EMCOR Group, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Business Description 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; and • 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 effect of the COVID-19 pandemic may continue to disrupt our customers’ operations and our job sites, and may continue to impact supply chains. Economic disruptions, including supply chain, production, and other logistical issues, as well as wage and general inflation, together with 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 have manifested themselves most notably through project delays or scheduling impacts and reduced labor productivity and efficiency, particularly within our United States construction segments and our United States building services segment. 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. In addition, the market for trade labor remains tight in many of the regions in which we operate. 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 impact our ability to convert such remaining performance obligations to revenues in the near term, or 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. Overview The following table presents selected financial data for the three months ended June 30, 2022 and 2021 (in thousands, except percentages and per share data): For the three months ended June 30, 2022 2021 Revenues $ 2,707,388 $ 2,437,666 Revenues increase from prior year 11.1 % 21.0 % Gross profit $ 383,008 $ 376,279 Gross profit as a percentage of revenues 14.1 % 15.4 % Operating income $ 137,644 $ 133,358 Operating income as a percentage of revenues 5.1 % 5.5 % Net income attributable to EMCOR Group, Inc. $ 100,664 $ 97,350 Diluted earnings per common share $ 1.99 $ 1.78 26 Table of Contents Revenues of $2.71 billion for the quarter ended June 30, 2022 represent an increase of 11.1% from revenues of $2.44 billion for the quarter ended June 30, 2021. Demand for our services continues to be strong and, as described in further detail below, we experienced revenue growth within all of our reportable segments except for our United Kingdom building services segment, the reduction in revenues of which was largely due to unfavorable exchange rate movements during 2022. During the second quarter of 2022, a company acquired in 2021 generated incremental revenues of approximately $33.7 million. Operating income for the quarter ended June 30, 2022 was $137.6 million, or 5.1% of revenues, compared to operating income of $133.4 million, or 5.5% of revenues, for the quarter ended June 30, 2021. The increase in operating income was a result of the aforementioned increase in revenues, while the decrease in operating margin was driven by a reduction in gross profit margin, predominantly within our United States construction segments, partially due to a change in project mix. In addition, as described in further detail below, gross profit margin for each of our construction segments was adversely impacted by supply chain disruptions and delays, which contributed to: (a) certain project losses recognized in the second quarter of 2022, which negatively impacted our consolidated operating margin by 40 basis points, and (b) reduced labor productivity when compared to the prior year. These declines in gross profit margin were partially offset by a reduction in the ratio of selling, general and administrative expenses to revenues as we were able to leverage our overhead cost structure during this period of revenue growth. Net income of $100.7 million, or $1.99 per diluted share, for the quarter ended June 30, 2022, compares favorably to net income of $97.4 million, or $1.78 per diluted share, for the quarter ended June 30, 2021. In addition to the increase in operating income referenced above, our diluted earnings per share for the second quarter of 2022 benefited from a reduced weighted average share count given the impact of common stock repurchases made by us throughout 2021 and 2022. Impact of Acquisitions In order to provide a more meaningful period-over-period discussion of our operating results, we may discuss amounts generated or incurred (revenues, gross profit, selling, general and administrative expenses, and operating income) from companies acquired. 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 half of 2022, we acquired three companies, each for an immaterial amount. Two companies, the results of operations of which have been included within our United States mechanical construction and facilities services segment, provide fire protection services in the Northeastern and Southern regions of the United States, respectively. The third company, the results of operations of which have been included within our United States building services segment, specializes in building automation and controls in the Southwestern region of the United States. The results of operations of each such company were de minimis. 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. 27 Table of Contents Results of Operations Revenues 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 June 30, 2022 % of Total 2021 % of Total Revenues: United States electrical construction and facilities services $ 564,112 21 % $ 492,130 20 % United States mechanical construction and facilities services 1,066,347 39 % 968,664 40 % United States building services 677,847 25 % 611,835 25 % United States industrial services 284,534 11 % 235,163 10 % Total United States operations 2,592,840 96 % 2,307,792 95 % United Kingdom building services 114,548 4 % 129,874 5 % Total operations $ 2,707,388 100 % $ 2,437,666 100 % For the six months ended June 30, 2022 % of Total 2021 % of Total Revenues: United States electrical construction and facilities services $ 1,086,142 20 % $ 951,525 20 % United States mechanical construction and facilities services 2,066,817 39 % 1,883,165 40 % United States building services 1,305,648 25 % 1,179,871 25 % United States industrial services 595,285 11 % 470,545 10 % Total United States operations 5,053,892 95 % 4,485,106 95 % United Kingdom building services 246,045 5 % 256,609 5 % Total operations $ 5,299,937 100 % $ 4,741,715 100 % As described below in more detail, our revenues for the second quarter of 2022 increased to $2.71 billion compared to $2.44 billion for the second quarter of 2021, and our revenues for the six months ended June 30, 2022 increased to $5.30 billion compared to $4.74 billion for the six months ended June 30, 2021. We experienced increases in revenues from all of our reportable segments, except for our United Kingdom building services segment, the reduction in revenues of which was largely due to unfavorable exchange rate movements during 2022. Companies acquired in 2022 and 2021 generated incremental revenues of approximately $33.7 million and $83.2 million for the three and six months ended June 30, 2022, respectively. Revenues of our United States electrical construction and facilities services segment were $564.1 million and $1,086.1 million for the three and six months ended June 30, 2022, respectively, compared to revenues of $492.1 million and $951.5 million for the three and six months ended June 30, 2021, respectively. This segment’s results for the three and six months ended June 30, 2022 included $33.7 million and $68.6 million, respectively, of incremental revenues generated by companies acquired in 2021. Excluding the impact of acquisitions, revenues of this segment increased by $38.3 million and $66.0 million, respectively, primarily as a result of an increase in revenues from: (a) the commercial market sector, inclusive of both certain telecommunication and technology projects as well as traditional commercial construction projects, (b) the healthcare market sector due to large project activity, and (c) transmission and distribution projects, including those to support sustainable energy solutions such as solar and wind. These revenue increases were partially offset by a decrease in revenues from the institutional market sector during both the three and six months ended June 30, 2022, due to the completion or substantial completion of various projects which were performed in the prior year. Our United States mechanical construction and facilities services segment revenues for the three months ended June 30, 2022 were $1,066.3 billion, a $97.7 million increase compared to revenues of $968.7 million for the three months ended June 30, 2021. Revenues of this segment for the six months ended June 30, 2022 were $2,066.8 million, a $183.7 million increase compared to revenues of $1,883.2 million for the six months ended June 30, 2021. The increase in this segment’s revenues for both periods was attributable to revenue growth within the majority of the market sectors in which we operate, including: (a) the manufacturing market sector, driven by certain large food processing projects, (b) the water and wastewater market sector, given increased project activity within the Southern region of the United States, (c) the institutional market sector, due to 28 Table of Contents increased project activity within the Midwestern and Northeastern regions of the United States, (d) the commercial market sector, as a result of increased demand for our mechanical construction and/or fire protection 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 (e) 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. In addition, revenues of this segment for the six months ended June 30, 2022 benefited from increased demand for our fire protection services within various warehousing and distribution facilities to support the build-out of our customers’ e-commerce supply chains. Revenues of our United States building services segment were $677.8 million and $1,305.6 million for the three and six months ended June 30, 2022, respectively, compared to revenues of $611.8 million and $1,179.9 million for the three and six months ended June 30, 2021, respectively. Excluding incremental acquisition revenues within this segment’s mobile mechanical services division of $14.6 million during the six months ended June 30, 2022, this segment’s revenue growth for both periods was primarily attributable to: (a) its commercial site-based services division, due to the award of facilities maintenance contracts with new customers, as well as scope or site expansion and increased project work 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 HVAC system retrofits and building automation and controls services, partially as our customers continue to seek ways to improve the energy efficiency or indoor air quality of their facilities. Revenues of our United States industrial services segment for the three months ended June 30, 2022 were $284.5 million, a $49.4 million increase compared to revenues of $235.2 million for the three months ended June 30, 2021. Revenues of this segment for the six months ended June 30, 2022 were $595.3 million, a $124.7 million increase compared to revenues of $470.5 million for the six months ended June 30, 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 downstream energy demand within this segment during the second half of 2021. Such increased demand continued into the first half of 2022 and resulted in growth in revenues from: (a) this segment’s field services operations, due to: (i) a more normalized spring turnaround season when compared to the prior year, and (ii) an increase in maintenance and capital project activity, 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 $114.5 million and $246.0 million for the three and six months ended June 30, 2022, respectively, compared to revenues of $129.9 million and $256.6 million for the three and six months ended June 30, 2021, respectively. The decrease in this segment’s revenues for both periods was predominantly a result of unfavorable exchange rate movements for the British pound versus the United States dollar, which negatively impacted this segment’s revenues by $12.5 million and $16.4 million for the three and six months ended June 30, 2022, respectively. Excluding the impact of foreign exchange rate movements, this segment’s revenues for the six months ended June 30, 2022 increased as a result of growth in project activities with existing customers, primarily within the commercial market sector, including certain telecommunication projects. Cost of sales and gross profit The following table presents our cost of sales, gross profit (revenues less cost of sales), and gross profit margin (gross profit as a percentage of revenues) (in thousands, except for percentages): For the three months ended June 30, For the six months ended June 30, 2022 2021 2022 2021 Cost of sales $ 2,324,380 $ 2,061,387 $ 4,564,374 $ 4,024,363 Gross profit $ 383,008 $ 376,279 $ 735,563 $ 717,352 Gross profit margin 14.1 % 15.4 % 13.9 % 15.1 % Our gross profit for the three months ended June 30, 2022 was $383.0 million, or 14.1% of revenues, compared to gross profit of $376.3 million, or 15.4% of revenues, for the three months ended June 30, 2021. Gross profit for the six months ended June 30, 2022 was $735.6 million, or 13.9% of revenues, compared to gross profit of $717.4 million, or 15.1% of revenues, for the six months ended June 30, 2021. Companies acquired in 2022 and 2021 generated incremental gross profit of approximately $5.4 million and $11.7 million for the three and six months ended June 30, 2022, respectively. Excluding the impact of acquisitions, the increase in gross profit for both 2022 periods 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. 29 Table of Contents The decrease in gross profit margin for both 2022 periods was primarily attributable to a reduction in gross profit margin within each of our United States construction segments, as a result of: (a) a less favorable project mix, and (b) the impact of supply chain disruptions and delays, that contributed to: (i) certain discrete project losses during the three and six months ended June 30, 2022, which negatively impacted our consolidated gross profit margin during such periods by 50 basis points and 40 basis points, respectively, and (ii) reduced labor productivity in instances where projects were either delayed or work was performed out of sequence as we awaited the receipt of key materials and equipment. Refer to the operating income section below for further discussion regarding the operating performance of each of our reportable segments. Selling, general and administrative expenses The following table presents our selling, general and administrative expenses and SG&A margin (selling, general and administrative expenses as a percentage of revenues) (in thousands, except for percentages): For the three months ended June 30, For the six months ended June 30, 2022 2021 2022 2021 Selling, general and administrative expenses $ 245,364 $ 242,921 $ 497,962 $ 466,990 SG&A margin 9.1 % 10.0 % 9.4 % 9.8 % Our selling, general and administrative expenses for the three months ended June 30, 2022 were $245.4 million compared to selling, general and administrative expenses of $242.9 million for the three months ended June 30, 2021. Selling, general and administrative expenses for the six months ended June 30, 2022 were $498.0 million compared to selling, general and administrative expenses of $467.0 million for the six months ended June 30, 2021. For the three and six months ended June 30, 2022, selling, general and administrative expenses included $3.1 million and $8.4 million, respectively, of incremental expenses directly related to companies acquired in 2022 and 2021, including amortization expense attributable to identifiable intangible assets of $1.1 million and $2.1 million, respectively. Excluding incremental expenses from businesses acquired, our selling, general and administrative expenses decreased by $0.7 million for the three months ended June 30, 2022 and increased by $22.6 million for the six months ended June 30, 2022. The organic increase in selling, general and administrative expenses for the year-to-date period was primarily attributable to an increase in: (a) salaries expense, as a result of an increase in headcount to support our organic revenue growth, (b) employee benefit costs, driven by greater medical claim activity, (c) travel and entertainment expenses, given a resumption in travel and business meals as COVID-19 related restrictions continue to ease, and (d) computer hardware and software costs, partially as a result of various information technology and cybersecurity initiatives currently in process. These increases were partially offset by a reduction in our provision for credit losses as our results for the prior year period included expense of approximately $4.1 million associated with a reserve taken for a specific customer bankruptcy within our United States industrial services segment. Selling, general and administrative expenses as a percentage of revenues were 9.1% and 10.0% for the three months ended June 30, 2022 and 2021, respectively, compared to 9.4% and 9.8% for the six months ended June 30, 2022 and 2021, respectively. The decrease in SG&A margin for both the three and six month periods was largely 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. 30 Table of Contents 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 June 30, 2022 % of Segment Revenues 2021 % of Segment Revenues Operating income (loss): United States electrical construction and facilities services $ 35,095 6.2 % $ 43,012 8.7 % United States mechanical construction and facilities services 76,945 7.2 % 76,724 7.9 % United States building services 38,161 5.6 % 32,538 5.3 % United States industrial services 6,458 2.3 % (208) (0.1) % Total United States operations 156,659 6.0 % 152,066 6.6 % United Kingdom building services 6,415 5.6 % 7,047 5.4 % Corporate administration (25,430) — (25,755) — Total operations 137,644 5.1 % 133,358 5.5 % Other items: Net periodic pension (cost) income 1,094 922 Interest expense, net (1,751) (1,316) Income before income taxes $ 136,987 $ 132,964 For the six months ended June 30, 2022 % of Segment Revenues 2021 % of Segment Revenues Operating income (loss): United States electrical construction and facilities services $ 55,088 5.1 % $ 83,264 8.8 % United States mechanical construction and facilities services 135,619 6.6 % 139,900 7.4 % United States building services 62,083 4.8 % 63,658 5.4 % United States industrial services 19,716 3.3 % (2,651) (0.6) % Total United States operations 272,506 5.4 % 284,171 6.3 % United Kingdom building services 17,003 6.9 % 16,458 6.4 % Corporate administration (51,908) — (50,267) — Total operations 237,601 4.5 % 250,362 5.3 % Other items: Net periodic pension (cost) income 2,263 1,830 Interest expense, net (3,040) (2,679) Income before income taxes $ 236,824 $ 249,513 Operating income was $137.6 million, or 5.1% of revenues, for the three months ended June 30, 2022 compared to operating income of $133.4 million, or 5.5% of revenues, for the three months ended June 30, 2021. The increase in operating income for the three months ended June 30, 2022 was primarily a result of increased operating income within our United States industrial services segment and our United States building services segment, partially offset by a decline in operating income within our United States electrical construction and facilities services segment. Operating income was $237.6 million, or 4.5% of revenues, for the six months ended June 30, 2022 compared to operating income of $250.4 million, or 5.3% of revenues, for the six months ended June 30, 2021. The decrease in operating income for the six months ended June 30, 2022 was predominately a result of a decrease in operating income within our United States electrical construction and facilities services segment, which was only partially offset by improved operating performance within our United States industrial services segment. The reduction in operating margin for both 2022 periods was driven by a reduction in gross profit margin, predominantly within our United States construction segments, due to a change in project mix, as well as the impact of certain project losses, which negatively impacted our consolidated operating margin by 40 basis points during each of the three and six months ended June 30, 2022. These declines in gross profit margin were partially offset by a reduction in the ratio of selling, general and administrative expenses to revenues as we were able to leverage our overhead cost structure during this period of revenue growth. The operating performance of each of our reportable segments is described in further detail below. 31 Table of Contents Operating income of our United States electrical construction and facilities services segment was $35.1 million, or 6.2% of revenues, for the three months ended June 30, 2022, compared to $43.0 million, or 8.7% of revenues, for the three months ended June 30, 2021. Operating income of this segment for the six months ended June 30, 2022 was $55.1 million, or 5.1% of revenues, compared to operating income of $83.3 million, or 8.8% of revenues, for the six months ended June 30, 2021. Companies acquired in 2021 contributed incremental operating income of $3.0 million and $4.2 million, inclusive of $0.4 million and $2.3 million of amortization expense associated with identifiable intangible assets, for the three and six months ended June 30, 2022, respectively. Excluding such acquisition contribution, operating income of this segment decreased by $10.9 million and $32.4 million during the three and six months ended June 30, 2022, respectively. A less favorable project mix within the commercial, institutional, and transportation market sectors, coupled with certain discrete project losses recognized during the first half of 2022, due, in part, to supply chain disruptions and delays, resulted in a decrease in gross profit and gross profit margin for both the three and six months ended June 30, 2022. 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 electrical construction and facilities services segment were negatively impacted by approximately $7.7 million and $14.3 million during the three and six months ended June 30, 2022, respectively. These reductions in estimated project profitability negatively affected the operating margin of this segment by 140 basis points and 130 basis points for the quarter and year-to-date 2022 periods, respectively. In addition, although improved from the first quarter of 2022, labor productivity and efficiency within this segment was adversely impacted during the first six months of 2022 as a result of increased lead times, which led to issues with respect to the sequencing of work on certain projects as we awaited delivery of key materials and equipment. We continue to evaluate our contractual rights and are pursuing recovery for such impacts to the extent permitted. The aforementioned reductions in gross profit margin were partially offset by a reduction in the ratio of selling, general, and administrative expense to revenues as this segment was able to successfully leverage its overhead cost structure during this period of revenue growth. Our United States mechanical construction and facilities services segment’s operating income for the three months ended June 30, 2022 was $76.9 million, or 7.2% of revenues, compared to operating income of $76.7 million, or 7.9% of revenues, for the three months ended June 30, 2021. Operating income of this segment for the six months ended June 30, 2022 was $135.6 million, or 6.6% of revenues, compared to operating income of $139.9 million, or 7.4% of revenues, for the six months ended June 30, 2021. Operating margin of this segment for both the three and six month 2022 periods was negatively impacted by a reduction in gross profit margin due to: (a) 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, and (b) certain project write-downs, which were partially a result of supply chain disruptions and/or material price escalations, a portion of which we will seek recovery from our customers. These reductions in operating margin resulted in a moderate decrease in this segment’s operating income for the first six months of 2022, despite the aforementioned increase in segment revenues for such period. 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 mechanical construction and facilities services segment were negatively impacted by approximately $4.1 million and $9.5 million during the three and six months ended June 30, 2022, respectively. These reductions in estimated project profitability negatively affected the operating margin of this segment by 40 basis points for both 2022 periods. Similar to our United States electrical construction and facilities services segment, reductions in gross profit margin for the three and six months ended June 30, 2022 were partially offset by reductions in the ratio of selling, general, and administrative expenses to revenues, given an increase in revenues without a commensurate increase in certain overhead costs. Operating income of our United States building services segment was $38.2 million, or 5.6% of revenues, for the three months ended June 30, 2022 compared to $32.5 million, or 5.3% of revenues, for the three months ended June 30, 2021. The increase in both operating income and operating margin for such three month period was largely due to greater gross profit and gross profit margin from this segment’s mobile mechanical services division resulting from improved profitability across the majority of its service lines, including projects, service repair and maintenance, and building automation and controls. These improvements were due to favorable project execution as well as certain price adjustments enacted, to the extent contractually permitted, in response to inflationary pressures, which partially offset the impact of increased material and commodity prices during the second quarter of 2022. Operating income of this segment for the six months ended June 30, 2022 was $62.1 million, or 4.8% of revenues, compared to operating income of $63.7 million, or 5.4% of revenues, for the six months ended June 30, 2021. The reduction in operating income and operating margin for such six month period was due to a decline in gross profit margin during the first quarter of 2022, which impacted this segment’s ability to convert revenue growth into incremental operating profit. While conditions have improved during the second quarter of 2022, gross profit margin of this segment for the first half of the year was negatively impacted by: (a) 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 (b) an escalation in fuel prices for its fleet of approximately 4,000 service vehicles. On a year-to-date basis, these negative first quarter impacts more than offset the increases in operating income and operating margin experienced during the second quarter of 2022. We continue to adjust our pricing models to address the inflationary, supply chain, and labor challenges we are experiencing. 32 Table of Contents Our United States industrial services segment reported operating income of $6.5 million, or 2.3% of revenues, for the three months ended June 30, 2022, compared to an operating loss of $0.2 million, or (0.1)% of revenues, for the three months ended June 30, 2021. For the six months ended June 30, 2022, this segment reported operating income of $19.7 million, or 3.3% of revenues, compared to an operating loss of $2.7 million, or (0.6)% of revenues, for the six months ended June 30, 2021. With respect to operating income, the improved performance for both 2022 periods was due to increased gross profit, resulting from the growth in this segment’s revenues referenced above, as well as a reduction in selling, general and administrative expenses, as the prior year period included a $4.1 million provision for credit losses in connection with a reserve taken for a specific customer bankruptcy. Operating margin of this segment, for both the three and six months ended June 30, 2022, benefited from a reduction in the ratio of selling, general and administrative expenses to revenues when compared to the prior year period, given: (a) this segment was able to leverage its overhead cost structure during a period of revenue growth and (b) the effect, in the prior year, of the previously referenced customer bankruptcy, which negatively impacted this segment’s operating margin by 180 basis points for the three months ended June 30, 2021 and 90 basis points for the six months ended June 30, 2021. For the second quarter of 2022, this reduction in SG&A margin was partially offset by a quarterly reduction in gross profit margin, when compared to the second quarter of 2021, given a change in the composition of project work period-over-period, which in the prior year benefited from favorable progression on certain renewable energy projects. For the six months ended June 30, 2022, however, this segment’s operating margin additionally benefited from an increase in gross profit margin driven by improved pricing for our traditional field services and shop services work, coupled with greater absorption of certain indirect cost of sales given the increase in year-to-date revenues. Operating income of our United Kingdom building services segment was $6.4 million, or 5.6% of revenues, for the three months ended June 30, 2022 compared to $7.0 million, or 5.4% of revenues, for the three months ended June 30, 2021. Operating income for the six months ended June 30, 2022 was $17.0 million, or 6.9% of revenues, compared to $16.5 million, or 6.4% of revenues, for the six months ended June 30, 2021. This segment’s operating income for the three and six months ended June 30, 2022 was negatively impacted by $0.6 million and $1.0 million, respectively, related to the effect of unfavorable exchange rates for the British pound versus the United States dollar. Excluding the impact of foreign exchange rate movements, operating income of this segment for the three months ended June 30, 2022 was essentially unchanged when compared to operating income for the three months ended June 30, 2021, while operating income for the six months ended June 30, 2022 represented a $1.5 million increase when compared to operating income for the six months ended June 30, 2021. The increase in this segment’s operating margin for both 2022 periods 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 margin from projects within the commercial market sector, including the telecommunication projects referenced in the revenue commentary for this segment. Our corporate administration expenses for the three months ended June 30, 2022 were $25.4 million, compared to $25.8 million for the three months ended June 30, 2021. For the six months ended June 30, 2022, our corporate administrative expenses were $51.9 million, compared to $50.3 million for the six months ended June 30, 2021. The slight increase in corporate administration expenses for the first six months of 2022 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 annual cost of living wage increases. Other items Net interest expense for the three months ended June 30, 2022 and 2021 was $1.8 million and $1.3 million, respectively. Net interest expense for the six months ended June 30, 2022 and 2021 was $3.0 million and $2.7 million, respectively. The increase in net interest expense for both 2022 periods was primarily a result of an increase in interest rates. For the three and six months ended June 30, 2022, our income tax provision was $36.3 million and $62.8 million, respectively, compared to an income tax provision of $35.6 million and $67.2 million for the three and six months ended June 30, 2021, respectively. Our income tax rate for both the three and six months ended June 30, 2022 was 26.5%, compared to an income tax rate for the three and six months ended June 30, 2021 of 26.8% and 27.0%, respectively. The increase in our income tax provision for the three months ended June 30, 2022 was due to an increase in income before income taxes, while the decrease in our income tax provision for the six months ended June 30, 2022 was a result of a reduction in income before income taxes as well as a decrease in our income tax rate during the period. The decrease in our income tax rate for the three and six months ended June 30, 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 half 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. 33 Table of Contents 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): June 30, 2022 % of Total December 31, 2021 % of Total June 30, 2021 % of Total Remaining performance obligations: United States electrical construction and facilities services $ 1,537,344 24 % $ 1,224,577 22 % $ 1,187,362 23 % United States mechanical construction and facilities services 3,566,879 55 % 3,272,124 58 % 2,901,509 57 % United States building services 1,070,734 17 % 872,550 16 % 743,093 15 % United States industrial services 130,763 2 % 111,838 2 % 125,970 2 % Total United States operations 6,305,720 98 % 5,481,089 98 % 4,957,934 97 % United Kingdom building services 155,412 2 % 118,208 2 % 148,794 3 % Total operations $ 6,461,132 100 % $ 5,599,297 100 % $ 5,106,728 100 % Our remaining performance obligations at June 30, 2022 were $6.46 billion compared to $5.60 billion at December 31, 2021 and $5.11 billion at June 30, 2021. The increase in remaining performance obligations at June 30, 2022, when compared to December 31, 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: (a) our United States construction segments, driven by the award of various construction projects within the commercial market sector, inclusive of various telecommunications projects as well as certain projects for customers within the biotech, life-sciences, and pharmaceutical industries, and (b) our United States building services segment given increased project opportunities within its mobile mechanical services division. While the continued growth in our remaining performance obligations is largely due to the strength in demand for our services, a portion of this increase can likely be attributed to external market factors such as material and labor inflation, which has increased the price of certain of our project work, as well as supply chain delays, which has impacted the timing of conversion of our remaining performance obligations to revenue, in certain instances. See Note 3 - Revenue from Contracts with Customers of the notes to consolidated financial statements for further disclosure regarding our remaining performance obligations. 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. 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 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. 34 Table of Contents As of June 30, 2022, we had cash and cash equivalents, excluding restricted cash, of $262.4 million, which are maintained in depository accounts and 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 June 30, 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; 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. Cash Flows The following table presents a summary of our operating, investing, and financing cash flows (in thousands): For the six months ended June 30, 2022 2021 Net cash used in operating activities $ (18,851) $ (6,972) Net cash used in investing activities $ (53,328) $ (70,939) Net cash used in financing activities $ (475,090) $ (157,085) Decrease in cash, cash equivalents, and restricted cash $ (559,026) $ (233,774) During the six months ended June 30, 2022, our cash balance, including cash equivalents and restricted cash, decreased by approximately $559.0 million from $822.6 million at December 31, 2021 to $263.5 million at June 30, 2022. Changes in our cash position from December 31, 2021 to June 30, 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 used in operating activities for the six months ended June 30, 2022 was approximately $18.9 million compared to approximately $7.0 million of net cash used in operating activities for the six months ended June 30, 2021. Historically, our working capital needs are greater in the first half 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 six months ended June 30, 2022 and 2021. The modest increase in net cash used in operating activities for the first six months of 2022, compared to the first six months of 2021, was almost entirely due to the decrease in our net income period-over-period, as changes in working capital for both periods were nearly identical. 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 six months ended June 30, 2022 decreased by approximately $17.6 million compared to the six months ended June 30, 2021 due to a decrease in payments for business acquisitions, partially offset by higher capital expenditures used to invest in organic growth. Financing Activities – Financing cash flows consist primarily of the issuance and repayment of short-term and long-term debt, repurchases of common stock, payments of dividends to stockholders, and the issuance of common stock through certain equity plans. Net cash used in financing activities for the six months ended June 30, 2022 was $475.1 million compared to net cash used in financing activities for the six months ended June 30, 2021 of $157.1 million. The $318.0 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 depends upon several factors, including market and business conditions, current and anticipated future liquidity, share price, and share availability, among others. 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 six months ended June 30, 2022 and 2021, cash payments related to dividends were $13.6 million and $14.2 million, respectively. Subsequent to June 30, 2022, our Board of Directors announced its intention to increase the regular quarterly divided to $0.15 per share commencing with the dividend to be paid in October 2022. 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 such quarterly dividends for the foreseeable future. 35 Table of Contents Material Cash Requirements from Contractual and Other Obligations As of June 30, 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 June 30, 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. As of June 30, 2022, we had 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, which are anticipated to increase in the near term. 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 $326.7 million at June 30, 2022, with $72.8 million payable within the next 12 months. Open Purchase Obligations – As of June 30, 2022, we had $1.96 billion of open purchase obligations, of which payments totaling approximately $1.71 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 June 30, 2022, our insurance liabilities, net of estimated recoveries, were $192.9 million. Of this net amount, approximately $37.4 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. To the extent that the amount required to settle claims covered by insurance continues to increase, the cost of our insurance coverage, including premiums and deductibles, is likely to increase. Retirement Plan Obligations – As of June 30, 2022, expected future payments relating to our defined benefit post retirement plans were approximately $4.2 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 June 30, 2022, the present value of expected future payments relating to these contingent consideration arrangements was $13.3 million. Of this amount, $7.6 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. 36 Table of Contents 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. As of June 30, 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 $1.6 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 June 30, 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. From time to time, we discuss with our current and other surety bond providers the amounts of surety bonds that may be available to us based on our financial strength and the absence of any default by us on any surety bond issued on our behalf and believe those amounts are currently adequate for our needs. 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 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. Accordingly, a reduction in the availability of surety bonds could have a material adverse effect on our financial position, results of operations, and/or cash flows. In the ordinary course of business, we, at times, guarantee obligations of our subsidiaries under certain contracts. Generally, we are liable under such an arrangement only if our subsidiary fails to perform its obligations under the contract. Historically, we have not incurred any substantial liabilities as a consequence of these guarantees. We do not have any other material financial guarantees or off-balance sheet arrangements other than those disclosed herein. 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 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. 37 Table of Contents 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 six months ended June 30, 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 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. Our fixed price construction projects generally use a cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. 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 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. For our fixed price service contracts with specified service periods, revenue is generally recognized on a straight-line basis over such service period when our inputs are expended evenly and the customer receives and consumes the benefits of our performance throughout the contract term. The timing of revenue recognition for the manufacturing of new build heat exchangers within our United States industrial services segment depends on the payment terms of the contract, as our performance does not create an asset with an alternative use to us. For those contracts for which we have a right to payment for performance completed to date at all times throughout our performance, inclusive of a cancellation, we recognize revenue over time. For these performance obligations, we use a cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. However, for those contracts for which we do not have a right, at all times, to payment for performance completed to date, we recognize revenue at the point in time when control is transferred to the customer. For bill-and-hold arrangements, revenue is recognized when the customer obtains control of the heat exchanger, which may be prior to shipping if certain recognition criteria are met. 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. 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. 38 Table of Contents 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 $11.8 million and $23.8 million, during the three and six months ended June 30, 2022, respectively. Of the amount recorded during the three months ended June 30, 2022, approximately $7.7 million was recorded within our United States electrical construction and facilities services segment and approximately $4.1 million was recorded within our United States mechanical construction and facilities services segment. Of the amount recorded during the six months ended June 30, 2022, approximately $14.3 million was recorded within our United States electrical construction and facilities services segment and approximately $9.5 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 and six months ended June 30, 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 June 30, 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 in excess of $75 million for the six months ended June 30, 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 Accounts receivable are recognized in the period we deliver goods or provide services to our customers or when our right to consideration is unconditional. The Company maintains an allowance for credit losses to reduce outstanding receivables to their net realizable value. A considerable amount of judgment is required when determining expected credit losses. Estimates of such losses are recorded when we believe a customer, or group of customers, may not be able to meet their financial obligations due to deterioration in financial condition or credit rating. Factors relevant to our assessment include our prior collection history with our customers, the related aging of past due balances, projections of credit losses based on historical trends in credit quality indicators or past events, and forecasts of future economic conditions. 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 June 30, 2022 and December 31, 2021, our accounts receivable of $2,439.6 million and $2,204.5 million, respectively, were recorded net of allowances for credit losses of $23.9 million and $23.5 million, respectively. The increase in our allowance for credit losses was attributable to an increase in the provision for credit losses, largely offset by the write-off of specific amounts deemed unrecoverable. We have adjusted our allowance for credit losses during the first six months of 2022 to account for the impact of changing economic conditions, including rising interest rates. 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. The provision for credit losses amounted to approximately $1.6 million and $5.5 million for the six months ended June 30, 2022 and 2021, respectively. The period-over-period decrease in the provision for credit losses was a result of an approximately $4.1 million reserve taken for a specific customer bankruptcy within our United States industrial services segment in the 2021 period. 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. 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 million. Insurance Liabilities We have loss payment deductibles for certain workers’ compensation, automobile liability, general liability, and property claims, have self-insured retentions for certain other casualty claims, and are self-insured for employee-related healthcare claims. In addition, we maintain a wholly-owned captive insurance subsidiary to manage certain of our insurance liabilities. Losses are recorded based upon estimates of our liability for claims incurred and for claims incurred but not reported. The liabilities are derived from known facts, historical trends, and industry averages, utilizing the assistance of an independent third-party actuary to determine the best estimate for the majority of these obligations. We believe the liabilities recognized on the Consolidated Balance Sheets for these obligations are adequate. However, such obligations are difficult to assess and estimate due to numerous factors, including severity of injury, determination of liability in proportion to other parties, timely reporting of occurrences, and effectiveness of safety and risk management programs. 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 39 Table of Contents the experience becomes known. In addition, as discussed above, an increase in the cost to settle insurance claims could result in higher insurance costs and deductibles. Our estimated net insurance liabilities for workers’ compensation, automobile liability, general liability, and property claims increased by $14.3 million at June 30, 2022 compared to December 31, 2021, partially as a result of greater potential exposures and an increase in certain of our deductibles or self-insured retentions. 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 $19.3 million of additional expense for the six months ended June 30, 2022. Income Taxes As of June 30, 2022 and December 31, 2021, we had net deferred income tax liabilities of $52.0 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 $215.0 million and $212.3 million of deferred income tax assets as of June 30, 2022 and December 31, 2021, respectively. The total valuation allowance on deferred income tax assets was approximately $2.5 million as of both June 30, 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. 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. However, revisions to our forecasts or declining macroeconomic conditions could result in changes to our assessment of the realization of these deferred income tax assets. Goodwill, Identifiable Intangible Assets, and Other Long-Lived Assets Goodwill As of June 30, 2022 and December 31, 2021, we had goodwill of $901.2 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 June 30, 2022, approximately 17.8% of our goodwill related to our United States electrical construction and facilities services segment, approximately 35.0% related to our United States mechanical construction and facilities services segment, approximately 34.5% related to our United States building services segment, and approximately 12.7% 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. Qualitative indicators that may trigger the need for interim quantitative impairment testing include, among others, a deterioration in macroeconomic conditions, declining financial performance, deterioration in the operational environment, or an expectation of selling or disposing of a portion of a reporting unit. Additionally, an interim impairment test may be triggered by a significant change in business climate, a loss of a significant customer, increased competition, or a sustained decrease in share price. In assessing whether our goodwill is impaired, we compare the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value exceeds the carrying amount, no impairment is recognized. 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. 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 10.4% for our United States construction segments and our United States building services segment, and 11.3% for our United States industrial services segment. 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. 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. The perpetual growth rate used for our annual testing was 2.0% for all of our reporting units. 40 Table of Contents Due to the inherent uncertainties involved in making estimates, our assumptions may change in future periods. Estimates and assumptions made for purposes of our goodwill impairment testing may prove to be inaccurate predictions of the future, and other factors used in assessing fair value, such as the weighted average cost of capital, are outside the control of management. Unfavorable changes in certain of these key assumptions may affect future testing results. For example, keeping all other assumptions constant, a 50 basis point increase in the weighted average cost of capital 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 $103.6 million, $185.5 million, $74.5 million, and $25.9 million, respectively. 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, 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 and six months ended June 30, 2022 and 2021. Identifiable Intangible Assets and Other Long-Lived Assets As of June 30, 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 $577.3 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. These forecasts reflect assumptions regarding anticipated macroeconomic conditions as well as our ability to successfully integrate acquired businesses. Absent earlier indicators of impairment, we test for impairment of subsidiary trade names that are not subject to amortization on an annual basis (October 1). In performing this test, we calculate the fair value of each trade name using the “relief from royalty payments” methodology. This approach involves two steps: (a) estimating reasonable royalty rates for each trade name and (b) applying these royalty rates to a net revenue stream and discounting the resulting cash flows to determine fair value. This fair value is then compared with the carrying value of each trade name. 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. 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 recoverable. 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. No impairment of our identifiable intangible assets or other long-lived assets was recognized during the three and six months ended June 30, 2022 and 2021. Other Considerations As referenced above, impairment testing is based upon assumptions and estimates determined by management from a review of our operating results and business plans as well as forecasts of anticipated growth rates and margins, among other considerations. 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. 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. 41 Table of Contents