Item 8. Financial Statements and Supplementary Data

_**

**INDEX TO FINANCIAL STATEMENTS **

		Page
Comfort Systems USA, Inc.
Management's Report on Internal Control over Financial Reporting			47
Report of Independent Registered Public Accounting Firm			48
Report of Independent Registered Public Accounting Firm			49
Consolidated Balance Sheets			50
Consolidated Statements of Operations			51
Consolidated Statements of Stockholders' Equity			52
Consolidated Statements of Cash Flows			53
Notes to Consolidated Financial Statements			54

**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, 2015 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, 2015.

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, 2015.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders of Comfort Systems USA, Inc.

We have audited the accompanying consolidated balance sheets of Comfort Systems USA, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Comfort Systems USA, Inc. at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Comfort Systems USA, Inc.'s internal control over financial reporting as of December 31, 2015, 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 23, 2016 expressed an unqualified opinion thereon.

		/s/ ERNST & YOUNG LLP

Houston, Texas February 23, 2016

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders Comfort Systems USA, Inc.

We have audited Comfort Systems USA, Inc.'s internal control over financial reporting as of December 31, 2015, 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). Comfort Systems USA, Inc.'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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about 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.

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.

In our opinion, Comfort Systems USA, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Comfort Systems USA, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2015 of Comfort Systems USA, Inc. and our report dated February 23, 2016 expressed an unqualified opinion thereon.

		/s/ ERNST & YOUNG LLP

Houston, Texas February 23, 2016

** COMFORT SYSTEMS USA, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts) **

		December 31,
		2015			2014
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	56,464		$	32,064
Accounts receivable, less allowance for doubtful accounts of $5,158 and $4,379, respectively			302,052			303,575
Other receivables			20,642			15,520
Inventories			7,941			8,646
Prepaid expenses and other			5,836			6,168
Costs and estimated earnings in excess of billings			31,338			27,620
Assets related to discontinued operations			—			176
​	​	​	​	​	​	​	​
Total current assets			424,273			393,769
PROPERTY AND EQUIPMENT, NET			60,813			55,759
GOODWILL			143,874			140,341
IDENTIFIABLE INTANGIBLE ASSETS, NET			41,079			45,666
OTHER NONCURRENT ASSETS			21,555			20,407
​	​	​	​	​	​	​	​
Total assets		$	691,594		$	655,942
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt		$	500		$	—
Current maturities of long-term capital lease obligations			251			317
Accounts payable			106,684			106,211
Accrued compensation and benefits			54,079			44,683
Billings in excess of costs and estimated earnings			85,397			77,446
Accrued self-insurance expense			29,803			28,903
Other current liabilities			28,677			24,513
Liabilities related to discontinued operations			—			263
​	​	​	​	​	​	​	​
Total current liabilities			305,391			282,336
LONG-TERM DEBT			10,500			39,500
LONG-TERM CAPITAL LEASE OBLIGATIONS			256			529
DEFERRED INCOME TAX LIABILITIES			1,810			1,310
OTHER LONG-TERM LIABILITIES			8,632			10,874
​	​	​	​	​	​	​	​
Total liabilities			326,589			334,549
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par, 5,000,000 shares authorized, none issued and outstanding			—			—
Common stock, $.01 par, 102,969,912 shares authorized, 41,123,365 and 41,123,365 shares issued, respectively			411			411
Treasury stock, at cost, 3,696,781 and 3,853,586 shares, respectively			(46,845	)		(43,598	)
Additional paid-in capital			323,765			320,084
Retained earnings			69,390			29,384
​	​	​	​	​	​	​	​
Comfort Systems USA, Inc. stockholders' equity			346,721			306,281
Noncontrolling interests			18,284			15,112
​	​	​	​	​	​	​	​
Total stockholders' equity			365,005			321,393
​	​	​	​	​	​	​	​
Total liabilities and stockholders' equity		$	691,594		$	655,942
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

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

** COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data) **

		Year Ended December 31,
		2015			2014			2013
REVENUE		$	1,580,519		$	1,410,795		$	1,357,272
COST OF SERVICES			1,262,390			1,161,024			1,117,389
​	​	​	​	​	​	​	​	​	​	​
Gross profit			318,129			249,771			239,883
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			228,965			207,652			194,214
GOODWILL IMPAIRMENT			—			727			—
GAIN ON SALE OF ASSETS			(880	)		(830	)		(589	)
​	​	​	​	​	​	​	​	​	​	​
Operating income			90,044			42,222			46,258
OTHER INCOME (EXPENSE):
Interest income			72			18			23
Interest expense			(1,753	)		(1,858	)		(1,351	)
Changes in the fair value of contingent earn-out obligations			225			(245	)		1,646
Other			76			91			204
​	​	​	​	​	​	​	​	​	​	​
Other income (expense)			(1,380	)		(1,994	)		522
​	​	​	​	​	​	​	​	​	​	​
INCOME BEFORE INCOME TAXES			88,664			40,228			46,780
INCOME TAX EXPENSE			31,224			11,614			18,148
​	​	​	​	​	​	​	​	​	​	​
INCOME FROM CONTINUING OPERATIONS			57,440			28,614			28,632
Income (loss) from discontinued operations, net of income tax expense (benefit) of $—, $(10) and $(119)			—			(15	)		(76	)
​	​	​	​	​	​	​	​	​	​	​
NET INCOME INCLUDING NONCONTROLLING INTERESTS			57,440			28,599			28,556
Less: Net income attributable to noncontrolling interests			8,076			5,536			1,287
​	​	​	​	​	​	​	​	​	​	​
NET INCOME ATTRIBUTABLE TO COMFORT SYSTEMS USA, INC		$	49,364		$	23,063		$	27,269
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
INCOME PER SHARE ATTRIBUTABLE TO COMFORT SYSTEMS USA, INC.:
Basic—
Income from continuing operations		$	1.32		$	0.61		$	0.73
Income from discontinued operations			—			—			—
​	​	​	​	​	​	​	​	​	​	​
Net income		$	1.32		$	0.61		$	0.73
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
Diluted—
Income from continuing operations		$	1.30		$	0.61		$	0.73
Income from discontinued operations			—			—			—
​	​	​	​	​	​	​	​	​	​	​
Net income		$	1.30		$	0.61		$	0.73
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
SHARES USED IN COMPUTING INCOME PER SHARE:
Basic			37,442			37,547			37,245
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
Diluted			37,868			37,797			37,536
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
DIVIDENDS PER SHARE		$	0.250		$	0.225		$	0.210
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

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

** COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In Thousands, Except Share Amounts) **

		Common Stock						Treasury Stock
		Additional Paid-In Capital			Retained Earnings (Deficit)			Non- Controlling Interests			Total Stockholders' Equity
		Shares			Amount			Shares			Amount
BALANCE AT DECEMBER 31, 2012			41,123,365			411			(3,879,299	)		(41,012	)		317,534			(6,528	)		16,901			287,306
Net income			—			—			—			—			—			27,269			1,287			28,556
Issuance of Stock:
Issuance of shares for options exercised including tax benefit			—			—			439,762			4,711			522			—			—			5,233
Issuance of restricted stock			—			—			122,375			1,301			(1,301	)		—			—			—
Shares received in lieu of tax withholding payment on vested restricted stock			—			—			(45,266	)		(631	)		—			—			—			(631	)
Tax benefit from vesting of restricted stock			—			—			—			—			184			—			—			184
Forfeiture of unvested restricted stock			—			—			(469	)		(5	)		5			—			—			—
Stock-based compensation expense			—			—			—			—			3,041			—			—			3,041
Dividends			—			—			—			—			(1,862	)		(5,973	)		—			(7,835	)
Share repurchase			—			—			(125,541	)		(1,832	)		—			—			—			(1,832	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
BALANCE AT DECEMBER 31, 2013			41,123,365			411			(3,488,438	)		(37,468	)		318,123			14,768			18,188			314,022
Net income			—			—			—			—			—			23,063			5,536			28,599
Issuance of Stock:
Issuance of shares for options exercised including tax benefit			—			—			103,619			1,132			79			—			—			1,211
Issuance of restricted stock			—			—			115,044			1,243			(1,243	)		—			—			—
Shares received in lieu of tax withholding payment on vested restricted stock			—			—			(34,657	)		(531	)		—			—			—			(531	)
Tax benefit from vesting of restricted stock			—			—			—			—			133			—			—			133
Stock-based compensation expense			—			—			—			—			2,992			—			—			2,992
Dividends			—			—			—			—			—			(8,447	)		—			(8,447	)
Distribution to noncontrolling interest			—			—			—			—			—			—			(8,612	)		(8,612	)
Share repurchase			—			—			(549,154	)		(7,974	)		—			—			—			(7,974	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
BALANCE AT DECEMBER 31, 2014			41,123,365			411			(3,853,586	)		(43,598	)		320,084			29,384			15,112			321,393
Net income			—			—			—			—			—			49,364			8,076			57,440
Issuance of Stock:
Issuance of shares for options exercised including tax benefit			—			—			317,333			3,728			966			—			—			4,694
Issuance of restricted stock & performance stock			—			—			200,015			2,292			(626	)		—			—			1,666
Shares received in lieu of tax withholding payment on vested restricted stock			—			—			(44,590	)		(937	)		—			—			—			(937	)
Tax benefit from vesting of restricted stock			—			—			—			—			284			—			—			284
Stock-based compensation expense			—			—			—			—			3,057			—			—			3,057
Dividends			—			—			—			—			—			(9,358	)		—			(9,358	)
Distribution to noncontrolling interest			—			—			—			—			—			—			(4,904	)		(4,904	)
Share repurchase			—			—			(315,953	)		(8,330	)		—			—			—			(8,330	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
BALANCE AT DECEMBER 31, 2015			41,123,365		$	411			(3,696,781	)	$	(46,845	)	$	323,765		$	69,390		$	18,284		$	365,005
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

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

** COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands) **

		Year Ended December 31,
		2015			2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income including noncontrolling interests		$	57,440		$	28,599		$	28,556
Adjustments to reconcile net income to net cash provided by operating activities—
Amortization of identifiable intangible assets			7,481			7,653			7,132
Depreciation expense			15,935			13,683			11,440
Goodwill impairment			—			727			—
Bad debt expense			1,552			1,275			19
Deferred tax expense (benefit)			(414	)		(4,579	)		4,514
Amortization of debt financing costs			317			283			245
Gain on sale of assets			(880	)		(830	)		(589	)
Changes in the fair value of contingent earn-out obligations			(225	)		245			(1,646	)
Stock-based compensation expense			5,609			4,806			3,974
Changes in operating assets and liabilities, net of effects of acquisitions and divestitures—
(Increase) decrease in—
Receivables, net			(3,584	)		(18,339	)		(12,427	)
Inventories			956			281			1,208
Prepaid expenses and other current assets			364			1,494			(109	)
Costs and estimated earnings in excess of billings			(3,630	)		2,744			(1,918	)
Other noncurrent assets			(479	)		(321	)		(491	)
Increase (decrease) in—
Accounts payable and accrued liabilities			11,617			(4,078	)		6,776
Billings in excess of costs and estimated earnings			7,908			7,545			(9,226	)
Other long-term liabilities			(2,100	)		1,364			965
​	​	​	​	​	​	​	​	​	​	​
Net cash provided by operating activities			97,867			42,552			38,423
​	​	​	​	​	​	​	​	​	​	​
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(20,808	)		(19,183	)		(17,403	)
Proceeds from sales of property and equipment			1,338			1,355			1,107
Proceeds from businesses sold			—			—			43
Cash paid for acquisitions, earn-outs and intangible assets, net of cash acquired			(6,158	)		(56,314	)		—
​	​	​	​	​	​	​	​	​	​	​
Net cash used in investing activities			(25,628	)		(74,142	)		(16,253	)
​	​	​	​	​	​	​	​	​	​	​
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit			24,500			128,500			43,000
Payments on revolving line of credit			(53,000	)		(90,000	)		(43,000	)
Payments on other long-term debt			—			(2,000	)		(5,400	)
Payments on capital lease obligations			(443	)		(115	)		—
Debt financing costs			—			(568	)		(552	)
Payments of dividends to stockholders			(9,358	)		(8,444	)		(7,875	)
Share repurchase program			(8,330	)		(7,974	)		(1,832	)
Shares received in lieu of tax withholding			(937	)		(531	)		(631	)
Excess tax benefit of stock-based compensation			1,240			115			534
Proceeds from exercise of options			3,738			1,229			4,883
Distributions to noncontrolling interests			(4,904	)		(8,612	)		—
Payments for contingent consideration arrangements			(345	)		—			—
​	​	​	​	​	​	​	​	​	​	​
Net cash provided by (used in) financing activities			(47,839	)		11,600			(10,873	)
​	​	​	​	​	​	​	​	​	​	​
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			24,400			(19,990	)		11,297
​	​	​	​	​	​	​	​	​	​	​
CASH AND CASH EQUIVALENTS, beginning of year—continuing operations and discontinued operations			32,064			52,054			40,757
​	​	​	​	​	​	​	​	​	​	​
CASH AND CASH EQUIVALENTS, end of year—continuing operations and discontinued operations		$	56,464		$	32,064		$	52,054
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

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

** COMFORT SYSTEMS USA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015 **

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 44% of our consolidated 2015 revenue is attributable to installation of systems in newly constructed facilities, with the remaining 56% attributable to maintenance, repair and replacement services.

Our consolidated 2015 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		$ in thousands			%
HVAC		$	1,216,999			77	%
Plumbing			221,273			14	%
Building Automation Control Systems			79,026			5	%
Other			63,221			4	%
​	​	​	​	​	​	​	​
Total		$	1,580,519			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. In the twelve months ended December 31, 2014, one of our operating locations recorded a revision in contract estimate on a project in a loss position resulting in a writedown to this individual project of $4.4 million, on a pre-tax basis.

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

2. Summary of Significant Accounting Policies (Continued)

Cash Flow Information

We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Cash paid (in thousands) for:

		Year Ended December 31,
		2015			2014			2013
Interest		$	1,408		$	1,764		$	799
Income taxes			35,538			15,366			15,821
​	​	​	​	​	​	​	​	​	​	​
Total		$	36,946		$	17,130		$	16,620
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued 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 at the date of initial application. We currently plan to use the modified retrospective basis on the adoption date. It is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. We are currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issue Costs." Under ASU 2015-03, an entity presents debt issue costs related to a note in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Entities would apply the new guidance retrospectively to all prior periods. In August 2015, the FASB issued ASU No. 2015-15, "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements." The amendment clarifies ASU 2015-03 and provides that an entity may defer and present debt issuance costs for a line-of-credit or other revolving credit facility arrangement as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on the arrangement. As such, we will continue to include debt issuance costs for our revolving credit facility arrangements in other noncurrent assets. These ASUs are effective for annual periods beginning after December 15, 2015, including interim periods within that reporting period. We early adopted these ASUs on December 31, 2015, which did not have a material impact on our consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory", which requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonable predictable costs of completion, disposal and transportation. Inventory measured using last-in, first-out (LIFO) and the retail inventory method (RIM) are not impacted by the new guidance. Entities should apply the new guidance prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. It is effective for fiscal years

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

2. Summary of Significant Accounting Policies (Continued)

beginning after December 15, 2016, including interim periods within those fiscal years. We are currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements.

In September 2015, the FASB issued ASU No. 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments", which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. It is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. We early adopted this ASU in the third quarter of 2015 and its adoption did not have a material impact on our consolidated financial statements.

In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes" ("ASU 2015-17"). The standard requires that deferred tax assets and liabilities be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent. ASU 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted and the standard may be applied either retrospectively or on a prospective basis to all deferred tax assets and liabilities. We early adopted ASU 2015-17 in the fourth quarter of 2015 on a retrospective basis. Accordingly, we reclassified $19.4 million of current deferred tax assets and $0.3 million of current deferred tax liabilities to noncurrent as of December 31, 2014 in our Consolidated Balance Sheet.

Revenue Recognition

Approximately 82% of our revenue was earned on a project basis and recognized through the percentage of completion method of accounting. Under this method, contract revenue recognizable at any time during the life of a contract is determined by multiplying expected total contract revenue by the percentage of contract costs incurred at any time to total estimated contract costs. More specifically, as part of the negotiation and bidding process in 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 work site. Prefabricated materials, such as ductwork and piping, are generally performed at our shops and recognized as contract costs when fabricated for the unique specifications of the job. Other materials costs are not significant and are generally recorded when delivered to the work site. This measurement

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

2. Summary of Significant Accounting Policies (Continued)

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,
		2015			2014
Costs incurred on contracts in progress		$	1,135,279		$	1,193,857
Estimated earnings, net of losses			188,243			151,950
Less—Billings to date			(1,377,581	)		(1,395,633	)
​	​	​	​	​	​	​	​
		$	(54,059	)	$	(49,826	)
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
Costs and estimated earnings in excess of billings		$	31,338		$	27,620
Billings in excess of costs and estimated earnings			(85,397	)		(77,446	)
​	​	​	​	​	​	​	​
		$	(54,059	)	$	(49,826	)
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

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, 2015 and 2014 were $51.6 million and $50.5 million, respectively, and are included in accounts receivable.

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

2. Summary of Significant Accounting Policies (Continued)

Accounts payable at December 31, 2015 and 2014 included $7.8 million and $8.9 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 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, 2015.

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 market using the average-cost method.

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

2. Summary of Significant Accounting Policies (Continued)

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.

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 two market approaches and an income approach, which utilizes discounted future cash flows. Assumptions critical to the fair value estimates under the discounted cash flow model include discount rates, cash flow projections, projected long-term growth rates and the determination of terminal values. The market approaches utilized market multiples of invested capital from comparable publicly traded companies ("public company approach") and comparable transactions ("transaction approach"). The market multiples from invested capital

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

2. Summary of Significant Accounting Policies (Continued)

include revenue, book equity plus debt and earnings before interest, taxes, depreciation and amortization ("EBITDA").

We amortize identifiable intangible assets with finite lives over their useful lives. Changes in strategy and/or market condition may result in 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 income 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 up to deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages. Loss estimates associated with the larger and longer-developing risks—workers' compensation, auto liability and general liability—are reviewed by a third-party actuary quarterly. Our self-insurance arrangements are further discussed in Note 12 "Commitments and Contingencies."

Warranty Costs

We typically warrant labor for the first year after installation on new HVAC systems. We generally warrant labor for thirty days after servicing of existing HVAC systems. A reserve for warranty costs is

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

2. Summary of Significant Accounting Policies (Continued)

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 income taxes are based on the difference between the financial reporting and tax basis of assets and liabilities. The deferred income tax provision represents the change during the reporting period in the deferred tax assets and deferred tax liabilities, net of the effect of acquisitions and dispositions. Deferred tax assets include tax loss and credit carryforwards and are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

We regularly evaluate valuation allowances established for deferred tax assets for which future realization is uncertain. We perform this evaluation quarterly. In assessing the realizability of deferred tax assets, we must consider whether it is more likely than not that some portion, or all, of the deferred 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 of income tax expense in our Consolidated Statements of Operations.

Segment Disclosure

Our activities are within the mechanical services industry, which is the single industry segment we serve. Each operating 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

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

2. Summary of Significant Accounting Policies (Continued)

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 3% of consolidated 2015 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.

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, 2015 (in thousands):

					Fair Value Measurements at Reporting Date Using
		Balance December 31, 2015			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Cash and cash equivalents		$	56,464		$	56,464		$	—		$	—
Life insurance—cash surrender value		$	3,646		$	—		$	3,646		$	—
Contingent earn-out obligations		$	450		$	—		$	—		$	450

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.

One of our operations has life insurance policies covering 49 employees with a combined face value of $45.7 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 $3.6 million as of December 31, 2015 and $3.2 million as of December 31, 2014. These assets are included in "Other Noncurrent Assets" in our consolidated balance sheets.

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

3. Fair Value Measurements (Continued)

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.

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).

		December 31,
		2015			2014
Balance at beginning of year		$	670		$	320
Issuances			350			200
Settlements			(345	)		(95	)
Adjustments to fair value			(225	)		245
​	​	​	​	​	​	​	​
Balance at end of year		$	450		$	670
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

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. No goodwill or other intangible asset impairments were recorded during the year ended December 31, 2015. During the year ended December 31, 2014, we recorded a goodwill impairment charge of $0.7 million based on Level 3 measurements. See Note 6 "Goodwill and Identifiable Intangible Assets, Net" for further discussion. We did not recognize any other impairments on those assets required to be measured at fair value on a nonrecurring basis.

4. Acquisitions

Acquisition of DynaTen

On May 1, 2014, we closed a transaction to acquire DynaTen Corporation ("DynaTen") which reports as a separate operating unit in Northern Texas. DynaTen is a regional mechanical contractor based in Fort Worth, Texas that engages in a broad range of mechanical contracting projects, HVAC services and controls, in the Dallas/Fort Worth metroplex and in surrounding areas. The total purchase price, which was finalized in the first quarter of 2015, was $40.5 million, of which $19.8 million was allocated to goodwill.

Other Acquisitions

We completed various other acquisitions in 2015 and 2014, 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 $8.3 million in 2015 and $15.4 million in 2014. No acquisitions were completed in 2013. One of the "tucked-in" acquisitions was completed on the last day

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

4. Acquisitions (Continued)

of the fourth quarter of 2015 with cash funding occurring in early January 2016. Our consolidated balance sheet includes preliminary allocations of the purchase price to the assets acquired and liabilities assumed for this acquisition pending the completion of the final valuation of intangible assets and purchase price adjustments. The results of operations of acquisitions are included in our consolidated financial statements from their respective acquisition dates. Additional contingent purchase price ("earn-out") has been or will be paid if certain acquisitions achieve predetermined profitability targets. Such earn-outs are not subject to the continued employment of the sellers.

5. Discontinued Operations

During the fourth quarter of 2012, we substantially completed the shutdown of our operation located in Delaware, which we decided to curtail operating in the fourth quarter of 2011. No activity was reported for the year ended December 31, 2015. The after tax loss was less than $0.1 million for the year ended December 31, 2014 and $0.1 million for the year ended December 31, 2013. These results have been recorded in discontinued operations under "Income (loss) from discontinued operations, net of income tax expense (benefit)."

Our consolidated statements of operations and the related earnings per share amounts have been restated to reflect the effects of the discontinued operations. No interest expense has been allocated to discontinued operations.

Revenue and pre-tax income (loss) related to discontinued operations are as follows (in thousands):

		Year Ended December 31,
		2015			2014			2013
Revenue			—		$	7		$	49
Pre-tax loss			—		$	(25	)	$	(195	)

6. Goodwill and Identifiable Intangible Assets, Net

Goodwill

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

		December 31,
		2015			2014
Balance at beginning of year		$	140,341		$	114,588
Additions (See Note 4)			3,533			26,480
Impairment adjustment			—			(727	)
​	​	​	​	​	​	​	​
Balance at end of year		$	143,874		$	140,341
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

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

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

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

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.

There was no impairment of goodwill as a result of our annual goodwill impairment test in 2015 and 2014. Prior to our annual goodwill impairment test in 2014, we recorded a goodwill impairment charge of $0.7 million during the second quarter of 2014. Based on market activity declines and write-downs incurred on several jobs, we determined that the operating environment, conditions and performance at our operating unit based in California could no longer support the related goodwill balance. 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. The fair value was estimated using a discounted cash flow model combined with market valuation approaches.

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.

Identifiable Intangible Assets, Net

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

				December 31,
				2015						2014
		Estimated Useful Lives in Years		Gross Book Value			Accumulated Amortization			Gross Book Value			Accumulated Amortization
Customer relationships		2 - 15		$	53,334		$	(31,960	)	$	50,440		$	(26,287	)
Backlog		1 - 2			1,600			(1,412	)		1,600			(829	)
Noncompete agreements		2 - 7			2,890			(2,890	)		2,890			(2,868	)
Tradenames		2 - 25			27,995			(8,478	)		27,995			(7,275	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total				$	85,819		$	(44,740	)	$	82,925		$	(37,259	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

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 two to twenty-five years. The amounts attributable to backlog are being amortized to "Cost of Services" on a proportionate method over the remaining backlog

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

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

period. Amortization expense for the years ended December 31, 2015, 2014 and 2013 was $7.5 million, $7.7 million and $7.1 million, respectively.

At December 31, 2015, future amortization expense of identifiable intangible assets is as follows (in thousands):

Year ended December 31—
2016		$	5,956
2017			4,640
2018			3,850
2019			3,430
2020			3,102
Thereafter			20,101
​	​	​	​	​
Total		$	41,079
​	​	​	​	​
​	​	​	​	​
​	​	​	​	​

7. Property and Equipment

Property and equipment consist of the following (dollars in thousands):

				December 31,
		Estimated Useful Lives in Years
		2015			2014
Land		—		$	2,745		$	2,745
Transportation equipment		1 - 10			64,951			56,229
Machinery and equipment		1 - 20			25,118			24,430
Computer and telephone equipment		1 - 10			21,141			19,812
Buildings and leasehold improvements		1 - 40			30,319			27,720
Furniture and fixtures		1 - 17			4,181			4,461
​	​	​	​	​	​	​	​	​	​
					148,455			135,397
Less—Accumulated depreciation					(87,642	)		(79,638	)
​	​	​	​	​	​	​	​	​	​
Property and equipment, net				$	60,813		$	55,759
​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​

Depreciation expense, including capital lease amortization, for the years ended December 31, 2015, 2014 and 2013 was $15.9 million, $13.7 million and $11.4 million, respectively.

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

8. Detail of Certain Balance Sheet Accounts

Activity in our allowance for doubtful accounts consists of the following (in thousands):

		December 31,
		2015			2014			2013
Balance at beginning of year		$	4,379		$	4,460		$	6,333
Additions for bad debt expense			1,552			1,275			19
Deductions for uncollectible receivables written off, net of recoveries			(798	)		(1,650	)		(1,892	)
Allowance for doubtful accounts of acquired companies at date of acquisition			25			294			—
​	​	​	​	​	​	​	​	​	​	​
Balance at end of year		$	5,158		$	4,379		$	4,460
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

Other current liabilities consist of the following (in thousands):

		December 31,
		2015			2014
Accrued warranty costs		$	7,746		$	7,227
Accrued job losses			1,365			1,329
Accrued rent and lease obligations			891			953
Accrued sales and use tax			2,216			1,945
Deferred revenue			2,175			1,538
Liabilities due to former owners			2,650			520
Other current liabilities			11,634			11,001
​	​	​	​	​	​	​	​
		$	28,677		$	24,513
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

9. Long-Term Debt Obligations

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

		December 31,
		2015			2014
Revolving credit facility		$	10,000		$	38,500
Notes to former owners			1,000			1,000
Capital lease obligations			507			846
​	​	​	​	​	​	​	​
Total debt			11,507			40,346
Less—current portion			(751	)		(317	)
​	​	​	​	​	​	​	​
Total long-term portion of debt		$	10,756		$	40,029
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

9. Long-Term Debt Obligations (Continued)

At December 31, 2015, future principal payments of debt are as follows (in thousands):

Year ended December 31—
2016		$	751
2017			663
2018			72
2019			10,021
2020			—
Thereafter			—
​	​	​	​	​
		$	11,507
​	​	​	​	​
​	​	​	​	​
​	​	​	​	​

Interest expense included the following primary elements (in thousands):

		Year Ended December 31,
		2015			2014			2013
Interest expense on notes to former owners		$	25		$	38		$	97
Interest expense on borrowings and unused commitment fees			692			790			278
Letter of credit fees			719			747			731
Amortization of debt financing costs			317			283			245
​	​	​	​	​	​	​	​	​	​	​
Total		$	1,753		$	1,858		$	1,351
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

Revolving Credit Facility

We have a $250.0 million senior credit facility (the "Facility") provided by a syndicate of banks, which is available for borrowings and letters of credit. The Facility expires in October 2019 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. In 2014, we incurred approximately $0.6 million in financing and professional costs in connection with an amendment to the Facility, which combined with the previous unamortized costs of $1.3 million, are being amortized on a straight-line basis as a non-cash charge to interest expense over the remaining term of the Facility. As of December 31, 2015, we had $10.0 million of outstanding borrowings, $41.5 million in letters of credit outstanding and $198.5 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

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

9. Long-Term Debt Obligations (Continued)

obligations under bonds. As of December 31, 2015, the book value of these assets was approximately $40.5 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) income taxes; (c) depreciation and amortization; (d) other non-cash charges; and (e) pre-acquisition results of acquired companies. The following is a reconciliation of Credit Facility Adjusted EBITDA to net income for 2015 (in thousands):

Net income including noncontrolling interests		$	57,440
Income taxes—continuing operations			31,224
Interest expense, net			1,681
Depreciation and amortization expense			23,416
Stock compensation expense			5,609
Goodwill impairment			—
EBITDA attributable to noncontrolling interests			(9,027	)
Pre-acquisition results of acquired companies, as defined under the Facility			373
​	​	​	​	​
Credit Facility Adjusted EBITDA		$	110,716
​	​	​	​	​
​	​	​	​	​
​	​	​	​	​

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 through maturity. The leverage ratio as of December 31, 2015 was 0.10.

Fixed Charge Coverage Ratio— The Facility requires that the ratio of Credit Facility Adjusted EBITDA, less non-financed capital expenditures, tax provision, dividends and amounts used to repurchase stock to the sum of interest expense and scheduled principal payments of indebtedness be at least 2.00; provided that the calculation of the fixed charge coverage ratio excludes stock repurchases and the payment of dividends at any time that the Company's Net Leverage Ratio does not exceed 1.50. The Facility also allows the fixed charge coverage ratio not to be reduced for stock repurchases through September 30, 2015 in an aggregate amount not to exceed $25 million if at the time of and after giving effect to such repurchase the Company's Net Leverage Ratio was less than or equal to 1.50. Capital expenditures, tax provision, dividends and stock repurchase payments are defined under the Facility for purposes of this covenant to be amounts for the four quarters ending as of any given quarterly covenant compliance measurement date. The fixed charge coverage ratio as of December 31, 2015 was 27.45.

Other Restrictions— The Facility permits acquisitions of up to $25.0 million per transaction, provided that the aggregate purchase price of such an acquisition and of acquisitions in the same

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

9. Long-Term Debt Obligations (Continued)

fiscal year does not exceed $60.0 million. However, these limitations only apply when the Company's Net Leverage Ratio is equal to or greater than 2.00.

While the Facility's financial covenants do not specifically govern capacity under the Facility, if our debt level under the Facility at a quarter-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, 2015.

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, 2015 relating to interest options under the Facility:

Base Rate Loan Option:
Federal Funds Rate plus 0.50%			0.87	%
Wells Fargo Bank, N.A. Prime Rate			3.50	%
One-month LIBOR plus 1.00%			1.43	%
Eurodollar Rate Loan Option:
One-month LIBOR			0.43	%
Six-month LIBOR			0.86	%

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

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

9. Long-Term Debt Obligations (Continued)

just the same as actual borrowings. 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 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			0.25	%		0.50	%		0.75	%		1.00	%
Eurodollar Rate Loan Option			1.25	%		1.50	%		1.75	%		2.00	%
Letter of credit fees			1.25	%		1.50	%		1.75	%		2.00	%
Commitment fees on any portion of the Revolving Loan capacity not in use for borrowings or letters of credit at any given time			0.20	%		0.25	%		0.30	%		0.35	%

The weighted average interest rate applicable to the borrowings under the Facility was approximately 1.7% as of December 31, 2015.

Notes to Former Owners

In conjunction with an immaterial acquisition in the fourth quarter of 2014, we issued a subordinated note to the former owners of the acquired company as part of the consideration used to acquire the company. This note had an outstanding balance of $1.0 million as of December 31, 2015 and bears interest, payable quarterly, at a weighted average interest rate of 2.5%. The principal is due in equal installments on October 2016 and 2017.

Other Debt

In conjunction with one of our acquisitions, we acquired capital lease obligations. As of December 31, 2015, $0.5 million of capital lease obligations were outstanding, of which $0.3 million was considered current.

Our majority owned subsidiary, Environmental Air Systems, LLC, has a revolving $2.5 million credit line that is available for temporary working capital needs and expires May 31, 2016. As of December 31, 2015, we had no outstanding borrowings and, therefore, $2.5 million of credit available. We estimate that the weighted average interest rate applicable to borrowings under this variable rate credit line would be approximately 2.2% as of December 31, 2015.

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

10. Income Taxes

Provision for Income Taxes

The provision for income taxes relating to continuing operations consists of the following (in thousands):

		December 31,
		2015			2014			2013
Current—
Federal		$	27,564		$	13,402		$	11,707
State and Puerto Rico			4,065			2,810			1,954
​	​	​	​	​	​	​	​	​	​	​
			31,629			16,212			13,661
​	​	​	​	​	​	​	​	​	​	​
Deferred—
Federal			(1,481	)		(308	)		3,254
State and Puerto Rico			1,076			(4,290	)		1,233
​	​	​	​	​	​	​	​	​	​	​
			(405	)		(4,598	)		4,487
​	​	​	​	​	​	​	​	​	​	​
		$	31,224		$	11,614		$	18,148
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

The difference in income taxes provided for and the amounts determined by applying the federal statutory tax rate to income before income taxes results from the following (in thousands):

		December 31,
		2015			2014			2013
Income tax expense at the statutory rate of 35%		$	31,032		$	14,080		$	16,373
Changes resulting from—
State income taxes, net of federal tax effect			3,432			1,653			1,910
Increase (decrease) in valuation allowance			463			(1,944	)		1,465
Increase (decrease) in tax contingency reserves			(72	)		(40	)		(145	)
Increase (decrease) from noncontrolling interests			(2,827	)		(1,938	)		(450	)
Non-deductible expenses			751			704			594
Production activity deduction			(1,701	)		(694	)		(520	)
Purchase accounting adjustments			—			(46	)		(472	)
Other			146			(161	)		(607	)
​	​	​	​	​	​	​	​	​	​	​
		$	31,224		$	11,614		$	18,148
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

10. Income Taxes (Continued)

Deferred Tax Assets (Liabilities)

Significant components of the net deferred tax assets and net deferred tax liabilities as reflected on the balance sheet are as follows (in thousands):

		Year Ended December 31,
		2015			2014
Deferred income tax assets—
Accounts receivable and allowance for doubtful accounts		$	1,889		$	1,626
Stock compensation			3,080			2,793
Accrued liabilities and expenses			19,174			18,670
State net operating loss carryforwards			6,781			6,958
Other			830			761
​	​	​	​	​	​	​	​
Total deferred income tax assets			31,754			30,808
​	​	​	​	​	​	​	​
Deferred income tax liabilities—
Property and equipment			(5,572	)		(7,035	)
Long-term contracts			(728	)		(535	)
Goodwill			(6,037	)		(3,562	)
Intangible assets			(156	)		(1,378	)
Other			(357	)		(271	)
​	​	​	​	​	​	​	​
Total deferred income tax liabilities			(12,850	)		(12,781	)
​	​	​	​	​	​	​	​
Less—Valuation allowance			(4,438	)		(3,975	)
​	​	​	​	​	​	​	​
Net deferred income tax assets		$	14,466		$	14,052
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

The deferred income tax assets and liabilities reflected above are included in the consolidated balance sheets as follows (in thousands):

		December 31,
		2015			2014
Deferred income tax assets—
Other noncurrent assets		$	16,276		$	15,362
Deferred income tax liabilities—
Deferred income tax liabilities		$	1,810		$	1,310

As of December 31, 2015, we had $6.8 million of future tax benefits related to $96.8 million of available state and Puerto Rican net operating loss carryforwards ("NOLs"), which expire between 2016 and 2035. A valuation allowance of $4.4 million has been recorded against the state and Puerto Rican net deferred tax assets. We recorded an increase in valuation allowances of $0.5 million for the year ended December 31, 2015. Our deferred tax assets for Puerto Rico are fully valued. A deferred tax asset for state NOLs, net of related valuation allowance, of $2.8 million reflects our conclusion that it is likely that this asset 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 net NOLs annually. A

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

10. Income Taxes (Continued)

return to profitability in our entities with valuation allowances on their NOL's and 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 deferred tax asset valuation allowance.

As of December 31, 2015 and 2014, approximately $0.2 million and $0.3 million, respectively, of unrecognized tax benefits, if recognized in future periods, would impact our effective tax rate. This liability is included in "Other Long-Term Liabilities" in the consolidated balance sheets. We do not expect that the total amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

We recognize potential interest and penalties related to unrecognized tax benefits in income tax expense. We had accrued approximately $0.3 million and $0.3 million for the payment of interest and penalties at December 31, 2015 and 2014, respectively. Our tax records are subject to review by the Internal Revenue Service for the 2012 tax year forward and by various state authorities for the 2007 tax year forward.

Liabilities for Uncertain Tax Positions

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding accrued interest and penalties, is as follows (in thousands):

		Year Ended December 31,
		2015			2014			2013
Balance at beginning of year		$	343		$	413		$	499
Additions based on tax positions related to the current year			—			—			—
Additions for tax positions of prior years			—			—			—
Reductions for tax positions of prior years			(103	)		(70	)		(86	)
Settlements			—			—			—
​	​	​	​	​	​	​	​	​	​	​
Balance at end of year		$	240		$	343		$	413
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

11. Employee Benefit Plans

We and certain of our subsidiaries sponsor various retirement plans for most full-time and some part-time employees. These plans primarily consist 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 $7.1 million in 2015, $6.1 million in 2014 and $5.5 million in 2013. Of these amounts, approximately $0.1 million was payable to the plans at December 31, 2015 and 2014.

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, 2015 and 2014, we had 11 and 6 employees, respectively, who were union members. There were no contributions made to multi-employer pension plans in 2015, 2014 or 2013. 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.

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

11. Employee Benefit Plans (Continued)

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 $3.3 million and $3.0 million recorded as of December 31, 2015 and 2014, respectively.

12. Commitments and Contingencies

Leases

We lease certain facilities and equipment under noncancelable operating leases. Rent expense for the years ended December 31, 2015, 2014 and 2013 was $20.6 million, $17.8 million, and $16.2 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 2015, 2014 and 2013 rent expense above are approximately $5.4 million, $3.8 million and $3.8 million of rent paid to these related parties, respectively. In addition to the noncancelable operating leases, we have capital lease obligations of $0.5 million as of December 31, 2015, which were attained through our acquisition in Northern Texas.

The following represents future minimum rental payments under noncancelable operating leases (in thousands):

Year ended December 31—
2016		$	11,819
2017			10,647
2018			9,066
2019			7,004
2020			4,949
Thereafter			6,068
​	​	​	​	​
		$	49,553
​	​	​	​	​
​	​	​	​	​
​	​	​	​	​

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

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

12. Commitments and Contingencies (Continued)

material effect on our operating results, cash flows or financial condition, after giving effect to provisions already recorded.

Surety

Many customers, particularly in connection with new construction, require us to post performance and payment bonds issued by a financial 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 have seen some strengthening as the commercial construction markets have started to rebound. Bonding capacity remains 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 up to deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages. Loss estimates associated with the larger and longer-developing risks, such as workers' compensation, auto liability and general liability, are reviewed by a third-party actuary quarterly.

Our self-insurance arrangements as of December 31, 2015 were as follows:

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

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

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

12. Commitments and Contingencies (Continued)

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

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

Employee Medical— We have two medical plans. The deductible for employee group health claims is $350,000 per person, per policy (calendar) year for each plan. Insurance then covers any responsibility for medical claims in excess of the deductible amount.

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

13. 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, 2015, there were 3.6 million shares available for issuance under this plan. The 2012 Plan will expire in May 2022. 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 approved extensions of the program to acquire additional shares. Since the inception of the repurchase program, the Board has approved 7.6 million shares to be repurchased. As of December 31, 2015, we have repurchased a cumulative total of 6.9 million shares at an average price of $11.99 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, 2015, we repurchased 0.3 million shares for approximately $8.3 million at an average price of $26.36 per share.

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

13. Stockholders' Equity (Continued)

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, contingently issuable 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 no anti-dilutive stock options for the years ended December 31, 2015 and 2013. There were approximately 0.2 million anti-dilutive stock options excluded from the calculation of diluted EPS for the year ended December 31, 2014.

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,
		2015			2014			2013
Common shares outstanding, end of period			37,427			37,270			37,578
Effect of using weighted average common shares outstanding			15			277			(333	)
​	​	​	​	​	​	​	​	​	​	​
Shares used in computing earnings per share—basic			37,442			37,547			37,245
Effect of shares issuable under stock option plans based on the treasury stock method			266			147			183
Effect of contingently issuable restricted shares			160			103			108
​	​	​	​	​	​	​	​	​	​	​
Shares used in computing earnings per share—diluted			37,868			37,797			37,536
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

14. Stock-Based Compensation

Under the 2012 Equity Incentive Plan (the "2012 Plan") grants of stock options, restricted stock and restricted stock units, and performance share units have been, and will be, determined and administered by the compensation committee of the Board of Directors. Total stock-based compensation expense was $5.6 million, $4.8 million and $4.0 million for the years ended December 31, 2015, 2014 and 2013, respectively. Total income tax benefit recognized for stock-based compensation arrangements was $2.1 million, $1.8 million and $1.5 million for each of the years ended December 31, 2015, 2014 and 2013. We present the benefits of tax deductions in excess of recognized compensation costs ("excess tax benefits") as financing cash flows in the consolidated statements of cash flows.

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

14. Stock-Based Compensation (Continued)

Upon the vesting of restricted shares, we have allowed the holder to elect to surrender an amount of shares to meet their minimum 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,
		2015
Stock Options		Shares			Weighted- Average Exercise Price
Outstanding at beginning of year			910		$	12.95
Granted			132		$	19.67
Exercised			(318	)	$	11.78
Forfeited			—		$	—
Expired			—		$	—
​	​	​	​	​	​	​	​
Outstanding at end of year			724		$	14.69
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
Options exercisable at end of year			437

The total intrinsic value of options exercised during the years ended December 31, 2015, 2014 and 2013 was $3.9 million, $0.4 million and $3.0 million, respectively. Stock options exercisable as of December 31, 2015 have a weighted-average remaining contractual term of 5.4 years and an aggregate intrinsic value of $6.8 million. As of December 31, 2015, we have 0.7 million options that are vested or expected to vest; these options have a weighted average exercise price of $14.69 per share, have a weighted-average remaining contractual term of 6.6 years and an aggregate intrinsic value of $9.9 million.

The following table summarizes information about stock options outstanding at December 31, 2015 (shares in thousands):

		Options Outstanding
					Weighted- Average Remaining Contractual Life						Options Exercisable
Range of Exercise Prices		Number Outstanding at 12/31/15			Weighted- Average Exercise Price			Number Exercisable at 12/31/15			Weighted- Average Exercise Price
$7.95 - $12.94			202			4.98		$	11.56			202		$	11.56
$12.95 - $17.94			390			6.61		$	14.63			235		$	14.13
$17.95 - $19.67			132			9.24		$	19.67			—		$	—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
$7.95 - $19.67			724			6.63		$	14.69			437		$	12.94
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

14. Stock-Based Compensation (Continued)

The fair value of each option award is estimated, based on several assumptions, on the date of grant using the Black-Scholes option valuation model. The fair values and the assumptions used for the 2015, 2014 and 2013 grants are shown in the table below:

		Year Ended December 31,
		2015		2014		2013
Weighted-average fair value per share of options granted		$6.33		$6.24		$5.06
Fair value assumptions:
Expected dividend yield		1.51%		1.34%		1.82%
Expected stock price volatility		38.4%		45.2%		46.6%
Risk-free interest rate		1.50%		1.91%		0.96%
Expected term		5.6 years		5.6 years		5.6 years

Stock options are accounted for as equity instruments, and compensation cost is recognized using the straight-line method over the vesting period. Stock options generally vest over a three-year vesting period. Certain stock option and restricted stock awards provide for accelerated vesting when the sum of an employee's age and years of service is at least 75. As of December 31, 2015, the unrecognized compensation cost related to stock options was $0.7 million, which is expected to be recognized over a weighted-average period of 1.7 years. The total fair value of options vested during the year ended December 31, 2015 was $0.8 million.

The following table summarizes information about nonvested stock option awards as of December 31, 2015 and changes for the year ended December 31, 2015 (shares in thousands):

Stock Options		Shares			Weighted-Average Grant Date Fair Value
Nonvested at December 31, 2014			323		$	5.43
Granted			132		$	6.33
Vested			(168	)	$	5.03
Forfeited			—			—
​	​	​	​	​	​	​	​
Nonvested at December 31, 2015			287		$	6.07
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

We generally issue treasury shares for stock options and restricted stock, unless treasury shares are not available.

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

14. Stock-Based Compensation (Continued)

Restricted Stock and Restricted Stock Units

The following table summarizes activity under our restricted stock plans (shares in thousands):

		Year Ended December 31,
		2015
Restricted Stock and Restricted Stock Units		Shares			Weighted- Average Grant Date Fair Value
Unvested at beginning of year			160		$	14.42
Granted			113		$	20.64
Vested			(121	)	$	16.42
Forfeited			(3	)	$	14.45
​	​	​	​	​	​	​	​
Unvested at end of year			149		$	17.48
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

Approximately $1.2 million of compensation expense related to restricted stock and restricted stock units will be recognized over a weighted-average period of 1.8 years. The total fair value of shares vested during the year ended December 31, 2015 was $2.0 million. The weighted-average fair value per share of restricted stock shares and units awarded during 2015, 2014 and 2013 was $20.64, $15.80 and $13.57, respectively. The aggregate intrinsic value of restricted stock vested during the years ended December 31, 2015, 2014 and 2013 was $3.4 million, $2.9 million and $4.7 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, 2015 was $5.2 million.

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

14. Stock-Based Compensation (Continued)

Of this amount, $2.0 million relates to the PSUs granted in 2013 whose performance period ended December 31, 2015. These awards will be settled within the upcoming year either in cash or stock. The accrued expense related to performance stock units for the years ended December 31, 2015 and 2014 was $2.6 million and $1.8 million, respectively. At the December 31, 2015 calculated fair market value, approximately $1.6 million of compensation expense related to performance stock units will be recognized over a weighted-average period of 1.4 years.

We generally issue treasury shares for stock compensation purposes, unless treasury shares are not available.

15. Selected Quarterly Financial Data (Unaudited)

Quarterly financial information for the years ended December 31, 2015 and 2014 is summarized as follows (in thousands, except per share data):

		2015
		Q1			Q2			Q3			Q4
Revenue		$	369,547		$	416,567		$	410,565		$	383,840
Gross profit(1)			64,688			82,049			87,465			83,927
Net income including noncontrolling interests			6,889			15,782			19,886			14,883
Net income attributable to Comfort Systems USA, Inc.			5,066			13,404			17,673			13,221
INCOME PER SHARE ATTRIBUTABLE TO COMFORT SYSTEMS USA, INC.:
Basic—
Income from continuing operations		$	0.14		$	0.36		$	0.47		$	0.35
Income from discontinued operations			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net income		$	0.14		$	0.36		$	0.47		$	0.35
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Diluted—
Income from continuing operations		$	0.13		$	0.35		$	0.46		$	0.35
Income from discontinued operations			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net income		$	0.13		$	0.35		$	0.46		$	0.35
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

15. Selected Quarterly Financial Data (Unaudited) (Continued)

		2014
		Q1			Q2			Q3			Q4
Revenue		$	321,381		$	362,801		$	370,145		$	356,468
Gross profit			52,149			61,859			66,459			69,304
Net income including noncontrolling interests			1,063			6,336			9,379			11,821
Net income attributable to Comfort Systems USA, Inc.			375			4,401			7,605			10,682
INCOME PER SHARE ATTRIBUTABLE TO COMFORT SYSTEMS USA, INC.:
Basic—
Income from continuing operations		$	0.01		$	0.12		$	0.20		$	0.29
Income from discontinued operations			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net income		$	0.01		$	0.12		$	0.20		$	0.29
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Diluted—
Income from continuing operations		$	0.01		$	0.12		$	0.20		$	0.29
Income from discontinued operations			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net income		$	0.01		$	0.12		$	0.20		$	0.29
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​

(1)

In the fourth quarter of 2015, we recognized a $3.4 million project gain related to change orders we received.

The sums of the individual quarterly earnings per share amounts do not necessarily agree with year-to-date 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.

16. Subsequent Events

Effective January 1, 2016, we acquired the remaining 40% noncontrolling interest in Environmental Air Systems, LLC ("EAS") headquartered in Greensboro, North Carolina. As required under applicable accounting standards, since the original acquisition in 2011, EAS has been fully consolidated with Comfort Systems USA's financial results. As a result, this transaction will not affect the presentation of revenue, EBITDA or other financial metrics for Comfort Systems USA that are above the elimination of noncontrolling interest numbers in our financial statements. EAS was the only entity in which we reported a noncontrolling interest for financial statement purposes as of December 31, 2015.

On February 22, 2016, the Company entered into Amendment No. 4 to Second Amended and Restated Credit Agreement and Amendment to Other Loan Documents (the "Fourth Amendment" and, together with the Facility, the "Amended Facility") with a syndicate of banks. The Amended Facility is secured by a first lien on substantially all of the Company's personal property except for assets related to projects subject to surety bonds and assets held by certain unrestricted subsidiaries and a second lien on the Company's assets related to projects subject to surety bonds. The Amended Facility provides an increased line of credit to the Company from $250 million to $325 million, with a

** COMFORT SYSTEMS USA, INC.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

16. Subsequent Events (Continued)

$100 million accordion option. The line of credit includes up to $125 million issuable in the form of letters of credit. The Amended Facility will expire in February 2021.

Effective February 1, 2016, we acquired the ShoffnerKalthoff family of companies, including ShoffnerKalthoff Mechanical Electrical Service, Inc., Shoffner Mechanical Services, Inc. and SKMES, Inc. (collectively, "Shoffner") for $17.25 million plus an earn-out that we will pay if certain financial targets are met after the acquisition date. Shoffner is a regional mechanical contractor based in Knoxville, Tennessee. Shoffner engages in a broad range of mechanical contracting projects, HVAC service and electrical contracting in Knoxville and surrounding areas.