10-Q 1 fix-20220930x10q.htm 10-Q
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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 September 30, 2022

OR

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: (713830-9600

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 October 21, 2022 was 35,760,816 (excluding treasury shares of 5,362,549).

COMFORT SYSTEMS USA, INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2022

    

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

6

Condensed Notes to Consolidated Financial Statements

7

Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3—Quantitative and Qualitative Disclosures about Market Risk

34

Item 4—Controls and Procedures

34

Part II—Other Information

35

Item 1—Legal Proceedings

35

Item 1A—Risk Factors

35

Item 2—Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 6—Exhibits

37

Signatures

38

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

COMFORT SYSTEMS USA, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

September 30,

December 31,

    

2022

    

2021

 

(Unaudited)

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$

71,139

$

58,776

Billed accounts receivable, less allowance for credit losses of $9,903 and $8,808, respectively

 

1,026,523

 

773,716

Unbilled accounts receivable, less allowance for credit losses of $986 and $715, respectively

 

89,941

 

61,881

Other receivables, less allowance for credit losses of $498 and $503, respectively

 

83,267

 

57,491

Inventories

 

38,149

 

21,853

Prepaid expenses and other

 

27,372

 

23,704

Costs and estimated earnings in excess of billings, less allowance for credit losses of $67 and $84, respectively

 

21,700

 

29,900

Total current assets

 

1,358,091

 

1,027,321

PROPERTY AND EQUIPMENT, NET

 

138,229

 

128,554

LEASE RIGHT-OF-USE ASSET

133,443

124,756

GOODWILL

 

611,039

 

592,114

IDENTIFIABLE INTANGIBLE ASSETS, NET

 

285,094

 

304,781

DEFERRED TAX ASSETS

11,327

22,905

OTHER NONCURRENT ASSETS

 

12,250

 

8,683

Total assets

$

2,549,473

$

2,209,114

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Current maturities of long-term debt

$

2,514

$

2,788

Accounts payable

330,288

254,788

Accrued compensation and benefits

 

149,926

 

129,971

Billings in excess of costs and estimated earnings

 

411,942

 

307,380

Accrued self-insurance

 

25,320

 

22,227

Other current liabilities

 

124,015

 

119,400

Total current liabilities

 

1,044,005

 

836,554

LONG-TERM DEBT, NET

 

378,192

 

385,242

LEASE LIABILITIES

114,443

 

107,701

DEFERRED TAX LIABILITIES

 

1,745

 

1,745

OTHER LONG-TERM LIABILITIES

 

59,956

 

72,206

Total liabilities

 

1,598,341

 

1,403,448

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, 5,349,349 and 5,032,311 shares, respectively

 

(185,574)

 

(150,580)

Additional paid-in capital

 

331,710

 

327,061

Retained earnings

 

804,585

 

628,774

Total stockholders’ equity

 

951,132

 

805,666

Total liabilities and stockholders’ equity

$

2,549,473

$

2,209,114

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

2

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,

    

2022

    

2021

    

2022

    

2021

 

REVENUE

$

1,120,012

$

833,896

$

3,023,176

$

2,217,552

COST OF SERVICES

 

917,788

 

674,684

 

2,492,816

 

1,808,416

Gross profit

 

202,224

 

159,212

 

530,360

 

409,136

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

121,194

 

95,287

 

357,694

 

271,050

GAIN ON SALE OF ASSETS

 

(406)

 

(180)

 

(1,112)

 

(1,021)

Operating income

 

81,436

 

64,105

 

173,778

 

139,107

OTHER INCOME (EXPENSE):

Interest income

 

5

 

1

 

14

 

7

Interest expense

 

(3,609)

 

(1,586)

 

(8,764)

 

(4,443)

Changes in the fair value of contingent earn-out obligations

 

(3,443)

 

(1,244)

 

530

 

4,523

Other

 

46

 

20

 

101

 

112

Other income (expense)

 

(7,001)

 

(2,809)

 

(8,119)

 

199

INCOME BEFORE INCOME TAXES

 

74,435

 

61,296

 

165,659

 

139,306

PROVISION (BENEFIT) FOR INCOME TAXES

 

12,920

 

14,999

 

(24,864)

 

33,553

NET INCOME

$

61,515

$

46,297

$

190,523

$

105,753

INCOME PER SHARE:

Basic

$

1.72

$

1.28

$

5.30

$

2.91

Diluted

$

1.71

$

1.27

$

5.28

$

2.90

SHARES USED IN COMPUTING INCOME PER SHARE:

Basic

 

35,853

 

36,296

 

35,966

 

36,328

Diluted

 

35,972

 

36,434

 

36,078

 

36,500

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

3

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In Thousands, Except Share Amounts)

(Unaudited)

Nine Months Ended

September 30, 2021

Additional

Total

 

    

Common Stock

    

Treasury Stock

    

Paid-In

Retained

    

Stockholders’

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Earnings

    

Equity

 

BALANCE AT DECEMBER 31, 2020

 

41,123,365

$

411

 

(4,935,186)

$

(129,243)

$

322,451

$

502,810

 

$

696,429

Net income

 

26,491

 

26,491

Issuance of Stock:

Issuance of shares for options exercised

 

61,454

1,616

(211)

 

1,405

Issuance of restricted stock & performance stock

 

29,544

777

1,431

 

2,208

Shares received in lieu of tax withholding payment on vested restricted stock

 

(11,424)

(854)

 

(854)

Stock-based compensation

 

2,472

 

2,472

Dividends ($0.115 per share)

 

(4,163)

 

(4,163)

Share repurchase

 

(13,250)

(885)

 

(885)

BALANCE AT MARCH 31, 2021

41,123,365

411

(4,868,862)

(128,589)

326,143

525,138

723,103

Net income

 

32,965

 

32,965

Issuance of Stock:

Issuance of shares for options exercised

 

69,342

1,853

191

 

2,044

Issuance of restricted stock & performance stock

 

71,816

1,904

(1,904)

 

Shares received in lieu of tax withholding payment on vested restricted stock

 

(19,989)

(1,509)

 

(1,509)

Stock-based compensation

 

1,749

 

1,749

Dividends ($0.115 per share)

 

(4,178)

 

(4,178)

Share repurchase

 

(27,092)

(2,162)

 

(2,162)

BALANCE AT JUNE 30, 2021

41,123,365

411

(4,774,785)

(128,503)

326,179

553,925

752,012

Net income

 

46,297

 

46,297

Issuance of Stock:

Issuance of shares for options exercised

 

 

Issuance of restricted stock & performance stock

 

 

Shares received in lieu of tax withholding payment on vested restricted stock

 

 

Stock-based compensation

 

314

 

314

Dividends ($0.12 per share)

 

(4,350)

 

(4,350)

Share repurchase

 

(306,122)

(22,484)

 

(22,484)

BALANCE AT SEPTEMBER 30, 2021

41,123,365

$

411

(5,080,907)

$

(150,987)

$

326,493

$

595,872

$

771,789

4

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In Thousands, Except Share Amounts)

(Unaudited)

Nine Months Ended

September 30, 2022

Additional

Total

    

Common Stock

    

Treasury Stock

    

Paid-In

Retained

    

Stockholders’

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Earnings

    

Equity

 

BALANCE AT DECEMBER 31, 2021

 

41,123,365

$

411

(5,032,311)

$

(150,580)

$

327,061

$

628,774

$

805,666

Net income

 

86,762

 

86,762

Issuance of Stock:

Issuance of shares for options exercised

 

 

Issuance of restricted stock & performance stock

 

38,863

1,232

2,312

 

3,544

Shares received in lieu of tax withholding payment on vested restricted stock

 

(15,348)

(1,399)

 

(1,399)

Stock-based compensation

 

2,605

 

2,605

Dividends ($0.13 per share)

 

(4,673)

 

(4,673)

Share repurchase

 

(161,614)

(14,097)

 

(14,097)

BALANCE AT MARCH 31, 2022

 

41,123,365

411

 

(5,170,410)

(164,844)

331,978

710,863

878,408

Net income

42,246

42,246

Issuance of Stock:

Issuance of shares for options exercised

Issuance of restricted stock & performance stock

75,092

2,425

(2,425)

Shares received in lieu of tax withholding payment on vested restricted stock

(20,658)

(1,848)

(1,848)

Stock-based compensation

1,822

1,822

Dividends ($0.14 per share)

(5,026)

(5,026)

Share repurchase

(226,689)

(18,757)

(18,757)

BALANCE AT JUNE 30, 2022

41,123,365

411

(5,342,665)

(183,024)

331,375

748,083

896,845

Net income

 

61,515

 

61,515

Issuance of Stock:

Issuance of shares for options exercised

 

29,862

1,023

(79)

 

944

Issuance of restricted stock & performance stock

 

 

Shares received in lieu of tax withholding payment on vested restricted stock

 

 

Stock-based compensation

 

414

 

414

Dividends ($0.14 per share)

 

(5,013)

 

(5,013)

Share repurchase

 

(36,546)

(3,573)

 

(3,573)

BALANCE AT SEPTEMBER 30, 2022

 

41,123,365

$

411

 

(5,349,349)

$

(185,574)

$

331,710

$

804,585

 

$

951,132

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

5

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

Nine Months Ended

September 30,

    

2022

    

2021

 

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$

190,523

$

105,753

Adjustments to reconcile net income to net cash provided by operating activities—

Amortization of identifiable intangible assets

 

36,602

 

28,934

Depreciation expense

 

24,643

 

21,066

Change in right-of-use assets

15,873

12,904

Bad debt expense (benefit)

 

1,471

 

(1,698)

Deferred tax provision

 

11,578

 

6,589

Amortization of debt financing costs

 

613

 

403

Gain on sale of assets

 

(1,112)

 

(1,021)

Changes in the fair value of contingent earn-out obligations

 

(530)

 

(4,523)

Stock-based compensation

 

7,479

 

7,378

Changes in operating assets and liabilities, net of effects of acquisitions and divestitures—

(Increase) decrease in—

Receivables, net

 

(275,848)

 

(25,809)

Inventories

 

(16,335)

 

(6,248)

Prepaid expenses and other current assets

 

1,513

 

15,592

Costs and estimated earnings in excess of billings and unbilled accounts receivable

 

(17,180)

 

(8,698)

Other noncurrent assets

 

(86)

 

(1,248)

Increase (decrease) in—

Accounts payable and accrued liabilities

 

98,781

 

15,112

Billings in excess of costs and estimated earnings

 

103,402

 

257

Other long-term liabilities

 

(11,863)

 

(12,089)

Net cash provided by operating activities

 

169,524

 

152,654

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment

 

(34,793)

 

(15,864)

Proceeds from sales of property and equipment

 

2,151

 

1,802

Cash paid for acquisitions, net of cash acquired

 

(48,507)

 

(105,543)

Payments for investments

(1,610)

Net cash used in investing activities

 

(82,759)

 

(119,605)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from revolving credit facility

 

495,000

 

160,000

Payments on revolving credit facility

 

(380,000)

 

(115,000)

Payments on term loan

(120,000)

(15,000)

Payments on other debt

 

(7,834)

 

(9,000)

Payments on finance lease liabilities

(820)

(207)

Debt financing costs

 

(2,297)

 

Payments of dividends to stockholders

 

(14,712)

 

(12,691)

Share repurchase

 

(36,427)

 

(25,531)

Shares received in lieu of tax withholding

 

(3,247)

 

(2,363)

Proceeds from exercise of options

 

944

 

3,449

Deferred acquisition payments

(50)

(400)

Payments for contingent consideration arrangements

 

(4,959)

 

(3,481)

Net cash used in financing activities

 

(74,402)

 

(20,224)

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

12,363

 

12,825

CASH AND CASH EQUIVALENTS, beginning of period

 

58,776

 

54,896

CASH AND CASH EQUIVALENTS, end of period

$

71,139

$

67,721

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

6

COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(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, 2021 (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, deferred tax assets, 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 October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” This standard requires an acquirer to apply Accounting Standards Codification Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022 and interim periods within that year. Early adoption is permitted. We do not expect our adoption of this standard on January 1, 2023 to have a material impact on our consolidated financial statements.

7

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 non-residential 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).

Income Taxes

We conduct business throughout the United States in virtually all fifty states. Our effective tax rate changes based upon our relative profitability, or lack thereof, in states with varying tax rates and rules. In addition, discrete items such as tax law changes, judgments and legal structures, can impact our effective tax rate. These items can also include

8

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.

In early October 2020, we filed amended federal returns for 2016, 2017 and 2018, primarily to claim the credit for increasing research activities (the “R&D tax credit”) requesting refunds of $9.8 million, $9.5 million and $11.9 million, respectively. The $31.2 million of refunds requested was offset by unrecognized tax benefits of $28.8 million due to the uncertainty of the outcome of an Internal Revenue Service (“IRS”) examination. The R&D tax credit had no material impact on our effective tax rates for the 2020 and 2021 calendar years.

Following an IRS survey of previously filed refund claims for the 2016, 2017 and 2018 tax years, the Joint Committee on Taxation approved such refunds in late January 2022. As a result, our benefit for income taxes in the first quarter of 2022 included a $28.8 million reduction in unrecognized tax benefits plus approximately $1.6 million of net interest income on the refunds.

Our benefit for income taxes in the first quarter of 2022 was further increased by $26.8 million for the expected refunds due to our intention to claim the R&D tax credit for the 2019, 2020 and 2021 tax years. In the third quarter of 2022, we claimed the R&D tax credit on our originally filed 2021 federal return and recognized an additional $1.7 million benefit for the 2019, 2020 and 2021 tax years. Furthermore, we have included an estimate for the R&D tax credit in the computation of our annual effective tax rate for the current year and will continue to do so for the foreseeable future.

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. We currently believe these provisions will be immaterial to our overall financial results, financial position and cash flows.

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. We believe the carrying value of our debt associated with our revolving credit facility approximates its fair value due to the variable rate on such debt.

Investments

We have a $1.6 million investment 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.

9

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

10

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.

In the first nine months of 2022 and 2021, net revenue recognized from our performance obligations satisfied in previous periods was not material.

Disaggregation of Revenue

Our consolidated 2022 revenue was derived from contracts to provide service activities in the mechanical and electrical services 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 September 30,

Nine Months Ended September 30,

Revenue by Service Provided

   

2022

   

2021

   

2022

   

2021

Mechanical Services

$

858,768

   

76.7

%

$

690,680

   

82.8

%

$

2,318,036

   

76.7

%

$

1,868,096

   

84.2

%

Electrical Services

261,244

23.3

%

143,216

17.2

%

705,140

23.3

%

349,456

15.8

%

Total

$

1,120,012

100.0

%

$

833,896

100.0

%

$

3,023,176

100.0

%

$

2,217,552

100.0

%