COMFORT SYSTEMS USA INC [FIX] Filings

10-Q 1 fix-20240630x10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2024


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number: 1-13011

COMFORT SYSTEMS USA, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of Incorporation or Organization)	76-0526487 (I.R.S. Employer Identification No.)
675 Bering Drive Suite 400 Houston, Texas 77057 (Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (713) 830-9600

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	FIX	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ⌧	Accelerated filer ◻	Non-accelerated filer ◻	Smaller reporting company ☐	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ☐ No ⌧

The number of shares outstanding of the issuer’s common stock as of July 19, 2024 was 35,676,594 (excluding treasury shares of 5,446,771).

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COMFORT SYSTEMS USA, INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2024


		Page
Part I—Financial Information		2
Item 1—Financial Statements		2
Consolidated Balance Sheets		2
Consolidated Statements of Operations		3
Consolidated Statements of Stockholders’ Equity		4
Consolidated Statements of Cash Flows		5
Condensed Notes to Consolidated Financial Statements		6
Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3—Quantitative and Qualitative Disclosures about Market Risk		33
Item 4—Controls and Procedures		33
Part II—Other Information		34
Item 1—Legal Proceedings		34
Item 1A—Risk Factors		34
Item 2—Unregistered Sales of Equity Securities and Use of Proceeds		34
Item 5—Other Information		35
Item 6—Exhibits		36
Signatures		37

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

COMFORT SYSTEMS USA, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)


	June 30,		December 31,
	2024		2023
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	199,419	$	205,150
Billed accounts receivable, less allowance for credit losses of $13,513 and $11,926, respectively		1,708,507		1,318,926
Unbilled accounts receivable, less allowance for credit losses of $1,055 and $850, respectively		81,184		72,774
Other receivables, less allowance for credit losses of $519 and $522, respectively		155,606		166,319
Inventories		63,778		65,538
Prepaid expenses and other		45,486		54,309
Costs and estimated earnings in excess of billings, less allowance for credit losses of $227 and $79, respectively		69,391		28,084
Total current assets		2,323,371		1,911,100
PROPERTY AND EQUIPMENT, NET		240,319		208,568
LEASE RIGHT-OF-USE ASSET		226,721		205,712
GOODWILL		874,947		666,834
IDENTIFIABLE INTANGIBLE ASSETS, NET		480,880		280,397
DEFERRED TAX ASSETS		50,112		17,723
OTHER NONCURRENT ASSETS		17,634		15,245
Total assets	$	4,213,984	$	3,305,579
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt	$	17,686	$	4,867
Accounts payable		590,529		419,962
Accrued compensation and benefits		209,390		169,136
Billings in excess of costs and estimated earnings and deferred revenue		1,149,896		909,538
Accrued self-insurance		31,881		27,774
Other current liabilities		335,566		189,928
Total current liabilities		2,334,948		1,721,205
LONG-TERM DEBT		73,377		39,345
LEASE LIABILITIES		208,710		188,136
DEFERRED TAX LIABILITIES		1,120		1,120
OTHER LONG-TERM LIABILITIES		113,535		77,944
Total liabilities		2,731,690		2,027,750
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, 5,431,971 and 5,438,625 shares, respectively		(225,573)		(209,807)
Additional paid-in capital		349,099		339,562
Retained earnings		1,358,357		1,147,663
Total stockholders’ equity		1,482,294		1,277,829
Total liabilities and stockholders’ equity	$	4,213,984	$	3,305,579

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

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COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2024		2023		2024		2023
REVENUE	$	1,810,290	$	1,296,430	$	3,347,306	$	2,471,070
COST OF SERVICES		1,446,694		1,068,510		2,686,347		2,037,745
Gross profit		363,596		227,920		660,959		433,325
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		179,537		136,430		342,260		271,462
GAIN ON SALE OF ASSETS		(611)		(592)		(1,431)		(1,104)
Operating income		184,670		92,082		320,130		162,967
OTHER INCOME (EXPENSE):
Interest income		1,264		92		2,867		1,489
Interest expense		(1,709)		(3,918)		(3,342)		(7,994)
Changes in the fair value of contingent earn-out obligations		(14,689)		(3,098)		(27,180)		(5,480)
Other		119		44		236		45
Other income (expense)		(15,015)		(6,880)		(27,419)		(11,940)
INCOME BEFORE INCOME TAXES		169,655		85,202		292,711		151,027
PROVISION FOR INCOME TAXES		35,646		15,726		62,383		24,335
NET INCOME	$	134,009	$	69,476	$	230,328	$	126,692

INCOME PER SHARE:
Basic	$	3.75	$	1.94	$	6.44	$	3.54
Diluted	$	3.74	$	1.93	$	6.43	$	3.53

SHARES USED IN COMPUTING INCOME PER SHARE:
Basic		35,746		35,822		35,742		35,817
Diluted		35,828		35,906		35,828		35,907

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

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COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In Thousands, Except Share Amounts)

(Unaudited)


	Six Months Ended
	June 30, 2023
							Additional				Total
	Common Stock			Treasury Stock			Paid-In		Retained		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Earnings		Equity
BALANCE AT DECEMBER 31, 2022	41,123,365	$	411	(5,362,224)	$	(187,212)	$	332,080	$	854,644	$	999,923
Net income	—		—	—		—		—		57,216		57,216
Issuance of Stock:
Issuance of shares for options exercised	—		—	1,000		36		(18)		—		18
Issuance of restricted stock & performance stock	—		—	31,960		1,131		3,384		—		4,515
Shares received in lieu of tax withholding on vested stock	—		—	(12,728)		(1,798)		—		—		(1,798)
Stock-based compensation	—		—	—		—		3,438		—		3,438
Dividends ($0.175 per share)	—		—	—		—		—		(6,254)		(6,254)
Share repurchase	—		—	(29,400)		(3,568)		—		—		(3,568)
BALANCE AT MARCH 31, 2023	41,123,365		411	(5,371,392)		(191,411)		338,884		905,606		1,053,490
Net income	—		—	—		—		—		69,476		69,476
Issuance of Stock:
Issuance of shares for options exercised	—		—	—		—		—		—		—
Issuance of restricted stock & performance stock	—		—	61,505		2,220		(2,220)		—		—
Shares received in lieu of tax withholding on vested stock	—		—	(19,739)		(2,891)		—		—		(2,891)
Stock-based compensation	—		—	—		—		1,749		—		1,749
Dividends ($0.20 per share)	—		—	—		—		—		(7,152)		(7,152)
Share repurchase	—		—	(24,000)		(3,208)		—		—		(3,208)
BALANCE AT JUNE 30, 2023	41,123,365	$	411	(5,353,626)	$	(195,290)	$	338,413	$	967,930	$	1,111,464


	Six Months Ended
	June 30, 2024
							Additional				Total
	Common Stock			Treasury Stock			Paid-In		Retained		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Earnings		Equity
BALANCE AT DECEMBER 31, 2023	41,123,365	$	411	(5,438,625)	$	(209,807)	$	339,562	$	1,147,663	$	1,277,829
Net income	—		—	—		—		—		96,319		96,319
Issuance of Stock:
Issuance of shares for options exercised	—		—	1,369		53		(26)		—		27
Issuance of restricted stock & performance stock	—		—	17,018		657		4,696		—		5,353
Shares received in lieu of tax withholding on vested stock	—		—	(6,763)		(2,126)		—		—		(2,126)
Stock-based compensation	—		—	—		—		4,350		—		4,350
Dividends ($0.25 per share)	—		—	—		—		—		(8,921)		(8,921)
Share repurchase	—		—	(1,500)		(295)		—		—		(295)
BALANCE AT MARCH 31, 2024	41,123,365		411	(5,428,501)		(211,518)		348,582		1,235,061		1,372,536
Net income	—		—	—		—		—		134,009		134,009
Issuance of Stock:
Issuance of shares for options exercised	—		—	—		—		—		—		—
Issuance of restricted stock & performance stock	—		—	47,344		1,851		(1,851)		—		—
Shares received in lieu of tax withholding on vested stock	—		—	(15,817)		(5,062)		—		—		(5,062)
Stock-based compensation	—		—	—		—		2,368		—		2,368
Dividends ($0.30 per share)	—		—	—		—		—		(10,713)		(10,713)
Share repurchase	—		—	(34,997)		(10,844)		—		—		(10,844)
BALANCE AT JUNE 30, 2024	41,123,365	$	411	(5,431,971)	$	(225,573)	$	349,099	$	1,358,357	$	1,482,294

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

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COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)


	Six Months Ended
	June 30,
	2024		2023
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	230,328	$	126,692
Adjustments to reconcile net income to net cash provided by operating activities—
Amortization of identifiable intangible assets		50,803		21,344
Depreciation expense		23,044		18,260
Change in right-of-use assets		14,323		10,884
Bad debt expense		2,691		2,027
Deferred tax benefit		(32,389)		(55,300)
Amortization of debt financing costs		342		340
Gain on sale of assets		(1,431)		(1,104)
Changes in the fair value of contingent earn-out obligations		27,180		5,480
Stock-based compensation		10,085		8,248
Changes in operating assets and liabilities, net of effects of acquisitions and divestitures—
(Increase) decrease in—
Receivables, net		(267,089)		(147,726)
Inventories		1,990		(5,992)
Prepaid expenses and other current assets		14,724		(3,423)
Costs and estimated earnings in excess of billings and unbilled accounts receivable		(45,428)		(5,165)
Other noncurrent assets		(1,316)		(988)
Increase (decrease) in—
Accounts payable and accrued liabilities		277,961		134,296
Billings in excess of costs and estimated earnings and deferred revenue		32,812		138,217
Other long-term liabilities		(2,215)		6,229
Net cash provided by operating activities		336,415		252,319
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(48,336)		(41,130)
Proceeds from sales of property and equipment		1,829		2,086
Cash paid for acquisitions, net of cash acquired		(234,657)		(53,404)
Payments for investments		(1,270)		(1,180)
Net cash used in investing activities		(282,434)		(93,628)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility		182,000		245,000
Payments on revolving credit facility		(182,000)		(360,000)
Proceeds from other debt		640		—
Payments on other debt		(3,848)		(1,966)
Payments of dividends to stockholders		(19,634)		(13,406)
Share repurchase		(11,139)		(6,776)
Shares received in lieu of tax withholding		(7,188)		(4,689)
Proceeds from exercise of options		27		18
Payments for contingent consideration arrangements		(18,570)		(14,079)
Net cash used in financing activities		(59,712)		(155,898)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(5,731)		2,793
CASH AND CASH EQUIVALENTS, beginning of period		205,150		57,214
CASH AND CASH EQUIVALENTS, end of period	$	199,419	$	60,007

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

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COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2024

(Unaudited)

1. Business and Organization

Comfort Systems USA, Inc., a Delaware corporation, provides comprehensive mechanical and electrical contracting services, which principally includes heating, ventilation and air conditioning (“HVAC”), plumbing, electrical, piping and controls, as well as off-site construction, monitoring and fire protection. We build, install, maintain, repair and replace mechanical, electrical and plumbing (“MEP”) systems throughout the United States. The terms “Comfort Systems,” “we,” “us,” or the “Company,” refer to Comfort Systems USA, Inc. or Comfort Systems USA, Inc. and its consolidated subsidiaries, as appropriate in the context.

2. Summary of Significant Accounting Policies and Estimates

Basis of Presentation

These interim statements should be read in conjunction with the historical Consolidated Financial Statements and related notes of Comfort Systems included in the Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) for the year ended December 31, 2023 (the “Form 10-K”).

The accompanying unaudited consolidated financial statements were prepared using generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X of the SEC. Accordingly, these financial statements do not include all the footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the Form 10-K. We believe all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature. The results of operations for interim periods are not necessarily indicative of the results for the full fiscal year.

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, self-insurance accruals, accounting for income taxes, fair value accounting for acquisitions and the quantification of fair value for reporting units in connection with our goodwill impairment testing.

Recent Accounting Pronouncements

Recent Accounting Pronouncements Not Yet Adopted

In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” This standard requires entities to disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief decision maker and included within each reported measure of segment profit and loss. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. We are currently evaluating the impact ASU 2023-07 will have on our disclosures; however, the standard will not have an impact on our consolidated financial position, results of operations or cash flows.

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” This standard requires entities to disclose more detailed information in the reconciliation of their statutory

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tax rate to their effective tax rate. The standard also requires entities to make additional disclosures on income taxes paid as well as on certain income statement-related disclosures. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. We are currently evaluating the impact ASU 2023-09 will have on our disclosures; however, the standard will not have an impact on our consolidated financial position, results of operations or cash flows.

Revenue Recognition

We recognize revenue over time for all of our services as we perform them because (i) control continuously transfers to that customer as work progresses, and (ii) we have the right to bill the customer as costs are incurred. The customer typically controls the work in process, as evidenced either by contractual termination clauses or by our rights to payment for work performed to date, plus a reasonable profit, for delivery of products or services that do not have an alternative use to the Company.

For the reasons listed above, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We generally use a cost-to-cost input method to measure our progress towards satisfaction of the performance obligation for our contracts, as it best depicts the transfer of assets to the customer that occurs as we incur costs on our contracts. Under the cost-to-cost input method, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenue, including estimated fees or profits, is recorded proportionally as costs are incurred. Costs to fulfill include labor, materials, subcontractors’ costs, other direct costs and an allocation of indirect costs.

For a small portion of our business in which our services are delivered in the form of service maintenance agreements for existing systems to be repaired and maintained, as opposed to constructed, our performance obligation is to maintain the customer’s mechanical system for a specific period of time. Similar to construction jobs, we recognize revenue over time; however, for service maintenance agreements in which the full cost to provide services may not be known, we generally use an input method to recognize revenue, which is based on the amount of time we have provided our services out of the total time we have been contracted to perform those services. Our revenue recognition policy is further discussed in Note 3 “Revenue from Contracts with Customers.”

Accounts Receivable and Allowance for Credit Losses

We are required to estimate and record the expected credit losses over the contractual life of our financial assets measured at amortized cost, including billed and unbilled accounts receivable, other receivables and contract assets. Accounts receivable include amounts from work completed in which we have billed or have an unconditional right to bill our customers. Our trade receivables are contractually due in less than a year.

We estimate our credit losses using a loss-rate method for each of our identified portfolio segments. Our portfolio segments are construction, service and other. While our construction and service financial assets are often with the same subset of customers and industries, our construction financial assets will generally have a lower loss-rate than service financial assets due to lien rights, which we are more likely to have on construction jobs. These lien rights result in lower credit loss expenses on average compared to receivables that do not have lien rights. Financial assets classified as “other” include receivables that are not related to our core revenue producing activities, such as receivables related to our acquisition activity from former owners, our vendor rebate program or receivables for estimated losses in excess of our insurance deductible, which are accrued with a corresponding accrued insurance liability.

Loss rates for our portfolios are based on numerous factors, including our history of credit loss expense by portfolio, the financial strength of our customers and counterparties in each portfolio, the aging of our receivables, our expectation of likelihood of payment, macroeconomic trends in the U.S. and the current and forecasted nonresidential construction market trends in the U.S.

In addition to the loss-rate calculations discussed above, we also record allowance for credit losses for specific receivables that are deemed to have a higher risk profile than the rest of the respective pool of receivables (e.g., when we hold concerns about a specific customer going bankrupt and no longer being able to pay the receivables due to us).

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Unbilled Accounts Receivable

Unbilled accounts receivable are amounts due to us that we have earned under a contract where our right to payment is unconditional. A right to consideration is unconditional if only the passage of time is required before payment of the consideration is due.

Income Taxes

We conduct business throughout the United States in virtually all fifty states. Our effective tax rate changes based upon our relative profitability, or lack thereof, in the federal and various state jurisdictions with differing tax rates and rules. In addition, discrete items such as tax law changes, judgments and legal structures, can impact our effective tax rate. These items can also include the tax treatment for impairment of goodwill and other intangible assets, changes in fair value of acquisition-related assets and liabilities, uncertain tax positions, and accounting for losses associated with underperforming operations.

The Inflation Reduction Act was enacted on August 16, 2022. This law, among other provisions, provides a corporate alternative minimum tax on adjusted financial statement income over $1 billion, which is effective for tax years beginning after December 31, 2022, and a 1% excise tax on net corporate stock repurchases after December 31, 2022. The impact of the excise tax is recorded in “Treasury Stock” within our Consolidated Balance Sheet. These provisions were not material to our current year overall financial results, financial position and cash flows.

In early September 2023, the IRS issued interim guidance addressing, together with other topics, the treatment of research and experimental (“R&E”) expenditures for taxpayers using the percentage of completion method to account for taxable income from long-term contracts. We have chosen to rely on such guidance beginning with the 2022 tax year, and the resultant reduction in taxable revenue offsets the deferral of tax deductions for R&E expenditures pursuant to the Tax Cuts and Jobs Act (2017) for the 2022 tax year. We filed our 2022 federal tax return in October 2023 requesting a refund of our $107.1 million overpayment, which had not been received as of June 30, 2024.

Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable, other receivables, accounts payable and life insurance policies, for which we deem the carrying values approximate their fair value due to the short-term nature of these instruments, as well as notes to former owners and a revolving credit facility.

Investments

We have a $5.6 million investment in a construction-focused technology fund with a fair value that is not readily determinable and is recorded at cost. This investment is included in “Other Noncurrent Assets” in our Consolidated Balance Sheet and is reviewed quarterly for impairment. We did not recognize any impairments in the current year related to this investment.

3. Revenue from Contracts with Customers

Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Sales-based taxes are excluded from revenue.

We provide mechanical and electrical contracting services. Our mechanical segment principally includes HVAC, plumbing, piping and controls, as well as off-site construction, monitoring and fire protection. Our electrical segment includes installation and servicing of electrical systems. We build, install, maintain, repair and replace products and systems throughout the United States. All of our revenue is recognized over time as we deliver goods and services to our customers. Revenue can be earned based on an agreed-upon fixed price or based on actual costs incurred, marked up at an agreed-upon percentage.

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We account for a contract when: (i) it has approval and commitment from both parties, (ii) the rights of the parties are identified, (iii) payment terms are identified, (iv) the contract has commercial substance, and (v) collectability of consideration is probable. We consider the start of a project to be when the above criteria have been met and we either have written authorization from the customer to proceed or an executed contract.

We generally do not incur significant incremental costs related to obtaining or fulfilling a contract prior to the start of a project. On rare occasions, when significant pre-contract costs are incurred, they are capitalized and amortized over the life of the contract using a cost-to-cost input method to measure progress towards contract completion. We do not currently have any capitalized obtainment or fulfillment costs in our Consolidated Balance Sheet and have not incurred any impairment loss on such costs in the current year.

Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue and cost at completion (the process described below in more detail) is complex, subject to many variables and requires significant judgment. The consideration to which we are entitled on our long-term contracts may include both fixed and variable amounts. Variable amounts can either increase or decrease the transaction price. A common example of variable amounts that can either increase or decrease contract value are pending change orders that represent contract modifications for which a change in scope has been authorized or acknowledged by our customer, but the final adjustment to contract price is yet to be negotiated. Other examples of positive variable revenue include amounts awarded upon achievement of certain performance metrics, program milestones or cost of completion date targets and can be based upon customer discretion. Variable amounts can result in a deduction from contract revenue if we fail to meet stated performance requirements, such as complying with the construction schedule.

We include estimated amounts of variable consideration in the contract price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the contract price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. We reassess the amount of variable consideration each accounting period until the uncertainty associated with the variable consideration is resolved. Changes in the assessed amount of variable consideration are accounted for prospectively as a cumulative adjustment to revenue recognized in the current period.

Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new, or changes the existing, enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing performance obligation(s). The effect of a contract modification on the transaction price, and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase or decrease) on a cumulative catch-up basis.

We have a Company-wide policy requiring periodic review of the Estimate at Completion in which management reviews the progress and execution of our performance obligations and estimated remaining obligations. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenue and costs. The risks and opportunities include management's judgment about the ability and cost to achieve the schedule (e.g., the number and type of milestone events), technical requirements (e.g., a newly developed product versus a mature product) and other contract requirements. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation (e.g., to estimate increases in wages and prices for materials and related support cost allocations), execution by our subcontractors, the availability and timing of funding from our customer, and overhead cost rates, among other variables.

Based on this analysis, any adjustments to revenue, cost of services, and the related impact to operating income are recognized as necessary in the quarter when they become known. These adjustments may result from positive program performance if we determine we will be successful in mitigating risks surrounding the technical, schedule and cost aspects of those performance obligations or realizing related opportunities and may result in an increase in operating income during the performance of individual performance obligations. Likewise, if we determine we will not be

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successful in mitigating these risks or realizing related opportunities, these adjustments may result in a decrease in operating income. Changes in estimates of revenue, cost of services and the related impact to operating income are recognized quarterly on a cumulative catch-up basis, meaning we recognize in the current period the cumulative effect of the changes on current and prior periods based on our progress towards complete satisfaction of a performance obligation. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations. For projects in which estimates of total costs to be incurred on a performance obligation exceed total estimates of revenue to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined.

During the three months ended June 30, 2024 and 2023, net revenue recognized from our performance obligations partially satisfied in the previous period positively impacted revenue by 2.4% and 1.2%, respectively, as a result of changes in estimates associated with performance obligations on contracts. During the six months ended June 30, 2024 and 2023, net revenue recognized from our performance obligations partially satisfied in the previous period positively impacted revenue by 3.2% and 1.7%, respectively, as a result of changes in estimates associated with performance obligations on contracts.

Disaggregation of Revenue

Our consolidated 2024 revenue was derived from contracts to provide service activities in the mechanical and electrical segments we serve. Refer to Note 11 “Segment Information” for additional information on our reportable segments. We disaggregate our revenue from contracts with customers by activity, customer type and service provided, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. See details in the following tables (dollars in thousands):


	Three Months Ended June 30,								Six Months Ended June 30,
Revenue by Service Provided	2024				2023				2024				2023
Mechanical Segment	$	1,451,679	80.2	%	$	975,923	75.3	%	$	2,636,688	78.8	%	$	1,894,538	76.7	%
Electrical Segment		358,611	19.8	%		320,507	24.7	%		710,618	21.2	%		576,532	23.3	%
Total	$	1,810,290	100.0	%	$	1,296,430	100.0	%	$	3,347,306	100.0	%	$	2,471,070	100.0	%

	Three Months Ended June 30,								Six Months Ended June 30,
Revenue by Type of Customer	2024				2023				2024				2023
Technology	$	561,313	31.0	%	$	265,231	20.5	%	$	1,026,127	30.7	%	$	491,480	19.9	%
Manufacturing		526,215	29.0	%		435,819	33.6	%		987,615	29.5	%		802,175	32.5	%
Education		193,433	10.7	%		127,178	9.8	%		327,416	9.8	%		237,431	9.6	%
Healthcare		140,747	7.8	%		138,384	10.7	%		274,476	8.2	%		298,199	12.1	%
Office Buildings		115,012	6.4	%		95,971	7.4	%		216,904	6.5	%		194,166	7.9	%
Retail, Restaurants and Entertainment		114,501	6.3	%		80,783	6.2	%		195,086	5.8	%		156,977	6.3	%
Government		91,073	5.0	%		77,597	6.0	%		178,874	5.3	%		142,012	5.7	%
Multi-Family and Residential		36,181	2.0	%		46,295	3.6	%		77,032	2.3	%		91,302	3.7	%
Other		31,815	1.8	%		29,172	2.2	%		63,776	1.9	%		57,328	2.3	%
Total	$	1,810,290	100.0	%	$	1,296,430	100.0	%	$	3,347,306	100.0	%	$	2,471,070	100.0	%

	Three Months Ended June 30,								Six Months Ended June 30,
Revenue by Activity Type	2024				2023				2024				2023
New Construction	$	1,082,272	59.8	%	$	681,912	52.6	%	$	1,981,248	59.2	%	$	1,309,864	53.0	%
Existing Building Construction		446,574	24.7	%		358,807	27.7	%		836,943	25.0	%		668,290	27.1	%
Service Projects