What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-27 compared with 2023-04-27 · 168 added, 116 removed, 177 unchanged (62% of the section changed)

15 unchanged sentences

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.

The continued strength in demand for our services is reflected in our results of operations for the first half of 2023, during which we experienced an increase in both revenue and operating income when compared to the first half of 2022.

As evidenced by the growth in our remaining performance obligations, which increased to $8.29 billion at June 30, 2023, from $7.46 billion at December 31, 2022, we anticipate a similar level of demand for our services throughout the remainder of the year, provided that the business environment does not significantly deteriorate.

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.

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.

While we generally strive to negotiate advanced payments or billing terms with our customers that allow us to invoice for these amounts, such purchases may apply pressure on our working capital requirements in future periods.

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.

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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.

While we believe the actions we have taken continue to be effective, as evidenced in part by our operating performance and operating cash flow 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.

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):

Any of these events could result in reduced demand for our services or affect our ability to collect payment, and therefore, have a material adverse effect on our business, financial condition, and/or results of operations.

The following table presents selected financial data for the three months ended June 30, 2023 and 2022 (in thousands, except percentages and per share data):

For the three months ended

7 unchanged sentences

Diluted earnings per common share $ 2.95 $ 1.99

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.

Revenues of $3.05 billion for the quarter ended June 30, 2023 set a new quarterly record for the Company and represent an increase of 12.5% from revenues of $2.71 billion for the quarter ended June 30, 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.

Revenues for the second quarter of 2023 were positively impacted by incremental contribution from acquired companies of approximately $40.6 million.

Operating income for the quarter ended June 30, 2023 was $196.7 million, or 6.5% of revenues, establishing new quarterly records for the Company.

This compares to operating income of $137.6 million, or 5.1% of revenues, for the quarter ended June 30, 2022.

The $59.0 million increase in operating income, and corresponding 140 basis point improvement in operating margin, were a result of improved operating performance within the majority of our reportable segments.

As described in further 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, and (c) the impact in the second quarter of 2022 of certain supply chain disruptions and delays, which were greater than those experienced during the current year period.

Net income of $140.6 million, or $2.95 per diluted share, for the quarter ended June 30, 2023, compares favorably to net income of $100.7 million, or $1.99 per diluted share, for the quarter ended June 30, 2022.

In addition to the increase in operating income referenced above, our diluted earnings per share for the second quarter of 2023 benefited from a reduced weighted average share count given the impact of common stock repurchases made by us throughout 2022 and 2023.

Impact of Acquisitions

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

During the first 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.

During the first half of 2023, we acquired five companies, each for an immaterial amount.

Two companies have been included within our Unites States mechanical construction and facilities services segment, one of which provides mechanical and pipe fabrication services, and one of which provides fire protection services, both in the Midwestern region of the United States.

The other three companies have been included within our United States building services segment and provide mechanical services in the Western and Midwestern regions of the United States.

The results of operations for all such companies were de minimis.

We acquired six companies during calendar year 2022 for total consideration of $100.8 million.

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Results of Operations

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,

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,

Total 2022 % of

6 unchanged sentences

Total operations $ 3,045,622 100 % $ 2,707,388 100 %

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:

For the six months ended June 30,

Total 2022 % of

United States electrical construction and facilities services $ 1,322,913 22 % $ 1,086,142 20 %

United States mechanical construction and facilities services 2,272,671 38 % 2,050,293 39 %

United States building services 1,500,387 25 % 1,322,172 25 %

United States industrial services 623,166 11 % 595,285 11 %

Total United States operations 5,719,137 96 % 5,053,892 95 %

United Kingdom building services 216,917 4 % 246,045 5 %

Total operations $ 5,936,054 100 % $ 5,299,937 100 %

As described below in more detail, as a result of revenue growth within the majority of our reportable segments, our consolidated revenues for the three months ended June 30, 2023 increased to $3.05 billion compared to $2.71 billion for the three months ended June 30, 2022, and our consolidated revenues for the six months ended June 30, 2023 increased to $5.94 billion compared to $5.30 billion for the six months ended June 30, 2022.

Revenues of our United States electrical construction and facilities services segment were $678.2 million and $1,322.9 million for the three and six months ended June 30, 2023, respectively, compared to revenues of $564.1 million and $1,086.1 million for the three and six months ended June 30, 2022, respectively.

This segment’s results included $40.6 million and $75.8 million of incremental acquisition revenues for the three and six months ended June 30, 2023, respectively.

Excluding the impact of acquisitions, revenues of this segment grew by $73.4 million and $160.9 million, respectively, primarily as a result of an increase in revenues within:

(a) the network and communications market sector, predominantly due to our data center projects, (b) the manufacturing and industrial market sector, from contracts with certain of our energy sector customers, including those for renewable energy projects, (c) the healthcare market sector, as a result of greater activity throughout several of the regions in which we operate, and (d) the hospitality and entertainment market sector, given an increase in projects within the Western region of the United States.

These revenue increases were partially offset by a reduction in revenues from the commercial and transportation market sectors given the completion or substantial completion of certain construction projects which were active in the year ago period.

Our United States mechanical construction and facilities services segment revenues for the three months ended June 30, 2023 were $1,194.1 million, a $136.5 million increase compared to revenues of $1,057.6 million for the three months ended June 30, 2022.

Revenues of this segment for the six months ended June 30, 2023 were $2,272.7 million, a $222.4 million increase compared to revenues of $2,050.3 million for the six months ended June 30, 2022.

The increase in this segment’s revenues for both 2023 periods 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:

(i) engaged in either the design and manufacturing of semiconductors or the production and development of electric vehicles and/or lithium batteries, and (ii) within the biotech, life-sciences, and pharmaceutical industries, (b) the network and communications market sector, due to increased data center project activity, and (c) the commercial market sector, inclusive of several fire protection projects within various warehousing and distribution facilities.

Revenues of our United States building services segment were $775.0 million and $1,500.4 million for the three and six months ended June 30, 2023, respectively, compared to revenues of $686.5 million and $1,322.2 million for the three and six months ended June 30, 2022, respectively.

The increase in this segment’s revenues for both 2023 periods 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.

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.

(i) project execution stemming from increased availability of materials and equipment when compared to the prior year period, which experienced greater 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) building automation and controls projects, as we continue to expand our service offerings, and (c) service repair and maintenance volumes, given growth in our service contract base.

In addition to increased revenues from its mechanical services division, this segment also experienced revenue growth during both the three and six month periods from its commercial site-based services and government site-based services divisions, 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.

Revenues of our United States industrial services segment for the three months ended June 30, 2023 were $292.3 million, compared to revenues of $284.5 million for the three months ended June 30, 2022.

Revenues of this segment for the six months ended June 30, 2023 were $623.2 million, compared to revenues of $595.3 million for the six months ended June 30, 2022.

The results of operations of this segment continue to improve at a modest pace, as evidenced by the revenue growth within both this segment’s field services and shop services divisions during the first half of 2023.

In addition to steady demand for maintenance and turnaround projects, we are beginning to see increased levels of capital spending by our customers, in the form of greater new build heat exchanger orders as well as through certain renewable fuel projects, which were active during the second quarter of 2023 and are anticipated to continue through the remainder of the year.

Our United Kingdom building services segment revenues were $106.0 million and $216.9 million for the three and six months ended June 30, 2023, respectively, compared to revenues of $114.5 million and $246.0 million for the three and six months ended June 30, 2022, respectively.

Unfavorable exchange rate movements for the British pound versus the United States dollar negatively impacted this segment’s second quarter and year-to-date 2023 revenues by $0.4 million and $11.2 million, respectively.

Excluding the impact of foreign exchange rate movements, this segment’s revenues decreased by $8.1 million and $17.9 million for the three and six months ended June 30, 2023, respectively, 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 network and communications and water and wastewater market sectors.

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):

The following table presents our cost of sales, gross profit (revenues less cost of sales), and gross profit as a percentage of revenues (“gross profit margin”) (in thousands, except for percentages):

For the three months ended

June 30, For the six months ended

2023 2022 2023 2022

Cost of sales $ 2,555,562 $ 2,324,380 $ 5,009,932 $ 4,564,374

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Gross profit margin 16.1 % 14.1 % 15.6 % 13.9 %

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.

Our gross profit for the three months ended June 30, 2023 was $490.1 million, or 16.1% of revenues, compared to gross profit of $383.0 million, or 14.1% of revenues, for the three months ended June 30, 2022.

Gross profit for the six months ended June 30, 2023 was $926.1 million, or 15.6% of revenues, compared to gross profit of $735.6 million, or 13.9% of revenues, for the six months ended June 30, 2022.

While the increase in gross profit can be partially attributed to the incremental revenue contribution described above, such increase, as well as the expansion in gross profit margin, were additionally a result of stronger operating performance within the majority of our reportable segments due to improved revenue mix and/or project execution.

For the three and six months ended June 30, 2023, acquisitions contributed incremental gross profit of $5.5 million and $10.4 million, respectively, inclusive of amortization expense attributable to identifiable intangible assets of $0.9 million and $1.7 million, respectively.

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):

The following table presents our selling, general and administrative expenses (“SG&A”) and selling, general and administrative expenses as a percentage of revenues (“SG&A margin”) (in thousands, except for percentages):

For the three months ended

June 30, For the six months ended

2023 2022 2023 2022

Selling, general and administrative expenses $ 293,393 $ 245,364 $ 574,545 $ 497,962

SG&A margin 9.6 % 9.1 % 9.7 % 9.4 %

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.

Our selling, general and administrative expenses for the three months ended June 30, 2023 were $293.4 million, or 9.6% of revenues, compared to selling, general and administrative expenses of $245.4 million, or 9.1% of revenues, for the three months ended June 30, 2022.

Selling, general and administrative expenses for the six months ended June 30, 2023 were $574.5 million, or 9.7% of revenues, compared to selling, general and administrative expenses of $498.0 million, or 9.4% of revenues, for the six months ended June 30, 2022.

Selling, general and administrative expenses for the three and six months ended June 30, 2023 included $5.1 million and $10.4 million, respectively, of incremental expenses directly related to companies acquired in 2023 and 2022, including amortization expense attributable to identifiable intangible assets of $1.1 million and $2.4 million, respectively.

Excluding incremental expenses from businesses acquired, the increase in selling, general and administrative expenses, and SG&A margin, for both 2023 periods was predominantly attributable to increases in 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, and 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 adjustments.

In addition to these increases in employment costs, our SG&A for both 2023 periods included incremental:

(a) computer hardware and software costs, as a result of various information technology and cybersecurity initiatives currently in process, (b) travel and entertainment expenses, and (c) rent and other occupancy costs driven by:

(i) the expansion or addition of certain fabrication facilities, which support our operations, and (ii) the impact of inflation on the real estate market.

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,

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

For the three months ended June 30,

Revenues 2022 % of

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Income before income taxes $ 193,693 $ 136,987

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.

As described in more detail below, these improvements in profitability were a result of:

For the six months ended June 30,

Revenues 2022 % of

Operating income (loss):

United States electrical construction and facilities services $ 91,238 6.9 % $ 55,088 5.1 %

United States mechanical construction and facilities services 206,074 9.1 % 135,045 6.6 %

United States building services 83,787 5.6 % 62,657 4.7 %

United States industrial services 22,907 3.7 % 19,716 3.3 %

Total United States operations 404,006 7.1 % 272,506 5.4 %

United Kingdom building services 11,351 5.2 % 17,003 6.9 %

Corporate administration (63,780) — (51,908) —

Total operations 351,577 5.9 % 237,601 4.5 %

Net periodic pension (cost) income (556) 2,263

Interest expense, net (4,524) (3,040)

Income before income taxes $ 346,497 $ 236,824

Operating income for the three months ended June 30, 2023 was $196.7 million, an increase of $59.0 million compared to operating income of $137.6 million for the three months ended June 30, 2022.

Operating margin for the three months ended June 30, 2023 was 6.5% compared to an operating margin of 5.1% for the three months ended June 30, 2022.

This performance established new quarterly records for the Company with respect to both operating income and operating margin.

For the six months ended June 30, 2023, operating income was $351.6 million, an increase of $114.0 million compared to operating income of $237.6 million for the six months ended June 30, 2022.

Operating margin for the six months ended June 30, 2023 was 5.9% compared to an operating margin of 4.5% for the six months ended June 30, 2022.

Similar to our quarterly performance, the results for the first six months of 2023 established new Company records with respect to operating income and operating margin for the first half of any year.

As described in more detail below, improvements in profitability were experienced within the majority of our reportable segments as a result of:

(a) better project execution during 2023, (b) a more favorable mix of work when compared to the 2022 periods, and (c) the impact in the first half of 2022 of certain supply chain disruptions and delays, which were greater than those experienced to date in 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:

Operating income of our United States electrical construction and facilities services segment was $50.7 million, or 7.5% of revenues, for the three months ended June 30, 2023, compared to $35.1 million, or 6.2% of revenues, for the three months ended June 30, 2022.

Operating income of this segment for the six months ended June 30, 2023 was $91.2 million, or 6.9% of revenues, compared to operating income of $55.1 million, or 5.1% of revenues, for the six months ended June 30, 2022.

The period-over-period increases in operating income and operating margin of this segment were 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.

In addition to the aforementioned impact of project mix, operating income of this segment for both 2023 periods benefited from improved project execution when compared to the year ago periods.

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.

These increases in gross profit, and gross profit margin, were partially offset by increased selling, general and administrative expenses and SG&A margin, largely as a result of greater incentive compensation expense recognized by several operating subsidiaries of this segment given improvements in forecasted profitability year-over-year.

For the three and six months ended June 30, 2023, this segment’s operating income included incremental acquisition contribution of $0.9 million and $1.2 million, respectively, inclusive of $1.5 million and $3.0 million of amortization expense associated with identifiable intangible assets, respectively.

Our United States mechanical construction and facilities services segment’s operating income for the three months ended June 30, 2023 was $119.8 million, or 10.0% of revenues, compared to operating income of $76.6 million, or 7.2% of revenues, for the three months ended June 30, 2022.

Operating income of this segment for the six months ended June 30, 2023 was $206.1 million, or 9.1% of revenues, compared to operating income of $135.0 million, or 6.6% of revenues, for the six months ended June 30, 2022.

The increase in operating income, and operating margin, for both 2023 periods was primarily a result of increased gross profit, and gross profit margin, from projects within the commercial market sector, including various 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.

Operating income and operating margin of this segment were also favorably impacted as a result of the successful close-out of certain projects during 2023.

Based on an evaluation of individual projects that were substantially complete in prior periods but had revisions to total estimated cost or anticipated contract value, which resulted in an increase to profitability in excess of $1.0 million, this segment’s operating income for the three and six months ended June 30, 2023 was positively impacted by approximately $8.0 million and $9.0 million, respectively.

These amounts resulted in incremental operating margin of 60 basis points for the quarterly period and 40 basis points for the year-to-date period.

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.

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.

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:

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 half of 2023, as evidenced in part by the increased gross profit margin within the commercial market sector referenced above.

The increases in gross profit and gross profit margin of this segment were partially offset by increased selling, general and administrative expenses and SG&A margin, given greater:

(a) incentive compensation expense, due to higher projected annual operating results for certain of the operating subsidiaries within this segment, and (b) salaries and related employment costs, largely as a result of additional headcount to support current and anticipated organic revenue growth.

Operating income of our United States building services segment was $46.1 million, or 6.0% of revenues, for the three months ended June 30, 2023 compared to $38.5 million, or 5.6% of revenues, for the three months ended June 30, 2022.

Operating income of this segment for the six months ended June 30, 2023 was $83.8 million, or 5.6% of revenues, compared to operating income of $62.7 million, or 4.7% of revenues, for the six months ended June 30, 2022.

The increase in operating income and operating margin for both 2023 periods was entirely attributable to this segment’s mechanical services division, largely as a result of greater gross profit and gross profit margin across the majority of its service lines, with the largest incremental contribution from projects and retrofits as well as building automation and controls.

These improvements were due to both favorable project execution and negotiated price adjustments made to customer contracts in response to inflationary pressures, such as increased material and fuel prices.

Operating margin of this segment for the three and six months ended June 30, 2023 additionally benefited from greater absorption of indirect costs as well as 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 $7.9 million, or 2.7% of revenues, for the three months ended June 30, 2023, compared to operating income of $6.5 million, or 2.3% of revenues, for the three months ended June 30, 2022.

For the six months ended June 30, 2023, this segment reported operating income of $22.9 million, or 3.7% of revenues, compared to operating income of $19.7 million, or 3.3% of revenues, for the six months ended June 30, 2022.

In addition to the growth in this segment’s revenues referenced above, which resulted in greater gross profit contribution, the improved period-over-period operating performance was attributable to better pricing within both its field services and shop services divisions, resulting in improved gross profit margin.

Operating income of our United Kingdom building services segment was $5.9 million, or 5.6% of revenues, for the three months ended June 30, 2023 compared to $6.4 million, or 5.6% of revenues, for the three months ended June 30, 2022.

The slight decrease in second quarter operating income was a result of a reduction in gross profit period-over-period, as an improvement in gross profit margin was not enough to overcome the previously referenced decline in this segment’s quarterly revenues.

Operating income for the six months ended June 30, 2023 was $11.4 million, or 5.2% of revenues, compared to $17.0 million, or 6.9% of revenues, for the six months ended June 30, 2022.

The decrease in this segment’s operating income for the six month period was primarily a result of a reduction in gross profit due to both lower year-to-date revenues as well as a contraction in gross profit margin given a shift in the mix and size of project work.

Operating margin of this segment was negatively impacted by the decrease in gross profit margin just referenced as well as an increase in the ratio of selling, general and administrative expenses to revenues, largely given the decline in revenues thus far in 2023, without a corresponding reduction in overhead costs, as we continue to invest in the future growth of this business.

This segment’s operating income for the six months ended June 30, 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.

Our corporate administration expenses for the three months ended June 30, 2023 were $33.9 million compared to $25.4 million for the three months ended June 30, 2022.

For the six months ended June 30, 2023, our corporate administrative expenses were $63.8 million, compared to $51.9 million for the six months ended June 30, 2022.

This increase in corporate expenses for both 2023 periods was primarily due to greater incentive compensation expense resulting from higher projected annual and long-term operating results, when compared to those which were anticipated during the same prior year periods.

In addition to incentive compensation, we have experienced increases in:

(a) salaries, largely as a result of annual cost of living adjustments, (b) computer hardware and software costs, due to various information technology and cybersecurity initiatives currently in process, and (c) travel and entertainment expenses, given a greater level of travel and business meals.

Net interest expense for the three months ended June 30, 2023 and 2022 was $2.7 million and $1.8 million, respectively.

Net interest expense for the six months ended June 30, 2023 and 2022 was $4.5 million and $3.0 million, respectively.

The increase in net interest expense for both 2023 periods was predominantly a result of an increase in interest rates.

For the three and six months ended June 30, 2023, our income tax provision was $53.1 million and $94.4 million, respectively, compared to an income tax provision of $36.3 million and $62.8 million for the three and six months ended June 30, 2022, respectively.

The increase in our income tax provision for the three and six months ended June 30, 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.

Our effective income tax rate for the three and six months ended June 30, 2023 was 27.4% and 27.3%, respectively, compared to an effective income tax rate for both the three and six months ended June 30, 2022 of 26.5%.

The change in our effective income tax rate 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.

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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):

2023 % of Total December 31, 2022 % of Total March 31,

2023 % of Total December 31, 2022 % of Total June 30,

2022 % of Total

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Total operations $ 8,286,159 100 % $ 7,459,299 100 % $ 6,461,132 100 %

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.

Our remaining performance obligations at June 30, 2023 were $8.29 billion compared to $7.46 billion at December 31, 2022 and $6.46 billion at June 30, 2022.

The increase in remaining performance obligations at June 30, 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.

(a) our United States construction segments, driven by the award of various 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.

(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, and (c) the manufacturing and industrial market sector, partially due to the continued re-shoring of their 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.

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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.

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.

As of June 30, 2023, we had cash and cash equivalents of $503.1 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.

Our credit agreement provides for a $1.30 billion revolving credit facility, for which there is $1.17 billion of available capacity as of June 30, 2023.

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

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

For the three months ended

Net cash used in operating activities $ (84,583) $ (95,814)

For the six months ended

Net cash provided by (used in) operating activities $ 214,932 $ (18,851)

Net cash used in investing activities $ (48,434) $ (53,328)

Net cash provided by (used in) financing activities $ 71,506 $ (193,513)

Net cash used in financing activities $ (126,370) $ (475,090)

Effect of exchange rate changes on cash, cash equivalents, and restricted cash $ 5,856 $ (11,757)

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.

Increase (decrease) in cash, cash equivalents, and restricted cash $ 45,984 $ (559,026)

During the six months ended June 30, 2023, our cash balance, including cash equivalents and restricted cash, increased by approximately $46.0 million from $457.1 million at December 31, 2022 to $503.1 million at June 30, 2023.

Changes in our cash position from December 31, 2022 to June 30, 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.

Net cash provided by operating activities for the six months ended June 30, 2023 was approximately $214.9 million compared to approximately $18.9 million of net cash used in operating activities for the six months ended June 30, 2022.

The favorable operating cash flow performance period-over-period was largely a result of customer deposits and advanced payments on certain construction contracts, as evidenced by the growth in our contract liabilities since December 31, 2022.

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.

Net cash used in investing activities for the six months ended June 30, 2023 decreased by approximately $4.9 million compared to the six months ended June 30, 2022

due to an increase in proceeds from the sale or disposal of property, plant and equipment as well as a decrease in payments for business acquisitions, partially offset by an increase in capital expenditures.

Financing Activities – Financing cash flows consist primarily of the issuance and repayment of short-term and long-term debt, repurchases of common stock, 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.

Net cash used in financing activities for the six months ended June 30, 2023 was $126.4 million compared to net cash used in financing activities for the six months ended June 30, 2022 of $475.1 million.

The $348.7 million reduction in financing cash outflows was almost entirely due to 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.

We currently pay a regular quarterly dividend of $0.18 per share.

For the six months ended June 30, 2023 and 2022, cash payments related to dividends were $15.7 million and $13.6 million, respectively.

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

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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.

Therefore, the $17.6 million variance between the six months ended June 30, 2023 and 2022 was a direct result of favorable exchange rate movements for the British pound versus the United States dollar.

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.

As of June 30, 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 June 30, 2023, there were no direct borrowings outstanding under our revolving credit facility and the amount outstanding under our term loan was $242.8 million.

We are required to make annual principal payments on our term loan of $13.9 million on December 31 of each year until maturity.

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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.

Future interest payments will be determined based on prevailing interest rates during that time, which may fluctuate 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.

Future payments for such leases, excluding leases with initial terms of one year or less, were $375.1 million at June 30, 2023, with $85.9 million payable within the next 12 months.

Open Purchase Obligations – As of June 30, 2023, we had $2.51 billion of open purchase obligations, of which payments totaling approximately $2.19 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.

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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.

As of June 30, 2023, our insurance liabilities, net of estimated recoveries, were $215.2 million.

Of this net amount, approximately $38.8 million is estimated to be payable within the next 12 months.

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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.

As of June 30, 2023, the present value of expected future payments relating to these contingent consideration arrangements was $14.3 million.

Of this amount, $8.2 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.

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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.

As of June 30, 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 $1.4 billion, which represents approximately 17% 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.

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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.

As of June 30, 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.

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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.

There have been no significant changes to our critical accounting policies or methods during the six months ended June 30, 2023.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis