aggregated, as the operating units meet all
of the aggregation criteria.
Concentrations of Credit Risk
We provide services in a broad range of geographic regions. Our credit risk primarily consists of receivables
from a variety of customers including general contractors, property owners and developers and commercial and
industrial companies. We are subject to potential credit risk related to changes in business and economic factors
throughout the United States within the nonresidential construction industry. However, we are entitled to payment for
work performed and have certain lien rights in that work. Further, we believe that our contract acceptance, billing and
collection policies are adequate to manage potential credit risk. We regularly review our accounts receivable and
estimate an allowance for uncollectible amounts. We have a diverse customer base, with no single customer accounting
for more than 2% of consolidated 2017 revenue.
Financial Instruments
Our financial instruments consist of cash and cash equivalents, accounts receivable, other receivables, accounts
payable, life insurance policies, notes to former owners, capital leases, and a revolving credit facility. We believe that the
carrying values of these instruments on the accompanying balance sheets approximate their fair values.
52
3. Fair Value Measurements
We classify and disclose assets and liabilities carried at fair value in one of the following three categories:
• Level 1—quoted prices in active markets for identical assets and liabilities;
• Level 2—observable market based inputs or unobservable inputs that are corroborated by market data; and
• Level 3—significant unobservable inputs in which little or no market data exists, therefore requiring an
entity to develop its own assumptions.
The following table summarizes the fair values, and levels within the fair value hierarchy in which the fair
value measurements fall, for assets and liabilities measured on a recurring basis as of December 31, 2017 and 2016 (in
thousands):
Balance
December 31,
Fair Value Measurements at Reporting Date
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Life insurance—cash surrender value . . . . . . . . . . . . . . . . . . . . . . . . $
Contingent earn-out obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Life insurance—cash surrender value . . . . . . . . . . . . . . . . . . . . . . . . $
Contingent earn-out obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Level 1
2017
36,542 $ 36,542 $
— $
3,128 $
— $
7,993 $
Level 2
Level 3
— $
3,128 $
— $
—
—
7,993
Level 2
Level 3
Level 1
December 31,
2016
32,074 $ 32,074 $
3,697 $
2,531 $
— $
— $ 3,697 $
— $
—
—
— $ 2,531
Cash and cash equivalents consist primarily of highly rated money market funds at a variety of well-known
institutions with original maturities of three months or less. The original cost of these assets approximates fair value due
to their short term maturity. The carrying value of our borrowings associated with the Revolving Credit Facility
approximate its fair value due to the variable rate on such debt.
One of our operations has life insurance policies covering 42 employees with a combined face value of
$31.3 million. The policies are invested in mutual funds and the fair value measurement of the cash surrender balance
associated with these policies is determined using Level 2 inputs within the fair value hierarchy and will vary with
investment performance. The cash surrender value of these policies is $3.1 million as of December 31, 2017 and
$3.7 million as of December 31, 2016. These assets are included in “Other Noncurrent Assets” in our consolidated
balance sheets.
We value contingent earn-out obligations using a probability weighted discounted cash flow method. This fair
value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement
within the fair value hierarchy. This analysis reflects the contractual terms of the purchase agreements (e.g., minimum
and maximum payments, length of earn-out periods, manner of calculating any amounts due, etc.) and utilizes
assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate. The
contingent earn-out obligations are measured at fair value each reporting period and changes in estimates of fair value
are recognized in earnings.
53
The table below presents a reconciliation of the fair value of our contingent earn-out obligations that use
significant unobservable inputs (Level 3) (in thousands).
450
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,531 $
3,240
Issuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,755
(428)
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,578)
Adjustments to fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,715)
(731)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,993 $ 2,531
December 31,
2017
2016
We measure certain assets at fair value on a nonrecurring basis. These assets are recognized at fair value when
they are deemed to be other-than-temporarily impaired. During the year ended December 31, 2017, we recorded a
goodwill impairment charge of $1.1 million based on Level 3 measurements. See Note 5 “Goodwill and Identifiable
Intangible Assets, Net” for further discussion. No goodwill or other intangible asset impairments were recorded during
the years ended December 31, 2016 and 2015. We did not recognize any other impairments on those assets required to
be measured at fair value on a nonrecurring basis.
4. Acquisitions
On April 1, 2017, we acquired all of the issued and outstanding stock of BCH Holdings, Inc. and each of its
wholly-owned subsidiaries (collectively “BCH”). BCH is an integrated, single-source provider of mechanical service,
maintenance and construction with headquarters in Tampa, Florida and operations throughout the southeastern region of
the United States, which reports as a separate operating location.
The following summarizes the acquisition date fair value of consideration transferred and identifiable assets
acquired and liabilities assumed, including an amount for goodwill (in thousands):
9,613
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
28,263
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs and estimated earnings in excess of billings . . . . . . . . .
1,690
708
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,927
50,512
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . .
46,500
Accounts payable and other current liabilities . . . . . . . . . . . .
(11,763)
Billings in excess of costs and estimated earnings . . . . . . . . .
(8,039)
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
(104)
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 121,307
The total purchase price was $121.3 million, including $95.4 million in cash, $14.3 million in notes payable to
former owners and an $11.6 million contingent earn-out obligation. Our consolidated balance sheet includes preliminary
allocations of the purchase price to the assets acquired and liabilities assumed pending the completion of the final
valuation of intangible assets and accrued liabilities.
The contingent earn-out obligation is based upon exceeding specified earnings milestones each year during a
four-year period. We determined the initial fair value of the contingent earn-out obligation based on a Monte Carlo
simulation model which represents a Level 3 measurement. We measure the contingent earn-out obligation at fair value
each reporting period and changes in the estimated fair value of the contingent payments are recognized in earnings.
Goodwill represents the future economic benefits arising from other assets acquired that could not be
individually identified and separately recognized. All of the goodwill recognized as a result of this transaction is tax
deductible.
54
The acquired assets include the following (in thousands):
Customer relationships . . . . . . . . . . . . . . . . . . . Excess Earnings
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess Earnings
Tradenames . . . . . . . . . . . . . . . . . . . . . . . . . . . . Relief-from-royalty
Total acquired intangible assets . . . . . . . . . . . .
10 years
1 year
25 years
$ 36,500
6,300
3,700
$ 46,500
Valuation
Method
Estimated
Estimated
Amortization Life Value
In estimating the fair value of the acquired intangible assets, we utilized the valuation methodology determined
to be the most appropriate for the individual intangible asset. In order to estimate the fair value of the backlog and
customer relationships, we utilized an excess earnings methodology, which consisted of the projected cash flows
attributable to these assets discounted to present value using a risk-adjusted discount rate that represented the required
rate of return. The tradename value was determined based on the relief-from-royalty method, which applies a royalty rate
to the revenue stream attributable to this asset and the resulting royalty payment is tax effected and discounted to present
value. Some of the more significant estimates and assumptions inherent in determining the fair value of the identifiable
intangible assets are associated with forecasting cash flows and profitability, which represent Level 3 inputs. The
primary assumptions used were generally based upon the present value of anticipated cash flows discounted at rates
ranging from 13%-18%. Estimated years of projected earnings generally follow the range of estimated remaining useful
lives for each intangible asset class.
Other Acquisitions
We completed two acquisitions in the first quarter of 2016. We acquired the remaining 40% noncontrolling
interest in Environmental Air Systems, LLC (“EAS”) on January 1, 2016 for $46.6 million, including $42.0 million
funded on the closing date plus a holdback, an earn-out that will be earned if certain financial targets are met after the
acquisition date and a working capital adjustment. Due to our majority ownership and control over EAS on the
acquisition date, the difference between the purchase price and the noncontrolling interest liability was recorded in
Additional Paid-In Capital in our Balance 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. The
acquisition date fair value of consideration transferred for this acquisition was $19.8 million, of which $14.8 million was
allocated to goodwill and identifiable intangible assets. The purchase price included $15.5 million funded on the closing
date plus a note payable to former owners, an earn-out that we will pay if certain financial targets are met after the
acquisition date and a working capital adjustment.
We completed various other acquisitions in 2017 and 2016 which were not material, individually or in the
aggregate, and were “tucked-in” with existing operations. The total purchase price for the “tucked-in” acquisitions,
including earn-outs, was $9.4 million in 2017 and $0.1 million in 2016.
The results of operations of acquisitions are included in our consolidated financial statements from their
respective acquisition dates. The acquisitions completed in the current and prior year were not material, individually or
in the aggregate. Additional contingent purchase price (“earn-out”) has been or will be paid if certain acquisitions
achieve predetermined profitability targets. Such earn-outs are not subject to the continued employment of the sellers.
55
5. Goodwill and Identifiable Intangible Assets, Net
Goodwill
The changes in the carrying amount of goodwill are as follows (in thousands):
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 149,208 $ 143,874
Additions (See Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,481
5,334
Impairment adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(1,105)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 200,584 $ 149,208
December 31,
2017
2016
We perform our annual impairment testing on October 1, or more frequently, if events and circumstances
indicate impairment may have occurred. As discussed in Note 2, “Summary of Significant Accounting Policies,” we
have the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value
of the reporting unit is less than the carrying value.
During our annual impairment testing on October 1, we performed a qualitative assessment for each reporting
unit, which considered various factors, including changes in the carrying value of the reporting unit, forecasted operating
results, long-term growth rates and discount rates. Additionally, 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 carrying value. Accordingly, no further testing was required.
Prior to our annual goodwill impairment test in 2017, we recorded a goodwill impairment charge of
$1.1 million during the first quarter of 2017. Based on changes to our market strategy that occurred in March 2017
related to our reporting unit based in California, we reevaluated our projected future earnings for this operating location
and determined that we could no longer support the related goodwill balance and therefore the goodwill associated with
this location was fully impaired. The fair value was estimated using a discounted cash flow model.
During 2016, we performed a quantitative assessment where the fair value of each reporting unit was estimated
using a discounted cash flow model combined with a market valuation approach. We assigned a weighting of 50% to the
discounted cash flow analysis and 50% to the public company approach for the year ended December 31, 2016. Based
on this assessment, we concluded that the fair value of each of the reporting units was greater than its carrying value. As
of October 1, 2016, the fair value exceeded the carrying value by a significant margin for all of our reporting units with a
goodwill balance.
During 2015, we performed a qualitative assessment for each reporting unit and no further testing was required.
There are significant inherent uncertainties and management judgment involved in estimating the fair value of
each reporting unit. While we believe we have made reasonable estimates and assumptions to estimate the fair value of
our reporting units, it is possible that a material change could occur. If actual results are not consistent with our current
estimates and assumptions, or the current economic outlook worsens, goodwill impairment charges may be recorded in
future periods.
56
Identifiable Intangible Assets, Net
Identifiable intangible assets consist of the following (dollars in thousands):
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . .
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncompete agreements . . . . . . . . . . . . . . . . . . . . . . . . . .
Tradenames . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
2017
Value
Amortization Value
Estimated
Useful Lives Gross Book Accumulated Gross Book Accumulated
Amortization
$ 98,244 $ (47,057) $ 57,230 $ (36,758)
(3,433)
(2,890)
(9,844)
$ 139,884 $ (63,840) $ 95,360 $ (52,925)
in Years
1 - 15
1 - 2
2 - 7
2 - 25
(5,478)
—
(11,305)
6,300
—
35,340
3,600
2,890
31,640
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
from one to twenty-five years. The amounts attributable to backlog are being amortized to “Cost of Services” on a
proportionate method over the remaining backlog period. Amortization expense for the years ended December 31, 2017,
2016 and 2015 was $17.4 million, $8.2 million and $7.5 million, respectively.
At December 31, 2017, future amortization expense of identifiable intangible assets is as follows (in
thousands):
Year ended December 31—
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,786
11,320
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,252
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,651
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,041
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,994
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,044
6. Property and Equipment
Property and equipment consist of the following (dollars in thousands):
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . .
Computer and telephone equipment . . . . . . . . . . . . . . . .
Buildings and leasehold improvements . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . .
Less—Accumulated depreciation . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . .
$
Estimated
Useful Lives
in Years
—
1 - 7
1 - 20
1 - 10
1 - 40
1 - 17
—
December 31,
2017
2,745 $
87,120
30,064
20,463
38,422
4,473
12,614
195,901
(108,310)
2016
2,745
74,137
27,843
20,791
35,166
4,224
425
165,331
(97,136)
87,591 $ 68,195
$
Depreciation expense, including capital lease amortization, for the years ended December 31, 2017, 2016 and
2015 was $20.1 million, $18.0 million and $15.9 million, respectively.
57
7. Detail of Certain Balance Sheet Accounts
Activity in our allowance for doubtful accounts consists of the following (in thousands):
December 31,
2016
2015
2017
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,288 $ 5,158 $ 4,379
Bad debt expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,552
Deductions for uncollectible receivables written off, net of
182
(27)
recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts of acquired companies at date
of acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,400 $ 4,288 $ 5,158
759
33
(1,829)
(876)
(798)
Other current liabilities consist of the following (in thousands):
Accrued warranty costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,149 $ 6,702
1,269
Accrued job losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,973
Accrued sales and use tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,257
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,196
Liabilities due to former owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,864
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 33,654 $ 34,261
598
2,308
3,895
2,981
17,723
December 31,
2017
2016
8. Long-Term Debt Obligations
Long-term debt obligations consist of the following (in thousands):
—
Revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,000 $
2,250
Notes to former owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,325
Other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
305
214
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
256
—
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,539
2,811
Less—current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(763)
(613)
Total long-term portion of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,926 $ 2,048
December 31,
2017
2016
At December 31, 2017, future principal payments of debt are as follows (in thousands):
Year ended December 31—
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
613
626
7,150
52,150
$ 60,539
58
Interest expense included the following primary elements (in thousands):
Year Ended December 31,
2015
2016
2017
25
Interest expense on notes to former owners . . . . . . . . . . . . . . . . . $
692
Interest expense on borrowings and unused commitment fees . .
719
Letter of credit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt financing costs . . . . . . . . . . . . . . . . . . . . . . .
317
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,156 $ 2,345 $ 1,753
1,862
553
376
1,251
657
367
365 $
70 $
Revolving Credit Facility
We have a $325.0 million senior credit facility (the “Facility”) provided by a syndicate of banks, with a
$100 million accordion option. The Facility, which is available for borrowings and letters of credit, expires in February
2021 and is secured by a first lien on substantially all of our personal property except for assets related to projects
subject to surety bonds and assets held by certain unrestricted subsidiaries and a second lien on our assets related to
projects subject to surety bonds. As of December 31, 2017, we had $45.0 million of outstanding borrowings,
$39.6 million in letters of credit outstanding and $240.4 million of credit available.
Collateral
A common practice in our industry is the posting of payment and performance bonds with customers. These
bonds are offered by financial institutions known as sureties, and provide assurance to the customer that in the event we
encounter significant financial or operational difficulties, the surety will arrange for the completion of our contractual
obligations and for the payment of our vendors on the projects subject to the bonds. In cooperation with our lenders, we
granted our sureties a first lien on assets such as receivables, costs and estimated earnings in excess of billings, and
equipment specifically identifiable to projects for which bonds are outstanding, as collateral for potential obligations
under bonds. As of December 31, 2017, the book value of these assets was approximately $40.9 million.
Covenants and Restrictions
The Facility contains financial covenants defining various measures and the levels of these measures with
which we must comply. Covenant compliance is assessed as of each quarter end. Credit Facility Adjusted EBITDA is
defined under the Facility for financial covenant purposes as net earnings for the four quarters ending as of any given
quarterly covenant compliance measurement date, plus the corresponding amounts for (a) interest expense; (b) provision
for income taxes; (c) depreciation and 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 2017 (in thousands):
Net income including noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55,272
45,666
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,086
37,456
Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,377
1,105
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pre-acquisition results of acquired companies, as defined under the Facility . . . . .
4,597
Credit Facility Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 153,559
The Facility’s principal financial covenants include:
Leverage Ratio—The Facility requires that the ratio of our Consolidated Total Indebtedness to our
Credit Facility Adjusted EBITDA not exceed 2.75 to 1.00 as of the end of each fiscal quarter. The leverage ratio
as of December 31, 2017 was 0.4.
Fixed Charge Coverage Ratio—The Facility requires that the ratio of Credit Facility Adjusted
EBITDA, less non-financed capital expenditures, provision for income taxes, dividends and amounts used to
59
repurchase stock to the sum of interest expense and scheduled principal payments of indebtedness be at least
2.00 to 1.00; provided that the calculation of the fixed charge coverage ratio excludes stock repurchases and the
payment of dividends at any time that the Company’s Net Leverage Ratio does not exceed 1.50 to 1.00. The
Facility also allows the fixed charge coverage ratio not to be reduced for stock repurchases through
September 30, 2015 in an aggregate amount not to exceed $25 million 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 repurchase the Company’s Net Leverage Ratio was less than or equal
to 1.50 to 1.00. Capital expenditures, provision for income taxes, dividends and stock repurchase payments are
defined under the Facility for purposes of this covenant to be amounts for the four quarters ending as of any
given quarterly covenant compliance measurement date. The fixed charge coverage ratio as of December 31,
2017 was 21.8.
Other Restrictions—The Facility permits acquisitions of up to $30.0 million per transaction, provided
that the aggregate purchase price of such an acquisition and of acquisitions in the same fiscal year does not
exceed $65.0 million. However, these limitations only apply when the Company’s Net Leverage Ratio is equal
to or greater than 2.00 to 1.00.
While the Facility’s financial covenants do not specifically govern capacity under the Facility, if our
debt level under the Facility at a quarter-end covenant compliance measurement date were to cause us to violate
the Facility’s leverage ratio covenant, our borrowing capacity under the Facility and the favorable terms that we
currently have could be negatively impacted by the lenders.
We were in compliance with all of our financial covenants as of December 31, 2017.
Interest Rates and Fees
There are two interest rate options for borrowings under the Facility, the Base Rate Loan Option and the
Eurodollar Rate Loan Option. Under the Base Rate Loan Option, the interest rate is determined based on the highest of
the Federal Funds Rate plus 0.5%, the prime lending rate offered by Wells Fargo Bank, N.A. or the one-month
Eurodollar Rate plus 1.00%. Under the Eurodollar Rate Loan Option, the interest rate is determined based on the one- to
six-month Eurodollar Rate. The Eurodollar Rate corresponds very closely to rates described in various general business
media sources as the London Interbank Offered Rate or “LIBOR.” Additional margins are then added to these rates. The
additional margins are determined based on the ratio of our Consolidated Total Indebtedness as of a given quarter end to
our “Credit Facility Adjusted EBITDA” for the twelve months ending as of that quarter end, as defined in the credit
agreement and shown below.
The interest rates under the Facility are floating rates determined by the broad financial markets, meaning they
can and do move up and down from time to time. For illustrative purposes, the following are the respective market rates
as of December 31, 2017 relating to interest options under the Facility:
Base Rate Loan Option:
Federal Funds Rate plus 0.50% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.87%
Wells Fargo Bank, N.A. Prime Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.50%
One-month LIBOR plus 1.00% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.56%
Eurodollar Rate Loan Option:
One-month LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.56%
Six-month LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.84%
Certain of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on our
behalf, such as to beneficiaries under our self-funded insurance programs. We have also occasionally used letters of
credit to guarantee performance under our contracts and to ensure payment to our subcontractors and vendors under
those contracts. Our lenders issue such letters of credit through the Facility. A letter of credit commits the lenders to pay
specified amounts to the holder of the letter of credit if the holder demonstrates that we have failed to perform specified
actions. If this were to occur, we would be required to reimburse the lenders 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 claim on a letter of credit would require immediate reimbursement by us to our lenders,
letters of credit are treated as a use of facility capacity just the same as actual borrowings. We have never had a claim
60
made against a letter of credit that resulted in payments by a lender or by us and believe such claim is unlikely in the
foreseeable future.
Commitment fees are payable on the portion of the revolving loan capacity not in use for borrowings or letters
of credit at any given time. Letter of credit fees and commitment fees are based on the ratio of Consolidated Total
Indebtedness to 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eurodollar Rate Loan Option . . . . . . . . . . . . . . . . . . . . . . .
Letter of credit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitment fees on any portion of the Revolving Loan
capacity not in use for borrowings or letters of credit at any
given time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.25 %
1.25 %
1.25 %
0.50 %
1.50 %
1.50 %
0.75 %
1.75 %
1.75 %
1.00 %
2.00 %
2.00 %
0.20 %
0.25 %
0.30 %
0.35 %
The weighted average interest rate applicable to the borrowings under the Facility was approximately 2.8% as
of December 31, 2017.
Notes to Former Owners
As part of the consideration used to acquire two companies, we have outstanding notes to the former owners.
These notes had an outstanding balance of $15.3 million as of December 31, 2017. In conjunction with the BCH
acquisition in the second quarter of 2017, we issued a promissory note to the former owners with an outstanding balance
of $14.3 million as of December 31, 2017 and bears interest, payable quarterly, at a weighted average interest rate of
3.0%. The principal is due in equal installments in April 2020 and 2021. In conjunction with the Shoffner acquisition in
the first quarter of 2016, we issued a subordinated note to former owners with an outstanding balance of $1.0 million as
of December 31, 2017 that bears interest, payable quarterly, at a weighted average interest rate of 3.0%. The principal is
due in equal installments in February 2018 and 2019.
Other Debt
As part of the Shoffner acquisition, we acquired debt with an outstanding balance at the acquisition date of
$0.4 million with principal and interest due the last day of every month; ending on the December 30, 2019 maturity date.
The interest rate is the one month LIBOR rate plus 2.25%. As of December 31, 2017, $0.2 million of the note was
outstanding, of which $0.1 million was considered current.
9. Income Taxes
Provision for Income Taxes
The provision for income taxes relating to continuing operations consists of the following (in thousands):
Current tax provision—
2017
December 31,
2016
2015
Federal . . . . . . . . . . . . . $ 35,434 $ 32,721 $ 27,564
4,065
State and Puerto Rico .
Total current . . . . . . . . . . .
31,629
Deferred tax provision
4,683
37,404
6,054
41,488
(benefit)—
(1,481)
Federal . . . . . . . . . . . . .
1,076
State and Puerto Rico .
Total deferred . . . . . . . . . .
(405)
Provision for income taxes $ 45,666 $ 36,165 $ 31,224
(2,101)
862
(1,239)
5,391
(1,213)
4,178
61
The provision for income taxes for the years ended December 31, 2017, 2016 and 2015 resulted in effective tax
rates on continuing operations of 45.2%, 35.8% and 35.2%, respectively. The reasons for the differences between these
effective tax rates and the 35% federal statutory rate are as follows (in thousands):
Income taxes at the federal statutory rate of 35% . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,328 $ 35,371 $ 31,032
Increases (decreases) resulting from—
2017
December 31,
2016
2015
Net state income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrecognized tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nondeductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic production activities deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate tax rate reduction to 21% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,432
463
(72)
(2,827)
751
—
(1,701)
—
146
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,666 $ 36,165 $ 31,224
4,262
(1,254)
20
—
825
(885)
(2,026)
—
(148)
2,838
91
153
—
1,134
(1,320)
(2,112)
9,478
76
While we believe we were able to make reasonable estimates of the impact of the recently enacted Tax Cuts and
Jobs Act in these financial statements, the amounts recorded are provisional and the final impact may differ from these
estimates due to, among other things, changes in our interpretations and assumptions and additional guidance that may
be issued by regulatory authorities.
Deferred Tax Assets (Liabilities)
Significant components of the deferred tax assets and deferred tax liabilities as reflected on the balance sheets
are as follows (in thousands):
Deferred tax assets—
Year Ended
December 31,
2017
2016
Accounts receivable and allowance for doubtful accounts $
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities and expenses . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . .
715 $ 1,627
3,036
23,000
5,053
875
—
759
34,350
(3,184)
31,166
2,297
19,555
6,007
—
2,272
544
31,390
(3,500)
27,890
Deferred tax liabilities—
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,398)
Long-term contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(637)
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(737)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(513)
(6,285)
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,703 $ 24,881
(4,668)
(625)
(1,572)
—
(322)
(7,187)
62
The deferred tax assets and liabilities as of December 31, 2017 were remeasured to account for the corporate
tax rate reduction to 21%, resulting in an increase to the provision for income taxes of $9.5 million. The deferred tax
assets and liabilities reflected above are included in the consolidated balance sheets as follows (in thousands):
Deferred tax assets . . . . . . . . $ 22,966 $ 27,170
Deferred tax liabilities . . . . . $ 2,263 $ 2,289
December 31,
2017
2016
As of December 31, 2017, we had $6.0 million of future tax benefits related to $71.8 million of available state
and Puerto Rican net operating loss carryforwards (“NOLs”), which begin to expire between 2018 and 2037. Valuation
allowances of $3.5 million have been recorded against certain state NOLs and deferred tax assets and all of our Puerto
Rican NOLs. We recorded an increase in valuation allowances of $0.3 million for the year ended December 31, 2017.
The $2.5 million deferred tax asset for state NOLs, net of related valuation allowances, reflects our conclusion that it is
more-likely-than-not these assets will be realized based upon expected future earnings in certain subsidiaries.
We update this assessment of the realizability of deferred tax assets relating to state NOLs annually. A return to
profitability in our entities with valuation allowances on their NOLs and other deferred tax assets would result in a
reversal of a portion of the valuation allowance relating to realized deferred tax assets. A sustained period of profitability
could cause a change in our judgment of the remaining deferred tax assets. If that were to occur, then it is likely that we
would reverse some or all of the remaining valuation allowances.
Liabilities for Uncertain Tax Positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding accrued interest
and penalties, is as follows (in thousands):
Year Ended
December 31,
2017
2016 2015
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . $ 240 $ 240 $ 343
—
Additions based on tax positions related to current year
Additions based on tax positions related to prior years .
—
Reductions for tax positions related to prior years . . . . .
(103)
Reductions for settlements with tax authorities . . . . . . . .
—
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,929 $ 240 $ 240
8,689
—
—
—
—
—
—
—
As of December 31, 2017 and 2016, we had $8.9 million and $0.2 million, respectively, of unrecognized tax
benefits, most of which, if recognized in future periods, would not impact our effective tax rate. We also had accrued
$0.7 million and $0.4 million for potential interest and penalties related to the unrecognized tax benefits as of
December 31, 2017 and 2016, respectively. These liabilities are included in “Other Long-Term Liabilities” in the
consolidated balance sheets. We recognize potential interest and penalties related to unrecognized tax benefits in our
provision for income taxes.
We expect to recognize a decrease in unrecognized tax benefits of up to $8.7 million within the next twelve
months due to the filing of a federal income tax automatic accounting method change application. Approximately
$3.0 million of the decrease is expected to impact our effective tax rate.
We are subject to taxation in the United States and various state jurisdictions. In the fourth quarter of 2017, we
received a ‘no change letter’ from the Internal Revenue Service upon completion of its examination of the 2015 tax year.
We remain open to examination by various state tax authorities for the 2009 tax year forward.
10. Employee Benefit Plans
We and certain of our subsidiaries sponsor various retirement plans for most full-time and some part-time
employees. These plans primarily consist of defined contribution plans. The defined contribution plans generally provide
for contributions up to 2.5% of covered employees’ salaries or wages. These contributions totaled $7.8 million in 2017,
63
$7.8 million in 2016 and $7.1 million in 2015. Of these amounts, approximately $0.5 million and $0.2 million were
payable to the plans at December 31, 2017 and 2016, respectively.
Certain of our subsidiaries also participate or have participated in various multi-employer pension plans for the
benefit of employees who are union members. As of December 31, 2017 and 2016, we had 6 and 5, respectively, who
were union members. There were no contributions made to multi-employer pension plans in 2017, 2016 or 2015. The
data available from administrators of other multi-employer pension plans is not sufficient to determine the accumulated
benefit obligations, nor the net assets attributable to the multi-employer plans in which our employees participate or
previously participated.
Certain individuals at one of our operating units are entitled to receive fixed annual payments that reach a
maximum amount, as specified in the related agreements, for a 15 year period following retirement or, in some cases, the
attainment of 65 years of age. We recognize the unfunded status of the plan as a non-current liability in our Consolidated
Balance Sheet. Benefits vest 50% after ten years of service, 75% after fifteen years of service and are fully vested after
20 years of service. We had an unfunded benefit liability of $4.0 million recorded as of December 31, 2017 and 2016.
11. Commitments and Contingencies
Leases
We lease certain facilities and equipment under noncancelable operating leases. Rent expense for the years
ended December 31, 2017, 2016 and 2015 was $21.1 million, $20.6 million, and $20.6 million, respectively. We
recognize escalating 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 lease buildings used in our operations. The terms of these leases generally range from three to ten years and
certain leases provide for escalations in the rental expenses each year, the majority of which are based on inflation.
Included in the 2017, 2016 and 2015 rent expense above are approximately $4.8 million, $5.1 million and $5.4 million
of rent paid to these related parties, respectively.
The following represents future minimum rental payments under noncancelable operating leases (in thousands):
Year ended December 31—
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,963
11,892
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,838
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,921
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,266
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,726
$ 71,606
Claims and Lawsuits
We are subject to certain legal and regulatory claims, including lawsuits arising in the normal course of
business. We maintain various insurance coverages to minimize financial risk associated with these claims. We have
estimated and provided accruals for probable losses and related legal fees associated with certain litigation in the
accompanying consolidated financial statements. While we cannot predict the outcome of these proceedings, in
management’s opinion and based on reports of counsel, any liability arising from these matters individually and in the
aggregate will not have a material effect on our operating results, cash flows or financial condition, after giving effect to
provisions already recorded.
In the fourth quarter of 2017, we entered into settlement agreements with British Petroleum (“BP”) related to
two claims from one of our subsidiaries regarding the April 2010 BP Deepwater Horizon oil spill. We recorded a
$1.0 million gain in the fourth quarter of 2017 in “Other Income” as a result of these settlements. Additionally, in the
fourth quarter of 2016, we entered into a separate settlement agreement with BP related to a claim from another one of
our subsidiaries and recorded a $0.6 million gain in the fourth quarter of 2016 in “Other Income”. 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.
64
Surety
Many customers, particularly in connection with new construction, require us to post performance and payment
bonds issued by a financial institution known as a surety. If we fail to perform under the terms of a contract or to pay
subcontractors and vendors who provided goods or services under a contract, the customer may demand that the surety
make payments or provide services under the bond. We must reimburse the surety for any expenses or outlays it incurs.
To date, we are not aware of any losses to our sureties in connection with bonds the sureties have posted on our behalf,
and do not expect such losses to be incurred in the foreseeable future.
Surety market conditions are favorable and bonding capacity is adequate in the current market conditions along
with acceptable terms and conditions. Historically, approximately 20% to 30% of our business has required bonds.
While we currently 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 to occur, the alternatives include doing more business that does not require bonds, posting other forms
of collateral for project performance such as letters of credit or cash, and seeking bonding capacity from other sureties.
We would likely also encounter concerns from customers, suppliers and other market participants as to our
creditworthiness. While we believe our general operating and financial characteristics would enable us to ultimately
respond effectively to an interruption in the availability of bonding capacity, such an interruption would likely cause our
revenue and profits to decline in the near term.
Self-Insurance
We are substantially self-insured for workers’ compensation, employer’s liability, auto liability, general liability
and employee group health claims, in view of the relatively high per-incident deductibles we absorb under our insurance
arrangements for these risks. Losses are estimated and accrued based upon known facts, historical trends and industry
averages. Estimated losses in excess of our deductible, which have not already been paid, are included in our accrual
with a corresponding 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.
Our self-insurance arrangements as of December 31, 2017 were as follows:
Workers’ Compensation—The per-incident deductible for workers’ compensation is $1.0 million.
Losses above $1.0 million are determined by statutory rules on a state-by-state basis, and are fully covered by
excess workers’ compensation insurance.
Employer’s Liability—For employer’s liability, the per-incident deductible is $1.0 million and then we
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 general liability and auto liability noted below).
General Liability—For general liability, the per-incident deductible is $1.0 million. We are fully
insured for the next $1.0 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 noted above
and auto liability noted below).
Auto Liability—For auto liability, the per-incident deductible is $0.5 million. We are fully insured for
the next $1.5 million of each loss, and then have several layers of excess loss insurance policies that cover
losses up to $100.0 million in aggregate across this risk area (as well as employer’s liability and general liability
noted above).
Employee Medical—We have three medical plans. The deductible for employee group health claims is
$350,000 per person, per policy (calendar) year for each plan. Insurance then covers any responsibility for
medical claims in excess of the deductible amount.
Our $100.0 million of aggregate excess loss coverage above applicable per-incident deductibles
represents one policy limit that applies to all lines of risk; we do not have a separate $100.0 million of excess
loss coverage for each of general liability, employer’s liability and auto liability.
65
12. Stockholders’ Equity
2012 Equity Incentive Plan
In May 2012, our stockholders approved our 2012 Equity Incentive Plan (the “2012 Plan”), which provides for
the granting of incentive or non-qualified stock options, stock appreciation rights, restricted or deferred stock, dividend
equivalents or other incentive awards to directors, employees, or consultants. The number of shares authorized and
reserved for issuance under the 2012 Plan is 5.1 million shares. As of December 31, 2017, there were 2.9 million shares
available for issuance under this plan; however, following adoption of the 2017 Plan (described below), no additional
shares will be issued under the 2012 Plan. The 2012 Plan will expire in May 2022.
2017 Omnibus Incentive Plan
In May 2017, our stockholders approved our 2017 Omnibus Incentive Plan (the “2017 Plan”), which provides
for the granting of incentive or non-qualified stock options, stock appreciation rights, restricted or deferred stock,
dividend equivalents or other incentive awards to directors, employees, or consultants. The number of shares authorized
and reserved for issuance under the 2017 Plan is 2.9 million shares. As of December 31, 2017, there were 2.9 million
shares available for issuance under this plan. The 2017 Plan will expire in May 2027. Additionally, we have outstanding
stock options, stock awards and stock units that were issued under other plans, and no further grants may be made under
those plans.
Share Repurchase Program
On March 29, 2007, our Board of Directors (the “Board”) approved a stock repurchase program to acquire up to
1.0 million shares of our outstanding common stock. Subsequently, the Board has from time to time increased the
number of shares that may be acquired under the program and approved extensions of the program. Since the inception
of the repurchase program, the Board has approved 8.1 million shares to be repurchased. As of December 31, 2017, we
have repurchased a cumulative total of 7.6 million shares at an average price of $13.75 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
negotiated transactions as permitted by securities laws and other legal requirements, and subject to market conditions
and other factors. The Board may modify, suspend, extend or terminate the program at any time. During the twelve
months ended December 31, 2017, we repurchased 0.3 million shares for approximately $9.0 million at an average price
of $34.23 per share.
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of
shares of common stock outstanding during 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
issuable performance stock units is based on the achievement of certain earnings per share targets and total shareholder
return. These shares are considered contingently issuable shares for purposes of calculating diluted earnings per share.
These shares are not included in the diluted earnings per share denominator until the performance criteria are met, if it is
assumed that the end of the reporting period was the end of the contingency period.
Unvested restricted stock, restricted stock units and performance stock units are included in diluted earnings per
share, weighted outstanding until the shares and units vest. Upon vesting, the vested restricted stock, restricted stock
units and performance stock units are included in basic earnings per share weighted outstanding from the vesting date.
There were less than 0.1 million anti-dilutive stock options excluded from the calculation of diluted EPS for the
year ended December 31, 2017. There were approximately 0.1 million anti-dilutive stock options excluded from the
calculation of diluted EPS for the year ended December 31, 2016. There were no anti-dilutive stock options for the year
ended December 31, 2015.
66
The following table reconciles the number of shares outstanding with the number of shares used in computing
basic and diluted earnings per share for each of the periods presented (in thousands):
Year Ended December 31,
Common shares outstanding, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,187 37,209
126
Effect of using weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . .
Shares used in computing earnings per share—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,239 37,335
330
Effect of shares issuable under stock option plans based on the treasury stock method . .
Effect of restricted and contingently issuable shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
146
Shares used in computing earnings per share—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,672 37,811
316
117
52
2017
2016
2015
37,427
15
37,442
266
160
37,868
13. Stock-Based Compensation
Grants of stock options, restricted stock and restricted stock units, and performance share units have been,
under the 2012 Plan, and will be, under the 2017 Omnibus Incentive Plan (the “2017 Plan”), determined and
administered by the compensation committee of the Board of Directors. Total stock-based compensation expense was
$6.4 million, $5.0 million and $5.6 million for the years ended December 31, 2017, 2016 and 2015, respectively. Stock-
based compensation expense is recognized using the straight-line method over the vesting period and generally vests
over a three-year vesting period. Certain awards provide for accelerated vesting when the sum of an employee's age and
years of service is at least 75. We recognize forfeitures as they occur. Total income tax benefit recognized for
stock-based compensation arrangements was $2.4 million, $1.9 million and $2.1 million for each of the years ended
December 31, 2017, 2016 and 2015. Subsequent to our adoption of ASU 2016-09 in the second quarter of 2016, we
elected to apply the presentation requirements for cash flows related to excess tax benefits prospectively. As such, we
present, in the consolidated statements of cash flows, the benefits of tax deductions in excess of recognized
compensation costs (“excess tax benefits”) as operating cash flows for the years ended 2017 and 2016 and as financing
cash flows for the year ended 2015.
We generally issue treasury shares for stock options and restricted stock, unless treasury shares are not
available. Upon the vesting of restricted shares, we have allowed the holder to elect to surrender an amount of shares to
meet their statutory tax withholding requirements. These shares are accounted for as treasury stock based upon the value
of the stock on the date of vesting.
Stock Options
The following table summarizes activity under our stock option plans (shares in thousands):
Year Ended
December 31,
2017
Weighted-
Average
Stock Options
714 $
Outstanding at beginning of year
Granted . . . . . . . . . . . . . . . . . . . . .
85 $
Exercised . . . . . . . . . . . . . . . . . . . (146) $
Forfeited . . . . . . . . . . . . . . . . . . . .
(23) $
Expired . . . . . . . . . . . . . . . . . . . . .
— $
Outstanding at end of year . . . . .
630 $
444
Options exercisable at end of year
Shares Exercise Price
17.01
36.25
14.08
23.55
—
20.03
The total intrinsic value of options exercised during the years ended December 31, 2017, 2016 and 2015 was
$3.6 million, $1.9 million and $3.9 million, respectively. Stock options exercisable as of December 31, 2017 have a
weighted-average remaining contractual term of 5.3 years and an aggregate intrinsic value of $12.5 million. As of
December 31, 2017, we have 0.6 million options that are vested or expected to vest; these options have a weighted
67
average exercise price of $20.03 per share, have a weighted-average remaining contractual term of 6.2 years and an
aggregate intrinsic value of $14.9 million.
The following table summarizes information about stock options outstanding at December 31, 2017 (shares in
thousands):
Range of Exercise Prices
$11.00 - $15.00 . . . . . . . . . . . . . . . . . . . . . . . .
$15.01 - $20.00 . . . . . . . . . . . . . . . . . . . . . . . .
$20.01 - $36.25 . . . . . . . . . . . . . . . . . . . . . . . .
$11.00 - $36.25 . . . . . . . . . . . . . . . . . . . . . . . .
265
189
176
630
Options Outstanding
Weighted-
Average
Remaining
Outstanding at Contractual
Number
12/31/2017
Life
Options Exercisable
Weighted-
Average
Number
Weighted-
Average
Exercisable at
Exercise Price 12/31/2017 Exercise Price
12.77
17.47
30.36
15.55
265 $
149 $
30 $
444 $
12.77
17.93
33.19
20.03
4.16 $
6.73 $
8.69 $
6.20 $
The fair value of each option award is estimated, based on several assumptions, on the date of grant using the
Black-Scholes option valuation model. The fair values and the assumptions used for the 2017, 2016 and 2015 grants are
shown in the table below:
Weighted-average fair value per share of options granted $
Fair value assumptions:
Year Ended December 31,
2016
2015
2017
11.43 $
9.94 $
6.33
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . .
Expected stock price volatility . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.89%
34.5%
2.11%
5.3 years
0.97%
37.9%
1.41%
5.3 years
1.51%
38.4%
1.50%
5.6 years
Stock options are accounted for as equity instruments. As of December 31, 2017, the unrecognized
compensation cost related to stock options was $0.4 million, which is expected to be recognized over a weighted-average
period of 1.4 years. The total fair value of options vested during the year ended December 31, 2017 was $0.8 million.
The following table summarizes information about nonvested stock option awards as of December 31, 2017 and
changes for the year ended December 31, 2017 (shares in thousands):
Stock Options
241 $
Nonvested at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85 $
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (117) $
(23) $
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
186 $
Nonvested at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares
Grant Date
Fair Value
7.83
11.43
7.23
7.88
9.85
Weighted-Average
68
Restricted Stock and Restricted Stock Units
The following table summarizes activity under our restricted stock plans (shares in thousands):
Year Ended
December 31,
2017
Weighted
Restricted Stock and Restricted Stock Units
Unvested at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 $
71 $
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(90) $
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(15) $
Unvested at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
92 $
Average Grant
Shares Date Fair Value
23.41
35.69
25.44
26.34
30.48
Approximately $0.8 million of compensation expense related to restricted stock and restricted stock units will
be recognized over a weighted-average period of 1.6 years. The total fair value of shares vested during the year ended
December 31, 2017 was $2.3 million. The weighted-average fair value per share of restricted stock shares and units
awarded during 2017, 2016 and 2015 was $35.69, $30.25 and $20.64, respectively. The aggregate intrinsic value of
restricted stock vested during the years ended December 31, 2017, 2016 and 2015 was $3.2 million, $3.6 million and
$3.4 million, respectively.
Performance Stock Units
Under the 2012 Plan, we granted dollar-denominated performance vesting restricted stock units (“PSUs”),
which cliff vest at the end of a three-year performance period. The PSUs are subject to two performance measures; 50%
of the PSUs are based on the annual performance of our stock price relative to a group of our peers (total shareholder
return) and 50% of the PSUs are measured based on meeting or exceeding a pre-determined annual earnings per share
target as set by our board of directors (EPS). Depending on the Company’s performance in relation to the established
performance measures, the awards may vest at zero to a maximum of 2.0 times the dollar-denominated award granted at
target. Upon achievement of the necessary performance metrics, the award will be determined in dollars and may be
settled in cash or stock based on the market price of the Company’s common stock at the end of the performance period,
at our discretion.
Compensation expense for dollar-denominated performance units will ultimately be equal to the final dollar
value awarded to the grantee upon vesting, settled either in cash or stock. However, throughout the performance period
we must record an accrued expense based on an estimate of that future payout. For units determined by EPS
performance, the awards are evaluated quarterly against established targets in order to estimate the liability throughout
the vesting period. For units determined by total shareholder return performance, a Monte Carlo simulation model was
used to estimate accruals throughout the vesting period. The model simulates our total shareholder return and compares
it against our peer group over the three-year performance period to produce a predicted distribution of relative share
performance. This is applied to the reward criteria to give an expected value of the total shareholder return element. The
calculated fair market value as of December 31, 2017 was $4.9 million. Of this amount, $2.2 million relates to the PSUs
granted in 2015 whose performance period ended December 31, 2017. These awards will be settled within the upcoming
year either in cash or stock. The expense related to performance stock units for the years ended December 31, 2017,
2016 and 2015 was $2.6 million, $1.6 million and $2.6 million, respectively. At the December 31, 2017 calculated fair
market value, approximately $0.7 million of compensation expense related to performance stock units will be recognized
over a weighted-average period of 1.2 years.
69
14. Selected Quarterly Financial Data (Unaudited)
Quarterly financial information for the years ended December 31, 2017 and 2016 is summarized as follows (in
thousands, except per share data):
Q1
Q2
Q3
Q4
2017
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $380,588 $465,411 $480,851 $ 461,072
93,731
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,539
Net income including noncontrolling interests (1) . . . . . . . . . . . . . . . . .
7,539
Net income attributable to Comfort Systems USA, Inc. (1) . . . . . . . . . .
INCOME PER SHARE ATTRIBUTABLE TO COMFORT
95,738
17,972
17,972
75,954
7,477
7,477
100,858
22,284
22,284
SYSTEMS USA, INC.:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.20 $
0.20 $
0.48 $
0.48 $
0.60 $
0.59 $
0.20
0.20
Q1
Q2
Q3
Q4
2016
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $385,942 $427,538 $428,760 $ 392,100
88,265
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,867
Net income including noncontrolling interests . . . . . . . . . . . . . . . . . . . .
Net income attributable to Comfort Systems USA, Inc. . . . . . . . . . . . . .
16,867
INCOME PER SHARE ATTRIBUTABLE TO COMFORT
89,426
17,717
17,717
73,502
9,841
9,841
92,816
20,471
20,471
SYSTEMS USA, INC.:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.26 $
0.26 $
0.47 $
0.47 $
0.55 $
0.54 $
0.45
0.45
(1) In the fourth quarter of 2017, we recorded a $9.5 million increase to the provision for income taxes to
remeasure our net deferred tax assets for the enacted corporate tax rate reduction.
The sums of the individual quarterly earnings per share amounts do not necessarily agree with year-to-date
earnings per 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 restricted stock in each quarter.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our executive management is responsible for ensuring the effectiveness of the design and operation of our
disclosure controls and procedures. We carried out an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective as of the end of the period covered
by this report.
70
Internal Controls over Financial Reporting
Management’s report on our internal controls over financial reporting can be found in Item 8 of this report. The
Independent Registered Public Accounting Firm’s Attestation Report on the effectiveness of our internal controls over
financial reporting can also be found in Item 8 of this report.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the three months ended December 31,
2017 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.
ITEM 9B. Other Information
None.
ITEM 10. Directors, Executive Officers and Corporate Governance
PART III
We have adopted a code of ethics that applies to our principal executive officer, our principal financial officer,
and our principal accounting officer, as well as to our other employees. This code of ethics consists of our Corporate
Compliance Policy. The Company has made this code of ethics available on our website, as described in Item 1 of this
annual report on Form 10-K. If we make substantive amendments to this code of ethics or grant any waiver, including
any implicit waiver, we will disclose the nature of such amendment or waiver on our website or in a report on Form 8-K
within four business days of such 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 disclosed under this item in the 120 days following December 31, 2017 and such information is hereby incorporated
by reference.
ITEMS 11, 12, 13 AND 14.
These items have been omitted in accordance with the instructions to Form 10-K. The Company will file with
the Commission a definitive proxy statement including the information to be disclosed under the items in the 120 days
following December 31, 2017 and such information is hereby incorporated by reference.
ITEM 15. Exhibits and Financial Statement Schedules
(a)
The following documents are filed as part of this annual report on Form 10-K:
PART IV
(1)
Consolidated Financial Statements: The Index to the Consolidated Financial Statements is included
under Part II, Item 8 of this annual report on Form 10-K and is incorporated herein by reference.
(2)
Financial Statement Schedules:
None.
71
(b)
Exhibits
Reference is made to the Index of Exhibits immediately following the signature page thereof, which is
incorporated herein by reference.
(c)
Excluded financial statements:
None.
ITEM 16. Form 10-K Summary
The Company has determined not to include a summary of the information required by the Form 10-K under
this Item 16 of the Form 10-K.
72
INDEX OF EXHIBITS
Exhibit
Number
3.1
3.2
3.3
3.4
3.5
4.1
*10.1
*10.2
*10.3
*10.4
*10.5
*10.6
*10.7
*10.8
*10.9
Description of Exhibits
Second Amended and Restated Certificate of Incorporation of the
Registrant
Certificate of Amendment dated May 21, 1998
Certificate of Amendment dated July 9, 2003
Certificate of Amendment dated May 20, 2016
Amended and Restated Bylaws of Comfort Systems USA, Inc.
Form of certificate evidencing ownership of Common Stock of the
Registrant
Comfort Systems USA, Inc. 1997 Long-Term Incentive Plan
Comfort Systems USA, Inc. 1997 Non-Employee Directors’ Stock
Plan
Amendment to the 1997 Non-Employee Directors’ Stock Plan dated
May 23, 2002
Comfort Systems USA, Inc. 2006 Equity Incentive Plan
Form of Option Award under the Comfort Systems USA, Inc. 2006
Equity Incentive Plan
Form of Option Award under the Comfort Systems USA, Inc. 2006
Stock Options/SAR Plan for Non-Employee Directors
Employment Agreement between the Company, Eastern Heating &
Cooling, Inc. and Alfred J. Giardinelli, Jr.
Amended and Restated 2006 Equity Compensation Plan for
Non-Employee Directors
2008 Senior Management Annual Performance Plan
*10.10
Form of Change in Control Agreement
*10.11
Form of Comfort Systems USA, Inc. Executive Severance Policy
*10.12
Form of Directors and Officers Indemnification Agreement
10.13
10.14
Second Amended and Restated Credit Agreement by and among
Comfort Systems USA, Inc., as Borrower and Wells Fargo Bank,
National Association, as Administrative Agent/Wells Fargo
Securities LLC, as Sole Lead Arranger and Sole Lead Book
Runner/Bank of Texas, N.A., Capital One, N.A., and Regions Bank
as Co-Syndication Agent/and Certain Financial Institutions as
Lenders
Stock Purchase Agreement, dated July 28, 2010
Incorporated by Reference
to the Exhibit Indicated Below
and to the Filing with the
Commission Indicated Below
Exhibit
Number Filing or File Number
3.1
3.2
3.3
3.1
3.1
4.1
10.1
10.2
10.3
4.5
10.6
333-24021
1998 Form 10-K
2003 Form 10-K
May 20, 2016
Form 8-K
March 25 ,2016
Form 8-K
333-24021
333-24021
333-24021
Second Quarter 2002
Form 10-Q/A
333-138377
2006 Form 10-K
10.7
2006 Form 10-K
10.1
A
B
10.2
10.3
10.1
10.1
Second Quarter 2003
Form 10-Q
Proxy Statement
April 10, 2008
Proxy Statement
April 10, 2008
First Quarter 2008
Form 10-Q
First Quarter 2008
Form 10-Q
May 19, 2009
Form 8-K
July 22, 2010
Form 8-K/A
10.1
July 30, 2010
Form 8-K
73
Incorporated by Reference
to the Exhibit Indicated Below
and to the Filing with the
Commission Indicated Below
10.1
Exhibit
Number Filing or File Number
First Quarter 2011
Form 10-Q
March 28, 2011
Form 8-K
Second Quarter 2011
Form 10-Q
10.1
10.1
10.1
10.1
10.1
10.2
A
B
10.1
10.1
10.2
10.1
10.28
10.29
10.1
10.1
10.2
10.33
10.1
10.1
10.1
Third Quarter 2011
Form 10-Q
First Quarter 2012
Form 10-Q
March 30, 2012
Form 8-K
March 30, 2012
Form 8-K
April 9, 2012
Proxy Statement
April 9, 2012
Proxy Statement
First Quarter 2013
Form 10-Q
March 22, 2013
Form 8-K
March 22, 2013
Form 8-K
Second Quarter 2013
Form 10-Q
2013 Form 10-K
2013 Form 10-K
First Quarter 2014
Form 10-Q
March 21, 2014
Form 8-K
March 21, 2014
Form 8-K
2014 Form 10-K
Third Quarter 2014
Form 10-Q
April 9, 2014
Form 8-K
April 1, 2015
Form 8-K
Exhibit
Number
*10.15
*10.16
*10.17
10.18
*10.19
Summary of 2011 Incentive Compensation Plan
Description of Exhibits
Form of Performance Restricted Stock Award Agreement dated
March 24, 2011
First Amendment to Comfort Systems USA, Inc. Amended and
Restated 2006 Equity Compensation Plan for Non-Employee
Directors
Amendment No. 1 to Second Amended and Restated Credit
Agreement, Second Amended and Restated Security Agreement,
and Second Amended and Restated Pledge Agreement
Summary of 2012 Incentive Compensation Plan
*10.20
Form of 2012 Restricted Stock Unit Agreement
*10.21
*10.22
Form of 2012 Dollar-denominated Performance Vesting Restricted
Stock Unit Agreement
2012 Equity Incentive Plan
*10.23
2012 Senior Management Annual Performance Plan
*10.24
Summary of 2013 Incentive Compensation Plan
*10.25
Form of 2013 Restricted Stock Unit Agreement
*10.26
10.27
*10.28
*10.29
*10.30
Form of 2013 Dollar-denominated Performance Vesting Restricted
Stock Unit Agreement
Amendment No. 2 to Second Amended and Restated Credit
Agreement and Amendment to Other Loan Documents
Letter Agreement between the Company and James Mylett
Form of Change in Control Agreement (2013)
Summary of 2014 Incentive Compensation Plan
*10.31
Form of 2014 Restricted Stock Unit Agreement
*10.32
*10.33
10.34
10.35
*10.36
Form of 2014 Dollar-denominated Performance Vesting Restricted
Stock Unit Agreement
Form of Option Award under the Comfort Systems USA, Inc. 2012
Equity Incentive Plan
Amendment No. 3 to Second Amended and Restated Credit
Agreement and Amendment to Other Loan Documents
Agreement and Plan of Merger between the Company and Dyna
Ten Corporation, dated April 9, 2014
Form of 2015 Restricted Stock Unit Agreement
74
Incorporated by Reference
to the Exhibit Indicated Below
and to the Filing with the
Commission Indicated Below
Exhibit
Number Filing or File Number
10.2
10.1
10.1
10.40
April 1, 2015
Form 8-K
First Quarter 2015
Form 10-Q
Third Quarter 2015
Form 10-Q
2015 Form 10-K
10.1
10.2
10.3
10.1
2.1
10.1
A
B
10.2
10.3
10.4
March 25, 2016
Form 8-K
March 25, 2016
Form 8-K
March 25, 2016
Form 8-K
January 11, 2017
Form 8-K
February 23, 2017
Form 8-K
April 3, 2017
Form 8-K
April 10, 2017
Proxy Statement
April 10, 2017
Proxy Statement
First Quarter 2017
Form 10-Q
First Quarter 2017
Form 10-Q
First Quarter 2017
Form 10-Q
Filed Herewith
Filed Herewith
Filed Herewith
Filed Herewith
Furnished Herewith
Furnished Herewith
Exhibit
Number
*10.37
*10.38
Description of Exhibits
Form of 2015 Dollar-denominated Performance Vesting Restricted
Stock Unit Agreement
Summary of 2015 Incentive Compensation Plan
*10.39
Form of Amended Change in Control Agreement
10.40
*10.41
*10.42
*10.43
*10.44
10.45
10.46
*10.47
Amendment No. 4 to Second Amended and Restated Credit
Agreement and Amendment to Other Loan Documents
Form of 2016 Restricted Stock Unit Agreement
Form of 2016 Dollar-denominated Performance Restricted Stock
Unit Agreement
Form of 2016 Stock Option Notice
Resignation and General Release Agreement between the Company
and James Mylett, dated as of January 10, 2017
Stock Purchase Agreement, dated February 21, 2017, by and among
the Company, BCH, the Selling Shareholders and Daryl Blume, in
his capacity as representative of the Selling Shareholders
Form of Promissory Note, dated April 1, 2017, issued by the
Company in favor of each of the Selling Shareholders
2017 Omnibus Incentive Plan
*10.48
2017 Senior Management Annual Performance Plan
*10.49
*10.50
*10.51
21.1
23.1
31.1
31.2
32.1
32.2
Form of Restricted Stock Unit Agreement under the Company’s
2012 Equity Incentive Plan
Form of Stock Option Notice under the Company’s 2012 Equity
Incentive Plan
Form of Dollar-denominated Performance Restricted Stock Unit
Agreement under the Company’s 2012 Equity Incentive Plan
List of subsidiaries of Comfort Systems USA, Inc.
Consent of Ernst & Young LLP
Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
* Management contract or compensatory plan.
75
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
COMFORT SYSTEMS USA, INC.
By:
/s/ BRIAN E. LANE
Brian E. Lane
President and Chief Executive Officer
Date: February 22, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ BRIAN E. LANE
Brian E. Lane
President, Chief Executive Officer, and
Director (Principal Executive Officer)
February 22, 2018
/s/ WILLIAM GEORGE
William George
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
February 22, 2018
/s/ JULIE S. SHAEFF
Julie S. Shaeff
Senior Vice President and Chief Accounting
Officer (Principal Accounting Officer)
February 22, 2018
/s/ FRANKLIN MYERS
Franklin Myers
Chairman of the Board
February 22, 2018
/s/ DARCY G. ANDERSON
Darcy G. Anderson
Director
/s/ HERMAN E. BULLS
Herman E. Bulls
Director
/s/ ALFRED J. GIARDINELLI, JR.
Alfred J. Giardinelli, Jr.
Director
/s/ ALAN P. KRUSI
Alan P. Krusi
/s/ JAMES H. SCHULTZ
James H. Schultz
Director
Director
/s/ CONSTANCE E. SKIDMORE
Constance E. Skidmore
Director
/s/ VANCE W. TANG
Vance W. Tang
Director
76
February 22, 2018
February 22, 2018
February 22, 2018
February 22, 2018
February 22, 2018
February 22, 2018
February 22, 2018
Corporate Information
Corporate Officers
Brian E. Lane
President and Chief Executive Officer
William George III
Executive Vice President and Chief Financial Officer
Thomas N. Tanner
Senior Vice President – Region 1
R. Dean Tillison
Senior Vice President – Region 2
Eric Reisner
Senior Vice President – Region 3
Charles R. Diltz
Senior Vice President – Region 4
Trent T. McKenna
Senior Vice President and General Counsel
Julie S. Shaeff
Senior Vice President and Chief Accounting Officer
Ila Patel
Director of Internal Audit
Byran Farris
Vice President – Safety and Risk Management
Sherlyn Hufford
Vice President – Financial Operations
William Fourt
Vice President – Construction
Jeremy D. Jones
Vice President and Chief Information Officer
Michael Goldberg
Vice President and Corporate Controller
Auditors
Ernst & Young, LLP
Houston, Texas
Transfer Agent
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, New York 11219
Stock Exchange Listing
NYSE Symbol: FIX
Stockholders’ Meeting
Tuesday, May 22, 2018, at 11:00 am
The Houstonian Hotel
111 Post Oak Lane
Houston, Texas 77024
Corporate Office
675 Bering Drive, Suite 400
Houston, Texas 77057
(713) 830-9600 Phone
(713) 830-9696 Fax
Web Site
www.comfortsystemsusa.com
Board of Directors
Franklin Myers
Chairman of the Board
Comfort Systems USA, Inc.
Senior Advisor
Quantum Energy Partners
Brian E. Lane
President and Chief Executive Officer
Comfort Systems USA, Inc.
Darcy G. Anderson
Vice Chairman
Hillwood
Herman E. Bulls
Vice Chairman, Americas and International Director
Jones Lang LaSalle Incorporated
President and Chief Executive Officer
Bulls Advisory Group, LLC
Fred J. Giardinelli
President
Eastern Heating & Cooling, Inc.
Alan P. Krusi
Retired President, Strategic Development
AECOM Technology Corporation
James H. Schultz
Retired President of Trane Commercial Air Conditioning Group
Constance E. Skidmore
Retired Partner of PricewaterhouseCoopers
Vance W. Tang
President and Owner
Vantegrity Consulting
Additional copies of this Annual Report, incorporating the Company’s Form 10-K filed with the Securities and Exchange Com mission, are available, without charge, through the Company’s Corporate
Office. The most recent certifications by our Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits to our Form 10-K for
the fiscal year ended December 31, 2017. We have also filed with the New York Stock Exchange the most recent Annual CEO Certification as required by Section 303A.12(a) of the New York Stock
Exchange Listed Company Manual.
2017 Annual Report
© 2018 Comfort Systems USA. All rights reserved. The paper on which this annual report is printed includes a minimum of 10% post-consumer recovered fiber.
www.comfortsystemsusa.com