COMFORT SYSTEMS USA INC [FIX] Filings

10-Q 1 fix-20240331x10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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

For the quarterly period ended March 31, 2024


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

Commission file number: 1-13011

COMFORT SYSTEMS USA, INC.

(Exact name of registrant as specified in its charter)

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

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

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


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

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

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

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

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

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

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

The number of shares outstanding of the issuer’s common stock as of April 19, 2024 was 35,721,909 (excluding treasury shares of 5,401,456).

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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

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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.

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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.

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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.

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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.

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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

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

Revenue Recognition

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

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

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

Accounts Receivable and Allowance for Credit Losses

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

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

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

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

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Unbilled Accounts Receivable

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

Income Taxes

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

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

In early September 2023, the IRS issued interim guidance addressing, together with other topics, the treatment of research and experimental (“R&E”) expenditures for taxpayers using the percentage of completion method to account for taxable income from long-term contracts. We have chosen to rely on such guidance beginning with the 2022 tax year, and the resultant reduction in taxable revenue offsets the deferral of tax deductions for R&E expenditures pursuant to the Tax Cuts and Jobs Act (2017) for the 2022 tax year. We filed our 2022 federal tax return in October 2023 requesting a refund of our $107.1 million overpayment, which 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.

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

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

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

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

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

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

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

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

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.

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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.

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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

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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.


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

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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—
2024 (remainder of the year)	$	71,121
2025		63,532
2026		52,948
2027		50,967
2028		50,806
Thereafter		200,510
Total	$	489,884

7. Debt Obligations

Debt obligations consist of the following (in thousands):


	March 31,		December 31,
	2024		2023
Revolving credit facility	$	—	$	—
Notes to former owners		89,070		44,070
Other debt		819		142
Total debt		89,889		44,212
Less—current portion		(12,885)		(4,867)
Total long-term portion of debt	$	77,004	$	39,345

Revolving Credit Facility

We have an $850.0 million senior credit facility (the “Facility”) provided by a syndicate of banks, which is composed of a revolving credit line guaranteed by certain of our subsidiaries. The Facility also provides for an accordion or increase option not to exceed the greater of (a) $250 million and (b) 1.0x Credit Facility Adjusted EBITDA (as defined below), as well as a sublimit of up to $175.0 million issuable in the form of letters of credit. The Facility expires in July 2027 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 the equity of, 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, 2024, we had no outstanding borrowings on the revolving credit facility, $81.2 million in letters of credit outstanding and $768.8 million of credit available.

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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:


	Net Leverage Ratio
	Less than 1.00		1.00 to less than 1.75		1.75 to less than 2.50		2.50 to less than 3.00		3.00 or greater
Additional Per Annum Interest Margin Added Under:
Base Rate Loan Option	0.00	%	0.25	%	0.50	%	0.75	%	1.00	%
SOFR Loan Option	1.00	%	1.25	%	1.50	%	1.75	%	2.00	%

There were no outstanding borrowings on the revolving credit facility as of March 31, 2024 and December 31, 2023.

Certain of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on our behalf, such as to beneficiaries under our self-funded insurance programs. We have also occasionally used letters of credit to guarantee performance under our contracts and to ensure payment to our subcontractors and vendors under those contracts. Our lenders issue such letters of credit through the Facility. A letter of credit commits the lenders to pay specified amounts to the holder of the letter of credit if the holder demonstrates that we have failed to perform specified actions. If this were to occur, we would be required to reimburse the lenders for amounts they fund to honor the letter of credit holder’s claim. Absent a claim, there is no payment or reserving of funds by us in connection with a letter of credit. However, because a claim on a letter of credit would require immediate reimbursement by us to our lenders, letters of credit are treated as a use of Facility capacity. The letter of credit fees range from 1.00% to 2.00% per annum, based on the Net Leverage Ratio.

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 0.15% to 0.25% per annum, based on the Net Leverage Ratio.

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, 2024.

Notes to Former Owners

As part of the consideration used to acquire ten companies, we have outstanding notes to the former owners. Together, these notes had an outstanding balance of $89.1 million as of March 31, 2024. At March 31, 2024, future principal payments of notes to former owners by maturity year are as follows (dollars in thousands):


	Balance at		Range of Stated
	March 31, 2024		Interest Rates
2024	$	4,800	2.5	%
2025		21,645	2.3 - 3.0	%
2026		31,625	2.5 - 5.5	%
2027		26,000	5.5	%
2028		5,000	5.5	%
Total	$	89,070

8. Leases

We lease certain facilities, vehicles and equipment primarily under noncancelable operating leases. The most significant portion of these noncancelable operating leases is for the facilities occupied by our corporate office and our operating locations. Leases with an initial term of 12 months or less are not recorded in the Consolidated Balance Sheet. We do not separate lease 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 short-term leases on equipment and facilities. Variable lease expense and short-term lease expense aggregated to $17.9 million and $10.2 million in the first

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three months of 2024 and 2023, respectively. These expenses were primarily related to short-term equipment rentals. 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 March 31, 2024 and December 31, 2023 was 6.0% and 5.8%, respectively. 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, 2024 and 2023 was $28.2 million and $17.3 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. In the third quarter of 2023, we commenced two large real estate leases to support our expected growth in off-site construction, with lease terms longer than our typical terms. The weighted average remaining lease term for our operating leases was 11.5 years at March 31, 2024 and 10.9 years at December 31, 2023.

A majority of the Company’s real property leases are with individuals or entities with whom we have no other business relationship. However, in certain instances the Company enters into real property leases with current or former employees. Rent paid to related parties for the three months ended March 31, 2024 and 2023 was approximately $2.1 million and $2.0 million, respectively.

If we decide to cancel or terminate a lease before the end of its term, we would typically owe the lessor the remaining lease payments under the term of the lease. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. On rare occasions, we rent or sublease certain real estate assets that we no longer use to third parties.

The following table summarizes the operating lease assets and liabilities included in the Consolidated Balance Sheet as follows (in thousands):



	March 31, 2024		December 31, 2023
Operating lease right-of-use assets	$	227,157	$	205,712
Operating lease liabilities:
Other current liabilities	$	26,130	$	24,426
Long-term operating lease liabilities		209,717		188,136
Total operating lease liabilities	$	235,847	$	212,562

The maturities of operating lease liabilities are as follows (in thousands):


Year ending December 31—
2024 (excluding the three months ended March 31, 2024)	$	29,282
2025		36,864
2026		33,144
2027		28,915
2028		25,252
Thereafter		183,669
Total lease payments		337,126
Less—present value discount		(101,279)
Present value of operating lease liabilities	$	235,847

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Supplemental information related to operating leases was as follows (in thousands):


	Three Months Ended March 31,
	2024		2023
Cash paid for amounts included in the measurement of operating lease liabilities	$	9,466	$	7,024
Operating lease right-of-use assets obtained in exchange for lease liabilities	$	29,426	$	9,446

9. Commitments and Contingencies

Claims and Lawsuits

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

In the first quarter of 2023, we recorded a pre-tax gain of $6.8 million from legal developments and settlements that primarily relate to disputes with customers regarding the outcome of completed projects as well as an obligation to perform subcontract work under two executed letters of intent for subsequent projects that we believed were not enforceable. The pre-tax gain of $6.8 million was recorded as an increase in gross profit of $6.6 million, a reduction in SG&A of $0.7 million, an increase in interest income of $1.3 million and an increase in the change in fair value of contingent earn-out obligations expense of $1.8 million in our Consolidated Statements of Operations.

As of March 31, 2024, we recorded an accrual for unresolved matters, which is not material to our financial statements, based on our analysis of likely outcomes related to the respective matters; however, it is possible that the ultimate outcome and associated costs will deviate from our estimates and that, in the event of an unexpectedly adverse outcome, we may experience additional costs and expenses in future periods.

Surety

Many customers, particularly in connection with new construction, require us to post performance and payment bonds issued by a financial institution known as a surety. If we fail to perform under the terms of a contract or to pay subcontractors and vendors who provided goods or services under a contract, the customer may demand that the surety make payments or provide services under the bond. We must reimburse the surety for any expenses or outlays it incurs.

Current market conditions for surety markets and bonding capacity are adequate, with acceptable terms and conditions. Historically, approximately 10% to 20% of our business has required bonds. While we currently have strong surety relationships to support our bonding needs, future market conditions or changes in the sureties’ assessment of our operating and financial risk could cause the sureties to decline to issue bonds for our work. If that were to occur, the alternatives include doing more business that does not require bonds, posting other forms of collateral for project performance, such as letters of credit or cash, and seeking bonding capacity from other sureties. We would likely also encounter concerns from customers, suppliers and other market participants as to our creditworthiness. While we believe our general operating and financial characteristics would enable us to ultimately respond effectively to an interruption in the availability of bonding capacity, such an interruption would likely cause our revenue and profits to decline in the near term.

Self-Insurance

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

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longer-developing risks, such as workers’ compensation, auto liability and general liability, are reviewed by a third-party actuary quarterly.

10. Stockholders’ Equity

Earnings Per Share

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

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

There were zero anti-dilutive stock options excluded from the calculation of diluted EPS for the three months ended March 31, 2024 and 2023.

The following table reconciles the number of shares outstanding with the number of shares used in computing basic and diluted earnings per share for each of the periods presented (in thousands):


	Three Months Ended
	March 31,
	2024	2023
Common shares outstanding, end of period	35,695	35,752
Effect of using weighted average common shares outstanding	44	60
Shares used in computing earnings per share—basic	35,739	35,812
Effect of shares issuable under stock option plans based on the treasury stock method	29	26
Effect of restricted and contingently issuable shares	60	69
Shares used in computing earnings per share—diluted	35,828	35,907

Share Repurchase Program

On March 29, 2007, our Board of Directors (the “Board”) approved a stock repurchase program to acquire up to 1.0 million shares of our outstanding common stock. Subsequently, the Board has from time to time increased the number of shares that may be acquired under the program and approved extensions of the program. Since the inception of the repurchase program, the Board has approved 10.9 million shares to be repurchased. As of March 31, 2024, we have repurchased a cumulative total of 10.3 million shares at an average price of $26.29 per share under the repurchase program.

The share repurchases will be made from time to time at our discretion in the open market or privately negotiated transactions, as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. The Board may modify, suspend, extend or terminate the program at any time. During the three months ended March 31, 2024, we repurchased less than 0.1 million shares for approximately $0.3 million at an average price of $196.89 per share.

11. Segment Information

Our activities are within the mechanical services industry and the electrical services industry, which represent our two reportable segments. We aggregate our operating segments into two reportable segments, as the operating

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segments meet all of the aggregation criteria. The following tables present information about our reportable segments (in thousands):



	Three Months Ended March 31, 2024
	Mechanical Segment		Electrical Segment		Corporate		Consolidated
Revenue	$	1,185,009	$	352,007	$	—	$	1,537,016
Gross Profit	$	217,712	$	79,651	$	—	$	297,363

	Three Months Ended March 31, 2023
	Mechanical Segment		Electrical Segment		Corporate		Consolidated
Revenue	$	918,615	$	256,025	$	—	$	1,174,640
Gross Profit	$	164,067	$	41,338	$	—	$	205,405

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

The following discussion and analysis should be read in conjunction with our historical Consolidated Financial Statements and related notes included elsewhere in this Form 10-Q and the Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2023 (the “Form 10-K”). This discussion contains “forward-looking statements” regarding our business and industry within the meaning of applicable securities laws and regulations. These statements are based on our current plans and expectations and involve risks and uncertainties that could cause our actual future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual results to differ include risks set forth in “Item 1A. Risk Factors” included in our Form 10-K. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. 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.

Introduction and Overview

We are a national provider of comprehensive mechanical and electrical installation, renovation, maintenance, repair and replacement services within the mechanical and electrical services industries. We operate primarily in the commercial, industrial and institutional markets and perform most of our work in manufacturing, healthcare, education, office, technology, retail and government facilities. We operate our business in two business segments: mechanical and electrical.

Nature and Economics of Our Business

In our mechanical business segment, customers hire us to ensure HVAC systems deliver specified or generally expected heating, cooling, conditioning and circulation of air in a facility. This entails installing core system equipment such as packaged heating and air conditioning units, or in the case of larger facilities, separate core components such as chillers, boilers, air handlers, and cooling towers. We also typically install connecting and distribution elements such as piping and ducting.

In our electrical business segment, our principal business activity is electrical construction and engineering in the commercial and industrial field. We also perform electrical logistics services, electrical service work, and electrical construction and engineering services.

In both our mechanical and electrical business segments, our responsibilities usually require conforming the systems to pre-established engineering drawings and equipment and performance specifications, which we frequently participate in establishing. Our project management responsibilities include staging equipment and materials to project sites, deploying labor to perform the work, and coordinating with other service providers on the project, including any subcontractors we might use to deliver our portion of the work.

Approximately 90.7% of our revenue is earned on a project basis for installation services in newly constructed facilities or for replacement of systems in existing facilities. When competing for project business, we usually estimate the costs we will incur on a project, and then propose a bid to the customer that includes a contract price and other performance and payment terms. Our bid price and terms are intended to cover our estimated costs on the project and provide a profit margin to us commensurate with the value of the installed system to the customer, the risk that project costs or duration will vary from estimate, the schedule on which we will be paid, the opportunities for other work that we might forego by committing capacity to this project, and other costs that we incur to support our operations but which are not specific to the project. Typically, customers will seek pricing from competitors for a given project. While the criteria on which customers select a provider vary widely and include factors such as quality, technical expertise, on-time performance, post-project support and service, and company history and financial strength, we believe that price for value is the most influential factor for most customers in choosing a mechanical or electrical installation and service provider.

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After a customer accepts our bid, we generally enter into a contract with the customer that specifies what we will deliver on the project, what our related responsibilities are and how much and when we will be paid. Our overall price for the project is typically set at a fixed amount in the contract, although changes in project specifications or work conditions that result in unexpected additional work are usually subject to additional payment from the customer via what are commonly known as change orders. Project contracts typically provide for periodic billings to the customer as we meet progress milestones or incur cost on the project. Project contracts in our industry also frequently allow for a small portion of progress billings or contract price to be withheld by the customer until after we have completed the work. Amounts withheld under this practice are known as retention or retainage.

Labor, materials and overhead costs account for the majority of our cost of service. Accordingly, labor management and utilization have the most impact on our project performance. Given the fixed price nature of much of our project work, if our initial estimate of project costs is wrong or we incur cost overruns that cannot be recovered in change orders, we can experience reduced profits or even significant losses on fixed price project work. We also perform some project work on a cost-plus or a time and materials basis, under which we are paid our costs incurred plus an agreed-upon profit margin, and such projects are sometimes subject to a guaranteed maximum cost. These margins are frequently less than fixed-price contract margins because there is less risk of unrecoverable cost overruns in cost-plus or time and materials work.

As of March 31, 2024, we had 8,668 projects in process. Our average project takes six to nine months to complete, with an average contract price of approximately $1.6 million. Our projects generally require working capital funding of equipment and labor costs. Customer payments on periodic billings generally do not recover these costs until late in the job. Our average project duration, together with typical retention terms as discussed above, generally allow us to complete the realization of revenue and earnings in cash within one year. We have what we consider to be a well-diversified distribution of revenue across end-use sectors that we believe reduces our exposure to negative developments in any given sector. Because of the integral nature of our services to most buildings, we have the legal right in almost all cases to attach liens to buildings or related funding sources when we have not been fully paid for installing systems, except with respect to some government buildings. The service work that we do, which is discussed further below, usually does not give rise to lien rights.

We also perform larger projects. Taken together, projects with contract prices of $2 million or more totaled $12.1 billion of aggregate contract value as of March 31, 2024, or approximately 88% of a total contract value for all projects in progress, totaling $13.7 billion. Generally, projects closer in size to $2 million will be completed in one year or less. It is unusual for us to work on a project that exceeds two years in length.

A stratification of projects in progress as of March 31, 2024, by contract price, is as follows:


		Aggregate
		Contract
	No. of	Price Value
Contract Price of Project	Projects	(millions)
Under $2 million	7,639	$	1,608.7
$2 million - $10 million	739		3,359.5
$10 million - $20 million	134		1,902.9
$20 million - $40 million	97		2,773.7
Greater than $40 million	59		4,023.4
Total	8,668	$	13,668.2

In addition to project work, approximately 9.3% of our revenue represents maintenance and repair service on already installed HVAC, electrical, and controls systems. This kind of work usually takes from a few hours to a few days to perform. Prices to the customer are based on the equipment and materials used in the service as well as technician labor time. We usually bill the customer for service work when it is complete, typically with payment terms of up to thirty days. We also provide maintenance and repair service under ongoing contracts. Under these contracts, we are paid regular monthly or quarterly amounts and provide specified service based on customer requirements. These agreements typically are for one or more years and frequently contain thirty- to sixty-day cancellation notice periods.

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A relatively small portion of our revenue comes from national and regional account customers. These customers typically have multiple sites and contract with us to perform maintenance and repair service. These contracts may also provide for us to perform new or replacement systems installation. We operate a national call center to dispatch technicians to sites requiring service. We perform the majority of this work with our own employees, with the balance being subcontracted to third parties that meet our performance qualifications.

Profile and Management of Our Operations

We manage our 47 operating units based on a variety of factors. Financial measures we emphasize include profitability and use of capital as indicated by cash flow and by other measures of working capital principally involving project cost, billings and receivables. We also monitor selling, general, administrative and indirect project support expense, backlog, workforce size and mix, growth in revenue and profits, variation of actual project cost from original estimate, and overall financial performance in comparison to budget and updated forecasts. Operational factors we emphasize include project selection, estimating, pricing, safety, management and execution practices, labor utilization, training, and the make-up of both existing backlog as well as new business being pursued, in terms of project size, technical application, facility type, end-use customers and industries and location of the work.

Most of our operations compete on a local or regional basis. Attracting and retaining effective operating unit managers is an important factor in our business, particularly in view of the relative uniqueness of each market and operation, the importance of relationships with customers and other market participants, such as architects and consulting engineers, and the high degree of competition and low barriers to entry in most of our markets. Accordingly, we devote considerable attention to operating unit management quality, stability, and contingency planning, including related considerations of compensation and non-competition protection where applicable.

Economic and Industry Factors

As a mechanical and electrical services provider, we operate in the broader nonresidential construction services industry and are affected by trends in this sector. While we do not have operations in all major cities of the United States, we believe our national presence is sufficiently large that we experience trends in demand for and pricing of our services that are consistent with trends in the national nonresidential construction sector. As a result, we monitor the views of major construction sector forecasters along with macroeconomic factors they believe drive the sector, including trends in gross domestic product, interest rates, business investment, employment, demographics and the fiscal condition of federal, state and local governments.

Spending decisions for building construction, renovation and system replacement are generally made on a project basis, usually with some degree of discretion as to when and if projects proceed. With larger amounts of capital, time, and discretion involved, spending decisions are affected to a significant degree by uncertainty, particularly concerns about economic and financial conditions and trends. We have experienced periods of time when economic weakness caused a significant slowdown in decisions to proceed with installation and replacement project work.

Operating Environment and Management Emphasis

In 2020, the advent of a global pandemic led to some delays in service and construction, including delayed project starts and air pockets or pauses during 2020 and 2021. We experienced increasing demand in 2022 and 2023, and we expect that the demand environment, especially for industrial and technology customers, will remain at high levels in 2024. Although we have largely recovered from negative impacts caused by the COVID-19 pandemic, we continue to experience increased labor costs, supply constraints and cost increases, and delays in delivery of various materials and equipment. We expect that constraints and delays will continue to abate in 2024; however, we anticipate that pressure on cost and availability, especially for skilled labor, will continue throughout 2024.

We have a credit facility in place with terms we believe are favorable that does not expire until July 2027. As of March 31, 2024, we had $768.8 million of credit available to borrow under our credit facility. We have strong surety relationships to support our bonding needs, and we believe our relationships with the surety markets are strong and benefit from our operating history and financial position. We have generated positive free cash flow in each of the last twenty-five calendar years and will continue our emphasis in this area. We believe that the relative size and strength of

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our Balance Sheet and surety relationships, as compared to most companies in our industry, represent competitive advantages for us.

As discussed at greater length in “Results of Operations” below, we expect price competition to continue as local and regional industry participants compete for customers. We will continue to invest in our service business, to pursue the more active sectors in our markets, and to emphasize our regional and national account business.

Cyclicality and Seasonality

The construction industry is subject to business cycle fluctuation. As a result, our volume of business, particularly in new construction projects and renovation, may be adversely affected by declines in new installation and replacement projects in various geographic regions of the United States during periods of economic weakness.

The mechanical and electrical contracting industries are also subject to seasonal variations. The demand for new installation and replacement is generally lower during the winter months (the first quarter of the year) due to reduced construction activity during inclement weather and less use of air conditioning during the colder months. Demand for our services is generally higher in the second and third calendar quarters due to increased construction activity and increased use of air conditioning during the warmer months. Accordingly, we expect our revenue and operating results generally will be lower in the first calendar quarter.

Critical Accounting Estimates

Management believes that there have been no significant changes during the three months ended March 31, 2024, to the items that we disclosed as our "Critical Accounting Estimates" in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. A summary of significant accounting policies and a summary of recent accounting pronouncements applicable to our Consolidated Financial Statements are included in Note 2 “Summary of Significant Accounting Policies and Estimates.”

Results of Operations (dollars in thousands):


	Three Months Ended March 31,
	2024				2023
Revenue	$	1,537,016	100.0	%	$	1,174,640	100.0	%
Cost of services		1,239,653	80.7	%		969,235	82.5	%
Gross profit		297,363	19.3	%		205,405	17.5	%
Selling, general and administrative expenses		162,723	10.6	%		135,032	11.5	%
Gain on sale of assets		(820)	(0.1)	%		(512)	—
Operating income		135,460	8.8	%		70,885	6.0	%
Interest income		1,603	0.1	%		1,397	0.1	%
Interest expense		(1,633)	(0.1)	%		(4,076)	(0.3)	%
Changes in the fair value of contingent earn-out obligations		(12,491)	(0.8)	%		(2,382)	(0.2)	%
Other income (expense)		117	—			1	—
Income before income taxes		123,056	8.0	%		65,825	5.6	%
Provision for income taxes		26,737				8,609
Net income	$	96,319	6.3	%	$	57,216	4.9	%

We had 44 operating locations as of December 31, 2023. In the first quarter of 2024, we split one of our operating locations into two separate operating locations. Additionally, we completed the acquisitions of Summit Industrial Construction, LLC (“Summit”) and J & S Mechanical Contractors, Inc. (“J&S”), which both report as separate operating locations. We had 47 operating locations as of March 31, 2024. Acquisitions are included in our results of operations from the respective acquisition date. The same-store comparison from 2024 to 2023, as described below, excludes Summit, which was acquired on February 1, 2024, J&S, which was acquired on February 1, 2024, DECCO, Inc. (“DECCO”), which was acquired on October 2, 2023, and one month of results for Eldeco, Inc (“Eldeco”), which was acquired on February 1, 2023. An operating location is included in the same-store comparison on the first day it has

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comparable prior year operating data, except for immaterial acquisitions that are often absorbed and integrated with existing operations.

Revenue—Revenue for the first quarter of 2024 increased $362.4 million, or 30.8%, to $1.54 billion compared to the same period in 2023. The increase included a 22.7% increase in revenue related to same-store activity and an 8.1% increase related to the Summit, J&S, DECCO, and Eldeco acquisitions. The same-store revenue growth was largely driven by strong market conditions, including the increase in our backlog. The increase in demand has been particularly strong in the technology and manufacturing sectors, particularly for data centers, chip plants, food and pharmaceuticals.

The following table presents our operating segment revenue (in thousands, except percentages):


	Three Months Ended March 31,
	2024				2023
Revenue:
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	%

Revenue for our mechanical segment increased $266.4 million, or 29.0%, to $1,185.0 million for the first quarter of 2024 compared to the same period in 2023. Of this increase, $87.5 million resulted from the acquisition of Summit, J&S, and DECCO, and $178.9 million was attributable to same-store activity. The same-store revenue increase primarily resulted from an increase in activity in the technology sector at one of our Texas operations ($44.0 million), at another one of our Texas operations ($41.2 million), at our North Carolina operation ($24.5 million) and in the Technology and Manufacturing sectors at one of our Virginia operations ($24.8 million).

Revenue for our electrical segment increased $96.0 million, or 37.5%, to $352.0 million for the first quarter of 2024 compared to the same period in 2023. The increase primarily resulted from an increase in activity in the technology sector at our Texas electrical operation ($38.8 million) and in the manufacturing sector at our North Carolina electrical operation ($29.9 million).

Backlog reflects revenue still to be recognized under contracted or committed installation and replacement project work. Project work generally lasts less than one year. Service agreement revenue, service work and short duration projects, which are generally billed as performed, do not flow through backlog. Accordingly, backlog represents only a portion of our revenue for any given future period, and it represents revenue that is likely to be reflected in our operating results over the next six to twelve months. As a result, we believe the predictive value of backlog information is limited to indications of general revenue direction over the near term, and should not be interpreted as indicative of ongoing revenue performance over several quarters.

The following table presents our operating segment backlog (in thousands, except percentages):


	March 31, 2024				December 31, 2023				March 31, 2023
Backlog:
Mechanical Segment	$	4,627,294	78.3	%	$	4,027,927	78.1	%	$	3,423,767	77.0	%
Electrical Segment		1,284,354	21.7	%		1,129,449	21.9	%		1,021,177	23.0	%
Total	$	5,911,648	100.0	%	$	5,157,376	100.0	%	$	4,444,944	100.0	%

Backlog as of March 31, 2024 was $5.91 billion, a 14.6% increase from December 31, 2023 backlog of $5.16 billion, and a 33.0% increase from March 31, 2023 backlog of $4.44 billion. The sequential backlog increase included the acquisitions of Summit ($440.9 million) and J&S ($171.7 million) as well as a same-store increase of $141.7 million, or 2.7%. The same-store sequential backlog increase was primarily a result of an increase in project bookings at our Texas electrical operation ($170.0 million). The sequential backlog increase was partially offset by completion of project work at one of our Texas operations ($136.1 million). The year-over-year backlog increase included the acquisitions of Summit ($440.9 million), J&S ($171.7 million) and DECCO ($52.1 million) as well as a same-store increase of $802.0 million, or 18.0%. Same-store year-over-year backlog growth was primarily attributable to increased project bookings at one of our Virginia operations ($185.0 million), our Texas electrical operation ($164.3

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million), our North Carolina operations ($101.9 million), one of our Tennessee operations ($79.4 million) and one of our South Carolina operations ($78.8 million).

Gross Profit—Gross profit increased $92.0 million, or 44.8%, to $297.4 million for the first quarter of 2024 as compared to the same period in 2023. The increase included a $4.8 million, or 2.4%, increase related to the Summit, J&S, DECCO, and Eldeco acquisitions, as well as a 42.4% increase in same-store activity. The same-store increase in gross profit was driven by both higher revenues in the current year as well as improved execution in our operations. We had increased volumes at our North Carolina operations ($15.4 million) and we achieved improvements in project execution at our Texas electrical operation ($22.8 million) and another one of our Texas operations ($18.3 million). These increases were partially offset by an increase in the first quarter of 2023 of $6.6 million in gross profit related to positive developments on legal matters, which did not recur in 2024. As a percentage of revenue, gross profit for the first quarter increased from 17.5% in 2023 to 19.3% in 2024, primarily due to the factors discussed above and improvements in our electrical segment gross profit margin.

Selling, General and Administrative Expenses (“SG&A”)—SG&A increased $27.7 million, or 20.5%, to $162.7 million for the first quarter of 2024 as compared to 2023. On a same-store basis, excluding amortization expense, SG&A increased $18.7 million, or 14.9%. The same-store increase is primarily due to higher same-store revenue and increased compensation costs ($13.7 million), largely attributable to increased headcount. Amortization expense increased $3.3 million during the period, primarily as a result of the Summit, J&S, DECCO and Eldeco acquisitions. As a percentage of revenue, SG&A for the first quarter decreased from 11.5% in 2023 to 10.6% in 2024 due to leverage resulting from the increase in revenue.

We have included same-store SG&A, excluding amortization, because we believe it is an effective measure of comparative results of operations. However, same-store SG&A, excluding amortization, is not considered under generally accepted accounting principles to be a primary measure of an entity’s financial results, and accordingly, should not be considered an alternative to SG&A as shown in our consolidated statements of operations.


	Three Months Ended
	March 31,
	2024		2023

	(in thousands)
SG&A	$	162,723	$	135,032
Less: SG&A from companies acquired		(5,684)		—
Less: Amortization expense		(12,609)		(9,295)
Same-store SG&A, excluding amortization expense	$	144,430	$	125,737

Interest Expense—Interest expense decreased $2.4 million, or 59.9%, to $1.6 million for the first quarter of 2024 as compared to the same period in 2023. The decrease in interest expense for the first quarter of 2024 is due to a decrease in our average outstanding debt balance compared to the prior year.

Changes in the Fair Value of Contingent Earn-out Obligations—The contingent earn-out obligations are measured at fair value each reporting period, and changes in estimates of fair value are recognized in earnings. Expense from changes in the fair value of contingent earn-out obligations for the first quarter of 2024 increased $10.1 million as compared to the same period in 2023. The increase in earn-out expense was primarily driven by higher actual and projected earning at Summit and J&S. Expense or income from changes in earn-out valuations may be more volatile in future periods due to large earn-out agreements for acquisitions that closed in the first quarter of 2024.

Provision for Income Taxes—Our provision for income taxes for the three months ended March 31, 2024 was $26.7 million with an effective tax rate of 21.7% as compared to a provision for income taxes of $8.6 million with an effective tax rate of 13.1% for the same period in 2023. The effective tax rate for 2024 was slightly higher than the 21% federal statutory rate primarily due to net state income taxes (3.7%) and nondeductible expenses (1.6%) partially offset by the credit for increasing research activities (the “R&D tax credit”) (4.4%). The effective tax rate for 2023 was lower than the 21% federal statutory rate primarily due to the R&D tax credit (9.7%) and an increase in the R&D tax credit for the 2022 tax year (5.1%). These R&D tax credit benefits were partially offset by net state income taxes (4.3%) and nondeductible expenses, including nondeductible expenses related to the TAS Energy Inc. acquisition (2.6%).

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As a result of conforming amendments made to the R&D tax credit in connection with the deferral of tax deductions for research and experimental (“R&E”) expenditures pursuant to the Tax Cuts and Jobs Act (2017), our provision for income taxes for the three months ended March 31, 2024 benefited from a $1.1 million increase in the R&D tax credit.

Outlook

We experienced strong ongoing demand in the first quarter of 2024, and, although we have largely recovered from negative impacts caused by the COVID-19 pandemic, we continue to experience increased labor costs, supply constraints, and delays in delivery of various materials and equipment. We are recognizing these challenges in our job planning and pricing, and we are ordering materials on an earlier timeline and seeking to collaborate with customers to share supply risks and to mitigate the effects of these challenges. We have been generally successful in maintaining productivity and in procuring needed materials despite ongoing challenges.

We have a good pipeline of opportunities and potential backlog. Considering our substantial advance bookings, we currently anticipate solid earnings and cash flow for 2024. Although we are preparing for a wide range of challenges and economic circumstances, including an eventual recession, we currently expect that supportive conditions for our industry, especially for our industrial and technology customers, are likely to continue throughout 2024.

Liquidity and Capital Resources (in thousands):


	Three Months Ended
	March 31,
	2024		2023

Cash provided by (used in):
Operating activities	$	146,557	$	126,909
Investing activities		(221,648)		(68,945)
Financing activities		(29,267)		(66,618)
Net increase (decrease) in cash and cash equivalents	$	(104,358)	$	(8,654)
Free cash flow:
Cash provided by operating activities	$	146,557	$	126,909
Purchases of property and equipment		(24,952)		(16,520)
Proceeds from sales of property and equipment		1,014		622
Free cash flow	$	122,619	$	111,011

Cash Flow

Our business does not require significant amounts of investment in long-term fixed assets. The substantial majority of the capital used in our business is working capital that funds our costs of labor and installed equipment deployed in project work until our customer pays us. Customary terms in our industry allow customers to withhold a small portion of the contract price until after we have completed the work, typically for six months. Amounts withheld under this practice are known as retention or retainage. Our average project duration, together with typical retention terms, generally allow us to complete the realization of revenue and earnings in cash within one year.

Cash Provided (Used in) by Operating Activities—Cash flow from operations is primarily influenced by demand for our services and operating margins but can also be influenced by working capital needs associated with the various types of services that we provide. In particular, working capital needs may increase when we commence large volumes of work under circumstances where project costs, primarily associated with labor, equipment and subcontractors, are required to be paid before the receivables resulting from the work performed are billed and collected. Working capital needs are generally higher during the late winter and spring months as we prepare and plan for the increased project demand when favorable weather conditions exist in the summer and fall months. Conversely, working capital assets are typically converted to cash during the late summer and fall months as project completion is underway. These seasonal trends are sometimes offset by changes in the timing of major projects, which can be impacted by the weather, project delays or accelerations and other economic factors that may affect customer spending.

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Cash provided by operating activities was $146.6 million during the first three months of 2024 compared to $126.9 million during the same period in 2023. The $19.6 million increase in cash provided was primarily driven by higher pre-tax income and a $90.1 million benefit from increases in accounts payable and accrued liabilities driven by the size and timing of payments. This increase was partially offset by a $135.8 million change in billing in excess of costs and deferred revenue due to more advance payments received in the prior year. We have received large advanced payments in the current and prior year that will reverse when project costs are incurred, except to the extent that additional advanced payments are received.

Cash Provided by (Used in) Investing Activities—During the first three months of 2024, cash used in investing activities was $221.6 million compared to $68.9 million during the same period in 2023. The $152.7 million increase in cash used primarily relates to an increase in cash paid (net of cash acquired) for acquisitions in the current year compared to the same period in 2023.

Cash Provided by (Used in) Financing Activities—Cash used in financing activities was $29.3 million for the first three months of 2024 compared to cash used of $66.6 million during the same period in 2023. The $37.4 million decrease in cash used is primarily due to higher repayments of debt in the prior year as operating cash flows were used to pay down outstanding debt. This decrease was partially offset by $18.6 million payments for contingent consideration related to acquisitions in the current year.

Free Cash Flow—We define free cash flow as cash provided by operating activities, less customary capital expenditures, plus the proceeds from asset sales. We believe free cash flow, by encompassing both profit margins and the use of working capital over our approximately one year working capital cycle, is an effective measure of operating effectiveness and efficiency. We have included free cash flow information here for this reason, and because we are often asked about it by third parties evaluating us. However, free cash flow is not considered under generally accepted accounting principles to be a primary measure of an entity’s financial results, and accordingly free cash flow should not be considered an alternative to operating income, net income, or amounts shown in our consolidated statements of cash flows as determined under generally accepted accounting principles. Free cash flow may be defined differently by other companies.

Share Repurchase Program

Debt

Revolving Credit Facility

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2024, we had no outstanding borrowings on the revolving credit facility, $81.2 million in letters of credit outstanding and $768.8 million of credit available.

There are two interest rate options for borrowings under the Facility, the Base Rate Loan (as defined in the Facility) option and the Secured Overnight Financing Rate (“SOFR”) 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.

As of March 31, 2024, we have $81.2 million in letter of credit commitments, of which $55.1 million will expire in 2024, $26.0 million will expire in 2025 and $0.1 million will expire in 2026. The substantial majority of these letters of credit are posted with insurers who disburse funds on our behalf in connection with our workers’ compensation, auto liability and general liability insurance program. These letters of credit provide additional security to the insurers that sufficient financial resources will be available to fund claims on our behalf, many of which develop over long periods of time, should we ever encounter financial duress. Posting of letters of credit for this purpose is a common practice for entities that manage their self-insurance programs through third-party insurers as we do. While some of these letter of credit commitments expire in the next twelve months, we expect nearly all of them, particularly those supporting our insurance programs, will be renewed annually.

Notes to Former Owners


	Balance at		Range of Stated
	March 31, 2024		Interest Rates
2024	$	4,800	2.5	%
2025		21,645	2.3 - 3.0	%
2026		31,625	2.5 - 5.5	%
2027		26,000	5.5	%
2028		5,000	5.5	%
Total	$	89,070

Outlook

We have generated positive net free cash flow for the last twenty-five calendar years, much of which occurred during challenging economic and industry conditions. We also continue to have significant borrowing capacity under our

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credit facility, and we maintain what we feel are reasonable cash balances. We believe these factors will provide us with sufficient liquidity to fund our operations for the foreseeable future.

Other Commitments

Under standard terms in the surety market, sureties issue bonds on a project-by-project basis, and can decline to issue bonds at any time. Historically, approximately 10% to 20% of our business has required bonds. While we currently have strong surety relationships to support our bonding needs, future market conditions or changes in our sureties’ assessment of our operating and financial risk could cause our sureties to decline to issue bonds for our work. If that were to occur, our alternatives include doing more business that does not require bonds, posting other forms of collateral for project performance, such as letters of credit or cash, and seeking bonding capacity from other sureties. We would likely also encounter concerns from customers, suppliers and other market participants as to our creditworthiness. While we believe our general operating and financial characteristics would enable us to ultimately respond effectively to an interruption in the availability of bonding capacity, such an interruption would likely cause our revenue and profits to decline in the near term.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk primarily related to potential adverse changes in interest rates, as discussed below. We are actively involved in monitoring exposure to market risk and continue to develop and utilize appropriate risk management techniques. We are not exposed to any other significant financial market risks, including commodity price risk, or foreign currency exchange risk from the use of derivative financial instruments. At times, we use derivative financial instruments to manage our interest rate risk.

We have exposure to changes in interest rates under our revolving credit facility. There were no outstanding borrowings on the revolving credit facility as of March 31, 2024 and December 31, 2023. Our debt with fixed interest rates consists of notes to former owners of acquired companies and acquired notes payable.

We measure certain assets at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. We did not recognize any impairments in the current year on those assets required to be measured at fair value on a nonrecurring basis.

The valuation of the Company’s contingent earn-out payments is determined using a probability weighted discounted cash flow method. This analysis reflects the contractual terms of the purchase agreements (e.g., minimum and maximum payment, length of earn-out periods, manner of calculating any amounts due, etc.) and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our executive management is responsible for ensuring the effectiveness of the design and operation of our disclosure controls and procedures. We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective as of the end of the period covered by this report.

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Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the three months ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, which could materially affect our business, financial condition, or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results.

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

Recent Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities

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During the quarter ended March 31, 2024, we purchased our common shares in the following amounts at the following average prices:


				Total Number of Shares	Maximum Number of
				Purchased as Part of	Shares that May Yet Be
	Total Number of	Average Price		Publicly Announced Plans	Purchased Under the Plans
Period	Shares Purchased	Paid Per Share		or Programs (1)	or Programs
January 1 - January 31	1,500	$	196.89	10,257,824	686,301
February 1 - February 29	—	$	—	10,257,824	686,301
March 1 - March 31	—	$	—	10,257,824	686,301
	1,500	$	196.89	10,257,824	686,301

________________________________________

(1)

Purchased as part of a program announced on March 29, 2007 under which, since the inception of this program, 10.9 million shares have been approved for repurchase.

Under our stock incentive plans, employees may elect to have us withhold common shares to satisfy statutory federal, state and local tax withholding obligations arising on the vesting of restricted stock awards and exercise of options. When we withhold these shares, we are required to remit to the appropriate taxing authorities the market price of the shares withheld, which could be deemed a purchase of the common shares by us on the date of withholding.

ITEM 5. Other Information

Securities Trading Plans of Directors and Officers

During the three months ended March 31, 2024, no directors or officers of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as defined in Item 408(a) and (c) of Regulation S-K.

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Item 6. Exhibits


		Incorporated by Reference to the Exhibit Indicated Below and to the Filing with the Commission Indicated Below
Exhibit Number	Description of Exhibits	Exhibit Number	Filing or File Number
3.1	Second Amended and Restated Certificate of Incorporation of the Registrant	3.1	333-24021
3.2	Certificate of Amendment dated May 21, 1998	3.2	1998 Form 10-K
3.3	Certificate of Amendment dated July 9, 2003	3.3	2003 Form 10-K
3.4	Certificate of Amendment dated May 20, 2016	3.1	May 20, 2016 Form 8-K
3.5	Amended and Restated Bylaws of Comfort Systems USA, Inc.	3.1	March 25, 2016 Form 8-K
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*	Inline XBRL Instance Document
101.SCH*	Inline XBRL Taxonomy Extension Schema Document
101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	Inline XBRL Taxonomy Extension Presentation Linkbase
104	Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document)

* Filed herewith.

** Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Comfort Systems USA, Inc.

April 25, 2024	By:	/s/ Brian E. Lane
		Brian E. Lane
		President, Chief Executive Officer and Director

April 25, 2024	By:	/s/ William George
		William George
		Executive Vice President and Chief Financial Officer

April 25, 2024	By:	/s/ Julie S. Shaeff
		Julie S. Shaeff
		Senior Vice President and Chief Accounting Officer