EMCOR Group, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS. EMCOR Group, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) (Unaudited) June 30, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 503,052 $ 456,439 Accounts receivable, less allowance for credit losses of $ 20,707 and $ 22,382 , respectively 2,852,103 2,567,371 Contract assets 289,368 273,176 Inventories 106,080 85,641 Prepaid expenses and other 59,018 79,346 Total current assets 3,809,621 3,461,973 Property, plant and equipment, net 162,594 157,819 Operating lease right-of-use assets 299,672 268,063 Goodwill 927,485 919,151 Identifiable intangible assets, net 574,475 593,975 Other assets 133,822 123,626 Total assets $ 5,907,669 $ 5,524,607 LIABILITIES AND EQUITY Current liabilities: Current maturities of long-term debt and finance lease liabilities $ 15,399 $ 15,567 Accounts payable 790,158 849,284 Contract liabilities 1,357,740 1,098,263 Accrued payroll and benefits 444,143 465,000 Other accrued expenses and liabilities 270,837 258,190 Operating lease liabilities, current 71,185 67,218 Total current liabilities 2,949,462 2,753,522 Long-term debt and finance lease liabilities 231,454 231,625 Operating lease liabilities, long-term 250,926 220,764 Other long-term obligations 357,740 344,405 Total liabilities 3,789,582 3,550,316 Equity: EMCOR Group, Inc. stockholders’ equity: Preferred stock, $ 0.10 par value, 1,000,000 shares authorized, zero issued and outstanding — — Common stock, $ 0.01 par value, 200,000,000 shares authorized, 61,062,601 and 60,947,947 shares issued, respectively 611 609 Capital surplus 81,556 74,795 Accumulated other comprehensive loss ( 86,527 ) ( 93,451 ) Retained earnings 3,450,553 3,214,281 Treasury stock, at cost 13,932,485 and 13,281,222 shares, respectively ( 1,328,808 ) ( 1,222,645 ) Total EMCOR Group, Inc. stockholders’ equity 2,117,385 1,973,589 Noncontrolling interests 702 702 Total equity 2,118,087 1,974,291 Total liabilities and equity $ 5,907,669 $ 5,524,607 See Notes to Consolidated Financial Statements. 1 Table of Contents EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)(Unaudited) Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Revenues $ 3,045,622 $ 2,707,388 $ 5,936,054 $ 5,299,937 Cost of sales 2,555,562 2,324,380 5,009,932 4,564,374 Gross profit 490,060 383,008 926,122 735,563 Selling, general and administrative expenses 293,393 245,364 574,545 497,962 Operating income 196,667 137,644 351,577 237,601 Net periodic pension (cost) income ( 282 ) 1,094 ( 556 ) 2,263 Interest expense, net ( 2,692 ) ( 1,751 ) ( 4,524 ) ( 3,040 ) Income before income taxes 193,693 136,987 346,497 236,824 Income tax provision 53,098 36,323 94,429 62,774 Net income $ 140,595 $ 100,664 $ 252,068 $ 174,050 Basic earnings per common share $ 2.97 $ 1.99 $ 5.30 $ 3.37 Diluted earnings per common share $ 2.95 $ 1.99 $ 5.28 $ 3.36 Dividends declared per common share $ 0.18 $ 0.13 $ 0.33 $ 0.26 See Notes to Consolidated Financial Statements. 2 Table of Contents EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)(Unaudited) Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Net income $ 140,595 $ 100,664 $ 252,068 $ 174,050 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 3,614 ( 7,703 ) 5,871 ( 10,545 ) Post-retirement plans, amortization of actuarial loss included in net income (1) 534 429 1,053 884 Other comprehensive income (loss) 4,148 ( 7,274 ) 6,924 ( 9,661 ) Comprehensive income $ 144,743 $ 93,390 $ 258,992 $ 164,389 _________ (1) Net of tax of $ 0.2 million and $ 0.1 million for the three months ended June 30, 2023 and 2022, respectively, and net of tax of $ 0.4 million and $ 0.3 million for the six months ended June 30, 2023 and 2022, respectively. See Notes to Consolidated Financial Statements. 3 Table of Contents EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)(Unaudited) Six months ended June 30, 2023 2022 Cash flows - operating activities: Net income $ 252,068 $ 174,050 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 25,393 23,106 Amortization of identifiable intangible assets 32,100 30,031 Non-cash share-based compensation expense 7,535 6,463 Other reconciling items ( 3,685 ) 2,290 Changes in operating assets and liabilities, excluding the effect of businesses acquired ( 98,479 ) ( 254,791 ) Net cash provided by (used in) operating activities 214,932 ( 18,851 ) Cash flows - investing activities: Payments for acquisitions of businesses, net of cash acquired ( 22,384 ) ( 26,614 ) Proceeds from sale or disposal of property, plant and equipment 10,514 1,033 Purchases of property, plant and equipment ( 36,564 ) ( 27,747 ) Net cash used in investing activities ( 48,434 ) ( 53,328 ) Cash flows - financing activities: Proceeds from revolving credit facility 100,000 100,000 Repayments of revolving credit facility ( 100,000 ) ( 100,000 ) Repayments of finance lease liabilities ( 1,477 ) ( 1,889 ) Dividends paid to stockholders ( 15,714 ) ( 13,619 ) Repurchases of common stock ( 105,299 ) ( 454,317 ) Taxes paid related to net share settlements of equity awards ( 5,295 ) ( 7,239 ) Issuances of common stock under employee stock purchase plan 4,441 4,023 Payments for contingent consideration arrangements ( 3,026 ) ( 2,049 ) 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 ) Increase (decrease) in cash, cash equivalents, and restricted cash 45,984 ( 559,026 ) Cash, cash equivalents, and restricted cash at beginning of year (1) 457,068 822,568 Cash, cash equivalents, and restricted cash at end of period (2) $ 503,052 $ 263,542 _________ (1) Includes $ 0.6 million and $ 1.2 million of restricted cash classified as “Prepaid expenses and other” in the Consolidated Balance Sheets as of December 31, 2022 and 2021, respectively. (2) Includes $ 1.2 million of restricted cash classified as “Prepaid expenses and other” in the Consolidated Balance Sheets as of June 30, 2022. See Notes to Consolidated Financial Statements. 4 Table of Contents EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF EQUITY For the three months ended June 30, 2022 and 2023 (In thousands)(Unaudited) EMCOR Group, Inc. Stockholders Total Common stock Capital surplus Accumulated other comprehensive loss (1) Retained earnings Treasury stock Noncontrolling interests Balance, March 31, 2022 $ 2,135,798 $ 608 $ 62,374 $ ( 85,949 ) $ 2,901,909 $ ( 743,846 ) $ 702 Net income 100,664 — — — 100,664 — — Other comprehensive loss ( 7,274 ) — — ( 7,274 ) — — — Common stock issued under share-based compensation plans 1 1 — — — — — Tax withholding for common stock issued under share-based compensation plans ( 2,295 ) — ( 2,295 ) — — — — Common stock issued under employee stock purchase plan 2,068 — 2,068 — — — — Common stock dividends ( 6,689 ) — 40 — ( 6,729 ) — — Repurchases of common stock ( 272,507 ) — — — — ( 272,507 ) — Share-based compensation expense 3,025 — 3,025 — — — — Balance, June 30, 2022 $ 1,952,791 $ 609 $ 65,212 $ ( 93,223 ) $ 2,995,844 $ ( 1,016,353 ) $ 702 Balance, March 31, 2023 $ 2,066,325 $ 610 $ 75,850 $ ( 90,675 ) $ 3,318,560 $ ( 1,238,722 ) $ 702 Net income 140,595 — — — 140,595 — — Other comprehensive income 4,148 — — 4,148 — — — Common stock issued under share-based compensation plans — 1 ( 1 ) — — — — Tax withholding for common stock issued under share-based compensation plans ( 53 ) — ( 53 ) — — — — Common stock issued under employee stock purchase plan 2,273 — 2,273 — — — — Common stock dividends ( 8,563 ) — 39 — ( 8,602 ) — — Repurchases of common stock ( 90,086 ) — — — — ( 90,086 ) — Share-based compensation expense 3,448 — 3,448 — — — — Balance, June 30, 2023 $ 2,118,087 $ 611 $ 81,556 $ ( 86,527 ) $ 3,450,553 $ ( 1,328,808 ) $ 702 _________ (1) Represents cumulative foreign currency translation adjustments and post-retirement liability adjustments. See Notes to Consolidated Financial Statements. 5 Table of Contents EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF EQUITY For the six months ended June 30, 2022 and 2023 (In thousands)(Unaudited) EMCOR Group, Inc. Stockholders Total Common stock Capital surplus Accumulated other comprehensive loss (1) Retained earnings Treasury stock Noncontrolling interests Balance, December 31, 2021 $ 2,253,089 $ 607 $ 61,874 $ ( 83,562 ) $ 2,835,504 $ ( 562,036 ) $ 702 Net income 174,050 — — — 174,050 — — Other comprehensive loss ( 9,661 ) — — ( 9,661 ) — — — Common stock issued under share-based compensation plans 2 2 — — — — — Tax withholding for common stock issued under share-based compensation plans ( 7,239 ) — ( 7,239 ) — — — — Common stock issued under employee stock purchase plan 4,023 — 4,023 — — — — Common stock dividends ( 13,619 ) — 91 — ( 13,710 ) — — Repurchases of common stock ( 454,317 ) — — — — ( 454,317 ) — Share-based compensation expense 6,463 — 6,463 — — — — Balance, June 30, 2022 $ 1,952,791 $ 609 $ 65,212 $ ( 93,223 ) $ 2,995,844 $ ( 1,016,353 ) $ 702 Balance, December 31, 2022 $ 1,974,291 $ 609 $ 74,795 $ ( 93,451 ) $ 3,214,281 $ ( 1,222,645 ) $ 702 Net income 252,068 — — — 252,068 — — Other comprehensive income 6,924 — — 6,924 — — — Common stock issued under share-based compensation plans — 2 ( 2 ) — — — — Tax withholding for common stock issued under share-based compensation plans ( 5,295 ) — ( 5,295 ) — — — — Common stock issued under employee stock purchase plan 4,441 — 4,441 — — — — Common stock dividends ( 15,714 ) — 82 — ( 15,796 ) — — Repurchases of common stock ( 106,163 ) — — — — ( 106,163 ) — Share-based compensation expense 7,535 — 7,535 — — — — Balance, June 30, 2023 $ 2,118,087 $ 611 $ 81,556 $ ( 86,527 ) $ 3,450,553 $ ( 1,328,808 ) $ 702 _________ (1) Represents cumulative foreign currency translation adjustments and post-retirement liability adjustments. See Notes to Consolidated Financial Statements. 6 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 1 - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Consequently, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted. References to the “Company,” “EMCOR,” “we,” “us,” “our,” and similar words refer to EMCOR Group, Inc. and its consolidated subsidiaries unless the context indicates otherwise. Readers of this report should refer to the consolidated financial statements and the notes thereto included in our latest Annual Report on Form 10-K filed with the Securities and Exchange Commission. In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of those of a normal recurring nature) necessary to present fairly our financial position and the results of our operations. 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. The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023. NOTE 2 - New Accounting Pronouncements The Financial Accounting Standards Board (the “FASB”) has issued an accounting standards update, which provides temporary optional expedients and exceptions to existing U.S. GAAP. This guidance is aimed at easing the financial reporting burdens related to reference rate reform, including the market transition from the London interbank offered rate (“LIBOR”), or other interbank offered rates, to alternative reference rates. Such accounting pronouncement, as amended, allows entities to account for and present certain contract modifications, which occur before December 31, 2024 and result from the transition to an alternative reference rate, as an event that does not require remeasurement at the modification date or reassessment of a previous accounting determination. In order to utilize such guidance, an entity must first conclude that the modified terms directly replace or have the potential to replace an eligible reference rate due to reference rate reform, and that any contemporaneous changes to other terms that change, or have the potential to change, the amount or timing of contractual cash flows are related to the replacement of a reference rate. Our credit agreement contains provisions that allow for an amendment to use alternative reference rates upon the discontinuation of LIBOR. In accordance with these provisions, we amended such agreement during the second quarter of 2023, to change the reference rate from LIBOR to an interest rate based on the secured overnight financing rate, as administered by the Federal Reserve Bank of New York (“SOFR”). As such amendment falls within the scope of the aforementioned guidance, we adopted this accounting pronouncement and utilized the optional expedients referenced above. The amendment of our credit agreement and the adoption of this accounting pronouncement did not have a material impact on our financial position and/or results of operations. A copy of the amendment to our credit agreement is included as Exhibit 4(a) to this quarterly report. Refer to Note 7 - Debt for further information regarding our credit agreement, including our borrowing rates. NOTE 3 - Revenue from Contracts with Customers The Company recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services by applying the following five step model: (1) Identify the contract with a customer A contract with a customer exists when: (a) the parties have approved the contract and are committed to perform their respective obligations, (b) the rights of the parties can be identified, (c) payment terms can be identified, (d) the arrangement has commercial substance, and (e) collectability of consideration is probable. Judgment is required when determining if the contractual criteria are met, specifically in the earlier stages of a project when a formally executed contract may not yet exist. In these situations, the Company evaluates all relevant facts and circumstances, including the existence of other forms of documentation or historical experience with our customers that may indicate a contractual agreement is in place and revenue should be recognized. In determining if the collectability of consideration is probable, the Company considers the customer’s ability and intention to pay such consideration through an evaluation of several factors, including an assessment of the creditworthiness of the customer and our prior collection history with such customer. 7 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 3 - Revenue from Contracts with Customers (Continued) (2) Identify the performance obligations in the contract At contract inception, the Company assesses the goods or services promised in a contract and identifies, as a separate performance obligation, each distinct promise to transfer goods or services to the customer. The identified performance obligations represent the “unit of account” for purposes of determining revenue recognition. In order to properly identify separate performance obligations, the Company applies judgment in determining whether each good or service provided is: (a) capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and (b) distinct within the context of the contract, whereby the transfer of the good or service to the customer is separately identifiable from other promises in the contract. In addition, when assessing performance obligations within a contract, the Company considers the warranty provisions included within such contract. To the extent the warranty terms provide the customer with an additional service, other than assurance that the promised good or service complies with agreed upon specifications, such warranty is accounted for as a separate performance obligation. In determining whether a warranty provides an additional service, the Company considers each warranty provision in comparison to warranty terms which are standard in the industry. Our contracts are often modified through change orders to account for changes in the scope and price of the goods or services we are providing. Although the Company evaluates each change order to determine whether such modification creates a separate performance obligation, the majority of our change orders are for goods or services that are not distinct within the context of our original contract and, therefore, are not treated as separate performance obligations. (3) Determine the transaction price The transaction price represents the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to our customers. The consideration promised within a contract may include fixed amounts, variable amounts, or both. To the extent the performance obligation includes variable consideration, including contract bonuses and penalties that can either increase or decrease the transaction price, the Company estimates the amount of variable consideration to be included in the transaction price utilizing one of two prescribed methods, depending on which method better predicts the amount of consideration to which the entity will be entitled. Such methods include: (a) the expected value method, whereby the amount of variable consideration to be recognized represents the sum of probability-weighted amounts in a range of possible consideration amounts, and (b) the most likely amount method, whereby the amount of variable consideration to be recognized represents the single most likely amount in a range of possible consideration amounts. When applying these methods, the Company considers all information that is reasonably available, including historical, current, and estimates of future performance. The expected value method is typically utilized in situations where a contract contains a large number of possible outcomes while the most likely amount method is typically utilized in situations where a contract has only two possible outcomes. Variable consideration is included in the transaction price only to the extent it is probable, in the Company’s judgment, that a significant future reversal in the amount of cumulative revenue recognized under the contract will not occur when the uncertainty associated with the variable consideration is subsequently resolved. This threshold is referred to as the variable consideration constraint. In assessing whether to apply the variable consideration constraint, the Company considers if factors exist that could increase the likelihood or the magnitude of a potential reversal of revenue, including, but not limited to, whether: (a) the amount of consideration is highly susceptible to factors outside of the Company’s influence, such as the actions of third parties, (b) the uncertainty surrounding the amount of consideration is not expected to be resolved for a long period of time, (c) the Company’s experience with similar types of contracts is limited or that experience has limited predictive value, (d) the Company has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances, and (e) the contract has a large number and broad range of possible consideration amounts. Pending change orders represent one of the most common forms of variable consideration included within contract value and typically represent contract modifications for which a change in scope has been authorized or acknowledged by our customer but the final adjustment to contract price is yet to be negotiated. In estimating the transaction price for pending change orders, the Company considers all relevant facts, including documented correspondence with the customer regarding acknowledgment of and/or agreement with the modification, as well as historical experience with the customer or similar contractual circumstances. Based upon this assessment, the Company estimates the transaction price, including whether the variable consideration constraint should be applied. 8 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 3 - Revenue from Contracts with Customers (Continued) Contract claims are another form of variable consideration which is common within our industry. Claim amounts represent revenue that has been recognized for contract modifications that are not submitted or are in dispute as to both scope and price. In estimating the transaction price for claims, the Company considers all relevant facts available. However, given the uncertainty surrounding claims, including the potential long-term nature of dispute resolution and the broad range of possible consideration amounts, there is an increased likelihood that any additional contract revenue associated with contract claims is constrained. The resolution of claims involves negotiations and, in certain cases, litigation. In the event litigation costs are incurred by us in connection with claims, such litigation costs are expensed as incurred, although we may seek to recover these costs. For some transactions, the receipt of consideration does not match the timing of the transfer of goods or services to the customer. For such contracts, the Company evaluates whether this timing difference represents a financing arrangement within the contract. Although rare, if a contract is determined to contain a significant financing component, the Company adjusts the promised amount of consideration for the effects of the time value of money when determining the transaction price of such contract. Although our customers may retain a portion of the contract price until completion of the project and final contract settlement, these retainage amounts are not considered a significant financing component as the intent of the withheld amounts is to provide the customer with assurance that we will complete our obligations under the contract rather than to provide financing to the customer. In addition, although we may be entitled to advanced payments from our customers on certain contracts, these advanced payments generally do not represent a significant financing component as the payments are used to meet working capital demands that can be higher in the early stages of a contract, as well as to protect us from our customer failing to meet its obligations under the contract. Changes in the estimates of transaction prices are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. Such changes in estimates can result in the recognition of revenue in a current period for performance obligations which were satisfied or partially satisfied in prior periods. Such changes in estimates may also result in the reversal of previously recognized revenue if the ultimate outcome differs from the Company’s previous estimate. (4) Allocate the transaction price to the performance obligations in the contract For contracts that contain multiple performance obligations, the Company allocates the transaction price to each performance obligation based on a relative standalone selling price. The Company determines the standalone selling price based on the price at which the performance obligation would have been sold separately in similar circumstances to similar customers. If the standalone selling price is not observable, the Company estimates the standalone selling price taking into account all available information such as market conditions and internal pricing guidelines. In certain circumstances, the standalone selling price is determined using an expected profit margin on anticipated costs related to the performance obligation. (5) Recognize revenue as performance obligations are satisfied The Company recognizes revenue at the time the related performance obligation is satisfied by transferring a promised good or service to its customers. A good or service is considered to be transferred when the customer obtains control. The Company can transfer control of a good or service and satisfy its performance obligations either over time or at a point in time. The Company transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time if one of the following three criteria are met: (a) the customer simultaneously receives and consumes the benefits provided by the Company’s performance as we perform, (b) the Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (c) the Company’s performance does not create an asset with an alternative use to us, and we have an enforceable right to payment for performance completed to date. For our performance obligations satisfied over time, we recognize revenue by measuring the progress toward complete satisfaction of that performance obligation. The selection of the method to measure progress towards completion can be either an input method or an output method and requires judgment based on the nature of the goods or services to be provided. 9 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 3 - Revenue from Contracts with Customers (Continued) For our construction contracts, revenue is generally recognized over time as our performance creates or enhances an asset that the customer controls as it is created or enhanced. Our fixed price construction projects generally use a cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. For our unit price construction contracts, progress towards complete satisfaction is measured through an output method, such as the number of units produced or delivered, when our performance does not produce significant amounts of work in process or finished goods prior to complete satisfaction of such performance obligations. For our services contracts, revenue is also generally recognized over time as the customer simultaneously receives and consumes the benefits of our performance as we perform the service. For our fixed price service contracts with specified service periods, revenue is generally recognized on a straight-line basis over such service period when our inputs are expended evenly and the customer receives and consumes the benefits of our performance throughout the contract term. The timing of revenue recognition for the manufacturing of new build heat exchangers within our United States industrial services segment depends on the payment terms of the contract, as our performance does not create an asset with an alternative use to us. For those contracts for which we have a right to payment for performance completed to date at all times throughout our performance, inclusive of a cancellation, we recognize revenue over time. For these performance obligations, we use a cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. However, for those contracts for which we do not have a right, at all times, to payment for performance completed to date, we recognize revenue at the point in time when control is transferred to the customer. For bill-and-hold arrangements, revenue is recognized when the customer obtains control of the heat exchanger, which may be prior to shipping if certain recognition criteria are met. For certain of our revenue streams, such as call-out repair and service work, outage services, refinery turnarounds, and specialty welding services that are performed under time and materials contracts, our progress towards complete satisfaction of such performance obligations is measured using an output method as the customer receives and consumes the benefits of our performance completed to date. Changes in Estimates Due to uncertainties inherent in the estimation process, as well as the significant judgment involved in determining variable consideration, it is possible that estimates of costs to complete a performance obligation, and/or our estimates of transaction prices, will be revised in the near term. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, or changes in the estimate of transaction prices, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs for a performance obligation indicates a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident. Based on an evaluation of individual projects that had revisions to total estimated costs or anticipated contract value, which resulted in a reduction of profitability in excess of $ 1.0 million, our operating results were negatively impacted during the three and six months ended June 30, 2023 and 2022, as summarized in the following table (in thousands): For the three months ended June 30, For the six months ended June 30, 2023 2022 2023 2022 United States electrical construction and facilities services $ 2,616 $ 7,721 $ 8,345 $ 14,261 United States mechanical construction and facilities services — 4,110 2,686 9,533 United States building services 1,084 — 1,544 — Total impact $ 3,700 $ 11,831 $ 12,575 $ 23,794 10 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 3 - Revenue from Contracts with Customers (Continued) During the three and six months ended June 30, 2023, we recognized revenue of approximately $ 8.0 million and $ 9.0 million, respectively, on 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. Such revenue was recognized entirely within our United States mechanical construction and facilities services segment. There were no significant amounts of revenue recognized during the three and six months ended June 30, 2022 related to performance obligations satisfied in prior periods. Disaggregation of Revenues Our revenues are principally derived from contracts to provide construction services relating to electrical and mechanical systems, as well as to provide a number of building services and industrial services to our customers. Our contracts are with many different customers in numerous industries. The following tables provide further disaggregation of our revenues, by categories we use to evaluate our financial performance within each of our reportable segments, for the three and six months ended June 30, 2023 and 2022 (in thousands, except for percentages). Refer to Note 14 - Segment Information of the notes to consolidated financial statements for additional information on how we disaggregate our revenues by reportable segment. Due to continued growth in certain of our end markets, beginning with the first quarter of 2023, we have expanded the market sectors included in the disclosure for each of our United States construction segments, as shown below. All prior period disclosures have been adjusted to additionally reflect these changes. For the three months ended June 30, 2023 % of Total 2022 % of Total United States electrical construction and facilities services: Network and communications market sector $ 215,288 32 % $ 179,491 32 % Commercial market sector 93,820 14 % 94,009 16 % Manufacturing and industrial market sector 95,883 14 % 65,304 12 % Healthcare market sector 64,813 9 % 43,278 8 % High-tech manufacturing market sector 38,039 6 % 22,955 4 % Institutional market sector 37,250 5 % 37,689 7 % Transportation market sector 41,247 6 % 42,440 7 % Water and wastewater market sector 4,603 1 % 5,184 1 % Hospitality and entertainment market sector 19,750 3 % 5,440 1 % Short duration projects (1) 50,740 7 % 52,868 9 % Service work 17,276 3 % 17,095 3 % 678,709 565,753 Less intersegment revenues ( 542 ) ( 1,641 ) Total segment revenues $ 678,167 $ 564,112 ________ (1) Represents those projects which generally are completed within three months or less. 11 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 3 - Revenue from Contracts with Customers (Continued) For the three months ended June 30, 2023 % of Total 2022 % of Total United States mechanical construction and facilities services: Network and communications market sector $ 87,034 7 % $ 60,643 6 % Commercial market sector 289,304 24 % 266,321 25 % Manufacturing and industrial market sector 166,051 14 % 155,290 15 % Healthcare market sector 117,842 10 % 126,985 12 % High-tech manufacturing market sector 177,653 15 % 71,528 7 % Institutional market sector 71,626 6 % 86,727 8 % Transportation market sector 9,229 1 % 16,246 1 % Water and wastewater market sector 67,286 6 % 67,746 6 % Hospitality and entertainment market sector 13,531 1 % 11,418 1 % Short duration projects (1) 73,978 6 % 84,470 8 % Service work 122,278 10 % 112,905 11 % 1,195,812 1,060,279 Less intersegment revenues ( 1,699 ) ( 2,630 ) Total segment revenues $ 1,194,113 $ 1,057,649 ________ (1) Represents those projects which generally are completed within three months or less. For the three months ended June 30, 2023 % of Total 2022 % of Total United States building services: Mechanical services $ 514,505 66 % $ 448,024 65 % Commercial site-based services 207,323 27 % 193,082 28 % Government site-based services 53,184 7 % 45,439 7 % Total segment revenues $ 775,012 $ 686,545 For the three months ended June 30, 2023 % of Total 2022 % of Total United States industrial services: Field services $ 250,877 86 % $ 247,542 87 % Shop services 41,406 14 % 36,992 13 % Total segment revenues $ 292,283 $ 284,534 Total United States operations $ 2,939,575 $ 2,592,840 For the three months ended June 30, 2023 % of Total 2022 % of Total United Kingdom building services: Service work $ 51,682 49 % $ 54,261 47 % Project work 54,365 51 % 60,287 53 % Total segment revenues $ 106,047 $ 114,548 Total operations $ 3,045,622 $ 2,707,388 12 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 3 - Revenue from Contracts with Customers (Continued) For the six months ended June 30, 2023 % of Total 2022 % of Total United States electrical construction and facilities services: Network and communications market sector $ 429,039 32 % $ 324,865 30 % Commercial market sector 190,918 14 % 195,850 18 % Manufacturing and industrial market sector 181,124 14 % 131,769 12 % Healthcare market sector 120,316 9 % 75,348 7 % High-tech manufacturing market sector 68,593 5 % 42,824 4 % Institutional market sector 74,661 6 % 69,455 6 % Transportation market sector 75,149 6 % 87,522 8 % Water and wastewater market sector 12,061 1 % 10,496 1 % Hospitality and entertainment market sector 39,802 3 % 11,294 1 % Short duration projects (1) 98,420 7 % 108,916 10 % Service work 34,153 3 % 30,424 3 % 1,324,236 1,088,763 Less intersegment revenues ( 1,323 ) ( 2,621 ) Total segment revenues $ 1,322,913 $ 1,086,142 ________ (1) Represents those projects which generally are completed within three months or less. For the six months ended June 30, 2023 % of Total 2022 % of Total United States mechanical construction and facilities services: Network and communications market sector $ 186,455 8 % $ 116,277 6 % Commercial market sector 545,150 24 % 527,821 26 % Manufacturing and industrial market sector 307,686 13 % 304,861 15 % Healthcare market sector 230,570 10 % 246,817 12 % High-tech manufacturing market sector 294,449 13 % 129,101 6 % Institutional market sector 135,674 6 % 152,649 7 % Transportation market sector 21,447 1 % 32,299 2 % Water and wastewater market sector 135,948 6 % 129,490 6 % Hospitality and entertainment market sector 23,608 1 % 24,198 1 % Short duration projects (1) 155,395 7 % 178,029 9 % Service work 239,466 11 % 213,649 10 % 2,275,848 2,055,191 Less intersegment revenues ( 3,177 ) ( 4,898 ) Total segment revenues $ 2,272,671 $ 2,050,293 ________ (1) Represents those projects which generally are completed within three months or less. 13 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 3 - Revenue from Contracts with Customers (Continued) For the six months ended June 30, 2023 % of Total 2022 % of Total United States building services: Mechanical services $ 977,039 65 % $ 829,421 63 % Commercial site-based services 416,694 28 % 396,632 30 % Government site-based services 106,654 7 % 96,119 7 % Total segment revenues $ 1,500,387 $ 1,322,172 For the six months ended June 30, 2023 % of Total 2022 % of Total United States industrial services: Field services $ 536,721 86 % $ 518,960 87 % Shop services 86,445 14 % 76,325 13 % Total segment revenues $ 623,166 $ 595,285 Total United States operations $ 5,719,137 $ 5,053,892 For the six months ended June 30, 2023 % of Total 2022 % of Total United Kingdom building services: Service work $ 103,345 48 % $ 119,078 48 % Project work 113,572 52 % 126,967 52 % Total segment revenues $ 216,917 $ 246,045 Total operations $ 5,936,054 $ 5,299,937 Accounts Receivable and Allowance for Credit Losses Accounts receivable are recognized in the period we deliver goods and services to our customers or when our right to consideration is unconditional. The Company maintains an allowance for credit losses to reduce outstanding receivables to their net realizable value. A considerable amount of judgment is required when determining expected credit losses. Estimates of such losses are recorded when we believe a customer, or group of customers, may not be able to meet their financial obligations due to deterioration in financial condition or credit rating. Factors relevant to our assessment include our prior collection history with our customers, the related aging of past due balances, projections of credit losses based on historical trends in credit quality indicators or past events, and forecasts of future economic conditions. In addition to monitoring delinquent accounts, management reviews the credit quality of its receivables by, among other things, obtaining credit ratings of significant customers, assessing economic and market conditions, and evaluating material changes to a customer’s business, cash flows, and financial condition. At June 30, 2023 and December 31, 2022, our allowance for credit losses was $ 20.7 million and $ 22.4 million, respectively. The decrease in our allowance for credit losses was attributable to the write-off of specific amounts deemed uncollectible, partially offset by the provision for credit losses recorded during the first six months of 2023. Allowances for credit losses are based on the best facts available and are reassessed and adjusted on a regular basis as additional information is received. Should anticipated collections fail to materialize, or if future economic conditions compare unfavorably to our forecasts, we could experience an increase in our credit losses. The change in the allowance for credit losses for the six months ended June 30, 2023 was as follows (in thousands): Balance at December 31, 2022 $ 22,382 Provision for credit losses 3,115 Net amounts written off against the allowance ( 4,790 ) Balance at June 30, 2023 $ 20,707 14 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 3 - Revenue from Contracts with Customers (Continued) Contract Assets and Contract Liabilities The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets include unbilled amounts from our construction projects when revenues recognized under the cost-to-cost measure of progress exceed the amounts invoiced to our customers, as the amounts are not yet billable under the terms of our contracts. Such amounts are recoverable from our customers based upon various measures of performance, including achievement of certain milestones, completion of specified units, or completion of a contract. In addition, many of our time and materials arrangements, as well as our contracts to perform turnaround services within the United States industrial services segment, are billed in arrears pursuant to contract terms that are standard within the industry, resulting in contract assets and/or unbilled receivables being recorded as revenue is recognized in advance of billings. Also included in contract assets are amounts we seek or will seek to collect from customers or others for errors or changes in contract specifications or design, contract change orders or modifications in dispute or unapproved as to scope and/or price, or other customer-related causes of unanticipated additional contract costs (claims and unapproved change orders). Our contract assets do not include capitalized costs to obtain and fulfill a contract. Contract assets are generally classified as current within the Consolidated Balance Sheets. Contract liabilities from our construction contracts arise when amounts invoiced to our customers exceed revenues recognized under the cost-to-cost measure of progress. Contract liabilities additionally include advanced payments from our customers on certain contracts. Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation and are recorded as either current or long-term, depending upon when we expect to recognize such revenue. The long-term portion of contract liabilities is included in “Other long-term obligations” in the Consolidated Balance Sheets. Net contract liabilities in the accompanying Consolidated Balance Sheets consisted of the following as of June 30, 2023 and December 31, 2022 (in thousands): June 30, 2023 December 31, 2022 Contract assets, current $ 289,368 $ 273,176 Contract assets, non-current — — Contract liabilities, current ( 1,357,740 ) ( 1,098,263 ) Contract liabilities, non-current ( 2,120 ) ( 2,273 ) Net contract liabilities $ ( 1,070,492 ) $ ( 827,360 ) The $ 243.1 million increase in net contract liabilities for the six months ended June 30, 2023 was primarily attributable to an increase in net contract liabilities on our uncompleted construction projects, partially as a result of the timing of invoicing to our customers, which included customer deposits and advanced billings on several large projects in the earlier stages of completion, resulting in amounts invoiced exceeding the revenue recognized for such projects. There was no significant impairment of contract assets recognized during the periods presented. Transaction Price Allocated to 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 percentages of total remaining performance obligations as of June 30, 2023 (in thousands, except for percentages): June 30, 2023 % of Total Remaining performance obligations: United States electrical construction and facilities services $ 2,180,133 26 % United States mechanical construction and facilities services 4,552,211 55 % United States building services 1,255,165 15 % United States industrial services 144,731 2 % Total United States operations 8,132,240 98 % United Kingdom building services 153,919 2 % Total operations $ 8,286,159 100 % 15 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 3 - Revenue from Contracts with Customers (Continued) Our remaining performance obligations at June 30, 2023 were $ 8.29 billion. Remaining performance obligations increase with awards of new contracts and decrease as we perform work and recognize revenue on existing contracts. We include a project within our remaining performance obligations at such time the project is awarded and agreement on contract terms has been reached. Our remaining performance obligations include amounts related to contracts for which a fixed price contract value is not assigned when a reasonable estimate of the total transaction price can be made. Remaining performance obligations include unrecognized revenues to be realized from uncompleted construction contracts. Although many of our construction contracts are subject to cancellation at the election of our customers, in accordance with industry practice, we do not limit the amount of unrecognized revenue included within remaining performance obligations for these contracts as the risk of cancellation is very low due to the inherent substantial economic penalty that our customers would incur upon cancellation or termination. We believe our reported remaining performance obligations for our construction contracts are firm and contract cancellations have not had a material adverse effect on us. Remaining performance obligations also include unrecognized revenues expected to be realized over the remaining term of service contracts. However, to the extent a service contract includes a cancellation clause which allows for the termination of such contract by either party without a substantive penalty, the remaining contract term, and therefore, the amount of unrecognized revenues included within remaining performance obligations, is limited to the notice period required for the termination. Our remaining performance obligations are comprised of: (a) original contract amounts, (b) change orders for which we have received written confirmations from our customers, (c) pending change orders for which we expect to receive confirmations in the ordinary course of business, (d) claim amounts that we have made against customers for which we have determined we have a legal basis under existing contractual arrangements and as to which the variable consideration constraint does not apply, and (e) other forms of variable consideration to the extent that such variable consideration has been included within the transaction price of our contracts. Such claim and other variable consideration amounts were immaterial for all periods presented. Refer to the table below for additional information regarding our remaining performance obligations, including an estimate of when we expect to recognize such remaining performance obligations as revenue (in thousands): Within one year Greater than one year Remaining performance obligations: United States electrical construction and facilities services $ 1,688,250 $ 491,883 United States mechanical construction and facilities services 3,761,074 791,137 United States building services 1,107,281 147,884 United States industrial services 143,228 1,503 Total United States operations 6,699,833 1,432,407 United Kingdom building services 104,658 49,261 Total operations $ 6,804,491 $ 1,481,668 NOTE 4 - Acquisitions of Businesses Acquisitions are accounted for utilizing the acquisition method of accounting and the prices paid for them are allocated to their respective assets and liabilities based upon the estimated fair value of such assets and liabilities at the dates of their respective acquisition by us. 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. During calendar year 2022, we acquired six companies 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 16 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 4 - Acquisitions of Businesses (Continued) 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. In connection with these acquisitions, we acquired working capital of $ 7.1 million and other net liabilities of $ 1.1 million, and have ascribed $ 28.9 million to goodwill and $ 65.9 million to identifiable intangible assets. We expect that all of the goodwill acquired in connection with these acquisitions will be deductible for tax purposes. The purchase price allocations for the businesses acquired in 2023 are preliminary and subject to change during their respective measurement periods. As we finalize such purchase price allocations, adjustments may be recorded relating to finalization of intangible asset valuations, tax matters, or other items. Although not expected to be significant, such adjustments may result in changes in the valuation of assets and liabilities acquired. The purchase price allocations for the businesses acquired in 2022 have been finalized during their respective measurement periods with an insignificant impact. On June 30, 2023, we entered into a definitive agreement to acquire ECM Holding Group, Inc. (“ECM”) in an all-cash transaction. ECM is a leading national energy specialty services firm, with estimated 2023 revenues of approximately $ 60 million. The transaction is expected to close in the third quarter of 2023, subject to customary closing conditions. Upon closing, its results will be included within our United States building services segment. NOTE 5 - Earnings Per Share Calculation of Basic and Diluted Earnings per Common Share The following tables summarize our calculation of Basic and Diluted Earnings per Common Share (“EPS”) for the three and six months ended June 30, 2023 and 2022 (in thousands, except share and per share data): For the three months ended June 30, 2023 2022 Numerator: Net income $ 140,595 $ 100,664 Denominator: Weighted average shares outstanding used to compute basic earnings per common share 47,393,493 50,507,024 Effect of dilutive securities—Share-based awards 195,176 204,746 Shares used to compute diluted earnings per common share 47,588,669 50,711,770 Basic earnings per common share $ 2.97 $ 1.99 Diluted earnings per common share $ 2.95 $ 1.99 For the six months ended June 30, 2023 2022 Numerator: Net income $ 252,068 $ 174,050 Denominator: Weighted average shares outstanding used to compute basic earnings per common share 47,584,656 51,610,014 Effect of dilutive securities—Share-based awards 182,586 204,150 Shares used to compute diluted earnings per common share 47,767,242 51,814,164 Basic earnings per common share $ 5.30 $ 3.37 Diluted earnings per common share $ 5.28 $ 3.36 17 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 5 - Earnings Per Share (Continued) The number of share-based awards excluded from the computation of diluted EPS for the three and six months ended June 30, 2023 because they would be anti-dilutive were 8,726 and 9,026 , respectively. The number of share-based awards excluded from the computation of diluted EPS for the three and six months ended June 30, 2022 because they would be anti-dilutive were 57,949 and 57,899 , respectively. NOTE 6 - Inventories Inventories in the accompanying Consolidated Balance Sheets consisted of the following amounts as of June 30, 2023 and December 31, 2022 (in thousands): June 30, 2023 December 31, 2022 Raw materials and construction materials $ 88,661 $ 74,014 Work in process 17,419 11,627 Inventories $ 106,080 $ 85,641 The increase in inventories as of June 30, 2023, compared to December 31, 2022, was a result of: (a) advanced purchases of materials and equipment for use on specific construction projects, in an effort to mitigate the impact of increased lead times, which have resulted from supply chain disruptions, (b) an increase in raw materials on hand to support our fabrication facilities given the growth in demand for our fire protection services, and (c) higher levels of work in process inventory within our United States industrial services segment given greater new build heat exchanger orders. NOTE 7 - Debt Debt in the accompanying Consolidated Balance Sheets consisted of the following amounts as of June 30, 2023 and December 31, 2022 (in thousands): June 30, 2023 December 31, 2022 Term loan $ 242,813 $ 242,813 Unamortized debt issuance costs ( 1,600 ) ( 2,080 ) Finance lease liabilities 5,640 6,459 Total debt 246,853 247,192 Less: current maturities 15,399 15,567 Total long-term debt $ 231,454 $ 231,625 Credit Agreement We have a credit agreement dated as of March 2, 2020 , which provides for a $ 1.3 billion revolving credit facility (the “2020 Revolving Credit Facility”) and a $ 300.0 million term loan (the “2020 Term Loan”) (collectively referred to as the “Original 2020 Credit Agreement”) expiring March 2, 2025 . On April 28, 2023 , we entered into the First Amendment to the Original 2020 Credit Agreement (the “First Amendment”), pursuant to which the reference rate contained therein was changed from LIBOR to Adjusted Term SOFR (as defined below). The Original 2020 Credit Agreement, as amended by the First Amendment, is hereinafter referred to as “the 2020 Credit Agreement.” We may increase the 2020 Revolving Credit Facility to $ 1.9 billion if additional lenders are identified and/or existing lenders are willing to increase their current commitments. We may allocate up to $ 400.0 million of available capacity under the 2020 Revolving Credit Facility to letters of credit for our account or for the account of any of our subsidiaries. As of June 30, 2023 and December 31, 2022, the balance of the 2020 Term Loan was $ 242.8 million. There were no direct borrowings outstanding under the 2020 Revolving Credit Facility as of June 30, 2023 and December 31, 2022. However, outstanding letters of credit reduce the available capacity under such facility, and as of June 30, 2023 and December 31, 2022, we had $ 130.9 million and $ 71.3 million, respectively, of letters of credit outstanding. At the Company’s election, borrowings under the 2020 Credit Agreement bear interest at either: (1) a base rate plus a margin of 0.00 % to 0.75 %, based on certain financial tests, or (2) a rate equal to the secured overnight financing rate as administered by the Federal Reserve Bank of New York for the applicable tenor plus 0.10 % (“Adjusted Term SOFR”) ( 5.34 % at June 30, 2023) plus a margin of 1.00 % to 1.75 %, based on certain financial tests. The base rate is determined by the greater of: (a) the prime commercial lending rate announced by Bank of Montreal from time to time ( 8.25 % at June 30, 2023), (b) the federal funds effective rate, plus ½ of 1.00%, (c) Adjusted Term SOFR for a one-month tenor, plus 1.00 %, or (d) 0.00 %. 18 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 7 - Debt (Continued) The interest rates in effect at June 30, 2023 and December 31, 2022 were 6.34 % and 5.73 %, respectively. A commitment fee is payable on the average daily unused amount of the 2020 Revolving Credit Facility, which ranges from 0.10 % to 0.25 %, based on certain financial tests. The fee was 0.10 % of the unused amount as of June 30, 2023 and December 31, 2022. Fees for letters of credit issued under the 2020 Revolving Credit Facility range from 0.75 % to 1.75 % of the respective face amounts of outstanding letters of credit, depending on the nature of the letter of credit, and are computed based on certain financial tests. We capitalized an additional $ 3.1 million of debt issuance costs associated with the 2020 Credit Agreement. Debt issuance costs are amortized over the life of the agreement as part of interest expense. Obligations under the 2020 Credit Agreement are guaranteed by most of our direct and indirect subsidiaries and are secured by substantially all of our assets. The 2020 Credit Agreement contains various covenants providing for, among other things, the maintenance of certain financial ratios and certain limitations on the payment of dividends, common stock repurchases, investments, acquisitions, indebtedness, and capital expenditures. We were in compliance with all such covenants as of June 30, 2023 and December 31, 2022. We are required to make annual principal payments on the 2020 Term Loan. Any voluntary prepayments are applied against the outstanding balance of the loan and reduce our future scheduled payments on a ratable basis. Based on our outstanding balance, principal payments of $ 13.9 million are due on December 31 of each year until maturity, with any remaining unpaid principal and interest due on March 2, 2025. NOTE 8 - Fair Value Measurements For disclosure purposes, we utilize a fair value hierarchy to categorize qualifying assets and liabilities into three broad levels based on the priority of the inputs used to determine their fair values. The hierarchy, which gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs, is comprised of the following three levels: Level 1 – Unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 – Observable inputs, other than Level 1 inputs, that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. Level 3 – Significant unobservable inputs that reflect the reporting entity’s own assumptions. Recurring Fair Value Measurements The following tables summarize the assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2023 and December 31, 2022 (in thousands): Assets at Fair Value as of June 30, 2023 Asset Category Level 1 Level 2 Level 3 Total Cash and cash equivalents (1) $ 503,052 $ — $ — $ 503,052 Deferred compensation plan assets (2) 45,045 — — 45,045 Total $ 548,097 $ — $ — $ 548,097 Assets at Fair Value as of December 31, 2022 Asset Category Level 1 Level 2 Level 3 Total Cash and cash equivalents (1) $ 456,439 $ — $ — $ 456,439 Deferred compensation plan assets (2) 36,882 — — 36,882 Restricted cash (3) 629 — — 629 Total $ 493,950 $ — $ — $ 493,950 _________________________ (1) Cash and cash equivalents consist of deposit accounts and money market funds with original maturity dates of three months or less, which are Level 1 assets. At June 30, 2023 and December 31, 2022, we had $ 272.4 million and $ 209.4 million, respectively, in money market funds. From time to time, we have cash balances in certain of our domestic bank accounts that exceed federally insured limits. (2) Deferred compensation plan assets are classified as “Other assets” in the Consolidated Balance Sheets. (3) Restricted cash is classified as “Prepaid expenses and other” in the Consolidated Balance Sheets. Restricted cash primarily represents cash held in account for use on customer contracts. 19 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 8 - Fair Value Measurements (Continued) Nonrecurring Fair Value Measurements We have recorded goodwill and identifiable intangible assets in connection with our business acquisitions. Such assets are measured at fair value at the time of acquisition based on valuation techniques that appropriately represent the methods which would be used by other market participants in determining fair value. In addition, goodwill and intangible assets are tested for impairment using similar valuation methodologies to determine the fair value of such assets. Periodically, we engage an independent third-party valuation specialist to assist with the valuation process, including the selection of appropriate methodologies and the development of market-based assumptions. The inputs used for these nonrecurring fair value measurements represent Level 3 inputs. Fair Value of Financial Instruments We believe that the carrying values of our financial instruments, which include accounts receivable and other financing commitments, approximate their fair values due primarily to their short-term maturities and low risk of counterparty default. The carrying value of our debt associated with the 2020 Credit Agreement approximates its fair value due to the variable rate on such debt. NOTE 9 - Income Taxes The following table presents our income tax provision and our income tax rate for the three and six months ended June 30, 2023 and 2022 (in thousands, except percentages): For the three months ended June 30, For the six months ended June 30, 2023 2022 2023 2022 Income tax provision $ 53,098 $ 36,323 $ 94,429 $ 62,774 Income tax rate 27.4 % 26.5 % 27.3 % 26.5 % The difference between the U.S. statutory tax rate of 21 % and our effective income tax rate for both the three and six months ended June 30, 2023 and 2022 was primarily a result of state and local income taxes and other permanent book-to-tax differences. The increase in our income tax provision for the three and six months ended June 30, 2023, when compared to the three and six months ended June 30, 2022, was due to: (a) greater income before income taxes, and (b) an increase in our effective income tax rate. The change in our effective income tax rate was attributable to an increase in certain permanent book-to-tax differences, including the impact of the expiration of specific provisions within the Consolidated Appropriations Act, 2021, which allowed for a 100% tax deduction for business meals in 2022. For periods after December 31, 2022, the tax deduction for business meals has been reduced to 50%. As of June 30, 2023 and December 31, 2022, we had no unrecognized income tax benefits. We file a consolidated federal income tax return including all of our U.S. subsidiaries with the Internal Revenue Service. We additionally file income tax returns with various state, local, and foreign tax agencies. Our income tax returns are subject to audit by various taxing authorities and are currently under examination for the years 2017 through 2020. NOTE 10 - Common Stock As of June 30, 2023 and December 31, 2022, there were 47,130,116 and 47,666,725 shares of our common stock outstanding, respectively. During the three months ended June 30, 2023 and 2022, we issued 42,578 and 76,426 shares of common stock, respectively. During the six months ended June 30, 2023 and 2022, we issued 114,654 and 171,757 shares of common stock, respectively. These shares were issued upon either the satisfaction of required conditions under our share-based compensation plans or the purchase of common stock pursuant to our employee stock purchase plan. We have paid quarterly dividends since October 25, 2011. We currently pay a regular quarterly dividend of $ 0.18 per share. 20 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 10 - Common Stock (Continued) In September 2011, our Board of Directors (the “Board”) authorized a share repurchase program allowing us to begin repurchasing shares of our outstanding common stock. Subsequently, the Board has from time to time increased the amount authorized for repurchases under such program. Since the inception of the repurchase program, the Board has authorized us to repurchase up to $ 2.15 billion of our outstanding common stock. During the six months ended June 30, 2023, we repurchased approximately 0.7 million shares of our common stock for approximately $ 106.2 million. Since the inception of the repurchase program through June 30, 2023, we have repurchased approximately 25.7 million shares of our common stock for approximately $ 1.87 billion. As of June 30, 2023, there remained authorization for us to repurchase approximately $ 283.6 million of our shares. The repurchase program has no expiration date, does not obligate the Company to acquire any particular amount of common stock, and may be suspended, recommenced, or discontinued at any time or from time to time without prior notice. We may repurchase our shares from time to time to the extent permitted by securities laws and other legal requirements, including provisions in our 2020 Credit Agreement placing limitations on such repurchases. The Inflation Reduction Act of 2022, which was enacted into law on August 16, 2022, imposes a nondeductible excise tax of 1% on the fair value of net stock repurchases in excess of share issuances made by publicly traded U.S. corporations, effective for repurchases after December 31, 2022. Starting with the first quarter of 2023, we have included the applicable excise tax as a component of treasury stock as it represents a direct cost associated with the repurchase of our common stock. NOTE 11 - Retirement Plans The funded status of our defined benefit plans, which represents the difference between the fair value of plan assets and the projected benefit obligations, is recognized in the Consolidated Balance Sheets with a corresponding adjustment to accumulated other comprehensive income (loss). Gains and losses for the differences between actuarial assumptions and actual results are recognized through accumulated other comprehensive income (loss). These amounts will be subsequently recognized as net periodic pension cost (income) within the Consolidated Statements of Operations. Our United Kingdom subsidiary has a defined benefit pension plan covering all eligible employees (the “UK Plan”); however, no individual joining the company after October 31, 2001 may participate in the UK Plan. On May 31, 2010, we curtailed the future accrual of benefits for active employees under such plan. We also sponsor three domestic retirement plans in which participation by new individuals is frozen. Amounts related to these domestic retirement plans were immaterial for all periods presented. Components of Net Periodic Pension Cost The components of net periodic pension cost (income) of the UK Plan for the three and six months ended June 30, 2023 and 2022 were as follows (in thousands): For the three months ended June 30, For the six months ended June 30, 2023 2022 2023 2022 Interest cost $ 2,451 $ 1,452 $ 4,827 $ 2,981 Expected return on plan assets ( 2,878 ) ( 3,082 ) ( 5,669 ) ( 6,326 ) Amortization of unrecognized loss 658 528 1,297 1,084 Net periodic pension cost (income) $ 231 $ ( 1,102 ) $ 455 $ ( 2,261 ) 21 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 12 - Commitments and Contingencies Severance Agreements We have agreements with our executive officers and certain other key management personnel providing for severance benefits for such employees upon termination of their employment under certain circumstances. Guarantees 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. Surety Bonds The terms of our construction contracts frequently require that we obtain from surety companies, and provide to our customers, surety bonds as a condition to the award of such contracts. These surety bonds are issued in return for premiums, which vary depending on the size and type of the bond, and secure our payment and performance obligations under such contracts. We have agreed to indemnify the surety companies for amounts, if any, paid by them in respect of surety bonds issued on our behalf. As of June 30, 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 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 may be issued as collateral for certain insurance obligations. As of June 30, 2023, we satisfied approximately $ 48.1 million of the collateral requirements of our insurance programs by utilizing surety bonds. 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. Hazardous Materials We are subject to regulation with respect to the handling or disposal of certain materials used in the performance of our services, which are classified as hazardous or toxic by federal, state, and local agencies. Our practice is to avoid participation in projects principally involving the remediation or removal of such materials. However, when remediation is required as part of our contract performance, we believe we comply with all applicable regulations governing the discharge of hazardous materials into the environment or otherwise relating to the protection of the environment. Government Contracts As a government contractor, we are subject to U.S. government audits and investigations relating to our operations, which such audits may result in fines, penalties and compensatory and treble damages, and possible suspension or debarment from doing business with the government. Based on currently available information, we believe the outcome of ongoing government disputes and investigations will not have a material impact on our financial position, results of operations, or liquidity. Legal Proceedings We are involved in several legal proceedings in which damages and claims have been asserted against us. We believe that we have a number of valid defenses to such proceedings and claims and intend to vigorously defend ourselves. We do not believe that any such matters will have a material adverse effect on our financial position, results of operations, or liquidity. We record a loss contingency if the potential loss from a proceeding or claim is considered probable and the amount can be reasonably estimated or a range of loss can be determined. We provide disclosure when it is reasonably possible that a loss will be incurred in excess of any recorded provision. Significant judgment is required in these determinations. As additional information becomes available, we reassess prior determinations and may change our estimates. Additional claims may be asserted against us in the future. Litigation is subject to many uncertainties, and the outcome of litigation is not predictable with assurance. It is possible that a litigation matter for which liabilities have not been recorded could be decided unfavorably to us, and that any such unfavorable decision could have a material adverse effect on our financial position, results of operations, or liquidity. 22 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 12 - Commitments and Contingencies (Continued) Insurance Liabilities We have loss payment deductibles for certain workers’ compensation, automobile liability, general liability, and property claims, have self-insured retentions for certain other casualty claims, and are self-insured for employee-related healthcare claims. In addition, we maintain a wholly-owned captive insurance subsidiary to manage certain of our insurance liabilities. Losses are recorded based upon estimates of our liability for claims incurred and for claims incurred but not reported. The liabilities are derived from known facts, historical trends, and industry averages, utilizing the assistance of an independent third-party actuary to determine the best estimate for the majority of these obligations. As of June 30, 2023 and December 31, 2022, the estimated current portion of such undiscounted insurance liabilities, included in “Other accrued expenses and liabilities” in the accompanying Consolidated Balance Sheets, were $ 53.9 million and $ 54.8 million, respectively. The estimated non-current portion of such undiscounted insurance liabilities included in “Other long-term obligations” as of June 30, 2023 and December 31, 2022 were $ 234.3 million and $ 221.7 million, respectively. The current portion of anticipated insurance recoveries of $ 15.1 million and $ 16.0 million as of June 30, 2023 and December 31, 2022, respectively, were included in “Prepaid expenses and other” and the non-current portion of anticipated insurance recoveries of $ 57.9 million and $ 59.0 million as of June 30, 2023 and December 31, 2022, respectively, were included in “Other assets” in the accompanying Consolidated Balance Sheets. NOTE 13 - Additional Cash Flow Information The following table presents additional cash flow information for the six months ended June 30, 2023 and 2022 (in thousands): For the six months ended June 30, 2023 2022 Cash paid for: Interest $ 9,678 $ 3,096 Income taxes $ 98,626 $ 103,560 Right-of-use assets obtained in exchange for new operating lease liabilities $ 70,059 $ 43,183 Right-of-use assets obtained in exchange for new finance lease liabilities $ 457 $ 576 NOTE 14 - Segment Information 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. 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. 23 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 14 - Segment Information (Continued) The following tables present financial information for each of our reportable segments for the three and six months ended June 30, 2023 and 2022 (in thousands): For the three months ended June 30, 2023 2022 Revenues from unrelated entities: United States electrical construction and facilities services $ 678,167 $ 564,112 United States mechanical construction and facilities services 1,194,113 1,057,649 United States building services 775,012 686,545 United States industrial services 292,283 284,534 Total United States operations 2,939,575 2,592,840 United Kingdom building services 106,047 114,548 Total operations $ 3,045,622 $ 2,707,388 Total revenues: United States electrical construction and facilities services $ 679,006 $ 566,029 United States mechanical construction and facilities services 1,209,242 1,064,925 United States building services 802,934 711,527 United States industrial services 293,057 287,440 Less intersegment revenues ( 44,664 ) ( 37,081 ) Total United States operations 2,939,575 2,592,840 United Kingdom building services 106,047 114,548 Total operations $ 3,045,622 $ 2,707,388 For the six months ended June 30, 2023 2022 Revenues from unrelated entities: United States electrical construction and facilities services $ 1,322,913 $ 1,086,142 United States mechanical construction and facilities services 2,272,671 2,050,293 United States building services 1,500,387 1,322,172 United States industrial services 623,166 595,285 Total United States operations 5,719,137 5,053,892 United Kingdom building services 216,917 246,045 Total operations $ 5,936,054 $ 5,299,937 Total revenues: United States electrical construction and facilities services $ 1,324,660 $ 1,089,443 United States mechanical construction and facilities services 2,308,726 2,061,955 United States building services 1,551,544 1,371,584 United States industrial services 631,564 611,941 Less intersegment revenues ( 97,357 ) ( 81,031 ) Total United States operations 5,719,137 5,053,892 United Kingdom building services 216,917 246,045 Total operations $ 5,936,054 $ 5,299,937 24 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 14 - Segment Information (Continued) For the three months ended June 30, 2023 2022 Operating income (loss): United States electrical construction and facilities services $ 50,722 $ 35,095 United States mechanical construction and facilities services 119,847 76,612 United States building services 46,137 38,494 United States industrial services 7,887 6,458 Total United States operations 224,593 156,659 United Kingdom building services 5,927 6,415 Corporate administration ( 33,853 ) ( 25,430 ) Total operations 196,667 137,644 Other items: Net periodic pension (cost) income ( 282 ) 1,094 Interest expense, net ( 2,692 ) ( 1,751 ) Income before income taxes $ 193,693 $ 136,987 For the six months ended June 30, 2023 2022 Operating income (loss): United States electrical construction and facilities services $ 91,238 $ 55,088 United States mechanical construction and facilities services 206,074 135,045 United States building services 83,787 62,657 United States industrial services 22,907 19,716 Total United States operations 404,006 272,506 United Kingdom building services 11,351 17,003 Corporate administration ( 63,780 ) ( 51,908 ) Total operations 351,577 237,601 Other items: Net periodic pension (cost) income ( 556 ) 2,263 Interest expense, net ( 4,524 ) ( 3,040 ) Income before income taxes $ 346,497 $ 236,824 25 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 14 - Segment Information (Continued) June 30, 2023 December 31, 2022 Total assets: United States electrical construction and facilities services $ 1,124,329 $ 1,078,405 United States mechanical construction and facilities services 2,049,168 1,835,001 United States building services 1,312,263 1,206,518 United States industrial services 566,959 552,545 Total United States operations 5,052,719 4,672,469 United Kingdom building services 268,845 255,547 Corporate administration 586,105 596,591 Total operations $ 5,907,669 $ 5,524,607 26 Table of Contents