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) September 30, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 523,632 $ 456,439 Accounts receivable, less allowance for credit losses of $ 21,644 and $ 22,382 , respectively 3,063,917 2,567,371 Contract assets 308,868 273,176 Inventories 115,466 85,641 Prepaid expenses and other 57,012 79,346 Total current assets 4,068,895 3,461,973 Property, plant and equipment, net 170,693 157,819 Operating lease right-of-use assets 306,112 268,063 Goodwill 953,359 919,151 Identifiable intangible assets, net 600,790 593,975 Other assets 124,344 123,626 Total assets $ 6,224,193 $ 5,524,607 LIABILITIES AND EQUITY Current liabilities: Current maturities of long-term debt and finance lease liabilities $ 6,482 $ 15,567 Accounts payable 824,155 849,284 Contract liabilities 1,489,324 1,098,263 Accrued payroll and benefits 553,838 465,000 Other accrued expenses and liabilities 284,275 258,190 Operating lease liabilities, current 74,728 67,218 Total current liabilities 3,232,802 2,753,522 Long-term debt and finance lease liabilities 97,480 231,625 Operating lease liabilities, long-term 256,306 220,764 Other long-term obligations 357,636 344,405 Total liabilities 3,944,224 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, 61,074,439 and 60,947,947 shares issued, respectively 611 609 Capital surplus 87,018 74,795 Accumulated other comprehensive loss ( 91,357 ) ( 93,451 ) Retained earnings 3,611,442 3,214,281 Treasury stock, at cost 13,932,485 and 13,281,222 shares, respectively ( 1,328,784 ) ( 1,222,645 ) Total EMCOR Group, Inc. stockholders’ equity 2,278,930 1,973,589 Noncontrolling interests 1,039 702 Total equity 2,279,969 1,974,291 Total liabilities and equity $ 6,224,193 $ 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 September 30, Nine months ended September 30, 2023 2022 2023 2022 Revenues $ 3,207,598 $ 2,826,361 $ 9,143,652 $ 8,126,298 Cost of sales 2,662,126 2,413,130 7,672,058 6,977,504 Gross profit 545,472 413,231 1,471,594 1,148,794 Selling, general and administrative expenses 308,139 263,137 882,684 761,099 Impairment loss on long-lived assets 2,350 — 2,350 — Operating income 234,983 150,094 586,560 387,695 Net periodic pension (cost) income ( 284 ) 1,025 ( 840 ) 3,288 Interest expense, net ( 90 ) ( 3,194 ) ( 4,614 ) ( 6,234 ) Income before income taxes 234,609 147,925 581,106 384,749 Income tax provision 64,863 42,153 159,292 104,927 Net income including noncontrolling interests 169,746 105,772 421,814 279,822 Net income attributable to noncontrolling interests 337 — 337 — Net income attributable to EMCOR Group, Inc. $ 169,409 $ 105,772 $ 421,477 $ 279,822 Basic earnings per common share $ 3.59 $ 2.16 $ 8.88 $ 5.52 Diluted earnings per common share $ 3.57 $ 2.16 $ 8.85 $ 5.50 Dividends declared per common share $ 0.18 $ 0.13 $ 0.51 $ 0.39 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 September 30, Nine months ended September 30, 2023 2022 2023 2022 Net income including noncontrolling interests $ 169,746 $ 105,772 $ 421,814 $ 279,822 Other comprehensive (loss) income, net of tax: Foreign currency translation adjustments ( 5,368 ) ( 8,712 ) 503 ( 19,257 ) Post-retirement plans, amortization of actuarial loss included in net income (1) 538 404 1,591 1,288 Other comprehensive (loss) income ( 4,830 ) ( 8,308 ) 2,094 ( 17,969 ) Comprehensive income 164,916 97,464 423,908 261,853 Comprehensive income attributable to noncontrolling interests 337 — 337 — Comprehensive income attributable to EMCOR Group, Inc. $ 164,579 $ 97,464 $ 423,571 $ 261,853 _________ (1) Net of tax of $ 0.5 million and $ 0.1 million for the three months ended September 30, 2023 and 2022, respectively, and net of tax of $ 0.2 million and $ 0.4 million for the nine months ended September 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) Nine months ended September 30, 2023 2022 Cash flows - operating activities: Net income including noncontrolling interests $ 421,814 $ 279,822 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 38,444 35,168 Amortization of identifiable intangible assets 49,335 45,465 Non-cash expense for impairment of long-lived assets 2,350 — Non-cash share-based compensation expense 10,703 9,322 Other reconciling items ( 3,865 ) ( 682 ) Changes in operating assets and liabilities, excluding the effect of businesses acquired ( 42,884 ) ( 130,741 ) Net cash provided by operating activities 475,897 238,354 Cash flows - investing activities: Payments for acquisitions of businesses, net of cash acquired ( 89,741 ) ( 91,078 ) Proceeds from sale or disposal of property, plant and equipment 12,015 6,897 Purchases of property, plant and equipment ( 56,306 ) ( 38,717 ) Net cash used in investing activities ( 134,032 ) ( 122,898 ) Cash flows - financing activities: Proceeds from revolving credit facility 100,000 270,000 Repayments of revolving credit facility ( 100,000 ) ( 100,000 ) Repayments of long-term debt ( 142,813 ) — Repayments of finance lease liabilities ( 2,138 ) ( 2,741 ) Dividends paid to stockholders ( 24,198 ) ( 20,037 ) Repurchases of common stock ( 105,299 ) ( 656,573 ) Taxes paid related to net share settlements of equity awards ( 5,365 ) ( 7,295 ) Issuances of common stock under employee stock purchase plan 6,769 6,097 Payments for contingent consideration arrangements ( 3,113 ) ( 2,049 ) Net cash used in financing activities ( 276,157 ) ( 512,598 ) Effect of exchange rate changes on cash, cash equivalents, and restricted cash 856 ( 20,540 ) Increase (decrease) in cash, cash equivalents, and restricted cash 66,564 ( 417,682 ) 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) $ 523,632 $ 404,886 _________ (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 $ 1.1 million of restricted cash classified as “Prepaid expenses and other” in the Consolidated Balance Sheets as of September 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 September 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, June 30, 2022 $ 1,952,791 $ 609 $ 65,212 $ ( 93,223 ) $ 2,995,844 $ ( 1,016,353 ) $ 702 Net income including noncontrolling interests 105,772 — — — 105,772 — — Other comprehensive loss ( 8,308 ) — — ( 8,308 ) — — — Tax withholding for common stock issued under share-based compensation plans ( 56 ) — ( 56 ) — — — — Common stock issued under employee stock purchase plan 2,074 — 2,074 — — — — Common stock dividends ( 6,418 ) — 32 — ( 6,450 ) — — Repurchases of common stock ( 206,292 ) — — — — ( 206,292 ) — Share-based compensation expense 2,859 — 2,859 — — — — Balance, September 30, 2022 $ 1,842,422 $ 609 $ 70,121 $ ( 101,531 ) $ 3,095,166 $ ( 1,222,645 ) $ 702 Balance, June 30, 2023 $ 2,118,087 $ 611 $ 81,556 $ ( 86,527 ) $ 3,450,553 $ ( 1,328,808 ) $ 702 Net income including noncontrolling interests 169,746 — — — 169,409 — 337 Other comprehensive loss ( 4,830 ) — — ( 4,830 ) — — — Tax withholding for common stock issued under share-based compensation plans ( 70 ) — ( 70 ) — — — — Common stock issued under employee stock purchase plan 2,328 — 2,328 — — — — Common stock dividends ( 8,484 ) — 36 — ( 8,520 ) — — Repurchases of common stock (2) 24 — — — — 24 — Share-based compensation expense 3,168 — 3,168 — — — — Balance, September 30, 2023 $ 2,279,969 $ 611 $ 87,018 $ ( 91,357 ) $ 3,611,442 $ ( 1,328,784 ) $ 1,039 _________ (1) Represents cumulative foreign currency translation adjustments and post-retirement liability adjustments. (2) Represents adjustment to estimate of excise tax on net share repurchases. Estimates of excise tax are subject to change in subsequent reporting periods, particularly if the amount of our share issuances exceed our share repurchases, thereby reducing the estimated excise tax due for the annual period. Refer to Note 10 - Common Stock for further detail regarding the excise tax on net share repurchases. See Notes to Consolidated Financial Statements. 5 Table of Contents EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF EQUITY For the nine months ended September 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 including noncontrolling interests 279,822 — — — 279,822 — — Other comprehensive loss ( 17,969 ) — — ( 17,969 ) — — — Common stock issued under share-based compensation plans 2 2 — — — — — Tax withholding for common stock issued under share-based compensation plans ( 7,295 ) — ( 7,295 ) — — — — Common stock issued under employee stock purchase plan 6,097 — 6,097 — — — — Common stock dividends ( 20,037 ) — 123 — ( 20,160 ) — — Repurchases of common stock ( 660,609 ) — — — — ( 660,609 ) — Share-based compensation expense 9,322 — 9,322 — — — — Balance, September 30, 2022 $ 1,842,422 $ 609 $ 70,121 $ ( 101,531 ) $ 3,095,166 $ ( 1,222,645 ) $ 702 Balance, December 31, 2022 $ 1,974,291 $ 609 $ 74,795 $ ( 93,451 ) $ 3,214,281 $ ( 1,222,645 ) $ 702 Net income including noncontrolling interests 421,814 — — — 421,477 — 337 Other comprehensive income 2,094 — — 2,094 — — — Common stock issued under share-based compensation plans — 2 ( 2 ) — — — — Tax withholding for common stock issued under share-based compensation plans ( 5,365 ) — ( 5,365 ) — — — — Common stock issued under employee stock purchase plan 6,769 — 6,769 — — — — Common stock dividends ( 24,198 ) — 118 — ( 24,316 ) — — Repurchases of common stock ( 106,139 ) — — — — ( 106,139 ) — Share-based compensation expense 10,703 — 10,703 — — — — Balance, September 30, 2023 $ 2,279,969 $ 611 $ 87,018 $ ( 91,357 ) $ 3,611,442 $ ( 1,328,784 ) $ 1,039 _________ (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 nine months ended September 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. During the second quarter of 2023, we amended our credit agreement 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. We are not exposed to any other material contracts that reference LIBOR. 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. 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 nine months ended September 30, 2023 and 2022, as summarized in the following table (in thousands): For the three months ended September 30, For the nine months ended September 30, 2023 2022 2023 2022 United States electrical construction and facilities services $ 2,635 $ 10,549 $ 12,219 $ 26,460 United States mechanical construction and facilities services 7,933 1,273 13,416 8,443 United States building services — — 2,977 — Total impact $ 10,568 $ 11,822 $ 28,612 $ 34,903 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 nine months ended September 30, 2023, we recognized revenue of approximately $ 10.0 million and $ 22.6 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. Of the amounts recorded during the three and nine months ended September 30, 2023, approximately $ 4.2 million and $ 4.3 million, respectively, were reported within our United States electrical construction and facilities services segment and approximately $ 5.8 million and $ 18.3 million, respectively, were reported within our United States mechanical construction and facilities services segment. There were no significant amounts of revenue recognized during the three and nine months ended September 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 nine months ended September 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 September 30, 2023 % of Total 2022 % of Total United States electrical construction and facilities services: Network and communications market sector $ 236,454 34 % $ 209,265 33 % Commercial market sector 104,270 15 % 106,058 17 % Manufacturing and industrial market sector 97,788 14 % 78,562 12 % Healthcare market sector 62,126 9 % 43,911 7 % High-tech manufacturing market sector 33,482 5 % 20,132 3 % Institutional market sector 37,916 6 % 46,344 7 % Transportation market sector 43,287 6 % 40,525 7 % Water and wastewater market sector 6,327 1 % 5,466 1 % Hospitality and entertainment market sector 16,708 2 % 8,598 1 % Short duration projects (1) 43,481 6 % 58,637 9 % Service work 15,927 2 % 16,829 3 % 697,766 634,327 Less intersegment revenues ( 360 ) ( 944 ) Total segment revenues $ 697,406 $ 633,383 ________ (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 September 30, 2023 % of Total 2022 % of Total United States mechanical construction and facilities services: Network and communications market sector $ 102,630 8 % $ 87,070 8 % Commercial market sector 283,659 21 % 271,908 25 % Manufacturing and industrial market sector 178,123 13 % 156,524 14 % Healthcare market sector 123,025 9 % 120,185 11 % High-tech manufacturing market sector 255,229 19 % 81,970 7 % Institutional market sector 89,215 7 % 99,066 9 % Transportation market sector 10,168 1 % 15,494 1 % Water and wastewater market sector 65,219 5 % 66,667 6 % Hospitality and entertainment market sector 14,716 1 % 9,910 1 % Short duration projects (1) 81,851 6 % 76,073 7 % Service work 128,912 10 % 127,033 11 % 1,332,747 1,111,900 Less intersegment revenues ( 3,147 ) ( 3,245 ) Total segment revenues $ 1,329,600 $ 1,108,655 ________ (1) Represents those projects which generally are completed within three months or less. For the three months ended September 30, 2023 % of Total 2022 % of Total United States building services: Mechanical services $ 542,371 66 % $ 471,134 65 % Commercial site-based services 222,499 27 % 199,957 28 % Government site-based services 52,848 7 % 48,292 7 % Total segment revenues $ 817,718 $ 719,383 For the three months ended September 30, 2023 % of Total 2022 % of Total United States industrial services: Field services $ 214,341 85 % $ 213,866 87 % Shop services 37,807 15 % 33,373 13 % Total segment revenues $ 252,148 $ 247,239 Total United States operations $ 3,096,872 $ 2,708,660 For the three months ended September 30, 2023 % of Total 2022 % of Total United Kingdom building services: Service work $ 54,286 49 % $ 51,762 44 % Project work 56,440 51 % 65,939 56 % Total segment revenues $ 110,726 $ 117,701 Total operations $ 3,207,598 $ 2,826,361 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 nine months ended September 30, 2023 % of Total 2022 % of Total United States electrical construction and facilities services: Network and communications market sector $ 665,493 33 % $ 534,130 31 % Commercial market sector 295,188 15 % 301,908 17 % Manufacturing and industrial market sector 278,912 14 % 210,331 12 % Healthcare market sector 182,442 9 % 119,259 7 % High-tech manufacturing market sector 102,075 5 % 62,956 4 % Institutional market sector 112,577 5 % 115,799 7 % Transportation market sector 118,436 6 % 128,047 7 % Water and wastewater market sector 18,388 1 % 15,962 1 % Hospitality and entertainment market sector 56,510 3 % 19,892 1 % Short duration projects (1) 141,901 7 % 167,553 10 % Service work 50,080 2 % 47,253 3 % 2,022,002 1,723,090 Less intersegment revenues ( 1,683 ) ( 3,565 ) Total segment revenues $ 2,020,319 $ 1,719,525 ________ (1) Represents those projects which generally are completed within three months or less. For the nine months ended September 30, 2023 % of Total 2022 % of Total United States mechanical construction and facilities services: Network and communications market sector $ 289,085 8 % $ 203,347 6 % Commercial market sector 828,809 23 % 799,729 25 % Manufacturing and industrial market sector 485,809 13 % 461,385 15 % Healthcare market sector 353,595 10 % 367,002 12 % High-tech manufacturing market sector 549,678 15 % 211,071 7 % Institutional market sector 224,889 6 % 251,715 8 % Transportation market sector 31,615 1 % 47,793 1 % Water and wastewater market sector 201,167 6 % 196,157 6 % Hospitality and entertainment market sector 38,324 1 % 34,108 1 % Short duration projects (1) 237,246 7 % 254,102 8 % Service work 368,378 10 % 340,682 11 % 3,608,595 3,167,091 Less intersegment revenues ( 6,324 ) ( 8,143 ) Total segment revenues $ 3,602,271 $ 3,158,948 ________ (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 nine months ended September 30, 2023 % of Total 2022 % of Total United States building services: Mechanical services $ 1,519,410 65 % $ 1,300,555 64 % Commercial site-based services 639,193 28 % 596,589 29 % Government site-based services 159,502 7 % 144,411 7 % Total segment revenues $ 2,318,105 $ 2,041,555 For the nine months ended September 30, 2023 % of Total 2022 % of Total United States industrial services: Field services $ 751,062 86 % $ 732,826 87 % Shop services 124,252 14 % 109,698 13 % Total segment revenues $ 875,314 $ 842,524 Total United States operations $ 8,816,009 $ 7,762,552 For the nine months ended September 30, 2023 % of Total 2022 % of Total United Kingdom building services: Service work $ 157,631 48 % $ 170,840 47 % Project work 170,012 52 % 192,906 53 % Total segment revenues $ 327,643 $ 363,746 Total operations $ 9,143,652 $ 8,126,298 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 September 30, 2023 and December 31, 2022, our allowance for credit losses was $ 21.6 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 nine 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. 14 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 3 - Revenue from Contracts with Customers (Continued) The change in the allowance for credit losses for the nine months ended September 30, 2023 was as follows (in thousands): Balance at December 31, 2022 $ 22,382 Provision for credit losses 5,256 Net amounts written off against the allowance, net of recoveries ( 5,994 ) Balance at September 30, 2023 $ 21,644 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 September 30, 2023 and December 31, 2022 (in thousands): September 30, 2023 December 31, 2022 Contract assets, current $ 308,868 $ 273,176 Contract assets, non-current — — Contract liabilities, current ( 1,489,324 ) ( 1,098,263 ) Contract liabilities, non-current ( 2,060 ) ( 2,273 ) Net contract liabilities $ ( 1,182,516 ) $ ( 827,360 ) Contract assets and contract liabilities increased by approximately $ 1.8 million and $ 5.0 million, respectively, as a result of acquisitions made by us during the first nine months of 2023. Excluding the impact of acquisitions, net contract liabilities increased by approximately $ 352.0 million during the nine months ended September 30, 2023, 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. 15 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 3 - Revenue from Contracts with Customers (Continued) 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 September 30, 2023 (in thousands, except for percentages): September 30, 2023 % of Total Remaining performance obligations: United States electrical construction and facilities services $ 2,158,104 25 % United States mechanical construction and facilities services 4,875,551 56 % United States building services 1,313,779 15 % United States industrial services 133,894 2 % Total United States operations 8,481,328 98 % United Kingdom building services 154,115 2 % Total operations $ 8,635,443 100 % Our remaining performance obligations at September 30, 2023 were $ 8.64 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 $ 1,743,345 $ 414,759 United States mechanical construction and facilities services 4,021,465 854,086 United States building services 1,166,368 147,411 United States industrial services 133,894 — Total United States operations 7,065,072 1,416,256 United Kingdom building services 107,125 46,990 Total operations $ 7,172,197 $ 1,463,246 16 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) 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 nine months of 2023, we acquired seven companies for total consideration of $ 92.8 million. Such acquisitions include: (a) a national energy efficiency specialty services firm, the results of operations of which have been included in our United States building services segment, and (b) six 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 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, and (ii) four mechanical services companies in the Western and Midwestern regions of the United States, that have been included within our United States building services segment. In connection with these acquisitions, we acquired working capital of $ 9.1 million and other net liabilities of $ 6.7 million, including certain deferred tax liabilities, and have preliminarily ascribed $ 34.2 million to goodwill and $ 56.2 million to identifiable intangible assets. We expect that $ 23.2 million of the goodwill and identifiable intangible assets acquired in connection with these 2023 acquisitions will be deductible for tax purposes. 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 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 and identifiable intangible assets acquired in connection with these 2022 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. 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 nine months ended September 30, 2023 and 2022 (in thousands, except share and per share data): For the three months ended September 30, 2023 2022 Numerator: Net income attributable to EMCOR Group, Inc. $ 169,409 $ 105,772 Denominator: Weighted average shares outstanding used to compute basic earnings per common share 47,173,974 48,867,420 Effect of dilutive securities—Share-based awards 224,223 182,731 Shares used to compute diluted earnings per common share 47,398,197 49,050,151 Basic earnings per common share $ 3.59 $ 2.16 Diluted earnings per common share $ 3.57 $ 2.16 17 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 5 - Earnings Per Share (Continued) For the nine months ended September 30, 2023 2022 Numerator: Net income attributable to EMCOR Group, Inc. $ 421,477 $ 279,822 Denominator: Weighted average shares outstanding used to compute basic earnings per common share 47,446,298 50,676,365 Effect of dilutive securities—Share-based awards 196,465 197,010 Shares used to compute diluted earnings per common share 47,642,763 50,873,375 Basic earnings per common share $ 8.88 $ 5.52 Diluted earnings per common share $ 8.85 $ 5.50 The number of share-based awards excluded from the computation of diluted EPS for the three and nine months ended September 30, 2023 because they would be anti-dilutive were 400 and 800 , respectively. The number of share-based awards excluded from the computation of diluted EPS for the three and nine months ended September 30, 2022 because they would be anti-dilutive were 850 and 1,350 , respectively. NOTE 6 - Inventories Inventories in the accompanying Consolidated Balance Sheets consisted of the following amounts as of September 30, 2023 and December 31, 2022 (in thousands): September 30, 2023 December 31, 2022 Raw materials and construction materials $ 93,750 $ 74,014 Work in process 21,716 11,627 Inventories $ 115,466 $ 85,641 The increase in inventories as of September 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 September 30, 2023 and December 31, 2022 (in thousands): September 30, 2023 December 31, 2022 Term loan $ 100,000 $ 242,813 Unamortized debt issuance costs ( 1,360 ) ( 2,080 ) Finance lease liabilities 5,322 6,459 Total debt 103,962 247,192 Less: current maturities 6,482 15,567 Total long-term debt $ 97,480 $ 231,625 18 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 7 - Debt (Continued) 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 September 30, 2023 and December 31, 2022, the balance of the 2020 Term Loan was $ 100.0 million and $ 242.8 million, respectively. There were no direct borrowings outstanding under the 2020 Revolving Credit Facility as of September 30, 2023 and December 31, 2022. However, outstanding letters of credit reduce the available capacity under such facility, and as of September 30, 2023 and December 31, 2022, we had $ 123.7 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”) ( 5.42 % at September 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 ( 8.50 % at September 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 %. The interest rates in effect at September 30, 2023 and December 31, 2022 were 6.42 % 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 September 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 September 30, 2023 and December 31, 2022. We are required to make annual principal payments on the 2020 Term Loan. Voluntary prepayments are applied against the outstanding balance of the loan and reduce our future scheduled payments on a ratable basis. During the quarter ended September 30, 2023, we made a prepayment in the amount of $ 142.8 million. Based on our outstanding balance, principal payments of $ 5.0 million are due on December 31, 2023 and 2024, 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. 19 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 8 - Fair Value Measurements (Continued) Recurring Fair Value Measurements The following tables summarize the assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2023 and December 31, 2022 (in thousands): Assets at Fair Value as of September 30, 2023 Asset Category Level 1 Level 2 Level 3 Total Cash and cash equivalents (1) $ 523,632 $ — $ — $ 523,632 Deferred compensation plan assets (2) 43,004 — — 43,004 Total $ 566,636 $ — $ — $ 566,636 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 September 30, 2023 and December 31, 2022, we had $ 361.9 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. 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, intangible assets, and certain other long-lived 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. During the quarter ended September 30, 2023, we identified facts and circumstances that indicated the carrying values of certain long-lived assets within our United States mechanical construction and facilities services segment may not be fully recoverable, necessitating a comparison of their carrying values to the undiscounted pre-tax cash flows expected to result from the use of such assets. As a result of this test, we determined that these assets were impaired, and recognized a $ 2.4 million impairment charge as calculated using a discounted cash flow model. As of September 30, 2023, the value of these assets was $ 2.0 million, which represents fair value as determined on a nonrecurring basis. 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. 20 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 9 - Income Taxes The following table presents our income tax provision and our income tax rate for the three and nine months ended September 30, 2023 and 2022 (in thousands, except percentages): For the three months ended September 30, For the nine months ended September 30, 2023 2022 2023 2022 Income tax provision $ 64,863 $ 42,153 $ 159,292 $ 104,927 Income tax rate 27.7 % 28.5 % 27.4 % 27.3 % The difference between the U.S. statutory tax rate of 21 % and our effective income tax rate for both the three and nine months ended September 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 nine months ended September 30, 2023, when compared to the three and nine months ended September 30, 2022, was primarily due to greater income before income taxes. While our effective income tax rate for the nine months ended September 30, 2023 is comparable to that for the nine months ended September 30, 2022, the difference between our effective income tax rate for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 was attributable to a revision to our estimate of the full year impact of certain permanent book-to-tax differences during the third quarter of 2022. As of September 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. Legislation has been enacted in the United Kingdom to implement measures in concert with the Base Erosion and Profit Shifting Pillar Two framework for international taxation developed by the member countries of the Organization for Economic Co-operation and Development (the “Pillar Two Model Rules”). The Pillar Two Model Rules are intended to ensure that multinational enterprises pay a minimum 15% effective tax rate in every jurisdiction in which they operate. While we do not anticipate that these rules will have a material effect on our tax provision or effective tax rate, we continue to monitor evolving tax legislation in the jurisdictions in which we operate. NOTE 10 - Common Stock As of September 30, 2023 and December 31, 2022, there were 47,141,954 and 47,666,725 shares of our common stock outstanding, respectively. During the three months ended September 30, 2023 and 2022, we issued 11,838 and 19,573 shares of common stock, respectively. During the nine months ended September 30, 2023 and 2022, we issued 126,492 and 191,330 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. 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 nine months ended September 30, 2023, we repurchased approximately 0.7 million shares of our common stock for approximately $ 106.1 million. Since the inception of the repurchase program through September 30, 2023, we have repurchased approximately 25.7 million shares of our common stock for approximately $ 1.87 billion. As of September 30, 2023, there remained authorization for us to repurchase approximately $ 283.7 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. 21 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 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 nine months ended September 30, 2023 and 2022 were as follows (in thousands): For the three months ended September 30, For the nine months ended September 30, 2023 2022 2023 2022 Interest cost $ 2,472 $ 1,344 $ 7,299 $ 4,325 Expected return on plan assets ( 2,903 ) ( 2,856 ) ( 8,572 ) ( 9,182 ) Amortization of unrecognized loss 664 490 1,961 1,574 Net periodic pension cost (income) $ 233 $ ( 1,022 ) $ 688 $ ( 3,283 ) 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 September 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 $ 2.0 billion, which represents approximately 23 % 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 September 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. 22 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 12 - Commitments and Contingencies (Continued) 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. 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 September 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 $ 52.4 million and $ 54.8 million, respectively. The estimated non-current portion of such undiscounted insurance liabilities included in “Other long-term obligations” as of September 30, 2023 and December 31, 2022 were $ 225.4 million and $ 221.7 million, respectively. The current portion of anticipated insurance recoveries of $ 13.2 million and $ 16.0 million as of September 30, 2023 and December 31, 2022, respectively, were included in “Prepaid expenses and other” and the non-current portion of anticipated insurance recoveries of $ 50.6 million and $ 59.0 million as of September 30, 2023 and December 31, 2022, respectively, were included in “Other assets” in the accompanying Consolidated Balance Sheets. 23 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 13 - Additional Cash Flow Information The following table presents additional cash flow information for the nine months ended September 30, 2023 and 2022 (in thousands): For the nine months ended September 30, 2023 2022 Cash paid for: Interest $ 13,632 $ 6,343 Income taxes $ 161,070 $ 133,540 Right-of-use assets obtained in exchange for new operating lease liabilities $ 99,745 $ 52,431 Right-of-use assets obtained in exchange for new finance lease liabilities $ 855 $ 1,124 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, technology, manufacturing, 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. 24 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 nine months ended September 30, 2023 and 2022 (in thousands): For the three months ended September 30, 2023 2022 Revenues from unrelated entities: United States electrical construction and facilities services $ 697,406 $ 633,383 United States mechanical construction and facilities services 1,329,600 1,108,655 United States building services 817,718 719,383 United States industrial services 252,148 247,239 Total United States operations 3,096,872 2,708,660 United Kingdom building services 110,726 117,701 Total operations $ 3,207,598 $ 2,826,361 Total revenues: United States electrical construction and facilities services $ 697,897 $ 634,957 United States mechanical construction and facilities services 1,342,149 1,125,162 United States building services 846,400 744,801 United States industrial services 252,244 266,182 Less intersegment revenues ( 41,818 ) ( 62,442 ) Total United States operations 3,096,872 2,708,660 United Kingdom building services 110,726 117,701 Total operations $ 3,207,598 $ 2,826,361 For the nine months ended September 30, 2023 2022 Revenues from unrelated entities: United States electrical construction and facilities services $ 2,020,319 $ 1,719,525 United States mechanical construction and facilities services 3,602,271 3,158,948 United States building services 2,318,105 2,041,555 United States industrial services 875,314 842,524 Total United States operations 8,816,009 7,762,552 United Kingdom building services 327,643 363,746 Total operations $ 9,143,652 $ 8,126,298 Total revenues: United States electrical construction and facilities services $ 2,022,557 $ 1,724,400 United States mechanical construction and facilities services 3,650,875 3,187,117 United States building services 2,397,944 2,116,385 United States industrial services 883,808 878,123 Less intersegment revenues ( 139,175 ) ( 143,473 ) Total United States operations 8,816,009 7,762,552 United Kingdom building services 327,643 363,746 Total operations $ 9,143,652 $ 8,126,298 25 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 14 - Segment Information (Continued) For the three months ended September 30, 2023 2022 Operating income (loss): United States electrical construction and facilities services $ 63,127 $ 35,558 United States mechanical construction and facilities services 138,476 90,500 United States building services 57,156 46,041 United States industrial services ( 174 ) ( 1,392 ) Total United States operations 258,585 170,707 United Kingdom building services 8,869 8,369 Corporate administration ( 30,121 ) ( 28,982 ) Impairment loss on long-lived assets ( 2,350 ) — Total operations 234,983 150,094 Other items: Net periodic pension (cost) income ( 284 ) 1,025 Interest expense, net ( 90 ) ( 3,194 ) Income before income taxes $ 234,609 $ 147,925 For the nine months ended September 30, 2023 2022 Operating income (loss): United States electrical construction and facilities services $ 154,365 $ 90,646 United States mechanical construction and facilities services 344,550 225,545 United States building services 140,943 108,698 United States industrial services 22,733 18,324 Total United States operations 662,591 443,213 United Kingdom building services 20,220 25,372 Corporate administration ( 93,901 ) ( 80,890 ) Impairment loss on long-lived assets ( 2,350 ) — Total operations 586,560 387,695 Other items: Net periodic pension (cost) income ( 840 ) 3,288 Interest expense, net ( 4,614 ) ( 6,234 ) Income before income taxes $ 581,106 $ 384,749 26 Table of Contents EMCOR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 14 - Segment Information (Continued) September 30, 2023 December 31, 2022 Total assets: United States electrical construction and facilities services $ 1,173,992 $ 1,078,405 United States mechanical construction and facilities services 2,159,947 1,835,001 United States building services 1,415,194 1,206,518 United States industrial services 586,360 552,545 Total United States operations 5,335,493 4,672,469 United Kingdom building services 262,629 255,547 Corporate administration 626,071 596,591 Total operations $ 6,224,193 $ 5,524,607 27 Table of Contents