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Item 2. Management’s Discussion and Analysis

2022-04-28 compared with 2021-10-28 · 243 added, 392 removed, 163 unchanged (80% of the section changed)

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Business Description

We are one of the largest electrical and mechanical construction and facilities services firms in the United States.

In addition, we provide a number of building services and industrial services.

Our services are provided to a broad range of commercial, industrial, utility, and institutional customers through approximately 90 operating subsidiaries.

Our offices are located in the United States and the United Kingdom.

We have the following reportable segments:

(a) United States electrical construction and facilities services (involving systems for electrical power transmission, distribution, and generation, including sustainable energy solutions such as solar, photovoltaic, and wind;

premises electrical and lighting systems;

process instrumentation in the refining, chemical processing, and food processing industries;

low-voltage systems, such as fire alarm, security, and process control;

voice and data communication, including fiber-optic and low-voltage cabling, distributed antenna systems, and audiovisual systems;

roadway and transit lighting and signaling;

and fiber optic lines);

(b) United States mechanical construction and facilities services (involving systems for heating, ventilation, air conditioning, refrigeration, and clean-room process ventilation;

fire protection;

plumbing, process, and high-purity piping;

controls and filtration;

water and wastewater treatment;

central plant heating and cooling;

cranes and rigging;

millwrighting;

and steel fabrication, erection, and welding);

(d) United States industrial services;

and (e) United Kingdom building services.

The “United States building services” and “United Kingdom building services” segments principally consist of those operations which provide a portfolio of services needed to support the operation and maintenance of customers’ facilities, including commercial and government site-based operations and maintenance;

facility management, maintenance, and services;

outage services to utilities and industrial plants;

military base operations support services;

mobile mechanical maintenance and services, including maintenance and service of mechanical, electrical, plumbing, and building automation systems;

indoor air quality improvement services;

floor care and janitorial services;

landscaping, lot sweeping, and snow removal;

other building services, including reception, security, and catering;

vendor management;

call center services;

installation and support for building systems;

program development, management, and maintenance for energy systems, including services aimed at assisting our customers in reducing energy consumption;

technical consulting and diagnostic services;

infrastructure and building projects for federal, state, and local governmental agencies and bodies;

and small modification and retrofit projects, which services are not generally related to customers’ construction programs.

The “United States industrial services” segment principally consists of those operations which provide industrial maintenance and services for refineries, petrochemical plants, and other customers within the oil and gas industry.

Services of this segment include refinery turnaround planning and engineering;

specialty welding;

overhaul and maintenance of critical process units;

specialty technical services;

instrumentation and electrical services for energy infrastructure;

on-site repairs, maintenance, and service of heat exchangers, towers, vessels, and piping;

and design, manufacturing, repair, and hydroblast cleaning of shell and tube heat exchangers and related equipment.

Our reportable segments reflect certain reclassifications of prior year amounts from our United States electrical construction and facilities services segment to our United States industrial services and our United States building services segments due to changes in our internal reporting structure aimed at realigning our service offerings.

COVID-19 and Market Update

As a result of the COVID-19 pandemic, we experienced significant disruptions throughout calendar year 2020, which impacted our ability to execute on our remaining performance obligations in many of the markets in which we operate.

The economic and operational impact of the pandemic, which were most acute during the second quarter of 2020, negatively affected our results of operations during such period and continue to impact portions of our business in 2021.

However, our strong balance sheet and operational flexibility have allowed us to successfully manage through the ongoing impacts of the pandemic while protecting our cash flow and liquidity.

Although the majority of our businesses have largely recovered from the financial impacts of the pandemic experienced in 2020, as evidenced by our consolidated performance and the growth in our remaining performance obligations, our United States industrial services segment continues to be negatively impacted by the lingering effects of the pandemic.

The prolonged impacts of lower demand and the overall lagging recovery of the oil and gas market have resulted in customers of this segment canceling or deferring regularly scheduled maintenance projects, reducing capital spending, implementing various cost cutting measures, and closing certain of their facilities.

Such customer actions continue to impact the demand for our service offerings within this segment.

We continue to monitor the short- and long-term impacts of the pandemic.

While our employees and customers have adapted to a new work environment and there continues to be scientific, societal, and economic progress to address the effects of COVID-19, including the widespread availability of effective vaccines in the markets we serve, there remains significant uncertainty about the future impacts of the pandemic, or any resulting market disruption or volatility, including the potential effects on our operations.

We continue to be cautiously optimistic about the markets in which we operate and the customers we serve;

however, should there be a slowdown in economic activity due to surges in the number of cases, or an increase in variants of the virus that are more contagious or against which current vaccines are less effective, it is possible that projects could be delayed or canceled or that we could experience access restrictions to our customers’ facilities, preventing us from performing maintenance and service projects.

The extent to which our business and results of operations are impacted in future periods will also depend upon a number of other factors.

These include the duration and extent of the pandemic;

limitations on the ability of our employees to perform their work due to illness caused by the pandemic or local, state, or federal orders requiring employees to quarantine;

the cost and disruption of mandatory testing that may be required of unvaccinated employees;

the extent, duration, and effective execution of ongoing government stabilization and recovery efforts;

the widespread adoption and long-term efficacy of vaccines and the availability and efficacy of other preventative treatments;

our customers’ demand for our services;

our ability to continue to safely and effectively operate in this environment;

and the ability of our customers to pay us for services rendered.

On September 8, 2021, President Biden directed the Occupational Safety and Health Administration to implement an emergency temporary standard (“ETS”) requiring employers with 100 or more employees to ensure their workforce is fully vaccinated or to require unvaccinated workers to produce a negative test result on at least a weekly basis.

The ETS has not yet been issued and, as of the date of this report, many details of the testing requirements are unknown, including the requirements for testing, the types of tests that will be acceptable, who will bear the costs of the tests, and whether or not employees’ time to undergo testing will be compensated.

The costs related to mandatory testing, however, will likely represent a substantial expense to the Company, which could have a material adverse effect on our business, financial condition, and/or results of operations to the extent that a significant portion of our workforce does not choose to become vaccinated.

Supply chain disruptions, material shortages, or escalating commodity prices could negatively impact our business.

To date, we have been able to source the supplies and materials needed to operate our business with only modest disruptions, and recent volatility in commodity prices has not had a significant impact on us.

However, the impact of the COVID-19 pandemic on our vendors and the pricing and availability of materials or supplies utilized in our operations continues to evolve and may have an adverse impact on our operations in future periods.

While we believe our remaining performance obligations are firm, customers may also slow down decision-making, delay planned work, or seek to terminate existing agreements.

We are one of the largest specialty contractors in the United States and a leading provider of electrical and mechanical construction and facilities services, building services, and industrial services.

Our services are provided to a broad range of commercial, industrial, utility, and institutional customers through approximately 90 operating subsidiaries, which specialize principally in providing construction services relating to electrical and mechanical systems in all types of facilities and in providing various services relating to the operation, maintenance, and management of those facilities.

Such operating subsidiaries are organized into the following reportable segments:

• United States electrical construction and facilities services;

• United States mechanical construction and facilities services;

• United States building services;

• United States industrial services;

• United Kingdom building services.

For a more complete description of our operations, refer to Item 1.

Business of our Form 10-K for the year ended December 31, 2021.

Our reportable segments and related disclosures reflect certain reclassifications of prior year amounts from our United States mechanical construction and facilities services segment to our United States building services segment, and from our United States building services segment to our United States construction segments, due to changes in our internal reporting structure aimed at realigning our service offerings.

Market Update

Although our business continues to recover from the financial impacts of the COVID-19 pandemic and related government orders implemented to mitigate it, the broader and longer-term implications the pandemic has on the global economy continue to develop.

Economic disruptions, including supply chain, production, and other logistical issues, as well as escalating commodity prices, have and may continue to negatively impact our business.

For example, we are experiencing lead times significantly in excess of normal levels while also experiencing the effects of inflation through increases in fuel, material, and other commodity prices.

These disruptions worsened in the first quarter of 2022 and have manifested themselves most notably through project delays and reduced labor productivity and efficiency, particularly within our United States construction segments and our United States building services segment, as described in further detail below.

In response to these challenges, we continue to strive to more effectively manage our business through enhanced labor planning and project scheduling, increased pricing to the extent contractually permitted, and by leveraging our relationships with our suppliers and customers.

However, the impact of these disruptions continues to evolve and the conflict in Ukraine has added another layer of uncertainty, especially with respect to energy costs.

There can be no assurance that our actions will serve to mitigate such impacts in future periods.

Further, while we believe our remaining performance obligations are firm, and our customers have not provided us with any indications that they no longer wish to proceed with planned projects, prolonged delays in the receipt of critical equipment could result in our customers seeking to terminate existing or pending agreements.

Any of these events could have a material adverse effect on our business, financial condition, and/or results of operations.

The following table presents selected financial data for the three months ended September 30, 2021 and 2020 (in thousands, except percentages and per share data):

The following table presents selected financial data for the three months ended March 31, 2022 and 2021 (in thousands, except percentages and per share data):

For the three months ended

September 30,

Revenues $ 2,592,549 $ 2,304,049

Revenues increase (decrease) from prior year 14.5 % (3.8) %

Revenues increase from prior year 12.5 % 0.2 %

Gross profit $ 352,555 $ 341,073

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Diluted earnings per common share $ 1.39 $ 1.54

Revenues of $2.52 billion for the quarter ended September 30, 2021 set a new quarterly record for the Company and represent an increase of 14.5% from revenues of $2.20 billion for the quarter ended September 30, 2020.

Revenues of $2.59 billion for the quarter ended March 31, 2022 represent an increase of 12.5% from revenues of $2.30 billion for the quarter ended March 31, 2021.

As described in further detail below, we experienced revenue growth within all of our reportable segments.

In addition, during the third quarter of 2021, companies acquired in 2021 and 2020 generated incremental revenues of approximately $50.3 million.

Operating income for the quarter ended September 30, 2021 of $137.4 million represents a marginal increase compared to operating income of $135.9 million for the quarter ended September 30, 2020.

Despite the growth in operating income, operating margin of 5.4% for the third quarter of 2021 decreased when compared to operating margin of 6.2% for the third quarter of 2020.

Declines in gross profit margin within our United States construction segments as well as our United States building services segment were only partially offset by a reduction in the ratio of selling, general and administrative expenses to revenues across each such segment.

Net income of $99.7 million, or $1.85 per diluted share, for the quarter ended September 30, 2021 compares favorably to net income of $61.2 million, or $1.11 per diluted share, for the quarter ended September 30, 2020.

While such increases were partially attributable to the growth in operating income referenced above, both net income and diluted earnings per common share for the third quarter of 2021 also benefited from:

(a) a more normalized tax rate, as our income tax rate in the prior year period was negatively impacted by the non-cash impairment charges recorded in the second quarter of 2020, the majority of which were non-deductible for tax purposes, and (b) a reduced weighted average share count in the 2021 period given the impact of common stock repurchases made by us throughout 2020 and 2021.

In addition, during the first quarter of 2022, companies acquired in 2021 generated incremental revenues of approximately $49.5 million.

Despite the increase in revenues referenced above, operating income for the quarter ended March 31, 2022 of $100.0 million, or 3.9% of revenues, represents a decrease compared to operating income of $117.0 million, or 5.1% of revenues, for the quarter ended March 31, 2021.

A decline in our consolidated gross profit margin negatively impacted our ability to convert such revenue growth into incremental operating profitability.

Notably, we experienced a decline in gross profit margin within our United States electrical construction and facilities services segment, largely as a result of a change in project mix, including a reduction in revenues from telecommunication construction projects.

Similarly, we experienced a decline in gross profit margin within our United States mechanical construction and facilities services segment, due to a greater number of projects within the manufacturing and water and wastewater market sectors for which we are acting as either the construction manager or general contractor and therefore carry lower than average gross profit margins.

In addition to the change in project mix referenced above, our United States construction segments, as well as our United States building services segment, were negatively impacted by supply chain disruptions and delays, which, in certain instances, led to either:

(a) reduced labor productivity and efficiency, (b) the under-absorption of labor costs in instances where projects were delayed pending the receipt of materials, or (c) material and commodity price escalations.

These decreases in gross profit margin were partially offset by improved gross profit margins within our United States industrial services segment, which experienced a more normalized spring turnaround season compared to the prior year, and our United Kingdom building services segment.

Impact of Acquisitions

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The amounts discussed reflect the acquired companies’ operating results in the current reported period only for the time period these entities were not owned by EMCOR in the comparable prior reported period.

During the first nine months of 2021, we acquired five companies, including:

(a) a company, the results of operations of which were de minimis, that provides mechanical services within the Southern region of the United States and has been included in our United States mechanical construction and facilities services segment, (b) two companies that provide electrical construction services for a broad array of customers in the Midwestern region of the United States, the results of operations of which have been included in our United States electrical construction and facilities services segment, and (c) two companies included within our United States building services segment, consisting of:

(i) a company that provides mobile mechanical services across North Texas and (ii) a company, the results of operations of which were de minimis, that provides building automation and controls solutions in the Southern region of the United States.

During calendar year 2020, we acquired three companies, including:

(a) a company that provides building automation and controls solutions within the Northeastern region of the United States, (b) a full service provider of mechanical services within the Washington, D.C.

metro area, and (c) a company, the results of operations of which were de minimis, that provides mobile mechanical services in the Southern region of the United States.

The results of operations for all three companies have been included within our United States building services segment.

During the first quarter of 2022, we acquired a company for an immaterial amount.

This company provides fire protection services in the Northeastern region of the United States.

We acquired eight companies during calendar year 2021 for total consideration of $131.2 million.

Such acquisitions include:

(a) two companies, the results of operations of which were de minimis, included within our United States mechanical construction and facilities services segment, consisting of:

(i) a company that provides mechanical services within the Southern region of the United States and (ii) a company that provides fire protection services in the Midwestern region of the United States, (b) two companies that provide electrical construction services for a broad array of customers in the Midwestern region of the United States, the results of operations of which have been included in our United States electrical construction and facilities services segment, and (c) four companies included within our United States building services segment, consisting of:

(i) a company that provides mobile mechanical services across North Texas and (ii) three companies, the results of operations of which were de minimis, that bolster our presence in geographies where we have existing operations and provide either mobile mechanical services or building automation and controls solutions.

Results of Operations

The following tables present our operating segment revenues from unrelated entities and their respective percentages of total revenues (in thousands, except for percentages):

For the three months ended September 30,

Total 2020 % of

United States electrical construction and facilities services $ 527,935 21 % $ 472,084 21 %

United States mechanical construction and facilities services 999,584 40 % 891,509 41 %

United States building services 632,455 25 % 556,514 25 %

United States industrial services 232,218 9 % 171,532 8 %

Total United States operations 2,392,192 95 % 2,091,639 95 %

United Kingdom building services 129,480 5 % 110,075 5 %

Total operations $ 2,521,672 100 % $ 2,201,714 100 %

For the nine months ended September 30,

The following table presents our operating segment revenues from unrelated entities and their respective percentages of total revenues (in thousands, except for percentages):

For the three months ended March 31,

Total 2021 % of

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Total operations $ 2,592,549 100 % $ 2,304,049 100 %

As described below in more detail, our revenues for the third quarter of 2021 increased to $2.52 billion compared to $2.20 billion for the third quarter of 2020, and our revenues for the nine months ended September 30, 2021 increased to $7.26 billion compared to $6.52 billion for the nine months ended September 30, 2020.

The increase in revenues for both periods was attributable to revenue growth within all of our reportable segments except, in the case of the nine months ended September 30, 2021, our United States industrial services segment.

Companies acquired in 2021 and 2020 generated incremental revenues of approximately $50.3 million and $133.2 million for the three and nine months ended September 30, 2021, respectively.

Revenues of our United States electrical construction and facilities services segment were $527.9 million and $1,473.6 million for the three and nine months ended September 30, 2021, respectively, compared to revenues of $472.1 million and $1,344.3 million for the three and nine months ended September 30, 2020, respectively.

Excluding the impact of acquisitions, the increase in revenues of this segment, for both periods, was primarily attributable to:

(a) a resumption of project activity within certain major metropolitan areas, where work was previously postponed due to access restrictions caused by the various containment and mitigation measures mandated in the prior year by certain of our customers and/or governmental authorities in response to the COVID-19 pandemic, leading to:

(i) an increase in commercial market sector revenues and (ii) greater short-duration project volumes in the current year, (b) revenue growth within the healthcare market sector, due to greater construction project activity in the Northeastern region of the United States, and (c) an increase in public works projects in the Western region of the United States, resulting in greater revenue contribution from the institutional market sector.

In addition, for the nine months ended September 30, 2021, this segment’s revenues were positively impacted by an increase in telecommunication construction project activity within the commercial market sector.

The results of this segment for the three and nine months ended September 30, 2021 included $29.5 million and $44.5 million, respectively, of incremental revenues generated by companies acquired in 2021.

The revenue increases referenced above were partially offset by a reduction in revenues within the transportation and manufacturing market sectors due to the completion or substantial completion of certain projects in the Northeastern and Western regions of the United States.

Our United States mechanical construction and facilities services segment revenues for the three months ended September 30, 2021 were $999.6 million, a $108.1 million increase compared to revenues of $891.5 million for the three months ended September 30, 2020.

Revenues of this segment for the nine months ended September 30, 2021 were $2,862.2 million, a $346.1 million increase compared to revenues of $2,516.1 million for the nine months ended September 30, 2020.

The increase in this segment’s revenues for both 2021 periods was attributable to revenue growth within the majority of the market sectors in which we operate, including:

(a) the commercial market sector, driven by:

(i) the continued build-out of our customers’ e-commerce supply chains, which has resulted in increased demand for our fire protection services within their warehousing and distribution facilities, and (ii) continued growth in digital processing, cloud computing, and data storage, which has resulted in an increase in telecommunication construction project opportunities, (b) the healthcare market sector, due to increased mechanical system retrofits and installations as our healthcare customers seek to upgrade their existing facilities or build new facilities, and (c) the manufacturing market sector, inclusive of certain large food processing projects, which began to accelerate during the third quarter of 2021.

These increases were partially offset by the completion or substantial completion of certain projects within the institutional market sector, which resulted in a reduction of revenues during both the three and nine months ended September 30, 2021.

Revenues of our United States building services segment were $632.5 million and $1,838.8 million for the three and nine months ended September 30, 2021, respectively, compared to revenues of $556.5 million and $1,563.1 million for the three and nine months ended September 30, 2020, respectively.

Excluding acquisition revenues within this segment’s mobile mechanical services division of $20.8 million and $88.6 million for the three and nine months ended September 30, 2021, respectively, this segment’s revenue growth for both 2021 periods was primarily attributable to:

(a) greater project, service repair and maintenance, and building automation and controls activities within our mobile mechanical services operations as well as an increase in project volume within our commercial site-based services operations, in both cases, partially as a result of a resumption in demand for certain of our service offerings when compared to the prior year, which was negatively impacted by the COVID-19 pandemic given the temporary closure of certain customer facilities, (b) a net increase in facilities maintenance contract revenues, partially as a result of new contract awards, and (c) increased customer demand for certain services aimed at improving the indoor air quality within their facilities.

In addition, revenues for the nine months ended September 30, 2021 benefited from an increase in snow removal activity year-over-year within our commercial site-based services division.

Revenues of our United States industrial services segment for the three months ended September 30, 2021 were $232.2 million, a $60.7 million increase compared to revenues of $171.5 million for the three months ended September 30, 2020.

While, in comparison to the prior year, we experienced improved demand for the service offerings of both our field services and shop services divisions during the third quarter of 2021, revenues of this segment for the nine months ended September 30, 2021 were $702.8 million, a reduction of $73.8 million versus the comparable 2020 period.

This segment’s results for the 2021 year-to-date period have been negatively impacted by the market conditions within the oil and gas and related industrial markets, including sustained lower demand for oil and other refined products, which, although recovering, has not returned to pre-pandemic levels.

These market conditions have resulted in:

(a) a decrease in maintenance and capital project activities within our field services operations and (b) a reduction in new build heat exchanger sales and related services within our shop services operations.

Our United Kingdom building services segment revenues were $129.5 million and $386.1 million for the three and nine months ended September 30, 2021, respectively, compared to revenues of $110.1 million and $315.6 million for the three and nine months ended September 30, 2020, respectively.

The increase in this segment’s revenues for both the three and nine month periods was primarily a result of growth in project activities with existing customers, primarily within the commercial market sector, partially as a result of a resumption in demand as customers began to release projects which were previously deferred due to the uncertainty created by the COVID-19 pandemic.

In addition, this segment’s revenues for the three and nine months ended September 30, 2021 were positively impacted by $8.0 million and $32.0 million, respectively, related to the effect of favorable exchange rates for the British pound versus the United States dollar.

As described below in more detail, as a result of revenue growth within all of our reportable segments, our revenues for the first quarter of 2022 increased to $2.59 billion compared to $2.30 billion for the first quarter of 2021.

Revenues of our United States electrical construction and facilities services segment were $522.0 million for the three months ended March 31, 2022 compared to revenues of $459.4 million for the three months ended March 31, 2021.

This segment’s results for the 2022 period included $34.9 million of incremental revenues generated by companies acquired in 2021.

Excluding the impact of acquisitions, revenues of this segment increased by $27.7 million, primarily as a result of an increase in revenues from:

(a) the commercial market sector, (b) transmission and distribution projects, including those to support sustainable energy solutions such as solar and wind, (c) the transportation market sector, driven by large project activity within the Midwestern region of the United States, and (d) healthcare project activity throughout several of the regions in which we operate.

Despite the increase in commercial market sector revenues, this segment experienced a reduction in telecommunication construction project revenues when compared to the prior year period, partially as a result of supply chain disruptions, which have resulted in a delay in the start-up of recently awarded projects as our customers await delivery of critical equipment.

In addition, this segment’s results for the three months ended March 31, 2022 reflect a decrease in revenues from the institutional market sector, due to the completion or substantial completion of certain projects which were performed in the prior year.

Our United States mechanical construction and facilities services segment revenues for the three months ended March 31, 2022 were $1.0 billion, an $86.0 million increase compared to revenues of $914.5 million for the three months ended March 31, 2021.

The increase in this segment’s revenues was attributable to revenue growth within the majority of the market sectors in which we operate, including:

(a) the water and wastewater market sector, given increased project activity within the Southern region of the United States, (b) the manufacturing market sector, driven by certain large food processing projects, (c) the commercial market sector, given:

(i) increased demand for our mechanical construction services by certain customers engaged in the design and manufacturing of semiconductors as well as customers within the biotech, life-sciences, and pharmaceutical industries, and (ii) the continued build-out of our customers’ e-commerce supply chains, which has resulted in increased demand for our fire protection services within their warehousing and distribution facilities, and (d) the healthcare market sector, due to increased mechanical system retrofits and installations as our healthcare customers seek to upgrade their existing facilities or build new facilities.

Revenues of our United States building services segment were $627.8 million for the three months ended March 31, 2022 compared to revenues of $568.0 million for the three months ended March 31, 2021.

Excluding incremental acquisition revenues within this segment’s mobile mechanical services division of $14.6 million, this segment’s revenue growth during the 2022 period was attributable to:

(a) its commercial site-based services and government services divisions, due to the award of facilities maintenance contracts with new customers, as well as scope expansion with existing customers, and (b) its mobile mechanical services division, due to:

(i) greater service repair and maintenance volumes, partially as a result of incremental repair opportunities driven by supply chain delays, which have created a need to extend the life of existing equipment in instances when replacement equipment is not readily available, and (ii) an increase in demand for building automation and controls services, partially as our customers continue to seek ways to improve the energy efficiency of their facilities.

Revenues of our United States industrial services segment for the three months ended March 31, 2022 were $310.8 million, a $75.4 million increase compared to revenues of $235.4 million for the three months ended March 31, 2021.

While there remains significant disruption and uncertainty within the broader oil and gas industry, most notably within the upstream and midstream energy sectors, we began to experience a resumption in demand within this segment during the second half of 2021.

Such increased demand continued into the first quarter of 2022 and resulted in growth in revenues from:

(a) this segment’s field services operations, due to a more normalized spring turnaround season when compared to the prior year, and (b) this segment’s shop services operations, as a result of greater new build heat exchanger sales and an increase in maintenance, repair, and hydro blast cleaning services.

Our United Kingdom building services segment revenues were $131.5 million for the three months ended March 31, 2022 compared to revenues of $126.7 million for the three months ended March 31, 2021.

The increase in this segment’s revenues was predominantly a result of growth in project activities with existing customers, primarily within the commercial market sector, including certain telecommunication projects.

Unfavorable exchange rates for the British pound versus the United States dollar negatively impacted this segment’s revenues for the first quarter of 2022 by $3.9 million.

Cost of sales and gross profit

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For the three months ended

September 30, For the nine months ended

September 30,

2021 2020 2021 2020

Cost of sales $ 2,239,994 $ 1,962,976

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Gross profit margin 13.6 % 14.8 %

Our gross profit for the three months ended September 30, 2021 was $381.3 million, or 15.1% of revenues, compared to gross profit of $363.2 million, or 16.5% of revenues, for the three months ended September 30, 2020.

Gross profit for the nine months ended September 30, 2021 was $1,098.7 million, or 15.1% of revenues, compared to gross profit of $1,011.5 million, or 15.5% of revenues, for the nine months ended September 30, 2020.

The increase in gross profit for both periods was a result of increased revenue volume, which resulted in an increase in gross profit from all of our reportable segments except, in the case of the nine months ended September 30, 2021, our United States industrial services segment, which experienced a decrease in gross profit when compared to the prior year given the negative macroeconomic conditions previously referenced.

The decrease in gross profit margin for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, was primarily attributable to a reduction in gross profit margin within each of our United States construction segments as well as our United States building services segment.

The decrease in gross profit margin for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, was predominantly attributable to a reduction in gross profit margin within our United States building services segment.

Our gross profit for the three months ended March 31, 2022 was $352.6 million, or 13.6% of revenues, compared to gross profit of $341.1 million, or 14.8% of revenues, for the three months ended March 31, 2021.

The increase in gross profit was a result of increased revenue volume, which despite the decrease in gross profit margin discussed below, resulted in an increase in consolidated gross profit.

The decrease in gross profit margin for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily attributable to a reduction in gross profit margin within each of our United States construction segments, as well as our United States building services segment, both as a result of a less favorable project mix, as well as certain discrete impacts in the period, due in part to supply chain delays and disruptions.

Refer to the operating income section below for further discussion regarding the operating performance of each of our reportable segments.

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For the three months ended

September 30, For the nine months ended

September 30,

2021 2020 2021 2020

Selling, general and administrative expenses $ 252,598 $ 224,069

SG&A margin 9.7 % 9.7 %

Our selling, general and administrative expenses for the three months ended September 30, 2021 were $243.9 million compared to selling, general and administrative expenses of $226.8 million for the three months ended September 30, 2020.

Selling, general and administrative expenses for the nine months ended September 30, 2021 were $710.9 million compared to selling, general and administrative expenses of $659.0 million for the nine months ended September 30, 2020.

For the three and nine months ended September 30, 2021, selling, general and administrative expenses included $5.3 million and $12.1 million, respectively, of incremental expenses directly related to companies acquired in 2021 and 2020, including amortization expense attributable to identifiable intangible assets of $1.2 million and $3.1 million, respectively.

Excluding incremental expenses from businesses acquired, our selling, general and administrative expenses increased by $11.9 million and $39.9 million for the three and nine months ended September 30, 2021, respectively.

The organic increase in selling, general and administrative expenses for both the three and nine month periods was primarily attributable to an increase in:

(a) employee benefit costs, driven by greater medical claim activity, and (b) salaries, as a result of:

(i) an increase in headcount to support our organic revenue growth in the current year, and (ii) the favorable impact in the prior year periods of certain short-term cost cutting measures enacted in response to the COVID-19 pandemic, including temporary furloughs and salary reductions.

In addition, the increase in selling, general and administrative expenses for the nine months ended September 30, 2021 was partially a result of greater incentive compensation expense, due to higher projected annual operating results than those which were anticipated during the same prior year period.

Selling, general and administrative expenses as a percentage of revenues were 9.7% and 10.3% for the three months ended September 30, 2021 and 2020, respectively, and 9.8% and 10.1% for the nine months ended September 30, 2021 and 2020, respectively.

The decrease in SG&A margin for both the three and nine month periods was a result of an increase in revenues without a commensurate increase in overhead costs, as we were able to leverage our existing overhead cost structure.

Impairment loss on goodwill, identifiable intangible assets, and other long-lived assets

During the second quarter of 2020, we identified certain indicators of impairment resulting from the COVID-19 pandemic and its impact on the oil and gas and related industrial markets.

These adverse conditions resulted in lower forecasted revenue and operating margin expectations for those of our businesses that are highly dependent on the strength of such markets, resulting in the recognition of a $232.8 million impairment charge within our United States industrial services segment.

Despite the weaker results of our United States industrial services segment for the year-to-date 2021 period, when compared to the prior year, we did not identify any indicators of impairment in the current year, as the operating performance and near term expectations of this segment are materially consistent with the forecasts utilized in our most recent impairment test.

However, a further deterioration in our operating performance, significant adverse changes to external market conditions or the assumptions utilized in our impairment tests, such as the weighted average cost of capital and our internal forecasts, if any, could result in the identification of future impairment indicators and potentially future goodwill impairment charges.

It is not possible at this time to determine if any future impairment charge will result or, if it does, whether such charge would be material to our results of operations.

Operating income (loss)

The following tables present our operating income (loss) and operating margin (operating income (loss) as a percentage of segment revenues) (in thousands, except for percentages):

For the three months ended September 30,

Revenues 2020 % of

Our selling, general and administrative expenses for the three months ended March 31, 2022 were $252.6 million compared to selling, general and administrative expenses of $224.1 million for the three months ended March 31, 2021.

Selling, general and administrative expenses for the 2022 period included $5.2 million of incremental expenses directly related to companies acquired in 2022 and 2021, including amortization expense attributable to identifiable intangible assets of $1.0 million.

Excluding incremental expenses from businesses acquired, our selling, general and administrative expenses increased by $23.3 million for the three months ended March 31, 2022.

The organic increase in selling, general and administrative expenses for the three months ended March 31, 2022 was primarily attributable to an increase in:

(a) salaries and incentive compensation expense, as a result of an increase in headcount to support our organic revenue growth in the current period, (b) employee benefit costs, driven by greater medical claim activity, (c) computer hardware and software costs, partially as a result of various information technology and cybersecurity initiatives currently in process, and (d) travel and entertainment expenses, given a resumption in travel and business meals as COVID-19 related restrictions continue to ease.

Selling, general and administrative expenses as a percentage of revenues was 9.7% for each of the three months ended March 31, 2022 and 2021.

Operating income (loss)

United States electrical construction and facilities services $ 44,055 8.3 % $ 45,928 9.7 %

United States mechanical construction and facilities services 82,302 8.2 % 80,048 9.0 %

United States building services 31,589 5.0 % 38,449 6.9 %

United States industrial services (3,012) (1.3) % (8,907) (5.2) %

Total United States operations 154,934 6.5 % 155,518 7.4 %

United Kingdom building services 6,582 5.1 % 5,327 4.8 %

Corporate administration (24,095) — (24,454) —

Restructuring expenses — — (536) —

Total operations 137,421 5.4 % 135,855 6.2 %

Net periodic pension (cost) income 908 751

Interest expense, net (1,286) (1,484)

Income before income taxes $ 137,043 $ 135,122

For the nine months ended September 30,

The following table presents our operating income (loss) and operating margin (operating income (loss) as a percentage of segment revenues) (in thousands, except for percentages):

For the three months ended March 31,

Revenues 2021 % of

7 unchanged sentences

Corporate administration (26,478) — (24,512) —

Restructuring expenses — — (605) —

Impairment loss on goodwill, identifiable intangible assets,

and other long-lived assets — — (232,750) —

Total operations 99,957 3.9 % 117,004 5.1 %

2 unchanged sentences

Income before income taxes $ 99,837 $ 116,549

Operating income for the three months ended September 30, 2021 of $137.4 million represents a marginal increase compared to operating income of $135.9 million for the three months ended September 30, 2020.

Despite the growth in operating income, operating margin of 5.4% for the three months ended September 30, 2021 decreased when compared to operating margin of 6.2% for the three months ended September 30, 2020.

As described below in more detail, the declines in gross profit margin within our United States construction segments as well as our United States building services segment were only partially offset by a reduction in the ratio of selling, general and administrative expenses to revenues across such segments.

Operating income for the nine months ended September 30, 2021 was $387.8 million, or 5.3% of revenues, and compares favorably to operating income of $119.2 million, or 1.8% of revenues, for the nine months ended September 30, 2020.

Our operating results for the 2020 year-to-date period included $232.8 million of non-cash goodwill, identifiable intangible asset, and other long-lived asset impairment charges recorded during the second quarter of 2020.

Excluding the impact of such impairment charges on our 2020 results, operating income increased by $35.8 million for the nine months ended September 30, 2021, largely as a result of greater organic operating income contribution from our United States mechanical construction and facilities services segment.

Companies acquired in 2021 and 2020 generated incremental operating income of $3.5 million, inclusive of $8.6 million of amortization expense associated with identifiable intangible assets, for the nine months ended September 30, 2021.

Operating income of our United States electrical construction and facilities services segment for the three months ended September 30, 2021 was $44.1 million, a slight reduction compared to operating income of $45.9 million for the three months ended September 30, 2020.

Operating income of this segment for the nine months ended September 30, 2021 was $127.0 million, compared to operating income of $117.9 million for the nine months ended September 30, 2020.

The increase in operating income for nine months ended September 30, 2021 was predominantly a result of increased gross profit from construction projects within the institutional, commercial, and healthcare market sectors, largely as a result of the revenue growth within these market sectors, as referenced above.

These increases were partially offset by a decline in gross profit from the transportation and manufacturing market sectors due to the completion or close-out of certain projects in the prior year.

Companies acquired in 2021 contributed incremental operating income of $0.9 million and $2.1 million, inclusive of $1.8 million and $2.8 million of amortization expense associated with identifiable intangible assets, for the three and nine months ended September 30, 2021, respectively.

Operating margin of this segment was 8.3% and 9.7% for the three months ended September 30, 2021 and 2020, respectively, and 8.6% and 8.8% for the nine months ended September 30, 2021 and 2020, respectively.

The decrease in operating margin for both 2021 periods was a result of a decline in this segment’s gross profit margin during the third quarter of 2021, predominantly within the commercial and transportation market sectors, partially due to a change in the composition of project work performed period-over-period.

In addition, gross profit margin for the prior year periods benefited from the settlement of the final contract value on certain projects within the transportation and institutional market sectors, which favorably impacted this segment’s gross profit margin by 0.7% and 0.4% for the three and nine months ended September 30, 2020, respectively.

Such decreases in gross profit margin were partially offset by a reduction in the ratio of selling, general and administrative expenses to revenues during the 2021 three and nine month periods.

Our United States mechanical construction and facilities services segment’s operating income for the three months ended September 30, 2021 was $82.3 million, a slight increase compared to operating income of $80.0 million for the three months ended September 30, 2020.

Operating margin of this segment was 8.2% and 9.0% for the three months ended September 30, 2021 and 2020, respectively.

The 80 basis point reduction in this segment’s operating margin period-over-period was primarily a result of a decrease in gross profit margin within the manufacturing market sector as:

(a) the results for the prior year period benefited from the favorable close-out of several projects and (b) the results for the current quarter include increased revenues from certain large food processing projects, for which we are acting as the construction manager and therefore carry lower than average gross profit margins.

The quarterly decrease in gross profit margin was partially offset by a reduction in the ratio of selling, general and administrative expenses to revenues given an increase in segment revenues without a commensurate increase in overhead costs.

Operating income of this segment for the nine months ended September 30, 2021 was $226.5 million, compared to operating income of $192.2 million for the nine months ended September 30, 2020.

The $34.4 million increase in operating income for the nine month period was a result of an increase in gross profit from construction projects within the majority of the market sectors in which we operate, driven by increased revenue volume year- over-year.

Despite the reduction in operating margin during the third quarter of 2021, the operating margin of this segment for the nine month period ended September 30, 2021 of 7.9%, represents an improvement from the 7.6% operating margin for the nine months ended September 30, 2020.

A slight reduction in this segment’s gross profit margin for the year-to-date period was more than offset by a decrease in the ratio of selling, general and administrative expenses to revenues, as referenced above.

Operating income of our United States building services segment for the three months ended September 30, 2021 was $31.6 million, or 5.0% of revenues, compared to operating income of $38.4 million, or 6.9% of revenues, for the three months ended September 30, 2020.

Despite an increase in quarterly revenues, gross profit remained consistent with the prior year period, as a result of lower gross profit margins across this segment’s portfolio of work, most notably within its mobile mechanical services division.

Flat gross profit, combined with an increase in selling, general and administrative expenses to support the revenue growth within this segment, resulted in a decrease in operating income quarter over quarter.

The decrease in operating margin for the quarterly period was a direct result of the reduced gross profit margin just referenced.

Operating income of this segment for the nine months ended September 30, 2021 was $91.2 million, or 5.0% of revenues, compared to operating income of $86.3 million, or 5.5% of revenues, for the nine months ended September 30, 2020.

The increase in this segment’s operating income for the year-to-date 2021 period was primarily due to the resumption in demand for certain of our service offerings when compared to the prior year period, which led to increased gross profit from:

(a) project, service repair and maintenance, and building automation and controls activities within our mobile mechanical services operations, and (b)

project volumes within our commercial site-based services operations.

In addition, gross profit for the nine months ended September 30, 2021 benefited from greater snow removal activity for our customers with whom we are contracted on a per snow event basis.

Companies acquired in 2021 and 2020, which are included within this segment’s mobile mechanical services division, generated incremental operating income of approximately $1.6 million, inclusive of $5.6 million of amortization expense associated with identifiable intangible assets, during the nine months ended September 30, 2021.

The decrease in operating margin for the nine month period was primarily attributable to a decrease in gross profit margin given a less favorable mix of work within this segment’s mobile mechanical services and government services divisions, including, with respect to the mobile mechanical services division, a greater number of fixed price capital projects, which traditionally have lower gross profit margins.

The decreases in gross profit margin for both the three and nine month periods were partially offset by a reduction in the ratio of selling, general and administrative expenses to revenues as this segment was able to effectively leverage its overhead cost structure during this period of revenue growth.

Our United States industrial services segment reported an operating loss of $3.0 million, or (1.3)% of revenues, for the three months ended September 30, 2021, compared to an operating loss of $8.9 million, or (5.2)% of revenues, for the three months ended September 30, 2020.

This segment reported an operating loss of $5.7 million, or (0.8)% of revenues, for the nine months ended September 30, 2021, compared to operating income of $9.8 million, or 1.3% of revenues, for the nine months ended September 30, 2020.

Despite the improved quarterly operating performance compared to the prior year, this segment’s results continue to be negatively impacted by the effects of adverse macroeconomic conditions within the oil and gas industry, as demonstrated by the unfavorable comparison for the year-to-date period.

Given such conditions, which began to significantly impact our business starting with the second quarter of 2020, this segment’s operating results for the nine months ended September 30, 2021 reflect a reduction in gross profit and gross profit margin from both our field services and shop services operations when compared to the nine months ended September 30, 2020.

In addition, the results of this segment for the nine months ended September 30, 2021 include a $4.1 million increase in the provision for credit losses in connection with a specific customer bankruptcy, which negatively impacted the segment’s operating margin for the nine months ended September 30, 2021 by 60 basis points.

Our United Kingdom building services segment’s operating income for the three months ended September 30, 2021 was $6.6 million, or 5.1% of revenues, compared to operating income of $5.3 million, or 4.8% of revenues, for the three months ended September 30, 2020.

Operating income for the nine months ended September 30, 2021 was $23.0 million, or 6.0% of revenues, compared to operating income of $16.4 million, or 5.2% of revenues, for the nine months ended September 30, 2020.

The increase in this segment’s operating income and operating margin for the three and nine months ended September 30, 2021 was primarily a result of an increase in gross profit and gross profit margin from projects within the commercial market sector, partially offset by an increase in selling, general and administrative expenses to support the segment’s revenue growth.

In addition, this segment’s operating income and operating margin for the nine months ended September 30, 2021 benefited from successful contract close-outs during the first quarter of the year.

This segment’s operating income for the three and nine months ended September 30, 2021 was positively impacted by $0.4 million and $2.0 million, respectively, related to the effect of favorable exchange rates for the British pound versus the United States dollar.

Our corporate administration operating loss for the three and nine months ended September 30, 2021 was $24.1 million and $74.4 million, respectively, compared to $24.5 million and $70.0 million for the three and nine months ended September 30, 2020, respectively.

The increase in corporate administration expenses for the nine months ended September 30, 2021 was primarily due to:

(a) an increase in computer hardware and software costs, including depreciation, as a result of various information technology and cyber security initiatives currently in process, and (b) an increase in incentive compensation expense due to higher projected annual operating results than those which were anticipated during the same prior year period.

These increases were partially offset by a decrease in salary expense given the realignment of certain of our back office functions in 2020.

Net interest expense for the three months ended September 30, 2021 and 2020 was $1.3 million and $1.5 million, respectively.

Net interest expense for the nine months ended September 30, 2021 and 2020 was $4.0 million and $6.1 million, respectively.

The decrease in net interest expense for the 2021 periods resulted from both lower interest rates and reduced average outstanding borrowings.

For the three and nine months ended September 30, 2021, our income tax provision was $37.3 million and $104.5 million, respectively, compared to an income tax provision of $73.9 million and $62.2 million for the three and nine months ended September 30, 2020, respectively.

Our income tax rate for the three and nine months ended September 30, 2021 was 27.2% and 27.1%, respectively, compared to an income tax rate for the three and nine months ended September 30, 2020 of 54.7% and 53.9%, respectively.

Our income tax rate, and resulting income tax provision, for the three and nine months ended September 30, 2020 were impacted by the tax effect of the $232.8 million of non-cash goodwill, identifiable intangible asset, and other long-lived asset impairment charges recorded during the second quarter of 2020, the majority of which was non-deductible for tax purposes.

Operating income was $100.0 million, or 3.9% of revenues, for the three months ended March 31, 2022 compared to operating income of $117.0 million, or 5.1% of revenues, for the three months ended March 31, 2021.

As described in further detail below, operating income and operating margin of each of our United States construction segments as well as our United States building services segment decreased when compared to the prior year period.

These declines were only partially offset by increases in operating income and operating margin within our United States industrial services segment and our United Kingdom building services segment.

Operating income of our United States electrical construction and facilities services segment was $20.0 million, or 3.8% of revenues, for the three months ended March 31, 2022, compared to $40.3 million, or 8.8% of revenues, for the three months ended March 31, 2021.

Companies acquired in 2021 contributed incremental operating income of $1.2 million, inclusive of $1.8 million of amortization expense associated with identifiable intangible assets, for the quarter ended March 31, 2022.

Excluding such acquisition contribution, operating income of this segment decreased by $21.5 million during the 2022 period.

The decrease in both operating income and operating margin was largely attributable to a decrease in gross profit and gross profit margin from:

(a) the commercial market sector, primarily as a result of a change in project mix, including a reduction in revenues from telecommunication construction projects given the temporary project delays previously referenced, and (b) the institutional market sector, given the favorable progression or close-out of certain projects in the prior year period.

In addition, labor productivity and efficiency within this segment was adversely impacted during the quarter as a result of supply chain disruptions and delays, which led to issues with respect to the sequencing of work on certain projects.

Our United States mechanical construction and facilities services segment’s operating income for the three months ended March 31, 2022 was $58.7 million, compared to operating income of $63.2 million for the three months ended March 31, 2021.

Despite the aforementioned increase in this segment’s revenues, operating income decreased due to a 100 basis point contraction in operating margin, largely as a result of a decline in gross profit margin given a greater number of projects within the manufacturing and water and wastewater market sectors for which we are acting as either the construction manager or general contractor and therefore carry lower than average gross profit margins.

In addition, the results of this segment for the first quarter of 2022 were negatively impacted by certain project write-downs resulting, in part, from supply chain disruptions and/or material price escalations, a portion for which we will seek recovery from our customers.

Based on an evaluation of individual projects that had revisions to total estimated costs, which resulted in a reduction of profitability in excess of $1.0 million, the operating results of our United States construction segments were negatively impacted by approximately $10.0 million during the three months ended March 31, 2022.

Of this amount, approximately $4.6 million was recorded within our United States electrical construction and facilities services segment and approximately $5.4 million was recorded withing our United States mechanical construction and facilities services segment.

These reductions in estimated project profitability negatively affected the operating margin of these segments for the first quarter of 2022 by 0.9% and 0.5%, respectively.

There were no changes in total estimated costs that had a significant impact on the operating results of these segments during the three months ended March 31, 2021.

Operating income of our United States building services segment was $23.9 million, or 3.8% of revenues, for the three months ended March 31, 2022 compared to $31.1 million, or 5.5% of revenues, for the three months ended March 31, 2021.

Given a reduction in gross profit margin within this segment, increased gross profit, resulting from the previously referenced period over period revenue growth, was more than offset by an increase in selling, general and administrative expenses, resulting in the decrease in operating income and operating margin for the first quarter of 2022.

Gross profit margin of this segment for the 2022 period was negatively impacted by:

(a) a less favorable mix of work within this segment’s mobile mechanical services division, including a greater number of fixed price capital projects, which traditionally have lower gross profit margins than the other service and repair offerings of this segment, (b) a shift from add-on project work within this segment’s commercial site-based services division, to more traditional facilities maintenance type projects, which carry lower gross profit margins, (c) supply chain disruptions, including longer lead times for certain materials and equipment, which resulted in a greater amount of unabsorbed labor costs in instances where projects were delayed pending the receipt of materials, and (d) an escalation in fuel prices for its fleet of approximately 4,000 service vehicles, a portion of which we were unable to pass along to our customers.

Our United States industrial services segment reported operating income of $13.3 million, or 4.3% of revenues, for the three months ended March 31, 2022, compared to an operating loss of $2.4 million, or (1.0)% of revenues, for the three months ended March 31, 2021.

The increase in both operating income and operating margin was due to an increase in gross profit and gross profit margin during the first quarter of 2022 from both our field services and shop services operations, given:

(a) a more normalized demand pattern, which led to increased revenue and resulted in greater gross profit contribution, and (b) improved project mix, as pricing began to recover.

In addition, operating margin of this segment benefited from a reduction in the ratio of selling, general administrative expenses to revenues as this segment was able to leverage its overhead cost structure during a period of revenue growth.

Operating income of our United Kingdom building services segment was $10.6 million, or 8.1% of revenues, for the three months ended March 31, 2022 compared to $9.4 million, or 7.4% of revenues, for the three months ended March 31, 2021.

The increase in this segment’s operating income and operating margin for the 2022 period was primarily a result of:

(a) the favorable close-out of a project within the institutional market sector and (b) an increase in gross profit and gross profit margin from projects within the commercial market sector, including the telecommunication projects referenced in the revenue commentary for this segment.

This segment’s operating income for the first quarter of 2022 was negatively impacted by $0.3 million related to the effect of unfavorable exchange rates for the British pound versus the United States dollar.

Our corporate administration expenses for the three months ended March 31, 2022 were $26.5 million compared to $24.5 million for the three months ended March 31, 2021.

The increase in corporate administration expenses was primarily due to an increase in employment costs, given an increase in headcount to support the revenue growth within our business as well as certain information technology and cybersecurity initiatives currently in process.

Net interest expense for the three months ended March 31, 2022 and 2021 was $1.3 million and $1.4 million, respectively.

For the three months ended March 31, 2022, our income tax provision was $26.5 million compared to an income tax provision of $31.6 million for the three months ended March 31, 2021.

Our income tax rate for the three months ended March 31, 2022 was 26.5% compared to an income tax rate for the three months ended March 31, 2021 of 27.2%.

The decrease in our income tax provision for the three months ended March 31, 2022 was a result of a reduction in taxable income as well as a decrease in our income tax rate during the period.

The decrease in our income tax rate for the three months ended March 31, 2022 was attributable to:

(a) a reduction in certain permanent book to tax differences, (b) the favorable impact of certain discrete tax items during the first quarter of 2022, including an increase in the income tax benefit recognized upon the issuance of common stock under our share-based compensation programs, and (c) a reduction in our state income tax rate due to a change in the allocation of earnings among the jurisdictions in which our income is taxed.

Remaining Unsatisfied Performance Obligations

The following table presents the transaction price allocated to remaining unsatisfied performance obligations (“remaining performance obligations”) for each of our reportable segments and their respective percentage of total remaining performance obligations (in thousands, except for percentages):

September 30, 2021 % of Total December 31, 2020 % of Total September 30, 2020 % of Total

2022 % of Total December 31, 2021 % of Total March 31,

2021 % of Total

Remaining performance obligations:

17 unchanged sentences

Such claim and other variable consideration amounts were immaterial for all periods presented.

Our remaining performance obligations at September 30, 2021 were $5.38 billion compared to $4.59 billion at December 31, 2020 and $4.53 billion at September 30, 2020.

The increase in remaining performance obligations at September 30, 2021 was attributable to an increase in remaining performance obligations within all of our reportable segments.

Most notably, we experienced an increase in remaining performance obligations within our United States construction segments, driven by the award of certain telecommunications, food processing, and water and wastewater construction projects, as well as our United States building services segment given increased project opportunities within its mobile mechanical services division and the award of several facilities maintenance contracts within its commercial site-based services division.

Our remaining performance obligations at March 31, 2022 were $5.95 billion compared to $5.60 billion at December 31, 2021 and $4.78 billion at March 31, 2021.

The increase in remaining performance obligations at March 31, 2022, when compared to December 31, 2021, was primarily attributable to an increase in remaining performance obligations within all of our reportable segments.

Most notably, we experienced an increase in remaining performance obligations within:

(a) our United States construction segments, driven by the award of various construction projects within:

(i) the commercial market sector, inclusive of certain telecommunications and semiconductor projects, and (ii) the institutional market sector, and (b) our United States building services segment given increased project opportunities within its mobile mechanical services division and the award of several facilities maintenance contracts within its commercial site-based services division.

The increases within our United States construction segments were partially offset by a reduction in remaining performance obligations from the manufacturing and water and wastewater market sectors due to the progression on several projects within such market sectors during the first quarter of 2022.

Liquidity and Capital Resources

The following section discusses our principal liquidity and capital resources, as well as our primary liquidity requirements and sources and uses of cash.

Our cash and cash equivalents are maintained in highly liquid investments with original maturity dates of three months or less.

Our short-term liquidity requirements primarily arise from:

(a) working capital requirements, (b) business acquisitions, (c) share repurchases, (d) cash dividend payments, (e) interest and principal payments related to our outstanding indebtedness, (f) capital expenditures, and (g) income tax payments.

We can expect to meet those requirements through our cash and cash equivalent balances, cash generated from our operations, and, if necessary, the borrowing capacity available under our revolving credit facility.

However, negative macroeconomic trends could have an adverse effect on future liquidity if we experience delays in the payment of outstanding receivables beyond normal payment terms or an increase in credit losses.

We are focused on the efficient conversion of operating income into cash to provide for the Company’s material cash requirements, including working capital needs, investment in our growth strategies through business acquisitions and capital expenditures, satisfaction of contractual commitments, including principal and interest payments on our outstanding indebtedness, and shareholder return through dividend payments and share repurchases.

We strive to maintain a balanced approach to capital allocation in order to achieve growth, deliver value, and minimize risk.

Management monitors financial markets and overall economic conditions for factors that may affect our liquidity and capital resources and adjusts our capital allocation strategy as necessary.

Negative macroeconomic trends could have an adverse effect on future liquidity if we experience delays in the payment of outstanding receivables beyond normal payment terms, an increase in credit losses, or significant increases in the price of commodities or the materials and equipment utilized for our project and service work, beyond those experienced to date.

In addition, during economic downturns, there have typically been fewer small discretionary projects from the private sector and our competitors have aggressively bid larger long-term infrastructure and public sector contracts.

Our short-term liquidity is also impacted by:

Our liquidity is also impacted by:

(a) the type and length of construction contracts in place, as performance of long duration contracts typically requires greater amounts of working capital, (b) the level of turnaround activities within our United States industrial services segment, as such projects are billed in arrears pursuant to contractual terms that are standard within the industry, and (c) the billing terms of our maintenance contracts, including those within our United States and United Kingdom building services segments.

While we strive to negotiate favorable billing terms, which allow us to invoice in advance of costs incurred on certain of our contracts, there can be no assurance that such terms will be agreed to by our customers.

Our long-term liquidity requirements can be expected to be met initially through cash generated from operating activities and, if necessary, the borrowing capacity available under our revolving credit facility.

As of March 31, 2022, we had cash and cash equivalents, excluding restricted cash, of $514.5 million, which are maintained in highly liquid investments with original maturity dates of three months or less.

Both our short-term and long-term liquidity requirements are expected to be met through our cash and cash equivalent balances, cash generated from our operations, and, if necessary, the borrowing capacity under our revolving credit facility.

Our credit agreement provides for a $1.30 billion revolving credit facility, for which there is $1.23 billion of available capacity as of March 31, 2022.

Refer to Note 7 - Debt of the notes to consolidated financial statements for further information regarding our credit agreement.

Based upon our current credit rating and financial position, we can also reasonably expect to be able to secure long-term debt financing if required to achieve our strategic objectives;

Over the long term, our primary revenue risk factor continues to be the level of demand for non-residential construction as well as building and industrial services, all of which are influenced by macroeconomic trends including interest rates, inflation, and governmental economic policy.

In addition, our ability to perform work is critical to meeting our long-term liquidity requirements.

however, no assurances can be made that such debt financing will be available on favorable terms.

We believe that we have sufficient financial resources available to meet our short-term and foreseeable long-term liquidity requirements.

The following table presents our net cash provided by (used in) operating activities, investing activities, and financing activities (in thousands):

For the nine months ended

September 30,

Net cash provided by operating activities $ 113,941 $ 546,834

The following table presents a summary of our operating, investing, and financing cash flows (in thousands):

For the three months ended

Net cash used in operating activities $ (95,814) $ (88,989)

Net cash used in investing activities $ (13,953) $ (31,764)

Net cash used in financing activities $ (193,513) $ (23,938)

(Decrease) increase in cash, cash equivalents, and restricted cash $ (238,542) $ 320,717

During the nine months ended September 30, 2021, our cash balance, including cash equivalents and restricted cash, decreased by approximately $238.5 million from $903.6 million at December 31, 2020 to $665.0 million at September 30, 2021.

Decrease in cash, cash equivalents, and restricted cash $ (306,699) $ (143,805)

During the three months ended March 31, 2022, our cash balance, including cash equivalents and restricted cash, decreased by approximately $306.7 million from $822.6 million at December 31, 2021 to $515.9 million at March 31, 2022.

Changes in our cash position from December 31, 2021 to March 31, 2022 are described in further detail below.

Operating Activities – Operating cash flows generally represent our net income as adjusted for certain non-cash items and changes in assets and liabilities.

Net cash provided by operating activities for the nine months ended September 30, 2021 was approximately $113.9 million compared to approximately $546.8 million of net cash provided by operating activities for the nine months ended September 30, 2020.

The $432.9 million decrease in operating cash flows was primarily attributable to strong organic revenue growth in the current year, which resulted in an increase in working capital balances, most notably accounts receivable and contract assets.

In addition, operating cash flow for the nine months ended September 30, 2020 benefited from the deferral of approximately $67.3 million of payroll tax payments given the enactment of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which allowed employers to defer payment of the employer’s portion of Social Security taxes throughout the majority of calendar year 2020.

Net cash used in operating activities for the three months ended March 31, 2022 was approximately $95.8 million compared to approximately $89.0 million of net cash used in operating activities for the three months ended March 31, 2021.

Historically, our working capital needs are greater in the first quarter of each year, resulting in a use of cash to fund our operations during such period, as evidenced by the fairly consistent use of cash during each of the three months ended March 31, 2022 and 2021.

As the year progresses, we anticipate the generation of positive operating cash flow.

Investing Activities – Investing cash flows consist primarily of payments for the acquisition of businesses, capital expenditures, and proceeds from the sale or disposal of property, plant, and equipment.

Net cash used in investing activities for the nine months ended September 30, 2021 increased by approximately $60.3 million compared to the nine months ended September 30, 2020 due to an increase in payments for business acquisitions, partially offset by lower capital expenditures.

Financing Activities – Financing cash flows consist primarily of the issuance and repayment of short-term and long-term debt, repurchases of common stock, payment of dividends to stockholders, and the issuance of common stock through certain employee equity plans.

Net cash used in financing activities for the nine months ended September 30, 2021 was $213.1 million compared to net cash used in financing activities for the nine months ended September 30, 2020 of $147.6 million.

The $65.5 million increase in cash used in financing activities was primarily due to an $84.2 million increase in funds used for the repurchase of our common stock, partially offset by a reduction in repayments of our outstanding debt given a voluntary prepayment of $22.5 million in the prior year period.

Until March 2, 2020, we had a credit agreement dated as of August 3, 2016, which provided for a $900.0 million revolving credit facility (the “2016 Revolving Credit Facility”) and a $400.0 million term loan (the “2016 Term Loan”) (collectively referred to as the “2016 Credit Agreement”).

On March 2, 2020, we amended and restated the 2016 Credit Agreement to provide for a $1.3 billion revolving credit facility (the “2020 Revolving Credit Facility”) and a $300.0 million term loan (the “2020 Term Loan”) (collectively referred to as the “2020 Credit Agreement”) expiring March 2, 2025.

We may increase the 2020 Revolving Credit Facility to $1.9 billion if additional lenders are identified and/or existing lenders are willing to increase their current commitments.

We may allocate up to $400.0 million of available capacity under the 2020 Revolving Credit Facility to letters of credit for our account or for the account of any of our subsidiaries.

At the Company’s election, borrowings under the 2020 Credit Agreement bear interest at either:

(1) a base rate plus a margin of 0.00% to 0.75%, based on certain financial tests, or (2) United States dollar LIBOR (0.08% at September 30, 2021) plus 1.00% to 1.75%, based on certain financial tests.

The base rate is determined by the greater of:

(a) the prime commercial lending rate announced by Bank of Montreal from time to time (3.25% at September 30, 2021), (b) the federal funds effective rate, plus ½ of 1.00%, (c) the daily one month LIBOR rate, plus 1.00%, or (d) 0.00%.

The interest rate in effect at September 30, 2021 was 1.08%.

A commitment fee is payable on the average daily unused amount of the 2020 Revolving Credit Facility, which ranges from 0.10% to 0.25%, based on certain financial tests.

The fee was 0.10% of the unused amount as of September 30, 2021.

Fees for letters of credit issued under the 2020 Revolving Credit Facility range from 0.75% to 1.75% of the respective face amounts of outstanding letters of credit, depending on the nature of the letter of credit, and are computed based on certain financial tests.

As of September 30, 2021 and December 31, 2020, the balance of the 2020 Term Loan was $270.6 million.

As of September 30, 2021 and December 31, 2020, there were no direct borrowings outstanding under the 2020 Revolving Credit Facility;

however, we had $71.3 million of letters of credit outstanding, which reduce the available capacity under such facility.

We capitalized an additional $3.1 million of debt issuance costs associated with the 2020 Credit Agreement.

Debt issuance costs are amortized over the life of the agreement as part of interest expense.

Obligations under the 2020 Credit Agreement are guaranteed by most of our direct and indirect subsidiaries and are secured by substantially all of our assets.

The 2020 Credit Agreement contains various covenants providing for, among other things, the maintenance of certain financial ratios and certain limitations on the payment of dividends, common stock repurchases, investments, acquisitions, indebtedness, and capital expenditures.

We were in compliance with all such covenants as of September 30, 2021 and December 31, 2020.

We are required to make annual principal payments on the 2020 Term Loan.

Any voluntary prepayments are applied against the outstanding balance of the loan and reduce our future scheduled payments on a ratable basis.

Based on our outstanding balance, principal payments of $13.9 million are due on December 31 of each year until maturity, with any remaining unpaid principal and interest due on March 2, 2025.

Share Repurchase Program and Dividends

In September 2011, our Board of Directors (the “Board”) authorized a share repurchase program allowing us to begin repurchasing shares of our outstanding common stock.

Subsequently, the Board has from time to time increased the amount of our common stock that we may repurchase under such program.

Since the inception of the repurchase program, the Board has authorized us to repurchase up to $1.15 billion of our outstanding common stock.

During the nine months ended September 30, 2021, we repurchased approximately 1.5 million shares of our common stock for approximately $183.2 million.

Since the inception of the repurchase program through September 30, 2021, we have repurchased approximately 19.1 million shares of our common stock for approximately $1.09 billion.

As of September 30, 2021, there remained authorization for us to repurchase approximately $62.7 million of our shares.

Subsequent to September 30, 2021, the Board authorized us to repurchase up to an additional $300.0 million of our outstanding common stock.

The repurchase program has no expiration date, does not obligate the Company to acquire any particular amount of common stock, and may be suspended, recommenced, or discontinued at any time or from time to time without prior notice.

We may repurchase our shares from time to time to the extent permitted by securities laws and other legal requirements, including provisions in our 2020 Credit Agreement placing limitations on such repurchases.

Net cash used in investing activities for the three months ended March 31, 2022 decreased by approximately $17.8 million compared to the three months ended March 31, 2021 due to a decrease in payments for business acquisitions, partially offset by higher capital expenditures.

Net cash used in financing activities for the three months ended March 31, 2022 was $193.5 million compared to net cash used in financing activities for the three months ended March 31, 2021 of $23.9 million.

The $169.6 million increase in cash used in financing activities was almost entirely due to an increase in funds used for the repurchase of our common stock.

The timing of repurchases is at management’s discretion subject to securities laws and other legal requirements and will depend upon several factors, including market and business conditions, future liquidity, share price, and share availability, among others.

The repurchase program has been and will be funded from our operations.

We have paid quarterly dividends since October 25, 2011.

For additional detail regarding our share repurchase program, refer to Note 10 - Common Stock of the notes to consolidated financial statements.

We currently pay a regular quarterly dividend of $0.13 per share.

For the three months ended March 31, 2022 and 2021, cash payments related to dividends were $6.9 million and $7.1 million, respectively.

Our credit agreement places limitations on the payment of dividends on our common stock.

However, we do not believe that the terms of such agreement currently materially limit our ability to pay a quarterly dividend of $0.13 per share for the foreseeable future.

The payment of dividends has been and will be funded from our operations.

Off-Balance Sheet Arrangements and Other Commitments

The terms of our construction contracts frequently require that we obtain from surety companies (“Surety Companies”), and provide to our customers, payment and performance bonds (“Surety Bonds”) as a condition to the award of such contracts.

Surety Bonds are issued in return for premiums, which vary depending on the size and type of the bond, and secure our payment and performance obligations under such contracts.

Material Cash Requirements from Contractual and Other Obligations

As of March 31, 2022, our short-term and long-term material cash requirements for known contractual and other obligations were as follows:

Outstanding Debt and Interest Payments – As of March 31, 2022, the amount outstanding under our term loan was $256.7 million.

Based on our outstanding balance, we are required to make annual principal payments of $13.9 million on December 31 of each year until maturity.

Any remaining unpaid principal is due on March 2, 2025, when the credit agreement governing our term loan expires.

We have no direct borrowings outstanding under our revolving credit facility.

In addition to annual principal payments, we are required to make quarterly interest payments on our outstanding indebtedness.

Future interest payments will be determined based on prevailing interest rates during that time.

Refer to Note 7 - Debt of the notes to consolidated financial statements for further detail of our debt obligations, including our term loan and revolving credit facility.

Operating and Finance Leases – In the normal course of business, we lease real estate, vehicles, and equipment under various arrangements which are classified as either operating or finance leases.

Future payments for such leases, excluding leases with initial terms of one year or less, were $322.6 million at March 31, 2022, with $71.3 million payable within the next 12 months.

Open Purchase Obligations – As of March 31, 2022, we had $1.92 billion of open purchase obligations, of which payments totaling approximately $1.67 billion are expected to become due within the next 12 months.

These obligations represent open purchase orders to suppliers and subcontractors related to our construction and services contracts.

These purchase orders are not reflected in the Consolidated Balance Sheets and are not expected to impact future liquidity as amounts should be recovered through customer billings.

Insurance Obligations – As described in further detail in Note 12 - Commitments and Contingencies of the notes to consolidated financial statements, we have loss payment deductibles and/or self-insured retentions for certain insurance matters.

As of March 31, 2022, our insurance liabilities, net of estimated recoveries, were $186.9 million.

Of this net amount, approximately $37.2 million is estimated to be payable within the next 12 months.

Due to many uncertainties inherent in resolving these matters, it is not practical to estimate these payments beyond such period.

Retirement Plan Obligations – As of March 31, 2022, expected future payments relating to our defined benefit post retirement plans were approximately $4.5 million per year.

We provide funding to our post retirement plans based on at least the minimum funding required by applicable regulations.

In determining the minimum funding required, we utilize current actuarial assumptions and exchange rates to forecast amounts that may be payable.

In our judgment, minimum funding estimates cannot be reliably estimated beyond a five-year time horizon.

Refer to Note 11 - Retirement Plans of the notes to consolidated financial statements for further information about our post retirement plans.

Deferred Payroll Taxes – The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) allowed U.S.

companies to defer the employer’s portion of social security taxes between March 27, 2020 and December 31, 2020.

Our first installment of these deferred social security taxes, totaling approximately $51 million, was paid in the fourth quarter of 2021 and our second installment of approximately $51 million is expected to be paid in the fourth quarter of 2022.

Contingent Consideration Liabilities – We have incurred liabilities related to contingent consideration arrangements associated with certain acquisitions, payable in the event discrete performance objectives are achieved by the acquired businesses during designated post-acquisition periods.

The aggregate amount of these liabilities can change due to additional business acquisitions, settlement of outstanding liabilities, changes in the fair value of amounts owed based on performance during such post-acquisition periods, and accretion in present value.

As of March 31, 2022, the present value of expected future payments relating to these contingent consideration arrangements was $11.2 million.

Of this amount, $5.1 million is estimated as being payable within the next 12 months, with the remainder due substantially during the following 12 months.

In addition, material cash requirements for other potential obligations, for which we cannot reasonably estimate future payments, include the following:

Legal Proceedings – We are involved in several legal proceedings in which damages and claims have been asserted against us.

While litigation is subject to many uncertainties and the outcome of litigation is not predictable with assurance, we do not believe that any such matters will have a material adverse effect on our financial position, results of operations, or liquidity.

Refer to Note 12 - Commitments and Contingencies of the notes to consolidated financial statements for more information regarding legal proceedings.

Multiemployer Benefit Plans – In addition to our Company sponsored benefit plans, we participate in certain multiemployer pension and other post retirement plans.

The cost of these plans is equal to the annual required contributions determined in accordance with the provisions of negotiated collective bargaining agreements.

Our future contributions to the multiemployer plans are dependent upon a number of factors.

Amounts of future contributions that we would be contractually obligated to make pursuant to these plans cannot be reasonably estimated.

Off-Balance Sheet Arrangements and Other Commercial Commitments

The terms of our construction contracts frequently require that we obtain from surety companies, and provide to our customers, surety bonds as a condition to the award of such contracts.

These surety bonds are issued in return for premiums, which vary depending on the size and type of the bond, and secure our payment and performance obligations under such contracts.

We have agreed to indemnify the surety companies for amounts, if any, paid by them in respect of surety bonds issued on our behalf.

Public sector contracts require Surety Bonds more frequently than private sector contracts and, accordingly, our bonding requirements typically increase as the amount of our public sector work increases.

As of September 30, 2021, based on the percentage-of-completion of our projects covered by Surety Bonds, our aggregate estimated exposure, assuming defaults on all our then existing contractual obligations, was approximately $1.4 billion, which represents approximately 27% of our total remaining performance obligations.

In addition, Surety Bonds are sometimes provided to secure obligations for wages and benefits payable to or for certain of our employees, at the request of labor unions representing such employees, or as collateral for certain insurance obligations.

As of September 30, 2021, we satisfied approximately $37.5 million of the collateral requirements of our insurance programs by utilizing Surety Bonds.

As of March 31, 2022, based on the percentage-of-completion of our projects covered by surety bonds, our aggregate estimated exposure, assuming defaults on all our then existing contractual obligations, was approximately $1.5 billion, which represents approximately 25% of our total remaining performance obligations.

Surety bonds expire at various times ranging from final completion of a project to a period extending beyond contract completion in certain circumstances.

Such amounts can also fluctuate from period to period based upon the mix and level of our bonded operating activity.

For example, public sector contracts require surety bonds more frequently than private sector contracts and, accordingly, our bonding requirements typically increase as the amount of our public sector work increases.

Our estimated maximum exposure as it relates to the value of the surety bonds outstanding is lowered on each bonded project as the cost to complete is reduced, and each commitment under a surety bond generally extinguishes concurrently with the expiration of its related contractual obligation.

Surety bonds are sometimes provided to secure obligations for wages and benefits payable to or for certain of our employees, at the request of labor unions representing such employees.

In addition, surety bonds or letters of credit may be issued as collateral for certain insurance obligations.

As of March 31, 2022, we satisfied approximately $48.1 million and $71.2 million of the collateral requirements of our insurance programs by utilizing surety bonds and letters of credit, respectively.

All such letters of credit were issued under our revolving credit facility, therefore reducing the available capacity of such facility.

We are not aware of any losses in connection with surety bonds that have been posted on our behalf, and we do not expect to incur significant losses in the foreseeable future.

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However, if we experience changes in our bonding relationships or if there are adverse changes in the surety industry, we may:

(a) seek to satisfy certain customer requests for Surety Bonds by posting other forms of collateral in lieu of Surety Bonds, such as letters of credit, parent company guarantees, or cash, in order to convince customers to forego the requirement for Surety Bonds, (b) increase our activities in our business segments that rarely require Surety Bonds, such as our building and industrial services segments, and/or (c) refrain from bidding for certain projects that require Surety Bonds.

(a) seek to satisfy certain customer requests for surety bonds by posting other forms of collateral in lieu of surety bonds, such as letters of credit, parent company guarantees, or cash, in order to convince customers to forego the requirement for surety bonds, (b) increase our activities in our businesses that rarely require surety bonds, and/or (c) refrain from bidding for certain projects that require surety bonds.

There can be no assurance that we would be able to effectuate alternatives to providing surety bonds to our customers or to obtain, on favorable terms, sufficient additional work that does not require surety bonds.

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We do not have any other material financial guarantees or off-balance sheet arrangements other than those disclosed herein.

Deferred Payroll Taxes

As allowed under the CARES Act, we deferred payment of approximately $102.5 million of employer payroll taxes during the year ended December 31, 2020.

These temporary deferrals are to be paid in two equal installments with the first due on or before January 3, 2022 and the second due on or before January 3, 2023.

Legal Proceedings

We are involved in several legal proceedings in which damages and claims have been asserted against us.

Certain Insurance Matters

As of September 30, 2021 and December 31, 2020, we utilized approximately $71.2 million of letters of credit obtained under our 2020 Revolving Credit Facility as collateral for insurance obligations.

As of September 30, 2021 and December 31, 2020, we satisfied an additional $37.5 million of these collateral requirements by utilizing Surety Bonds.

New Accounting Pronouncements

We review new accounting standards to determine the expected impact, if any, that the adoption of such standards will have on our financial position and/or results of operations.

See Note 2 - New Accounting Pronouncements of the notes to consolidated financial statements included in Item 1.

Financial Statements for further information regarding new accounting standards, including the anticipated dates of adoption and the effects on our consolidated financial position, results of operations, or liquidity.

Application of Critical Accounting Policies

Our consolidated financial statements are based on the application of significant accounting policies, which require management to make estimates and assumptions.

Our significant accounting policies are described in Note 2 - Summary of Significant Accounting Policies of the notes to consolidated financial statements included in Item 8 of our annual report on Form 10-K for the year ended December 31, 2020.

We believe that some of the more subjective areas in the application of accounting policies that affect our financial condition and results of operations are the impact of changes in the estimates and judgments pertaining to:

(a) revenue recognition from contracts with customers;

(b) collectability or valuation of accounts receivable and the associated allowance for credit losses;

(d) income taxes;

and (e) goodwill, identifiable intangible assets, and other long-lived assets.

See Note 2 - New Accounting Pronouncements of the notes to consolidated financial statements for further information regarding new accounting standards, including the anticipated dates of adoption and the effects on our consolidated financial position, results of operations, or liquidity.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements is based on the application of significant accounting policies, which require management to make estimates and assumptions.

Our significant accounting policies are described further in Note 2 - Summary of Significant Accounting Policies of the notes to consolidated financial statements included in Item 8 of our Form 10-K for the year ended December 31, 2021.

We base our estimates on historical experience, known or expected trends, third-party valuations, and various other assumptions that we believe to be reasonable under the circumstances.

As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

There have been no significant changes to our critical accounting policies or methods for the three months ended March 31, 2022.

We believe the following critical accounting policies govern the more significant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition from Contracts with Customers

We believe our most critical accounting policy is revenue recognition.

The Company recognizes revenue by applying the following five step model:

(1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to performance obligations in the contract, and (5) recognize revenue as performance obligations are satisfied.

The Company recognizes revenue at the time the related performance obligation is satisfied by transferring a promised good or service to its customers.

A good or service is considered to be transferred when the customer obtains control.

The Company can transfer control of a good or service and satisfy its performance obligations either over time or at a point in time.

The Company transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time if one of the following three criteria are met:

(a) the customer simultaneously receives and consumes the benefits provided by the Company’s performance as we perform, (b) the Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (c) the Company’s performance does not create an asset with an alternative use to us, and we have an enforceable right to payment for performance completed to date.

For our performance obligations satisfied over time, we recognize revenue by measuring the progress toward complete satisfaction of that performance obligation.

The selection of the method to measure progress towards completion can be either an input method or an output method and requires judgment based on the nature of the goods or services to be provided.

For our construction contracts, revenue is generally recognized over time as our performance creates or enhances an asset that the customer controls as it is created or enhanced.

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Under the cost-to-cost measure of progress, 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.

For our unit price construction contracts, progress towards complete satisfaction is measured through an output method, such as the amount of units produced or delivered, when our performance does not produce significant amounts of work in process or finished goods prior to complete satisfaction of such performance obligations.

For our unit price construction contracts, progress towards complete satisfaction is measured through an output method, such as the number of units produced or delivered, when our performance does not produce significant amounts of work in process or finished goods prior to complete satisfaction of such performance obligations.

For our services contracts, revenue is also generally recognized over time as the customer simultaneously receives and consumes the benefits of our performance as we perform the service.

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For certain of our revenue streams, such as call-out repair and service work, outage services, refinery turnarounds, and specialty welding services that are performed under time and materials contracts, our progress towards complete satisfaction of such performance obligations is measured using an output method as the customer receives and consumes the benefits of our performance completed to date.

Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term.

For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made.

When the current estimate of total costs for a performance obligation indicate a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident.

For the three and nine months ended September 30, 2021 and 2020, there were no changes in total estimated costs that had a significant impact on our operating results.

In addition, there were no significant losses recognized during the three and nine months ended September 30, 2021 and 2020.

The timing of revenue recognition may differ from the timing of invoicing to customers.

Contract assets include unbilled amounts from our construction projects when revenues recognized under the cost-to-cost measure of progress exceed the amounts invoiced to our customers, as the amounts cannot be billed under the terms of our contracts.

Such amounts are recoverable from our customers based upon various measures of performance, including achievement of certain milestones, completion of specified units, or completion of a contract.

In addition, many of our time and materials arrangements, as well as our contracts to perform turnaround services within the United States industrial services segment, are billed in arrears pursuant to contract terms that are standard within the industry, resulting in contract assets and/or unbilled receivables being recorded as revenue is recognized in advance of billings.

Also included in contract assets are amounts we seek or will seek to collect from customers or others for errors or changes in contract specifications or design, contract change orders or modifications in dispute or unapproved as to scope and/or price, or other customer-related causes of unanticipated additional contract costs (claims and unapproved change orders).

Our contract assets do not include capitalized costs to obtain and fulfill a contract.

Contract assets are generally classified as current within the Consolidated Balance Sheets.

Contract liabilities from our construction contracts arise when amounts invoiced to our customers exceed revenues recognized under the cost-to-cost measure of progress.

Contract liabilities additionally include advanced payments from our customers on certain contracts.

Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation and are recorded as either current or long-term, depending upon when we expect to recognize such revenue.

The long-term portion of contract liabilities is included in “Other long-term obligations” in the Consolidated Balance Sheets.

See Note 3 - Revenue from Contracts with Customers of the notes to consolidated financial statements included in Item 1.

Financial Statements for further disclosure regarding revenue recognition.

The nature of our contracts gives rise to several types of variable consideration, including pending change orders and claims;

contract bonuses and incentive fees;

and liquidated damages and penalties.

We recognize revenue for such variable consideration when it is probable, in our judgment, that a significant future reversal in the amount of cumulative revenue recognized under the contract will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

The Company estimates the amount of variable consideration to be included in the transaction price utilizing one of two prescribed methods, depending on which method better predicts the amount of consideration to which the entity will be entitled.

Due to uncertainties inherent in the estimation process, as well as the significant judgment involved in determining variable consideration, it is possible that estimates of costs to complete a performance obligation, and/or our estimates of transaction prices, will be revised in the near-term.

For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, or changes in the estimate of transaction prices, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made.

Based on an evaluation of individual projects that had revisions to total estimated costs, which resulted in a reduction of profitability in excess of $1.0 million, our operating results were negatively impacted by approximately $10.0 million, during the three months ended March 31, 2022.

Of this amount, approximately $4.6 million was recorded within our United States electrical construction and facilities services segment and approximately $5.4 million was recorded within our United States mechanical construction and facilities services segment.

There were no changes in total estimated costs that had a significant impact on our operating results during the three months ended March 31, 2021.

Due to the significant judgments utilized in the estimation process described above, if subsequent actual results and/or updated assumptions, estimates, or projections related to our underlying project positions were to change from those utilized at March 31, 2022, it could result in a material impact to our results of operations.

For example, a 50 basis point increase or decrease in the estimated gross profit margin on our uncompleted construction projects, in the aggregate, as a result of a revision in estimated costs to complete a performance obligation or a revision in estimated transaction price, would have resulted in an increase or decrease to operating income of approximately $70 million for the three months ended March 31, 2022.

See Note 3 - Revenue from Contracts with Customers of the notes to consolidated financial statements for further disclosure regarding revenue recognition.

Accounts Receivable and Allowance for Credit Losses

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In addition to monitoring delinquent accounts, management reviews the credit quality of its receivables by, among other things, obtaining credit ratings of significant customers, assessing economic and market conditions, and evaluating material changes to a customer’s business, cash flows, and financial condition.

At September 30, 2021 and December 31, 2020, our accounts receivable of $2,181.7 million and $1,922.1 million, respectively, were recorded net of allowances for credit losses of $22.6 million and $18.0 million, respectively.

The increase in our allowance for credit losses was predominantly attributable to our evaluation of a specific outstanding receivable within our United States industrial services segment during the second quarter of 2021.

At March 31, 2022 and December 31, 2021, our accounts receivable of $2,303.4 million and $2,204.5 million, respectively, were recorded net of allowances for credit losses of $23.0 million and $23.5 million, respectively.

The decrease in our allowance for credit losses was predominantly attributable to the write-off of specific amounts deemed unrecoverable.

Allowances for credit losses are based on the best facts available and are reassessed and adjusted on a regular basis as additional information is received.

Should anticipated collections fail to materialize, or if future economic conditions compare unfavorably to our forecasts, we could experience an increase in our allowances for credit losses.

The provision for credit losses amounted to approximately $5.8 million and $3.4 million for the nine months ended September 30, 2021 and 2020, respectively.

For example, if economic conditions were to significantly deteriorate, such as to those experienced during the last global financial crisis, the portion of our allowance for credit losses, which is estimated based on our historical credit loss experience, could increase by up to approximately $13.5 million.

Insurance Liabilities

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Therefore, if our actual experience differs from the assumptions and estimates used for recording the liabilities, adjustments may be required and will be recorded in the period that the experience becomes known.

Our estimated net insurance liabilities for workers’ compensation, automobile liability, general liability, and property claims increased by $3.0 million at September 30, 2021 compared to December 31, 2020, partially as a result of greater potential exposures, including the impact of acquired companies.

If our estimated insurance liabilities for workers’ compensation, automobile liability, general liability, and property claims were to increase by 10%, it would have resulted in $17.5 million of additional expense for the nine months ended September 30, 2021.

Deferred income tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and income tax bases of assets and liabilities as well as for net operating loss and tax credit carryforwards.

Deferred income taxes are valued using enacted tax rates expected to be in effect when income taxes are paid or recovered, with the effect of a change in tax laws or rates recognized in the statement of operations in the period in which such change is enacted.

Our estimated net insurance liabilities for workers’ compensation, automobile liability, general

liability, and property claims increased by $8.3 million at March 31, 2022 compared to December 31, 2021, partially as a result of greater potential exposures.

If our estimated insurance liabilities for workers’ compensation, automobile liability, general liability, and property claims were to increase by 10%, it would have resulted in $18.7 million of additional expense for the three months ended March 31, 2022.

As of March 31, 2022 and December 31, 2021, we had net deferred income tax liabilities of $51.1 million and $51.0 million, respectively, primarily resulting from differences between the carrying value and income tax bases of certain identifiable intangible assets, goodwill, and depreciable fixed assets.

Included within these net deferred income tax liabilities are $214.6 million and $212.3 million of deferred income tax assets as of March 31, 2022 and December 31, 2021, respectively.

The total valuation allowance on deferred income tax assets was approximately $2.5 million as of both March 31, 2022 and December 31, 2021.

The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

Deferred income taxes are recorded net of a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset will not be realized.

In making such determination, we consider all available evidence, including projections of future taxable income, tax-planning strategies, and recent results of operations.

At September 30, 2021 and December 31, 2020, we had net deferred income tax liabilities of $29.6 million and $29.4 million, respectively, primarily resulting from differences between the carrying value and income tax bases of certain identifiable intangible assets, goodwill, and depreciable fixed assets.

Included within these net deferred income tax liabilities are $228.0 million and $217.1 million of deferred income tax assets as of September 30, 2021 and December 31, 2020, respectively.

The total valuation allowance on deferred income tax assets, primarily related to state net operating loss carryforwards, was approximately $3.9 million as of both September 30, 2021 and December 31, 2020.

Based on our taxable income, which has generally exceeded the amount of our net deferred income tax asset balance, as well as current projections of future taxable income, we have determined that it is more likely than not that our net deferred income tax assets will be realized.

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Goodwill, Identifiable Intangible Assets, and Other Long-Lived Assets

As of September 30, 2021 and December 31, 2020, we had goodwill of $888.3 million and $851.8 million, respectively, arising out of the acquisition of businesses.

As of March 31, 2022 and December 31, 2021, we had goodwill of $891.5 million and $890.3 million, respectively, arising out of the acquisition of businesses.

Goodwill is not amortized but instead allocated to its respective reporting unit and evaluated for impairment annually, or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired.

We have determined that our reporting units are consistent with the reportable segments identified in Note 14 - Segment Information of the notes to consolidated financial statements.

As of September 30, 2021, approximately 17.9% of our goodwill related to our United States electrical construction and facilities services segment, approximately 34.1% related to our United States mechanical construction and facilities services segment, approximately 35.2% related to our United States building services segment, and approximately 12.8% related to our United States industrial services segment.

As of March 31, 2022, approximately 18.0% of our goodwill related to our United States electrical construction and facilities services segment, approximately 34.7% related to our United States mechanical construction and facilities services segment, approximately 34.5% related to our United States building services segment, and approximately 12.8% related to our United States industrial services segment.

Absent any earlier identified impairment indicators, we perform our annual goodwill impairment assessment on October 1 each fiscal year.

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However, if the carrying amount of the reporting unit exceeds the fair value, the goodwill of the reporting unit is impaired and an impairment loss in the amount of the excess is recognized and charged to operations.

We did not identify any impairment indicators during the three and nine months ended September 30, 2021 that would necessitate an interim impairment assessment of our goodwill and no impairment of our goodwill was recognized during such periods.

However, our operations were significantly impacted by the COVID-19 pandemic starting with the second quarter of 2020.

During the same period, the demand for oil and other refined products significantly deteriorated as a result of the pandemic and the corresponding preventative measures taken around the world to mitigate the spread of the virus, including various local, state, and national jurisdictional “shelter-in-place” orders.

Further, other macroeconomic events during such period, including geopolitical tensions between the Organization of Petroleum Exporting Countries (OPEC) and Russia, resulted in a significant drop in the price of crude oil.

These negative factors created significant volatility and uncertainty in the markets in which our United States industrial services segment operates, resulting in a significant decrease in the demand for our service offerings.

Consequently, in the second quarter of 2020, we revised our near-term revenue and operating margin expectations for such segment and concluded that a triggering event had occurred which indicated that it was more likely than not that its fair value was less than its carrying amount.

Based on the outcome of our second quarter 2020 interim goodwill impairment test, we concluded that the carrying amount of our United States industrial services segment exceeded its fair value by $225.5 million, resulting in the recognition of a non-cash goodwill impairment charge in that amount, which was included within our results of operations for the nine months ended September 30, 2020.

We did not identify impairment indicators related to any other reporting unit that would have required an interim impairment assessment.

Additionally, as described below, we subsequently (as of October 1, 2020) performed our annual impairment assessment of all reporting units and determined there was no incremental impairment of goodwill.

As of the date of our most recent impairment test (October 1, 2021), the fair values of our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment, our United States building services segment, and our United States industrial services segment exceeded their carrying values by approximately $1,516.1 million, $2,772.7 million, $784.2 million, and $40.6 million, respectively.

In completing our annual impairment assessment, we determined the fair value of each of our reporting units using an income approach whereby fair value was calculated utilizing discounted estimated future cash flows, assuming a risk-adjusted industry weighted average cost of capital.

The weighted average cost of capital used in our annual impairment testing was 10.6%, 10.4%, and 11.6% for our United States construction segments, our United States building services segment, and our United States industrial services segment, respectively.

These weighted average cost of capital estimates were developed with the assistance of an independent third-party valuation specialist and reflect the overall level of inherent risk within the respective reporting unit and the rate of return a market participant would expect to earn as of the date of our impairment test.

The weighted average cost of capital used in our annual impairment testing was 10.4% for our United States construction segments and our United States building services segment, and 11.3% for our United States industrial services segment.

Our cash flow projections were derived from our most recent internal forecasts of anticipated revenue growth rates and operating margins, with cash flows beyond the discrete forecast period estimated using a terminal value calculation which incorporated historical and forecasted trends, an estimate of long-term growth rates, and assumptions about the future demand for our services.

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In addition, keeping all other assumptions constant, a 50 basis point reduction in the perpetual growth rate would cause the estimated fair values of our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment, our United States building services segment, and our United States industrial services segment to decrease by approximately $52.4 million, $95.9 million, $35.8 million, and $9.5 million, respectively.

Given the amounts by which the fair value exceeds the carrying value for each of our reporting units, other than our United States industrial services segment, the decreases in estimated fair values described above would not have significantly impacted the results of our impairment tests.

In the case of our United States industrial services segment, however, such decreases would cause the estimated fair value of such reporting unit to approximate its carrying value.

Given the amounts by which the fair value exceeds the carrying value for each of our reporting units, the decreases in estimated fair values described above would not have significantly impacted the results of our impairment tests.

Further, for each of our reporting units, other than our United States industrial services segment, a 10% decline in the estimated fair value of such reporting unit, due to other changes in our assumptions, including forecasted future cash flows, would not have significantly impacted the results of our impairment tests.

In the case of our United States industrial services segment, however, a 10% decrease would cause the estimated fair value of this reporting unit to approximate its carrying value.

No impairment of our goodwill was recognized during the three months ended March 31, 2022 and 2021.

Identifiable Intangible Assets and Other Long-Lived Assets

As of September 30, 2021 and December 31, 2020, net identifiable intangible assets (primarily consisting of our contract backlog, developed technology/vendor network, customer relationships, and subsidiary trade names) arising out of the acquisition of businesses were $602.2 million and $582.9 million, respectively.

As of March 31, 2022 and December 31, 2021, net identifiable intangible assets (primarily consisting of our customer relationships, subsidiary trade names, developed technology/vendor network, and contract backlog) arising out of the acquisition of businesses were $574.6 million and $589.4 million, respectively.

The determination of related estimated useful lives for identifiable intangible assets and whether those assets are impaired involves significant judgments based upon short- and long-term projections of future performance.

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This fair value is then compared with the carrying value of each trade name.

If the carrying amount of the trade name is greater than the implied fair value of the trade name, an impairment in the amount of the excess is recognized and charged to operations.

In addition, we review for impairment of identifiable intangible assets that are being amortized as well as other long-lived assets whenever facts and circumstances indicate that their carrying values may not be fully recoverable.

If the carrying amount is greater than the implied fair value of the trade name, an impairment in the amount of the excess is recognized and charged to operations.

As of October 1, 2021, we performed our annual impairment testing of all subsidiary trade names that are not subject to amortization and determined that there was no impairment of these assets.

In performing this impairment assessment, we considered the sensitivity of the reported amounts to the methods, assumptions, and estimates underlying our testing.

For example, we performed sensitivity analyses and concluded that, individually, none of the following changes in estimates or assumptions would have significantly impacted the results of our testing or resulted in an impairment of our subsidiary trade names:

(a) a 50 basis point increase in the discount rate utilized in our testing, (b) a 50 basis point decline in the perpetual growth rate utilized in our testing, or (c) a 10% decrease in the estimated fair value of each trade name.

This test compares their carrying values to the undiscounted pre-tax cash flows expected to result from the use of the assets.

If the assets are impaired, the assets are written down to their fair values, generally determined based on their discounted estimated future cash flows.

Given the negative market conditions disclosed above, we evaluated certain of our identifiable intangible assets and other long-lived assets for impairment during the second quarter of 2020.

Such assets included those associated with the businesses in our United States industrial services segment.

As a result of these assessments, during the quarter ended June 30, 2020, we recorded non-cash impairment charges of $7.3 million.

We subsequently (as of October 1, 2020) performed our annual impairment assessment of all subsidiary trade names that are not subject to amortization and determined there was no incremental impairment of these assets.

Additionally, we have not identified any impairment indicators during the three and nine months ended September 30, 2021 that would necessitate an interim impairment assessment of either our identifiable intangible assets or other long-lived assets, and no impairment of these assets was recognized during such 2021 periods.

No impairment of our identifiable intangible assets or other long-lived assets was recognized during the three months ended March 31, 2022 and 2021.

Other Considerations

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In addition, estimates of weighted average costs of capital are developed with the assistance of an independent third-party valuation specialist.

These assumptions and estimates may change in future periods, especially in consideration of the uncertainty created by the COVID-19 pandemic and its potential impact on the broader economy and our results of operations in future periods, particularly with respect to our United States industrial services segment.

Significant adverse changes to external market conditions or our internal forecasts, if any, could result in future impairment charges.

These assumptions and estimates may change in future periods.

Significant adverse changes to external market conditions or our internal forecasts, if any, could result in future impairment charges, particularly with respect to our United States industrial services segment given that the fair value of this reporting unit more closely approximates its carrying value.

It is not possible at this time to determine if any future impairment charge will result or, if it does, whether such a charge would be material to our results of operations.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis