10-Q 1 fix-20220331x10q.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 March 31, 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 April 22, 2022 was 35,983,287 (excluding treasury shares of 5,193,278).

COMFORT SYSTEMS USA, INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 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

5

Condensed Notes to Consolidated Financial Statements

6

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

20

Item 3—Quantitative and Qualitative Disclosures about Market Risk

29

Item 4—Controls and Procedures

30

Part II—Other Information

31

Item 1—Legal Proceedings

31

Item 1A—Risk Factors

31

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

31

Item 6—Exhibits

33

Signatures

34

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

COMFORT SYSTEMS USA, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

March 31,

December 31,

    

2022

    

2021

 

(Unaudited)

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$

115,615

$

58,776

Billed accounts receivable, less allowance for credit losses of $8,694 and $8,808, respectively

 

804,832

 

773,716

Unbilled accounts receivable, less allowance for credit losses of $751 and $715, respectively

 

70,901

 

61,881

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

 

73,677

 

57,491

Inventories

 

24,918

 

21,853

Prepaid expenses and other

 

31,373

 

23,704

Costs and estimated earnings in excess of billings, less allowance for credit losses of $53 and $84, respectively

 

18,313

 

29,900

Total current assets

 

1,139,629

 

1,027,321

PROPERTY AND EQUIPMENT, NET

 

127,711

 

128,554

LEASE RIGHT-OF-USE ASSET

124,936

124,756

GOODWILL

 

593,947

 

592,114

IDENTIFIABLE INTANGIBLE ASSETS, NET

 

291,990

 

304,781

DEFERRED TAX ASSETS

20,577

22,905

OTHER NONCURRENT ASSETS

 

9,623

 

8,683

Total assets

$

2,308,413

$

2,209,114

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Current maturities of long-term debt

$

407

$

2,788

Accounts payable

267,246

254,788

Accrued compensation and benefits

 

121,990

 

129,971

Billings in excess of costs and estimated earnings

 

316,478

 

307,380

Accrued self-insurance

 

22,410

 

22,227

Other current liabilities

 

128,668

 

119,400

Total current liabilities

 

857,199

 

836,554

LONG-TERM DEBT, NET

 

412,079

 

385,242

LEASE LIABILITIES

107,033

 

107,701

DEFERRED TAX LIABILITIES

 

1,745

 

1,745

OTHER LONG-TERM LIABILITIES

 

51,949

 

72,206

Total liabilities

 

1,430,005

 

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, 5,170,410 and 5,032,311 shares, respectively

 

(164,844)

 

(150,580)

Additional paid-in capital

 

331,978

 

327,061

Retained earnings

 

710,863

 

628,774

Total stockholders’ equity

 

878,408

 

805,666

Total liabilities and stockholders’ equity

$

2,308,413

$

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

March 31,

    

2022

    

2021

 

REVENUE

$

885,216

$

669,761

COST OF SERVICES

 

732,072

 

546,292

Gross profit

 

153,144

 

123,469

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

117,776

 

88,214

GAIN ON SALE OF ASSETS

 

(323)

 

(350)

Operating income

 

35,691

 

35,605

OTHER INCOME (EXPENSE):

Interest income

 

3

 

3

Interest expense

 

(2,129)

 

(1,497)

Changes in the fair value of contingent earn-out obligations

 

4,088

 

1,186

Other

 

56

 

(69)

Other income (expense)

 

2,018

 

(377)

INCOME BEFORE INCOME TAXES

 

37,709

 

35,228

PROVISION (BENEFIT) FOR INCOME TAXES

 

(49,053)

 

8,737

NET INCOME

$

86,762

$

26,491

INCOME PER SHARE:

Basic

$

2.40

$

0.73

Diluted

$

2.40

$

0.73

SHARES USED IN COMPUTING INCOME PER SHARE:

Basic

 

36,076

 

36,286

Diluted

 

36,188

 

36,499

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)

Three Months Ended

March 31, 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

Three Months Ended

March 31, 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

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

4

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

Three Months Ended

March 31,

    

2022

    

2021

 

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$

86,762

$

26,491

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

Amortization of identifiable intangible assets

 

12,791

 

8,925

Depreciation expense

 

8,046

 

7,051

Change in right-of-use assets

4,734

4,377

Bad debt expense (benefit)

 

25

 

(1,018)

Deferred tax provision (benefit)

 

2,328

 

(410)

Amortization of debt financing costs

 

133

 

133

Gain on sale of assets

 

(323)

 

(350)

Changes in the fair value of contingent earn-out obligations

 

(4,088)

 

(1,186)

Stock-based compensation

 

3,996

 

4,711

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

(Increase) decrease in—

Receivables, net

 

(52,701)

 

49,684

Inventories

 

(3,104)

 

(2,181)

Prepaid expenses and other current assets

 

(2,803)

 

(390)

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

 

2,562

 

6,840

Other noncurrent assets

 

181

 

(284)

Increase (decrease) in—

Accounts payable and accrued liabilities

 

1,899

 

(33,087)

Billings in excess of costs and estimated earnings

 

9,046

 

20,550

Other long-term liabilities

 

(5,755)

 

(5,209)

Net cash provided by operating activities

 

63,729

 

84,647

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment

 

(9,192)

 

(4,812)

Proceeds from sales of property and equipment

 

1,056

 

498

Cash paid for acquisitions, net of cash acquired

 

3

 

(10,716)

Payments for investments

(1,236)

Net cash used in investing activities

 

(9,369)

 

(15,030)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from revolving credit facility

 

50,000

 

10,000

Payments on revolving credit facility

 

(10,000)

 

(70,000)

Payments on term loan

(7,500)

(7,500)

Payments on other debt

 

(7,797)

 

Payments on finance lease liabilities

(253)

Payments of dividends to stockholders

 

(4,673)

 

(4,163)

Share repurchase

 

(14,097)

 

(885)

Shares received in lieu of tax withholding

 

(1,399)

 

(854)

Proceeds from exercise of options

 

 

1,405

Deferred acquisition payments

(50)

(400)

Payments for contingent consideration arrangements

 

(1,752)

 

Net cash provided by (used in) financing activities

 

2,479

 

(72,397)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

56,839

 

(2,780)

CASH AND CASH EQUIVALENTS, beginning of period

 

58,776

 

54,896

CASH AND CASH EQUIVALENTS, end of period

$

115,615

$

52,116

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

5

COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 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 March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848).” The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. Our current debt facility (as further described in Note 7) includes a Eurodollar Rate Loan Option with an interest rate that is determined based on the one- to six-month LIBOR rates, which will cease to be published on June 30, 2023. We currently do not expect the impact of the transition from LIBOR to alternative reference rates to have a significant impact to our consolidated financial statements.

6

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 are currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements.

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.

7

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 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 plus approximately $0.1 million of net interest income on the expected refunds due to our intention to claim the R&D tax credit for the 2019, 2020 and 2021 tax years. Additionally, 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.

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, a revolving credit facility and a term loan. We believe the carrying value of our debt associated with our senior credit facility approximates its fair value due to the variable rate on such debt.

Investments

We have a $1.2 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.

8

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

9

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 three 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 March 31,

Revenue by Service Provided

   

   

2022

   

2021

Mechanical Services

$

682,511

   

77.1

%

$

565,620

   

84.5

%

Electrical Services

202,705

22.9

%

104,141

15.5

%

Total

$

885,216

100.0

%

$

669,761

100.0

%

Three Months Ended March 31,

Revenue by Type of Customer

2022

2021

 

Industrial

$

410,184

46.3

%

$

269,583

40.3

%

Education

89,446

10.1

%

92,457

13.8

%

Office Buildings

75,115

8.5

%

78,996

11.8

%

Healthcare

134,795

15.2

%

95,091

14.2

%

Government

57,465

6.5

%

43,165

6.4

%

Retail, Restaurants and Entertainment

65,582

7.4

%

44,576

6.7

%

Multi-Family and Residential

24,442

2.8

%

24,660

3.7

%

Other

28,187

3.2

%

21,233

3.1

%

Total

$

885,216

100.0

%

$

669,761

100.0

%

Three Months Ended March 31,

Revenue by Activity Type

2022

2021

 

New Construction

$

429,418

48.5

%

$

302,061

45.1

%

Existing Building Construction

259,285

29.3

%

216,601

32.3

%

Service Projects

76,252

8.6

%

60,060

9.0

%

Service Calls, Maintenance and Monitoring

120,261

13.6

%

91,039

13.6

%

Total

$

885,216

100.0

%

$

669,761

100.0

%

Contract Assets and Liabilities

Project contracts typically provide for a schedule of billings or invoices to the customer based on our job-to-date completion percentage of specific tasks inherent in the fulfillment of our performance obligation(s). The schedules for such billings usually do not precisely match the schedule on which costs are incurred. Contract assets include unbilled amounts typically resulting from sales under long term contracts when the cost-to-cost method of revenue recognition is used, revenue recognized exceeds the amount billed to the customer and right to payment is conditional or subject to completing a milestone, such as a phase of the project. Contract assets are generally classified as current.

Contract liabilities consist of advance payments and billings in excess of revenue recognized. Our contract assets and liabilities are reported in a net position on a contract by contract basis at the end of each reporting period. We

10

classify advance payments and billings in excess of revenue recognized as current. It is very unusual for us to have advanced payments with a term of greater than one year; therefore, our contract assets and liabilities are usually all current. If we have advanced payments with a term greater than one year, the noncurrent portion of advanced payments would be included in “Other Long-term Liabilities” in our Consolidated Balance Sheets.

The following table presents the changes in contract assets and contract liabilities (in thousands):

Three Months Ended March 31,

Year Ended December 31,

2022

2021

Contract

    

Contract

Contract

    

Contract

Assets

Liabilities

Assets

Liabilities

Balance at beginning of period

$

29,900

$

307,380

$

18,622

$

226,237

Change due to acquisitions / disposals

(10)

52

10,356

36,523

Change related to credit allowance

31

(5)

Other changes in the period

(11,608)

21,135

927

44,620

Balance at end of period

$

18,313

$

328,567

$

29,900

 

$

307,380

In the first three months of 2022 and 2021, we recognized revenue of $220.6 million and $167.8 million related to our contract liabilities at January 1, 2022 and January 1, 2021, respectively.

We did not have any impairment losses recognized on our receivables or contract assets in the first three months of 2022 and 2021.

Remaining Performance Obligations

Remaining construction performance obligations represent the remaining transaction price of firm orders for which work has not been performed and exclude unexercised contract options. As of March 31, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was $2.73 billion. The Company expects to recognize revenue on approximately 80-85% of the remaining performance obligations over the next 12 months, with the remaining recognized thereafter. Our service maintenance agreements are generally one-year renewable agreements. We have adopted the practical expedient that allows us to not include service maintenance contracts with a total term of one year or less; therefore, we do not report unfulfilled performance obligations for service maintenance agreements.

4. Fair Value Measurements

Interest Rate Risk Management and Derivative Instruments

We have interest rate swap agreements in place to reduce our exposure to variable interest rates on our term loan and revolving credit facility. The notional amount covered by these interest rate swaps was $80.0 million as of March 31, 2022, and the termination date is September 30, 2022.

We use derivative instruments to manage exposure to market risk, including interest rate risk. Unsettled amounts under our interest rate swaps are recorded in the Consolidated Balance Sheet at fair value in “Other Receivables” or “Other Current Liabilities.” Gains and losses on our interest rate swaps are recorded in the Consolidated Income Statement in “Interest Expense.” For the three months ended March 31, 2022 and March 31, 2021, we recognized a net loss of $0.1 million related to our interest rate swaps. We currently do not have any derivatives that are accounted for as hedges under ASC 815.

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.

11

The following table summarizes the fair values, and levels within the fair value hierarchy in which the fair value measurements are included, for assets and liabilities measured on a recurring basis as of March 31, 2022 and December 31, 2021 (in thousands):

Fair Value Measurements at March 31, 2022

    

Level 1

    

Level 2

    

Level 3

    

Total

Cash and cash equivalents

$

115,615

$

$

$

115,615

Life insurance—cash surrender value

$

$

6,358

$

$

6,358

Contingent earn-out obligations

$

$

$

28,275

$

28,275

Fair Value Measurements at December 31, 2021

    

Level 1

    

Level 2

    

Level 3

    

Total

Cash and cash equivalents

$

58,776

$

$

$

58,776

Life insurance—cash surrender value

$

$

6,643

$

$

6,643

Contingent earn-out obligations

$

$

$

34,114

$

34,114

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 Company’s outstanding term loan held by third-party financial institutions is carried at cost, adjusted for debt issuance costs. The Company’s term loan is not publicly traded and the carrying amount approximates fair value as the loan accrues interest at a variable rate. The carrying value of our borrowings associated with the revolving credit facility approximate its fair value due to the variable rate on such debt.

We have life insurance policies covering 109 employees with a combined face value of $74.7 million. The policies are invested in several investment vehicles, 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 was $6.4 million as of March 31, 2022 and $6.6 million as of December 31, 2021. 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 and operating income, probabilities of achieving such future cash flows and operating income and a weighted average cost of capital. Significant changes in any of these assumptions could result in a significantly higher or lower potential liability. The contingent earn-out obligations are measured at fair value each reporting period, and changes in estimates of fair value are recognized in earnings. As of March 31, 2022, cash flows were discounted using a weighted average cost of capital ranging from 10.5% - 16.5%.

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):

    

Three Months Ended

Year Ended

    

March 31, 2022

December 31, 2021

Balance at beginning of period

    

$

34,114

$

25,979

 

Issuances

 

 

19,949

Settlements

(1,751)

(3,994)

Adjustments to fair value

 

(4,088)

 

(7,820)

Balance at end of period

$

28,275

$

34,114

5. Acquisitions

On December 31, 2021, we acquired MEP Holding Co., Inc., and its related subsidiaries (collectively, “MEP Holdings”) for a total preliminary purchase price of $57.3 million, which included $45.2 million funded on the closing

12

date, $7.6 million in notes payable to former owners, an earn-out that will be paid if certain financial targets are met after the acquisition date and a working capital adjustment. As a result of the acquisition, MEP Holdings is a wholly owned subsidiary of the Company and reports as a separate operating location in our electrical services segment. Additionally, on December 31, 2021, we completed an acquisition of a service and controls business in Kentucky with a total preliminary purchase price of $20.6 million and a temporary staffing company based in Indiana with a total preliminary purchase price of $4.7 million, which are both reported in our mechanical services segment.

On December 1, 2021, we acquired Ivey Mechanical Company, LLC (“Ivey”) headquartered in Kosciusko, Mississippi for a total preliminary purchase price of $79.1 million, which included $64.1 million of cash paid on the closing date, $8.0 million in notes payable to former owners, a $0.4 million short term payable plus an earn-out that will be paid if certain financial targets are met after the acquisition date and a working capital adjustment. As a result of the acquisition, Ivey is a wholly owned subsidiary of the Company and reports as a separate operating location in our mechanical services segment.

On August 1, 2021, we acquired all of the issued and outstanding equity interests of Amteck Holdco LLC and each of its wholly owned subsidiaries (collectively “Amteck”). The total preliminary purchase price was $138.6 million of which $112.8 million was allocated to goodwill and identifiable intangible assets. The total preliminary purchase price included $107.4 million in cash, $8.4 million in working capital adjustment, $10.0 million in notes payable to former owners and a $12.9 million contingent earn-out obligation. Amteck provides electrical contracting solutions and services, including design and build, pre-fabrication and installation for core electric and low-voltage systems, as well as services for planned maintenance, retrofit and emergency work. Amteck is headquartered in Kentucky and primarily serves the greater Southeastern United States, including Kentucky, Tennessee and the Carolinas. As a result of the acquisition, Amteck is a wholly owned subsidiary of the Company reported in our electrical services segment.

In the first quarter of 2021, we completed an acquisition of a mechanical contractor in Utah with a total purchase price of $18.1 million, which is reported in our mechanical services segment.

The results of operations of acquisitions are included in our consolidated financial statements from their respective acquisition dates. Our Consolidated Balance Sheet includes preliminary allocations of the purchase price to the assets acquired and liabilities assumed for the applicable acquisitions pending the completion of the final valuation of intangible assets and accrued liabilities. 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, when they are not subject to the continued employment of the sellers, are estimated as of the purchase date and included as part of the consideration paid for the acquisition. If we have an earn-out under which continued employment is a condition to receipt of payment, then the earn-out is recorded as compensation expense over the period earned.

6. Goodwill and Identifiable Intangible Assets, Net

Goodwill

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

Mechanical Services

Electrical Services

    

Segment

    

Segment

Total

Balance at December 31, 2020

$

307,448

$

156,944

$

464,392

Acquisitions and purchase price adjustments (See Note 5)

 

52,771

74,951

127,722

Impact of segment reorganization

1,101

(1,101)

Balance at December 31, 2021

361,320

230,794

592,114

Acquisitions and purchase price adjustments (See Note 5)

1,833

1,833

Balance at March 31, 2022

$

363,153

$

230,794

$

593,947

During the fourth quarter of 2021, the Company performed a qualitative assessment for all of our reporting units except one for which we performed a quantitative assessment, 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,

13

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 substantially greater than its carrying value. Accordingly, no further testing was required. For our Texas electrical operation, we performed a step 1 quantitative assessment, and the calculated fair value exceeded the carrying value by 32%. As a result of the reporting unit’s smaller excess of fair value percentage, this reporting unit is more susceptible to impairment risk from additional adverse changes in its operating environment, including micro- and macroeconomic environment conditions that could negatively impact them. Such adverse changes could include worsening economic conditions in the locations or markets they primarily serve, whether due to COVID-19 or other events and conditions. As of March 31, 2022, the Texas electrical operation had a goodwill balance of $96.8 million.

Identifiable Intangible Assets, Net

At March 31, 2022, future amortization expense of identifiable intangible assets is as follows (in thousands):

Year ending December 31—

    

    

2022 (remainder of the year)

    

$

33,715

 

2023

34,532

2024

 

32,343

2025

 

30,156

2026

 

29,312

Thereafter

 

131,932

Total

$

291,990

7. Debt Obligations

Debt obligations consist of the following (in thousands):

March 31,

December 31,

    

2022

    

2021

 

Revolving credit facility

$

260,000

$

220,000

Term loan

112,500

120,000

Notes to former owners

40,157

 

47,954

Finance lease liabilities (See Note 8)

266

Total principal amount

412,657

 

388,220

Less—unamortized debt issuance costs

(171)

(190)

Total debt, net of unamortized debt issuance costs

412,486

388,030

Less—current portion

(407)

 

(2,788)

Total long-term portion of debt, net

$

412,079

$

385,242

Revolving Credit Facility and Term Loan

We have a $600.0 million senior credit facility (the “Facility”) provided by a syndicate of banks. The Facility is composed of a revolving credit line in the amount of $450.0 million and a $150.0 million term loan, and the Facility provides for a $150.0 million accordion or increase option for the revolving portion of the Facility. As of March 31, 2022, the Facility capacity was $562.5 million, as the term loan was paid down by $37.5 million since the inception of the Facility. The amended Facility also includes a sublimit of up to $160.0 million issuable in the form of letters of credit. The Facility expires in January 2025 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 our wholly owned captive insurance company, and a second lien on our assets related to projects subject to surety bonds. As of March 31, 2022, we had $260.0 million of outstanding borrowings on the revolving credit facility, $55.6 million in letters of credit outstanding and $134.4 million of credit available.

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There are two interest rate options for borrowings under the Facility, the Base Rate Loan Option and the Eurodollar Rate Loan Option. These rates are floating rates determined by the broad financial markets, meaning they can and do move up and down from time to time. Additional margins are then added to these two rates.

The following is a summary of the additional margins:

Consolidated Total Indebtedness to

 

Credit Facility Adjusted EBITDA

 

    

Less than 1.00

    

1.00 to 1.75

    

1.75 to 2.50

    

2.50 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

%

The weighted average interest rate applicable to the borrowings under the revolving credit facility was approximately 1.9% as of March 31, 2022. The weighted average interest rate applicable to the term loan was approximately 2.0% as of March 31, 2022.

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. 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 a claim is unlikely in the foreseeable future. The letter of credit fees range from 1.25% to 2.00% per annum, based on the ratio of Consolidated Total Indebtedness to “Credit Facility Adjusted EBITDA,” which shall mean Consolidated EBITDA as such term is defined in the credit agreement.

Commitment fees are payable on the portion of the revolving loan capacity not in use for borrowings or letters of credit at any given time. These fees range from 0.20% to 0.35% per annum, based on the ratio of Consolidated Total Indebtedness to Credit Facility Adjusted EBITDA.

The Facility contains financial covenants defining various financial measures and the levels of these measures with which we must comply. Covenant compliance is assessed as of each quarter end. We were in compliance with all of our financial covenants as of March 31, 2022.

Notes to Former Owners

As part of the consideration used to acquire nine companies, we have outstanding notes to the former owners. Together, these notes had an outstanding balance of $40.2 million as of March 31, 2022. At March 31, 2022, future principal payments of notes to former owners by maturity year are as follows (dollars in thousands):

Balance at

Range of Stated

    

March 31, 2022

Interest Rates

2022

    

$

407

 

2.5 - 3.5

%

2023

9,400

2.5

%

2024

 

10,800

2.5 - 3.0

%

2025

 

19,550

2.3 - 2.5

%

Total

$

40,157

8. Leases

We lease certain facilities, vehicles and equipment primarily under noncancelable operating leases. The most significant portion of these noncancelable operating leases are for the facilities occupied by our corporate office and our operating locations. We have finance leases on vehicles that are not material to our consolidated financial position. Leases with an initial term of 12 months or less are not recorded in the Balance Sheet. We do not separate lease

15

components from their associated non-lease components pursuant to lease accounting guidance. We have certain leases with variable payments based on an index as well as some short-term leases on equipment and facilities. Variable lease expense and short-term lease expense were not material to our financial statements and aggregated to $4.1 million and $1.9 million in the first three months of 2022 and 2021, respectively. Lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The weighted average discount rate for our operating leases as of both March 31, 2022 and December 31, 2021 was 4.0%. We recognize operating lease expense, including escalating lease payments and lease incentives, on a straight-line basis over the lease term. Operating lease expense for the three months ended March 31, 2022 and 2021 was $10.4 million and $7.2 million, respectively.

The lease terms generally range from three to ten years. Some leases include one or more options to renew, which may be exercised to extend the lease term. We include the exercise of lease renewal options in the lease term when it is reasonably certain that we will exercise the option and such exercise is at our sole discretion. The weighted average remaining lease term for our operating leases was 8.4 years at March 31, 2022 and 8.7 years at December 31, 2021.