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, healthcare, utility, and institutional customers through approximately 100 operating subsidiaries. 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. We refer to our United States electrical construction and facilities services segment and our United States mechanical construction and facilities services segment together as our United States construction segments. For a more complete description of our operations, refer to Item 1. Business of our Form 10-K for the year ended December 31, 2022. 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 due to changes in our internal reporting structure aimed at realigning our service offerings. Market Update Our business and end markets remain resilient despite the impact of uncertain global economic conditions, including supply chain, production, and other logistical issues, an inflationary cost environment, rising interest rates, and skilled labor shortages in certain regions. The continued strength in demand for our services is reflected in our results of operations for the first quarter of 2023, during which we experienced an increase in both revenue and operating income when compared to the first quarter of 2022. As evidenced by the growth in our remaining performance obligations, which increased to $7.87 billion at March 31, 2023, from $7.46 billion at December 31, 2022, we anticipate the demand for our services to continue throughout the year. Although improved from the year ago period, we continue to experience pressures in our supply chain, which are resulting in material and equipment lead times significantly in excess of normal levels. Delays in critical material and equipment deliveries have additionally resulted in us funding purchases at earlier stages of project progression, or in advance of project commencement, which has and will continue to apply pressure on working capital requirements. Although we experienced a reduction in commodity prices when compared to the prior year period, and current economic indicators suggest that inflation is slowing, there continues to be volatility in the price of fuel, certain materials, and other commodities used in our operations. Further, in an effort to mitigate inflation, the Federal Reserve Board increased the federal funds rate throughout 2022 and into the first quarter of 2023. While there remains uncertainty around further increases, interest rates, even at their current levels, will likely result in an increase in our annual interest expense. Our management teams continue to adapt to the challenges of the current operating environment in order to manage our business more effectively through diligent contract negotiations, enhanced labor planning and project scheduling, and increased supplier engagement. As contractually permitted, and in order to combat inflationary pressures, we have and will continue to seek increases in pricing to the extent we experience increases in our costs. While we believe the actions we have taken continue to be effective, as evidenced in part by our operating performance to date, the impact of these disruptions continues to evolve and 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 we have not experienced any material project cancellations to date, 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 delay or terminate existing or pending agreements. Lastly, the current interest rate environment may cause a decline in capital or maintenance spending of our customers or prospective customers, particularly as it pertains to short duration project work. Any of these events could result in reduced demand for our services and have a material adverse effect on our business, financial condition, and/or results of operations. 23 Table of Contents Overview The following table presents selected financial data for the three months ended March 31, 2023 and 2022 (in thousands, except percentages and per share data): For the three months ended March 31, 2023 2022 Revenues $ 2,890,432 $ 2,592,549 Revenues increase from prior year 11.5 % 12.5 % Gross profit $ 436,062 $ 352,555 Gross profit as a percentage of revenues 15.1 % 13.6 % Operating income $ 154,910 $ 99,957 Operating income as a percentage of revenues 5.4 % 3.9 % Net income $ 111,473 $ 73,386 Diluted earnings per common share $ 2.32 $ 1.39 Revenues of $2.89 billion for the quarter ended March 31, 2023 set a new first quarter record for the Company and represent an increase of 11.5% from revenues of $2.59 billion for the quarter ended March 31, 2022. 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. Revenues for the first quarter of 2023 were positively impacted by incremental contribution from acquired companies of approximately $35.2 million. Operating income for the quarter ended March 31, 2023 was $154.9 million, or 5.4% of revenues, establishing new first quarter records for the Company. This compares to operating income of $100.0 million, or 3.9% of revenues, for the quarter ended March 31, 2022. The $55.0 million increase in operating income, and corresponding 150 basis point improvement in operating margin, were a result of improved operating performance within each of our reportable segments, other than our United Kingdom building services segment. These improvements in profitability were a result of: (a) better project execution during 2023, (b) a more favorable mix of work when compared to the 2022 period, which included a number of projects with lower than average gross profit margins, and (c) the impact in the first quarter of 2022 of certain supply chain disruptions and delays, which were greater than those experienced during the first quarter of 2023. Net income of $111.5 million, or $2.32 per diluted share, for the quarter ended March 31, 2023, compares favorably to net income of $73.4 million, or $1.39 per diluted share, for the quarter ended March 31, 2022. In addition to the increase in operating income referenced above, our diluted earnings per share for the first quarter of 2023 benefited from a reduced weighted average share count given the impact of common stock repurchases made by us throughout 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 quarter of 2023, we acquired two companies, each for an immaterial amount. One company has been included within our Unites States mechanical construction and facilities services segment and provides mechanical and pipe fabrication services in the Midwestern region of the United States. The other company has been included within our United States building services segment and provides mechanical services in the Western region of the United States. The results of operations for both such companies were de minimis. We acquired six companies during calendar year 2022 for total consideration of $100.8 million. Such acquisitions include: (a) a company that provides electrical construction services in the Greater Boston area, the results of operations of which have been included in our United States electrical construction and facilities services segment, and (b) five companies that enhance our presence in geographies where we have existing operations, the results of operations of which were de minimis, consisting of: (i) two companies that provide fire protection services in the Northeastern and Southern regions of the United States, respectively, and that have been included within our United States mechanical construction and facilities services segment, (ii) two companies that specialize in either building automation and controls or mechanical services in the Southwestern and Southern regions of the United States, respectively, and that have been included within our United States building services segment, and (iii) a company that provides electrical construction services in the Midwestern region of the United States and that has been included within our United States electrical construction and facilities services segment. 24 Table of Contents Results of Operations Revenues 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, 2023 % of Total 2022 % of Total Revenues: United States electrical construction and facilities services $ 644,746 22 % $ 522,030 20 % United States mechanical construction and facilities services 1,078,558 38 % 992,644 38 % United States building services 725,375 25 % 635,627 25 % United States industrial services 330,883 11 % 310,751 12 % Total United States operations 2,779,562 96 % 2,461,052 95 % United Kingdom building services 110,870 4 % 131,497 5 % Total operations $ 2,890,432 100 % $ 2,592,549 100 % As described below in more detail, as a result of revenue growth within the majority of our reportable segments, our consolidated revenues for the first quarter of 2023 increased to $2.89 billion compared to $2.59 billion for the first quarter of 2022. Revenues of our United States electrical construction and facilities services segment were $644.7 million for the three months ended March 31, 2023 compared to revenues of $522.0 million for the three months ended March 31, 2022. This segment’s results for the 2023 period included $35.2 million of incremental acquisition revenues. Excluding the impact of acquisitions, revenues of this segment grew by $87.5 million, primarily as a result of an increase in revenues from: (a) the network and communications market sector, predominantly due to our data center projects, (b) the healthcare market sector, as a result of greater project activity throughout several of the regions in which we operate, (c) the manufacturing and industrial market sector, inclusive of revenues from contracts with certain of our energy sector customers, and (d) the hospitality and entertainment market sector, given an increase in projects within the Northeastern and Western regions of the United States. These revenue increases were partially offset by a reduction in revenues from the transportation and commercial market sectors given the completion or substantial completion of certain projects which were active in the year ago period. Our United States mechanical construction and facilities services segment revenues for the three months ended March 31, 2023 were $1,078.6 million, an $85.9 million increase compared to revenues of $992.6 million for the three months ended March 31, 2022. The increase in this segment’s revenues was primarily attributable to revenue growth within: (a) the high-tech manufacturing market sector, as a result of increased demand for our mechanical construction and/or fire protection services by certain customers engaged in either: (i) the design and manufacturing of semiconductors or (ii) the production and development of electric vehicles and/or lithium batteries, and (b) the network and communications market sector, due to increased data center project activity. Revenues of our United States building services segment were $725.4 million for the three months ended March 31, 2023, compared to revenues of $635.6 million for the three months ended March 31, 2022. The $89.7 million increase in this segment’s revenues period-over-period was primarily attributable to its mechanical services division, due to increased: (a) HVAC project and retrofit work, as a result of greater: (i) project execution stemming from increased availability of materials and equipment when compared to the prior year period, which experienced significant supply chain disruptions and delays, and (ii) demand for system upgrades and replacements, partially as our customers continue to seek ways to improve the energy efficiency or indoor air quality of their facilities, (b) service repair and maintenance volumes, given growth in our service contract base, and (c) building automation and controls projects, as we continue to expand our service offerings. Revenues of our United States industrial services segment for the three months ended March 31, 2023 were $330.9 million, compared to revenues of $310.8 million for the three months ended March 31, 2022. While there remains significant disruption and uncertainty within the broader oil and gas industry, the results of operations of this segment continue to improve at a modest pace. A steady resumption in demand for our field services, including an increase in turnaround projects as well as maintenance and capital project activity, has resulted in increased revenues from this segment during the three months ended March 31, 2023 when compared to the three months ended March 31, 2022. In addition, revenues of this segment for the 2023 period were positively impacted by greater new build heat exchanger sales and services within its shop services division. 25 Table of Contents Our United Kingdom building services segment revenues were $110.9 million for the three months ended March 31, 2023 compared to revenues of $131.5 million for the three months ended March 31, 2022. Unfavorable exchange rate movements for the British pound versus the United States dollar negatively impacted this segment’s revenues by $10.8 million for the quarter ended March 31, 2023. Excluding the impact of foreign exchange rate movements, this segment’s revenue decreased by $9.8 million as a result of: (a) the loss of certain facilities maintenance contracts not renewed pursuant to rebid, and (b) a reduction in project activity, notably within the water and wastewater market sector. 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 March 31, 2023 2022 Cost of sales $ 2,454,370 $ 2,239,994 Gross profit $ 436,062 $ 352,555 Gross profit margin 15.1 % 13.6 % Our gross profit for the three months ended March 31, 2023 was $436.1 million, or 15.1% of revenues, compared to gross profit of $352.6 million, or 13.6% of revenues, for the three months ended March 31, 2022. While the increase in gross profit can be partially attributed to the increased revenue contribution described above, such increase, as well as the increase in gross profit margin, were additionally a result of increased operating performance within each of our reportable segments, other than our United Kingdom building services segment. For the three months ended March 31, 2023, acquisitions contributed incremental gross profit of $4.9 million, inclusive of amortization expense attributable to identifiable intangible assets of $0.9 million. 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 March 31, 2023 2022 Selling, general and administrative expenses $ 281,152 $ 252,598 SG&A margin 9.7 % 9.7 % Our selling, general and administrative expenses for the three months ended March 31, 2023 were $281.2 million compared to selling, general and administrative expenses of $252.6 million for the three months ended March 31, 2022. Selling, general and administrative expenses for the three months ended March 31, 2023 included $5.2 million of incremental expenses directly related to companies acquired in 2023 and 2022, including amortization expense attributable to identifiable intangible assets of $1.2 million. Excluding incremental expenses from businesses acquired, our selling, general and administrative expenses increased by $23.3 million period-over-period. This organic increase in selling, general and administrative expenses was primarily attributable to an increase in: (a) salaries and related employment expenses, largely as a result of additional headcount to support our organic revenue growth as well as annual cost of living increases, and (b) incentive compensation expense across the majority of our reportable segments, due to higher projected annual operating results compared to those which were anticipated during the same prior year period. Selling, general and administrative expenses as a percentage of revenues was 9.7% for the each of the three months ended March 31, 2023 and 2022. 26 Table of Contents Operating income (loss) 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, 2023 % of Segment Revenues 2022 % of Segment Revenues Operating income (loss): United States electrical construction and facilities services $ 40,516 6.3 % $ 19,993 3.8 % United States mechanical construction and facilities services 86,227 8.0 % 58,433 5.9 % United States building services 37,650 5.2 % 24,163 3.8 % United States industrial services 15,020 4.5 % 13,258 4.3 % Total United States operations 179,413 6.5 % 115,847 4.7 % United Kingdom building services 5,424 4.9 % 10,588 8.1 % Corporate administration (29,927) — (26,478) — Total operations 154,910 5.4 % 99,957 3.9 % Other items: Net periodic pension (cost) income (274) 1,169 Interest expense, net (1,832) (1,289) Income before income taxes $ 152,804 $ 99,837 Operating income for the quarter ended March 31, 2023 was $154.9 million, or 5.4% of revenues, compared to operating income of $100.0 million, or 3.9% of revenues, for the quarter ended March 31, 2022. The $55.0 million increase in operating income, and corresponding 150 basis point improvement in operating margin, were a result of improved operating performance within each of our reportable segments, other than our United Kingdom building services segment. As described in more detail below, these improvements in profitability were a result of: (a) better project execution during 2023, (b) a more favorable mix of work when compared to the 2022 period, which included a number of projects with lower than average gross profit margins, and (c) the impact in the first quarter of 2022 of certain supply chain disruptions and delays, which were greater than those experienced during the first quarter of 2023, and that, in the prior year, led to: (i) reduced labor productivity and efficiency, (ii) the under-absorption of labor costs in instances where projects were delayed pending the receipt of materials, or (iii) material and commodity price escalations. Operating income of our United States electrical construction and facilities services segment was $40.5 million, or 6.3% of revenues, for the three months ended March 31, 2023, compared to $20.0 million, or 3.8% of revenues, for the three months ended March 31, 2022. The period-over-period increase in both operating income and operating margin of this segment was largely a result of a more favorable mix of work, which resulted in increased gross profit, and gross profit margin, recognized from construction projects within the: (a) network and communications market sector, (b) commercial market sector, and (c) healthcare market sector. In addition to the aforementioned impact of project mix, operating income of this segment for the three months ended March 31, 2023 benefited from improved project execution when compared to the year ago period. Although we continue to experience supply chain disruptions and delays, which are impacting project delivery in various ways, market conditions surrounding equipment availability have steadily improved over the last twelve months and our management teams continue to adapt to this environment. Such developments have resulted in improved job-site and labor productivity as well as more normalized project sequencing. Our United States mechanical construction and facilities services segment’s operating income for the three months ended March 31, 2023 was $86.2 million, or 8.0% of revenues, compared to operating income of $58.4 million, or 5.9% of revenues, for the three months ended March 31, 2022. The increase in operating income, and operating margin, for the three months ended March 31, 2023, was primarily a result of increased gross profit, and gross profit margin, from projects within the commercial market sector, including several fire protection projects. In addition, operating income of this segment benefited from incremental gross profit contribution from the high-tech manufacturing market sector due to greater project activity, including certain construction projects for customers engaged in the manufacturing of semiconductors. Similar to our United States electrical construction and facilities services segment, the results for this segment in the prior year period were negatively impacted by external market conditions, which manifested themselves through price escalations, particularly for materials and commodities, such as copper and steel, that are used in our mechanical and fire protection operations. Although there remains volatility in the pricing of these commodities, more favorable pricing year-over-year has resulted in improved profitability of this segment during the first quarter of 2023, as evidenced in part by the increased gross profit margin within the commercial market sector referenced above. 27 Table of Contents Operating income of our United States building services segment was $37.7 million, or 5.2% of revenues, for the three months ended March 31, 2023 compared to $24.2 million, or 3.8% of revenues, for the three months ended March 31, 2022. The period-over-period increase in operating income and operating margin was largely due to greater gross profit and gross profit margin within this segment’s 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 negotiated price adjustments made to customer contracts in response to inflationary pressures, such as increased material and fuel prices. Operating margin of this segment additionally benefited from a reduction in the ratio of selling, general and administrative expenses to revenues given an increase in revenues without a commensurate increase in certain overhead costs. Our United States industrial services segment reported operating income of $15.0 million, or 4.5% of revenues, for the three months ended March 31, 2023, compared to operating income of $13.3 million, or 4.3% of revenues, for the three months ended March 31, 2022. In addition to the growth in this segment’s revenues referenced above, which resulted in greater gross profit contribution, the improved quarterly performance was attributable to better pricing within both this segment’s field services and shop services divisions, resulting in improved gross profit margin period-over-period. Operating income of our United Kingdom building services segment was $5.4 million, or 4.9% of revenues, for the three months ended March 31, 2023 compared to $10.6 million, or 8.1% of revenues, for the three months ended March 31, 2022. This segment’s operating income for the first quarter of 2023 was negatively impacted by $0.5 million related to the effect of unfavorable exchange rate movements for the British pound versus the United States dollar. Excluding the impact of foreign exchange, the decrease in this segment’s operating income and operating margin period-over-period was primarily a result of a reduction in gross profit and gross profit margin due to a shift in the mix and size of project work. In addition, operating income and operating margin of this segment were negatively impacted by growth in selling, general and administrative expenses, such as: (a) employment related costs, given an increase in office headcount to support the business, and (b) information technology expenses, resulting from certain initiatives currently in process. Our corporate administration expenses for the three months ended March 31, 2023 were $29.9 million compared to $26.5 million for the three months ended March 31, 2022. This increase in corporate expenses was primarily due to greater incentive compensation expense as a result of higher projected annual and long-term operating results, when compared to those which were anticipated during the same prior year period. Other items Net interest expense for the three months ended March 31, 2023 and 2022 was $1.8 million and $1.3 million, respectively. The increase in net interest expense was a result of both an increase in interest rates and greater average outstanding borrowings. For the three months ended March 31, 2023, our income tax provision was $41.3 million compared to an income tax provision of $26.5 million for the three months ended March 31, 2022. The increase in our income tax provision for the three months ended March 31, 2023 was due to: (a) greater income before income taxes, and (b) an increase in our effective income tax rate. Our effective income tax rate for the three months ended March 31, 2023 was 27.0% compared to an effective income tax rate for the three months ended March 31, 2022 of 26.5%. The change in our effective income tax rate period-over-period was attributable to an increase in certain permanent book-to-tax differences. Refer to Note 9 - Income Taxes of the notes to consolidated financial statements for further discussion regarding our income tax provision and effective income tax rate. 28 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): March 31, 2023 % of Total December 31, 2022 % of Total March 31, 2022 % of Total Remaining performance obligations: United States electrical construction and facilities services $ 2,050,956 26 % $ 2,014,079 27 % $ 1,297,086 22 % United States mechanical construction and facilities services 4,295,524 54 % 3,987,134 53 % 3,361,504 56 % United States building services 1,254,787 16 % 1,172,816 16 % 1,017,588 17 % United States industrial services 131,759 2 % 124,653 2 % 116,496 2 % Total United States operations 7,733,026 98 % 7,298,682 98 % 5,792,674 97 % United Kingdom building services 140,117 2 % 160,617 2 % 160,207 3 % Total operations $ 7,873,143 100 % $ 7,459,299 100 % $ 5,952,881 100 % Our remaining performance obligations at March 31, 2023 were $7.87 billion compared to $7.46 billion at December 31, 2022 and $5.95 billion at March 31, 2022. The increase in remaining performance obligations at March 31, 2023, when compared to December 31, 2022, was attributable to an increase in remaining performance obligations within all of our reportable segments, except for our United Kingdom building services segment. Most notably, we experienced an increase in remaining performance obligations from: (a) our United States mechanical construction and facilities services segment, driven by the award of various construction projects within the majority of the market sectors in which we operate, and (b) our United States building services segment, given increased project opportunities within its mechanical services division. From a market sector perspective, we experienced the largest growth in remaining performance obligations within: (a) the high-tech manufacturing market sector, inclusive of projects for customers engaged in: (i) the design and manufacturing of semiconductors, and (ii) the production and development of electric vehicles and/or lithium batteries, (b) the network and communications market sector, largely driven by data center construction projects, (c) the healthcare market sector, given demand for mechanical construction services at existing and new customer facilities, and (d) the manufacturing and industrial market sector, partially due to the continued re-shoring of supply chain by certain of our customers. 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. 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. 29 Table of Contents As of March 31, 2023, we had cash and cash equivalents, excluding restricted cash, of $420.1 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, as 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 $1.13 billion of available capacity as of March 31, 2023. 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 three months ended March 31, 2023 2022 Net cash used in operating activities $ (84,583) $ (95,814) Net cash used in investing activities $ (25,405) $ (13,953) Net cash provided by (used in) financing activities $ 71,506 $ (193,513) Effect of exchange rate changes on cash, cash equivalents, and restricted cash $ 2,239 $ (3,419) Decrease in cash, cash equivalents, and restricted cash $ (36,243) $ (306,699) During the three months ended March 31, 2023, our cash balance, including cash equivalents and restricted cash, decreased by approximately $36.2 million from $457.1 million at December 31, 2022 to $420.8 million at March 31, 2023. Changes in our cash position from December 31, 2022 to March 31, 2023 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 three months ended March 31, 2023 was approximately $84.6 million compared to approximately $95.8 million of net cash used in operating activities for the three months ended March 31, 2022. 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, 2023 and 2022. 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 three months ended March 31, 2023 increased by approximately $11.5 million compared to the three months ended March 31, 2022 due to an increase in capital expenditures and payments for business acquisitions, partially offset by an increase in proceeds from the sale or disposal of property, plant and equipment. 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 provided by financing activities for the three months ended March 31, 2023 was $71.5 million compared to net cash used in financing activities for the three months ended March 31, 2022 of $193.5 million. The $265.0 million change in financing cash flows was primarily due to borrowings of $100.0 million under our revolving credit facility and a decrease in funds used for the repurchase of our common stock during 2023. The timing of common stock 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, which, commencing with the dividend to be paid on April 28, 2023, will increase from $0.15 per share to $0.18 per share. For the three months ended March 31, 2023 and 2022, cash payments related to dividends were $7.2 million and $6.9 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 such quarterly dividends for the foreseeable future. Effect of Exchange Rate Changes on Cash, Cash Equivalents, and Restricted Cash – We are exposed to fluctuations in foreign currency exchange rates, almost entirely with respect to the British pound. Therefore, the $5.7 million variance between the three months ended March 31, 2023 and 2022 was a direct result of favorable exchange rate movements for the British pound versus the United States dollar. 30 Table of Contents Material Cash Requirements from Contractual and Other Obligations As of March 31, 2023, 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, 2023, the amount outstanding under our term loan was $242.8 million, and we had $100.0 million in direct borrowings outstanding under our revolving credit facility. We are required to make annual principal payments on our term loan of $13.9 million on December 31 of each year until maturity. All remaining unpaid amounts are due on March 2, 2025, when the credit agreement governing our term loan and revolving credit facility expires. Until such time, we are required to make periodic interest payments on our outstanding indebtedness. Future interest payments will be determined based on prevailing interest rates during that time, which may 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 $344.0 million at March 31, 2023, with $80.7 million payable within the next 12 months. Open Purchase Obligations – As of March 31, 2023, we had $2.43 billion of open purchase obligations, of which payments totaling approximately $2.11 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, 2023, our insurance liabilities, net of estimated recoveries, were $207.1 million. Of this net amount, approximately $38.0 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. 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, 2023, the present value of expected future payments relating to these contingent consideration arrangements was $15.0 million. Of this amount, $8.8 million is estimated as being payable within the next 12 months, with the remainder due pursuant to the terms of our contractual agreements some of which extend through 2025. 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. 31 Table of Contents 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 March 31, 2023, 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 19% 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, 2023, we satisfied approximately $48.1 million and $71.1 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. 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, 2022. 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, 2023. 32 Table of Contents