10-Q 1 fix-20240331x10q.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, 2024

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 19, 2024 was 35,721,909 (excluding treasury shares of 5,401,456).

COMFORT SYSTEMS USA, INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 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

31

Item 4—Controls and Procedures

31

Part II—Other Information

33

Item 1—Legal Proceedings

33

Item 1A—Risk Factors

33

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

33

Item 5—Other Information

34

Item 6—Exhibits

34

Signatures

36

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

COMFORT SYSTEMS USA, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

March 31,

December 31,

    

2024

    

2023

 

(Unaudited)

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$

100,792

$

205,150

Billed accounts receivable, less allowance for credit losses of $11,949 and $11,926, respectively

 

1,570,643

 

1,318,926

Unbilled accounts receivable, less allowance for credit losses of $929 and $850, respectively

 

76,975

 

72,774

Other receivables, less allowance for credit losses of $519 and $522, respectively

 

136,100

 

166,319

Inventories

 

71,061

 

65,538

Prepaid expenses and other

 

62,500

 

54,309

Costs and estimated earnings in excess of billings, less allowance for credit losses of $108 and $79, respectively

 

30,118

 

28,084

Total current assets

 

2,048,189

 

1,911,100

PROPERTY AND EQUIPMENT, NET

 

226,197

 

208,568

LEASE RIGHT-OF-USE ASSET

227,157

205,712

GOODWILL

 

862,934

 

666,834

IDENTIFIABLE INTANGIBLE ASSETS, NET

 

489,884

 

280,397

DEFERRED TAX ASSETS

31,928

17,723

OTHER NONCURRENT ASSETS

 

16,540

 

15,245

Total assets

$

3,902,829

$

3,305,579

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Current maturities of long-term debt

$

12,885

$

4,867

Accounts payable

557,859

419,962

Accrued compensation and benefits

 

153,859

 

169,136

Billings in excess of costs and estimated earnings and deferred revenue

 

1,131,928

 

909,538

Accrued self-insurance

 

29,712

 

27,774

Other current liabilities

 

253,416

 

189,928

Total current liabilities

 

2,139,659

 

1,721,205

LONG-TERM DEBT

 

77,004

 

39,345

LEASE LIABILITIES

209,717

 

188,136

DEFERRED TAX LIABILITIES

 

1,120

 

1,120

OTHER LONG-TERM LIABILITIES

 

102,793

 

77,944

Total liabilities

 

2,530,293

 

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, 5,428,501 and 5,438,625 shares, respectively

 

(211,518)

 

(209,807)

Additional paid-in capital

 

348,582

 

339,562

Retained earnings

 

1,235,061

 

1,147,663

Total stockholders’ equity

 

1,372,536

 

1,277,829

Total liabilities and stockholders’ equity

$

3,902,829

$

3,305,579

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,

    

2024

    

2023

 

REVENUE

$

1,537,016

$

1,174,640

COST OF SERVICES

 

1,239,653

 

969,235

Gross profit

 

297,363

 

205,405

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

162,723

 

135,032

GAIN ON SALE OF ASSETS

 

(820)

 

(512)

Operating income

 

135,460

 

70,885

OTHER INCOME (EXPENSE):

Interest income

 

1,603

 

1,397

Interest expense

 

(1,633)

 

(4,076)

Changes in the fair value of contingent earn-out obligations

 

(12,491)

 

(2,382)

Other

 

117

 

1

Other income (expense)

 

(12,404)

 

(5,060)

INCOME BEFORE INCOME TAXES

 

123,056

 

65,825

PROVISION FOR INCOME TAXES

 

26,737

 

8,609

NET INCOME

$

96,319

$

57,216

INCOME PER SHARE:

Basic

$

2.70

$

1.60

Diluted

$

2.69

$

1.59

SHARES USED IN COMPUTING INCOME PER SHARE:

Basic

 

35,739

 

35,812

Diluted

 

35,828

 

35,907

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, 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

Three Months Ended

March 31, 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

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,

    

2024

    

2023

 

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$

96,319

$

57,216

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

Amortization of identifiable intangible assets

 

23,913

 

10,331

Depreciation expense

 

11,254

 

9,187

Change in right-of-use assets

7,981

5,357

Bad debt expense

 

356

 

946

Deferred tax provision (benefit)

 

(14,205)

 

(27,537)

Amortization of debt financing costs

 

171

 

169

Gain on sale of assets

 

(820)

 

(512)

Changes in the fair value of contingent earn-out obligations

 

12,491

 

2,382

Stock-based compensation

 

7,414

 

6,141

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

(Increase) decrease in—

Receivables, net

 

(125,582)

 

(125,937)

Inventories

 

(5,293)

 

(1,386)

Prepaid expenses and other current assets

 

(4,499)

 

(911)

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

 

(4,822)

 

(2,281)

Other noncurrent assets

 

(280)

 

(298)

Increase (decrease) in—

Accounts payable and accrued liabilities

 

118,757

 

28,652

Billings in excess of costs and estimated earnings and deferred revenue

 

23,307

 

159,140

Other long-term liabilities

 

95

 

6,250

Net cash provided by operating activities

 

146,557

 

126,909

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment

 

(24,952)

 

(16,520)

Proceeds from sales of property and equipment

 

1,014

 

622

Cash paid for acquisitions, net of cash acquired

 

(196,670)

 

(53,047)

Payments for investments

(1,040)

Net cash used in investing activities

 

(221,648)

 

(68,945)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from revolving credit facility

 

162,000

 

85,000

Payments on revolving credit facility

 

(162,000)

 

(140,000)

Proceeds from other debt

640

Payments on other debt

 

(22)

 

(16)

Payments of dividends to stockholders

 

(8,921)

 

(6,254)

Share repurchase

 

(295)

 

(3,568)

Shares received in lieu of tax withholding

 

(2,126)

 

(1,798)

Proceeds from exercise of options

 

27

 

18

Payments for contingent consideration arrangements

 

(18,570)

 

Net cash used in financing activities

 

(29,267)

 

(66,618)

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(104,358)

 

(8,654)

CASH AND CASH EQUIVALENTS, beginning of period

 

205,150

 

57,214

CASH AND CASH EQUIVALENTS, end of period

$

100,792

$

48,560

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, 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

6

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).

7

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 has not been received as of March 31, 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 $5.4 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.

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 2024 and 2023, net revenue recognized from our performance obligations partially satisfied in the previous period positively impacted revenue by 4.1% and 2.2%, 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 March 31,

Revenue by Service Provided

   

2024

   

2023

   

Mechanical Segment

$

1,185,009

   

77.1

%

$

918,615

   

78.2

%

Electrical Segment

352,007

22.9

%

256,025

21.8

%

Total

$

1,537,016

100.0

%

$

1,174,640

100.0

%

Three Months Ended March 31,

Revenue by Type of Customer

2024

2023

 

Manufacturing

$

461,400

30.0

%

$

366,356

31.2

%

Technology

464,814

30.2

%

226,249

19.3

%

Healthcare

133,729

8.7

%

159,815

13.5

%

Education

133,983

8.7

%

110,253

9.4

%

Office Buildings

101,892

6.6

%

98,195

8.4

%

Retail, Restaurants and Entertainment

80,585

5.2

%

76,194

6.5

%

Government

87,801

5.7

%

64,415

5.5

%

Multi-Family and Residential

40,851

2.7

%

45,007

3.8

%

Other

31,961

2.2

%

28,156

2.4

%

Total

$

1,537,016

100.0

%

$

1,174,640

100.0

%

Three Months Ended March 31,

Revenue by Activity Type

2024

2023

 

New Construction

$

898,976

58.5

%

$

627,952

53.5

%

Existing Building Construction

390,369

25.4

%

309,483

26.3

%

Service Projects

104,114

6.8

%

103,105

8.8

%

Service Calls, Maintenance and Monitoring

143,557

9.3

%

134,100

11.4

%

Total

$

1,537,016

100.0

%

$

1,174,640

100.0

%

Contract Assets and Liabilities

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 not considered to have a significant financing component, as they are intended to protect the customer in the event that we do not perform our obligations under the contract.

10

Contract liabilities consist of advance payments and billings in excess of revenue recognized. Advanced payments from customers related to work not yet started are classified as deferred revenue. Contract liabilities are not considered to have a significant financing component, as they are used to meet working capital requirements that are generally higher in the early stages of a contract and are intended to protect us from the other party failing to meet its obligations under the contract. Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period.

Contract assets and liabilities in the Consolidated Balance Sheet consisted of the following amounts as of March 31, 2024 and December 31, 2023 (in thousands):

March 31, 2024

December 31, 2023

Contract assets:

Costs and estimated earnings in excess of billings, less allowance for credit losses

$

30,118

$

28,084

Contract liabilities:

Billings in excess of costs and estimated earnings and deferred revenue

$

1,131,928

$

909,538

In the first three months of 2024 and 2023, we recognized revenue of $547.5 million and $341.9 million related to our contract liabilities at January 1, 2024 and January 1, 2023, respectively.

We did not have any impairment losses recognized on our receivables or contract assets in the first three months of 2024 and 2023.

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, 2024, the aggregate amount of the transaction price allocated to remaining performance obligations was $5.91 billion. The Company expects to recognize revenue on approximately 65-75% 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

At times, we use derivative instruments to manage exposure to market risk, including interest rate risk. Unsettled amounts under our interest rate swaps, if any, 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 Statement of Operations in “Interest Expense.” We currently do not have any derivatives that are accounted for as hedges under ASC 815.

Fair Value Measurement

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, 2024 and December 31, 2023 (in thousands):

Fair Value Measurements at March 31, 2024

    

Level 1

    

Level 2

    

Level 3

    

Total

Cash and cash equivalents

$

100,792

$

$

$

100,792

Life insurance—cash surrender value

$

$

7,721

$

$

7,721

Contingent earn-out obligations

$

$

$

71,296

$

71,296

Fair Value Measurements at December 31, 2023

    

Level 1

    

Level 2

    

Level 3

    

Total

Cash and cash equivalents

$

205,150

$

$

$

205,150

Life insurance—cash surrender value

$

$

7,473

$

$

7,473

Contingent earn-out obligations

$

$

$

44,222

$

44,222

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. 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. We believe the carrying values of our notes to former owners approximate their fair values due to the relatively short remaining terms on these notes.

We have life insurance policies covering 127 employees with a combined face value of $86.7 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 is 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, 2024, cash flows were discounted using a weighted average cost of capital ranging from 15.0% to 19.0%.

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, 2024

December 31, 2023

 

Balance at beginning of period

    

$

44,222

    

$

32,317

 

 

Issuances

 

51,784

 

4,315

Settlements

(37,201)

(16,017)

Adjustments to fair value

 

12,491

 

23,607

Balance at end of period

$

71,296

$

44,222

5. Acquisitions

Summit Industrial Construction, LLC Acquisition

On February 1, 2024, we acquired Summit Industrial Construction, LLC (“Summit”). Summit is headquartered in Houston, Texas and is a specialty industrial contractor offering engineering, design-assist and turnkey, direct hire

12

construction services of systems serving the advanced technology, power, and industrial sectors. As a result of the acquisition, Summit is a wholly owned subsidiary of the Company reported in our mechanical segment.

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

Consideration transferred:

Cash paid at closing

$

267,500

Working capital adjustment

14,595

Notes issued to former owners

35,000

Estimated fair value of contingent earn-out payments

42,732

$

359,827

Recognized amounts of identifiable assets acquired and liabilities assumed:

Cash and cash equivalents

$

171,027

Billed and unbilled accounts receivable

59,921

Prepaid expenses and other

1,476

Cost and estimated earnings in excess of billings

578

Property and equipment

2,528

Lease right-of-use asset

2,365

Goodwill

155,220

Identifiable intangible assets

170,100

Other noncurrent assets

136

Accounts payable

(15,138)

Billings in excess of costs and estimated earnings and deferred revenue

(179,895)

Current operating lease liabilities

(1,495)

Accrued expenses and other current liabilities

(6,243)

Long-term operating lease liabilities

(753)

$

359,827

The allocation of the purchase price to the assets acquired and liabilities assumed is preliminary and, therefore, subject to change pending the completion of the final valuation of intangible assets and accrued liabilities. Goodwill represents the future economic benefits arising from other assets acquired that cannot be individually identified and separately recognized. The goodwill recognized as a result of the Summit acquisition is deductible for tax purposes.

In estimating the fair value of the acquired intangible assets, we utilized the valuation methodology determined to be the most appropriate for the individual intangible asset. In order to estimate the fair value of the backlog and customer relationships, we utilized an excess earnings methodology, which consisted of the projected cash flows attributable to these assets discounted to present value using a risk-adjusted discount rate that represented the required rate of return. The trade name value was determined based on the relief-from-royalty method, which applies a royalty rate to the revenue stream attributable to this asset, and the resulting royalty payment is tax effected and discounted to present value. Some of the more significant estimates and assumptions inherent in determining the fair value of the identifiable intangible assets are associated with forecasting cash flows and profitability, which represent Level 3 inputs. The primary assumptions used were generally based upon the present value of anticipated cash flows discounted at rates ranging from 18.5% to 20.5%. Estimated years of projected earnings generally follow the range of estimated remaining useful lives for each intangible asset class.

The acquired intangible assets include the following (dollars in thousands):

Valuation Method

Estimated Useful Life

Estimated Fair Value

Backlog

Excess earnings

1.8 years

$

35,800

Trade Name

Relief-from-royalty

22.9 years

11,300

Customer Relationships

Excess earnings

10 years

123,000

Total

$

170,100

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The contingent earn-out obligation is associated with the achievement of four earnings milestones over a 47-month period, and the range of each estimated milestone payment is $2.6 million to $20.5 million. We determined the initial fair value of the contingent earn-out obligation based on the Monte Carlo Simulation method, which represents a Level 3 measurement.  Cash flows were discounted using discount rates ranging from 18.2% to 19.5%, which we believe is appropriate and representative of a market participant assumption.  Subsequent to the acquisition date, the contingent earn-out obligation is remeasured at fair value each reporting period.  Changes in the estimated fair value of the contingent payments subsequent to the acquisition date are recognized immediately in earnings.

J & S Mechanical Contractors, Inc. Acquisition

On February 1, 2024, we acquired all of the issued and outstanding shares of capital stock of J & S Mechanical Contractors, Inc. (“J&S”). J&S is headquartered in West Jordan, Utah, and provides mechanical construction services to commercial and industrial sectors, specializing in data center HVAC systems and hospital medical gas systems. As a result of the acquisition, J&S is a wholly owned subsidiary of the Company reported in our mechanical segment.

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

Consideration transferred:

Cash paid at closing

$

100,000

Working capital adjustment

1,531

Notes issued to former owners

10,000

Estimated fair value of contingent earn-out payments

9,052

$

120,583

Recognized amounts of identifiable assets acquired and liabilities assumed:

Cash and cash equivalents

$

14,802

Billed and unbilled accounts receivable

38,411

Inventory

230

Prepaid expenses and other

326

Costs and estimated earnings in excess of billings

728

Property and equipment

2,674

Lease right-of-use asset

4,552

Goodwill

40,680

Identifiable intangible assets

63,300

Other noncurrent assets

10

Accounts payable

(20,612)

Billings in excess of costs and estimated earnings and deferred revenue

(19,188)

Current operating lease liabilities

(133)

Accrued expenses and other current liabilities

(826)

Long-term debt

(59)

Long-term operating lease liabilities

(4,312)

$

120,583

The allocation of the purchase price to the assets acquired and liabilities assumed is preliminary and, therefore, subject to change pending the completion of the final valuation of intangible assets and accrued liabilities. Goodwill represents the future economic benefits arising from other assets acquired that cannot be individually identified and separately recognized. The goodwill recognized as a result of the J&S acquisition is deductible for tax purposes.

In estimating the fair value of the acquired intangible assets, we utilized the valuation methodology determined to be the most appropriate for the individual intangible asset. In order to estimate the fair value of the backlog and customer relationships, we utilized an excess earnings methodology, which consisted of the projected cash flows attributable to these assets discounted to present value using a risk-adjusted discount rate that represented the required rate of return. The trade name value was determined based on the relief-from-royalty method, which applies a royalty rate to the revenue stream attributable to this asset, and the resulting royalty payment is tax effected and discounted to

14

present value. Some of the more significant estimates and assumptions inherent in determining the fair value of the identifiable intangible assets are associated with forecasting cash flows and profitability, which represent Level 3 inputs. The primary assumptions used were generally based upon the present value of anticipated cash flows discounted at rates ranging from 15.5% to 17.0%. Estimated years of projected earnings generally follow the range of estimated remaining useful lives for each intangible asset class.

The acquired intangible assets include the following (dollars in thousands):

    

    

Estimated

    

Estimated

    

Valuation Method

    

Useful Life

    

Fair Value

Backlog

 

Excess earnings

 

1.8 years

$

12,900

Trade Name

 

Relief-from-royalty

 

22 years

 

10,600

Customer Relationships

 

Excess earnings

 

9 years

39,800

Total

$

63,300

The contingent earn-out obligation is associated with the achievement of three earnings milestones over a 35-month period, and the range of each estimated milestone payment is $1.1 million to $4.7 million. We determined the initial fair value of the contingent earn-out obligation based on the Monte Carlo Simulation method, which represents a Level 3 measurement.  Cash flows were discounted using a range of discount rates ranging from 15.4% to 16.5%, which we believe is appropriate and representative of a market participant assumption.  Subsequent to the acquisition date, the contingent earn-out obligation is remeasured at fair value each reporting period.  Changes in the estimated fair value of the contingent payments subsequent to the acquisition date are recognized immediately in earnings.

Other Acquisitions

On October 2, 2023, we acquired all of the issued and outstanding shares of capital stock of DECCO, Inc. (“DECCO”), headquartered in Nashua, New Hampshire, for a total preliminary purchase price of $59.8 million, which included $48.8 million of cash paid on the closing date, $7.0 million in notes payable to the former owners, an earn-out that will be paid if certain financial targets are met after the acquisition date and a working capital adjustment. DECCO operates in the Northeastern United States and performs mechanical and plumbing services with specialties in piping systems, steam, power, biotechnical processes and conveying systems, in addition to turnkey tool and equipment installation, critical equipment handling services and associated maintenance and support services. As a result of the acquisition, DECCO is a wholly owned subsidiary of the Company reported in our mechanical segment.

On February 1, 2023, we acquired all of the issued and outstanding shares of capital stock of Eldeco, Inc. (“Eldeco”), headquartered in South Carolina, for a total purchase price of $74.0 million, which included $60.8 million of cash paid on the closing date, $8.0 million in notes payable to the former owners, an earn-out that will be paid if certain financial targets are met after the acquisition date and a working capital adjustment. Eldeco performs electrical design and construction services in the Southeastern region of the United States. As a result of the acquisition, Eldeco is a wholly owned subsidiary of the Company reported in our electrical 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.

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6. Goodwill and Identifiable Intangible Assets, Net

Goodwill

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

    

Mechanical Segment

    

Electrical Segment

Total

 

Balance at December 31, 2022

$

363,929

$

247,860

$

611,789

Acquisitions and purchase price adjustments (See Note 5)

 

29,347

25,698

55,045

Balance at December 31, 2023

393,276

273,558

666,834

Acquisitions and purchase price adjustments (See Note 5)

195,900

200

196,100

Balance at March 31, 2024

$

589,176

$

273,758

$

862,934

Identifiable Intangible Assets, Net

At March 31, 2024, future amortization expense of identifiable intangible assets is as follows (in thousands):

Year ending December 31—