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		40
Report of Independent Registered Public Accounting Firm		41
Report of Independent Registered Public Accounting Firm		42
Consolidated Balance Sheets		43
Consolidated Statements of Operations		44
Consolidated Statements of Stockholders’ Equity		45
Consolidated Statements of Cash Flows		46
Notes to Consolidated Financial Statements		47

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a‑15(f) and 15d‑15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013 framework). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included elsewhere herein, has issued an attestation report auditing the effectiveness of our internal control over financial reporting as of December 31, 2017.

Report of Independent Registered Public Accounting Firm

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

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Comfort Systems USA, Inc. (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 22, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2002.

Houston, Texas

February 22, 2018

Report of Independent Registered Public Accounting Firm

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

Opinion on Internal Control over Financial Reporting

We have audited Comfort Systems USA, Inc.’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Comfort Systems USA, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and our report dated February 22, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Houston, Texas

February 22, 2018

COMFORT SYSTEMS USA, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

		December 31,
		2017			2016
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	36,542		$	32,074
Accounts receivable, less allowance for doubtful accounts of $3,400 and $4,288, respectively			382,867			318,837
Other receivables			21,235			20,363
Inventories			10,303			9,208
Prepaid expenses and other			8,294			6,106
Costs and estimated earnings in excess of billings			30,116			29,369
Total current assets			489,357			415,957
PROPERTY AND EQUIPMENT, NET			87,591			68,195
GOODWILL			200,584			149,208
IDENTIFIABLE INTANGIBLE ASSETS, NET			76,044			42,435
DEFERRED TAX ASSETS			22,966			27,170
OTHER NONCURRENT ASSETS			4,578			5,938
Total assets		$	881,120		$	708,903
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt		$	613		$	600
Current maturities of long-term capital lease obligations			—			163
Accounts payable			132,011			103,440
Accrued compensation and benefits			69,217			61,712
Billings in excess of costs and estimated earnings			106,005			83,985
Accrued self-insurance			32,228			33,520
Other current liabilities			33,654			34,261
Total current liabilities			373,728			317,681
LONG-TERM DEBT			59,926			1,955
LONG-TERM CAPITAL LEASE OBLIGATIONS			—			93
DEFERRED TAX LIABILITIES			2,263			2,289
OTHER LONG-TERM LIABILITIES			27,258			10,252
Total liabilities			463,175			332,270
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par, 5,000,000 shares authorized, none issued and outstanding			—			—
Common stock, $.01 par, 102,969,912 shares authorized, 41,123,365 and 41,123,365 shares issued, respectively			411			411
Treasury stock, at cost, 3,936,291 and 3,914,251 shares, respectively			(63,519)			(57,387)
Additional paid-in capital			312,784			309,625
Retained earnings			168,269			123,984
Total stockholders’ equity			417,945			376,633
Total liabilities and stockholders’ equity		$	881,120		$	708,903

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,
			2017			2016			2015
REVENUE			$	1,787,922		$	1,634,340		$	1,580,519
COST OF SERVICES				1,421,641			1,290,331			1,262,390
Gross profit				366,281			344,009			318,129
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES				266,586			243,201			228,965
GOODWILL IMPAIRMENT				1,105			—			—
GAIN ON SALE OF ASSETS				(670)			(761)			(880)
Operating income				99,260			101,569			90,044
OTHER INCOME (EXPENSE):
Interest income				70			9			72
Interest expense				(3,156)			(2,345)			(1,753)
Changes in the fair value of contingent earn-out obligations				3,715			731			225
Other				1,049			1,097			76
Other income (expense)				1,678			(508)			(1,380)
INCOME BEFORE INCOME TAXES				100,938			101,061			88,664
PROVISION FOR INCOME TAXES				45,666			36,165			31,224
NET INCOME INCLUDING NONCONTROLLING INTERESTS				55,272			64,896			57,440
Less: Net income attributable to noncontrolling interests				—			—			8,076
NET INCOME ATTRIBUTABLE TO COMFORT SYSTEMS USA, INC.			$	55,272		$	64,896		$	49,364
INCOME PER SHARE ATTRIBUTABLE TO COMFORT SYSTEMS USA, INC.:
Basic			$	1.48		$	1.74		$	1.32
Diluted			$	1.47		$	1.72		$	1.30
SHARES USED IN COMPUTING INCOME PER SHARE:
Basic				37,239			37,335			37,442
Diluted				37,672			37,811			37,868
DIVIDENDS PER SHARE			$	0.295		$	0.275		$	0.250

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)

												Additional						Non-			Total
		Common Stock					Treasury Stock					Paid-In			Retained			Controlling			Stockholders’
		Shares		Amount			Shares		Amount			Capital			Earnings			Interests			Equity
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		—			—		—			—			3,057			—			—			3,057
Dividends		—			—		—			—			—			(9,358)			—			(9,358)
Distribution to noncontrolling interest		—			—		—			—			—			—			(4,904)			(4,904)
Share repurchase		—			—		(315,953)			(8,330)			—			—			—			(8,330)
BALANCE AT DECEMBER 31, 2015		41,123,365			411		(3,696,781)			(46,845)			323,765			69,390			18,284			365,005
Cumulative effect of change in accounting principle		—			—		—			—			—			(38)			—			(38)
Net income		—			—		—			—			—			64,896			—			64,896
Issuance of Stock:
Issuance of shares for options exercised		—			—		111,761			1,568			10			—			—			1,578
Issuance of restricted stock & performance stock		—			—		172,727			2,282			(306)			—			—			1,976
Shares received in lieu of tax withholding payment on vested restricted stock		—			—		(41,788)			(1,304)			—			—			—			(1,304)
Stock-based compensation		—			—		—			—			3,502			—			—			3,502
Dividends		—			—		—			—			—			(10,264)			—			(10,264)
Acquisition of noncontrolling interest		—			—		—			—			(17,346)			—			(18,284)			(35,630)
Share repurchase		—			—		(460,170)			(13,088)			—			—			—			(13,088)
BALANCE AT DECEMBER 31, 2016		41,123,365			411		(3,914,251)			(57,387)			309,625			123,984			—			376,633
Net income		—			—		—			—			—			55,272			—			55,272
Issuance of Stock:
Issuance of shares for options exercised		—			—		145,746			2,257			(205)			—			—			2,052
Issuance of restricted stock & performance stock		—			—		134,646			2,037			(421)			—			—			1,616
Shares received in lieu of tax withholding payment on vested restricted stock		—			—		(39,335)			(1,419)			—			—			—			(1,419)
Stock-based compensation		—			—		—			—			3,785			—			—			3,785
Dividends		—			—		—			—			—			(10,987)			—			(10,987)
Share repurchase		—			—		(263,097)			(9,007)			—			—			—			(9,007)
BALANCE AT DECEMBER 31, 2017		41,123,365		$	411		(3,936,291)		$	(63,519)		$	312,784		$	168,269		$	—		$	417,945

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,
		2017			2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income including noncontrolling interests		$	55,272		$	64,896		$	57,440
Adjustments to reconcile net income to net cash provided by operating activities—
Amortization of identifiable intangible assets			17,404			8,185			7,481
Depreciation expense			20,052			17,981			15,935
Goodwill impairment			1,105			—			—
Bad debt expense (benefit)			182			(27)			1,552
Deferred tax provision (benefit)			4,178			(1,239)			(414)
Amortization of debt financing costs			376			367			317
Gain on sale of assets			(670)			(761)			(880)
Changes in the fair value of contingent earn-out obligations			(3,715)			(731)			(225)
Stock-based compensation			6,377			5,041			5,609
Changes in operating assets and liabilities, net of effects of acquisitions and divestitures—
(Increase) decrease in—
Receivables, net			(37,799)			7,038			(3,584)
Inventories			(584)			213			956
Prepaid expenses and other current assets			2,467			(8,850)			364
Costs and estimated earnings in excess of billings			1,869			3,144			(3,630)
Other noncurrent assets			1,005			(143)			(479)
Increase (decrease) in—
Accounts payable and accrued liabilities			22,068			2,736			11,617
Billings in excess of costs and estimated earnings			13,265			(8,351)			7,908
Other long-term liabilities			11,238			1,689			(2,100)
Net cash provided by operating activities			114,090			91,188			97,867
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(35,467)			(23,217)			(20,808)
Proceeds from sales of property and equipment			1,359			1,062			1,338
Cash paid for acquisitions, net of cash acquired			(94,860)			(57,163)			(6,158)
Net cash used in investing activities			(128,968)			(79,318)			(25,628)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit			177,000			144,000			24,500
Payments on revolving line of credit			(132,000)			(154,000)			(53,000)
Payments on other debt			(835)			(592)			—
Payments on capital lease obligations			(256)			(251)			(443)
Debt financing costs			—			(789)			—
Payments of dividends to stockholders			(10,987)			(10,264)			(9,358)
Share repurchase			(9,007)			(13,088)			(8,330)
Shares received in lieu of tax withholding			(1,419)			(1,304)			(937)
Excess tax benefit of stock-based compensation			—			—			1,240
Proceeds from exercise of options			2,052			1,578			3,738
Distributions to noncontrolling interests			—			—			(4,904)
Deferred acquisition payments			(2,802)			(1,350)			—
Payments for contingent consideration arrangements			(2,400)			(200)			(345)
Net cash provided by (used in) financing activities			19,346			(36,260)			(47,839)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			4,468			(24,390)			24,400
CASH AND CASH EQUIVALENTS, beginning of year			32,074			56,464			32,064
CASH AND CASH EQUIVALENTS, end of year		$	36,542		$	32,074		$	56,464

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

COMFORT SYSTEMS USA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017

1. Business and Organization

Comfort Systems USA, Inc., a Delaware corporation, provides comprehensive mechanical contracting services, which principally includes heating, ventilation and air conditioning (“HVAC”), plumbing, piping and controls, as well as off-site construction, electrical, monitoring and fire protection. We install, maintain, repair and replace products and systems throughout the United States. Approximately 38% of our consolidated 2017 revenue is attributable to installation of systems in newly constructed facilities, with the remaining 62% attributable to maintenance, repair and replacement services.

Our consolidated 2017 revenue was derived from the following service activities, all of which are in the mechanical services industry, the single industry segment we serve:

		Revenue
Service Activity		$ in thousands			%
HVAC and Plumbing		$	1,615,468		90	%
Building Automation Control Systems			94,041		5	%
Other			78,413		5	%
Total		$	1,787,922		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.

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,
		2017			2016			2015
Interest		$	2,832		$	1,864		$	1,408
Income taxes		$	38,144		$	29,349		$	35,538

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 provides a framework that replaces the existing revenue recognition guidance. The guidance can be applied on a full retrospective or modified retrospective basis whereby the entity records a cumulative effect of initially applying this update on the adoption date. We plan to use the modified retrospective basis on the adoption date. ASU 2014-09 is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. We believe the areas that may impact us the most include accounting for variable consideration, capitalization of incremental costs of obtaining a contract and the guidance on the number of performance obligations contained in a contract. We currently expect the adoption of ASU 2014-09 to have an impact of less than $0.5 million on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The standard requires lessees to recognize assets and liabilities for most leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. ASU 2016-02’s transition provisions are applied using a modified retrospective approach at the beginning of the earliest comparative period presented in the financial statements. Full retrospective application is prohibited. We are currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. This standard provides guidance on how certain cash receipts and cash payments are presented and classified in the statement of cash flows and is intended to reduce diversity in practice with respect to these items. The standard is applied using a retrospective transition method and is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We currently do not believe the adoption will have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and other (Topic 350): Simplifying the Accounting for Goodwill Impairment”. This standard removes Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Additionally, entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The standard is applied prospectively and is effective for fiscal years beginning after December 15, 2019, including annual or interim goodwill impairment tests within those fiscal years. Early adoption is permitted for interim and annual goodwill impairment tests performed on testing dates after January 1, 2017. We early adopted ASU 2017-04 in the first quarter of 2017, which did not have a material impact on our consolidated financial statements.

Revenue Recognition

Approximately 81% of our revenue was earned on a project basis and recognized through the percentage of completion method of accounting. Under this method, contract revenue recognizable at any time during the life of a contract is determined by multiplying expected total contract revenue by the percentage of contract costs incurred at any time to total estimated contract costs. More specifically, as part of the negotiation and bidding process in connection with obtaining installation contracts, we estimate our contract costs, which include all direct materials (exclusive of rebates), labor and subcontract costs and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. These contract costs are included in our results of operations under the caption

“Cost of Services.” Then, as we perform under those contracts, we measure costs incurred, compare them to total estimated costs to complete the contract and recognize a corresponding proportion of contract revenue. Labor costs are considered to be incurred as the work is performed. Subcontractor labor is recognized as the work is performed, but is generally subjected to approval as to milestones or other evidence of completion. Non‑labor project costs consist of purchased equipment, prefabricated materials and other materials. Purchased equipment on our projects is substantially produced to job specifications and is a value added element to our work. The costs are considered to be incurred when title is transferred to us, which typically is upon delivery to the work site. Prefabricated materials, such as ductwork and piping, are generally performed at our shops and recognized as contract costs when fabricated for the unique specifications of the job. Other material costs are not significant and are generally recorded when delivered to the work site. This measurement and comparison process requires updates to the estimate of total costs to complete the contract, and these updates may include subjective assessments.

We generally do not incur significant costs prior to receiving a contract, and therefore, these costs are expensed as incurred. In limited circumstances, when significant pre‑contract costs are incurred, they are deferred if the costs can be directly associated with a specific contract and if their recoverability from the contract is probable. Upon receiving the contract, these costs are included in contract costs. Deferred costs associated with unsuccessful contract bids are written off in the period that we are informed that we will not be awarded the contract.

Project contracts typically provide for a schedule of billings or invoices to the customer based on reaching agreed upon milestones or as we incur costs. The schedules for such billings usually do not precisely match the schedule on which costs are incurred. As a result, contract revenue recognized in the statement of operations can and usually does differ from amounts that can be billed or invoiced to the customer at any point during the contract. Amounts by which cumulative contract revenue recognized on a contract as of a given date exceed cumulative billings to the customer under the contract are reflected as a current asset in our balance sheet under the caption “Costs and estimated earnings in excess of billings.” Amounts by which cumulative billings to the customer under a contract as of a given date exceed cumulative contract revenue recognized on the contract are reflected as a current liability in our balance sheet under the caption “Billings in excess of costs and estimated earnings.”

Contracts in progress are as follows (in thousands):

		December 31,
		2017			2016
Costs incurred on contracts in progress		$	1,288,330		$	1,116,182
Estimated earnings, net of losses			253,641			207,252
Less—Billings to date			(1,617,860)			(1,378,050)
		$	(75,889)		$	(54,616)
Costs and estimated earnings in excess of billings		$	30,116		$	29,369
Billings in excess of costs and estimated earnings			(106,005)			(83,985)
		$	(75,889)		$	(54,616)

Accounts receivable include amounts billed to customers under retention or retainage provisions in construction contracts. Such provisions are standard in our industry and usually allow for a small portion of progress billings or the contract price to be withheld by the customer until after we have completed work on the project, typically for a period of six months. Based on our experience with similar contracts in recent years, the majority of our billings for such retention balances at each balance sheet date are finalized and collected within the subsequent year. Retention balances at December 31, 2017 and 2016 were $68.7 million and $60.7 million, respectively, and are included in accounts receivable.

Accounts payable at December 31, 2017 and 2016 included $11.9 million and $10.1 million of retainage under terms of contracts with subcontractors, respectively. The majority of the retention balances at each balance sheet date are finalized and paid within the subsequent year.

The percentage of completion method of accounting is also affected by changes in job performance, job conditions and final contract settlements. These factors may result in revisions to estimated costs and, therefore, revenue. Such revisions are frequently based on further estimates and subjective assessments. The effects of these revisions are recognized in the period in which the revisions are determined. When such revisions lead to a conclusion that a loss will

be recognized on a contract, the full amount of the estimated ultimate loss is recognized in the period such a conclusion is reached, regardless of the percentage of completion of the contract.

Revisions to project costs and conditions can give rise to change orders under which the customer agrees to pay additional contract price. Revisions can also result in claims we might make against the customer to recover project variances that have not been satisfactorily addressed through change orders with the customer. Except in certain circumstances, we do not recognize revenue or margin based on change orders or claims until they have been agreed upon with the customer. The amount of revenue associated with unapproved change orders and claims was immaterial for the year ended December 31, 2017.

Variations from estimated project costs could have a significant impact on our operating results, depending on project size, and the recoverability of the variation via additional customer payments.

Revenue associated with maintenance, repair and monitoring services and related contracts are recognized as services are performed. Amounts associated with unbilled service work orders are reflected as a current asset in our balance sheet under the caption “Costs and estimated earnings in excess of billings” and amounts billed in advance of work orders being performed are reflected as a current liability in our balance sheet under the caption “Billings in excess of costs and estimated earnings.”

Accounts Receivable

The carrying value of our receivables, net of the allowance for doubtful accounts, represents the estimated net realizable value. We estimate our allowance for doubtful accounts based upon the creditworthiness of our customers, prior collection history, ongoing relationships with our customers, the aging of past due balances, our lien rights, if any, in the property where we performed the work and the availability, if any, of payment bonds applicable to the contract. The receivables are written off when they are deemed to be uncollectible.

Inventories

Inventories consist of parts and supplies that we purchase and hold for use in the ordinary course of business and are stated at the lower of cost or net realizable value using the average-cost method.

Property and Equipment

Property and equipment are stated at cost, and depreciation is computed using the straight‑line method over the estimated useful lives of the assets. Leasehold improvements are capitalized and amortized over the lesser of the expected life of the lease or the estimated useful life of the asset.

Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments, which extend the useful lives of existing equipment, are capitalized and depreciated over the remaining useful life of the equipment. Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in “Gain on sale of assets” in the statement of operations.

Recoverability of Goodwill and Identifiable Intangible Assets

Goodwill is the excess of purchase price over the fair value of the net assets of acquired businesses. We assess goodwill for impairment each year, and more frequently if circumstances suggest an impairment may have occurred.

When the carrying value of a given reporting unit exceeds its fair value, an impairment loss is recorded to the extent that the implied fair value of the goodwill of the reporting unit is less than its carrying value. If other reporting units have had increases in fair value, such increases may not be recorded. Accordingly, such increases may not be netted against impairments at other reporting units. The requirements for assessing whether goodwill has been impaired involve market‑based information. This information, and its use in assessing goodwill, entails some degree of subjective assessment.

We perform our annual impairment testing as of October 1 and any impairment charges resulting from this process are reported in the fourth quarter. We segregate our operations into reporting units based on the degree of operating and financial independence of each unit and our related management of them. We perform our annual goodwill impairment testing at the reporting unit level. Each of our operating units represents an operating segment, and our operating segments are our reporting units.

In the evaluation of goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of one of our reporting units is greater than its carrying value. If, after completing such assessment, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then there is no need to perform any further testing. If we conclude otherwise, then we perform the first step of a two‑step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying value of the reporting unit.

We estimate the fair value of the reporting unit based on a market approach and an income approach, which utilizes discounted future cash flows. Assumptions critical to the fair value estimates under the discounted cash flow model include discount rates, cash flow projections, projected long‑term growth rates and the determination of terminal values. The market approach utilizes market multiples of invested capital from comparable publicly traded companies (“public company approach”). The market multiples from invested capital include revenue, book equity plus debt and earnings before interest, provision for income taxes, depreciation and amortization (“EBITDA”).

We amortize identifiable intangible assets with finite lives over their useful lives. Changes in strategy and/or market condition may result in adjustments to recorded intangible asset balances.

Long‑Lived Assets

Long‑lived assets are comprised principally of goodwill, identifiable intangible assets, property and equipment, and deferred tax assets. We periodically evaluate whether events and circumstances have occurred that indicate that the remaining balances of these assets may not be recoverable. We use estimates of future income from operations and cash flows, as well as other economic and business factors, to assess the recoverability of these assets.

Acquisitions

We recognize assets acquired and liabilities assumed in business combinations, including contingent assets and liabilities, based on fair value estimates as of the date of acquisition.

Contingent Consideration—In certain acquisitions, we agree to pay additional amounts to sellers contingent upon achievement by the acquired businesses of certain predetermined profitability targets. We have recognized liabilities for these contingent obligations based on their estimated fair value at the date of acquisition with any differences between the acquisition date fair value and the ultimate settlement of the obligations being recognized in income from operations.

Contingent Assets and Liabilities—Assets and liabilities arising from contingencies are recognized at their acquisition date fair value when their respective fair values can be determined. If the fair values of such contingencies cannot be determined, they are recognized at the acquisition date if the contingencies are probable and an amount can be reasonably estimated. Acquisition date fair value estimates are revised as necessary if, and when, additional information regarding these contingencies becomes available to further define and quantify assets acquired and liabilities assumed.

Self‑Insurance Liabilities

We are substantially self‑insured for workers’ compensation, employer’s liability, auto liability, general liability and employee group health claims, in view of the relatively high per‑incident deductibles we absorb under our insurance arrangements for these risks. Losses are estimated and accrued based upon known facts, historical trends and industry averages. Estimated losses in excess of our deductible, which have not already been paid, are included in our accrual with a corresponding receivable from our insurance carrier. Loss estimates associated with the larger and longer‑developing risks—workers’ compensation, auto liability and general liability—are reviewed by a third‑party actuary quarterly. Our self‑insurance arrangements are further discussed in Note 11 “Commitments and Contingencies.”

Warranty Costs

We typically warrant labor for the first year after installation on new HVAC systems. We generally warrant labor for thirty days after servicing of existing HVAC systems. A reserve for warranty costs is estimated and recorded based upon the historical level of warranty claims and management’s estimate of future costs.

Income Taxes

We are subject to income tax in the United States and Puerto Rico and file a consolidated return for federal income tax purposes. Income taxes are provided for under the liability method, which takes into account differences between financial statement treatment and tax treatment of certain transactions.

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

We regularly evaluate valuation allowances established for deferred tax assets for which future realization is uncertain. We perform this evaluation quarterly. In assessing the realizability of deferred tax assets, we must consider whether it is more-likely-than-not some portion, or all, of the deferred tax assets will not be realized. We consider all available evidence, both positive and negative, in determining whether a valuation allowance is required. Such evidence includes the scheduled reversal of deferred tax liabilities, projected future taxable income, taxable income in prior carryback years and tax planning strategies in making this assessment, and judgment is required in considering the relative weight of negative and positive evidence.

Significant judgment is required in assessing the timing and amounts of deductible and taxable items. We establish reserves when, despite our belief that our tax return positions are supportable, we believe that certain positions may be disallowed. When facts and circumstances change, we adjust these reserves through our provision for income taxes.

To the extent interest and penalties may be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and are classified as a component in provision for income taxes in our Consolidated Statements of Operations.

Segment Disclosure

Our activities are within the mechanical services industry, which is the single industry segment we serve. Each operating unit represents an operating segment and these segments have been aggregated, as the operating units meet all of the aggregation criteria.

Concentrations of Credit Risk

We provide services in a broad range of geographic regions. Our credit risk primarily consists of receivables from a variety of customers including general contractors, property owners and developers and commercial and industrial companies. We are subject to potential credit risk related to changes in business and economic factors throughout the United States within the nonresidential construction industry. However, we are entitled to payment for work performed and have certain lien rights in that work. Further, we believe that our contract acceptance, billing and collection policies are adequate to manage potential credit risk. We regularly review our accounts receivable and estimate an allowance for uncollectible amounts. We have a diverse customer base, with no single customer accounting for more than 2% of consolidated 2017 revenue.

Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable, other receivables, accounts payable, life insurance policies, notes to former owners, capital leases, and a revolving credit facility. We believe that the carrying values of these instruments on the accompanying balance sheets approximate their fair values.

3. Fair Value Measurements

We classify and disclose assets and liabilities carried at fair value in one of the following three categories:

	·		Level 1—quoted prices in active markets for identical assets and liabilities;

	·		Level 2—observable market based inputs or unobservable inputs that are corroborated by market data; and

	·		Level 3—significant unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following table summarizes the fair values, and levels within the fair value hierarchy in which the fair value measurements fall, for assets and liabilities measured on a recurring basis as of December 31, 2017 and 2016 (in thousands):

		Balance			Fair Value Measurements at Reporting Date
		December 31,
		2017			Level 1			Level 2			Level 3
Cash and cash equivalents		$	36,542		$	36,542		$	—		$	—
Life insurance—cash surrender value		$	3,128		$	—		$	3,128		$	—
Contingent earn-out obligations		$	7,993		$	—		$	—		$	7,993

		December 31,
		2016			Level 1			Level 2			Level 3
Cash and cash equivalents		$	32,074		$	32,074		$	—		$	—
Life insurance—cash surrender value		$	3,697		$	—		$	3,697		$	—
Contingent earn-out obligations		$	2,531		$	—		$	—		$	2,531

Cash and cash equivalents consist primarily of highly rated money market funds at a variety of well‑known institutions with original maturities of three months or less. The original cost of these assets approximates fair value due to their short term maturity. The carrying value of our borrowings associated with the Revolving Credit Facility approximate its fair value due to the variable rate on such debt.

One of our operations has life insurance policies covering 42 employees with a combined face value of $31.3 million. The policies are invested in mutual funds and the fair value measurement of the cash surrender balance associated with these policies is determined using Level 2 inputs within the fair value hierarchy and will vary with investment performance. The cash surrender value of these policies is $3.1 million as of December 31, 2017 and $3.7 million as of December 31, 2016. These assets are included in “Other Noncurrent Assets” in our consolidated balance sheets.

We value contingent earn‑out obligations using a probability weighted discounted cash flow method. This fair value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. This analysis reflects the contractual terms of the purchase agreements (e.g., minimum and maximum payments, length of earn‑out periods, manner of calculating any amounts due, etc.) and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate. The contingent earn‑out obligations are measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings.

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,
		2017			2016
Balance at beginning of year		$	2,531		$	450
Issuances			11,755			3,240
Settlements			(2,578)			(428)
Adjustments to fair value			(3,715)			(731)
Balance at end of year		$	7,993		$	2,531

We measure certain assets at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the year ended December 31, 2017, we recorded a goodwill impairment charge of $1.1 million based on Level 3 measurements. See Note 5 “Goodwill and Identifiable Intangible Assets, Net” for further discussion. No goodwill or other intangible asset impairments were recorded during the years ended December 31, 2016 and 2015. We did not recognize any other impairments on those assets required to be measured at fair value on a nonrecurring basis.

4. Acquisitions

On April 1, 2017, we acquired all of the issued and outstanding stock of BCH Holdings, Inc. and each of its wholly-owned subsidiaries (collectively “BCH”). BCH is an integrated, single-source provider of mechanical service, maintenance and construction with headquarters in Tampa, Florida and operations throughout the southeastern region of the United States, which reports as a separate operating location.

The following summarizes the acquisition date fair value of consideration transferred and identifiable assets acquired and liabilities assumed, including an amount for goodwill (in thousands):

Cash and cash equivalents		$	9,613
Receivables			28,263
Costs and estimated earnings in excess of billings			1,690
Other current assets			708
Property and equipment			3,927
Goodwill			50,512
Identifiable intangible assets			46,500
Accounts payable and other current liabilities			(11,763)
Billings in excess of costs and estimated earnings			(8,039)
Other non-current liabilities			(104)
Total purchase price		$	121,307

The total purchase price was $121.3 million, including $95.4 million in cash, $14.3 million in notes payable to former owners and an $11.6 million contingent earn-out obligation. Our consolidated balance sheet includes preliminary allocations of the purchase price to the assets acquired and liabilities assumed pending the completion of the final valuation of intangible assets and accrued liabilities.

The contingent earn-out obligation is based upon exceeding specified earnings milestones each year during a four-year period. We determined the initial fair value of the contingent earn-out obligation based on a Monte Carlo simulation model which represents a Level 3 measurement. We measure the contingent earn-out obligation at fair value each reporting period and changes in the estimated fair value of the contingent payments are recognized in earnings.

Goodwill represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. All of the goodwill recognized as a result of this transaction is tax deductible.

The acquired assets include the following (in thousands):

		Valuation		Estimated		Estimated
		Method		Amortization Life		Value
Customer relationships		Excess Earnings		10 years		$	36,500
Backlog		Excess Earnings		1 year			6,300
Tradenames		Relief-from-royalty		25 years			3,700
Total acquired intangible assets						$	46,500

In estimating the fair value of the acquired intangible assets, we utilized the valuation methodology determined to be the most appropriate for the individual intangible asset. In order to estimate the fair value of the backlog and customer relationships, we utilized an excess earnings methodology, which consisted of the projected cash flows attributable to these assets discounted to present value using a risk-adjusted discount rate that represented the required rate of return. The tradename value was determined based on the relief-from-royalty method, which applies a royalty rate to the revenue stream attributable to this asset and the resulting royalty payment is tax effected and discounted to present value. Some of the more significant estimates and assumptions inherent in determining the fair value of the identifiable intangible assets are associated with forecasting cash flows and profitability, which represent Level 3 inputs. The primary assumptions used were generally based upon the present value of anticipated cash flows discounted at rates ranging from 13%-18%. Estimated years of projected earnings generally follow the range of estimated remaining useful lives for each intangible asset class.

Other Acquisitions

We completed two acquisitions in the first quarter of 2016. We acquired the remaining 40% noncontrolling interest in Environmental Air Systems, LLC (“EAS”) on January 1, 2016 for $46.6 million, including $42.0 million funded on the closing date plus a holdback, an earn-out that will be earned if certain financial targets are met after the acquisition date and a working capital adjustment. Due to our majority ownership and control over EAS on the acquisition date, the difference between the purchase price and the noncontrolling interest liability was recorded in Additional Paid-In Capital in our Balance Sheet.

Additionally in the first quarter of 2016, we acquired 100% of the ShoffnerKalthoff family of companies (collectively, “Shoffner”), which reports as a separate operating location in the Knoxville, Tennessee area. The acquisition date fair value of consideration transferred for this acquisition was $19.8 million, of which $14.8 million was allocated to goodwill and identifiable intangible assets. The purchase price included $15.5 million funded on the closing date plus a note payable to former owners, an earn-out that we will pay if certain financial targets are met after the acquisition date and a working capital adjustment.

We completed various other acquisitions in 2017 and 2016 which were not material, individually or in the aggregate, and were “tucked-in” with existing operations. The total purchase price for the “tucked-in” acquisitions, including earn-outs, was $9.4 million in 2017 and $0.1 million in 2016.

The results of operations of acquisitions are included in our consolidated financial statements from their respective acquisition dates. The acquisitions completed in the current and prior year were not material, individually or in the aggregate. Additional contingent purchase price (“earn-out”) has been or will be paid if certain acquisitions achieve predetermined profitability targets. Such earn-outs are not subject to the continued employment of the sellers.

5. Goodwill and Identifiable Intangible Assets, Net

Goodwill

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

		December 31,
		2017			2016
Balance at beginning of year		$	149,208		$	143,874
Additions (See Note 4)			52,481			5,334
Impairment adjustment			(1,105)			—
Balance at end of year		$	200,584		$	149,208

We perform our annual impairment testing on October 1, or more frequently, if events and circumstances indicate impairment may have occurred. As discussed in Note 2, “Summary of Significant Accounting Policies,” we have the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying value.

During our annual impairment testing on October 1, we performed a qualitative assessment for each reporting unit, which considered various factors, including changes in the carrying value of the reporting unit, forecasted operating results, long-term growth rates and discount rates. Additionally, we considered qualitative key events and circumstances (i.e. macroeconomic environment, industry and market specific conditions, cost factors and events specific to the reporting unit, etc.). Based on this assessment, we concluded that it was more likely than not that the fair value of each of the reporting units was greater than its carrying value. Accordingly, no further testing was required.

Prior to our annual goodwill impairment test in 2017, we recorded a goodwill impairment charge of $1.1 million during the first quarter of 2017. Based on changes to our market strategy that occurred in March 2017 related to our reporting unit based in California, we reevaluated our projected future earnings for this operating location and determined that we could no longer support the related goodwill balance and therefore the goodwill associated with this location was fully impaired. The fair value was estimated using a discounted cash flow model.

During 2016, we performed a quantitative assessment where the fair value of each reporting unit was estimated using a discounted cash flow model combined with a market valuation approach. We assigned a weighting of 50% to the discounted cash flow analysis and 50% to the public company approach for the year ended December 31, 2016. Based on this assessment, we concluded that the fair value of each of the reporting units was greater than its carrying value. As of October 1, 2016, the fair value exceeded the carrying value by a significant margin for all of our reporting units with a goodwill balance.

During 2015, we performed a qualitative assessment for each reporting unit and no further testing was required.

There are significant inherent uncertainties and management judgment involved in estimating the fair value of each reporting unit. While we believe we have made reasonable estimates and assumptions to estimate the fair value of our reporting units, it is possible that a material change could occur. If actual results are not consistent with our current estimates and assumptions, or the current economic outlook worsens, goodwill impairment charges may be recorded in future periods.

Identifiable Intangible Assets, Net

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

		Estimated		2017						2016
		Useful Lives		Gross Book			Accumulated			Gross Book			Accumulated
		in Years		Value			Amortization			Value			Amortization
Customer relationships		1 - 15		$	98,244		$	(47,057)		$	57,230		$	(36,758)
Backlog		1 - 2			6,300			(5,478)			3,600			(3,433)
Noncompete agreements		2 - 7			—			—			2,890			(2,890)
Tradenames		2 - 25			35,340			(11,305)			31,640			(9,844)
Total				$	139,884		$	(63,840)		$	95,360		$	(52,925)

The amounts attributable to customer relationships, noncompete agreements and tradenames are amortized to “Selling, General and Administrative Expenses” on a pattern of economic benefit or a straight‑line method over periods from one to twenty‑five years. The amounts attributable to backlog are being amortized to “Cost of Services” on a proportionate method over the remaining backlog period. Amortization expense for the years ended December 31, 2017, 2016 and 2015 was $17.4 million, $8.2 million and $7.5 million, respectively.

At December 31, 2017, future amortization expense of identifiable intangible assets is as follows (in thousands):

Year ended December 31—
2018		$	13,786
2019			11,320
2020			9,252
2021			7,651
2022			6,041
Thereafter			27,994
Total		$	76,044

6. Property and Equipment

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

		Estimated
		Useful Lives		December 31,
		in Years		2017			2016
Land		—		$	2,745		$	2,745
Transportation equipment		1 - 7			87,120			74,137
Machinery and equipment		1 - 20			30,064			27,843
Computer and telephone equipment		1 - 10			20,463			20,791
Buildings and leasehold improvements		1 - 40			38,422			35,166
Furniture and fixtures		1 - 17			4,473			4,224
Construction in progress		—			12,614			425
					195,901			165,331
Less—Accumulated depreciation					(108,310)			(97,136)
Property and equipment, net				$	87,591		$	68,195

Depreciation expense, including capital lease amortization, for the years ended December 31, 2017, 2016 and 2015 was $20.1 million, $18.0 million and $15.9 million, respectively.

7. Detail of Certain Balance Sheet Accounts

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

		December 31,
		2017			2016			2015
Balance at beginning of year		$	4,288		$	5,158		$	4,379
Bad debt expense (benefit)			182			(27)			1,552
Deductions for uncollectible receivables written off, net of recoveries			(1,829)			(876)			(798)
Allowance for doubtful accounts of acquired companies at date of acquisition			759			33			25
Balance at end of year		$	3,400		$	4,288		$	5,158

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

		December 31,
		2017			2016
Accrued warranty costs		$	6,149		$	6,702
Accrued job losses			598			1,269
Accrued sales and use tax			2,308			1,973
Deferred revenue			3,895			5,257
Liabilities due to former owners			2,981			4,196
Other current liabilities			17,723			14,864
		$	33,654		$	34,261

8. Long‑Term Debt Obligations

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

		December 31,
		2017			2016
Revolving credit facility		$	45,000		$	—
Notes to former owners			15,325			2,250
Other debt			214			305
Capital lease obligations			—			256
Total debt			60,539			2,811
Less—current portion			(613)			(763)
Total long-term portion of debt		$	59,926		$	2,048

At December 31, 2017, future principal payments of debt are as follows (in thousands):

Year ended December 31—
2018		$	613
2019			626
2020			7,150
2021			52,150
		$	60,539

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

		Year Ended December 31,
		2017			2016			2015
Interest expense on notes to former owners		$	365		$	70		$	25
Interest expense on borrowings and unused commitment fees			1,862			1,251			692
Letter of credit fees			553			657			719
Amortization of debt financing costs			376			367			317
Total		$	3,156		$	2,345		$	1,753

Revolving Credit Facility

We have a $325.0 million senior credit facility (the “Facility”) provided by a syndicate of banks, with a $100 million accordion option. The Facility, which is available for borrowings and letters of credit, expires in February 2021 and is secured by a first lien on substantially all of our personal property except for assets related to projects subject to surety bonds and assets held by certain unrestricted subsidiaries and a second lien on our assets related to projects subject to surety bonds. As of December 31, 2017, we had $45.0 million of outstanding borrowings, $39.6 million in letters of credit outstanding and $240.4 million of credit available.

Collateral

A common practice in our industry is the posting of payment and performance bonds with customers. These bonds are offered by financial institutions known as sureties, and provide assurance to the customer that in the event we encounter significant financial or operational difficulties, the surety will arrange for the completion of our contractual obligations and for the payment of our vendors on the projects subject to the bonds. In cooperation with our lenders, we granted our sureties a first lien on assets such as receivables, costs and estimated earnings in excess of billings, and equipment specifically identifiable to projects for which bonds are outstanding, as collateral for potential obligations under bonds. As of December 31, 2017, the book value of these assets was approximately $40.9 million.

Covenants and Restrictions

The Facility contains financial covenants defining various measures and the levels of these measures with which we must comply. Covenant compliance is assessed as of each quarter end. Credit Facility Adjusted EBITDA is defined under the Facility for financial covenant purposes as net earnings for the four quarters ending as of any given quarterly covenant compliance measurement date, plus the corresponding amounts for (a) interest expense; (b) provision for income taxes; (c) depreciation and amortization; (d) stock compensation; (e) other non‑cash charges; and (f) pre‑acquisition results of acquired companies. The following is a reconciliation of Credit Facility Adjusted EBITDA to net income for 2017 (in thousands):

Net income including noncontrolling interests		$	55,272
Provision for income taxes			45,666
Interest expense, net			3,086
Depreciation and amortization expense			37,456
Stock-based compensation			6,377
Goodwill impairment			1,105
Pre-acquisition results of acquired companies, as defined under the Facility			4,597
Credit Facility Adjusted EBITDA		$	153,559

The Facility’s principal financial covenants include:

Leverage Ratio—The Facility requires that the ratio of our Consolidated Total Indebtedness to our Credit Facility Adjusted EBITDA not exceed 2.75 to 1.00 as of the end of each fiscal quarter. The leverage ratio as of December 31, 2017 was 0.4.

Fixed Charge Coverage Ratio—The Facility requires that the ratio of Credit Facility Adjusted EBITDA, less non-financed capital expenditures, provision for income taxes, dividends and amounts used to

repurchase stock to the sum of interest expense and scheduled principal payments of indebtedness be at least 2.00 to 1.00; provided that the calculation of the fixed charge coverage ratio excludes stock repurchases and the payment of dividends at any time that the Company’s Net Leverage Ratio does not exceed 1.50 to 1.00. The Facility also allows the fixed charge coverage ratio not to be reduced for stock repurchases through September 30, 2015 in an aggregate amount not to exceed $25 million and for stock repurchases made after February 22, 2016 but on or prior to December 31, 2017 in an aggregate amount not to exceed $25 million, if at the time of and after giving effect to such repurchase the Company’s Net Leverage Ratio was less than or equal to 1.50 to 1.00. Capital expenditures, provision for income taxes, dividends and stock repurchase payments are defined under the Facility for purposes of this covenant to be amounts for the four quarters ending as of any given quarterly covenant compliance measurement date. The fixed charge coverage ratio as of December 31, 2017 was 21.8.

Other Restrictions—The Facility permits acquisitions of up to $30.0 million per transaction, provided that the aggregate purchase price of such an acquisition and of acquisitions in the same fiscal year does not exceed $65.0 million. However, these limitations only apply when the Company’s Net Leverage Ratio is equal to or greater than 2.00 to 1.00.

While the Facility’s financial covenants do not specifically govern capacity under the Facility, if our debt level under the Facility at a quarter‑end covenant compliance measurement date were to cause us to violate the Facility’s leverage ratio covenant, our borrowing capacity under the Facility and the favorable terms that we currently have could be negatively impacted by the lenders.

We were in compliance with all of our financial covenants as of December 31, 2017.

Interest Rates and Fees

There are two interest rate options for borrowings under the Facility, the Base Rate Loan Option and the Eurodollar Rate Loan Option. Under the Base Rate Loan Option, the interest rate is determined based on the highest of the Federal Funds Rate plus 0.5%, the prime lending rate offered by Wells Fargo Bank, N.A. or the one‑month Eurodollar Rate plus 1.00%. Under the Eurodollar Rate Loan Option, the interest rate is determined based on the one‑ to six‑month Eurodollar Rate. The Eurodollar Rate corresponds very closely to rates described in various general business media sources as the London Interbank Offered Rate or “LIBOR.” Additional margins are then added to these rates. The additional margins are determined based on the ratio of our Consolidated Total Indebtedness as of a given quarter end to our “Credit Facility Adjusted EBITDA” for the twelve months ending as of that quarter end, as defined in the credit agreement and shown below.

The interest rates under the Facility are floating rates determined by the broad financial markets, meaning they can and do move up and down from time to time. For illustrative purposes, the following are the respective market rates as of December 31, 2017 relating to interest options under the Facility:

Base Rate Loan Option:
Federal Funds Rate plus 0.50%		1.87%
Wells Fargo Bank, N.A. Prime Rate		4.50%
One-month LIBOR plus 1.00%		2.56%
Eurodollar Rate Loan Option:
One-month LIBOR		1.56%
Six-month LIBOR		1.84%

Certain of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on our behalf, such as to beneficiaries under our self‑funded insurance programs. We have also occasionally used letters of credit to guarantee performance under our contracts and to ensure payment to our subcontractors and vendors under those contracts. Our lenders issue such letters of credit through the Facility. A letter of credit commits the lenders to pay specified amounts to the holder of the letter of credit if the holder demonstrates that we have failed to perform specified actions. If this were to occur, we would be required to reimburse the lenders for amounts they fund to honor the letter of credit holder’s claim. Absent a claim, there is no payment or reserving of funds by us in connection with a letter of credit. However, because a claim on a letter of credit would require immediate reimbursement by us to our lenders, letters of credit are treated as a use of facility capacity just the same as actual borrowings. We have never had a claim

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 2.8% as of December 31, 2017.

Notes to Former Owners

As part of the consideration used to acquire two companies, we have outstanding notes to the former owners. These notes had an outstanding balance of $15.3 million as of December 31, 2017. In conjunction with the BCH acquisition in the second quarter of 2017, we issued a promissory note to the former owners with an outstanding balance of $14.3 million as of December 31, 2017 and bears interest, payable quarterly, at a weighted average interest rate of 3.0%. The principal is due in equal installments in April 2020 and 2021. In conjunction with the Shoffner acquisition in the first quarter of 2016, we issued a subordinated note to former owners with an outstanding balance of $1.0 million as of December 31, 2017 that bears interest, payable quarterly, at a weighted average interest rate of 3.0%. The principal is due in equal installments in February 2018 and 2019.

Other Debt

As part of the Shoffner acquisition, we acquired debt with an outstanding balance at the acquisition date of $0.4 million with principal and interest due the last day of every month; ending on the December 30, 2019 maturity date. The interest rate is the one month LIBOR rate plus 2.25%. As of December 31, 2017, $0.2 million of the note was outstanding, of which $0.1 million was considered current.

9. Income Taxes

Provision for Income Taxes

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

		December 31,
		2017			2016			2015
Current tax provision—
Federal		$	35,434		$	32,721		$	27,564
State and Puerto Rico			6,054			4,683			4,065
Total current			41,488			37,404			31,629
Deferred tax provision (benefit)—
Federal			5,391			(2,101)			(1,481)
State and Puerto Rico			(1,213)			862			1,076
Total deferred			4,178			(1,239)			(405)
Provision for income taxes		$	45,666		$	36,165		$	31,224

The provision for income taxes for the years ended December 31, 2017, 2016 and 2015 resulted in effective tax rates on continuing operations of 45.2%, 35.8% and 35.2%, respectively. The reasons for the differences between these effective tax rates and the 35% federal statutory rate are as follows (in thousands):

		December 31,
		2017			2016			2015
Income taxes at the federal statutory rate of 35%		$	35,328		$	35,371		$	31,032
Increases (decreases) resulting from—
Net state income taxes			2,838			4,262			3,432
Valuation allowances			91			(1,254)			463
Net unrecognized tax benefits			153			20			(72)
Noncontrolling interests			—			—			(2,827)
Nondeductible expenses			1,134			825			751
Stock-based compensation deductions			(1,320)			(885)			—
Domestic production activities deduction			(2,112)			(2,026)			(1,701)
Corporate tax rate reduction to 21%			9,478			—			—
Other			76			(148)			146
Provision for income taxes		$	45,666		$	36,165		$	31,224

While we believe we were able to make reasonable estimates of the impact of the recently enacted Tax Cuts and Jobs Act in these financial statements, the amounts recorded are provisional and the final impact may differ from these estimates due to, among other things, changes in our interpretations and assumptions and additional guidance that may be issued by regulatory authorities.

Deferred Tax Assets (Liabilities)

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

		Year Ended
		December 31,
		2017			2016
Deferred tax assets—
Accounts receivable and allowance for doubtful accounts		$	715		$	1,627
Stock-based compensation			2,297			3,036
Accrued liabilities and expenses			19,555			23,000
Net operating loss carryforwards			6,007			5,053
Goodwill			—			875
Intangible assets			2,272			—
Other			544			759
Subtotal			31,390			34,350
Valuation allowances			(3,500)			(3,184)
Total deferred tax assets			27,890			31,166
Deferred tax liabilities—
Property and equipment			(4,668)			(4,398)
Long-term contracts			(625)			(637)
Goodwill			(1,572)			—
Intangible assets			—			(737)
Other			(322)			(513)
Total deferred tax liabilities			(7,187)			(6,285)
Net deferred tax assets		$	20,703		$	24,881

The deferred tax assets and liabilities as of December 31, 2017 were remeasured to account for the corporate tax rate reduction to 21%, resulting in an increase to the provision for income taxes of $9.5 million. The deferred tax assets and liabilities reflected above are included in the consolidated balance sheets as follows (in thousands):

		December 31,
		2017			2016
Deferred tax assets		$	22,966		$	27,170
Deferred tax liabilities		$	2,263		$	2,289

As of December 31, 2017, we had $6.0 million of future tax benefits related to $71.8 million of available state and Puerto Rican net operating loss carryforwards (“NOLs”), which begin to expire between 2018 and 2037. Valuation allowances of $3.5 million have been recorded against certain state NOLs and deferred tax assets and all of our Puerto Rican NOLs. We recorded an increase in valuation allowances of $0.3 million for the year ended December 31, 2017. The $2.5 million deferred tax asset for state NOLs, net of related valuation allowances, reflects our conclusion that it is more-likely-than-not these assets will be realized based upon expected future earnings in certain subsidiaries.

We update this assessment of the realizability of deferred tax assets relating to state NOLs annually. A return to profitability in our entities with valuation allowances on their NOLs and other deferred tax assets would result in a reversal of a portion of the valuation allowance relating to realized deferred tax assets. A sustained period of profitability could cause a change in our judgment of the remaining deferred tax assets. If that were to occur, then it is likely that we would reverse some or all of the remaining valuation allowances.

Liabilities for Uncertain Tax Positions

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

		Year Ended
		December 31,
		2017			2016			2015
Balance at beginning of year		$	240		$	240		$	343
Additions based on tax positions related to current year			8,689			—			—
Additions based on tax positions related to prior years			—			—			—
Reductions for tax positions related to prior years			—			—			(103)
Reductions for settlements with tax authorities			—			—			—
Balance at end of year		$	8,929		$	240		$	240

As of December 31, 2017 and 2016, we had $8.9 million and $0.2 million, respectively, of unrecognized tax benefits, most of which, if recognized in future periods, would not impact our effective tax rate. We also had accrued $0.7 million and $0.4 million for potential interest and penalties related to the unrecognized tax benefits as of December 31, 2017 and 2016, respectively. These liabilities are included in “Other Long‑Term Liabilities” in the consolidated balance sheets. We recognize potential interest and penalties related to unrecognized tax benefits in our provision for income taxes.

We expect to recognize a decrease in unrecognized tax benefits of up to $8.7 million within the next twelve months due to the filing of a federal income tax automatic accounting method change application. Approximately $3.0 million of the decrease is expected to impact our effective tax rate.

We are subject to taxation in the United States and various state jurisdictions. In the fourth quarter of 2017, we received a ‘no change letter’ from the Internal Revenue Service upon completion of its examination of the 2015 tax year. We remain open to examination by various state tax authorities for the 2009 tax year forward.

10. Employee Benefit Plans

We and certain of our subsidiaries sponsor various retirement plans for most full‑time and some part‑time employees. These plans primarily consist of defined contribution plans. The defined contribution plans generally provide for contributions up to 2.5% of covered employees’ salaries or wages. These contributions totaled $7.8 million in 2017,

$7.8 million in 2016 and $7.1 million in 2015. Of these amounts, approximately $0.5 million and $0.2 million were payable to the plans at December 31, 2017 and 2016, respectively.

Certain of our subsidiaries also participate or have participated in various multi‑employer pension plans for the benefit of employees who are union members. As of December 31, 2017 and 2016, we had 6 and 5, respectively, who were union members. There were no contributions made to multi‑employer pension plans in 2017, 2016 or 2015. The data available from administrators of other multi‑employer pension plans is not sufficient to determine the accumulated benefit obligations, nor the net assets attributable to the multi‑employer plans in which our employees participate or previously participated.

Certain individuals at one of our operating units are entitled to receive fixed annual payments that reach a maximum amount, as specified in the related agreements, for a 15 year period following retirement or, in some cases, the attainment of 65 years of age. We recognize the unfunded status of the plan as a non‑current liability in our Consolidated Balance Sheet. Benefits vest 50% after ten years of service, 75% after fifteen years of service and are fully vested after 20 years of service. We had an unfunded benefit liability of $4.0 million recorded as of December 31, 2017 and 2016.

11. Commitments and Contingencies

Leases

We lease certain facilities and equipment under noncancelable operating leases. Rent expense for the years ended December 31, 2017, 2016 and 2015 was $21.1 million, $20.6 million, and $20.6 million, respectively. We recognize escalating rental payments that are quantifiable at the inception of the lease on a straight‑line basis over the lease term. Concurrent with the acquisitions of certain companies, we entered into various agreements with previous owners to lease buildings used in our operations. The terms of these leases generally range from three to ten years and certain leases provide for escalations in the rental expenses each year, the majority of which are based on inflation. Included in the 2017, 2016 and 2015 rent expense above are approximately $4.8 million, $5.1 million and $5.4 million of rent paid to these related parties, respectively.

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

Year ended December 31—
2018		$	13,963
2019			11,892
2020			9,838
2021			7,921
2022			6,266
Thereafter			21,726
		$	71,606

Claims and Lawsuits

We are subject to certain legal and regulatory claims, including lawsuits arising in the normal course of business. We maintain various insurance coverages to minimize financial risk associated with these claims. We have estimated and provided accruals for probable losses and related legal fees associated with certain litigation in the accompanying consolidated financial statements. While we cannot predict the outcome of these proceedings, in management’s opinion and based on reports of counsel, any liability arising from these matters individually and in the aggregate will not have a material effect on our operating results, cash flows or financial condition, after giving effect to provisions already recorded.

In the fourth quarter of 2017, we entered into settlement agreements with British Petroleum (“BP”) related to two claims from one of our subsidiaries regarding the April 2010 BP Deepwater Horizon oil spill. We recorded a $1.0 million gain in the fourth quarter of 2017 in “Other Income” as a result of these settlements. Additionally, in the fourth quarter of 2016, we entered into a separate settlement agreement with BP related to a claim from another one of our subsidiaries and recorded a $0.6 million gain in the fourth quarter of 2016 in “Other Income”. While we still have other subsidiaries with outstanding claims against BP related to this matter, we cannot predict when or if we will receive any further settlement compensation as a result of these outstanding claims.

Surety

Many customers, particularly in connection with new construction, require us to post performance and payment bonds issued by a financial institution known as a surety. If we fail to perform under the terms of a contract or to pay subcontractors and vendors who provided goods or services under a contract, the customer may demand that the surety make payments or provide services under the bond. We must reimburse the surety for any expenses or outlays it incurs. To date, we are not aware of any losses to our sureties in connection with bonds the sureties have posted on our behalf, and do not expect such losses to be incurred in the foreseeable future.

Surety market conditions are favorable and bonding capacity is adequate in the current market conditions along with acceptable terms and conditions. Historically, approximately 20% to 30% of our business has required bonds. While we currently have strong surety relationships to support our bonding needs, future market conditions or changes in the sureties’ assessment of our operating and financial risk could cause the sureties to decline to issue bonds for our work. If that were to occur, the alternatives include doing more business that does not require bonds, posting other forms of collateral for project performance such as letters of credit or cash, and seeking bonding capacity from other sureties. We would likely also encounter concerns from customers, suppliers and other market participants as to our creditworthiness. While we believe our general operating and financial characteristics would enable us to ultimately respond effectively to an interruption in the availability of bonding capacity, such an interruption would likely cause our revenue and profits to decline in the near term.

Self‑Insurance

We are substantially self‑insured for workers’ compensation, employer’s liability, auto liability, general liability and employee group health claims, in view of the relatively high per‑incident deductibles we absorb under our insurance arrangements for these risks. Losses are estimated and accrued based upon known facts, historical trends and industry averages. Estimated losses in excess of our deductible, which have not already been paid, are included in our accrual with a corresponding receivable from our insurance carrier. Loss estimates associated with the larger and longer‑developing risks, such as workers’ compensation, auto liability and general liability, are reviewed by a third‑party actuary quarterly.

Our self‑insurance arrangements as of December 31, 2017 were as follows:

Workers’ Compensation—The per‑incident deductible for workers’ compensation is $1.0 million. Losses above $1.0 million are determined by statutory rules on a state‑by‑state basis, and are fully covered by excess workers’ compensation insurance.

Employer’s Liability—For employer’s liability, the per-incident deductible is $1.0 million and then we have several layers of excess loss insurance policies that cover losses up to $100.0 million in aggregate across this risk area (as well as general liability and auto liability noted below).

General Liability—For general liability, the per-incident deductible is $1.0 million. We are fully insured for the next $1.0 million of each loss, and then have several layers of excess loss insurance policies that cover losses up to $100.0 million in aggregate across this risk area (as well as employer’s liability noted above and auto liability noted below).

Auto Liability—For auto liability, the per-incident deductible is $0.5 million. We are fully insured for the next $1.5 million of each loss, and then have several layers of excess loss insurance policies that cover losses up to $100.0 million in aggregate across this risk area (as well as employer’s liability and general liability noted above).

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

Our $100.0 million of aggregate excess loss coverage above applicable per‑incident deductibles represents one policy limit that applies to all lines of risk; we do not have a separate $100.0 million of excess loss coverage for each of general liability, employer’s liability and auto liability.

12. Stockholders’ Equity

2012 Equity Incentive Plan

In May 2012, our stockholders approved our 2012 Equity Incentive Plan (the “2012 Plan”), which provides for the granting of incentive or non‑qualified stock options, stock appreciation rights, restricted or deferred stock, dividend equivalents or other incentive awards to directors, employees, or consultants. The number of shares authorized and reserved for issuance under the 2012 Plan is 5.1 million shares. As of December 31, 2017, there were 2.9 million shares available for issuance under this plan; however, following adoption of the 2017 Plan (described below), no additional shares will be issued under the 2012 Plan. The 2012 Plan will expire in May 2022.

2017 Omnibus Incentive Plan

In May 2017, our stockholders approved our 2017 Omnibus Incentive Plan (the “2017 Plan”), which provides for the granting of incentive or non‑qualified stock options, stock appreciation rights, restricted or deferred stock, dividend equivalents or other incentive awards to directors, employees, or consultants. The number of shares authorized and reserved for issuance under the 2017 Plan is 2.9 million shares. As of December 31, 2017, there were 2.9 million shares available for issuance under this plan. The 2017 Plan will expire in May 2027. Additionally, we have outstanding stock options, stock awards and stock units that were issued under other plans, and no further grants may be made under those plans.

Share Repurchase Program

On March 29, 2007, our Board of Directors (the “Board”) approved a stock repurchase program to acquire up to 1.0 million shares of our outstanding common stock. Subsequently, the Board has from time to time increased the number of shares that may be acquired under the program and approved extensions of the program. Since the inception of the repurchase program, the Board has approved 8.1 million shares to be repurchased. As of December 31, 2017, we have repurchased a cumulative total of 7.6 million shares at an average price of $13.75 per share under the repurchase program.

The share repurchases will be made from time to time at our discretion in the open market or privately negotiated transactions as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. The Board may modify, suspend, extend or terminate the program at any time. During the twelve months ended December 31, 2017, we repurchased 0.3 million shares for approximately $9.0 million at an average price of $34.23 per share.

Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted EPS is computed considering the dilutive effect of stock options, restricted stock, restricted stock units and performance stock units. The vesting of unvested contingently issuable performance stock units is based on the achievement of certain earnings per share targets and total shareholder return. These shares are considered contingently issuable shares for purposes of calculating diluted earnings per share. These shares are not included in the diluted earnings per share denominator until the performance criteria are met, if it is assumed that the end of the reporting period was the end of the contingency period.

Unvested restricted stock, restricted stock units and performance stock units are included in diluted earnings per share, weighted outstanding until the shares and units vest. Upon vesting, the vested restricted stock, restricted stock units and performance stock units are included in basic earnings per share weighted outstanding from the vesting date.

There were less than 0.1 million anti-dilutive stock options excluded from the calculation of diluted EPS for the year ended December 31, 2017. There were approximately 0.1 million anti-dilutive stock options excluded from the calculation of diluted EPS for the year ended December 31, 2016. There were no anti-dilutive stock options for the year ended December 31, 2015.

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,
			2017		2016		2015
Common shares outstanding, end of period			37,187		37,209		37,427
Effect of using weighted average common shares outstanding			52		126		15
Shares used in computing earnings per share—basic			37,239		37,335		37,442
Effect of shares issuable under stock option plans based on the treasury stock method			316		330		266
Effect of restricted and contingently issuable shares			117		146		160
Shares used in computing earnings per share—diluted			37,672		37,811		37,868

13. Stock‑Based Compensation

Grants of stock options, restricted stock and restricted stock units, and performance share units have been, under the 2012 Plan, and will be, under the 2017 Omnibus Incentive Plan (the “2017 Plan”), determined and administered by the compensation committee of the Board of Directors. Total stock‑based compensation expense was $6.4 million, $5.0 million and $5.6 million for the years ended December 31, 2017, 2016 and 2015, respectively. Stock-based compensation expense is recognized using the straight‑line method over the vesting period and generally vests over a three‑year vesting period. Certain awards provide for accelerated vesting when the sum of an employee's age and years of service is at least 75. We recognize forfeitures as they occur. Total income tax benefit recognized for stock‑based compensation arrangements was $2.4 million, $1.9 million and $2.1 million for each of the years ended December 31, 2017, 2016 and 2015. Subsequent to our adoption of ASU 2016-09 in the second quarter of 2016, we elected to apply the presentation requirements for cash flows related to excess tax benefits prospectively. As such, we present, in the consolidated statements of cash flows, the benefits of tax deductions in excess of recognized compensation costs (“excess tax benefits”) as operating cash flows for the years ended 2017 and 2016 and as financing cash flows for the year ended 2015.

We generally issue treasury shares for stock options and restricted stock, unless treasury shares are not available. Upon the vesting of restricted shares, we have allowed the holder to elect to surrender an amount of shares to meet their statutory tax withholding requirements. These shares are accounted for as treasury stock based upon the value of the stock on the date of vesting.

Stock Options

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

		Year Ended
		December 31,
		2017
				Weighted-
				Average
Stock Options		Shares		Exercise Price
Outstanding at beginning of year		714		$	17.01
Granted		85		$	36.25
Exercised		(146)		$	14.08
Forfeited		(23)		$	23.55
Expired		—		$	—
Outstanding at end of year		630		$	20.03
Options exercisable at end of year		444

The total intrinsic value of options exercised during the years ended December 31, 2017, 2016 and 2015 was $3.6 million, $1.9 million and $3.9 million, respectively. Stock options exercisable as of December 31, 2017 have a weighted‑average remaining contractual term of 5.3 years and an aggregate intrinsic value of $12.5 million. As of December 31, 2017, we have 0.6 million options that are vested or expected to vest; these options have a weighted

average exercise price of $20.03 per share, have a weighted‑average remaining contractual term of 6.2 years and an aggregate intrinsic value of $14.9 million.

The following table summarizes information about stock options outstanding at December 31, 2017 (shares in thousands):

		Options Outstanding							Options Exercisable
				Weighted-
				Average
		Number		Remaining		Weighted-			Number		Weighted-
		Outstanding at		Contractual		Average			Exercisable at		Average
Range of Exercise Prices		12/31/2017		Life		Exercise Price			12/31/2017		Exercise Price
$11.00 - $15.00		265		4.16		$	12.77		265		$	12.77
$15.01 - $20.00		189		6.73		$	17.93		149		$	17.47
$20.01 - $36.25		176		8.69		$	33.19		30		$	30.36
$11.00 - $36.25		630		6.20		$	20.03		444		$	15.55

The fair value of each option award is estimated, based on several assumptions, on the date of grant using the Black‑Scholes option valuation model. The fair values and the assumptions used for the 2017, 2016 and 2015 grants are shown in the table below:

		Year Ended December 31,
		2017			2016			2015
Weighted-average fair value per share of options granted		$	11.43		$	9.94		$	6.33
Fair value assumptions:
Expected dividend yield			0.89%			0.97%			1.51%
Expected stock price volatility			34.5%			37.9%			38.4%
Risk-free interest rate			2.11%			1.41%			1.50%
Expected term			5.3 years			5.3 years			5.6 years

Stock options are accounted for as equity instruments. As of December 31, 2017, the unrecognized compensation cost related to stock options was $0.4 million, which is expected to be recognized over a weighted‑average period of 1.4 years. The total fair value of options vested during the year ended December 31, 2017 was $0.8 million.

The following table summarizes information about nonvested stock option awards as of December 31, 2017 and changes for the year ended December 31, 2017 (shares in thousands):

				Weighted-Average
				Grant Date
Stock Options		Shares		Fair Value
Nonvested at December 31, 2016		241		$	7.83
Granted		85		$	11.43
Vested		(117)		$	7.23
Forfeited		(23)		$	7.88
Nonvested at December 31, 2017		186		$	9.85

Restricted Stock and Restricted Stock Units

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

		Year Ended
		December 31,
		2017
				Weighted
				Average Grant
Restricted Stock and Restricted Stock Units		Shares		Date Fair Value
Unvested at beginning of year		126		$	23.41
Granted		71		$	35.69
Vested		(90)		$	25.44
Forfeited		(15)		$	26.34
Unvested at end of year		92		$	30.48

Approximately $0.8 million of compensation expense related to restricted stock and restricted stock units will be recognized over a weighted‑average period of 1.6 years. The total fair value of shares vested during the year ended December 31, 2017 was $2.3 million. The weighted‑average fair value per share of restricted stock shares and units awarded during 2017, 2016 and 2015 was $35.69, $30.25 and $20.64, respectively. The aggregate intrinsic value of restricted stock vested during the years ended December 31, 2017, 2016 and 2015 was $3.2 million, $3.6 million and $3.4 million, respectively.

Performance Stock Units

Under the 2012 Plan, we granted dollar‑denominated performance vesting restricted stock units (“PSUs”), which cliff vest at the end of a three‑year performance period. The PSUs are subject to two performance measures; 50% of the PSUs are based on the annual performance of our stock price relative to a group of our peers (total shareholder return) and 50% of the PSUs are measured based on meeting or exceeding a pre‑determined annual earnings per share target as set by our board of directors (EPS). Depending on the Company’s performance in relation to the established performance measures, the awards may vest at zero to a maximum of 2.0 times the dollar‑denominated award granted at target. Upon achievement of the necessary performance metrics, the award will be determined in dollars and may be settled in cash or stock based on the market price of the Company’s common stock at the end of the performance period, at our discretion.

Compensation expense for dollar‑denominated performance units will ultimately be equal to the final dollar value awarded to the grantee upon vesting, settled either in cash or stock. However, throughout the performance period we must record an accrued expense based on an estimate of that future payout. For units determined by EPS performance, the awards are evaluated quarterly against established targets in order to estimate the liability throughout the vesting period. For units determined by total shareholder return performance, a Monte Carlo simulation model was used to estimate accruals throughout the vesting period. The model simulates our total shareholder return and compares it against our peer group over the three‑year performance period to produce a predicted distribution of relative share performance. This is applied to the reward criteria to give an expected value of the total shareholder return element. The calculated fair market value as of December 31, 2017 was $4.9 million. Of this amount, $2.2 million relates to the PSUs granted in 2015 whose performance period ended December 31, 2017. These awards will be settled within the upcoming year either in cash or stock. The expense related to performance stock units for the years ended December 31, 2017, 2016 and 2015 was $2.6 million, $1.6 million and $2.6 million, respectively. At the December 31, 2017 calculated fair market value, approximately $0.7 million of compensation expense related to performance stock units will be recognized over a weighted‑average period of 1.2 years.

14. Selected Quarterly Financial Data (Unaudited)

Quarterly financial information for the years ended December 31, 2017 and 2016 is summarized as follows (in thousands, except per share data):

		2017
		Q1			Q2			Q3			Q4
Revenue		$	380,588		$	465,411		$	480,851		$	461,072
Gross profit			75,954			95,738			100,858			93,731
Net income including noncontrolling interests (1)			7,477			17,972			22,284			7,539
Net income attributable to Comfort Systems USA, Inc. (1)			7,477			17,972			22,284			7,539
INCOME PER SHARE ATTRIBUTABLE TO COMFORT SYSTEMS USA, INC.:
Basic		$	0.20		$	0.48		$	0.60		$	0.20
Diluted		$	0.20		$	0.48		$	0.59		$	0.20

		2016
		Q1			Q2			Q3			Q4
Revenue		$	385,942		$	427,538		$	428,760		$	392,100
Gross profit			73,502			89,426			92,816			88,265
Net income including noncontrolling interests			9,841			17,717			20,471			16,867
Net income attributable to Comfort Systems USA, Inc.			9,841			17,717			20,471			16,867
INCOME PER SHARE ATTRIBUTABLE TO COMFORT SYSTEMS USA, INC.:
Basic		$	0.26		$	0.47		$	0.55		$	0.45
Diluted		$	0.26		$	0.47		$	0.54		$	0.45

	(1)		In the fourth quarter of 2017, we recorded a $9.5 million increase to the provision for income taxes to remeasure our net deferred tax assets for the enacted corporate tax rate reduction.

The sums of the individual quarterly earnings per share amounts do not necessarily agree with year‑to‑date earnings per share as each quarter’s computation is based on the weighted average number of shares outstanding during the quarter, the weighted average stock price during the quarter and the dilutive effects of options and contingently issuable restricted stock in each quarter.